Nvidia's bid to prevent securities fraud reaches the Supreme Court

John Kruzel and Andrew Chung
| Reuters

WASHINGTON, Nov 13 (Reuters) – The U.S. Supreme Court on Wednesday examined Nvidia’s NVDA.O bid to torpedo a securities fraud lawsuit, accusing the artificial intelligence chip maker of misleading investors about how much of its revenue was dependent on the volatile cryptocurrency market.

The justices heard arguments in Nvidia’s appeal against a lower court’s decision allowing a 2018 class action — a lawsuit led by Stockholm, Sweden-based investment management company E. Ohman J:of Fonder AB — to proceed.

It is one of two cases the Supreme Court has heard this month that could lead to rulings that make it harder for private litigants to hold companies accountable for alleged securities fraud. The other, involved. Meta’s META.O Facebook was discussed on November 6.

At issue in the Nvidia case is whether prosecutors met the heightened legal bar for bringing private securities fraud lawsuits set by a 1995 federal law called the Private Securities Litigation Reform Act, which aimed to reduce frivolous lawsuits to exclude.

Some judges expressed reservations about intervening in the case. They questioned whether there is a clear legal issue for them to decide, rather than just a dispute over facts, and indicated that they may not be ideally placed to resolve the case given its technical complexity of it.

“It seems to me that you’re asking us to do a kind of analysis that we’re not very good at and that we didn’t expect when we took up this case,” liberal Justice Elena Kagan told Neal Katyal, the lawyer arguing for Nvidia.

Liberal judge Ketanji Brown Jackson wondered whether the standard Nvidia has asked the court to adopt would place too heavy a burden on the plaintiffs.

“I think my concern is that you seem to be requiring that plaintiffs actually have the evidence to make their case,” Jackson said, noting that plaintiffs often don’t obtain critical evidence until later in the lawsuit.

Prosecutors accused Nvidia and its CEO Jensen Huang of violating a 1934 federal law, the Securities Exchange Act, by making statements in 2017 and 2018 that falsely downplayed how much of Nvidia’s revenue growth came from crypto- related purchases.

Conservative Chief Justice John Roberts seemed to be looking for a middle ground.

“If I think the positions on both sides are a little too absolute, how do you find a sweet spot when it comes to when the (Private Securities Litigation Reform Act) is met?” Roberts asked Katyal.

The higher legal standards under the law mean plaintiffs need more than “just a little bit of direct evidence,” Roberts said. ‘On the other hand, it seems to me that you cannot insist only on the direct evidence before filing a complaint. So if I don’t think it’s black and white, how… can I decide where the balance lies? “

Starting in 2017, as the price of certain cryptocurrencies rose, Nvidia’s chips became increasingly popular for crypto mining, a process that involves performing complex mathematical equations to secure cryptocurrencies such as bitcoin and ether.

In late 2018, amid a decline in crypto profitability, Nvidia’s revenues fell short of expectations, causing its stock price to fall in early November of that year.

Prosecutors accused Nvidia and its top executives of hiding the impact of crypto mining on its business. The lawsuit seeks, in part, unspecified monetary damages to recoup the lost value of Nvidia stock in the hands of the investors.

Nvidia agreed in 2022 to pay US$5.5 million to US authorities to settle charges that it failed to properly disclose the impact of crypto mining on its gaming business, but without admitting federal regulators’ findings or to deny.

‘Inaccurate characterization’

Conservative Justice Neil Gorsuch asked Deepak Gupta, the attorney representing the plaintiffs, to respond to Nvidia’s argument that their claims about how much of the company’s revenue went to crypto miners relied heavily on an expert opinion from the economics consulting firm Prysm Group, which contains too few details to break the first phase of the lawsuit.

Gupta called Nvidia’s claim “an inaccurate characterization of the report.”

“What Prysm actually did was math,” Gupta said. “It was taking publicly available numbers and doing some multiplication.”

“Expensive math, I guess,” Gorsuch said, prompting laughter in the courtroom.

A federal judge dismissed the lawsuit, but the San Francisco-based 9th U.S. Circuit Court of Appeals subsequently revived the lawsuit.

Conservative Justice Brett Kavanaugh addressed concerns raised by outside advocacy groups at the Supreme Court that the 9th Circuit’s decision created “a blueprint” to circumvent the increased legal bar Congress set in the Private Securities Litigation Reform Act.

President Joe Biden’s administration supported the shareholders in the case.

The Supreme Court’s rulings in the Facebook and Nvidia cases are expected at the end of June.

The US Supreme Court is considering an attempt by Facebook to escape a securities fraud lawsuit: Read the full story

Facebook and Nvidia ask the US Supreme Court to spare them from securities fraud lawsuits: Read the full story

The US Supreme Court will hear Nvidia’s bid to end its shareholder lawsuit: Read the full story

Reporting by John Kruzel and Andrew Chung; Editing by Will Dunham