At the outset of the current U.S. Supreme Court term, corporate and securities law observers and commentators were excited that the Court had agreed to take up two securities law cases that had significant potential to provide insights about securities lawsuit pleading standards and processes. However, as noted here, in November, the court dismissed the Facebook Cambridge Analytica case, one of the two cases the Court was to take up this term. Now, in a terse, one-line December 11, 2024, order, the Court dismissed the Nvidia case, the second of the two cases it had agreed to take up, meaning that instead of addressing two securities law cases this term, it will now not consider any securities cases. A copy of the Court’s December 11, 2024, order can be found here.

Background

Nvidia made GPUs intended for gaming applications. In or about 2017, cryptocurrency companies began using its GPUs for crypto mining operations. Sales of its GPUs reached record levels in 2017 and most of 2018 and the company told investors it was working hard to meet demand. However, when the company learned of excess supply of certain of its GPUs in certain distribution channels, it disclosed the excess supply of the GPUs, its share price declined, and plaintiff shareholders filed securities class action lawsuits against the company and certain of its directors and officers.

In their complaint, the plaintiff shareholders alleged that Jensen Huang, the company’s CEO, knowingly understated the extent to which demand for certain of the company’s GPUs was being driven by cryptocurrency miners (as opposed to demand from gamers). In their complaint, the plaintiffs did not, for example, cite internal documents reflecting GPU demand by crypto miners as opposed to gamers; rather, plaintiffs relied on an expert witness to analyze public data about activities of the crypto mining companies, using assumptions about the amount of computing power needed to facilitate the disclosed activities, and from that estimating the number of GPUs needed for the activity and what percentage of those GPUs would have been NVIDIA’s. From this “chain of assumptions,” the expert purported to determine what percentage of NVIDIA’s revenue was derived from crypto miners, the basis on which the plaintiffs alleged that the company’s actual dependence on crypto miners differed from the company’s disclosures. 

The District Court granted the defendants motion to dismiss. However, the Ninth Circuit, in a split opinion, written over the dissent of Judge Gabriel Sanchez affirmed in part and reversed in part the lower court’s dismissal.

NVIDIA filed a petition for a writ of certiorari to the U.S. Supreme Court. In their petition, NVIDIA said that the case presents two questions:

1. Whether plaintiffs seeking to allege scienter under the PSLRA based on allegations about internal company documents must plead with particularity the contents of those documents.

2. Whether plaintiffs can satisfy the PSLRA’s falsity requirement by relying on an expert opinion to substitute for particularized allegations of fact.

In a June 17, 2024, order, the Court granted the company’s petition for a writ of certiorari. The case, which was docketed for the current U.S. Supreme Court term, had been fully briefed, and indeed, on November 13, 2024, the Court heard oral argument. According to press reports of the argument, the Court seemed very skeptical, and several individual justices seemingly were questioning why the case was before the court. Indeed, as reported here, Justice Elena Kegan said, with respect to the Nvidia case, that “it becomes less and less clear why we took this case” rather than simply allowing the Ninth Circuit’s decision to stand.

Then on December 11, 2024, the U.S. Supreme Court entered an order dismissing the case on the grounds that the writ of certiorari was improvidently granted. As usual when this happens, the Court provided no explanation for the dismissal. A dismissal on these grounds means that the Court has decided that it should not have agreed to review the case. A dismissal of this type typically occurs when the Court realizes, upon further examination, that the case does not meet the criteria for Supreme Court review or that there was some procedural or substantive issue that makes the case unsuitable for their consideration. (More background on a dismissal on this ground can be found here.)

Discussion

The practical effect of the Supreme Court’s dismissal is that the Ninth Circuit’s ruling in the case will stand, meaning that the appellate court’s overturning of part of the district court’s dismissal of the case is operative, and the portion of the case that the Ninth Circuit revived by overturning the district court’s dismissal will now go back to the district court for further proceedings.

The Supreme Court’s dismissal of the case also means that the Court now will not weigh in on the interesting and important issues that the case presented. The question of what a plaintiff relying on internal documents in support of a securities law claim must plead is a recurring one. The question of the extent to which a plaintiff can rely on expert witness testimony to support the sufficiency of a securities law claim also is recurring. The lower courts must now deal with these questions without Supreme Court guidance on the issue, and in that regard must deal with the split in the circuit on these issues that Nvidia has cited in support of its petition for the writ of certiorari.

