Court considers dispute over disclosure of NVIDIA sales to crypto miners

DISCUSSION OF CASE

NVIDIA, the world’s most valuable company, sells computer graphics processing chips designed primarily for use in video games, which it sells to gaming device manufacturers. As it happens, NVIDIA’s chips are also useful for cryptocurrency mining, and in 2017 many crypto miners started buying NVIDIA chips for that purpose. As usage increased, NVIDIA’s chip sales increased. But in 2018, when the price of bitcoin went through a period of sharp decline, which reduced the incentive for cryptomining, NVIDIA’s sales fell.

The shareholders responded by filing the proposed class action here, alleging that NVIDIA executives (including CEO Jensen Huang) made false and misleading statements about the extent to which cryptomining supported NVIDIA’s chip sales. The US Court of Appeals for the 9th Circuit allowed the case to proceed, and the Supreme Court agreed to review the case.

At issue in the case is the Private Securities Litigation Reform Act, a statute enacted in 1995 to curb securities class action lawsuits. Among other things, it establishes a high bar for crafting a successful complaint in such a case. If the suit alleges a false or misleading statement, it must not only specify the reasons why each statement is believed to be misleading, but also “state with particularity all facts upon which that belief is formed.” Moreover, the complaint must also “expressly state the facts” that “give[e] lead to a strong inference that the defendant acted with the requisite state of mind.” This “strong inference” standard is substantially higher than the normal standard for a complaint.

Under that statute, shareholders have a hard time showing that Huang lied when he made statements that downplayed the share of NVIDIA chip sales attributable to cryptomining. The shareholders have no documents or statements that directly show any reason to believe that Huang knew what proportion of the sales were made to crypto miners. Rather, they rely on an expert report that estimated the number of crypto-mining processors built during the relevant time, the number of chips that would have been required, and the proportion of those chips likely to have been sold by NVIDIA. Because the numbers produced by those estimates were inconsistent with Huang’s public statements, the shareholders allege that his statements were false—indeed, that he must have known them to be false.

NVIDIA scoffs at this as a potential theory of the matter. The company argues that when the theory of “scienter” (the securities law standard of intent—a Latin term meaning something like “with knowledge”) is that internal corporate documents contradict public statements, the PSLRA’s specificity requirement means that plaintiff have to assert the content of these internal documents. So in this case, because the shareholders have made no such allegations—they allege nothing at all about documents Huang could have seen—they have failed to meet their burden.

For similar reasons, NVIDIA argues that shareholders have not done enough to allege that any of Huang’s statements are false. The complaint makes no direct allegations at all about NVIDIA chip sales or the share to crypto miners; rather, it only provides the generalized estimates of its expert witness based on the size of the crypto market and NVIDIA’s likely share of it. That kind of “generic market research,” claims NVIDIA, cannot reveal a case of counterfeiting “in particular.”

In the Supreme Court, the shareholders shy away from exclusive reliance on the expert report. Instead, they point to a body of evidence suggesting that various employees at NVIDIA were tracking the rise of cryptomining and that NVIDIA executives were aware of this information. Because existing Supreme Court cases on the PSLRA require a “holistic inquiry” that assesses the information in context, they argue that the justices should reject the “bright line” rule that shareholders see in NVIDIA’s argument, which would require plaintiffs to produce ” tuxedo gun” internal document when they file their complaint.

For its part, NVIDIA strongly responds that – contrary to what the shareholders claim in the Supreme Court – the lower court decision confirms the allegations of fraud as resting solely on Huang’s failure to make statements about the sale of cryptomining that match the results of the plaintiff’s results. expert.

As with last week’s argument i Facebook v. Amalgamated Bankshareholders here will surely face some skeptical questions from judges who will believe that the complaint in this case is precisely the kind of thing the PSLRA was designed to suppress. Saying that the rule NVIDIA is proposing makes this type of case basically impossible—because of the difficulty of obtaining confidential and compromising corporate documents to support a complaint—these judges are just as likely to disagree and respond , that the PSLRA is designed for precisely that result.