The US Supreme Court is preparing to address appeals from two prominent technology companies, Meta’s Facebook and Nvidia, as they seek to dismiss federal securities fraud lawsuits. These cases may have significant implications for the ability of private litigants to hold corporations accountable for misconduct.
Following a series of rulings in June that weakened the authority of federal regulators, including the Securities and Exchange Commission (SEC) responsible for overseeing securities fraud, the Supreme Court may now limit the power of private plaintiffs to enforce federal regulations aimed at deterring corporate wrongdoings.
Andrew Feller, a former SEC attorney who now practices privately, noted that the Court’s recent inclination toward pro-business decisions could signal a favorable environment for Facebook and Nvidia before the justices.
With a 6-3 conservative majority, the Supreme Court’s approach to business interests has been increasingly aggressive, as reflected in the recent pattern of challenges against regulations meant to ensure corporate accountability. Feller highlighted that private rights of action, which allow individuals or groups to sue for damages, are likely to be contested further.
Facebook and Nvidia have turned to the Supreme Court after the 9th US Circuit Court of Appeals in San Francisco allowed separate class action lawsuits over securities fraud to advance against them.
The Court is set to hear Facebook’s arguments this Wednesday in a case regarding allegations that it misled investors by failing to disclose risks related to a data breach involving Cambridge Analytica. This breach, which affected over 30 million users, was linked to improper use of Facebook data during the 2016 presidential election.
Investors led by Amalgamated Bank filed a class action in 2018, claiming Facebook withheld critical information about the breach, leading to a decline in stock value. The lawsuit seeks damages to recover losses incurred following the stock drop prompted by media coverage of the breach.
The central legal question revolves around whether Facebook violated disclosure requirements by neglecting to mention the previous data breach in its discussions of business risks, which it portrayed as purely hypothetical.
In its defense, Facebook contended that it was not obligated to disclose that a warned risk had already occurred, arguing that reasonable investors would interpret risk disclosures as forward-looking and speculative.
Moreover, the SEC previously brought an action against Facebook, which was settled for $100 million. The company also faced a $5 billion penalty from the US Federal Trade Commission due to issues linked to Cambridge Analytica.
Michael Perino, a law professor at St. John’s University, emphasized the importance of private rights of action, describing them as essential supplements to public enforcement mechanisms. He noted that the SEC often operates with limited resources relative to its extensive responsibilities, and private securities lawsuits enable lawyers to act on behalf of affected investors.
Nvidia Crypto-Related Purchases
The Supreme Court will also hear Nvidia’s case on November 13, as the company attempts to dismiss a securities class action that claims it misled investors regarding the extent of sales attributed to the volatile cryptocurrency market.
This lawsuit, led by E. Ohman J:or Fonder AB, accuses Nvidia of violating the Securities Exchange Act by downplaying the share of revenue growth derived from crypto-related sales during 2017 and 2018. Such omissions allegedly misled investors seeking to understand the implications of cryptocurrency mining on Nvidia’s financial performance.
Nvidia’s Supreme Court filing argues that the plaintiffs failed to meet the legal criteria established by the 1995 Private Securities Litigation Reform Act, which sets the standard for initiating private securities fraud lawsuits.
In 2022, Nvidia agreed to pay $5.5 million to settle charges regarding inadequate disclosures about the impact of cryptocurrency on its gaming division.
David Shargel, a private attorney with experience before the SEC, suggested that limitations imposed on federal regulators could elevate the prominence of private securities litigation. He pointed to a June ruling that deemed the SEC’s in-house enforcement unconstitutional under the Seventh Amendment, which guarantees the right to a jury trial for civil cases.
Shargel expressed concern that these developments could strain the SEC’s resources and create opportunities for increasing private litigation, although predicting specific trends in private actions remains challenging.
© Thomson Reuters 2024
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