The split in the circuits, usually of such significant concern to the Supreme Court, is a particularly noteworthy concern with respect to these questions; Nvidia had argued in its petition for the writ that the positions of the Second and Ninth Circuits on these issues diverge, meaning that, with diverging positions in the two Circuits with the greatest volume of securities litigation activity, resulting in potentially diverging case outcomes.

Based on the media reports of oral arguments in this case, it appears that the Court was skeptical of the pleading standard for which Nvidia argued, expressing concern that requirements that Nvidia urged could raise impossible barriers for claimants at the pleading stage. Some justices also questioned how the expert witness’s report could be questioned at the motion to dismiss stage of the proceedings.

In any event, it is now the case that in a Supreme Court term in which it looked as if the Court would be weighing in on the pleading standards in securities suits in two different cases, the Court will now not be saying anything on U.S. securities law issues this term. You would also think that the court might be more restrained in agreeing to take up further securities law cases, at least in the near term.

Kind of feels like showing up for a wedding ceremony, with everyone all dressed up and the witnesses gathered and the music playing, and instead of nuptials, the guests are treated to an abrupt and unexpected announcement that the wedding has been cancelled.

As I have documented on this site, conservative advocacy and legal groups have been pursuing an aggressive ESG backlash campaign. Among other things, these groups’ efforts have caused several high-profile companies to walk back their DEI initiatives. These groups have also pushed for state-level anti-ESG legislation and have also even pursued anti-ESG litigation. The litigation results have been mixed at best, as noted for example here. However, in the ESG-backlash securities lawsuit filed by a conservative advocacy group against Target in the wake of a consumer boycott following the company’s LGBT “Pride Month” campaign, a federal district court has denied the defendants’ motion to dismiss. As discussed below, there are several interesting features of the court’s ruling. A copy of the Court’s December 4, 2024, opinion can be found here.

Continue Reading ESG Backlash Securities Suit Against Target Survives Dismissal Motion

As D&O insurance professionals try to assess the potential impact on the industry from Donald Trump’s return to the White House next month, one area of focus has been on the Trump’s appointment powers. This includes, obviously, the President’s authority to appoint judges to the federal judiciary, but in addition involves his power to make appointments to the Presidential cabinet and to the federal agencies. As Trump’s appointments have unfolded over the last few weeks, none looms larger (for now at least) for the D&O arena than the announcement last Wednesday that Trump will nominate former SEC Commissioner Paul Atkins as SEC Chair. This appointment, if confirmed, could result in a significant change of direction at the SEC, which in turn could have important implications for the world of D&O.

Continue Reading Trump Selects “Anti-Gensler” for SEC Chair
Tim J. Leech

Recent case law developments in Delaware’s courts underscore the importance for corporate boards to monitor “mission critical” operations at their companies. These developments have important corporate governance implications, as I detailed in a September blog post (here). In the following guest post, Tim J. Leach, FCPA FCA Managing Director Risk Oversight Solutions Inc. takes a deeper look at the corporate governance implications from the recent duty of oversight/duty to monitor case law. I would like to thank Tim for allowing me to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is Tim’s article.

Continue Reading Guest Post: “Mission Critical”: Director Liability Ticking Time Bomb

One of the hot topics in the corporate space over the last several months has been the question whether Delaware corporations should consider reincorporating in another state, such as Texas or Nevada. Much of the discussion in this re-domestication debate has centered on recent controversial decisions out of Delaware’s courts. The ongoing discussion of these issues resurfaced in the last few days with the news that Delaware Chancellor Katherine McCormick had rejected Tesla’s motion for reconsideration of her earlier rejection of Elon Musk’s $55.8 billion pay package.

A recent law review article by Yale Law Professor Jonathan R. Macey addresses the question whether, in light of the recent case law developments in the state’s courts, Delaware corporations will now be “Leaving for Las Vegas.” Professor Macey’s article considers the extent to which recent Delaware case law developments may motivate key Delaware constituents to consider incorporation alternatives. As discussed below, Professor Macey’s article has in turn triggered further discussion of the central questions about the recent output of Delaware’s courts in corporate and securities lawsuits.

Continue Reading Will Delaware Corporations Be “Leaving for Las Vegas”?

