292 F.3d 361 (3rd Cir. 2002), 00-4318, Pinker v. Roche Holdings Ltd.

Docket Nº:00-4318, 01-1562.
Citation:292 F.3d 361
Party Name:Harold PINKER, individually and on behalf of all others similarly situated v. ROCHE HOLDINGS LTD. Harold Pinker, Appellant
Case Date:May 30, 2002
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit

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292 F.3d 361 (3rd Cir. 2002)

Harold PINKER, individually and on behalf of all others similarly situated


ROCHE HOLDINGS LTD. Harold Pinker, Appellant

Nos. 00-4318, 01-1562.

United States Court of Appeals, Third Circuit

May 30, 2002

Argued: Nov. 7, 2001.

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Jeffrey H. Squire, Ira M. Press (Argued), Mark A. Strauss, Lewis S. Sandier, Kirby, McInerney & Squire LLP, New York, NY, Michael M. Rosenbaum, Budd, Larner, Gross & Rosenbaum, Short Hills, NJ, Counsel for Plaintiff-Appellant.

Lawrence J. Portnoy (Argued), Gwenn M. Kalow, Manisha M. Sheth, Davis, Polk & Wardwell, New York, NY, Michael R. Griffinger, Thomas Valen, Gibbons, Del Deo, Dolan, Griffinger & Vecchione, Newark, NJ, Counsel for Defendant-Appellee.

Before: BECKER, Chief Judge, McKEE and RENDELL, Circuit Judges.


BECKER, Chief Judge.

American Depositary Receipts ("ADRs") are financial instruments that allow investors in the United States to purchase and sell stock in foreign corporations in a simpler and more secure manner than trading in the underlying security in a foreign market. Harold Pinker, the plaintiff in this putative securities fraud class action, invested in ADRs of the defendant, Roche Holdings Ltd. ("Roche"), a Swiss corporation with its principal place of business in Switzerland. The gravamen of Pinker's action is that he purchased Roche ADRs at a price that 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 the truth about Roche's collusive activity began to emerge, Pinker alleges, the price of Roche ADRs dropped, and Pinker and other similarly situated investors suffered a loss. As a result, Pinker claims, Roche is liable for securities fraud in violation of Section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder by the Securities and Exchange Commission ("SEC").

The District Court dismissed Pinker's complaint under both Fed.R.Civ.P. 12(b)(2) (for lack of personal jurisdiction) and Fed. R.Civ.P. 12(b)(6) (for failure to adequately plead reliance). In reviewing the District Court's dismissal of Pinker's complaint under Fed.R.Civ.P. 12(b)(2), we examine the extent of Roche's contacts with the United States as a whole. We think that by sponsoring ADRs that are actively traded by American investors, Roche purposely availed itself of the American securities market and thereby evidenced the requisite minimum contacts with the United States to support the exercise of personal jurisdiction by a federal court. Moreover, in light of the fact that Roche is alleged to have made affirmative misrepresentations that misled its ADR holders, we consider the exercise of personal jurisdiction over Roche consistent with "traditional notions of fair play and substantial justice." Int'l Shoe Co. v. Washington, 326 U.S. 310, 316, 66 S.Ct. 154, 90 L.Ed. 95 (1945) (quoting Milliken v. Meyer, 311 U.S. 457, 463, 61 S.Ct. 339, 85 L.Ed. 278 (1940)). Consequently, we conclude that the District Court had in personam jurisdiction over Roche and that dismissal under Rule 12(b)(2) was inappropriate.

We also think that dismissal was improper under Rule 12(b)(6), for we are satisfied that Pinker's complaint adequately pled the reliance element of a securities

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fraud claim. Pinker's potential weak spot is that his complaint reflected that at the time he purchased the Roche ADRs, he was aware of a private antitrust lawsuit that had been brought against the company alleging vitamin price fixing. But the complaint also alleges that additional, more damning information about Roche's involvement in a price-fixing conspiracy came to light after Pinker's purchase of the ADRs—specifically, the fact that Roche pled guilty to criminal antitrust charges. 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 anticompetitive activity after Pinker's purchase. Pinker, therefore, has alleged sufficient facts to demonstrate that he reasonably relied on Roche's misrepresentations about the competitiveness of the vitamin market.

