Auto Ind. Pension Trust Fund v. Toshiba Corp.

FOR PUBLICATION

UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

MARK STOYAS, individually No. 16-56058
and on behalf of all others
similarly situated, D.C. No.
Plaintiff, 2:15-cv-04194-DDP-JC

and
OPINION
AUTOMOTIVE INDUSTRIES
PENSION TRUST FUND; NEW
ENGLAND TEAMSTERS &
TRUCKING INDUSTRY
PENSION FUND,
Plaintiffs-Appellants,

v.

TOSHIBA CORPORATION,
Defendant-Appellee.

Appeal from the United States District Court
for the Central District of California
Dean D. Pregerson, Senior District Judge, Presiding

Argued and Submitted November 9, 2017
Pasadena, California

Filed July 17, 2018
2 AUTO. INDUS. PENSION TRUST FUND V. TOSHIBA

Before: Kim McLane Wardlaw and William A. Fletcher,*
Circuit Judges, and Wiley Y. Daniel,** District Judge.

Opinion by Judge Wardlaw

SUMMARY***

Securities Fraud

The panel reversed the district court’s dismissal and
remanded to allow amendment of the complaint in an action
in which purchasers of American Depository Shares or
Receipts alleged violations of §§ 10(b) and 20(a) of the
Securities Exchange Act based on Toshiba Corp.’s fraudulent
accounting practices.

ADRs are financial instruments that enable investors in
the United States to buy and sell stock in foreign corporations
such as Toshiba, whose common stock is publicly traded on
the Tokyo Stock Exchange. The district court concluded that
under the test set forth in Morrison v. Nat’l Australia Bank

*
This case was submitted to a panel that included Judge Stephen R.
Reinhardt. Following Judge Reinhardt’s death, Judge W. Fletcher was
drawn by lot to replace him. Ninth Circuit General Order 3.2.h. Judge W.
Fletcher has read the briefs, reviewed the record, and listened to oral
argument.
**
The Honorable Wiley Y. Daniel, United States District Judge for
the U.S. District Court for Colorado, sitting by designation.
***
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
 AUTO. INDUS. PENSION TRUST FUND V. TOSHIBA 3

Ltd., 561 U.S. 247 (2010), the Exchange Act, which does not
apply extraterritorially, did not apply to the purchase of
Toshiba ADRs because the over-the-counter market by which
the Toshiba ADRs were sold was not a “national exchange,”
and there was no domestic transaction between the ADR
purchasers and Toshiba.

Reversing, the panel declined to resolve the question of
whether, under Morrison, the Exchange Act applied to
“domestic exchanges” or only “national securities exchanges”
because the over-the-counter market was not an “exchange”
within the meaning of the Exchange Act. The panel
nevertheless concluded that the Exchange Act could apply to
the Toshiba ADR transactions, as domestic transactions in
securities not registered on an exchange. The panel
concluded that Toshiba ADRs were “securities” under the
Exchange Act. Adopting the Second and Third Circuits’
“irrevocable liability” test, looking to where purchasers
incurred the liability to take and pay for securities, and where
sellers incurred the liability to deliver securities, the panel
further concluded that plaintiffs must be allowed to amend
their complaint to allege that the purchase of Toshiba ADRs
on the over-the-counter market was a domestic purchase, and
that the alleged fraud was “in connection with” the purchase.

COUNSEL

Susan K. Alexander (argued), San Francisco, California, for
Plaintiffs-Appellants.

Christopher M. Curran (argued), Washington, D.C., for
Defendants-Appellees.
4 AUTO. INDUS. PENSION TRUST FUND V. TOSHIBA

OPINION

WARDLAW, Circuit Judge:

In Morrison v. National Australia Bank Ltd., 561 U.S.
247 (2010), the Supreme Court held that the presumption
against extraterritorial applicability of congressional
legislation renders the U.S. Securities Exchange Act of 1934
(“the Exchange Act”) applicable to deceptive conduct only in
connection with the purchases or sales of any securities
registered on a national securities exchange or domestic
transactions in other securities not so registered. The Court
reasoned that “the focus of the Exchange Act is not upon the
place where the deception originated, but upon purchases and
sales of securities in the United States.” Id. at 266.
Appellants Automotive Industries Pension Trust Fund
(“AIPTF”) and New England Teamsters & Trucking Industry
Pension Fund (together, the “Funds”) are named plaintiffs in
a putative class action alleging violations of the Exchange
Act and the Financial Instruments and Exchange Act of Japan
(“JFIEA”) against Toshiba Corporation (“Toshiba”) based on
its now-admitted fraudulent accounting practices that caused
hundreds of millions of dollars in loss to U.S. investors. The
complaint alleges (1) violation of Section 10(b) of the
Exchange Act and Rule 10b-5 on behalf of American
Depository Shares or Receipts (“ADRs”) purchasers,
(2) violation of Section 20(a) of the Exchange Act on behalf
of ADR purchasers, and (3) violation of JFIEA Article 21-2
on behalf of ADR purchasers and purchasers of Toshiba
common stock. The district court dismissed the case with
prejudice on the grounds that the over-the-counter market by
which ADRs are sold was not a “national exchange” within
the meaning of Morrison, and that there was not any domestic
transaction between ADR purchasers and Toshiba. Having
 AUTO. INDUS. PENSION TRUST FUND V. TOSHIBA 5

dismissed the Exchange Act claims, the district court
dismissed the Japanese law claim under principles of comity
and forum non conveniens.

Thus, at the heart of this appeal is the question of the
nature of ADRs and their transactions, and whether Toshiba
ADRs are covered by the Exchange Act through either
registry on a national exchange, or through domestic sales
and purchases.

I. FACTUAL AND PROCEDURAL BACKGROUND

In the wake of Toshiba’s admission of substantial
institutional accounting fraud and accompanying restatements
of pre-tax profits,1 Mark Stoyas filed this securities fraud
class action on June 4, 2015, against Toshiba, its current chief
executive officer, and its former chief executive officer based
on his ownership of thirty-three Toshiba ADRs and a loss of
$180.53. Later, AIPTF became lead plaintiff based on its
purchase on March 23, 2015, of 36,000 Toshiba ADRs in the

1
On September 7, 2015, Toshiba restated its pre-tax profits for fiscal
years 2008 through 2014, eliminating $2.6 billion in profit, or about a
third of its total reported profit during the period. Toshiba also restated
shareholder equity, eliminating $9.9 billion in equity. The restatements
followed a series of internal investigations prompted by a Japanese
government order that revealed widespread, deliberately fraudulent
accounting practices designed to inflate Toshiba’s profit statements over
an at least six-year period. As a result, Toshiba’s stock price declined by
more than 40 percent, a loss of $7.6 billion in market capitalization, and
nine senior executives resigned.
6 AUTO. INDUS. PENSION TRUST FUND V. TOSHIBA

United States on an over-the-counter market run by OTC
Markets Group and a loss of $196,913.47.2

The Funds filed the first amended complaint (“FAC”) on
December 17, 2015. The FAC added New England
Teamsters & Trucking Industry Pension Fund as a named
plaintiff; unlike AIPTF, it had purchased 343,000 shares of
Toshiba common stock on the Tokyo Stock Exchange.

The FAC alleges three class action claims for relief
against Toshiba.3 The first two claims are brought on behalf
of a class of all persons who acquired Toshiba ADRs (“ADR
class”) between May 8, 2012, and November 12, 2015
(“Class Period”). The first claim alleges violations of Section
10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-
5, 17 C.F.R. § 240.10b-5. Class members “acquired” Toshiba
ADRs “in reliance upon the truth and accuracy” of Toshiba’s
fraudulent financial statements, paid artificially inflated
prices, and suffered economic loss when the ADRs declined
in value after the fraud was revealed and pre-tax profits were
restated.

