Arshil Sulayman | NVIDIA Corporation v. E. Ohman J:or Fonder AB

INTRODUCTION 

The Private Securities Litigation Reform Act (PSLRA) imposes heightened pleading requirements for plaintiffs filing federal securities fraud class action lawsuits. Specifically, plaintiffs raising a claim of securities fraud must “state with particularity all facts on which” they base their belief that a false statement was made by a defendant corporation and “state with particularity facts giving rise to a strong inference” that the defendant in making those false statements acted with scienter, or intent. 15 U.S.C. § 78u-4(b)(1)(B) and (2)(A).

The petitioner, NVIDIA Corporation, manufactures and sells graphics processing units (GPUs), which accelerate the speed at which mathematical and computational functions are performed. NVIDIA’s branded “GeForce” GPUs were originally marketed to video game manufacturers for their high-speed graphics processing functions, but cryptocurrency miners also began purchasing these GPUs for their superior computational power. Still, NVIDIA reported revenue from GeForce GPU sales in its “gaming” segment, rather than a “crypto” segment. Throughout 2017 and 2018 as cryptocurrency prices fluctuated, investors were concerned about the GeForce GPUs’ revenue being too closely tied to the volatility of cryptocurrency market. NVIDIA’s CEO, Jensen Huang, assured investors that NVIDIA’s booming revenues were primarily from gaming and not from mining. However, in late 2018 when the cryptocurrency market crashed, NVIDIA reported an excess supply of GeForce GPUs and slashed approximately 500 million dollars from its “gaming” segment earnings projections. NVIDIA’s stock plummeted after this announcement, and investors felt misled: this was precisely the risk they foresaw and raised concerns about, which Huang quelled with the assurances that gamers, not miners, were driving spikes in revenue.

After this stock price drop, respondent E. Ohman J:or Fouder AB, representing the shareholders, filed a class-action suit for securities fraud. The shareholders claim that Huang intentionally and knowingly understated the impact of crypto-related mining to investors, and that internal NVIDIA documents would have shown that crypto-mining was a significant factor in its revenue. The shareholders, unable to access the company’s internal documents prior to the discovery process, cited to expert opinions and reports showing that crypto-mining was a significant driver of revenue from 2017 to 2018 and claimed that NVIDIA’s internal documents would have undoubtedly reflected this same information. These expert opinions were used in lieu of facts stated in particularity as required by the PSLRA.

The district court granted NVIDIA’s motion to dismiss, holding that the shareholders failed to satisfy the particularity requirement of the PSLRA because the complaint relied solely on expert opinion rather than facts contained within NVIDIA’s unreleased internal documents. The court also held that respondents failed to show scienter, relying heavily on the unreliable statements of former NVIDIA employees and failing to establish that Huang made a false statement knowingly or recklessly. The Ninth Circuit Court of Appeals reversed, holding that the respondent’s expert reports amounted to a sufficiently particularized allegation of falsity under the PSLRA and that the complaint should therefore survive a motion to dismiss. The court also found that respondents sufficiently pleaded scienter by alleging that Huang would have known about NVIDIA’s internal documents by virtue of his role as CEO and that these documents would have shown the same data contained in the shareholders’ expert reports.  

With the U.S. Supreme Court granting certiorari, NVIDIA challenges the Ninth Circuit’s reversal by arguing that respondents did not meet the pleading standards of the PSLRA, and thus the complaint should be dismissed.

ISSUE PRESENTED

There are two questions presented in this case: (1) whether plaintiffs seeking to allege scienter under the Private Securities Litigation Reform Act based on allegations about internal company documents must plead with particularity the contents of those documents, and (2) whether plaintiffs can satisfy the PSLRA’s falsity requirement by relying on an expert opinion to substitute for particularized allegations of fact. In other words, what is the proper pleading standard for PSLRA claims to show scienter based on internal company documents and to show falsity based on expert opinion in lieu of facts?

ARGUMENTS

NVIDIA Corp. first argues that the shareholders’ complaint falls short of the PLSRA’s pleading requirements because it fails to plead the contents of the internal documents allegedly showing scienter. It does not matter that NVIDIA has not released these documents. According to NVIDIA, if the contents of internal documents are not pleaded with particularity, then a “strong inference” of scienter cannot be supported, and a plaintiff cannot meet the heightened pleading standards of the PSLRA. Petitioners argue that requiring anything less would lower the pleading standards set by the PSLRA, which in turn would undermine the PSLRA’s purpose of deterring frivolous securities claims. Petitioner NVIDIA Corp. then argues that allowing a plaintiff to substitute particularized allegations of fact with expert opinion would similarly lower the PSLRA’s pleading standards. If that practice were allowed, then any plaintiff could meet the PSLRA’s heightened pleading standards by simply paying an expert to give a report or opinion. Such a result would again undermine the PSLRA’s purpose of deterring frivolous claims.

The respondent shareholders argue that courts must holistically assess whether a complaint has sufficiently inferred scienter and whether the falsity allegations are sufficiently pleaded with particularity. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007), Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27 (2011). NVIDIA’S interpretation of the pleading requirements, the shareholders argue, would bar the filing of most securities lawsuits because investors are generally unable to access the specific content of internal documents until the discovery stage. Respondent further argues that under a holistic assessment, scienter and falsity were properly pleaded to the standards of the PSLRA since the complaint contained detailed and specific allegations from credible sources. NVIDIA’s interpretation finds no support in the PSLRA’s text and runs contrary to the Court’s practice of engaging in an holistic assessment, demonstrated in Tellabs and Matrixx.

The Circuits are split on both questions. The Second, Third, Fifth, Seventh, and Tenth Circuits hold that, when a plaintiff alleges scienter based on internal company documents, the complaint must allege with particularity the specific contents of those documents. The First and Ninth Circuit hold that plaintiffs can sufficiently allege with particularity by pointing to what would have been contained in those documents. The Second and Fifth Circuits held that plaintiffs cannot use expert opinion in lieu of particular allegations of fact. The Ninth Circuit, as discussed above, created a circuit split by holding that a plaintiff can use expert opinion to meet the PSLRA’s falsity requirements.

LOOKING FORWARD

The questions presented here require the Court to further define pleading standards for securities claims under the PSLRA. If the Court finds for the petitioner, the holistic assessment of securities fraud complaints, adopted in Tellabs and Matrixx, could be abandoned. Plaintiffs alleging falsity and scienter without access to the internal documents necessary to prove those claims would not survive the motion to dismiss phase. However, stringent pleading requirements would uphold the intent of the PSLRA to deter frivolous securities fraud claims.

If the court finds for the respondent, Tellabs and Matrixx’s holistic assessment of securities fraud complaints may apply to all securities fraud complaints. Future plaintiffs could substitute expert opinion for particularized facts and could hypothesize about internal company documents to prove scienter. Looking forward, this case will be impactful on the viability of all federal securities fraud lawsuits and will define the ease with which a securities fraud claims can make their way to trial.

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