In a recent case, the Second Circuit court decided that a Securities Exchange Act Section 10(b) action could be brought because the transaction at issue had sufficient connections to the United States to constitute a “domestic transaction.” The action involved Bahamian and American plaintiffs bringing an action against a Bahamian company. The company’s securities were not listed in the United States. The Supreme Court standard established in the Morrison v. National Australia Bank Ltd. case held that Section 10(b) applies only to “transactions listed on domestic exchanges and domestic transactions in other securities.” The Second Circuit based its conclusion on the fact that the plaintiffs became obligated to take and pay for the securities, and the securities were delivered in the United States. Even though Bahamian regulatory approval was required for the issuance, the condition subsequent did not negate the fact that liability had been incurred in the United States.
The Ninth Circuit recently decided a case, Automotive Industries Pension Trust Fund v. Toshiba Corp., in which the Circuit court considered the application of the Supreme Court’s territoriality standard in the Morrison v. National Australia Bank Ltd. case. The court considered whether purchasers of Toshiba unsponsored ADRs on the over-the-counter market were precluded from bringing Section 10(b) and 10b-5 claims under the Securities Exchange Act of 1934. The Ninth Circuit concluded that the Morrison standard did not preclude the claims. Finding that the OTC market does not constitute an exchange, the Circuit court nonetheless concluded that under Morrison one would look to where purchasers incurred the liability to take and pay for the securities and where the sellers incurred the liability to deliver the securities to the purchasers. To the extent that these elements took place in the United States, the transaction would be deemed to be a domestic transaction and Exchange Act claims arising in connection with the transaction can be brought in the United States. Although, in this particular instance, the Ninth Circuit determined that plaintiffs failed to show that the relevant transactions were “domestic” and remanded to the district court on this matter, the Circuit court decision stands for the proposition that concluding that a transaction is “domestic” is enough to bring a securities claim in the United States. For issuers that have unsponsored ADR programs and had no role in setting up the ADR program and derive no benefit from the unsponsored ADR program, the decision may raise serious concerns. So, at least in the Ninth Circuit, there no longer seems to be a difference between a sponsored and an unsponsored ADR program for purposes of liability.
Although Securities and Exchange Commission Chair Clayton has made clear that the Commission does not intend to focus on addressing mandatory arbitration provisions in the near term, the controversy regarding action in this regard remains active. A coalition of bipartisan state treasurers (California, Illinois, Iowa, Oregon, Pennsylvania and Rhode Island) delivered a letter to the Commission expressing their “serious concern” that the Commission may consider allowing IPO issuers to adopt mandatory arbitration provisions. The letter repeats many of the arguments made by investor and consumer protection groups in their letters to the Commission, noting that the cost for individual pension plan members, including teachers, municipal workers, and other individual investors associated with bringing an individual action on securities law claims would be too costly. This would mean, according to the state treasurers, that securities regulators would be left responsible for all oversight, without private shareholder litigation to police the capital markets.
The U.S. Supreme Court reached a decision in China Agritech, Inc. v. Resh holding that the equitable tolling rule does not apply to subsequently filed class action claims. In a 1974 decision, American Pipe & Construction Company v. Utah, the Supreme Court had held that the timely filing of a class action tolls the statute of limitations for putative class action members, meaning that even if the statute of limitations had already run, putative class members would still be able to join an existing class action, intervene in the resulting individual action if class certification were denied or bring an individual action if the class action were dismissed. Courts had split on whether this principle of equitable tolling applied to subsequently filed class actions. The Supreme Court held that American Pipe tolling does not apply to class actions. The Supreme Court focused on the “’efficiency and economy’ of litigation that support tolling of individual claims…do not support maintenance of untimely successive class actions.”