Nvidia High Court Test Weighs Securities Suits as SEC Backstop

Nvidia Corp.'s argument before the US Supreme Court next month pits the software and computing giant not only against investors alleging securities fraud, but also against two federal agencies that have thrown their support behind the shareholder lawsuit.

The Securities and Exchange Commission and the Justice Department said in an amicus brief that the investors’ complaint contained sufficient fraud allegations for the high court to uphold the US Court of Appeals for the Ninth Circuit reviving the proposed class action.

The justices this week granted Solicitor General Elizabeth Prelogar’s request to weigh in at the case’s Nov. 13 hearing. The government’s bid signals the administration’s interest in maintaining the steady flow of private securities actions as a complement to the SEC’s own limited enforcement capacity, according to attorneys and law professors.

“The SEC, like any government agency, is resource-limited,” said David Shargel, a partner at Bracewell LLP who has represented clients before the SEC and the DOJ. “Private actions alongside enforcement actions create a more comprehensive system of enforcement, but they also provide deterrence.”

Investors’ allegations that Nvidia and CEO Jensen Huang misled them about the company’s dependence on crypto mining revenue before a 2018 market decline persuaded a Ninth Circuit panel that Huang made materially false statements with a requisite level of intent.

In its Supreme Court brief, Nvidia argued the complaint leans too heavily on an expert’s “invented” data about the company’s revenue, and that the Ninth Circuit decision “eviscerates the guardrails” Congress put in place under the 1995 Private Securities Litigation Reform Act to prevent excessive or abusive securities litigation.

An Nvidia spokesperson declined to comment.

Private Enforcement

The government’s claim that private suits are necessary for investor protection isn’t based on a systematic study of securities fraud class actions and their impact on official enforcement actions, said Adam Pritchard, a professor at University of Michigan Law School who focuses on securities class actions and SEC enforcement.

“This case is Ninth Circuit error correction,” he said. “Here you have this specific provision in the PSLRA that is meant to weed out made-up lawsuits, and the Ninth Circuit has allowed a made-up expert opinion to be the basis for a lawsuit.”

The SEC has long taken the position that investors who bring lawsuits provide a valuable supplement its own litigation capacity, even within the PSLRA’s guardrails, lawyers say. SEC spokespeople didn’t respond to requests for comment.

The agency brought 784 enforcement actions in fiscal 2023, including 501 stand-alone actions, according an SEC press release. Meanwhile, investors filed 228 proposed securities class actions last year, according to a National Economic Research Associates study.

“Private market actors have different information, different incentives,” said Jill. E. Fisch, a professor at University of Pennsylvania’s Carey Law School who teaches corporate and securities law. “There are also cases that are more complex, more burdensome requiring more expert testimony. So with limited resources the SEC can’t necessarily pursue all of those cases, but sometimes private actors can.”

The crypto-related disclosures and statements at the center of the Nvidia case are also a priority for the current administration. The SEC under Chair Gary Gensler has worked to develop expertise on crypto enforcement, but that doesn’t make the agency the best candidate to bring every case involving questions around digital asset mining revenue.

“One of the concerns that the SG’s office and administration has right now is defending regulation broadly, as the current administration has an interest in the regulatory state and various features of regulation,” Fisch said. “It’s dealing with a Supreme Court that has articulated some reservations about that.”

Resource Considerations

The government throwing its support behind Nvidia investors is especially timely in the context of another high court case, SEC v. Jarkesy, which the justices decided in June. After that ruling, the agency must bring securities fraud enforcement actions seeking civil penalties to court—often a cumbersome process—rather than handling them with in-house administrative law judges.

“Federal court litigation is very resource-intensive, so this is coming on the heels of a Supreme Court case that is going to require the SEC to really think carefully about how it’s using resources,” said Haimavathi Marlier, a partner at Morrison Foerster LLP and co-chair of the firm’s securities litigation, enforcement, and white collar defense group.

Former SEC officials who filed their own amicus brief supporting Nvidia acknowledged the agency’s “limited resources” but argued that protecting scienter, or the necessary level of intent to show liability, was important to ensure that “meritless claims against good-faith actors” remain barred under the PSLRA.

A separate group of ex-SEC officials voiced support for the investor respondents in the case, arguing the agency has too much on its plate to go after all instances of securities fraud without private litigation as a backstop.

“With a limited budget, and roughly 4600 employees, the SEC is responsible for the oversight of roughly 40,000 entities, and also must review the disclosures of approximately 7800 reporting companies,” they said in an Oct. 2 amicus brief. “Enforcement resources are stretched thin, and the SEC alone simply cannot ensure a level playing field for honest market participants.”

Reframing Securities Litigation

Nvidia’s case stands to redefine the barrier to entry for individual investors to bring their claims against companies and named officers in federal court, potentially limiting the scope of alleged wrongdoing that the SEC could expect private litigation to encompass.

“The SEC and the DOJ have expressed a strong interest in this case because from their position, if the court adopts Nvidia’s view, plaintiffs would need access to internal documents specifically in order to plead scienter and they would not be able to rely on expert opinion at the pleading stage,” Marlier said.

A ruling in favor of the investor respondents may clear the way for other securities class actions to survive motions to dismiss, but the justices siding with Nvidia wouldn’t necessarily cut off the flow of suits seeking to show securities fraud through misleading statements or disclosures, according to Shargel.

“For Nvidia and companies like it, any company that could be the target of a private securities action, the decision will determine whether private plaintiffs are going to have an easier time going forward meeting their pleading obligations,” he said. “If the company wins, it’s hard to say whether there will actually be a decrease in the number of lawsuits against companies. Plaintiffs will find a way.”

The case is NVIDIA Corp. v. E. Ohman J:or Fonder AB, U.S., No. 23-970.