Supreme Court to Consider PSLRA Scienter Standards in NVIDIA Case

News | July 3, 2024 By:

On Monday, June 17, 2024, the U.S. Supreme Court granted a petition for a writ of certiorari filed by computer manufacturer NVIDIA Corporation and its CEO, Jensen Huang, seeking to address a legal standard for alleging scienter under the Private Securities Litigation Reform Act of 1995 (PSLRA).

The case, NVIDIA Corp., et al. v. E. Ohman J:or Fonder AB, et al., No. 23-970, U.S. Sup., stems from a putative class action complaint filed by shareholders E. Ohman J:or Fonder AB and Stichting Pensioenfonds PGB against NVIDIA, Huang, and other executives. The lawsuit alleges that the defendants issued false and misleading statements about the impact of cryptocurrency-related sales on the company’s revenues in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.

The shareholders claim that NVIDIA’s GeForce GPU sales increased significantly due to cryptocurrency mining, despite the company’s launch of Crypto SKU, a GPU designed specifically for cryptocurrency mining, in May 2017. They also allege that Huang downplayed concerns about the decline in crypto mining profitability, which led to a 28.5% drop in NVIDIA’s stock price in two trading days after the company announced it had missed revenue projections.

The District Court for the Northern District of California dismissed the complaint with leave to amend, citing the shareholders’ failure to sufficiently plead that the defendants’ statements were materially false or misleading and that they were made knowingly or recklessly. The shareholders amended their complaint, but the District Court granted the defendants’ motion to dismiss, ruling that the amended complaint failed to plead a primary violation of Section 10(b) and, consequently, a violation of Section 20(a) control person liability.

The shareholders appealed to the Ninth Circuit, which issued its opinion on August 25, 2023. The majority of the panel relied on the findings of the Prysm Group, a consulting firm employed by the shareholders, to conclude that NVIDIA and the individual defendants violated Section 10(b) and Rule 10b-5. The majority held that the shareholders sufficiently alleged that Huang, but not the other executives, made the statements knowingly or recklessly.

NVIDIA and Huang petitioned for rehearing, citing the dissenting opinion of Judge Gabriel P. Sanchez, who argued that the majority’s approach was inconsistent with the PSLRA’s congressional policy. The petition was denied, with Judge Sanchez recommending rehearing.

In their petition for certiorari, NVIDIA and Huang posed two questions: whether plaintiffs seeking to allege scienter under the PSLRA must plead with particularity the contents of internal company documents, and whether plaintiffs can satisfy the PSLRA’s falsity requirement by relying on an expert opinion to substitute for particularized allegations of fact.

NVIDIA and Huang argue that the Ninth Circuit’s decision deepened a circuit split over scienter and created a new split regarding falsity. They claim that five circuits have previously ruled that plaintiffs need to base scienter claims on internal documents, citing cases such as In re Stone & Webster, Inc., Sec. Litig. and Arkansas Pub. Emps.’ Ret. Sys. v. Bristol-Myers Squibb Co.

Four amicus curiae briefs were filed in support of NVIDIA and Huang, including one from the Atlantic Legal Foundation, which argued that the expert opinion relied on by the funds is not reliable without facts. The Washington Legal Foundation and the National Association of Manufacturers jointly filed a brief, stating that the Ninth Circuit’s finding “exacerbates the disparate approaches circuits take in applying the PSLRA’s heightened pleading standard.”

In their opposition brief, the shareholders argued that there is “no merit” to NVIDIA and Huang’s argument that the Ninth Circuit deepened a circuit split regarding scienter and created one regarding falsity. They claim that NVIDIA and Huang “flagrantly mischaracterize” the allegations in the complaint and that the Ninth Circuit’s decision did not impose a categorical rule requiring pleading of detailed evidentiary matter to survive a motion to dismiss.

In their reply, NVIDIA and Huang maintained that the Ninth Circuit deepened a split over scienter and that the issue recurs frequently, citing over three dozen cases involving allegations based on internal company documents. They warned that if the Supreme Court does not address the issue, the decision below will become a “roadmap” for securities plaintiffs to sidestep the PSLRA’s guardrails by hiring a pre-litigation expert to speculate about the contents of internal company documents.

Please contact BlockTribune for access to a copy of this filing.