NVIDIA Corp. v. E. Ohman J:or Fonder AB
LII note: The U.S Supreme Court has now decided NVIDIA Corp. v. E. Ohman J:or Fonder AB
Issues
Does the Private Securities Litigation Reform Act require plaintiffs alleging scienter (knowledge of fraud by defendants) based on allegations about internal company documents to plead with particularity the contents of those documents? And, does the Act permit expert opinion rather than particularized allegations of fact to satisfy the Act’s falsity requirement?
This case asks the Supreme Court to decide how plaintiffs can demonstrate intent (also called “scienter”) under the Private Securities Litigation Reform Act (“PSLRA”) for the purpose of alleging securities fraud. More specifically, this case asks the Supreme Court to decide whether plaintiffs can allege intent based on allegations about internal company documents without referring to specific content in those documents. It also asks the Supreme Court to determine if plaintiffs can satisfy the Act's falsity requirement by relying on an expert opinion in lieu of particularized allegations of fact. NVIDIA argues that Öhman’s failure to allege with particularity the contents of the internal documents to show that NVIDIA misrepresented its finances to investors does not show a strong inference of scienter that the PSLRA requires in order to reduce frivolous lawsuits, and that Öhman’s reliance on expert testimony to satisfy the PSLRA’s rigorous particularity standard would allow plaintiffs to circumvent it. Öhman counters that the PSLRA evinces a holistic approach in meeting the burden of showing a strong inference of scienter rather than requiring one specific allegation. Öhman also claims that an expert’s conclusion is an allegation of fact since the experts’ assertion is backed by embedded statements of fact to arrive at such a conclusion. The outcome of this case has strong implications for the national economy and access to justice.
Questions as Framed for the Court by the Parties
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 Act's falsity requirement by relying on an expert opinion to substitute for particularized allegations of fact.
Facts
In 1995, Congress enacted the Private Securities Litigation Reform Act (“PSLRA”) to rein in frivolous suits in securities fraud class actions. Among other things, the PSLRA requires that plaintiffs plead with particularity facts leading to a strong inference of scienter, imposes a stay on discovery until after motions to dismiss are decided, and provides a safe harbor for forward-looking statements.
NVIDIA Corporation (“NVIDIA”) is one of the world’s leading producers of graphics processing units (“GPUs”). GPUs are commonly used to efficiently perform computationally intensive tasks (such as graphic rendering in video games) but they can also be used to mine cryptocurrency. At the beginning of the disputed period, (“Class Period”) running from May 10, 2017, through November 14, 2018, NVIDIA experienced a dramatic increase in revenue driven by growing sales of its GeForce GPU. GeForce GPU was a product primarily designed for gaming, and also used to mine cryptocurrencies during the Class Period. Near the end of the Class Period, the profitability of cryptocurrency mining declined, which led to a decline in the sale of GeForce GPUs and ultimately a precipitous fall in NVIDIA’s share price.
Lead Plaintiff E. Öhman J:or Fonder AB (“Öhman”) brought a class action against defendant NVIDIA and three of its officers for knowingly or recklessly making materially “misleading and false statements regarding the impact of cryptocurrency sales on NVIDIA’s financial performance.” Specifically, Öhman alleged that the individual Defendants’ answers to questions by investors and analysts about how much of NVIDIA’s revenues were based on cryptocurrency mining were materially false or misleading, and that those statements were made knowingly or recklessly in violation of the Securities Exchange Act of 1934's antifraud provision.
