US Supreme Court decision on Pleading Requirements for Securities Fraud Claims

Recently, there was a surprising development in two securities fraud cases as the U.S. Supreme Court dismissed without explanation Facebook, Inc. v. Amalgamated Bank and NVIDIA Corp. v. E. Ohman J:or Fonder AB. These cases were expected to provide clarity on the requirements for plaintiffs in securities fraud class actions under the Securities Exchange Act of 1934. Specifically, the Court was set to decide on whether plaintiffs need to provide detailed information from internal company documents, if expert opinions can replace specific facts in a complaint, and if past risk disclosures must mention that a risk has materialized, even if it poses no present or future harm to the business.

Both cases initially started in the Northern District of California, where investors accused Facebook and NVIDIA, along with some of their officers, of making false or misleading statements to shareholders under Rule 10b-5 and Section 10(b) of the Exchange Act.

In the Facebook case, shareholders alleged that the company misled them about Cambridge Analytica’s misuse of user data. They argued that Facebook downplayed the risk of data misuse in its filings, even though the breach had already occurred. Similarly, in the NVIDIA case, plaintiffs claimed that the company’s officers misrepresented sales to crypto miners as revenue from video game partners, pointing to internal sources showing a high demand for GPUs from miners.

The district court dismissed both complaints, stating that Facebook’s risk disclosure was not misleading as the Cambridge Analytica breach was already known, and the allegations in the NVIDIA case did not adequately show scienter.

However, two divided 9th Circuit panels reversed the district court decisions. They found that Facebook’s risk disclosure about data misuse was misleading as the full extent of the Cambridge Analytica scandal was not public when the disclosure was made. In the NVIDIA case, the court determined that the plaintiffs had satisfied the scienter requirement and provided enough evidence for their claims.

Both Facebook and NVIDIA sought the Supreme Court’s review, but their cases were dismissed. Facebook was seeking clarification on when risk disclosures are considered false or misleading, while NVIDIA wanted guidance on pleading requirements for internal documents and the use of expert opinions in complaints.

Overall, these cases highlight the complexities surrounding securities fraud claims and the challenges plaintiffs face in meeting the strict requirements set forth by the law.