The Supreme Court agreed on June 17 to hear a case from Silicon Valley tech giant Nvidia that could make it more difficult for shareholders to pursue securities fraud lawsuits.
The case comes after Nvidia agreed in May 2022 to pay the U.S. Securities and Exchange Commission (SEC) $5.5 million to resolve civil charges that the company failed to properly disclose the effect of cryptocurrency mining on its gaming operations. In two quarters in fiscal 2018, the company did not disclose that crypto mining was a “significant element” of its revenue growth from sales of chips made for gaming, the SEC stated.
The justices granted the petition for certiorari, or review, in Nvidia Corp. v. E. Ohman J:or Fonder AB in an unsigned order. No justices dissented. The court did not explain its decision. At least four of the nine justices must vote to grant a petition for it to advance to the oral argument stage.
Based in Santa Clara, California, Nvidia is a high-tech company known for its graphics processors commonly used in artificial intelligence development. E. Ohman J:or Fonder AB is an investment management firm in Stockholm, Sweden.
Investors sued Nvidia claiming that the company misrepresented its dependency on revenue from volatile cryptocurrency mining before a market setback in 2018. The company argues that the legal complaint filed against it lacks sufficient specificity to move forward.
A lower court resurrected the proposed class action lawsuit brought by shareholders in California and the Swedish firm against the company. Those suing alleged that Nvidia and senior company officials violated the federal Securities Exchange Act of 1934 by making statements that downplayed how much of the company’s revenue growth came from crypto-related transactions.
Those omissions misled market participants who wanted to understand the effect of crypto mining on the company’s business, the plaintiffs argued.
U.S. District Judge Haywood Gilliam Jr., an appointee of President Barack Obama, threw out the lawsuit in 2021, but a divided U.S. Court of Appeals for the Ninth Circuit reinstated it. That court determined that the plaintiffs had adequately alleged the company’s CEO made “false or misleading statements and did so knowingly or recklessly,” and it permitted the case to go ahead.
If the Ninth Circuit’s ruling is not reversed, it “threatens to turn the Nation’s largest circuit into a haven for abusive securities litigation,” Nvidia states in its petition.
Congress created the 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 drops, the statute ratcheted up the pleadings standards for securities fraud complaints.
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, citing a 2009 precedent from the U.S. Court of Appeals for the Fourth Circuit.
The Supreme Court has interpreted Section 10(b) of the Securities Exchange Act to create a private right of action with six elements, including “a material misrepresentation or omission by the defendant,” scienter, 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.
Scienter is a legal term meaning prior intent or knowledge of wrongdoing.
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 survive 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.”
The plaintiffs’ complaint against Nvidia arose after 2018, when sales of the company’s GeForce graphics processing units (GPUs) peaked even as cryptocurrency prices fluctuated and the company said it was working hard to boost supply.
Nvidia argues it did the right thing when, at the end of 2018, the company reported a glut of GeForce GPUs in the distribution pipeline, leading to a decrease in its stock price, according to the petition.
The Supreme Court’s decision to grant the Nvidia petition came after the court decided on June 10 to look at a large shareholder lawsuit that claims that Facebook parent Meta Platforms Inc. deceived investors regarding a data-harvesting controversy that involved Cambridge Analytica, a political consulting firm.
The court’s eventual ruling in the case could affect corporate disclosure standards going forward.
The case involves a private securities fraud-related class action arising out of the now-defunct UK-based Cambridge Analytica’s “wrongful acquisition and misuse of Facebook user data,” according to Facebook’s filing with the nation’s highest court.
Meta agreed in December 2022 to pay out $725 million to settle a class-action proceeding that said the company permitted third parties, including Cambridge Analytica, to access as many as 87 million users’ personal information. The incident was made public in 2018.
Cambridge Analytica in 2016 worked for then-presidential candidate Donald Trump’s election campaign and had access to personal data from millions of Facebook accounts for purposes of targeting and profiling voters. The account holders didn’t consent and had their data harvested by means of an app.
The controversy led to government investigations, and Meta CEO Mark Zuckerberg was called to testify before Congress.
The Supreme Court is expected to hear the Nvidia and Meta cases in its new term that begins in October.
