The U.S. Supreme Court is currently considering appeals in two significant securities cases: NVIDIA Corp. v. E. Ohman J:OR Fonder AB and Facebook, Inc. v. Amalgamated Bank. Both cases present issues under federal securities laws that some experts believe merit review and reversal by the Supreme Court.
Defendants in both cases are seeking reversal of rulings from the U.S. Court of Appeals for the Ninth Circuit. The Ninth Circuit allowed the claims brought against them under federal securities laws to proceed. The court is expected to review the petitions in the coming weeks, offering an opportunity for much-needed clarity on liability theories often faced by corporations and their executives.
In the NVIDIA case, the primary issue revolves around “scienter,” or fraudulent intent. The Ninth Circuit concluded that scienter was adequately alleged against the company’s CEO concerning statements made about the sources of demand for one of NVIDIA’s products. Under U.S. securities laws, a plaintiff must state facts with particularity, giving rise to a “strong inference” that the defendant acted with the required state of mind, which is either actual knowledge or deliberate recklessness.
The plaintiffs in NVIDIA were criticized for failing to meet this standard in several respects. The Ninth Circuit credited allegations that other courts have found insufficient to plead scienter, such as anonymous reports from former employees and external expert speculation on market demand. This reliance on an external expert to infer what the company executives might have known sets a challenging precedent that demands Supreme Court intervention.
In the Facebook case, the appeal arises from allegations that certain risk factors on third-party misuse of user data in Facebook’s SEC filings were false and misleading. The Ninth Circuit concluded that risk factors could independently form the basis of a securities fraud claim. This decision points to an increasingly common tactic where plaintiffs aim to transform risk factor warnings into an assertion that the risk warned of will never occur.
Risk factors are intended to alert investors to potential adverse events that could materially impact a company’s standing. Utilizing these warnings as grounds for securities fraud claims sets a problematic precedent. The Supreme Court’s intervention could clarify whether these warnings should serve as a shield against liability rather than a basis for fraud claims.
The cases at hand, NVIDIA Corp. v. E. Ohman J:OR Fonder AB, No. 23-970, and Facebook, Inc. v. Amalgamated Bank, No. 23-980, pose critical questions about the boundaries of corporate liability and aim to address discrepancies in judicial interpretations of securities laws.
For a detailed critique by Susan Hurd and Carissa Lavin of Alston & Bird, see the original article on Bloomberg Law.