Mark Stoyas, individually and on behalf of all others similarly situated, Plaintiff,
Toshiba Corporation, Defendant-Appellee. and Automotive Industries Pension Trust Fund; New England Teamsters & Trucking Industry Pension Fund, Plaintiffs-Appellants,
and Submitted November 9, 2017 Pasadena, California
from the United States District Court for the Central
District of California D.C. No. 2:15-cv-04194-DDP-JC Dean D.
Pregerson, Senior District Judge, Presiding
K. Alexander (argued), San Francisco, California, for
Christopher M. Curran (argued), Washington, D.C., for
Before: Kim McLane Wardlaw and William A. Fletcher, [*] Circuit Judges,
and Wiley Y. Daniel, [**] District Judge.
panel reversed the district court's dismissal and
remanded to allow amendment of the complaint in an action in
which purchasers of American Depository Shares or Receipts
alleged violations of §§ 10(b) and 20(a) of the
Securities Exchange Act based on Toshiba Corp.'s
fraudulent accounting practices.
are financial instruments that enable investors in the United
States to buy and sell stock in foreign corporations such as
Toshiba, whose common stock is publicly traded on the Tokyo
Stock Exchange. The district court concluded that under the
test set forth in Morrison v. Nat'l Australia
Bank Ltd., 561 U.S. 247 (2010), the Exchange
Act, which does not apply extraterritorially, did not apply
to the purchase of Toshiba ADRs because the over-the-counter
market by which the Toshiba ADRs were sold was not a
"national exchange," and there was no domestic
transaction between the ADR purchasers and Toshiba.
the panel declined to resolve the question of whether, under
Morrison, the Exchange Act applied to "domestic
exchanges" or only "national securities
exchanges" because the over-the-counter market was not
an "exchange" within the meaning of the Exchange
Act. The panel nevertheless concluded that the Exchange Act
could apply to the Toshiba ADR transactions, as domestic
transactions in securities not registered on an exchange. The
panel concluded that Toshiba ADRs were "securities"
under the Exchange Act. Adopting the Second and Third
Circuits' "irrevocable liability" test, looking
to where purchasers incurred the liability to take and pay
for securities, and where sellers incurred the liability to
deliver securities, the panel further concluded that
plaintiffs must be allowed to amend their complaint to allege
that the purchase of Toshiba ADRs on the over-the-counter
market was a domestic purchase, and that the alleged fraud
was "in connection with" the purchase.
WARDLAW, CIRCUIT JUDGE
Morrison v. National Australia Bank Ltd., 561 U.S.
247 (2010), the Supreme Court held that the presumption
against extraterritorial applicability of congressional
legislation renders the U.S. Securities Exchange Act of 1934
("the Exchange Act") applicable to deceptive
conduct only in connection with the purchases or sales of any
securities registered on a national securities exchange or
domestic transactions in other securities not so registered.
The Court reasoned that "the focus of the Exchange Act
is not upon the place where the deception originated, but
upon purchases and sales of securities in the United
States." Id. at 266. Appellants Automotive
Industries Pension Trust Fund ("AIPTF") and New
England Teamsters & Trucking Industry Pension Fund
(together, the "Funds") are named plaintiffs in a
putative class action alleging violations of the Exchange Act
and the Financial Instruments and Exchange Act of Japan
("JFIEA") against Toshiba Corporation
("Toshiba") based on its now-admitted fraudulent
accounting practices that caused hundreds of millions of
dollars in loss to U.S. investors. The complaint alleges (1)
violation of Section 10(b) of the Exchange Act and Rule 10b-5
on behalf of American Depository Shares or Receipts
("ADRs") purchasers, (2) violation of Section 20(a)
of the Exchange Act on behalf of ADR purchasers, and (3)
violation of JFIEA Article 21-2 on behalf of ADR purchasers
and purchasers of Toshiba common stock. The district court
dismissed the case with prejudice on the grounds that the
over-the-counter market by which ADRs are sold was not a
"national exchange" within the meaning of
Morrison, and that there was not any domestic
transaction between ADR purchasers and Toshiba. Having
dismissed the Exchange Act claims, the district court
dismissed the Japanese law claim under principles of comity
and forum non conveniens.
at the heart of this appeal is the question of the nature of
ADRs and their transactions, and whether Toshiba ADRs are
covered by the Exchange Act through either registry on a
national exchange, or through domestic sales and purchases.