The second claim alleges violation of Section 20(a) of the
Exchange Act, 15 U.S.C. § 78t(a). Toshiba, despite having

2
Following the Private Securities Litigation Reform Act of 1995,
15 U.S.C. § 78u-4(a)(3)(A)(i), notice of the action was published in
Business Wire. On August 3, 2015, AIPTF filed a motion for appointment
as lead plaintiff; in light of AIPTF’s larger financial interest, Stoyas did
not oppose the motion and the district court granted it. See 15 U.S.C.
§ 78u-4(a)(3)(B)(iii)(I)(bb) (rebuttable presumption that the party with the
largest financial interest at stake is the most adequate plaintiff).
3
AIPTF dismissed the claims against the Toshiba chief executive
officers before filing the FAC.
 AUTO. INDUS. PENSION TRUST FUND V. TOSHIBA 7

the ability to control its directors, officers, and managers,
including twenty-four specific individuals, failed to prevent
their fraudulent conduct or, alternatively, “actively controlled
and directed those actions so as to cause the violations” of
securities laws.4

The third claim alleges violation of JFIEA Article 21-2.
It is brought on behalf of both the ADR class and a class of
“all citizens and residents of the United States who otherwise
acquired shares of Toshiba common stock during the Class
Period.” Appellants claim that “Toshiba breached its duty to
make a reasonable and diligent investigation of the
statements” in its financial reports and “to ensure that the
statements contained therein were truthful and accurate.” The
material false information and omissions artificially inflated
the price of Toshiba common stock, and class members were
harmed when the value of the stock declined due to the
revelation of fraudulent accounting.

The district court dismissed the FAC with prejudice on
May 20, 2016. Applying Morrison, the district court held
that the over-the-counter market was not a “stock exchange”
within the meaning of the Exchange Act, and that the FAC
failed to allege Toshiba’s involvement in the ADR
transactions at issue, rendering Section 10(b) inapplicable.
Having dismissed the Funds’ Exchange Act claims, the
district court dismissed the Japanese law claim on the basis of
comity and forum non conveniens. Finding any amendment

4
“Controlling person” liability under Section 20(a) requires a primary
violation of the Exchange Act, so the Funds’ Section 20(a) claim turns on
the viability of their Section 10(b) claim. Morrison, 561 U.S. at 253 n.2.
For clarity, the balance of the opinion discusses only the Section 10(b)
claim.
8 AUTO. INDUS. PENSION TRUST FUND V. TOSHIBA

would be futile, the district court dismissed the case with
prejudice. The Funds timely appeal. Fed. R. App. P. 4(a)(1).

II. JURISDICTION AND STANDARD OF REVIEW

The district court had jurisdiction over the Exchange Act
claims pursuant to Exchange Act Section 27(a), 15 U.S.C.
§ 78aa(a). The district court had jurisdiction over the JFIEA
claim based on diversity jurisdiction, as Toshiba is a foreign
corporation, as well as supplemental jurisdiction, because it
arises from the same case or controversy as the Exchange Act
claims. 28 U.S.C. §§ 1332(a)(2), (d)(2); 28 U.S.C. § 1367.

We have jurisdiction pursuant to 28 U.S.C. § 1291 to
review the district court’s order and final judgment
dismissing the Funds’ claims with prejudice. See Fed. R. Civ.
P. 54(b).

“We review de novo the district court’s grant of a motion
to dismiss under Rule 12(b)(6), accepting all factual
allegations in the complaint as true and construing them in
the light most favorable to the nonmoving party.” Fields v.
Twitter, Inc., 881 F.3d 739, 743 (9th Cir. 2018) (quotation
omitted). “[R]eview is generally limited to the face of the
complaint, materials incorporated into the complaint by
reference, and matters of judicial notice.” New Mexico State
Inv. Council v. Ernst & Young LLP, 641 F.3d 1089, 1094 (9th
Cir. 2011). In other words, we inquire “whether the
complaint at issue contains ‘sufficient factual matter,
accepted as true, to state a claim of relief that is plausible on
its face.’” Harris v. Cty. of Orange, 682 F.3d 1126, 1131 (9th
Cir. 2012) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009)).
 AUTO. INDUS. PENSION TRUST FUND V. TOSHIBA 9

Denial of leave to amend is reviewed for abuse of
discretion. Airs Aromatics, LLC v. Opinion Victoria’s Secret
Stores Brand Mgmt., Inc., 744 F.3d 595, 598 (9th Cir. 2014).
“Dismissal with prejudice and without leave to amend is not
appropriate unless it is clear on de novo review that the
complaint could not be saved by amendment.” Harris,
682 F.3d at 1331 (quoting Eminence Capital, LLC v. Aspeon,
Inc., 316 F.3d 1048, 1052 (9th Cir. 2003) (per curiam)). “A
district court’s failure to consider the relevant factors [set
forth in Foman v. Davis, 371 U.S. 178 (1962)] and articulate
why dismissal should be with prejudice instead of without
prejudice may constitute an abuse of discretion.” Eminence
Capital, 316 F.3d at 1052.

III. DISCUSSION

Toshiba’s common stock is publically traded on the
Tokyo Stock Exchange. The Funds’ Exchange Act claims are
in connection with Toshiba ADR transactions on the over-
the-counter market as opposed to direct purchases of Toshiba
common stock. Nevertheless, the Exchange Act applies to
Toshiba ADR transactions because Toshiba ADRs are
“securities” under the Exchange Act and AIPTF’s purchase
of Toshiba ADRs on the over-the-counter market is a
domestic “purchase or sale of . . . any security not” registered
on a national securities exchange. 15 U.S.C. § 78j(b); see
Morrison, 561 U.S. at 269–70.

A. Toshiba ADRs are “Securities”

The Exchange Act of 1934 applies to “securities,” defined
to include “any note, stock, treasury stock, security future, . . .
transferable share, investment contract, . . . any instrument
commonly known as a ‘security’; or any . . . receipt for . . .
10 AUTO. INDUS. PENSION TRUST FUND V. TOSHIBA

any of the foregoing.” 15 U.S.C. § 78c(a)(10); Sec. & Exch.
Comm’n v. W.J. Howey Co., 328 U.S. 293, 297 (1946)
(describing the definition as encompassing “documents traded
for speculation or investment”). This expansive list, along
with the Exchange Act’s remedial purpose, precludes “a
narrow and literal reading of the definition of securities.”
Warfield v. Alaniz, 569 F.3d 1015, 1020 (9th Cir. 2009); see,
e.g., Reves v. Ernst & Young, 494 U.S. 56, 60 (1990) (noting
that Congress “painted with a broad brush” the “scope of the
market that it wished to regulate” through federal securities
laws); Marine Bank v. Weaver, 455 U.S. 551, 555–56 (1982)
(“[T]he term ‘security’ was meant to include ‘the many types
of instruments that in our commercial world fall within the
ordinary concept of a security.’” (quoting H. R. Rep. No. 85
at 11 (1933))); Tcherepnin v. Knight, 389 U.S. 332, 336
(1967) (“[I]n searching for the meaning and scope of the
word ‘security’ in the Act, form should be disregarded for
substance and the emphasis should be on economic reality.”).

Toshiba ADRs fit comfortably within the Exchange Act’s
definition of “security,” specifically as “stock.” To constitute
“stock” under the Exchange Act, an instrument must possess
“some of the significant characteristics typically associated”
with common stock: “(i) the right to receive dividends
contingent upon an apportionment of profits;
(ii) negotiability; (iii) the ability to be pledged or
hypothecated; (iv) the conferring of voting rights in
proportion to the number of shares owned; and (v) the
capacity to appreciate in value.” Landreth Timber Co. v.
Landreth, 471 U.S. 681, 686 (1985) (quotation omitted).

ADRs “allow U.S. investors to invest in non-U.S.
companies and give non-U.S. companies easier access to U.S.
capital markets.” Sec. & Exch. Comm’n, Office of Inv’r
 AUTO. INDUS. PENSION TRUST FUND V. TOSHIBA 11

Education and Advocacy, “Investor Bulletin: American
Depository Receipts” at 1 (August 2012) [hereinafter “ADR
Bulletin”]; see Waggoner v. Barclays PLC, 875 F.3d 79, 84
n.3 (2d Cir. 2017). Specifically, ADRs are negotiable
certificates issued by a United States depositary institution,
typically banks, and they represent a beneficial interest in, but
not legal title of, a specified number of shares of a non-United
States company.5 See Pinker v. Roche Holdings Ltd.,
292 F.3d 361, 367 (3d Cir. 2002). The depositary institution
itself maintains custody over the foreign company’s shares.6
Id.; ADR Bulletin at 1. There are four depositary institutions
for Toshiba ADRs: Bank of New York Mellon, Citibank
N.A., Deutsche Bank Trust Company Americas, and
Convergex Depositary, Inc.

