United States Supreme Court to Hear Two Securities Cases This Term

The Supreme Court is set to hear arguments in November in two securities cases: Facebook, Inc. v. Amalgamated Bank and NVIDIA Corp. v. E. Ohman J:or Fonder AB and Stichting Pensioenfonds PGB. In these cases, Facebook and NVIDIA argue that the Ninth Circuit improperly lowered the pleading standard in securities fraud class actions arising under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. In both cases, the Ninth Circuit decision was over a dissent. The Solicitor General has filed in both cases in support of positions taken by shareholders, and the Supreme Court granted the Solicitor General's request to participate in the oral arguments.  

Facebook, Inc. v. Amalgamated Bank 

At issue in Facebook are the risk disclosures included in companies' quarterly and annual reports filed with the SEC. The parties dispute whether companies must disclose past instances where risks materialized or just harms that could materialize in the future. In its 2016 Form 10-K, Facebook disclosed that if third parties improperly accessed or disclosed user data, Facebook could suffer business harm. Shareholders subsequently brought suit alleging that these statements were materially false and misleading because the disclosures were framed as hypothetical when the political consulting group Cambridge Analytica had already improperly collected Facebook users' personal data in 2015. A divided panel of the Ninth Circuit held that plaintiffs adequately pleaded falsity. Facebook has asked the Court to reverse the Ninth Circuit and adopt a standard they argue is consistent with a majority of circuit courts, requiring a company to disclose only harms that could materialize in the future.  

NVIDIA Corp. v. E. Ohman J:or Fonder AB and Stichting Pensioenfonds PGB 

At issue in NVIDIA are the heightened standards for pleading scienter and falsity for Section 10(b) claims, set by the Private Securities Litigation Reform Act of 1995 ("PSLRA"). Shareholder plaintiffs alleged that NVIDIA and its CEO made false or misleading statements that understated the extent to which demand for its graphics processing units were driven by cryptocurrency miners. A divided panel of the Ninth Circuit held that plaintiffs adequately pleaded scienter on the basis of internal company documents that purportedly contradicted the company's public statements. NVIDIA has asked the Court to find that shareholders needed to allege with particularity the contents of those internal company documents, rather than merely speculate as to what the documents might have said. NVIDIA argues that the Ninth Circuit also held that an expert opinion offered by plaintiffs was sufficient to allege falsity. NVIDIA has asked the Court to hold that plaintiffs' post-hoc expert opinion, which was based on generic market research rather than any personal knowledge of the facts, fell short of pleading falsity with particularized facts as required by the PSLRA. Shareholder plaintiffs dispute NVIDIA's characterization of the Ninth Circuit's holding and contend that the Ninth Circuit relied on other particularized facts, in addition to the expert opinion, in holding that the pleading requirements of the PSLRA for falsity were satisfied. The shareholders also argue that their expert relied on particularized facts to support its opinions. 

The Court's opinions may have significant implications for securities fraud litigation. In Facebook, a ruling could determine whether public companies' risk disclosures need only be limited to current and future risk, or whether past negative events must also be disclosed. In NVIDIA, the Court could further clarify the pleading standards for scienter and falsity in suits by private parties and provide guidance on the role of expert reports in alleging securities fraud.