SCOTUS Fails to Settle Key Securities Debate

Alex Franchi

 

In 2024, the Supreme Court granted, and subsequently withdrew, certiorari on E. Ohman v. Nvidia, a securities litigation case from the Ninth Circuit.^[1] In Nvidia, the Ninth Circuit held that the shareholders could use a report from a hired expert, the Prysm Group, as evidence at the pleading stage.^[2] At first blush, this decision may not seem controversial, but it flied in the face of several other circuits - most notably, the Second. This is of particular importance given that the Second and Ninth Circuits handle the lion’s share of securities litigation, with one expert estimating that those two circuits alone see 60% of all securities cases in the US.^[3] By choosing not to settle the issue, the Court has all but guaranteed that forum shopping in securities cases will skyrocket for the foreseeable future. 

The reason Prysm’s testimony was at issue is due to the Private Securities Litigation Reform Act of 1995 (the PSLRA). Before the law was passed, shareholders were frequently suing companies and demanding an immediate settlement, else the company would be drawn into a lengthy (and more to the point, costly) discovery process. To stop this, Congress promulgated the PSLRA, which, among other things, placed a stay on discovery in securities cases until after the motion to dismiss stage. In practice, this means that today, a complaint alleging a breach of the securities laws can only use publicly available information until the court has ruled the case can move past the motion to dismiss. This is made all the more important because the outcome of the motion to dismiss stage is absolutely crucial to any securities case - a whopping 89% of securities litigation cases are either dismissed or settled after the motion to dismiss (as opposed to the 0.4% which go to trial).^[4] 

Thus, in Nvidia, the use of a hired expert at this stage was a hotly debated subject of the litigation. The Nvidia shareholders hired Prysm to perform an investigation and write a report detailing the likelihood that Nvidia’s gaming chip sales were inflated by sales to crypto miners during a major crypto boom (something Nvidia executives repeatedly denied).^[5] Prysm concluded that the sales were in fact inflated, and the plaintiffs attempted to include this evidence in their complaint. The district court disallowed the report’s usage and dismissed the complaint for failing to meet the PSLRA’s falsity requirement, but the Ninth Circuit overturned. In doing so, they developed something of a test, stating that “(1) the very similar analyses of [an independent report on the same subject] and Prysm; (2) the statements of [former employees]; and (3) the fact that NVIDIA's earnings collapsed when cryptocurrency prices collapsed and crypto miners quit purchasing NVIDIA's GeForce GPUs” were enough to show that the report was reliable and the falsity claim was met.^[6] 

This decision was met with swift condemnation by some commentators, including former SEC officials.^[7] Others felt that this decision was appropriate, and that ruling otherwise would unduly place further pressure on plaintiffs, who already face an uphill battle at the motion to dismiss stage.^[8] For the judiciary’s part, no other circuits have agreed with the Ninth Circuit. In fact, most circuits who have ruled on this issue have cut against the Ninth. In Arkansas Public Employees Retirement System v. Bristol-Myers-Squibb, the Second Circuit held that “statements attributed to former Bristol-Myers employees, whose identities are kept confidential, and to an expert opinion” did not clear the PSLRA’s falsity requirement.^[9] Similarly, in Financial Acquisition Partners v. Blackwell, the Fifth Circuit held that “allowing plaintiffs to rely on an expert's opinion in order to state securities claims requires a court to ‘confront a myriad of complex evidentiary issues not generally capable of resolution at the pleading stage.’ In addition, considering such opinions might require ruling on the expert's qualifications. This would be inappropriate at the pleading stage.”^[10] In short, there is a wide circuit split on this issue, and academics are similarly divided on whether or not the Ninth Circuit’s decision was proper. 

Given that, it was a relief to many when the Court granted certiorari on Nvidia to settle the issue. However, the Court withdrew cert after oral arguments, determining it was improvidently granted.^[11] Specifically, the Court found that the question was too fact specific. This was something of a blow to Nvidia, as the Court was generally expected to side with them.^[12] The question then becomes - where do we go from here? And there isn’t a clear answer. It seems as though the Court has left the power to the trial courts for the time being, given their insistence on this being a factual question. Some scholars believe that this decision just kicks the proverbial can down the road and the question will eventually return to the Court, because the gap between circuits is so substantial.^[13] The only thing we can predict with any certainty is that plaintiffs in securities cases will try their best to get venue in the Ninth Circuit for the foreseeable future. 

 

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[1] NVIDIA Corp. v. E. Ohman J:or Fonder AB, 2024 WL 5058572 (2024) (per curiam). 

[2] E. Ohman J:or Fonder AB v. NVIDIA Corp., 81 F.4th 918 (9th Cir. 2023). 

[3] Brief for Professor Joseph A. Grundfest as Amicus Curiae Supporting Petitioners-Appellants at 3, E. Ohman J v. NVIDIA Corp., 81 F.4th 918 (9th Cir. 2023) (No. 23-970). 

[4] James K. Goldfarb, et al., Securities Class Actions: Data, Trends, and Insights, Davis Wright Tremaine LLP, Mar. 13, 2023, https://www.dwt.com/blogs/financial-services-law-advisor/2023/03/securities-class-actions-data-trends-2022#:~:text=From%201997%20to%202022%2C%2046,and%2010%20percent%20are%20pending. 

[5] E. Ohman v. NVIDIA, 81 F.4th at 926. 

[6] Id. at 932. 

[7] Brief for Former SEC Officials as Amici Curiae Supporting Petitioners-Appellants at 3, E. Ohman J v. NVIDIA Corp., 81 F.4th 918 (9th Cir. 2023) (No. 23-970). See also Brief for Professor Joseph A. Grundfest as Amicus Curiae Supporting Petitioners-Appellants at 3, E. Ohman J v. NVIDIA Corp., 81 F.4th 918 (9th Cir. 2023) (No. 23-970). 

[8] Brief for Quantitative Experts as Amici Curiae Supporting Respondent-Appellees at 3, E. Ohman J v. NVIDIA Corp., 81 F.4th 918 (9th Cir. 2023) (No. 23-970). 

[9] Arkansas Pub. Emps. Ret. Sys. v. Bristol-Myers Squibb Co., 28 F.4th 343, 351 (2d Cir. 2022). 

[10] Fin. Acquisition Partners LP v. Blackwell, 440 F.3d 278, 285–86 (5th Cir. 2006) (quoting DeMarco v. DepoTech Corp., 149 F.Supp.2d 1212, 1221 (S.D.Cal., 2001)). 

[11] Joseph A. Grundfest, A Decision Deferred, Not a Decision Denied: Supreme Court Dismisses NVIDIA v. E. Ohman J:or Fonder AB as Improvidently Granted, The Federalist Society (Dec. 11, 2024), https://fedsoc.org/commentary/fedsoc-blog/a-decision-deferred-not-a-decision-denied-supreme-court-dis misses-nvidia-v-e-ohman-j-or-fonder-ab-as-improvidently-granted. 

[12] Ronald Mann, Supreme Court Dismisses NVIDIA’s Securities Fraud Appeal, SCOTUSblog (Dec. 11, 2024, 3:29 PM), https://www.scotusblog.com/2024/12/supreme-court-dismisses-nvidias-securities-fraud-appeal/.

[13] Joseph A. Grundfest, Supreme Court Dismisses NVIDIA v. E. Ohman J:or Fonder AB as Improvidently Granted, The Federalist Society (Dec. 11, 2024), https://fedsoc.org/commentary/fedsoc-blog/a-decision-deferred-not-a-decision-denied-supreme-court-dismisses-nvidia-v-e-ohman-j-or-fonder-ab-as-improvidently-granted.