5
Technically, ADRs are receipts that evidence ownership of an
“American Depository Share” or “ADS,” which is the actual negotiable
certificate. See In re Additional Form F-6 Eligibility Requirement,
Securities Act Release No. 8287, Exchange Act Release No. 48482
[hereinafter “2003 SEC ADR Release”], 68 Fed. Reg. 54,644, 54,644 n.4
(Sept. 17, 2003). The parties, documents, and other opinions use both
terms interchangeably, but for clarity we use only the acronym ADR in
this opinion. In any event, if an ADS constitutes “stock” within the
meaning of the Exchange Act, then the corresponding ADR is also a
“security” within the Exchange Act because 15 U.S.C. § 78c(a)(10)
includes receipts for stock.
6
General background on ADRs can be found in Pinker; Bruce L.
Hertz, American Depository Receipts, 600 P.L.I./Comm. 237 (1992);
Adee et al., DR programmes, Bloomenthal and Wolff, 10C International
Capital Markets & Securities Regulation § 49:58 (April 2018 Update);
Amendola et al., American Depository Receipts, 69 American
Jurisprudence 2d, Securities Regulation—Federal § 760 (May 2018
Update); and Adee et al., Depository receipt program, 3F Securities &
Federal Corporate Law § 28:15 (2d ed. & March 2018 update).
12 AUTO. INDUS. PENSION TRUST FUND V. TOSHIBA

Toshiba ADRs are registered with the Securities and
Exchange Commission through the filing of Form F-6.7
17 C.F.R. § 239.36; ADR Bulletin at 2; see City of Monroe
Employees Ret. Sys. v. Bridgestone Corp., 399 F.3d 651,
655–56 & n.2 (6th Cir. 2005); Bruns, Nordeman & Co. v. Am.
Nat. Bank & Tr. Co., 394 F.2d 300, 304 n.4 (2d Cir. 1968)
(stating that the Securities and Exchange Commission started
requiring registration of ADRs in 1955). Toshiba ADRs are
unsponsored, which means that the depositary institutions
each filed Form F-6 without Toshiba’s “formal participation”
and possibly without its acquiescence. American Depository
Receipts, Securities Act Release No. 33-6984, Exchange Act
Release No. 34-29226, 56 Fed. Reg. 24,420, 24,422 (May 23,
1991) [hereinafter “1991 SEC ADR Release”]; 2003 SEC
ADR Release at 54,645. Accordingly, when AIPTF
purchased Toshiba ADRs, it was entering into “essentially a

7
Form F-6 “relates only to the contractual terms of deposit under the
deposit agreement. . . . [It] contains no information about the non-U.S.
company.” ADR Bulletin at 2; see also 2003 SEC ADR Release at
54,644–45; Pinker, 292 F.3d at 367. In Form F-6s for the Toshiba ADRs,
the depositary institutions attested that they exercised “reasonable
diligence” in forming a “reasonable, good-faith belief” that Toshiba ADRs
were exempt from Securities and Exchange Commission registration
pursuant to Rule 12g3-2(b), 17 C.F.R. § 240.12g3-2(b). Exemption from
Registration under Section 12(g) of the Securities Exchange Act of 1934
for Foreign Private Issuers, Exchange Act Release No. 58465, 73 Fed.
Reg. 52,752, 52,762 (Sept. 5, 2008) [hereinafter “2008 SEC ADR
Rulemaking”] (to be codified at 17 C.F.R. pts. 239, 240, 249). Toshiba
ADRs are automatically exempt, since (1) a foreign stock exchange is the
primary trading market for Toshiba’s common stock and (2) Toshiba
electronically publishes in English “information that is material to an
investment decision” in its securities, including annual reports, financial
statements, and press releases. 17 C.F.R. § 240.12g3-2(b)(3)(i).
 AUTO. INDUS. PENSION TRUST FUND V. TOSHIBA 13

two-party contract” with the depositary institution.8 2003
SEC ADR Release at 54,645. The contractual terms are
specified in the ADR itself, to which ADR holders are
“deemed to have agreed . . . by their acceptance and holding
of ADRs.” Batchelder v. Kawamoto, 147 F.3d 915, 919 (9th
Cir. 1998) (quoting 1991 SEC ADR Release).

Toshiba ADRs share many of the five significant
characteristics typically associated with common stock. See
Landreth Timber, 471 U.S. at 686. First, depositary
institutions transfer the dividends they receive on deposited
Toshiba common stock to the corresponding Toshiba ADR
owner.9 Second, Toshiba ADRs are negotiable: they are
traded through U.S. broker-dealers; collectively, the
depositary institutions have registered 205 million Toshiba
ADRs; Toshiba ADRs are owned “by hundreds of thousands
of persons”; and Toshiba ADR holders may split or combine
Toshiba ADRs into new instruments as they see fit. Pinker,
292 F.3d at 367 (“ADRs are tradeable in the same manner as

8
In contrast, ADRs are sponsored when a depositary institution and
the foreign company jointly file Form F-6 to register the ADRs. 2003
SEC ADR Release at 54,645. Accordingly, purchasers of sponsored
ADRs enter into essentially a three-party contract with the depositary and
the foreign company. Id. Sponsored ADRs are further subdivided into
three levels, corresponding to where the ADRs are listed and whether the
foreign company is using the ADRs to raise capital. ADR Bulletin at 2;
see In re Volkswagen “Clean Diesel” Mktg., Sales Practices, & Prod.
Liab. Litig., No. 2672 CRB (JSC), 2017 WL 66281, at *6 n.5 (N.D. Cal.
Jan. 4, 2017); Burch and Foerster, Capital Markets Handbook § 5.19 (6th
ed. 2018); Bloomenthal and Wolff, Securities and Federal Corporate Law
§ 28:15 (2d ed. & March 2018 update). A sponsored ADR precludes
another depositary’s issuance of an unsponsored ADR. See 1991 SEC
ADR Release at 24,422–23.
9
Each Toshiba ADR corresponds to six Toshiba common shares.
14 AUTO. INDUS. PENSION TRUST FUND V. TOSHIBA

any other registered American security.”); In re Hawaii
Corp., 829 F.2d 813, 815 (9th Cir. 1987) (defining
negotiability). Third, nothing in the Toshiba ADRs restricts
pledging or hypothecation. Fourth, each of the four Toshiba
ADR depositary institutions is willing to exercise the voting
rights associated with the deposited Toshiba common stock
as directed by the Toshiba ADR owners. Fifth, Toshiba
ADRs have the same “interest . . . in the management, profit
and assets” of Toshiba as investors in Toshiba common stock,
Comm’r of Internal Revenue v. Scatena, 85 F.2d 729, 732
(9th Cir. 1936), because ADR value is directly linked to the
value of Toshiba common stock: Toshiba ADRs decreased in
value “in tandem” with the decrease in Toshiba common
stock price.10

More broadly, the economic reality of Toshiba ADRs is
closely akin to stock. See Waggoner, 875 F.3d at 85 n.3
(expert testifying that ADRs are the “rough . . . equivalent” of
stock); Law Debenture Tr. Co. of New York v. Maverick Tube
Corp., 595 F.3d 458, 464 (2d Cir. 2010) (ADRs “share
several of the same characteristics as ordinary shares.”).
They are designed to allow seamless investment in foreign

