And Then There Were None: Supreme Court Dismisses Review of Second Securities Case

After having tantalized the securities bar by agreeing to review two Ninth Circuit decisions reversing the dismissals of securities class actions, the Supreme Court recently ended up dismissing both writs of certiorari as having been improvidently granted.  The Court seems to have concluded that both lawsuits – one against Facebook and another against NVIDIA – raised only case-specific questions about the lower courts’ rulings, rather than unsettled legal principles that required authoritative clarification.

The dismissals of the certiorari petitions leave the Ninth Circuit’s rulings intact.  They also illustrate the perils of seeking review of appellate decisions that depend too much on the intricacies of the particular case.  The Supreme Court heard full oral argument in both appeals but found itself getting too deeply enmeshed in debates about the sufficiency of the allegations at the pleading stage – a position the Court generally tries to avoid.  Apparently seeing no clean way to decide the cases solely on broad legal rules that the Court had not already articulated, the Court chose to bow out.

The Facebook Case

The Facebook litigation arose from a series of allegedly false or misleading statements about Facebook’s protection of its users’ and their friends’ data.  For purposes of the Supreme Court’s grant of certiorari, only one set of statements was relevant:  Facebook’s disclosures about the risks of improper third-party access to and disclosure of users’ data and the injury that Facebook could suffer from such disclosure.

Starting in late 2015, news articles reported that Cambridge Analytica, a British political-consulting firm, had improperly harvested and retained personal data from millions of Facebook users.  In mid-2016, Facebook negotiated a confidential settlement with an academic who had helped Cambridge Analytica and who certified that he had deleted data in his possession, although he also revealed that he had shared data with Cambridge Analytica’s chief executive officer and that the data were still in use.

In 2017, Facebook issued its 2016 annual report with risk disclosures that allegedly portrayed third-party misuse of users’ data as only a hypothetical risk that could harm the company if it materialized.  When Facebook’s stock price later dropped, allegedly because of the misuse of user data, shareholders sued.

The District Court dismissed the case, but the Ninth Circuit – in a split 2-1 decision – reversed the dismissal of the allegations about the risk disclosures.  The majority ruled that plaintiffs had adequately pled the falsity of Facebook’s statements representing “the risk of third parties improperly accessing and using Facebook users’ data as purely hypothetical” even though, in reality, “that exact risk had already transpired.”

In a partial dissent, Judge Bumatay opined that the challenged statements were not false or misleading because the harm from the data disclosure had not yet materialized even if the risk of disclosure had already occurred and was no longer hypothetical.  But the majority rejected that contention.  “Our case law does not require harm to have materialized for a statement to be materially misleading.  Facebook’s statement was plausibly materially misleading even if Facebook did not yet know the extent of the reputational harm it would suffer as a result of the breach.”  According to the majority, “it is the fact of the [data] breach itself, rather than the anticipation of reputational or financial harm, that caused anticipatory statements to be materially misleading.”

The Supreme Court granted Facebook’s certiorari petition on the question “whether risk disclosures are false or misleading when they do not disclose that a risk has materialized in the past, even if that past event presents no known risk of ongoing or future business harm.”  The Court heard oral argument in early November 2024, but, on November 22, 2024, it dismissed the writ of certiorari as having been improvidently granted.  Facebook, Inc. v. Amalgamated Bank (No. 23-980).

The NVIDIA Case

The NVIDIA case involved allegations that NVIDIA had misrepresented the impact of cryptocurrency sales on its financial performance to conceal the extent to which its revenue growth depended on the volatile demand for cryptocurrency. Plaintiffs contended that defendants had known that increases in NVIDIA’s Gaming segment products were largely driven by crypto-related sales but had falsely minimized the impact of those sales on the company’s revenues.  NVIDIA’s stock price fell when the company eventually announced that it had missed revenue projections because “post crypto channel inventory” had taken longer to sell as the profitability of crypto mining declined.

The District Court dismissed the case, ruling that plaintiffs had not sufficiently pled that any allegedly false or misleading statements had been made with scienter. A divided panel of the Ninth Circuit reversed, holding that plaintiffs had adequately pled false or misleading statements as well as scienter as to the company’s CEO.  The majority’s ruling on falsity was based in part on a report by an “economic consulting firm” that plaintiffs had retained for the litigation. The Complaint cited the report to support the allegations that NVIDIA had understated its crypto-related revenue.

