Denial of Certiorari in Stoyas v. Toshiba Corp.

Key Issue

While all circuits agree that a domestic transaction is necessary for the Exchange Act to apply, there is a split between the Second and Ninth circuits as to whether a domestic transaction is sufficient for its application, without more. Toshiba sought certiorari to resolve this split; in denying certiorari, the Supreme Court has left the question open.

Background & Decision

In July of 2018, the Ninth Circuit revived a securities class action against Toshiba,1 a Japanese company whose Japanese disclosures had been exposed as incorporating fraudulent accounting practices, on the theory that U.S. purchasers of Toshiba ADRs could assert claims against Toshiba under the Exchange Act. The Ninth Circuit held that this result was consistent with the Supreme Court's ruling in Morrison v. National Australia Bank Ltd.2 that the Exchange Act does not apply extraterritorially, but only to "transactions in securities listed on domestic exchanges, and domestic transactions in other securities."3 In so doing, the Ninth Circuit declined to follow the Second Circuit's decision in Parkcentral Global Hub Ltd. v. Porsche Automobile Holdings SE, which held that a domestic transaction is necessary, but not sufficient, for the Exchange Act to apply.4 At the same time, however, the Ninth Circuit suggested a different route to reach perhaps the same destination. It suggested that there might be sufficient distance between the alleged fraud—which was one arguably on Toshiba shareholders—and the purchase and sale of Toshiba ADRs so as to flunk the "in connection with" requirement.

Toshiba petitioned for certiorari, arguing that the split between the Ninth and Second circuits was significant and likely to have the usual pernicious consequences, including forum shopping by plaintiffs interested in the Ninth Circuit's more liberal approach to the Morrison inquiry. A few weeks ago, in June, the Supreme Court denied its petition.

Thoughts & Takeaways

The Supreme Court's denial of certiorari leaves intact a potential split between the Ninth Circuit's holding that a domestic transaction is sufficient for the Exchange Act to apply, and the Second Circuit's holding that a domestic transaction is necessary, but not sufficient. It will be interesting to see whether there will in fact be an increase in the number of securities fraud class actions filed in the Ninth Circuit, and in particular, whether more such cases are filed against foreign defendants whose relevant conduct occurred abroad and whose sole connection to the United States is the sale of their ADRs.

In addition, Stoyas itself will be interesting to follow. In Stoyas, the application of the Exchange Act to Toshiba hung on the slender thread of the domestic market in its Level 1 ADRs (which can be generated without any involvement or even consent from the company whose stock is referenced). But the Ninth Circuit emphasized that, to adequately plead a violation of the Exchange Act, plaintiffs must also sufficiently allege that Toshiba's fraudulent conduct in Japan was "in connection with" the ADR transactions that are the sole hook for domestic liability.5 How plaintiffs do so in the amended complaint that they now have an opportunity to file, and how the courts will evaluate that attempt, will determine the extent to which the result in Stoyas will differ from the result in Parkcentral.

Read the petition for certiorari here, and read the decision below here.

Denial of Certiorari in Mineworkers' Pension Scheme v. First Solar Inc.

Key Issue

Also in June, the Supreme Court denied a petition for a writ of certiorari from the Ninth Circuit's decision in Mineworkers' Pension Scheme v. First Solar Inc., which held that a private securities fraud plaintiff can establish loss causation based on a decline in the market price of a security even when the event or disclosure that triggered the decline did not reveal the fraud on which the plaintiff's claim is based.6

The Ninth Circuit permitted plaintiffs to recover based on the drop in the stock's value before the fraud was revealed to the market because "the underlying facts concealed by fraud affect[ed] the stock price."7 The Ninth Circuit concluded that the revelation of fraud to the market is just one of multiple theories on which a plaintiff may establish proximate cause in the context of a securities fraud claim. The denial of certiorari in this case gives securities plaintiffs in the Ninth Circuit in a stronger position with respect to pleading and proving loss causation.

Background & Decision

First Solar, a 2012 securities fraud class action filed against a major producer of solar panels, alleged that the company had concealed certain defects in its solar panels and understated their financial impact; as disappointing financial results trickled out and the company's stock took a hit, plaintiffs alleged that investors were suffering an injury proximately caused by the defendant company's fraud—despite the fact that that fraud had not yet been revealed to the market.

The district court, and then the Ninth Circuit, agreed with plaintiffs that they did not need to show that their losses were caused by the revelation of a fraud, as long as the loss could be traced back to the facts which the defendant had misstated. In other words, when the negative impact of a fraud is revealed to the market before the fraud itself is revealed, loss causation can be satisfied by showing its connection to that impact.

Thoughts & Takeaways

The Supreme Court's denial of certiorari leaves intact a decision that could be highly consequential for securities fraud defendants, because it enables plaintiffs to establish loss causation in a broader set of circumstances.

