The World in U.S. Courts: Summer and Fall 2016 - Securities Law/Commodities Exchange Act (CEA)
This was a class action lawsuit alleging that the plaintiffs purchased American Depository Shares (ADS) in Toshiba on a U.S. over-the-counter market at inflated prices, based on fraudulent profit reports by Toshiba. Among other arguments, the defendants contended that the securities laws did not reach the conduct alleged because it occurred outside the U.S.
The District Court in Los Angeles stated that U.S. securities law does not have extraterritorial effect, and would only attach to transactions that either (i) involved the purchase or sale of securities on a U.S. exchange, or (ii) involved domestic U.S. transactions. The Court determined that the first test was not satisfied, because the “over the counter” U.S. market on which the securities were purchased was not regulated in such a manner as to be an “exchange” for purposes of the extraterritoriality analysis.
With regard to the second test, the Court observed that the ADS at issue here were not, like some involving non-U.S. companies, “sponsored” by Toshiba—meaning that Toshiba played no role in the creation of the U.S. security and had no contractual relationship with the institution that sold it. Thus, while the plaintiffs’ transactions clearly took place in the U.S., the Court found that they were not ones for which Toshiba could be found liable.