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Written by Ronald Mann
November 12, 2024
At 2:13 p.m.
NVIDIA headquarters in Santa Clara, California (JHVEPhoto via Shutterstock)
NVIDIA, the world’s most valuable company, sells computer graphics processing chips designed primarily for use in video games to manufacturers of gaming devices. Coincidentally, NVIDIA chips are also useful for mining cryptocurrencies, and in 2017 many crypto miners started purchasing NVIDIA chips for that purpose. As its uses increased, so did sales of NVIDIA’s chips. However, NVIDIA’s revenue declined in 2018 as the price of Bitcoin plummeted, reducing the incentive for cryptocurrency mining.
Shareholders have filed a proposed class action lawsuit alleging that NVIDIA executives, including CEO Jensen Huang, made false and misleading statements about how much use in crypto mining supports NVIDIA chip sales. I responded by submitting it here. The U.S. Court of Appeals for the Ninth Circuit allowed the case to proceed, and the Supreme Court agreed to reconsider the issue.
At issue in this lawsuit is the Private Securities Litigation Reform Act, enacted in 1995 to prevent securities class actions. Among other things, it sets a high bar for crafting a successful complaint in such cases. If a lawsuit alleges false or misleading statements, not only identify why you believe each statement is misleading, but also “specify all the facts on which that belief was formed.” Must be. Additionally, the complaint must “state specific facts” that “give rise to a strong inference that the defendant acted in the requisite state of mind.” This “strong inference” standard is significantly higher than the standard for ordinary complaints.
Under the law, shareholders have a hard time proving that Mr. Hwang made false statements when he downplayed the share of Nvidia chip sales that comes from cryptocurrency mining. Shareholders do not have any direct documentation or statements that give them reason to believe that Mr. Hwang knew the percentage of sales to cryptocurrency miners. Rather, they relied on expert reports that estimated the number of cryptocurrency mining processors built during the relevant period, the number of chips required, and the share of those chips likely sold by NVIDIA. I am. Because the numbers produced by these estimates do not match Mr. Hwang’s public statements, shareholders claim that his statements are false and, in fact, that Mr. Hwang knew they were false. He claims that it must have been.
NVIDIA is mocking this as a potential theory for this incident. The company argues that if the “scientist” theory (the intent standard in securities law, meaning something like “knowledgeable” in Latin) holds that internal documents are inconsistent with public announcements, the PSLRA’s particularity requirement applies to plaintiffs’ He claims that this means that he is doing the following. to claim the contents of those internal documents. In other words, in this case, the shareholder has not made any such claim, that is, has not made any claim regarding the documents that Mr. Hwang may have seen, so the shareholder has not met the burden. .
For similar reasons, NVIDIA argues that shareholders did not do enough to assert that Mr. Huang’s statements were false. The complaint makes no direct allegations about the sale of NVIDIA chips or their distribution to cryptocurrency miners. Rather, we only provide general estimates based on expert testimony based on the size of the cryptocurrency market and NVIDIA’s share of that market. NVIDIA argues that such “general market research” cannot “in-depth” identify cases of fraud.
In the Supreme Court, shareholders retreated from exclusive reliance on expert reports. Instead, they point to a variety of evidence suggesting that various NVIDIA employees were tracking the rise of cryptocurrency mining, and that NVIDIA executives were paying attention to that information. Existing Supreme Court cases regarding the PSLRA require a “comprehensive investigation” that evaluates information in context, so the justices have given plaintiffs “a smoking gun” when they file a complaint. ” was created in an internal document.
NVIDIA argues that, contrary to shareholders’ claims in the Supreme Court, the lower court’s judgment was based entirely on Huang’s failure to make statements consistent with the plaintiffs’ findings regarding sales of virtual currency mining, and that NVIDIA was not guilty of fraud. It strongly disputes that the allegations of conduct are justified. expert.
Similar to last week’s discussion in Facebook v. Amalgamated Bank, shareholders here will no doubt face skeptical questioning from the judge. A judge would think the charges in this case are exactly the kind of things the PSLRA was designed to quash. NVIDIA’s proposed rules would make this type of litigation essentially impossible, they say, because it would be difficult to obtain confidential or compromised corporate documents to support complaints. judges will likely disagree and say that’s what the PSLRA was designed to do. That’s exactly the result.