10
The FAC alleges that Toshiba’s actions “affect[ed] the price of
Toshiba’s ADRs in the same manner and to the same extent” as they
affected the price of Toshiba common stock. We note, however, that one
Second Circuit case raised several reasons why that may not be the case.
See Law Debenture Tr. Co. of New York v. Maverick Tube Corp.,
595 F.3d 458, 469–71 (2d Cir. 2010) (“[T]he price at which an [ADR] is
traded is not simply a function of the value of the foreign issuer’s
underlying security. ‘The ADR trading price is also a function of,’ inter
alia, ‘foreign currency exchange rates,’ the risks of fluctuation in those
rates, the administrative costs of establishing, maintaining, and operating
the depositary, and ‘inefficient market dissemination of news about the
issuer of the deposited securities.’” (quoting 1991 SEC ADR Release at
24,424)).
 AUTO. INDUS. PENSION TRUST FUND V. TOSHIBA 15

companies akin to owning shares of U.S. companies—ADRs
are denominated in U.S. dollars, cleared through U.S.
settlement systems, and are listed alongside U.S. stocks.
ADR Bulletin at 1; Morrison, 561 U.S. at 251. Prospective
investors in Toshiba ADRs have electronic access to English
translations of “information that is material to an investment
decision” in Toshiba’s common stock, including annual
reports, financial statements, and press releases. 17 C.F.R.
§ 240.12g3-2(b)(3)(i). And Toshiba ADR owners can obtain
legal ownership of Toshiba common stock in exchange for
their ADRs at any time. Reese v. Malone, 747 F.3d 557, 563
n.1 (9th Cir. 2014), overruled on other grounds by City of
Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Align
Tech., Inc., 856 F.3d 605 (9th Cir. 2017).

Accordingly, ADRs are consistently referred to and
treated as securities by the parties, depositary institutions, the
Securities and Exchange Commission, courts, and scholars.
See, e.g., Bank of New York Mellon Corp. v. Comm’r of
Internal Revenue, 801 F.3d 104, 116 (2d Cir. 2015); Reese,
747 F.3d at 563 n.1 (analyzing Exchange Act claim based on
purchase of ADRs); Reese v. BP Expl. (Alaska) Inc., 643 F.3d
681, 684–85 (9th Cir. 2011) (same); City of Monroe, 399 F.3d
at 655–56 (same); Pinker, 292 F.3d at 367; Compaq
Computer Corp. & Subsidiaries v. Comm’r of Internal
Revenue, 277 F.3d 778, 779–80 (5th Cir. 2001); IES Indus.,
Inc. v. United States, 253 F.3d 350, 351 (8th Cir. 2001);
17 C.F.R. § 230.405 (defining “depository share” as “a
security, evidenced by an American Depositary Receipt”);
ADR Bulletin at 1; 2008 SEC ADR Rulemaking at 52,763;
2003 SEC ADR Release at 54,644 n.4 & 54,646 (“For the
purposes of Securities Act registration, ADRs and the
deposited securities are separate securities, requiring separate
registration or exemption from Securities Act registration.”);
16 AUTO. INDUS. PENSION TRUST FUND V. TOSHIBA

1991 SEC ADR Release at 24,421 n.5; Nanda et al.,
American Depository Shares, 2 Litigation of International
Disputes in U.S. Courts § 8:38 (April 2018 update);
Dickerson et al., Open questions after Morrison—American
Depository Receipts, Litigating International Torts in U.S.
Courts § 7:7 (August 2017 update); Amendola et al.,
American Depository Receipt, 18 C.J.S. Corporations § 251
(March 2018 update); Lewkow, American depositary shares,
Marans et al., 1 Manual of Foreign Investment in the U.S.
§ 6:26 (3d ed. & December 2013 update); see also United
States v. Martoma, No. 12 CR 973 PGG, 2013 WL 6632676,
at *3 n.1 (S.D.N.Y. Dec. 17, 2013) (collecting post-Morrison
securities fraud actions that proceeded based on ADRs).11

B. The Exchange Act

The Exchange Act of 1934 “anchor[s] federal regulation
of vital elements of our economy.” Merrill Lynch, Pierce,
Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 78 (2006) (“The

11
Toshiba characterizes Securities and Exchange Commission v.
Ficeto, 839 F. Supp. 2d 1101, 1115 (C.D. Cal. 2011) as concluding that
ADRs “fall entirely outside” of the Exchange Act because “they are
‘merely placeholders for the ordinary shares traded on foreign
exchanges.’” But in that passage from Ficeto, the district court is
summarizing the holdings of two cases, one of which is questionable and
the other of which is directly contrary. The first case, In re Société
Générale Sec. Litig., No. 08 Civ. 2495 (RMB), 2010 WL 3910286
(S.D.N.Y. Sept. 29, 2010), has been criticized as incorrect and contrary to
Morrison. See Martoma, 2013 WL 6632676, at *4 & n.3 (noting In re
Société Générale’s reliance on pre-Morrison authority); Wu v. Stomber,
883 F. Supp. 2d 233, 253 (D.D.C. 2012), aff’d, 750 F.3d 944 (D.C. Cir.
2014). The second, In re Vivendi Universal, S.A. Sec. Litig., 765 F. Supp.
2d 512 (S.D.N.Y. 2011), aff’d sub nom. In re Vivendi, S.A. Sec. Litig.,
838 F.3d 223 (2d Cir. 2016), explicitly refers to ADRs as a separate
security. Id. at 521 n.2.
 AUTO. INDUS. PENSION TRUST FUND V. TOSHIBA 17

magnitude of the federal interest in protecting the integrity
and efficient operation of the market for nationally traded
securities cannot be overstated.”). Exchange Act Section
10(b) makes it “unlawful for any person, directly or indirectly
. . . [t]o use or employ . . . any manipulative or deceptive
device or contrivance in contravention” of Securities and
Exchange Commission rules and regulations “in connection
with the purchase or sale of any security registered on a
national securities exchange or any security not so
registered.” 15 U.S.C. § 78j(b). As a “‘catchall’ clause”
enabling the Securities and Exchange Commission “to deal
with new manipulative (or cunning) devices,” Ernst & Ernst
v. Hochfelder, 425 U.S. 185, 203 (1976) (quotation omitted),
Section 10(b) is an essential component of the regulatory
scheme.

In 1942, the Securities and Exchange Commission
promulgated Rule 10b-5 to implement Section 10(b). Sec. &
Exch. Comm’n Release Notice, Release No. 3230, 1942 WL
34443 (May 21, 1942). Rule 10b-5 makes it unlawful for

any person, directly or indirectly, . . .

(a) To employ any device, scheme, or
artifice to defraud,

(b) To make any untrue statement of a
material fact or to omit to state a material
fact necessary in order to make the
statements made, in the light of the
circumstances under which they were
made, not misleading, or
18 AUTO. INDUS. PENSION TRUST FUND V. TOSHIBA

(c) To engage in any act, practice, or
course of business which operates or
would operate as a fraud or deceit upon
any person,

in connection with the purchase or sale of any
security.

17 C.F.R. § 240.10b-5(b); see Dabit, 547 U.S. at 78; Sec. &
Exch. Comm’n v. Clark, 915 F.2d 439, 448, 450 (9th Cir.
1990) (stating that Rule 10b-5 has become “the centerpiece
of federal securities regulation”). Notably, Section 10(b) and
Rule 10b-5 repeatedly use the qualifier “any,” and therefore
“are obviously meant to be inclusive.” Affiliated Ute Citizens
of Utah v. United States, 406 U.S. 128, 151 (1972); see also
Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299,
312 (1985) (Section 10(b) and Rule 10b-5 have “broad
reach.”).

Section 10(b) and Rule 10b-5 “may well be the most
litigated provisions in the federal securities laws.” Sec. &
Exch. Comm’n v. Nat’l Sec., Inc., 393 U.S. 453, 465 (1969).
However, it was not until 2010 that the Court first addressed
whether Section 10(b) and Rule 10b-5 apply extraterritorially.
Morrison, 561 U.S. at 265.