The United States District Court for the Northern District of California granted the Defendants’ motion to dismiss on the grounds that Plaintiffs’ falsity allegations relied on an expert opinion, which does not satisfy the “particularity” requirement under PSLRA, and on the grounds that statements from former employees fail to establish scienter. Plaintiffs filed an amended complaint, but the District Court dismissed it again as Plaintiffs failed to link the contents of any data sources to “particular statements” by NVIDIA executives. The United States Court of Appeals for the Ninth Circuit reversed with respect to one of NVIDIA’s officers, Jensen Huang, as well as NVIDIA itself, reasoning that Plaintiffs adequately pleaded falsity because the expert opinion’s “detailed analysis” cleared the PSLRA’s demanding bar. The Ninth Circuit also held that Plaintiffs established a strong inference of scienter because taking the allegation that Huang, who is a meticulous manager, closely monitored sales data as true would support the inference that “Huang reviewed sales data showing that a large share of NVIDIA’s GeForce GPUs sold during the Class Period were being used for crypto mining.”
The United States Supreme Court granted NVIDIA’s petition for certiorari on June 17, 2024.
Analysis
LEGISLATIVE INTENT
NVIDIA asserts that Öhman’s case is the kind of claim the PSLRA was created to weed out. NVIDIA notes that not only do fraud claims require pleading with “particularity,” but the PSLRA also requires pleadings to show a “strong inference” of scienter—knowledge of fraud by defendants—before reaching discovery. NVIDIA argues that Congress sought to prevent “fishing expeditions:” claims with weak pleadings that were only filed with the hope of uncovering actual evidence in discovery. Thus, NVIDIA contends, that if a plaintiff claims fraud on the grounds that company executives knew of internal company documents that contradicted their public statements, they trigger the PSLRA’s scienter burdens. NVIDIA asserts that, since Öhman is doing exactly that, the PSLRA requires that they allege the contents of the internal documents in question to meet their burden. NVIDIA contends that Öhman failed to meet its PSLRA burden when it neglected to allege with particularity the contents of the internal documents. NVIDIA asserts that the Ninth Circuit’s decision created a roadmap for plaintiffs to bypass the PSLRA by using outside expert testimony about internal company documents to substitute for particularized allegations regarding the actual contents of the documents. NVIDIA argues that, when the Ninth Circuit ruled in Öhman’s favor, it undermined the goals of the PSLRA.
Öhman maintains that its suit is the kind of meritorious action the PSLRA sought to preserve. Öhman argues that the PSLRA serves the twin goals of preventing frivolous cases and preserving the ability to bring meritorious claims. Öhman argues that the statute protects the filing of legitimate claims by allowing plaintiffs to plead allegations about internal company documents on information and belief, since internal company documents are what plaintiffs are least likely to have prior to discovery. Öhman contends that NVIDIA’s proposed bright-line rule that any allegations of scienter based on internal company documents must allege with particularity the contents of those documents would undercut Congress’s intent to allow those claims to proceed. Öhman counters that rather than requiring pleadings to allege specific facts with particularity, the PSLRA evinces a holistic approach to analyzing PSLRA claims. The particularity and “strong inference of fraud” required by the PSLRA, Öhman asserts, should be demonstrated through the totality of allegations in a plaintiff’s pleadings, rather than any one specific required allegation. Thus, Öhman contends, its use of an expert to allege the contents of internal company documents and establish scienter met the holistic burden imposed by the PSLRA. Öhman argues that, rather than conforming to the PSLRA and Congress’s intent, NVIDIA’s rule would defeat the purpose of the law.
CONFORMITY WITH PRECEDENT
NVIDIA argues that its position is in line with Supreme Court precedent in Tellabs, Inc. v. Makor Issues & Rights. NVIDIA asserts that in Tellabs, the Court declared the PSLRA inquiry to be “inherently comparative.” Specifically, NVIDIA contends that, according to Tellabs, in order to meet the “strong inference” burden required by the PSLRA, a pleading’s inference of scienter must be at least as compelling as the opposite inference—that is, as the inference that there was no knowledge. Additionally, NVIDIA argues, Tellabs established that ambiguities and omissions in pleadings count against the strong inference of scienter. NVIDIA asserts that, without specific allegations of the contents of internal company documents, Öhman’s pleading makes it impossible to engage in this comparative analysis or arrive at a strong inference. Thus, NVIDIA argues, that the Ninth Circuit neglected to conduct the comparison of inferences required by Tellabs. In addition, NVIDIA argues that, without the contents of the internal documents, Öhman’s pleadings amount to a showing that NVIDIA kept records, and NVIDIA’s CEO had access to them, which is true of every company and does not rise to the level of a strong inference without alleging what the records said.
