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A foreign company that markets its stock in the United States through a company-sponsored program of selling “American Depositary Receipts” or ADRs can be sued in U.S. courts for violating federal securities laws, the 3rd U.S. Circuit Court of Appeals has ruled. “A foreign corporation that purposefully avails itself of the American securities market has adequate notice that it may be haled into an American court for fraudulently manipulating that market,” Chief U.S. Circuit Judge Edward R. Becker wrote in Pinker v. Roche Holdings Ltd. Writing for a unanimous three-judge panel, Becker found that Chief U.S. District Judge John W. Bissell of the District of New Jersey erred in dismissing a class action against Roche, a Swiss company, for lack of personal jurisdiction. “Allowing Roche to escape the personal jurisdiction of the federal courts would in essence nullify the regulatory protection that American investors seek when they purchase ADRs,” Becker wrote in an opinion joined by U.S. Circuit Judges Theodore A. McKee and Marjorie O. Rendell. “If ADRs are subject to the United States securities regulatory regime in theory, but are exempt in practice due to the inability of American courts to exercise personal jurisdiction over the foreign corporation issuer, one would expect them to be considered a less attractive option for American investors.” Becker also found that the lead plaintiff had properly pleaded a claim for reliance on Roche’s alleged misrepresentations even though he had purchased his ADRs more than a month after the company was hit with a federal antitrust suit that accused it of participating in a long-running scheme to fix prices in the market for bulk vitamins. Roche insisted that the antitrust suit put investors on notice and that the price of its ADRs adjusted in the wake of the news. But Becker found that “more damning” information came to light later when the company and one of its executives pleaded guilty to federal criminal charges and paid a record fine of $500 million. “It is possible that the full truth about Roche’s anti-competitive activity had not yet emerged by the time at which [Harold] Pinker purchased his ADRs, and, therefore, he has adequately pled reasonable reliance under a fraud-on-the-market theory of liability,” Becker wrote. “Although the market price of Roche ADRs may have begun to adjust for Roche’s anti-competitive activity before Pinker’s purchase, the complaint alleges facts from which it can be inferred that the market further adjusted for Roche’s anti-competitive activity after Pinker’s purchase,” Becker wrote. ADRs were created in 1927 to assist American investors who wanted to invest internationally, but were reluctant to do so due to regulatory and currency exchange difficulties. They also offered significant benefits to foreign companies, allowing them to tap into the American capital market. They have since become one of the preferred methods for trading foreign securities in the U.S., with the value of ADRs bought and sold annually in the hundreds of billions. An ADR is a receipt issued by a depositary bank that represents a specific amount of a foreign security that has been deposited with a foreign branch or agent of the depositary. Technically, the holder of an ADR is not the title owner of the underlying shares; instead, title is held either by the depositary, the custodian or their agent. But ADRs are tradeable in the same way any other registered American security is sold. They may be listed on any of the major exchanges in the U.S. or traded over the counter, and are subject to the Securities Act and the Exchange Act. As a result, trading an ADR is simpler and more secure for American investors than trading in the underlying security in the foreign market. Although not all ADRs are “sponsored,” Roche’s were. In June 1992, Roche filed papers with the Securities and Exchange Commission to register 100 million ADRs, and has since filed annual and semi-annual reports with the SEC. Pinker’s suit was filed on behalf of a class of investors who purchased Roche ADRs between Dec. 3, 1996 and May 20, 1999 — the date on which Roche entered a plea agreement with the U.S. Justice Department admitting its participation in the price-fixing conspiracy. The suit alleged that the price of Roche ADRs was artificially inflated due to the company’s misrepresentations about the competitiveness of the vitamin market when in fact its subsidiaries were engaged in a worldwide conspiracy to fix vitamin prices. As examples of misleading statements to investors, Pinker’s suit pointed to Roche’s press releases that described the competition in the vitamin market as “fiercely” and “highly” competitive. As a result, the suit alleged, Roche’s statements portrayed it as a company succeeding and excelling through superior business practices when, in fact, its financial success was due to its participation in a collusive scheme. Roche’s lawyers argued on appeal that the exercise of personal jurisdiction is inappropriate because its ADRs were not listed on any American exchanges. Becker disagreed, saying “the mere fact that its ADRs were not listed on an American stock exchange does not demonstrate that Roche did not seek to avail itself of the American securities market, for even though Roche ADRs were not traded on an exchange, the complaint alleges that Roche ADRs were actively traded on the over-the-counter market and that the average daily trading volume of Roche ADRs was about 25,000.” The fact that Roche’s ADRs were sponsored only bolstered that conclusion, Becker said. “Sponsored ADRs such as Roche’s require the issuer to deposit shares with an American branch of a depositary and to enter a deposit agreement with the ADR holders defining the rights of ADR holders and the corresponding duties of the issuer. By sponsoring an ADR, therefore, Roche took affirmative steps purposefully directed at the American investing public,” Becker wrote. Roche’s sponsorship, Becker said, “amounted to an active marketing of its equity interests to American investors.” Pinker was represented by attorneys Ira M. Press, Jeffrey H. Squire, Mark A. Strauss and Lewis S. Sandler of Kirby McInerney & Squire in New York; and Michael M. Rosenbaum of Budd Larner Gross & Rosenbaum in Short Hills, N.J. Roche was represented by attorneys Lawrence J. Portnoy, Gwenn M. Kalow and Manisha M. Sheth of Davis Polk & Wardwell in New York; and Michael R. Griffinger and Thomas Valen of Gibbons, Del Deo, Dolan, Griffinger & Vecchione in Newark, N.J.

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