WASHINGTON (Reuters) – The U.S. Supreme Court will consider bids from two tech giants – Meta’s Facebook (META) and Nvidia (NVDA) – to fend off federal securities fraud lawsuits in separate cases that would make it more difficult for private litigants can make companies accountable.
After a trio of Supreme Court rulings in June that weakened federal regulators — including the Securities and Exchange Commission, which oversees securities fraud — the justices may now be ready to rein in the power of private plaintiffs to enforce federal rules that aimed at punishing corporate misconduct.
Andrew Feller, a former SEC attorney who is now in private practice, said the Supreme Court’s recent record of making business-friendly decisions that limited the authority of federal regulators suggests that Facebook and Nvidia may similarly “ a receptive audience” for the judges.
The Supreme Court has a 6-3 conservative majority.
“I believe business interests will continue their recent pattern of aggressively challenging rules designed to hold them accountable, including by challenging remaining private rights of action,” Feller said.
A private right of action refers to the ability of a private individual or group to sue for alleged harm.
Social media platform Facebook and artificial intelligence chipmaker Nvidia appealed to the Supreme Court after the San Francisco-based 9th US Circuit Court of Appeals allowed separate securities fraud class action lawsuits against them.
The Supreme Court will hear arguments Wednesday in Facebook’s attempt to dismiss a lawsuit accusing the company of misleading investors in violation of the Securities Exchange Act, a 1934 federal law that requires publicly traded companies to disclose their business risks. to make.
The plaintiffs, a group of Facebook investors led by Amalgamated Bank, accused the company in a 2018 class action of withholding information from investors about a 2015 data breach involving British political consulting firm Cambridge Analytica that cost more than 30 million affected Facebook users.
The lawsuit arose after Facebook’s shares fell following 2018 media reports that Cambridge Analytica had used unlawfully collected Facebook user data in connection with Donald Trump’s successful 2016 presidential campaign. The lawsuit seeks unspecified monetary damages in part to to recoup the lost value of Facebook shares. by the investors.
The question is whether Facebook broke the law by failing to detail the earlier data breach in subsequent corporate risk disclosures, and instead portraying the risk of such incidents as purely hypothetical.
Facebook argued in its Supreme Court filing, among other things, that it was not required to state that the forewarned risk had already materialized because “a reasonable investor would understand that (risk disclosures) are forward-looking and probabilistic in nature. “
The SEC filed an enforcement action against Facebook over the case in 2019, which the company settled for $100 million. Facebook paid a separate $5 billion fine to the US Federal Trade Commission over the Cambridge Analytica issue.
Michael Perino, a professor at St. John’s University School of Law in New York, described private rights of action as “a necessary complement” to public enforcement efforts.
“The SEC is demonstrably under-resourced given the broad scope of its responsibilities,” Perino said. “Securities class action lawsuits essentially replace private attorneys to bring actions on behalf of injured investors.”
Nvidia crypto-related purchases
The Supreme Court will hear arguments on November 13 in Nvidia’s attempt to quash a securities class action, accusing the Santa Clara, California-based company of misleading investors about how much of its revenue went to the volatile cryptocurrency industry .
The 2018 lawsuit, led by Stockholm-based investment management firm E. Ohman J:or Fonder AB, accused Nvidia of violating the Securities Exchange Act by making statements in 2017 and 2018 that falsely downplayed how much of its revenue growth of the company came from crypto. -related purchases.
These omissions misled investors and analysts interested in understanding the impact of crypto mining on Nvidia’s business, the plaintiffs said.
In its filing with the Supreme Court, Nvidia said prosecutors had failed to clear the legal bar set by a 1995 federal law called the Private Securities Litigation Reform Act, which set the standard for filing private securities fraud lawsuits .
Nvidia agreed in 2022 to pay $5.5 million to US authorities to settle charges that it failed to properly disclose the impact of crypto mining on its gaming business.
David Shargel, a lawyer in private practice who has represented clients before the SEC, said private securities lawsuits could gain in importance due to recent Supreme Court rulings weakening federal regulators.
Among the cases Shargel cited was a June 27 decision striking down the SEC’s internal enforcement of laws protecting investors from securities fraud as a violation of the right to a jury trial in the Seventh Amendment of the U.S. Constitution.
“This could further strain the commission’s resources, as well as those of other agencies seeking to pursue fraud-like claims, opening the door to more private lawsuits,” Shargel said of the SEC.
“I think it is difficult to predict exactly in which direction private actions will move,” Shargel added, “but it is not difficult to imagine that they could take on greater significance.”
(Reporting by John Kruzel; Editing by Will Dunham)
