Circuit Split on Morrison Application

On July 17, 2018 the Ninth Circuit, in Stoyas v. Toshiba Corporation, held that the Supreme Court’s ruling in Morrison v. National Australia Bank Ltd. did not preclude the assertion of claims under the U.S. federal securities laws against foreign issuers with respect to domestic transactions in unsponsored American Depository Receipts (“ADRs”). The court, however, further held that even though a domestic transaction in unsponsored ADRs is necessary for the federal securities law to apply under Morrison, it is not sufficient under the Exchange Act. In order to state a claim against a foreign issuer, a plaintiff must also allege sufficient facts to demonstrate that the defendant’s actions were committed “in connection with” the domestic transaction at issue. In short, the plaintiff must allege facts showing that the foreign issuer committed the fraud to induce the domestic transaction. In issuing this decision, the Ninth Circuit explicitly parted ways with the Second Circuit’s decision in Parkcentral Global Hub Ltd. v. Porsche Automobile Holdings, which held that a domestic transaction may not satisfy Morrison if the nature of the transaction and allegations of fraud were predominantly foreign. The Ninth Circuit’s decision has important consequences for determining the extraterritorial scope of the federal securities laws, particularly with respect to unsponsored ADRs and other transactions in which the named foreign entity may not have been involved.

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