Justices seem interested in circuit split over American depositary receipts

The U.S. Supreme Court appears interested in a recent circuit split over how its own precedent applies to securities that allow American investors to trade foreign corporate shares on the domestic stock exchanges.

Earlier this month, the justices conferenced to consider the case and, without deciding whether to take it, asked U.S. Solicitor General Noel Francisco to provide his views on the dispute, a sign that the high court may decide to resolve it.

The mechanism in question in the underlying case is the unsponsored American depositary receipt.

Issued by American banks, the receipts correspond to shares of companies based in foreign countries and allow investors to trade otherwise inaccessible securities on the American stock market.

In July, the 9th U.S. Circuit Court of Appeals weighed in on a class action involving the receipts, making significant news for members of the securities bar and corporate compliance officers across the country.

The relevant lawsuit sought to hold the Japanese company Toshiba Corporation liable for misleading investors who had purchased the receipts.

In 2015, the corporate giant admitted years of fraudulent accounting practices that slashed its estimated 2008 to 2014 profits by $2.6 billion.

Plaintiffs said misleading financial information released over the years violated the Securities Exchange Act.

A Los Angeles-based federal judge dismissed the suit, citing 2010 a Supreme Court precedent establishing a presumption that the act doesn't have an extraterritorial application.

But a three-judge panel of the 9th Circuit reversed that decision, saying existing case law didn't require dismissal because receipts purchased in the United States from American banks were not foreign exchanges. It remanded the case to allow plaintiffs to amend their complaint, which the court reasoned wasn't properly pleaded.

The decision created a circuit split between two extremely powerful federal appeals courts relevant to securities-related litigation, the San Francisco-based 9th Circuit and the New York-based 2nd U.S. Circuit Court of Appeals.

In 2014, that court said that a domestic transaction alone was not enough to invoke the Securities Exchange Act.

And last year, a group of White & Case LLP lawyers representing Toshiba urged the Supreme Court to review the dispute.

The 9th Circuit "in effect has opened a new forum for U.S. class-action litigation against any foreign issuer in the world," wrote White & Case partner Christopher M. Curran. "The Ninth Circuit's decision invites opportunistic plaintiffs to exploit the conflict between the Second and Ninth Circuits by filing only in the Ninth Circuit new Exchange Act claims against foreign issuers."

Curran characterized the split as between the "two most important circuits in U.S. securities law," adding that the views of the law are "irreconcilable."

And numerous amicus parties, including the U.S. Chamber of Commerce, have urged the justices to take the case. Toshiba Corp. v. Automotive Industries Pension Trust Fund, 18-486.

"It's clearly got the attention of the securities bar," commented O'Melveny & Myers LLP partner Seth Aronson, who is uninvolved in the case. "Those of us who defend foreign-based companies that issue ADRs in the U.S. are watching this issue closely."

The putative plaintiff class, represented by Robbins Geller Rudman & Dowd LLP partner Susan K. Alexander, has told the Supreme Court there's no need to review the case, saying in a brief that Toshiba's concern of a potential flood of securities suits against foreign corporations in the 9th Circuit is unfounded because of other pleading requirements plaintiffs must meet.

"Petitioner has identified no deluge of improperly foreign claims being filed following Morrison," Alexander wrote, referencing the 2010 Supreme Court decision on the Securities Exchange Act's application to foreign companies. "If no such flood existed before the Ninth Circuit's decision in this case, there is no reason to expect one now."

She further characterized the 2nd Circuit ruling as a narrow one that hasn't been followed with regularity within that court's jurisdiction.