Meta, Nvidia Appeals Could Have Broad Impact on Securities Cases

The US Supreme Court’s recent oral arguments in two securities litigation appeals, Facebook, Inc. v. Amalgamated Bank and Nvidia Corp. v. E. Ohman J:Or Fonder AB, could have major implications for what plaintiffs must do to satisfy the heightened pleading requirements for securities fraud class actions.

In both cases, Meta, previously called Facebook, and Nvidia want the high court to overturn the US Court of Appeals for the Ninth Circuit’s denials of their motions to dismiss federal securities fraud claims.

The plaintiffs in Facebook claim that a particular risk disclosure in the company’s Form 10-K annual report was misleading, because it presented the risk of third parties misappropriating Facebook’s user data as “hypothetical,” when Facebook knew there had been misappropriation at least once in the past.

Facebook argues that the past event was already a matter of public knowledge when the 10-K was filed and that Facebook believed the past event wouldn’t cause any continuing or future harm.

The justices spent much time during oral argument Nov. 6 in a battle of the hypotheticals—offering and then tweaking various scenarios to assess whether it would ever be appropriate to require an issuer to disclose past events in a forward-looking risk disclosure section of SEC filings.

Many of these arguments turned on whether there was some sort of implied representation of past or present circumstances baked into a risk factor statement. Some justices voiced concern over assuming investors read anything into such statements and, if so, noting potential variability regarding what investors were likely to infer.

The justices also explored whether other existing regulations already require companies to disclose past adverse events, or whether the SEC could better answer the question of what further disclosure, if any, should occur in the risk factors section.

These questions suggest the Supreme Court is disinclined to impose a bright-line rule compelling disclosure of past occurrences in the risk factor section of public filings. The Supreme Court could, therefore, choose to issue a more narrow ruling that focuses on the unique facts of this case.

Many of the justices seemed to struggle with where to draw the line on disclosure in other cases, which also would seem to weigh in favor of a narrower ruling that wouldn’t alter current disclosure practices.

The Supreme Court’s Nov. 13 oral arguments in Nvidia sought to answer two questions:

• Whether plaintiffs attempting to plead fraudulent intent or “scienter” based on allegations that the company tracked issues of importance via internal reports must plead “the contents” of those reports with particularity
• Whether plaintiffs can rely on outside expert opinions to infer what these internal reports “must have shown,” even though the expert had never worked for the company at issue nor had access to its internal reports and data

The plaintiffs in Nvidia relied on unnamed former employees who claimed the company generated internal reports tracking crypto-related sales. Nvidia argued these allegations failed to satisfy the heightened pleading standards for securities fraud claims, because the former employees didn’t purport to know the specific contents of any specific report and didn’t claim personal knowledge of the CEO’s review of any one report prior to making statements challenged by the plaintiffs.

Some of the justices raised concerns about whether a requirement to plead “the contents” of internal reports was too burdensome a standard to impose because the plaintiffs won’t likely have access to such documents until later in the case.

Nvidia’s counsel explained they weren’t asking the court to impose a standard requiring the plaintiffs to quote specific language from or to cite to the exact metrics included in internal reports. Instead, they argued, the plaintiffs should be required to allege particularized facts to both support the claim that the report said something contrary to the company’s public statements and show the executive charged with securities fraud saw that report before making the challenged statements.

This reasoning is sound because something more should be required than simply a generalized description of the practice of generating reports. The statutory pleading standard expressly requires “particularized facts” that give rise to a “strong inference” of fraudulent intent.

There was some commentary about whether the court was being asked to weigh into the facts of the case as opposed to clarifying the applicable legal standard. Regardless, it seems highly unlikely the court would issue an opinion that watered down what are supposed to be the more challenging requirements for pleading securities fraud.

Even though time was spent discussing the plaintiffs’ reliance on an outside expert’s report, the lack of vigor in the questioning on this issue was surprising. From a practitioner’s perspective, it would be highly problematic to allow bought-and-paid for expert opinions to be considered at the motion to dismiss stage. Their consideration invites the type of peripheral disputes about the expert’s embedded—and perhaps flawed—methodologies and assumptions that arose here.

If there are public facts that an expert could marshal, then simply put those facts in the complaint. The addition of expert opinions at this early stage of a case presents a host of avoidable problems.

Both appeals present important issues for the court’s consideration. The allegations challenged in these cases are present in virtually every securities case that is filed. The court’s ruling on these appeals, thus, has the potential to strengthen the ability of defendants to secure early dismissal of securities fraud claims.

The cases are Facebook v. Amalgamated Bank, U.S., No. 23-980, argued 11/6/24 and NVIDIA v. E. Ohman J:Or Fonder AB, U.S., No. 23-970, argued 11/13/24.

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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