In Morrison, three Australian individuals sought to bring
Exchange Act securities fraud claims in the Southern District
of New York against National Australia Bank Limited
(“Australia Bank”), then the largest bank in Australia. Id. at
251–53. One of Australia Bank’s subsidiaries, headquartered
in Florida, and its executives had allegedly engaged in
deceptive conduct and publically made misleading
statements, which were repeated in Australia Bank’s annual
 AUTO. INDUS. PENSION TRUST FUND V. TOSHIBA 19

reports and other public documents. Id. at 251–52. While
Australia Bank ADRs were listed on the New York Stock
Exchange, the Australians had purchased Australia Bank’s
ordinary shares, which were “traded on the Australian Stock
Exchange and other foreign securities exchanges, but not on
any exchange in the United States,” and they sought to
represent a class of foreign purchasers of Australia Bank’s
ordinary shares. Id. at 251, 253.

Analyzing the text of Section 10(b), the Court found “no
affirmative indication” that it applied extraterritorially. Id. at
265; see also id. at 262 (“On its face, § 10(b) contains nothing
to suggest it applies abroad.”). Unless Congress “clearly
expressed” its “affirmative intention” of extraterritorial effect
“we must presume it is primarily concerned with domestic
conditions.” Id. at 255 (quotation omitted). Therefore, the
Court held that Section 10(b) does not apply extraterritorially.
Id. at 265.

To define what constitutes the permissible, non-
extraterritorial application of Section 10(b) and Rule 10b-5,
the Court articulated a transactional test rooted in the text of
Section 10(b). Id. at 266–70 & 267 n.9; see also id. at
261–62 (“Rule 10b-5 . . . was promulgated under § 10(b), and
does not extend beyond conduct encompassed by § 10(b)’s
prohibition.” (quotation omitted)). Section 10(b) focuses “not
upon the place where . . . deception originated, but upon
purchases and sales of securities in the United States.” Id. at
266. In other words, “Section 10(b) does not punish
deceptive conduct, but only deceptive conduct ‘in connection
with the purchase or sale of any security registered on a
national securities exchange or any security not so
registered.’” Id. (quoting Section 10(b), 15 U.S.C. § 78j(b));
see also id. at 272 (“Not deception alone, but deception with
20 AUTO. INDUS. PENSION TRUST FUND V. TOSHIBA

respect to certain purchases or sales is necessary for a
violation of the statute.”).

The Court drew a line delineating categories of
transactions Congress sought to regulate and parties whom
Congress sought to protect: in its view, Section 10(b) applies
to “only transactions in securities listed on domestic
exchanges, and domestic transactions in other securities.” Id.
at 267. The transactional test the Morrison Court
adopted—whether the purchase or sale (1) involves a security
listed on a domestic exchange or (2) takes place in the United
States—avoided “the interference with foreign securities
regulation” that application of the Exchange Act to foreign
transactions would produce. Id. at 269.

Thus, the Court squarely held that the Exchange Act did
not apply where Australia Bank’s shares were not listed on a
United States exchange and “all aspects of the purchases”
took place outside the United States, even though a subsidiary
of Australia Bank and its executives “engaged in the
deceptive conduct” in the United States. Id. at 252–53, 273.
Deceptive domestic conduct or the presence of other, non-
transactional domestic activity cannot substitute for
Morrison’s requirement of a security’s presence on a
domestic exchange or of a security’s domestic transaction.
As the Court reasoned, “it is a rare case of prohibited
extraterritorial application that lacks all contact with the
territory of the United States. But the presumption against
extraterritorial application would be a craven watchdog
indeed if it retreated to its kennel whenever some domestic
activity is involved in the case.” Id. at 266.
 AUTO. INDUS. PENSION TRUST FUND V. TOSHIBA 21

1. “Registered on a National Securities Exchange”

The Court derived its first category of transactions to
which Section 10(b) applies from Section 10(b)’s language:
“any security registered on a national securities exchange.”
15 U.S.C. § 78j(b); see Morrison, 561 U.S. at 268 n.10
(stating that the second category arises from the other half of
Section 10(b), “any security not so registered”). But when
articulating the rule, the Morrison Court repeatedly describes
the regulated category as “securities listed on domestic
exchanges.”12 Morrison, 561 U.S. at 267 (emphasis added);
see id. at 268, 270 (same); id. at 273 (“security listed on an
American stock exchange” and “securities listed on a
domestic exchange”).

Facially, the terms are distinct: “national security
exchange” is a term of art referring to a subset of
“exchanges” that are registered with the Securities and
Exchange Commission and that abide by the requirements set
out in 15 U.S.C. § 78f and its regulations. Twenty one
exchanges are currently so registered, and two are exempt
based on a limited volume of transactions.13 No over-the-
counter market is a “national security exchange,” and the
Funds do not argue otherwise.

12
Under Morrison and in today’s common parlance, the terms
“registered” and “listed” are essentially equivalent. See In re Vivendi,
765 F. Supp. 2d at 528 n.13.
13
The Securities and Exchange Commission maintains a website
listing national securities exchanges. Sec. & Exch. Comm’n, Fast
Answers: National Securities Exchanges, https://tinyurl.com/ycox23jn
(last modified Nov. 1, 2017). As of briefing in this appeal, eighteen
national securities exchanges were so registered.
22 AUTO. INDUS. PENSION TRUST FUND V. TOSHIBA

Toshiba urges us to eliminate any discrepancy by reading
the term “domestic exchange” as used in Morrison as the
equivalent of “national securities exchange.” But Toshiba
incorrectly characterizes Morrison’s discussion of “domestic
exchange” as mere shorthand for what Toshiba believes the
Court must have meant to write—national securities
exchange. The Court uses the term “domestic exchange”
interchangeably both when defining the first category of
transactions to which Section 10(b) applies and throughout
the remainder of the opinion. And there is little wonder that
the Court did so: the entire focus of the Morrison opinion is
the “longstanding principle” that Congressional legislation,
including Section 10(b), is meant to apply only within the
territorial jurisdiction of the United States, and its
announcement of the “transactional test” to separate domestic
from foreign purchases and sales.14 Morrison, 561 U.S. at
255, 269.

We need not and do not resolve this argument, although
from our reading the Funds have the better of it. The over-
the-counter market on which Toshiba ADRs trade is simply
not an “exchange” under the Exchange Act.

14
Toshiba relies on the Third Circuit’s decision in United States v.
Georgiou, 777 F.3d 125 (3d Cir. 2015). But rather than analyzing Section
10(b) or the text of Morrison, Georgiou cites Morrison’s concluding
summation paragraph, which used “American stock exchange,” and
simply treats that term as “national security exchanges.” Id. at 134
(quoting Morrison, 561 U.S. at 273).
 AUTO. INDUS. PENSION TRUST FUND V. TOSHIBA 23

The Exchange Act defines “exchange” as

any organization, association, or group of
persons, whether incorporated or
unincorporated, which constitutes, maintains,
or provides a market place or facilities for
bringing together purchasers and sellers of
securities or for otherwise performing with
respect to securities the functions commonly
performed by a stock exchange as that term is
generally understood, and includes the market
place and the market facilities maintained by
such exchange.

15 U.S.C. § 78c(a)(1). The Securities and Exchange
Commission’s implementing regulation sets forth two
requirements—the organization, association, or group of
persons must (1) bring “together the orders for securities of
multiple buyers and sellers” and (2) use “established, non-
discretionary methods . . . under which such orders interact
with each other, and the buyers and sellers entering such
orders agree to the terms of the trade.” 17 C.F.R. § 240.3b-
16(a)(1)–(2).
24 AUTO. INDUS. PENSION TRUST FUND V. TOSHIBA

Toshiba ADRs trade on OTC Link,15 an over-the-counter
market operated by OTC Markets Group.16 Since May 2012,
OTC Link has registered with the Securities and Exchange
Commission as a “broker-dealer” alternative trading system.17

