On June 17, 2024, the Supreme Court granted certiorari to review a decision of the United States Court of Appeals for the Ninth Circuit reversing the dismissal of a putative class action asserting claims under the Securities Exchange Act of 1934 and 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.”
In the complaint at issue, plaintiffs alleged that the company, which produces graphic processing units (“GPU”), misrepresented the proportion of GPU sales that were made to cryptocurrency miners, for which demand allegedly was more volatile than the demand for GPUs used for gaming. As covered in our prior post here, the district court dismissed the complaint for failure to allege scienter. In a divided decision, the Ninth Circuit reversed (covered in our prior post here). The majority, among other things, credited for purposes of the motion to dismiss plaintiffs’ allegations that a consulting firm retained by plaintiffs concluded that the company understated the revenue attributable to sales related to cryptocurrency mining. The majority also held that the statements of two confidential witnesses regarding what could be gleaned from internal documents at the company supported a strong inference of scienter as to the CEO, even though neither confidential witness personally witnessed the CEO reviewing the allegedly available information. In his dissent, Judge Gabriel P. Sanchez held that an “after-the-fact” analysis by an outside expert should not serve as the “primary source of falsity.” The dissent also took issue with plaintiffs’ inability to point to the specific content of any internal document that allegedly was seen by the CEO from which scienter could be inferred.
In petitioning for certiorari, the company and its CEO urged the Supreme Court to consider two issues over which circuit courts have split. First, with respect to scienter, appellants argued that five circuits (Second, Third, Fifth, Seventh, and Tenth Circuits) “ruled as a matter of law that plaintiffs seeking to plead scienter based on internal company documents must plead with particularity the actual contents of those documents.” Before the Ninth Circuit’s decision, according to appellants, the First Circuit was the “sole outlier,” allowing plaintiffs to proceed past the motion to dismiss based on internal company reports combined with “speculative allegations [from confidential witnesses] about what those reports might have said.” Second, with respect to falsity, appellants argued that the Second Circuit and Fifth Circuit “agreed that a plaintiff’s expert opinion could not substitute for particularized factual allegations of falsity” and that, “‘[a]lthough it is permissible for a plaintiff to bolster a complaint by including a nonconclusory opinion to which an expert may potentially testify,’ such ‘opinions cannot substitute for facts under the PSLRA.’” Appellants argued that the Ninth Circuit’s disagreement with these decisions “opened the door to securities fraud suits based on the opinions of retained experts—rather than particularized facts—circumventing the PSLRA’s rigorous pleading standards.”
Plaintiffs attempting to bring securities class actions frequently rely on allegations about internal reports or other internal data they claim was available to executives at a company, and the Court’s answer to the first question should clarify how the heightened pleading requirements of the PSLRA apply to such allegations. While less common, the Court’s answer to the second question could have significant implications for the use of consulting experts in future securities class action complaints.
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