Read the petition for certiorari here, and read the decision below here.

Denial of Certiorari in Perryman v. Romero

Key Issue

In March of this year, in Frank v. Gaos,8 the Supreme Court avoided directly addressing an objection to the cy pres settlement mechanism despite an invitation to do so. More recently, on June 24, the Supreme Court declined even to take up a challenge to cy pres relief, denying certiorari in Perryman v. Romero.9 Some commentators have interpreted this as a signal that, at least for the time being, cy pres is here to stay. However, the tea leaves are not so clear, and if a better vehicle for challenging a cy pres settlement comes along, it is possible that the Supreme Court will take it up.

Background & Decision

Perryman concerned the settlement of a class action in which plaintiffs alleged that the defendants had fraudulently enrolled all 1.3 million class members into a membership program without their consent, and then charged them a monthly membership fee, reaping tens of millions of dollars thereby. The case settled for $12.5 million, with class counsel requesting $8.65 million in fees and $200,000 in costs, a special payment of $80,000 to the class representatives, and the $3.65 million remainder available to class members who submitted refund claims. Class members were also to receive a $20 coupon that could be redeemed at the website of one of the defendants, which defendants valued at around $26 million (a valuation that was disputed). After administrative costs were satisfied and refunds paid, any remaining unclaimed money was to go to cy pres awards to three San Diego universities, including one from which several of the attorneys on the case graduated. The awards were to be coordinated with the main defendant and directed to be used in relation to issues of internet privacy or data security.

Ted Frank, for the Center for Class Action Fairness, which also objected to the settlement in Frank v. Gaos, represented Perryman, a member of the class, in his objection to this settlement. Perryman objected on a number of grounds, among them, the distribution of any money to cy pres recipients when all class members were known and would receive a distribution.

The district court was not persuaded and approved the settlement, despite the fact that only about 3,000 class members claimed refunds, with the result that about $225,000 was refunded to class members, leaving about $3 million to go to cy pres recipients. And, on appeal, the Ninth Circuit too rejected the cy pres argument (despite taking issue with other aspects of the settlement, including vacating the award of fees). The Ninth Circuit noted that due to the large size of the class, a distribution of any remaining amounts would be "de minimis." Nor was the court persuaded by the argument that an award to universities to which certain of the litigating attorneys had relationships was improper or that it was improper for the cy pres award to be geographically concentrated despite a nationwide class.

Thoughts & Takeaways

Unlike Frank v. Gaos, Perryman did not involve a cy pres-only settlement. In Perryman, the cy pres mechanism was used to distribute unclaimed funds, with other funds being paid directly or indirectly to class members. It therefore raised a somewhat different question about the cy pres mechanism. To the extent that the grant of certiorari in Frank v. Gaos suggested that the Supreme Court was open to weighing in against the use of cy pres, the denial of the petition in Perryman does not necessarily signal a shift in its views.

Ted Frank, counsel to Perryman and also "Frank" in Frank v. Gaos, has assured the press that he has other cy pres cases pending,10 and will certainly continue his scrutiny of class action settlements. Consequently, cy pres only settlements, or settlements where the cy pres portion is more significant in comparison to direct relief than it was in Perryman, should still be considered carefully by counsel, and the potential (depending on the circuit, perhaps remote, but not nonexistent) for a successful appeal of cy pres relief should be taken seriously in structuring and negotiating classwide relief.

Read the petition for certiorari here, and read the decision below here.

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1. Stoyas v. Toshiba Corp., 896 F.3d 933 (9th Cir. 2018). In the Supreme Court, the case was captioned Toshiba Corp. v. Auto. Industries Pension Trust Fund, No. 18-459.

2. Morrison v. Nat'l Australia Bank Ltd., 561 U.S. 247 (2010).

3. Id. at 267.

4. Parkcentral Global Hub Ltd. v. Porsche Automobile Holdings SE, 763 F.3d 198, 216 (2d Cir. 2014).

5. Stoyas, 896 F.3d at 32.

6. Mineworkers' Pension Scheme v. First Solar Inc., 881 F.3d 750 (9th Cir. 2018). In the Supreme Court, the case was captioned First Solar Inc. v. Mineworkers' Pension Scheme, No. 18-164.

7. Id. at 754.

8. Frank v. Gaos,—S. Ct.—, No. 17-961, 2019 WL 1264582 (Mar. 20, 2019) (per curiam).

9. Brian Perryman v. Josue Romero, et al., No. 18-1074. In the Supreme Court, the case was captioned Brian Perryman v. Josue Romero, et al., No. 18-1074.

10. Bem Kochman, High Court Won't Hear Challenge to Cy Pres Mechanism, Law360 (June 24, 2019),

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