On Wednesday, November 13, the Supreme Court heard oral argument in the case NVIDIA Corp. v. Ohman J, a class action suit filed in the Northern District of California alleging securities fraud under § 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. Early signals from the Justices’ questions have led observers to believe that the Court may affirm the Ninth Circuit’s decision to reverse and remand the decision granting Nvidia’s motion to dismiss for failure to state a claim.
As detailed in our blog post from June covering the Supreme Court’s decision to review this case, the Plaintiffs here are investors in Nvidia who claim that the computer-chip manufacturer and its chief executives misrepresented the extent of Nvidia’s reliance on the volatile cryptocurrency mining industry in 2017 and 2018. Plaintiffs’ amended complaint was initially dismissed by the district court for failure to state a claim in accordance with the stricter pleading requirements of the Private Securities Litigation Reform Act (“PSLRA”). On appeal, the Ninth Circuit affirmed in part and reversed in part, determining that Plaintiffs had pled sufficient facts to allege that Defendants had knowingly or recklessly made false or misleading statements even under the heightened standards of the PSLRA. The Supreme Court granted cert on June 17, 2024.
At oral argument, counsel for Defendants argued that Plaintiffs were unable to state a claim for securities fraud because they failed to satisfy the requirements of pleading scienter and falsity under the PSLRA. Defendants argued that Plaintiffs failed to allege scienter because their allegations about internal company documents did not plead with particularity the contents of those documents. Defendants argued that Plaintiffs cannot plead falsity by relying on an expert opinion to substitute for particularized allegations of fact.
But the Justices appeared generally unreceptive to Defendants’ arguments. Justice Ketanji Brown Jackson stated that adoption of the pleading standard suggested by Nvidia would place an impossible burden upon Plaintiffs at the motion-to-dismiss stage, and Justice Elena Kagan lamented that “it becomes less and less clear why we took this case” rather than simply allowing the Ninth Circuit’s decision to stand. Much of the Court’s conservative wing was in agreement; for example, Justice Samuel Alito questioned Defendants’ counsel as to how the Court can be expected to evaluate the quality of Plaintiffs’ outside expert’s report at this nascent stage of the litigation.
The Court’s ultimate decision may have significant practical effects on securities class action litigation, particularly as to how courts evaluate Rule 12(b)(6) motions under the PSLRA. The Court’s decision may also have broader implications regarding the treatment of expert analyses at the pleading stage.