15
Formerly called OTC Pink, OTC Link is a “electronic inter-dealer
quotation system that displays quotes from broker-dealers. . . . OTC Link
does not require companies whose securities are quotes on its systems to
meet any listing requirements.” Sec. & Exch. Comm’n, Fast Answers:
OTC Link LLC, https://tinyurl.com/yaas8nr9 (last modified May 9, 2013);
see Sec. & Exch. Comm. v. CMKM Diamonds, Inc., 729 F.3d 1248, 1251
(9th Cir. 2013); Sec. & Exch. Comm. v. Platforms Wireless Int’l Corp.,
617 F.3d 1072, 1081 (9th Cir. 2010). The Funds allege that OTC Link is
a “highly efficient and automated market” and that Toshiba ADRs are
owned “by hundreds of thousands of persons.” OTC Link contrasts with
two other OTC markets, OTCQX and OTCQB, which both have
additional listing and disclosure requirements. See OTC Markets Group,
Reporting Standards, https://tinyurl.com/y773bmlc (last visited July 9,
2018); OTC Markets Group, Information for Pink Companies,
https://tinyurl.com/y98g2q3j (last visited July 9, 2018).
16
The FAC does not specify on which OTC market Toshiba ADRs
trade, but we sua sponte take judicial notice of the materials submitted
with the Funds’ appellate briefing. See Fed. R. Evid. 201.
17
The Securities and Exchange Commission maintains a website
containing lists of alternative trading systems. The lists have been posted
monthly since August 2014 and were posted approximately every four
months between January 2009 and August 2014. Sec. & Exch. Comm’n,
Alternative Trading System (“ATS”) List, https://tinyurl.com/p3k5l44 (last
modified June 30, 2018). We take judicial notice of the Securities and
Exchange Commission’s list of registered alternative trading systems.
See, e.g., Corrie v. Caterpillar, Inc., 503 F.3d 974, 978 n.2 (9th Cir. 2007)
(taking judicial notice of government-published documents). In
addition, OTC Markets Group’s website describes OTC Link as an “SEC
regulated” and “SEC-registered” alternative trading system. See OTC
Markets Group, Our Company, https://tinyurl.com/yavh7396 (last visited
July 9, 2018); OTC Markets Group, How To Get Traded,
https://tinyurl.com/yangt6cj (last visited July 9, 2018).
 AUTO. INDUS. PENSION TRUST FUND V. TOSHIBA 25

As an alternative trading system, OTC Link is separately
regulated by the Securities and Exchange Commission and is
specifically exempt from the Exchange Act’s definition of
“exchange.” See 15 U.S.C. § 78mm(a)(1);18 17 C.F.R.
§§ 242.300–303 (“Regulation ATS”) (regulations that apply
to alternative trading systems); 17 C.F.R. § 240.3a1-1(a)(2)
(exempting entities in compliance with Regulation ATS from
15 U.S.C. § 78c(a)(1)’s definition of “exchange”); Regulation
of Exchanges and Alternative Trading Systems, 63 Fed. Reg.
70,844 (Dec. 22, 1998). The Securities and Exchange
Commission’s regulation is a reasonable exercise of the
express delegation of authority in 15 U.S.C. § 78mm to the
Securities and Exchange Commission, so we give controlling
weight to the Securities and Exchange Commission’s
categorization of OTC Link as not an “exchange” within the
meaning of the Exchange Act. See Chevron, U.S.A., Inc. v.
Nat. Res. Def. Council, Inc., 467 U.S. 837, 844 (1984)
(regulations promulgated pursuant to express Congressional
delegations of authority “are given controlling weight unless
they are arbitrary, capricious, or manifestly contrary to the
statute”); Sharemaster v. Sec. & Exch. Comm’n, 847 F.3d
1059, 1066 n.5 (9th Cir. 2017) (holding that “Congress vested
the Commission with general authority to administer the
Exchange Act,” thereby meeting the preconditions for
Chevron deference).

18
15 U.S.C. § 78mm(a)(1) authorizes the Securities and Exchange
Commission to, “notwithstanding any other provision of this chapter, . . .
conditionally or unconditionally exempt any person, security, or
transaction, or any class or classes of persons, securities, or transactions,
from any provision or provisions of this chapter or of any rule or
regulation thereunder, to the extent that such exemption is necessary or
appropriate in the public interest, and is consistent with the protection of
investors” by “rule, regulation, or order.”
26 AUTO. INDUS. PENSION TRUST FUND V. TOSHIBA

The Funds present the Exchange Act’s definition of
“exchange” but do not respond to Toshiba’s argument that
OTC Link is an alternative trading system, not an exchange.
Instead, they urge us to follow Absolute Activist Value Master
Fund Ltd. v. Ficeto, 677 F.3d 60 (2d Cir. 2012), in which the
Second Circuit noted that in Ficeto the Securities and
Exchange Commission “successfully argued that the first
prong of Morrison is satisfied because the case involves
securities traded on the over-the-counter securities market,
not securities sold on foreign exchanges.” Id. at 66 n.3 (citing
Ficeto, 839 F. Supp. 2d at 1112). As Absolute Activist
expressly took no position on whether Morrison’s first
category included over-the-counter markets, the Funds are
actually asking us to adopt Ficeto. See id. at 66 (“The case at
hand does not concern the first prong of Morrison.”). But
Ficeto’s analysis failed to consider whether over-the-counter
market trades fell within Morrison’s second category of
regulated transactions, and incorrectly assumed that over-the-
counter market trades must be regulated, if at all, only if they
come within Morrison’s first category.

The Funds also urge us to follow the Eleventh Circuit’s
decision in United States v. Isaacson, 752 F.3d 1291 (11th
Cir. 2014), which they argue had “no trouble” holding that
over-the-counter markets such as OTC Link are “exchanges.”
But Isaacson’s brief discussion of Morrison actually had “no
trouble” concluding that the criminal conduct at issue
satisfied Morrison’s requirement of a U.S. nexus. Isaacson,
752 F.3d at 1299. Isaacson mentioned expert testimony
explaining that over-the-counter “exchanges were ‘similar
to’” the New York Stock Exchange and NASDAQ, but did
not state that such evidence established that they were
domestic exchanges under Morrison. Instead, after citing
evidence supporting the inference that the securities at issue
 AUTO. INDUS. PENSION TRUST FUND V. TOSHIBA 27

were purchased in the United States, Isaacson concluded that
Morrison’s requirements were satisfied. Isaacson, 752 F.3d
at 1299. As discussed below, we agree with Isaacson and the
Funds that the Exchange Act regulates over-the-counter
markets, but nothing in Isaacson convinces us that OTC Link
is an “exchange” under the Exchange Act.

2. “Or any Security not so Regulated”

The Court’s second category of transactions reached by
Section 10(b) is “domestic transactions in other securities,”
derived from Section 10(b)’s text, “any security not so
registered.” Morrison, 561 U.S. at 268 & n.10 (quoting
15 U.S.C. § 78j(b)); see also id. at 273 (defining category as
“the purchase or sale of any other security in the United
States”). Morrison did not describe the contours of this
category at length, but did say that it exclusively focuses on
“domestic purchases and sales.” Id. at 268; see id. at 273
(holding this category inapplicable to the transactions at hand
because “all aspects of the purchases complained of . . .
occurred outside the United States”).

Cases since Morrison have articulated an “irrevocable
liability” test to determine when a securities transaction is
domestic. The test originated in the Second Circuit’s decision
in Absolute Activist, which held that “a securities transaction
occurs when the parties incur irrevocable liability.” Absolute
Activist, 677 F.3d at 67. Because irrevocable liability
determines the timing of a transaction, it also determines the
location: a plaintiff must plausibly allege “that the purchaser
incurred irrevocable liability within the United States to take
and pay for a security, or that the seller incurred irrevocable
liability within the United States to deliver a security.” Id. at
68. The Second Circuit also found an alternative means of
28 AUTO. INDUS. PENSION TRUST FUND V. TOSHIBA

alleging a domestic transaction: alleging that title to the
shares was transferred within the U.S. Id. (citing Quail
Cruises Ship Mgmt. Ltd. v. Agencia de Viagens CVC Tur
Limitada, 645 F.3d 1307, 1310–11 (11th Cir. 2011)
(reversing dismissal under Morrison when the complaint
alleged domestic transfer of title)). The Second Circuit
detailed factual allegations in a complaint that could
sufficiently allege a domestic transaction: “facts concerning
the formation of the contracts, the placement of purchase
orders, the passing of title, or the exchange of money.” Id. at
70. The irrevocable liability test has been adopted by the
Third Circuit.19 See Georgiou, 777 F.3d at 137.

