NVIDIA

The Supreme Court will soon weigh two cases that could potentially make it harder for misled investors to sue Big Tech companies after major scandals.

One case involves one of the largest tech scandals of all time, the Facebook-Cambridge Analytica data breach. In 2019, Facebook agreed to pay “more than $5 billion in civil penalties to settle charges by the Federal Trade Commission (FTC) and the Securities and Exchange Commission (SEC) that it had misled its users and investors over the privacy and security of user data on its platform,” a Supreme Court filing said.

The other case involves an allegation that Nvidia intentionally hid how much of its 2017–2018 GPU demand was due to a volatile cryptocurrency boom and not Nvidia’s core gaming business—allegedly misleading investors ahead of a crypto crash. After the bust, Nvidia suddenly had to slash half a billion dollars from its earnings projection, and market experts later estimated that the firm had understated its crypto-related revenue by more than a billion. In 2022, Nvidia paid a $5.5 million SEC penalty over the inadequate disclosures that one SEC chief said “deprived investors of critical information to evaluate the company’s business in a key market.”

Investors, however, have not yet settled their own legal challenges. In both cases, investors suing convinced the 9th Circuit that the companies were guilty of misleading investors. But now, the tech companies have appealed to the Supreme Court, hoping to reverse those rulings.

In case documents, each claimed that their investors have not satisfied high legal bars, which Nvidia argued Congress designed to prevent “frivolous” or “nuisance” lawsuits from going on “fishing expeditions” to claim securities “fraud by hindsight.” Both warned that SCOTUS upholding the 9th Circuit rulings risked flooding courts with frivolous suits, with Nvidia cautioning that such lawsuits can be “used to injure the entire US economy.”

The Supreme Court will hear arguments in the Facebook case on Wednesday, November 6, then the Nvidia case on November 13.

SCOTUS may be persuaded by tech companies still stuck coping with the aftermath of scandals. A former SEC lawyer, Andrew Feller, told Reuters that the Supreme Court’s conservative majority may continue its “recent track record of handing down business-friendly decisions that narrowed the authority of federal regulators” in these cases. Both cases give justices opportunities to “rein in the power of private plaintiffs to enforce federal rules aimed at punishing corporate misconduct,” Reuters reported.

Facebook defends describing risk as hypothetical

The Facebook case centers on an SEC disclosure where Facebook said that its business may be harmed by a data breach, posing that as a hypothetical, without mentioning the ongoing Cambridge Analytica data breach. Specifically, Facebook wrote, “[a]ny failure to prevent or mitigate . . . improper access to or disclosure of our data or user data . . . could result in the loss or misuse of such data, which could harm our business and reputation and diminish our competitive position.”

Investors felt misled, accusing Facebook of hiding the breach by only presenting the risk as a hypothetical that implied no breach had ever occurred in the past and certainly did not disclose the present risk.

However, in a SCOTUS filing, Facebook insisted that “no reasonable investor would interpret a risk disclosure using probabilistic, forward-looking language as impliedly representing that the specified triggering event had never occurred in the past.”

Facebook is now arguing that SCOTUS agreeing that the company should have disclosed the major data breach “would result in a regime under which companies would be required to disclose every previous material incident they have experienced—effectively creating a sweeping regime of omissions liability.”

According to Facebook, news broke about the Cambridge Analytica data breach in 2015, and its business wasn’t immediately harmed. Following that logic, the social media company hopes that SCOTUS will agree that Facebook was only required to disclose the data breach in its SEC filing if Facebook knew its business would likely be harmed from the ongoing breach.

By affirming the 9th Circuit ruling, Facebook alleged, SCOTUS would be “vastly expanding the circumstances in which risk disclosures are deemed false or misleading,” exposing to legal challenges “a wide range of previously immune forward-looking statements—revenue projections, future business plans or objectives, and the like.”

But investors suing argue that Facebook is still being misleading about the data scandal in its court filings.

“The only reason Facebook has ever given to explain why the misappropriation risked no harm was that the event was allegedly disclosed to the public in 2015 and no one cared,” investors’ SCOTUS brief said. But in 2015, a report exposing a data breach tied to a Ted Cruz campaign was denied by Cambridge Analytica and prompted a Facebook investigation that concluded no damage had been done.

