On August 25, 2023, a sharply divided panel of the United States
Court of Appeals for the Ninth Circuit affirmed in part and
reversed in part the dismissal of a putative class action asserting
claims under the Securities Exchange Act against a producer of
graphics processing units and certain of its executives. E.
Ohman J:or Fonder AB v. NVIDIA Corp., —F.4th—,
2023 WL 5496507 (9th Cir. 2023). As discussed in our prior post, plaintiffs alleged that the
company made misrepresentations regarding the extent to which its
revenues and growth depended on sales of graphics processing units
to the volatile cryptocurrency mining industry. The Ninth Circuit
held that plaintiffs adequately alleged that statements by two
executives were misleading, and adequately alleged scienter as to
the company's CEO.
The majority explained that plaintiffs sufficiently alleged that the company had misstated its revenue attributable to crypto industry sales, based on allegations that an investment banking analyst report and a consulting firm retained by plaintiffs both indicated that the company had understated its revenue attributable to sales related to cryptocurrency mining by including sales of units used for mining among sales of units ostensibly designed for computer gaming. Id. at *7–8. The majority rejected defendants' argument that it was improper to rely on the analysis offered by plaintiffs' consulting firm, concluding that the analysis was detailed, offered by well credentialed consultants, plausible, conservative, consistent with the analysis in the contemporaneous non-party investment banking report, and consistent with statements by confidential witnesses who averred that sales of various units were counted toward gaming as opposed to a separate unit that focused in part on supporting cryptocurrency mining. Id. at *8–10.
The majority next evaluated challenged statements made by the company CEO and CFO suggesting that cryptocurrency-related sales did not have a substantial impact on company revenue, and that sales of gaming-related chips did not support the cryptocurrency industry. Id. at *10–12. The majority determined that these statements were adequately alleged to be misleading, emphasizing that analysts referenced the challenged statements to support the conclusion the company was not highly dependent on the cryptocurrency mining industry. Id. at *12. The majority also observed that analysts and media reports expressed surprise at subsequent revelations of the company's cryptocurrency-related exposure and that the company's stock allegedly fell when that information was revealed. Id. at *12–13.
The majority then held that the statements of two confidential witnesses, as well as statements by the CEO himself (who was also the company's founder) noting his familiarity with the company, adequately supported an inference that the CEO's challenged statements were made with scienter. Id. at *14–16. The majority noted that the confidential witnesses were former employees who were alleged to be well-positioned to assemble information about how gaming units were sold to cryptocurrency miners, and that one of the former employees met regularly with the CEO and observed the CEO discussing that miners were buying gaming units. Id. at *16. The Court therefore concluded that plaintiffs' allegations, including that the CEO had access to detailed sales reports that were prepared for him, that he was a detail-oriented manager, and that sales data showed gaming units were being used for cryptocurrency mining, collectively supported an inference of scienter. Id. As to the CFO, however, the Court held that plaintiffs' allegations failed to establish a strong inference of scienter, because plaintiffs' only "concrete allegation"—that the CFO had access to contradictory information and could request sales data—failed to show that the CFO actually accessed contradictory information. Id. at *17.
The remainder of the majority's opinion responded to observations of Judge Gabriel P. Sanchez in dissent. Judge Sanchez first critiqued the majority's reliance on plaintiffs' economic consultant, noting that the Court had never suggested that such an analysis could serve as a primary source of allegations. Id. at *17; Id. at *27 (dissent). But the majority reiterated that its analysis relied also on the contemporaneous observations of analysts and the confidential witnesses. Id. at *17 (majority). The majority also disagreed with Judge Sanchez's conclusions that the analytical approaches presented by plaintiffs' consultant and the analyst were materially different, noting any discrepancy could be accounted for by the fact that one report examined a fifteen-month period, while the other an eighteen-month period. Id. at *18. And the majority emphasized that the PSLRA required plaintiffs to state factual allegations with particularity but did not limit the sources from which those allegations could be drawn. Id.
With respect to scienter, Judge Sanchez argued that no allegations from the two former employees suggested the CEO actually accessed centralized sales databases and neither former employee accessed aggregate reports during the class period. Id. at *31–32 (dissent). As for statements offered by these former employees about quarterly sales meetings, Judge Sanchez noted that one former employee attended two such meetings with the CEO and observed that the CEO was detail-oriented but left the company before the start of the class period. Id. at *32–33. Judge Sanchez emphasized the company introduced units focused on supporting cryptocurrency mining precisely because the company saw that its gaming units were being used for this purpose. Id. at *33. Judge Sanchez also observed that neither witness alleged that the CEO made a statement that was actually false. Id. The majority on the other hand emphasized that the amount of at-issue revenue allegedly unaccounted for, more than $1 billion, made it plausible to infer that the CEO was aware of how this revenue was generated, given his allegedly detailed management style. Id. at *22 (majority).
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