I. Facts and Procedural History

A. The Allegations of Pinker's Complaint

Roche is a Swiss holding company that conducts its operations through a network of subsidiary corporations. These subsidiaries manufacture and sell, among other things, Pharmaceuticals, fragrances, vitamins, and chemicals throughout the world. Pinker alleges that Roche, acting in concert with its subsidiaries, entered into a worldwide conspiracy with certain competitors in the early 1990s to fix prices and allocate market share for bulk vitamins. Pinker's complaint alleges that at the same time it was engaging in this conspiracy, Roche made material misrepresentations and misleading statements indicating that the vitamin market was competitive. Pinker's complaint points to press releases and annual and semi-annual reports issued by Roche in which it described the competition in the vitamin market as, among other things, "fiercely" and "highly" competitive. In the face of this supposed competition, Pinker avers, 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.

Pinker alleges that Roche sponsored an ADR facility in the United States in 1992, and that during the class period the over-the-counter market for Roche ADRs, which had a daily trading volume of 25,000, "was an efficient market that promptly digested current information with respect to the Company from all publicly-available sources and reflected such information in Roche's stock price." Consequently, Pinker contends, Roche committed a fraud on the market through its misrepresentations about the competitiveness of the vitamin market, causing him to pay an artificially inflated price for his Roche ADRs when he purchased them on April 27, 1999. Before Pinker purchased ADRs in Roche, on March 12, 1999, a Minneapolis law firm announced its filing of a class action antitrust lawsuit against Roche and eight other companies in which it alleged a conspiracy to fix prices and set volumes in the United States vitamin market. Although Pinker acknowledges that this announcement had the effect of causing Roche's ADR price to decline, he argues that the price declined further after the full extent of Roche's anti-competitive activity became known on May 20, 1999. On that date, Pinker alleges, Roche announced that it had reached a settlement with the U.S. Department of Justice under which it and a former company executive agreed to plead guilty to conspiracy to fix prices and allocate market share and Roche agreed to

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pay a record $500 million fine for its wrongdoing.

B. American Depositary Receipts (ADRs)

Because the role of ADRs is so central to our analysis of personal jurisdiction, we think it important to describe their operation in some detail. 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. See Melissa Wilyerding, Depository Receipts, II Global View (Brown Brothers Harriman), 2001, at 3. They also offered significant benefits to foreign companies, allowing them to tap into the American capital market. See id. They have since become one of the preferred methods for trading foreign securities in the United States, with the value of ADRs bought and sold annually in the hundreds of billions. See Bruce L. Hertz, American Depository Receipts, 600 P.L.I./Comm. 237, 239 (1992).

An ADR is a receipt that is issued by a depositary bank that represents a specified amount of a foreign security that has been deposited with a foreign branch or agent of the depositary, known as the custodian. Id. at 240-41. The holder of an ADR is not the title owner of the underlying shares; the title owner of the underlying shares is either the depositary, the custodian, or their agent. Id. at 241. ADRs are tradeable in the same manner as any other registered American security, may be listed on any of the major exchanges in the United States or traded over the counter, and are subject to the Securities Act and the Exchange Act. Id. at 242, 246. This makes trading an ADR simpler and more secure for American investors than trading in the underlying security in the foreign market. Id. at 240.

ADRs may be either sponsored or unsponsored. An unsponsored ADR is established with little or no involvement of the issuer of the underlying security. A sponsored ADR, in contrast, is established with the active participation of the issuer of the underlying security. Id. at 242-43. An issuer who sponsors an ADR enters into an agreement with the depositary bank and the ADR owners. Id. at 243. The agreement establishes the terms of the ADRs and the rights and obligations of the parties, such as the ADR holders' voting rights. Id.

SEC Form F-6 governs the registration of ADRs. Form F-6 requires that the registrant disclose important information related to the issuance of the ADR, including the terms of the depositary agreement (if any), material contracts between the depositary and the issuer, and an opinion of counsel regarding the legality of the ADRs. Id. at 288. Moreover, Form F-6 mandates that the registrant provide in its prospectus a description of the ADRs...

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