Öhman counters that the Tellabs test militates in its favor. Öhman asserts that the facts of Tellabs—where a CEO received reports that contradicted his public statements, and the pleadings were not dismissed despite not alleging the specific content of the reports—support Öhman’s argument for a holistic inquiry rather than focusing on requiring a certain allegation. Öhman contends that, since Tellabs requires allegations to be considered holistically and not in isolation, any court applying it will reject NVIDIA’s bright-line rule that requires certain allegations to be in the complaint. Öhman further asserts that, while the Tellabs court may have found omissions and ambiguities to count against an inference of scienter, the court did not rule that such omissions preclude the inference, nor did the court require “smoking-gun” evidence. Öhman contends that although Tellabs requires the inference of scienter be “strong,” the requirement does not change the fundamental nature of the inquiry as a holistic one. Öhman argues that, if NVIDIA’s rule were used, not alleging the specific contents of company documents would be fatal for a complaint, and thus would not allow for Tellabs’s comparative analysis to account for every aspect of the complaint’s allegations.
ROLE OF EXPERTS IN PLEADINGS
NVIDIA contends that Öhman’s claim, particularly around the issue of falsity, focuses on expert reports to circumvent the particularity requirement. NVIDIA argues that Öhman’s expert’s testimony, which makes certain conclusions about the availability of revenue data to NVIDIA’s CEO, cannot be considered a fact simply because an expert alleges it. NVIDIA argues that the court must strip an expert’s opinions out of the pleadings and only scrutinize the remaining allegations of fact and resulting inferences. Additionally, NVIDIA contends that since the facts underlying Öhman’s expert opinions do not derive from NVIDIA’s internal documents themselves, but rather from generic market research, they do not meet the particularity standard required of factual allegations in fraud pleadings. NVIDIA maintains that Öhman’s experts relied on assumptions about NVIDIA’s processing power and share in the cryptocurrency market that are not based in particularized fact and used a generalized methodology involving a string of speculations in the absence of internal NVIDIA data. NVIDIA further contends that excessively relying on experts at the pleadings stage allows Öhman to circumvent the rigorous evidentiary standards that govern expert testimony at trial. Similarly, NVIDIA argues that unlike at trial, in the pleadings stage, the defendant’s ability to call a competing rebuttal expert is lessened. NVIDIA maintains that a ruling for Öhman will allow future plaintiffs to find hired-gun experts to create conclusions based on generic market data, essentially permitting plaintiffs to substitute the particularized factual allegations with expert opinion.
Öhman maintains that the expert reports regarding falsity in its pleadings are based on enough factual allegations to meet its burden under the PSLRA. Öhman argues that NVIDIA misunderstands the difference between “factual matter” and “conclusory allegations.” Specifically, Öhman contends, an expert opinion can provide factual matter if it is based on public data. Öhman asserts that the Court, in Matrixx Initiatives v. Siracusano, ruled that a pleading’s use of medical experts and studies to suggest a link between zinc and anosmia, when viewed holistically alongside other allegations, was sufficient to meet the PSLRA.Similarly, Öhman argues that its expert’s conclusion—that NVIDIA earned $1.728 billion in crypto revenue—are allegations of fact since the expert’s assertion is backed by embedded statements of fact to arrive at such a conclusion. Additionally, Öhman asserts that, since the PSLRA allows pleading falsity on information and belief, simply stating facts or conclusions derived from experts that plead the facts justifying their conclusions, that form the plaintiff’s belief is sufficient to meet this burden. Öhman contends that when NVIDIA attacks the methodology, reliability, and assumptions of Öhman’s experts, they are mistakenly applying evidentiary standards from later in trial. Öhman asserts that, in the allegation-based pleadings stage, a simple assertion by an expert is enough to meet a plaintiff’s PSLRA burden, provided it supports a “reasonable expectation” that further evidence will come out in discovery.
