You have to hand it to the plaintiffs lawyers who filed a shareholder class action accusing Toyota of lying about the carmaker’s sudden acceleration problems. They knew that only a tiny fraction of Toyota’s stock—less than 10 percent—trades in the U.S. as American Depository Shares. So under the U.S. Supreme Court’s 2010 ruling in Morrison v. National Australia Bank, which bars suits involving shares traded on foreign exchanges, their securities fraud claims were extremely restricted. But rather than assert any of the Morrison work-arounds that other plaintiffs lawyers have already tried and failed to sell to federal judges—such as arguing that a company’s foreign-traded shares are “listed” if its American Depository Shares trade on a U.S. exchange—the lawyers suing Toyota looked across the Pacific Ocean for a new way to thwart Morrison. Unfortunately for them, they fared no better than everyone else who’s tried to find any vulnerability in the Supreme Court’s ruling.
Shareholders counsel from (seemingly ubiquitous) Bernstein Litowitz Berger & Grossmann asserted a theory in the Toyota case that’s reminiscent of the strategy plaintiffs lawyers attempted in bringing racketeering claims against securities fraud aiders and abettors. They alleged that Toyota had violated Japan’s U.S.-modeled Financial Instruments and Exchange Act, and argued that under the Class Action Fairness Act, shareholders could bring a federal-court class action based on that violation. Bernstein Litowitz acknowledged that CAFA defers to U.S. securities laws for claims involving “covered securities,” but the plaintiffs lawyers said Tokyo-traded Toyota shares don’t fit the definition of covered securities because they’re not listed and traded in the U.S.
In other words, Bernstein Litowitz tried to use the exact fact that bars Toyota common stockholders from bringing U.S. securities fraud claims under Morrison to assert a right to sue in the U.S. for a violation of the parallel Japanese securities law.
It sounds confusing, but Bernstein Litowitz argued in the shareholders’ memo opposing dismissal of the case that it’s really not. “The court has diversity jurisdiction over the Japanese law claims under CAFA because: (1) the class exceeds 100 members; (2) the amount in controversy exceeds $5 million; and (3) there is minimal diversity,” they wrote.
Toyota, represented by Shearman & Sterling and Gibson, Dunn & Crutcher, said that was a preposterous argument. Claims under Japanese law belong in Japan, they argued, particularly because Japanese securities law precedent is relatively undeveloped. “Litigating the Japanese law claim in the U.S. would undermine both Japan’s interest in the development of its own securities laws and the U.S.’s interest in promoting the development of strong securities laws abroad,” Toyota’s lawyers wrote in their motion to dismiss.
Los Angeles federal judge Dale Fischer sided with the defense, dismissing the Japanese law-based claim with prejudice--and in language that seems intended to foreclose any similar attempts to get around Morrison. The judge conceded that she could exercise jurisdiction (although she took issue with Bernstein Litowitz’s analysis of covered securities under CAFA), but declined to do so. “Foreign governments have the right to decide how to regulate their own securities markets,” Judge Fischer wrote in an 11-page opinion. “This respect for foreign law would be completely subverted if foreign claims were allowed to be piggybacked into virtually every American securities fraud case, imposing American procedures, requirements, and interpretations likely never contemplated by the drafters of the foreign law. While there may be instances where it is appropriate to exercise supplemental jurisdiction over foreign securities fraud claims, any reasonable reading of Morrison suggests that these instances will be rare.”
(Reporting by Alison Frankel)
An earlier version incorrectly referred to Judge Dale Fischer as a man. The judge is a woman.