“Facebook actively misled the public about its investigation, ‘represent[ing] that no misconduct had been discovered,'” investors alleged, and “Facebook’s deception extended to its public filings with the SEC.”

According to investors, the real damage was done when the true extent of the Cambridge Analytica scandal was exposed in 2018. That caused substantial revenue losses that Facebook likely understood it was risking while allegedly leaving investors blind to those risks for years.

Investors argue that disclosure should not be required of every data breach that hits Facebook, whether it harms its business or not, but that the Cambridge Analytica data breach was significant and should have been disclosed as a material risk. The 9th Circuit agreed, holding that “publicly treating such a material adverse event as a merely hypothetical prospect can be misleading even if the event has not yet produced follow-on business harm because the company has kept the truth from the public.”

They further argued that requiring so-called overdisclosure wouldn’t trigger unwarranted litigation, as Facebook suggests, because Congress has always “given considerable attention to concerns over abusive private litigation.”

If Facebook wins, investors alleged, SCOTUS risks giving any tech company “a license to intentionally mislead investors about the occurrence of hugely material events by describing those events as purely hypothetical prospects.” Siding with Facebook would allegedly give “companies an incentive to stuff their annual reports with boilerplate, generic warnings that reveal little about the company’s actual business and to cover up events that could give rise to corporate scandals, as Facebook did here.”

Facebook argued that if the SEC is concerned about specific disclosures connected to the data breach, “the SEC can invoke the rulemaking process to impose” a requirement that companies must disclose all “past material adverse events.”

Nvidia disputes expert’s crypto data

While the Facebook case involved a bigger scandal, the Nvidia case could have bigger legal implications if Nvidia wins.

In the Nvidia case, investors argued that Nvidia CEO Jensen Huang made public statements allegedly misleading investors by downplaying the high demand for GPUs tied to volatile crypto markets. To plead their case, investors relied on statements from Nvidia employees, internal documents like meeting slides, industry research, as well as an expert opinion crunching general market numbers and estimating that Nvidia “underreported its crypto revenues by $1.126 billion.”

Nvidia claimed it’s far more plausible that the company simply made an “honest miscalculation” while navigating a complex emerging market.

To defend against the suit, Nvidia is arguing that the Private Securities Litigation Reform Act (PSLRA) imposes “special burdens on plaintiffs seeking to bring federal securities fraud class actions” through “heightened pleading requirements” to deter frivolous lawsuits arguing fraud by hindsight.

According to Nvidia, the PSLRA requires investors to allege particular facts based on particular contents of internal Nvidia documents, which goes beyond relying on an expert opinion. The tech company has urged SCOTUS that the 9th Circuit “‘significantly erode[d]” the PSLRA requirements by allowing Plaintiffs to “simply” hire “an expert who manufactured data to fit their allegations.”

“They hired an expert to create data and then filed a class action alleging that Nvidia and its CEO committed securities fraud by failing to disclose the data invented by Plaintiffs’ expert,” Nvidia argued.

This allegedly “eviscerates the guardrails that Congress erected to protect the public from abusive securities litigation” and creates a “dangerous” and “easy-to-replicate ‘roadmap’ for plaintiffs to sidestep the PSLRA in this recurring context.”

“Far from serving Congress’s goal of guarding against fishing expeditions by vexatious litigants, the Ninth Circuit’s opinion declares it open season so long as a plaintiff has funding to hire an expert,” Nvidia alleged.

Investors are hoping SCOTUS will uphold the 9th Circuit’s judgment. Instead of seeing their suit as frivolous, they argued that the SEC fine over the same misconduct “undermines any suggestion that this is the type of frivolous suit that the PSLRA was meant to screen out.”

They’ve disputed Nvidia’s arguments that they’ve relied solely on a hired expert to support their claims, arguing that each fact was corroborated by employee witnesses and third-party reports.

If Nvidia wins, investors warned, the SCOTUS decision would risk harming a wide range of private securities litigation that Congress has found “‘is an indispensable tool’ for ‘defrauded investors’ to ‘recover their losses without having to rely upon government action.'”