In recent days, SEC observers have speculated about who the new head of the agency will be in the incoming Trump Administration and what the new leadership might mean for the agency’s regulatory and enforcement agenda. While we await the upcoming changes, it is still worth asking what the agency has been up to from an enforcement standpoint in the most recently completed fiscal year (ended September 30, 2024). The agency’s recently issued enforcement activity report and a separate academic study of the agency’s enforcement activity against public companies and their subsidiaries both reveal some interesting and arguably unexpected information about what the agency has been doing. Among other things, the agency’s report shows that while the agency’s overall enforcement activity levels declined in the most recent fiscal year, the agency’s total recoveries were at record levels – but both of these observations require further discussion as well.

Continue Reading SEC’s FY 2024 Enforcement Activity Declined While Total Financial Remedies Surged

ESG has been and remains a serious concern for corporate executives. However, the role that it plays as a part of the corporate risk equation has changed. From a time not that long ago where companies were under pressure to establish their ESG credentials and promote ESG objectives, many companies now face an opposite politically charged backlash, that, among other things, has pushed some companies to walk back their ESG-related initiatives. For example, just this past week Walmart became the latest company to drop its DEI program in response to right-wing pressure, joining similar moves by Ford, Harley-Davidson, and Lowe’s, among others.  

In the latest example of ways that politically-motivated activists are attempting to turn companies’ ESG initiatives against them, last Wednesday a groups of eleven states’ attorneys general led by Texas AG Ken Paxton filed a federal court suit against Blackrock, Vanguard, and State Street, alleging that the three institutional investors conspired to restrict the availability of coal, to the alleged detriment of consumers, and in alleged violation of federal and state antitrust laws. A copy of the Texas AG’s November 27, 2024, press release about the lawsuit can be found here. A copy of the state AGs’ complaint can be found here.

Continue Reading State AGs File ESG-Related Antitrust Suit Against Big Institutional Investors
Umesh Pratapa

In the following guest post, Umesh Pratapa takes a look at environmental liability risks under Indian law and consider the D&O insurance implications. Umesh is the Author of the handbook on D&O liability insurance published by Institute of Directors (IOD), India, and Consultant – liability insurance. I would like to thank Umesh for allowing me to publish his article on this site. I welcome guest post submissions from responsible authors on topics of interest to the site’s readers. Please contact me directly if you would like to submit a guest post. Here is Umesh’s article.

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Continue Reading Guest Post: India: Environmental Litigation Risks – D&O Liability Insurance

Is a company’s action against a corporate executive to recover the costs of defense the company advanced on his behalf “restitutionary” in nature and are the amounts involved therefore precluded from coverage under the D&O insurance policy’s definition of Loss? In an opinion that undoubtedly will gladden the hearts of policyholder-side advocates, a California appellate court held that it is not. As discussed below, there are a number of interesting features to the court’s opinion. The California Court of Appeals’ November 12, 2024 opinion can be found here.

Continue Reading CA Court: Suit to Recover Executive’s Defense Fees not “Restitutionary”

As often happens when companies are hit with securities class action lawsuits, Lululemon, which in August was sued in a securities suit, was hit with a parallel shareholder derivative lawsuit. The derivative suit allegations not only largely track the allegations in the prior securities suit, but the derivative suit complaint expressly refers to the prior securities lawsuit filings. However, there is an unusual twist. In addition to tracking the same allegations as the securities suit, the Lululemon derivative suit complaint contains an entirely new and different set of allegations – and the new set of allegations are interesting in their own right.

The new allegations relate to the Lululemon’s DEI program (or what Lululemon called its IDEA program, standing for Inclusion, Diversity, Equity, and Action). DEI programs have been the recent focus of attention, with, for example, some companies facing litigation for even having a DEA program, and other companies (such as Ford and Harley-Davidson) having to publicly back away from their DEI program in response to political pressure. The allegations in the new Lululemon derivative complaint do not seek to challenge the company for having adopted this kind of program; the allegations instead question the company’s actions for doing too little to combat discrimination and eliminate racial issues at the company. In the context of a changing environment surrounding ESG issues in general, and DEI issues in particular, the new Lululemon lawsuit represents an interesting development, as discussed below. The derivative complaint in the new lawsuit can be found here.

Continue Reading Lululemon Hit with Derivative Suit for Allegedly Ineffective DEI Program