A petition for certiorari asks the Supreme Court to resolve two circuit splits concerning pleading scienter based on internal reports. Nvidia, the petitioner, argues that the decision against it deepened a circuit split by allowing a case to proceed to discovery based on speculation about what internal reports might have said. The ruling also created a new circuit split as to whether a plaintiff’s expert opinion can alone satisfy the falsity element of a securities fraud action (NVIDIA Corp. v. E. Öhman J:or Fonder AB, March 4, 2024).
Circuit splits. Last August, a Ninth Circuit panel narrowly revived some claims alleging that Nvidia Corp. and three of its officers defrauded investors by downplaying the extent to which Nvidia’s gaming revenues relied on the demand for cryptocurrency. The district court had held that the plaintiffs failed to prove scienter, but the appeals court found the complaint pleaded that one of the individual defendants both made materially false and misleading statements and did so with scienter.
Judge Sanchez dissented from the Ninth Circuit opinion. He observed that the complaint’s central falsity allegation was based entirely on a post-hoc analysis by an outside expert (Prysm) that relied on generic market research and questionable assumptions. The complaint did not put forward any internal report or data source that would have put executives on notice that their statements were false or misleading when made, nor did it cite any internal source corroborating Prysm’s revenue estimates. On the contrary, the only specific allegation of an internal study supported the defendants’ statements.
Further, Judge Sanchez noted, “We have never allowed an outside expert to serve as the primary source of falsity allegations where the expert has no personal knowledge of the facts on which their opinion is based, for example by corroborating their conclusions with specific internal information or witness statements.”
Petition. Nvidia argues in its cert petition that for the reasons Judge Sanchez noted, the panel opinion creates one circuit split (using an expert opinion to prove falsity) and deepens another (allowing scienter to rest on speculation). It asks the Court to consider two questions:
- Whether plaintiffs alleging scienter under the PSLRA based on allegations about internal company documents must plead with particularity the contents of those documents, as held by the Second, Third, Fifth, Seventh, and Tenth Circuits; and
- Whether plaintiffs can satisfy the PSLRA’s falsity requirement by relying on an expert opinion to substitute for particularized allegations of fact. The Second and Fifth Circuits have answered this question in the negative.
Two aspects of the PSLRA’s heightened pleading standards show why the Ninth Circuit’s analysis of the scienter element is incorrect. Congress has required scienter to be pleaded with particularity, which demands detail—“omissions and ambiguities count against inferring scienter” (Tellabs, Inc. v. Makor Issues & Rights, Ltd. (U.S. 2007)). Second, the PSLRA imposes another, even stricter demand on scienter: the plaintiff must plead facts giving rise to a strong inference that the defendant acted with the requisite state of mind.
Nvidia argues that the Ninth Circuit’s falsity analysis is also incorrect. The falsity element requires particularized allegations of fact, but an expert opinion is not a fact at all, much less a particularized one. “Allowing plaintiffs to evade that obligation by retaining an expert—who then turns to generic market data to speculate about what might have happened—eviscerates the PSLRA,” Nvidia writes.
The case is No. 23-970.