We recently indicated approval of the irrevocable liability
test in Securities and Exchange Commission v. World Capital
Market, Inc., 864 F.3d 996 (9th Cir. 2017). There, we cited
Absolute Activist and the irrevocable liability rule as support
for holding that, where “the undisputed evidence . . . shows
that far more than $5 million in investor transactions took
place in the United States,” the district court properly rejected
the argument that application of the Exchange Act was

19
The Second Circuit has repeatedly reaffirmed the irrevocable
liability test. See, e.g., Myun-Uk Choi v. Tower Research Capital LLC,
890 F.3d 60, 66 (2d Cir. 2018); In re Petrobras Sec., 862 F.3d 250, 262
(2d Cir. 2017); In re Vivendi, 838 F.3d at 265; United States v. Mandell,
752 F.3d 544, 548 (2d Cir. 2014). The test has also been adopted by
numerous district courts in our circuit. See, e.g., In re Volkswagen, 2017
WL 66281, at *4 & n.3; Sec. & Exch. Comm’n v. Yin Nan Michael Wang,
No. LACV1307553JAKSSX, 2015 WL 12656906, at *10–11 (C.D. Cal.
Aug. 18, 2015); WPP Luxembourg Gamma Three Sarl v. Spot Runner,
Inc., No. CV09CV02487DMGPLAX, 2013 WL 12203024, at *6 (C.D.
Cal. Apr. 4, 2013); MVP Asset Mgmt. (USA) LLC v. Vestbirk, No. 2:10-
CV-02483-GEB, 2013 WL 1726359, at *3–7 (E.D. Cal. Mar. 22, 2013);
Sec. & Exch. Comm’n v. Geranio, No. CV 12-04257 DMG, 2013 WL
12146516, at *4 (C.D. Cal. Jan. 29, 2013).
 AUTO. INDUS. PENSION TRUST FUND V. TOSHIBA 29

impermissibly extraterritorial. Id. at 1008. While we avoided
explicitly adopting the test, we deemed Absolute Activist
“instructive.” Id. at 1008 n.11 (“We have yet to address what
constitutes a domestic transaction under Morrison.”).
Consistent with World Capital Market and the irrevocable
liability test, in Securities and Exchange Commission v.
Levine, 462 F. App’x 717 (9th Cir. 2011), we held that the
Securities Act governed particular transactions “because the
actual sales closed in Nevada when [the individual] received
complete stock purchase agreements and payments.” Id. at
719 (citing Morrison); see Morrison, 561 U.S. at 268–69
(indicating that the Exchange Act extraterritoriality analysis
applies to the Securities Act). And in Securities and
Exchange Commission v. Fujinaga, 696 F. App’x 203 (9th
Cir. 2017), we held that the Exchange Act applied because
the “sales of securities were ‘made’ in the United States.” Id.
at 206 (citing Morrison, 561 U.S. at 269–70). We elaborated
that “to complete an investment, investors’ funds were wired
to [a] United States bank account, their paperwork was
forwarded to [an] office in Nevada,” which “issued the
Certificate of Investment.” Id.

We are persuaded by the Second and Third Circuits’
analysis and therefore adopt the irrevocable liability test to
determine whether the securities were the subject of a
domestic transaction. Looking to where purchasers incurred
the liability to take and pay for securities, and where sellers
incurred the liability to deliver securities, Absolute Activist,
677 F.3d at 68, hews to Section 10(b)’s focus on transactions
and Morrison’s instruction that purchases and sales constitute
transactions, Morrison, 561 U.S. at 267–68. Furthermore,
factual allegations concerning contract formation, placement
of purchase orders, passing of title, and the exchange of
30 AUTO. INDUS. PENSION TRUST FUND V. TOSHIBA

money are directly related to the consummation of a
securities transaction. See Absolute Activist, 677 F.3d at 70.

As Toshiba acknowledges, the FAC alleges that AIPTF’s
Toshiba ADRs were purchased in the United States. The
FAC also alleges that Bank of New York, one of the
depositary institutions, sold Toshiba ADRs in the United
States. Missing from the FAC, however, are specific factual
allegations regarding where the parties to the transaction
incurred irrevocable liability. Cf. In re Petrobras Sec.,
862 F.3d at 263, 273 (identifying the relevant facts as
including who sold the relevant securities and how those
transactions were effectuated, as evidenced by documentation
such as confirmation slips). But AIPTF is a United States
entity; its executives direct, control, and coordinate its
activities in the United States; and its headquarters are in
Alameda, California. OTC Markets Group operates OTC
Link in the United States. And the four Toshiba ADR
depositary institutions’ principal executive offices, agents for
service, and offices where ADR holders can exchange their
ADRs for Toshiba common shares are all in New York.
Accordingly, an amended complaint could almost certainly
allege sufficient facts to establish that AIPTF purchased its
Toshiba ADRs in a domestic transaction.20 See Morrison,
251 U.S. at 273 & 251 n.1 (indicating that at least some
aspects of an ADR transaction for an ADR listed on the New
York Stock Exchange occur in the United States).

20
The FAC defines the ADR class as “all persons who acquired
Toshiba” ADRs, regardless of the location of irrevocable liability. Any
class definition in an amended complaint, however, should comport with
Morrison and the irrevocable liability test.
 AUTO. INDUS. PENSION TRUST FUND V. TOSHIBA 31

Rather than challenging whether the transactions were
domestic, Toshiba argues that the existence of a domestic
transaction is necessary but not sufficient under Morrison,
relying on the Second Circuit case Parkcentral Global Hub
v. Porsche Automobile Holdings, 763 F.3d 198 (2d Cir.
2014). Specifically, Toshiba argues that because the Funds
did not allege any connection between Toshiba and the
Toshiba ADR transactions, Morrison precludes the Funds’
Exchange Act claims. But this turns Morrison and Section
10(b) on their heads: because we are to examine the location
of the transaction, it does not matter that a foreign entity was
not engaged in the transaction. For the Exchange Act to
apply, there must be a domestic transaction; that Toshiba may
ultimately be found not liable for causing the loss in value to
the ADRs does not mean that the Act is inapplicable to the
transactions.

Parkcentral is distinguishable on many grounds.21 First,
Parkcentral did not involve ADRs but instead involved
“securities-based swap agreements.” Parkcentral, 763 F.3d
at 205. Unlike ADRs, those entirely private agreements do
not constitute investments in the company on whose
securities they are based nor do they confer any ownership
interest in those reference securities. Id. at 205–07.
Furthermore, the swap agreements’ value is wholly
unconstrained by the amount of reference security available
and is not directly pegged to the value of the reference
security. Id. at 205–07 & 206 n.8. Second, the private swap
agreements are not traded on Securities and Exchange

21
Parkcentral explicitly cautioned against extending its rule,
instructing that its analysis should not be “perfunctorily applied to other
cases based on the perceived similarity of a few facts.” Parkcentral,
763 F.3d at 217.
32 AUTO. INDUS. PENSION TRUST FUND V. TOSHIBA

Commission-regulated platforms, systems, or exchanges. Id.
at 207. Third, the reference securities in the company at
issue, Volkswagen, were traded entirely on foreign
exchanges, implicating concerns that incompatible U.S. and
foreign law would almost certainly regulate the same
security. Id. at 207, 215–17. Fourth, there was no allegation
that Volkswagen knew about or facilitated the swap
agreements. Id. at 207, 215.