FACTUAL AND PROCEDURAL BACKGROUND
wake of Toshiba's admission of substantial institutional
accounting fraud and accompanying restatements of pre-tax
profits,  Mark Stoyas filed this securities fraud
class action on June 4, 2015, against Toshiba, its current
chief executive officer, and its former chief executive
officer based on his ownership of thirty-three Toshiba ADRs
and a loss of $180.53. Later, AIPTF became lead plaintiff
based on its purchase on March 23, 2015, of 36, 000 Toshiba
ADRs in the United States on an over-the-counter market run
by OTC Markets Group and a loss of $196,
913.47. The Funds filed the first amended
complaint ("FAC") on December 17, 2015. The FAC
added New England
& Trucking Industry Pension Fund as a named plaintiff;
unlike AIPTF, it had purchased 343, 000 shares of Toshiba
common stock on the Tokyo Stock Exchange.
alleges three class action claims for relief against
Toshiba. The first two claims are brought on behalf
of a class of all persons who acquired Toshiba ADRs
("ADR class") between May 8, 2012, and November 12,
2015 ("Class Period"). The first claim alleges
violations of Section 10(b) of the Exchange Act, 15 U.S.C.
§ 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5.
Class members "acquired" Toshiba ADRs "in
reliance upon the truth and accuracy" of Toshiba's
fraudulent financial statements, paid artificially inflated
prices, and suffered economic loss when the ADRs declined in
value after the fraud was revealed and pre-tax profits were
second claim alleges violation of Section 20(a) of the
Exchange Act, 15 U.S.C. § 78t(a). Toshiba, despite
having the ability to control its directors, officers, and
managers, including twenty-four specific individuals, failed
to prevent their fraudulent conduct or, alternatively,
"actively controlled and directed those actions so as to
cause the violations" of securities laws.
third claim alleges violation of JFIEA Article 21-2. It is
brought on behalf of both the ADR class and a class of
"all citizens and residents of the United States who
otherwise acquired shares of Toshiba common stock during the
Class Period." Appellants claim that "Toshiba
breached its duty to make a reasonable and diligent
investigation of the statements" in its financial
reports and "to ensure that the statements contained
therein were truthful and accurate." The material false
information and omissions artificially inflated the price of
Toshiba common stock, and class members were harmed when the
value of the stock declined due to the revelation of
district court dismissed the FAC with prejudice on May 20,
2016. Applying Morrison, the district court held
that the over-the-counter market was not a "stock
exchange" within the meaning of the Exchange Act, and
that the FAC failed to allege Toshiba's involvement in
the ADR transactions at issue, rendering Section 10(b)
inapplicable. Having dismissed the Funds' Exchange Act
claims, the district court dismissed the Japanese law claim
on the basis of comity and forum non conveniens. Finding any
amendment would be futile, the district court dismissed the
case with prejudice. The Funds timely appeal. Fed. R. App. P.
JURISDICTION AND STANDARD OF REVIEW
district court had jurisdiction over the Exchange Act claims
pursuant to Exchange Act Section 27(a), 15 U.S.C. §
78aa(a). The district court had jurisdiction over the JFIEA
claim based on diversity jurisdiction, as Toshiba is a
foreign corporation, as well as supplemental jurisdiction,
because it arises from the same case or controversy as the
Exchange Act claims. 28 U.S.C. §§ 1332(a)(2),
(d)(2); 28 U.S.C. § 1367.
jurisdiction pursuant to 28 U.S.C. § 1291 to review the
district court's order and final judgment dismissing the
Funds' claims with prejudice. See Fed. R. Civ.
review de novo the district court's grant of a motion to
dismiss under Rule 12(b)(6), accepting all factual
allegations in the complaint as true and construing them in
the light most favorable to the nonmoving party."
