On November 13, 2024, the United States Supreme Court heard oral argument in an appeal from a decision of the United States Court of Appeals for the Ninth Circuit in a putative class action asserting claims under the Securities Exchange Act of 1934 against a technology company and certain of its officers. NVIDIA Corporation v. E. Ohman J:or Fonder AB, No. 23-970. Relevant to the appeal, plaintiffs allege that (a) expert analysis revealed that defendants had materially understated the extent to which the company’s graphics processing units were purchased by the volatile cryptocurrency mining industry and (b) the company’s CEO had known of the misrepresentations because he received internal reports reflecting the truth. As discussed in prior posts, the district court dismissed the case entirely and with prejudice, but the Ninth Circuit, in a 2-1 decision, partially reversed, holding that plaintiffs adequately alleged that statements by two executives had been misleading, and adequately alleged scienter as to the company’s CEO. The Supreme Court granted certiorari to address the following questions: “1. Whether plaintiffs seeking to allege scienter under the Private Securities Litigation Reform Act (“PSLRA”) based on allegations about internal company documents must plead with particularity the contents of those documents”; and “2. Whether plaintiffs can satisfy the PSLRA’s falsity requirement by relying on an expert opinion to substitute for particularized allegations of fact.”
During oral argument, Justices Sotomayor, Kagan, Gorsuch, and Barrett appeared to question whether the case legitimately presented legal issues warranting Supreme Court review, rather than calling for “error correction” of the Ninth Circuit’s application of the law to the complaint’s factual allegations. All four justices suggested that the petitioners/defendants were asking the Court to reverse because the Ninth Circuit (according to the company) had misapplied the heightened pleading standard under the PSLRA, rather than asking the Supreme Court to resolve a disputed issue of law. Justice Sotomayor, in particular, suggested that defendants had been incorrect to suggest there was a circuit split regarding the pleading standards required under the PSLRA. Other justices seemed potentially more inclined to address the merits of the case but did not clearly signal their views regarding an appropriate outcome.
As to the pleading standard for establishing a “strong inference” of scienter based on internal company documents, the Court pressed the parties as to what the appropriate balance should be between detail and inference in order for a complaint to be sufficiently particularized. For example, Justice Jackson questioned whether defendants were urging that plaintiffs must actually describe the details of internal company documents to satisfy the PSLRA’s particularity requirement. Defendants disavowed such a position. They asserted instead that the issue was “contextual”; if internal company documents served as the basis of an alleged inference of scienter, the contents of the documents should be described with particularity, which they argued had not been done in the complaint here. Defendants emphasized that they were not advocating for a bright-line rule but were instead asking the Supreme Court to provide a definition of “particularity” that, at a minimum, would require a complaint to include enough detail to show why a speaker’s public statements deviated from the information he or she had learned from the relevant documents.
With respect to the issue of whether or when a complaint can rely on an expert report to allege falsity, Justice Alito questioned the manner in which defendants believed courts should scrutinize highly technical expert analyses at the pleadings stage. Defendants argued that the Supreme Court did not need to address that question but could simply hold that an expert report cannot substitute for particularized factual allegations. Justice Gorsuch pressed plaintiffs as to whether it was appropriate for plaintiffs to rely on an expert analysis using an undisclosed model. But plaintiffs responded that their expert in the case at bar was simply “doing math,” not using an undisclosed model, and also argued that the expert analysis at issue was not being used to substitute for particularized factual allegations but was instead being offered to supplement such allegations.
While it is difficult to predict what the Supreme Court may do, any guidance from the Court with respect to either the meaning or application of “particularity” or the use of expert analyses at the pleading stage could be significant. However, it is not clear whether the Supreme Court will find it necessary or appropriate to weigh in on those subjects in this particular case.
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