Ten years after Morrison v. National Australia Bank limited the U.S. securities laws to “domestic” transactions, investors are still determining how best to prosecute the cross-border securities frauds that arise in the interconnected world of securities trading.
The good news is that U.S. investors may be able to recover losses on certain purchases outside the U.S. through U.S. class actions, even without the U.S. securities laws.
In an opinion dated Jan. 28, the Central District of California in Stoyas v. Toshiba joined a number of other courts that have allowed class actions to include causes of action from the relevant non-U.S. jurisdiction alongside U.S. securities claims.
Courts Inclined When Litigation Has Meaningful Impact on U.S.
A number of factors will determine whether it make sense to litigate non-U.S. purchases in the U.S., but courts seem more inclined to take jurisdiction where the litigation touches the U.S. in some meaningful way.
The Stoyas case is no exception—though Toshiba is a Japanese corporation, the litigation includes U.S. purchases, U.S. plaintiffs, and a multibillion-dollar accounting fraud centered on Toshiba’s U.S. subsidiary, Westinghouse Electric Co.
Toshiba’s common stock trades globally—its common stock is listed in Japan, but also trades in the U.S. over-the-counter (OTC) market, both as dollar-denominated foreign shares (or F-shares) and through “unsponsored” American Depository Receipts (ADRs).
To capture non-U.S. and U.S. purchases, the Stoyas class included claims under Japan’s Financial Instruments and Exchange Act (JFIEA) alongside Securities Exchange Act of 1934 (Exchange Act) claims, but limited the JFIEA claims to U.S. citizens and residents who purchased Toshiba stock on Japan’s exchanges.
Defendants put Toshiba’s nationality at the center of their dismissal efforts, arguing that the Exchange Act claims should be dismissed because the ADRs and F-shares were not sufficiently “domestic” under Morrison, and that the JFIEA claims should be dismissed under the principles of comity and forum non conveniens.
When defendants first made these arguments in 2016, the district court agreed and dismissed. On appeal, the Ninth Circuit reversed the ADR ruling and remanded with instructions to allow the class to amend. The class amended, and the defendants moved to dismiss again, repeating their Morrison, comity, and forum non conveniens arguments.
On remand, the district court rejected the defendants’ comity and forum non conveniens arguments, holding that, “[i]n light of the court’s conclusion that Plaintiffs have sufficiently alleged Securities Exchange Act claims, the court concludes that comity and forum non conveniens do not compel dismissal of Plaintiffs’ JFIEA claim.”
This brief holding draws on a more fulsome comity-like analysis the court performed earlier in the opinion, where it concluded that the U.S. had a strong interest in the ADR claims. The court held that even though Toshiba is a Japanese corporation, the plaintiffs alleged facts sufficient to link the defendants’ fraud to the U.S. transactions, satisfying the Exchange Act’s “in connection with” requirement, and “comity concerns are addressed, and lessened, when a plaintiff has sufficiently alleged conduct in connection with a domestic transaction.”
The court also found that the U.S. had a strong interest in adjudicating the ADR claims because the proposed class is composed of U.S. citizens and residents.
Stoyas Gives Guidance for Classes with U.S. and Non-U.S. Purchasers
Read as a whole, the Stoyas holding suggests that the ability of a class to plead Exchange Act claims and satisfy Morrison is a good proxy for whether a litigation has a sufficient connection to the U.S. to take jurisdiction over non-U.S. claims as well, and separate comity or forum non conveniens analyses may be unnecessary—at least where the plaintiffs are U.S. citizens or residents. Stoyas therefore provides useful guidance for classes that include both U.S. and non-U.S. purchasers.
In addition to comity and forum non conveniens, however, investors should also consider whether they will be able to maintain non-U.S. claims in the class action in question. For example, though the Securities Litigation Uniform Standards Act of 1998 (SLUSA) is widely understood to preclude securities class actions from maintaining U.S. state law claims, a few courts have held that it also bars class actions from maintaining non-U.S. claims as well.
If SLUSA is not an issue, investors should still consider whether the applicable foreign law claims can be adjudicated as a class or in a U.S. court. Some non-U.S. claims will have individualized elements, such as reliance, that prevent class certification. The Stoyas class does not face this hurdle, as JFIEA does not require proof of reliance.
Investors should also be aware of issues unique to the relevant jurisdiction. For example, Judge Jed S. Rakoff held that Brazilian law required investors that purchased in Brazil to arbitrate their claims against Petrobras, and dismissed Brazilian law claims from In re Petrobras Securities Litigation.
By contrast, the Israeli securities laws mirror their U.S. counterparts, and the class in In re Perrigo Company PLC Securities Litigation recently certified a class that purchased stock in Israel alongside an Exchange Act class.
The world of investing has, if anything, become more global and interconnected since Morrison, and investors will continue to find themselves exposed to cross-border frauds. Where available, non-U.S. causes of action can provide a powerful tool for recovering losses on non-U.S. purchases.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Eric J. Belfi is a partner in the New York office of Labaton Sucharow LLP and a member of the firm’s executive committee. An accomplished litigator with a broad range of experience in commercial matters, Belfi represents many of the world’s leading pension funds and other institutional investors.
Thomas W. Watson is an associate in the New York office of Labaton Sucharow LLP. Watson focuses on prosecuting complex securities fraud cases on behalf of institutional investors.