In re NVIDIA Corporation Securities Litigation

Background

This consolidated securities class action was brought by E. Öhman J:or Fonder and Stichting Pensionenonds PGB against NVIDIA Corporation and Jensen Huang, Colette Kress, and Jeff Fisher. The plaintiffs asserted claims under Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5.

The plaintiffs alleged that NVIDIA and its executives misled investors during the class period—from May 10, 2017, through November 14, 2018—about NVIDIA’s exposure to cryptocurrency mining. In particular, they alleged that the defendants represented that cryptocurrency-related revenue was insignificant, that NVIDIA’s rising gaming revenue came from sales for gaming, and that most cryptocurrency-related revenue was reported in the company’s original equipment segment. The plaintiffs alleged instead that a substantial amount of cryptocurrency-related revenue came from GeForce products reported in the gaming segment. They also alleged that NVIDIA’s stock price fell after the company reduced its revenue guidance and attributed the reversal to a sharp decline in cryptocurrency demand.

The court had previously dismissed the plaintiffs’ original complaint with leave to amend. The plaintiffs filed a First Amended Complaint asserting the same claims.

Motions and judicial notice

The defendants moved to dismiss the First Amended Complaint and to strike allegations attributed to a newly identified confidential witness, referred to as FE-5. The defendants submitted a declaration in which FE-5 disavowed several statements attributed to him and argued that the allegations were unreliable and immaterial.

The court granted judicial notice of certain documents for the limited purpose of determining what was disclosed to the market. It also treated one internal presentation as part of the complaint under the incorporation-by-reference doctrine, granted judicial notice of stock-price information, denied incorporation by reference as to one video because it was unclear whether it was the video cited in the complaint, and denied other requests as moot.

Motion to strike

The court denied the motion to strike. It held that the allegations attributed to FE-5 could bear on the plaintiffs’ argument that the defendants acted with the required state of mind. The parties disputed whether FE-5 had made the statements attributed to him and why he later disavowed them. The court concluded that these factual disputes were not appropriate to resolve through a motion to strike at the motion-to-dismiss stage.

Motion to dismiss

A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) tests whether a complaint states a legally recognized claim supported by enough facts to be plausible. Securities-fraud claims under Section 10(b) and Rule 10b-5 also must satisfy heightened pleading requirements under Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act.

The court agreed with the defendants that the plaintiffs failed to adequately plead scienter—the required state of mind, which in this context had to involve at least deliberate or conscious recklessness. The plaintiffs alleged that the defendants had access to sales databases, management reports, meetings, usage data, and information from China showing increased cryptocurrency-related sales. But the court found that the complaint did not sufficiently connect the contents of those information sources to particular challenged statements, or show that the individual defendant who made a statement knowingly or recklessly contradicted information known to that defendant.

As to Huang, the court found that the allegations about databases, meetings, emails, and usage reports lacked enough detail about what information he received and when. The court also found that the allegations did not adequately show that the information concerned global sales or contradicted the specific statements at issue. As to Fisher and Kress, the court found that the allegations did not sufficiently connect them to the relevant information or establish that either actually accessed the database.

The court also rejected the plaintiffs’ “core operations” theory. That theory can support an inference of a defendant’s knowledge when executives made specific admissions showing detailed involvement in company operations, when witnesses showed that executives helped create false reports, or, in rare circumstances, when the matter was so prominent that it would be absurd to suggest management did not know about it. The court found that the plaintiffs’ allegations about monitoring sales channels, following the cryptocurrency market, the importance of the gaming segment, China’s market, and analyst questions did not meet that standard.

Because the plaintiffs failed to plead scienter for their Section 10(b) claim, the court also dismissed the Section 20(a) control-person-liability claim. The court stated that it therefore did not need to address the defendants’ arguments concerning falsity.

Disposition

Judge Haywood S. Gilliam, Jr. granted the defendants’ motion to dismiss without leave to amend because the plaintiffs had already received an opportunity to amend and still had not added the required particularity. The court denied the defendants’ motion to strike, directed the clerk to enter judgment for the defendants, and ordered the case closed.