Fields v. Twitter, Inc., 881 F.3d 739, 743 (9th Cir.
2018) (quotation omitted). "[R]eview is generally
limited to the face of the complaint, materials incorporated
into the complaint by reference, and matters of judicial
notice." New Mexico State Inv. Council v. Ernst
& Young LLP, 641 F.3d 1089, 1094 (9th Cir. 2011). In
other words, we inquire "whether the complaint at issue
contains 'sufficient factual matter, accepted as true, to
state a claim of relief that is plausible on its
face.'" Harris v. Cty. of Orange, 682 F.3d
1126, 1131 (9th Cir. 2012) (quoting Ashcroft v.
Iqbal, 556 U.S. 662, 678 (2009)).
of leave to amend is reviewed for abuse of discretion.
Airs Aromatics, LLC v. Opinion Victoria's Secret
Stores Brand Mgmt., Inc., 744 F.3d 595, 598 (9th Cir.
2014). "Dismissal with prejudice and without leave to
amend is not appropriate unless it is clear on de novo review
that the complaint could not be saved by amendment."
Harris, 682 F.3d at 1331 (quoting Eminence
Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th
Cir. 2003) (per curiam)). "A district court's
failure to consider the relevant factors [set forth in
Foman v. Davis, 371 U.S. 178 (1962)] and articulate
why dismissal should be with prejudice instead of without
prejudice may constitute an abuse of discretion."
Eminence Capital, 316 F.3d at 1052.
common stock is publically traded on the Tokyo Stock
Exchange. The Funds' Exchange Act claims are in
connection with Toshiba ADR transactions on the
over-the-counter market as opposed to direct purchases of
Toshiba common stock. Nevertheless, the Exchange Act applies
to Toshiba ADR transactions because Toshiba ADRs are
"securities" under the Exchange Act and AIPTF's
purchase of Toshiba ADRs on the over-the-counter market is a
domestic "purchase or sale of . . . any security
not" registered on a national securities exchange. 15
U.S.C. § 78j(b); see Morrison, 561 U.S. at
Toshiba ADRs are "Securities"
Exchange Act of 1934 applies to "securities,"
defined to include "any note, stock, treasury stock,
security future, . . . transferable share, investment
contract, . . . any instrument commonly known as a
'security'; or any . . . receipt for . . . any of the
foregoing." 15 U.S.C. § 78c(a)(10); Sec. &
Exch. Comm'n v. W.J. Howey Co., 328 U.S. 293, 297
(1946) (describing the definition as encompassing
"documents traded for speculation or investment").
This expansive list, along with the Exchange Act's
remedial purpose, precludes "a narrow and literal
reading of the definition of securities." Warfield
v. Alaniz, 569 F.3d 1015, 1020 (9th Cir. 2009); see,
e.g., Reves v. Ernst & Young, 494 U.S. 56,
60 (1990) (noting that Congress "painted with a broad
brush" the "scope of the market that it wished to
regulate" through federal securities laws); Marine
Bank v. Weaver, 455 U.S. 551, 555-56 (1982) ("[T]he
term 'security' was meant to include 'the many
types of instruments that in our commercial world fall within
the ordinary concept of a security.'" (quoting H. R.
Rep. No. 85 at 11 (1933))); Tcherepnin v. Knight,
389 U.S. 332, 336 (1967) ("[I]n searching for the
meaning and scope of the word 'security' in the Act,
form should be disregarded for substance and the emphasis
should be on economic reality.").
ADRs fit comfortably within the Exchange Act's definition
of "security," specifically as "stock."
