Supreme Court justices seemed to struggle with Nvidia’s argument on Nov. 13 that shareholders’ securities fraud lawsuit claiming that the company downplayed its reliance on the volatile cryptocurrency sector should be dismissed.
Investors sued the Silicon Valley artificial intelligence chipmaker, claiming that the company misrepresented how dependent it was on revenue from volatile cryptocurrency mining before a market setback in 2018. The company counters that the legal complaint filed against it lacks the legally required specificity to move forward.
Specifically, shareholders allege that Nvidia CEO Jensen Huang made public statements that contradicted its own internal reports. The shareholders’ lawsuit is led by E. Ohman J:or Fonder AB, an investment management firm in Stockholm.
U.S. District Judge Haywood Gilliam threw out the lawsuit in 2020, finding that shareholders failed to show that the company had made false statements.
The U.S. Court of Appeals for the Ninth Circuit reinstated the legal action in August 2023, holding that the shareholders’ allegations were legally sufficient to proceed with the case.
That court determined that the plaintiffs had adequately alleged that the company’s CEO made “false or misleading statements and did so knowingly or recklessly,” and it permitted the case to go ahead.
Congress created the federal Private Securities Litigation Reform Act of 1955 (PSLRA) to curb abuses in class action lawsuits related to securities.
To discourage litigants from engaging in fishing expeditions during the discovery process whenever a company’s stock falls in value, the statute ratcheted up the pleadings standards for securities fraud complaints.
A pleading is a written statement filed in a legal proceeding that explains a claim, defense, or other position. Often, such a document is filed early in the process before the case goes to trial.
These heightened pleading requirements are “‘designed to discourage private securities actions lacking merit’ and to ensure plaintiffs have legitimate grounds to bring suit before engaging in ‘fishing expeditions brought in the dim hope of discovering a fraud,’” the petition states, quoting a 2009 precedent from the U.S. Court of Appeals for the Fourth Circuit.
The Supreme Court has interpreted Section 10(b) of the federal Securities Exchange Act to create a private right of action with six elements, including “a material misrepresentation or omission by the defendant”; scienter, a legal term meaning prior intent or knowledge of wrongdoing; a connection between the misrepresentation or omission and the purchase or sale of a security; and reliance on the misrepresentation or omission leading to an economic loss, the petition said.
The PSLRA made it more difficult to plead a false statement or misleading omission and scienter by imposing “special burdens on plaintiffs seeking to bring federal securities fraud class actions,” according to the petition.
To withstand a dismissal motion, the PSLRA works in tandem with federal civil procedure rules to require plaintiffs “to state with particularity” the facts constituting the alleged violation, along with the facts “giving rise to a strong inference that the defendant acted with the requisite state of mind.”
During oral argument on Nov. 13, Nvidia attorney Neal Katyal said the Ninth Circuit’s ruling “creates an easy roadmap for plaintiffs to evade the [PSLRA].”
“When a stock price drops, all they have to do is find an expert with numbers that contradict a company’s public statements, then allege the company keeps records that executives look at, and then argue those records would have matched the hired expert’s numbers,” he said.
The legal complaint against Huang “never shows his scienter to be as cogent and compelling as not” and “merely surmises that Huang reviewed internal reports showing a higher quantum of crypto purchases than what he disclosed, yet it never alleges the contents of those reports.”
“[Huang] introduced a crypto-specific chip and increased the supply of gaming chips with the hopes that prices would fall,“ Katyal said. ”The fact that this process took longer than anticipated is not securities fraud.”
Several justices questioned what role the U.S. Supreme Court should play in this dispute, saying that instead of focusing on a legal issue, the parties seemed to be asking the court to decide facts in the case, which is something it normally doesn’t do.
Justice Sonia Sotomayor told Katyal, “This is pure error correction you’re asking us to do.”
Justice Elena Kagan told the lawyer, “You’re asking us to engage in a kind of analysis that we are not very good at and weren’t expecting when we took this case.”
Chief Justice John Roberts seemed to search for a rule the court could fashion to deal with this kind of dispute.
He said the raised pleadings standards of the PSLRA suggest that plaintiffs have to have more than “just a little bit of direct evidence.”
“On the other hand ... you can’t insist on only the direct evidence before a complaint goes forward,“ he said. ”So if I don’t think it’s black and white, how ... do I decide where the balance is?”
Justice Brett Kavanaugh told the shareholders’ attorney, Deepak Gupta, that the Ninth Circuit decision may have drawn up a “blueprint” for going around the strict pleadings requirements of the PSLRA.
“It’s our role to make sure that we have policed the lines Congress drew so that the economy is not harmed,” the justice said.
Gupta replied: “Congress struck that balance with this statute. They wanted meritorious cases to go forward like this one.”
U.S. Department of Justice attorney Colleen Sinzdak argued in favor of affirming the Ninth Circuit.
“To resolve this case, the court does not need to create any new one-size-fits-all rules. Instead, it can simply reiterate a few basic principles that flow from the plain text of the PSLRA,” she said.
The Supreme Court is expected to rule on the case by June 2025.
