US Supreme Court Holds Oral Argument on Securities Fraud Pleading Standards

The US Supreme Court held oral argument in NVIDIA Corp. v. E. Ohman J:or Fonder AB on November 13, 2024, considering the standards for pleading falsity and scienter under the federal securities laws. The Justices’ questioning focused in large part on the “delta” the Court perceived between the “bright-line” rules for which NVIDIA advocated in its certiorari petition—which, according to NVIDIA, are the prevailing pleading standards in several circuits—and the case-specific review and reversal of the lower court’s ruling that NVIDIA appeared to be seeking at argument. Some Justices expressed skepticism whether the circuit courts had actually adopted NVIDIA’s bright-line rules, or if such rules would be appropriate or workable in all circumstances.

The Justices’ questioning signaled that the Court’s ruling in this case is unlikely to be the sea change that some commentators predicted, and that the Court may opt instead for a more limited ruling or an outright dismissal of the petition. If the Court does decide the case, its questioning suggests that the opinion could cast doubt on—or expressly disavow—the bright-line rules advanced by NVIDIA.

BACKGROUND

As we previously discussed when the Supreme Court granted certiorari in this case, to avoid dismissal under the Private Securities Litigation Reform Act of 1995 (PSLRA), securities fraud complaints must, among other things, plead with particularity the falsity of the alleged misrepresentations, as well as “acts giving rise to a strong inference that the defendant acted with” scienter. [1]

The plaintiffs in NVIDIA alleged that NVIDIA and several of its officers, including its CEO, misrepresented the extent to which revenues from the company’s GeForce graphics processing units (GPUs) were attributable to purchases by video gamers rather than cryptocurrency miners. [2] Plaintiffs attempted to plead scienter by alleging that defendants had access to internal NVIDIA documents reflecting high demand for the GPUs from miners, but plaintiffs did not allege the specific content of any such document. [3]

The US District Court for the Northern District of California dismissed the complaint for failure to plead the required strong inference of scienter, holding that plaintiffs had failed to “tie the specific contents” of any internal NVIDIA documents to “particular statements” by defendants and thus did not “plausibly show that the Defendant who made each specified statement knowingly or recklessly spoke falsely.” [4]

The US Court of Appeals for the Ninth Circuit reversed in part, holding that plaintiffs had sufficiently pleaded scienter as to the CEO, based on allegations that the CEO had access to detailed sales data and frequently reviewed sales reports. In addition, reaching an issue the District Court had not, the Ninth Circuit also held that the plaintiffs had sufficiently pleaded falsity based on the work of plaintiffs’ retained expert. [5]

On June 17, 2024, the Supreme Court agreed to consider the two questions presented by NVIDIA’s certiorari petition: (1) “Whether plaintiffs seeking to allege scienter under the PSLRA 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.” [6] As discussed in our earlier LawFlash, NVIDIA contends that circuit courts are split as to each question.

SUPREME COURT ORAL ARGUMENT

During the November 13 oral argument, the Justices actively questioned both sides, but directed their most pointed questions to NVIDIA’s counsel. Though the 90-minute argument covered a range of topics, the Justices focused on three principal issues:

First, with respect to scienter, several Justices took issue with what Justice Ketanji Brown Jackson described as the “delta” between the “bright-line” rule NVIDIA advocated for in its petition (i.e., that plaintiffs must allege the specific contents of internal documents to survive dismissal) and what its counsel appeared to seek at argument (i.e., that rather than adopt a bright-line rule, the Court instead vacates the Ninth Circuit’s decision based on the specific facts of the case). Justice Sonia Sotomayor, in particular, opined that NVIDIA was asking the Court to engage in “pure error correction,” and questioned whether the Court should have agreed to hear the case. Justice Neil Gorsuch similarly suggested that the scienter question presented in NVIDIA’s petition had “migrated into fact-intensive discussion” that the Court was not expecting and was ill-equipped to decide.

Second, a couple of the Justices noted that bright-line rules, such as those NVIDIA advanced in its petition, generally are disfavored, and expressed skepticism that pleading the specific contents of internal company documents is always necessary to establish documents-based scienter. Justice Jackson, for instance, suggested that securities fraud plaintiffs may adequately plead scienter based on allegations that employees reviewed certain internal company documents and knew that the documents contradicted the CEO’s public statements, even if the employees could not at the time of pleading recall the specific content of the documents.

Justice Elena Kagan likewise posed multiple hypothetical scenarios, including where a CEO publicly stated that the company’s sales were up, but plaintiffs plead facts indicating that the CEO regularly reviewed documents detailing the company’s sales figures (without pleading the specific content of those documents) and cite publicly available evidence showing that sales were actually down. Justice Kagan seemed to suggest that scienter would be adequately pleaded in such case. In attempting to address these and other hypotheticals, NVIDIA’s counsel appeared to retreat from the petition’s bright-line rule, arguing instead that the rule should be “contextual” based on what plaintiffs allege about what NVIDIA’s CEO knew and when he knew it.

Third, with respect to falsity, the Court again questioned whether NVIDIA is seeking a blanket rule barring reliance on expert reports to demonstrate falsity at the pleading stage, or if NVIDIA is instead asking the Court to wade into whether plaintiffs’ expert report in this particular case is flawed. NVIDIA’s counsel appeared to concede that NVIDIA is, in fact, seeking the latter. Justice Kagan responded that this sort of fact-based analysis is something that the Court is not “very good at” and was not “expecting” to have to do.

Justice Samuel Alito questioned how a court could evaluate at the pleading stage the reliability and potential flaws in opinions by experts on highly technical issues. Justice Gorsuch noted that, like the scienter question, there was “some delta” between the broad falsity question presented in NVIDIA’s petition and the narrower fact-based analysis NVIDIA’s counsel seemed to be advocating for at argument (i.e., that the plaintiffs’ expert report in this case is unreliable and flawed). NVIDIA’s counsel repeatedly pushed back on the notion that the company’s position has changed, but ultimately appeared to admit that a rigorous, robust expert report, with a fully disclosed methodology, could be sufficient to plead falsity in other cases.

CONCLUSION

If the Supreme Court decides to rule on the two questions presented in NVIDIA’s petition, the decision could significantly impact future adjudication of motions to dismiss securities fraud claims. But oral argument revealed that the questions NVIDIA presented may, in fact, be more case-specific than observers, and the Court itself, anticipated. The Justices’ questioning suggests that many of them view the questions presented as seeking fact-intensive “error correction” of the Ninth Circuit’s analysis, which the Court is generally reluctant to perform.

Ultimately, the Court may choose to issue a much narrower ruling with limited impact on future securities litigation—or to dismiss the petition as improvidently granted. To the extent the Court reaches the issues identified by NVIDIA, the Court’s questioning signals a real risk that a decision in this case could undermine or expressly disavow those bright-line rules on which public companies and their officers have relied for decades.