To constitute "stock" under the Exchange Act, an
instrument must possess "some of the significant
characteristics typically associated" with common stock:
"(i) the right to receive dividends contingent upon an
apportionment of profits; (ii) negotiability; (iii) the
ability to be pledged or hypothecated; (iv) the conferring of
voting rights in proportion to the number of shares owned;
and (v) the capacity to appreciate in value."
Landreth Timber Co. v. Landreth, 471 U.S. 681, 686
(1985) (quotation omitted).
"allow U.S. investors to invest in non-U.S. companies
and give non-U.S. companies easier access to U.S. capital
markets." Sec. & Exch. Comm'n, Office of
Inv'r Education and Advocacy, "Investor Bulletin:
American Depository Receipts" at 1 (August 2012)
[hereinafter "ADR Bulletin"]; see Waggoner v.
Barclays PLC, 875 F.3d 79, 84 n.3 (2d Cir. 2017).
Specifically, ADRs are negotiable certificates issued by a
United States depositary institution, typically banks, and
they represent a beneficial interest in, but not legal title
of, a specified number of shares of a non-United States
company. See Pinker v. Roche Holdings
Ltd., 292 F.3d 361, 367 (3d Cir. 2002). The depositary
institution itself maintains custody over the foreign
company's shares.Id.; ADR Bulletin at 1. There are
four depositary institutions for Toshiba ADRs: Bank of New
York Mellon, Citibank N.A., Deutsche Bank Trust Company
Americas, and Convergex Depositary, Inc.
ADRs are registered with the Securities and Exchange
Commission through the filing of Form F-6.17 C.F.R. §
239.36; ADR Bulletin at 2; see City of Monroe Employees
Ret. Sys. v. Bridgestone Corp., 399 F.3d 651, 655-56
& n.2 (6th Cir. 2005); Bruns, Nordeman & Co. v.
Am. Nat. Bank & Tr. Co., 394 F.2d 300, 304 n.4 (2d
Cir. 1968) (stating that the Securities and Exchange
Commission started requiring registration of ADRs in 1955).
Toshiba ADRs are unsponsored, which means that the depositary
institutions each filed Form F-6 without Toshiba's
"formal participation" and possibly without its
acquiescence. American Depository Receipts, Securities Act
Release No. 33-6984, Exchange Act Release No. 34-29226, 56
Fed. Reg. 24, 420, 24, 422 (May 23, 1991) [hereinafter
"1991 SEC ADR Release"]; 2003 SEC ADR Release at
54, 645. Accordingly, when AIPTF purchased Toshiba ADRs, it
was entering into "essentially a two-party
contract" with the depositary institution. 2003 SEC ADR
Release at 54, 645. The contractual terms are specified in
the ADR itself, to which ADR holders are "deemed to have
agreed . . . by their acceptance and holding of ADRs."
Batchelder v. Kawamoto, 147 F.3d 915, 919 (9th Cir.
1998) (quoting 1991 SEC ADR Release).
ADRs share many of the five significant characteristics
typically associated with common stock. See Landreth
Timber, 471 U.S. at 686. First, depositary institutions
transfer the dividends they receive on deposited Toshiba
common stock to the corresponding Toshiba ADR
owner. Second, Toshiba ADRs are negotiable: they
are traded through U.S. broker-dealers; collectively, the
depositary institutions have registered 205 million Toshiba
ADRs; Toshiba ADRs are owned "by hundreds of thousands
of persons"; and Toshiba ADR holders may split or
combine Toshiba ADRs into new instruments as they see fit.
Pinker, 292 F.3d at 367 ("ADRs are tradeable in
the same manner as any other registered American
security."); In re Hawaii Corp., 829 F.2d 813,
815 (9th Cir. 1987) (defining negotiability). Third, nothing
in the Toshiba ADRs restricts pledging or hypothecation.
Fourth, each of the four Toshiba ADR depositary institutions
is willing to exercise the voting rights associated with the
deposited Toshiba common stock as directed by the Toshiba ADR
owners. Fifth, Toshiba ADRs have the same "interest . .
. in the management, profit and assets" of Toshiba as
investors in ...