Facebook, NVIDIA Securities Cases Deserve Supreme Court Reversal

The US Supreme Court is considering hearing appeals in two securities cases: NVIDIA v. E. Ohman J:OR Fonder AB and Facebook v. Amalgamated Bank. Both present critical issues under the federal securities laws that we believe the court must review and ultimately reverse.

Defendants in each case want the justices to reverse a ruling from the US Court of Appeals for the Ninth Circuit that allowed claims brought against them under the federal securities laws to proceed. The court is expected to review the petitions in the coming weeks.

The cases present an opportunity for much-needed clarity on theories of liability that corporations and executives routinely face in securities lawsuits—and about which courts, regrettably, continue to reach different conclusions.

NVIDIA Case

The defendants in NVIDIA, among other issues, oppose the Ninth Circuit’s conclusion that “scienter,” or fraudulent intent, was alleged adequately against the company’s CEO concerning statements he made on the sources of demand for one of the company’s products.

US securities laws require a plaintiff to state, with particularity, facts that give rise to a “strong inference” that the defendant acted with the required state of mind, which is actual knowledge or deliberate recklessness.

We believe the plaintiffs failed to meet this standard in several respects that merit reversal by the Supreme Court. For one, the Ninth Circuit wrongly credited allegations that other courts have found insufficient to plead scienter, namely that:

• The executive was “a highly competent, extremely detailed-oriented manager” who would be on top of prominent issues.
• There were internal reports, meetings, and systems within the company that supposedly tracked product demand. For this point, the plaintiffs followed the typical playbook and relied on unnamed former employees who purportedly supplied plaintiffs’ counsel with these allegations.

There are many problems with relying on anonymous sources, the most glaring of which here is that these former employees failed to provide particular facts showing what specific information the CEO supposedly knew at the time he spoke that allegedly contradicted statements he made.

That’s what the securities laws require. The fact that a company has certain processes in place—and that executives might on occasion access internal data—is unremarkable and not an indicator of fraud.

Attempting to work around this deficiency, the NVIDIA plaintiffs relied on an outside expert who claimed to have reverse-engineered from market data a “best guess” on possible sources of demand during the class period.

A bought-and-paid-for litigation expert’s opinion estimating what sources might have been feeding demand isn’t a “fact” that should carry weight, but the Ninth Circuit assumed the expert’s speculation was what the company and its executives might have known.

An outsider to the company can’t possibly supply the facts required under the securities laws on the “who knew what when” within the company. The notion that a plaintiff can overcome scienter pleading defects through a hired expert’s speculation sets a dangerous precedent that shouldn’t be allowed to stand.

Facebook Case

This appeal stems from allegations that certain risk factors on third-party misuse of user data in Facebook’s SEC filings were false and misleading because they supposedly framed risks as “purely hypothetical” when, the plaintiffs contend, the risks had already “materialized.”

Risk factors are designed to warn of future adverse events that could have a material impact and provide beneficial information to investors in assessing a company’s risk profile.

The Facebook defendants, among other issues, oppose the Ninth Circuit’s decision that certain risk factors could independently form the basis of a securities fraud claim. Facebook presents an example of an increasingly common tactic where plaintiffs seek to morph risk factor warnings, which companies must provide, into a sort of omnibus representation that the thing warned of will never occur.

But the whole purpose of identifying specific risk factors is to warn of something that could theoretically happen. If the risk factor accurately predicts a future problem, as was the case in Facebook, the plaintiffs treat the risk factor as a “gotcha” moment, claiming that the negative event disclosed must have been known earlier.

Risk factors should serve as a shield against liability because they are part of the total mix of information known to investors. Risk factors shouldn’t be used as a sword to manufacture claims based on hindsight speculation.

This debate over whether risk factors can be actionable under the federal securities laws arises frequently in securities cases. This tactic of attempting to weaponize risk factors merits review and reversal by the Supreme Court.

The cases are NVIDIA Corp. v. E. Ohman J:OR Fonder AB, No. 23-970, and Facebook, Inc. v. Amalgamated Bank, No. 23-980.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Susan Hurd is partner in Alston & Bird’s securities litigation group.

Carissa Lavin is an associate in Alston & Bird’s securities litigation group.

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