Nvidia (NVDA) and Meta (META) are fighting two Supreme Court cases this year that they claim will flood the legal system with investor lawsuits if not ruled in their favor.
So far things are not going quite as they should.
Nvidia’s lawyers argued their case before the Supreme Court on Wednesday, drawing skepticism from judges across the ideological spectrum. The same thing happened to Meta’s lawyers last week.
“It seems to me that you’re asking us to do some kind of analysis that we’re not very good at,” Judge Elena Kagan, an appointee of Democratic President Barack Obama, told Nvidia’s attorney Neal Kumar Katyal.
The outcome of these cases could undermine or embolden future securities fraud litigants.
Nvidia argues that investors who have sued the company alleging that Nvidia CEO Jensen Huang made false statements should be required to provide more specific information in their lawsuit about what Huang knew at the time of his statements.
The investors allege that Huang knowingly deviated from Nvidia’s internal corporate data in 2017 and 2018 by misattributing the company’s demand for chips to the video game market.
The investors hypothesized that demand at the time was actually driven by the more volatile cryptocurrency mining market. That hypothesis was based on the opinion of a financial analyst who based his conclusion on publicly available documents, rather than Nvidia’s corporate documents.
“This is a very technical subject, and I simply don’t understand how any court would be opposed to considering this at the oral argument stage,” Supreme Court Justice Samuel Alito, an appointee of Republican President George W. Bush, told the lawyer from Nvidia.
The justices urged Nvidia to explain why they had to reverse a decision by the 9th Circuit Court of Appeals, repeating a point they made last week in the case against Meta’s Facebook.
In both cases, the appeals court allowed investors to proceed against the companies with proposed securities fraud class action lawsuits.
Professor Jonathan Macey of Yale Law School said he was surprised by the judges’ questions in the Facebook case.
“One thing that was surprising during the oral argument,” he said, “is that you have this kind of alliance between conservative Justice Clarence Thomas and liberal Justice Sonia Sotomayor, who raised concerns that were “very pro-prosecution.” .”
Facebook, for its part, said investors should not claim it misled its shareholders by omitting the fact that its partnership with British political consultancy Cambridge Analytica exposed the data of 87 million Facebook users.
At the heart of both disputes is the question of what facts a plaintiff must include in a legal complaint to maintain a case in court.
Facebook argued that the disclosures were not false or misleading by failing to disclose that Cambridge Analytica’s breach actually occurred in the past, especially because the alleged risk did not involve a known risk of ongoing or future business harm.
According to Nvidia, investors should not be able to maintain a proposed class action lawsuit against the company by relying on expert advice.
“Congress wanted to stop these types of lawsuits, lawsuits that, in retrospect, enabled fraud,” Katyal said on behalf of Nvidia during Wednesday’s oral arguments.
“If a stock goes down, all of it [plaintiffs] All we have to do is find an expert with numbers that contradict a company’s public statements,” said Katyal.
Katyal went on to say that a decision in favor of shareholders created “an easy roadmap” for plaintiffs to avoid a federal law that requires certain information to be included in a securities fraud complaint.
The Private Securities Litigation Reform Act (PSLRA), created in part to prevent frivolous lawsuits, requires a plaintiff to prove that a defendant company intended to make a false or misleading statement and that the statement was in fact was false.
Supreme Court Justice Neil Gorsuch, an appointee of Republican President Donald Trump, also entertained the idea that the PSLRA may need refinement.
Gorsuch said “it beggars belief” to think that a CEO like Huang would have been unaware of the source of such a large portion of the company’s revenue.
Jim Redwood, a securities law professor at Albany Law, doubted the Supreme Court would ultimately rule in favor of investors. He said he expects both cases to be resolved in a manner that precludes future securities lawsuits.
“The Facebook case is a little closer,” he said, explaining that the social media company’s case may be a bit weaker than Nvidia’s.
The Justice Department joined the Nvidia case and sided with investors.
“We believe the 9th Circuit correctly applied the standard here,” the DOJ attorney said during arguments Wednesday.
Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on X @alexiskweed.
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