In re NVIDIA Corporation Securities Litigation

Background

This consolidated securities class action was brought by E. Öhman J:or Fonder and Stichting Pensionenonds PGB on behalf of people who purchased or otherwise acquired NVIDIA common stock during the alleged class period. The plaintiffs sued NVIDIA Corporation and Jensen Huang, Colette Kress, and Jeff Fisher. They asserted claims under Section 10(b) of the Securities Exchange Act of 1934, Securities and Exchange Commission Rule 10b-5, and Section 20(a), which concerns control-person liability.

The plaintiffs alleged that NVIDIA and its executives misrepresented the company’s exposure to cryptocurrency mining. In particular, they alleged that the defendants represented that cryptocurrency-related revenue was insignificant overall, that only a small portion of gaming revenue came from cryptocurrency miners, and that most cryptocurrency-related revenue was reported in NVIDIA’s original-equipment-manufacturer segment rather than its gaming segment. The plaintiffs alleged that later disclosures about cryptocurrency demand, inventory, and gaming revenue caused NVIDIA’s stock price to fall and investors to suffer losses.

Judicial notice

The defendants asked the court to take judicial notice of, or consider as part of the complaint, 33 documents. The court granted judicial notice of specified securities filings, conference presentations, earnings-call transcripts, articles, and a Form 4 concerning Huang’s stock sale. It also granted judicial notice of two exhibits showing historical stock prices. The court denied as moot the request concerning 15 exhibits that were not specifically referenced in the complaint or relevant to the analysis. It denied the request concerning an analyst report, even though the plaintiffs cited that report extensively, because the report did not form the basis of the plaintiffs’ claims.

Legal standards

The court applied Federal Rule of Civil Procedure 12(b)(6), which permits dismissal when a complaint does not state a legally sufficient claim. Securities-fraud claims also must satisfy heightened pleading requirements under Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act. The plaintiffs therefore had to plead the alleged falsity and the defendants’ required state of mind—often called scienter—with particularity. The court explained that a Section 10(b) or Rule 10b-5 claim requires a material misrepresentation or omission, scienter, a connection to the purchase or sale of a security, reliance, economic loss, and loss causation.

Falsity

The plaintiffs relied heavily on an analysis by Prysm Group, which estimated that NVIDIA earned $1.728 billion in cryptocurrency-mining-related revenue during the class period and understated that revenue by approximately $1.126 billion. The court held that the complaint did not describe Prysm’s assumptions and methods with enough detail to establish that its conclusions were reliable. In particular, the complaint did not adequately support the assumption that NVIDIA’s share of the cryptocurrency-mining market matched its share of the gaming market. The court also found that the allegations concerning an analysis by RBC Capital Markets and a former employee identified as FE-1 did not supply the missing detail.

The court therefore found that the plaintiffs had not pleaded falsity with the specificity required by the securities-fraud pleading rules and granted the defendants’ motion to dismiss on that basis. Because the plaintiffs’ falsity claims depended on Prysm’s analysis, the court did not conduct a statement-by-statement analysis at that stage. It directed the plaintiffs to provide a statement-by-statement chart in any amended complaint.

Scienter

The court also held that the plaintiffs did not adequately allege scienter. The allegations from confidential former employees did not sufficiently show that the witnesses had the necessary personal knowledge or that their information established that any individual defendant knowingly or recklessly made a false statement. The court also rejected the plaintiffs’ argument that the defendants must have known the information because gaming was a core NVIDIA business. Finally, it held that Huang’s sale of 110,000 shares did not support an inference of scienter because the sale represented less than one-half of one percent of his holdings and occurred before NVIDIA’s highest stock price during the class period.

The court therefore granted the defendants’ motion to dismiss as to scienter.

Loss causation

Although the court stated that it did not need to reach loss causation after finding inadequate pleading of falsity and scienter, it addressed the issue to guide any later motion to dismiss. Loss causation means that the alleged misstatement, rather than another event, foreseeably caused the investor’s loss. The court found that the plaintiffs adequately alleged this connection. They tied partial disclosures on August 16, 2018, and November 15, 2018, to stock-price declines and alleged that those disclosures revealed NVIDIA’s dependence on cryptocurrency mining and the effect of the decline in mining demand on gaming inventory and revenue.

The court therefore denied the defendants’ motion as to loss causation.

Section 20(a) claim and disposition

The plaintiffs’ Section 20(a) control-person claim depended on an underlying Section 10(b) violation. Because the court found that the plaintiffs had not adequately pleaded falsity and scienter for the Section 10(b) claim, it dismissed the Section 20(a) claim.

In conclusion, the court granted in part and denied in part the defendants’ motion to dismiss, with leave to amend. The plaintiffs were directed to follow the court’s pleading instructions, including preparing the required chart, and to file any amended complaint within 28 days of the order. Judge Haywood S. Gilliam, Jr. signed the order on March 16, 2020.