Discussion
ECONOMIC DYNAMICS OF DISCOVERY AND SETTLEMENT
The Washington Legal Foundation et al. (“WLF”), in support of NVIDIA, warns that allowing a more flexible pleading standard would hamper American companies’ ability to compete. The WLF argues that lower pleading standards would cause plaintiffs’ attorneys to file frivolous class action claims to pressure companies to agree to exorbitant settlements rather than face the time and cost of discovery. The Digital Chamber (“The Chamber”), in support of NVIDIA, posits that a lower pleading standard would have a chilling effect on companies becoming or remaining publicly traded, and on qualified employees and experts from working with such companies out of concern for corporations’ perceived exposure to PSLRA liability. Furthermore, the Chamber claims that these harms are magnified for emerging technology companies, which tend to be less understood by the market and, crucially, by judges who might rely on erroneous expert testimony to justify allowing a case to proceed to discovery.
Former Securities and Exchange Commission (“SEC”) officials (“Officials”) contend that the SEC lacks the resources to prosecute all securities fraud in the country, and so relies on private enforcement actions to ensure a well-functioning economy and capital market. In fact, the Officials point out that research shows that private enforcement actions have a greater fraud deterrent effect than SEC action does. The Officials reason that companies will be more likely to commit fraud if there are more barriers to private enforcement action. Certain institutional investors (“Investors”), primarily representing local pension and retirement funds, in support of Öhman, claim that the greatest threat to markets is fraud, and that American capital markets garner international respect because of how well policed they are. The Investors fear that with more barriers to private enforcement actions, fraud will increase, investors will lose faith in the markets, and the markets will suffer as a result.
ACCESS TO JUSTICE
The Atlantic Legal Foundation (“ALF”), in support of NVIDIA, states that courts must have clear standards to respect the due process rights of litigants, particularly defendants, and that a reduced pleading standard would encourage plaintiffs’ firms to hire experts to speculate on internal company documents to grant access to discovery. Furthermore, the ALF warns that such reduced standards encourage forum shopping and encourage plaintiffs’ lawyers to take on wealthy companies, hoping for a windfall payout. Professor Joseph A. Grundfest, in support of NVIDIA, adds that a more lax pleading standard is directly contrary to the purpose of the Private Securities Litigation Reform Act, because the Act was meant to curb nuisance suits and abusive litigation.
Scholars of Civil Procedure, in support of Öhman, on the other hand, state that particularized pleading is a requirement so defendants know what claims they must meet, and that the expert testimony, such as that found in Öhman’s complaint, serves that purpose. Professor Brian T. Fitzpatrick, in support of Öhman, argues that NVIDIA’s proposed pleading standard would prevent plaintiffs from accessing justice by functionally requiring access to internal company documents, which is unduly burdensome. In fact, Professor Fitzpatrick explains that his research has failed to identify any pattern of nuisance securities fraud suits, while an estimated 10% of large corporations commit fraud each year, with only 1/3 of that fraud being detected. Furthermore, the American Association for Justice (“AAJ”), in support of Öhman, claims that requiring pleading with particularity about internal company documents would have a chilling effect on the actions of whistleblowers by requiring them to not merely expose fraud but also provide confidential internal documents to support their statements. In response to NVIDIA’s concerns about mischaracterized documents, AAJ argues that companies would need only to produce the mischaracterized documents to defend against abusive litigation.
Conclusion
Authors
Written by: Sasha Prakir, Samantha Wood and Richard Han
Edited by: Rodrigo F. Tojo Garcia
Additional Resources
- Choi, Stephen, and Pritchard, A.C., Securities Regulation: Cases and Analysis. 6th ed., Foundation Press, 2024.
- Lipton, Ann, NVIDIA, Business Law Prof Blog (16 August, 2024).