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The U.S. Supreme Court scrutinized on Wednesday Nvidia’s (NVDA.O), opens new tab bid to torpedo a securities fraud lawsuit accusing the artificial intelligence chipmaker of misleading investors about how much of its sales depended on the volatile cryptocurrency market.
The court heard arguments in Nvidia’s appeal of a lower court decision that allowed a class action lawsuit filed in 2018 by Stockholm, Sweden-based investment management firm E. Ohman J:or Fonder AB.
It is one of two cases the Supreme Court is considering this month that may result in decisions that make it more difficult for private parties to hold businesses accountable for alleged securities fraud. The other one, involving Meta’s (META.O), opens new tab Facebook, was argued on Nov. 6.
Whether the plaintiffs in the Nvidia case met the higher threshold for bringing private securities fraud claims—established by the Private Securities Litigation Reform Act, a federal law passed in 1995 with the goal of eliminating frivolous lawsuits—is the question at hand.
A few justices voiced reluctance to get involved in the case. They expressed concern that they might not be in the best position to settle the case due to its technical complexity and questioned whether there is a clear legal issue for them to decide rather than merely a disagreement over facts.
“It 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 when we took this case,” liberal Justice Elena Kagan told Neal Katyal, the lawyer arguing for Nvidia.
Ketanji Brown Jackson, a liberal justice, asked if the standard that Nvidia has asked the court to adopt would burden plaintiffs excessively.
Jackson pointed out that crucial evidence is frequently not acquired by plaintiffs until much later in the litigation process. “I guess my concern is that you appear to be requiring plaintiffs to actually have the evidence in order to plead their case,” Jackson said.
The plaintiffs claimed that Nvidia and its CEO, Jensen Huang, had violated the Securities Exchange Act, a federal law enacted in 1934, by making false claims in 2017 and 2018 about the proportion of Nvidia’s revenue growth that came from purchases related to cryptocurrency.
John Roberts, the chief justice of the Conservative Party, seemed to be looking for a compromise.
“How do you find sort of the sweet spot in terms of when the Private Securities Litigation Reform Act is satisfied, if I believe that the positions on both sides are a little too absolute?” It was Roberts who asked Katyal.
The higher legal standards under the law mean that plaintiffs need more than “just a little bit of direct evidence,” Roberts said. “On the other hand, it seems to me you can’t insist on only the direct evidence before a complaint goes forward. So if I don’t think it’s black and white, how … do I decide where the balance is?”
Beginning in 2017, as the price of certain cryptocurrencies rose, Nvidia’s chips became increasingly popular for cryptomining, a process that involves performing complex math equations in order to secure cryptocurrencies such as bitcoin and ether.
By late 2018, amid a decline in crypto profitability, Nvidia’s revenue fell short of its projections, leading its stock price to fall in early November of that year.
The plaintiffs accused Nvidia and its top officials of concealing the impact of cryptomining on its business. The lawsuit aims to recover the investors’ lost value of their Nvidia stock, among other unspecified monetary damages.
In 2022, Nvidia agreed to pay $5.5 million to U.S. authorities to settle claims that it had not sufficiently disclosed the impact of cryptomining on its gaming business, without denying or contesting the findings of federal regulators.
“INACCURATE CHARACTERISATION”
Conservative Justice Neil Gorsuch asked the plaintiffs’ lawyer, Deepak Gupta, to respond to Nvidia’s argument that their assertions about the portion of the company’s sales that went to cryptocurrency miners were based mainly on an expert opinion from the economic consulting firm Prysm Group, which lacked enough data to pass the case’s initial phase.
Gupta called Nvidia’s claim “an inaccurate characterisation of the report.”
“Basically what Prysm was doing was math,” Gupta said. “It was taking publicly available figures and doing some multiplication.”
“Expensive math, I have to 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 it.
The Supreme Court received complaints from outside interest groups alleging that the 9th Circuit is decision created “a blueprint” for evading the stricter legal requirements outlined by Congress in the Private Securities Litigation Reform Act. Brett Kavanaugh, a conservative justice, raised this issue.
The administration of President Joe Biden backed the shareholders in the lawsuit.
By the end of June, we should know the Supreme Court’s decisions in the Facebook and Nvidia cases.