But the principal reason that we should not follow the
Parkcentral decision is because it is contrary to Section 10(b)
and Morrison itself. It carves-out “predominantly foreign”
securities fraud claims from Section 10(b)’s ambit, id. at 216,
disregarding Section 10(b)’s text: the domestic “purchase or
sale of any security registered on a national securities
exchange or any security not so registered,” 15 U.S.C.
§ 78j(b) (emphases added). The basis for the carve-out was
speculation about Congressional intent, Parkcentral, 763 F.3d
at 215, an inquiry Morrison rebukes, Morrison, 561 U.S. at
256. Parkcentral’s test for whether a claim is foreign is an
open-ended, under-defined multi-factor test, Parkcentral,
763 F.3d at 217, akin to the vague and unpredictable tests that
Morrison criticized and endeavored to replace with a “clear,”
administrable rule, Morrison, 561 U.S. at 257–59, 269–70.
And Parkcentral’s analysis relies heavily on the foreign
location of the allegedly deceptive conduct, Parkcentral,
763 F.3d at 215–16, which Morrison held to be irrelevant to
the Exchange Act’s applicability, given Section 10(b)’s
exclusive focus on transactions, Morrison, 561 U.S. at
266–68.22

22
Notably, no Second Circuit case, nor any other Circuit, has applied
Parkcentral’s rule. See Myun-Uk Choi, 890 F.3d at 66–67 (citing
Absolute Activist, not Parkcentral, for Morrison’s second category); In re
 AUTO. INDUS. PENSION TRUST FUND V. TOSHIBA 33

C. The Sufficiency of the Funds’ Exchange Act Allegations

Toshiba argues forcefully that applying the Exchange Act
to these unsponsored ADRs would undermine Morrison’s
animating comity concerns. Nevertheless, that is not a basis
for declining to follow the Court’s clear instructions in
Morrison. And it may very well be that the Morrison test in
some cases will result in the Exchange Act’s application to
claims of manipulation of share value from afar.

Toshiba’s argument, however, is directly relevant to
whether the Funds have sufficiently alleged an Exchange Act
claim.23 Morrison delineates the transactions to which the
Exchange Act can theoretically apply without being
impermissibly extraterritorial, but while applicability is
necessary, it is not sufficient to state an Exchange Act claim.

Section 10(b) of the Exchange Act makes it unlawful
“[t]o use or employ, in connection with the purchase or sale”
of a security “any manipulative or deceptive device or
contrivance.” 15 U.S.C. § 78j(b) (emphasis added).
Accordingly, there must be “a connection between the
misrepresentation or omission and the purchase or sale of a
security.” Stoneridge Inv. Partners, LLC v. Sci.-Atlanta,
552 U.S. 148, 157 (2008). We have held that for fraud to be
“in connection with the purchase or sale of any security,” it
must “touch” the sale—i.e., it must be done to induce the
purchase at issue. Arrington v. Merrill Lynch, Pierce, Fenner

Petrobras, 862 F.3d at 261–62 (same); In re Vivendi, 838 F.3d at 265
(same).
23
Toshiba did not challenge personal jurisdiction before the district
court and expressly disclaimed any such argument on appeal.
34 AUTO. INDUS. PENSION TRUST FUND V. TOSHIBA

& Smith, Inc., 651 F.2d 615, 619 (9th Cir. 1981) (citing
Superintendent of Ins. v. Bankers Life & Cas. Co., 404 U.S.
6, 12–13 (1971)); see also Ambassador Hotel Co. v. Wei-
Chuan Inv., 189 F.3d 1017, 1026 (9th Cir. 1999) (The fraud
“must have more than some tangential relation to the
securities transaction.”). Even though “in connection with”
“should be construed not technically and restrictively, but
flexibly to effectuate [the Exchange Act’s] remedial
purposes,” Chadbourne, 134 S. Ct. at 1069 (quotation
omitted), the FAC falls short, Ambassador Hotel, 189 F.3d at
1026 (“The court should consider whether the plaintiff has
shown some causal connection between the fraud and the
securities transaction in question. Deception related to the
value or merit of the securities in question has sufficient
connection to securities transactions to bring the fraud within
the scope of § 10(b).” (emphases added) (citations omitted));
see generally Rezner v. Bayerische Hypo-Und Vereinsbank
AG, 630 F.3d 866, 871–72 (9th Cir. 2010).

First and foremost, sufficiently pleading Toshiba’s
connection to the ADR transactions requires clearly setting
forth the transactions. However, the FAC omits basic details
about ADRs. It also fails to include factual allegations
regarding the over-the-counter market on which Toshiba
ADRs are listed, whether Toshiba ADRs are sponsored, the
depositary institutions that offer Toshiba ADRs, the Form F-
6’s they used to register the Toshiba ADRs, the trading
volume of Toshiba ADRs, and the Toshiba ADRs’
contractual terms (along with relevant variants between
depositary institutions). And it lacks detail regarding
AIPTF’s purchase of the Toshiba ADRs, including how the
purchase was made and which particular depositary
institution holds the corresponding Toshiba common stock.
Instead, the FAC erroneously ignores the distinction between
 AUTO. INDUS. PENSION TRUST FUND V. TOSHIBA 35

ADRs and common stock, alleging simply that AIPTF
“acquired Toshiba common stock during the Class Period
through the purchase on March 23, 2015 of 36,000 shares of
[Toshiba ADRs] in the United States,” that OTC Link is a
“highly efficient and automated market,” and that “shares of
Toshiba common stock and [ADRs] are owned by hundreds
of thousands of persons.”

Second, before the district court and on appeal, the Funds
argued that “it is likely that Toshiba was indeed involved in
the establishment” of the ADRs. In support, the Funds rely
on (1) a letter sent by Deutsche Bank (one of the Toshiba
ADR depositary institutions) to the Securities and Exchange
Commission during ADR rulemaking in 2008 stating that “in
practice, depositary banks typically obtain the issuer’s
consent before establishing an unsponsored ADR facility,”
2008 SEC ADR Rulemaking at 52,762 n.113; (2) a Paul,
Weiss memorandum about the 2008 rulemaking which states
that depositary issuers of unsponsored ADRs “typically
request[] a letter of non-objection” from the foreign
company; and (3) the fact that Toshiba made it possible for
depositary institutions to issue unsponsored Toshiba ADRs
by meeting the requirements in 17 C.F.R. § 240.12g3-2(b),
including posting its annual report in English on its website
and by not establishing a sponsored ADR (which would
preclude unsponsored ADRs), see 1991 SEC ADR Release at
24,422–23. However, none of these facts is alleged in the
FAC.24

24
We disagree with the Funds to the extent they argue that Toshiba’s
exemption under Rule 12g3-2(b), and specifically its maintenance of an
English website with English translations of relevant documents and
conference calls, without more, is sufficient to connect Toshiba to the
Toshiba ADR transactions. The FAC does not allege that Toshiba
36 AUTO. INDUS. PENSION TRUST FUND V. TOSHIBA

Third and finally, the FAC alleges that Bank of New York
Mellon is one of Toshiba’s largest ten shareholders and that
during the Class Period institutional investors in the United
States owned “at least 485 million shares of Toshiba common
stock, representing more than 11% of the Company’s
outstanding shares.” Absent from the FAC, however, is the
Funds’ assertion at oral argument that Bank of New York
Mellon is unlikely to have acquired over fifty million Toshiba
shares without Toshiba’s involvement. Oral Arg. at
27:36–28:30 (Nov. 9, 2017), https://tinyurl.com/ydfsrvyw.

IV. CONCLUSION

The district court misapplied Morrison. And, without
significant analysis, it concluded that leave to amend would
be futile. It therefore dismissed the Funds’ case with
prejudice. For the reasons discussed above, we believe the
FAC does not sufficiently allege a domestic violation of the
Exchange Act, but that allowing leave to amend would not be
futile. Therefore, we reverse and remand to allow the Funds
to amend their complaint. See Doe I v. Nestle USA, Inc.,
766 F.3d 1013, 1028 (9th Cir. 2014).25

REVERSED; REMANDED.

provided English materials to support unsponsored ADRs, and Rule 23g3-
2(b) exemption is automatic. 2008 SEC ADR Rulemaking at 52,767.
And as Toshiba points out, there are many plausible reasons for a
company to provide English materials, precluding the inference that
Toshiba’s actions were to support unsponsored ADRs.
25
The district court predicated dismissal of the Funds’ JFIEA claim
on dismissal of the Exchange Act claims. We decline to address in the
first instance whether dismissal of the JFIEA claim remains appropriate
notwithstanding the Exchange Act claims’ viability.