Some Supreme Court justices scrutinized Nvidia’s attempt to dodge a securities fraud lawsuit

• The US Supreme Court heard Nvidia’s arguments against a class action securities fraud lawsuit.
• Nvidia is accused of misleading shareholders about cryptocurrency mining-related sales.
• The company’s lawyers argue plaintiffs have not met pleading standards set by a 1995 law.

The US Supreme Court on Wednesday heard arguments in a case in which Nvidia is trying to dodge a securities fraud lawsuit brought by shareholders. But some of the justices expressed concern over the chip giant’s assertions.

Nvidia petitioned the nation’s highest court after a lower court permitted a 2018 class action lawsuit alleging that the company and its CEO Jensen Huang misled investors about its cryptocurrency mining-related sales to move ahead.

Attorneys for Nvidia argue that the plaintiffs in the lawsuit, led by a Swedish investment management firm, have not met the stricter pleading standards laid out by the 1995 Private Securities Litigation Reform Act.

The decision by the US Court of Appeals for the Ninth Circuit to allow the lawsuit to proceed “creates an easy road map for plaintiffs to evade the Reform Act,” Nvidia attorney Neal Katyal argued before the justices.

The Private Securities Litigation Reform Act or PSLRA was designed, in part, to curtail frivolous securities lawsuits.

“When a stock drops, all they have to do is find an expert with numbers that contradict the company’s public statements, then allege the company keeps records that executives look at, and then argue those records would have matched the hired expert’s numbers,” said Katyal, who argued that the plaintiff’s complaint relies on expert opinion and lacks company documents.

When asked by Justice Clarence Thomas what the plaintiff’s complaint would look like in order to comply with the PSLRA, Katyal said it would have to answer “what did the CEO know” and “when did he know it.”

“I guess my concern is that you appear to be requiring for plaintiffs to actually have the evidence in order to plead their case,” said Justice Ketanji Brown Jackson, adding, “part of my concern is that you seem to be wanting a bright line that says the contents of the documents are necessary.”

Justice Sonia Sotomayer said that she was “concerned” by Nvidia’s petition to the court and told Katyal, “We often don’t grant cert to error correct.”

“I’m not actually sure what rule we could articulate that would be clearer than our cases already say,” Sotomayer said.

Chief Justice John Roberts said the aspect that concerned him about both sides’ arguments was that it was “a little black and white.”

“If I think that the positions on both sides are a little too absolute, how do you find sort of the sweet spot in terms of when the PSLRA is satisfied?” Roberts asked.

“It can’t be just a little bit of direct evidence because that statute was intended to do something,” Roberts said. “On the other hand, it seems to me, you can’t insist on only the direct evidence before a complaint goes forward. So if I don’t think it’s black and white, how do I decide where the balance is?”

A Nvidia spokesperson told BI the company “appreciated the opportunity to answer the Court’s detailed questions this morning. We brought this case to the Supreme Court to protect shareholders and the economy from groundless lawsuits, and look forward to the Court’s resolution of this matter.”

In his arguments, Deepak Gupta, an attorney representing the plaintiffs, said the PSLRA “demands particularity.”

“Everyone agrees you can’t circumvent the statute with conclusory allegations or unsubstantiated expert opinions,” Gupta said.

“But that’s not what happened here,” said Gupta. “On falsity, the Court of Appeals holding expressly rested on a combination of facts showing that a substantial part of gaming revenues came from crypto.”

This included accounts from former employees, detailed accounts of internal data and meetings, expert analysis, and “Huang’s eventual acknowledgment of the crypto hangover, which sent the stock tumbling 28%,” said Gupta.

A district court previously dismissed the plaintiffs’ class action lawsuit and the Ninth Circuit reversed that decision.

The plaintiffs allege in their brief to the Supreme Court that in 2017 when Nvidia’s sales of graphic processing units (GPUs) were surging, the company and Huang “knew those record sales were due in substantial part to demand from cryptocurrency miners.”

“But for more than a year, Huang denied that mining-related sales were driving NVIDIA’s revenue growth because he knew that the securities market looked askew at GPU sales to miners, which are notoriously cyclical,” the brief says.

“Huang’s strategy fell apart in late 2018, when cryptocurrency prices collapsed, GPU purchases by miners withered, and demand for GeForce GPUs shrank dramatically,” the brief says. “NVIDIA then finally admitted that — contrary to Huang’s previous denials—its record revenue growth had been largely due to mining-related demand for GeForce GPUs.”

Nvidia’s attorneys argued in its petition to the Supreme Court that on public calls with investors, company executives “made clear that they believed crypto miners were buying both GeForce GPUs and Crypto SKUs.”

“This case aptly demonstrates the danger of allowing plaintiffs to guess at the pleading stage what internal company reports could have said,” the petition says. “Plaintiffs speculate that internal NVIDIA sales reports would have reflected the amount of gaming segment revenue driven by sales to miners rather than to gamers.”

It adds, “But there is no basis in Plaintiffs’ allegations to assume that this information was available to NVIDIA.”

In 2022, Nvidia agreed to pay the Securities and Exchange Commission $5.5 million to settle charges for “inadequate disclosures” regarding the impact of crypto mining on the company’s gaming business. Nvidia agreed to pay the penalty without admitting or denying the SEC’s findings.

A decision from the Supreme Court is expected by June.