Judge Sanchez dissented. As to falsity, he opined that the majority had given improper weight to the economic consultant’s post hoc analysis of NVIDIA’s alleged reliance on crypto-related revenue.  According to Judge Sanchez, “we have never allowed an outside expert to serve as the primary source of falsity allegations where the expert has no personal knowledge of the facts on which their opinion is based.”  As to scienter, he opined that plaintiffs had not alleged with particularity the contents of any internal report or data source that would have alerted NVIDIA’s executives to the alleged falsity of their public statements.

NVIDIA petitioned for certiorari on two questions:

• “Whether plaintiffs seeking to allege scienter under the Private Securities Litigation Reform Act based on allegations about internal company documents must plead with particularity the contents of those documents,” and
• “Whether plaintiffs can satisfy the [PSLRA’s] falsity requirement by relying on an expert opinion to substitute for particularized allegations of fact.”

The Supreme Court granted certiorari and heard oral argument in November 2024.  But on December 11, 2024, the Court dismissed the writ of certiorari as having been improvidently granted.  NVIDIA Corp. v. E. Ohman J:Or Fonder AB (No. 23-970).

Implications

One might wonder how the Supreme Court got itself into this situation twice in one Term, and both times in securities class actions from the Ninth Circuit.  Did the temptation to review – and perhaps reverse – two divided Ninth Circuit decisions upholding securities-fraud claims at the pleading stage prove irresistible for at least some Justices?  Did the certiorari petitions and the subsequent merits briefs succeed (at least initially) in framing supposedly unsettled legal issues that actually were not as unsettled or important as they were portrayed as being?  Did the Justices throw up their collective hands when oral argument devolved into technical discussions that they had not anticipated addressing?  In the NVIDIA case, for example, Justice Alito at one point said:  “This is a highly technical subject, and I just don’t understand how a court is supposed to evaluate [it]” at the pleading stage.  Justice Kagan similarly remarked that “[i]t just seems to me that you’re asking us to engage in a kind of analysis that we are not very good at and weren’t expecting to [undertake] when we took this case.”

But speculation aside, the Ninth Circuit’s decisions stand at least for now, and they could affect securities litigation in several respects.

First, securities plaintiffs will probably cite Facebook’s holding that a statement can be materially misleading even if the harm required for a securities-fraud claim had not yet materialized when the alleged misstatement was made.  This principle, if accepted elsewhere, could prove potent in situations where (as in Facebook) a company’s risk disclosures speak about a risk in only hypothetical terms even though the risk has already occurred, but no resulting harm has yet materialized.  In that situation, a court could conclude that the failure to disclose the actual occurrence of the risk made the merely hypothetical discussion of it false or misleading even in the absence of materialized harm.

Second, securities plaintiffs will likely cite NVIDIA’s holding that a complaint can (at least in some circumstances) use a retained expert’s sufficiently specific, after-the-fact report to plead falsity even if the expert lacked personal knowledge of the facts on which the report was based.  Some securities complaints in recent years have included allegations based on expert reports, and that approach to pleading falsity might continue.

Third, securities plaintiffs might cite NVIDIA’s refusal to require securities complaints to plead the contents of internal documents that allegedly show a corporate executive’s scienter.  On this point, however, litigants should not overread the Ninth Circuit’s holding.  Courts throughout the country have held that a securities plaintiff cannot plead the strong inference of scienter required by the PSLRA by alleging only that an executive had access to unspecified corporate documents.  If those documents allegedly contained facts inconsistent with the executive’s statements, the complaint generally must plead what those documents said.  The Ninth Circuit’s majority opinion did not articulate a categorical rule that a complaint never needs to plead the contents of documents that allegedly are inconsistent with the executive’s statements.  Rather, the majority based its conclusion on the totality of the allegations of scienter:  its “holistic review” considered allegations that “(1) [the CEO] had detailed sales reports prepared for him; (2) [the CEO] had access to detailed data on both crypto demand and usage of NVIDIA’s products; (3) [the CEO] was a meticulous manager who closely monitored sales data; . . . (4) sales data at the time would have shown that a large portion of GPU sales were being used for crypto mining”; and (5) the CEO had “admitted to closely monitoring the sales data.”  The majority’s ruling does not appear to suggest that a plaintiff can create a strong inference of scienter by pleading the mere existence of undescribed documents allegedly contradicting a corporate executive’s statements.