The U.S. Supreme Court is preparing to review requests from two tech giants—Meta’s Facebook (NASDAQ:META) and Nvidia (NASDAQ:NVDA)—to dismiss federal securities fraud lawsuits in separate cases that could complicate private litigants’ ability to hold companies accountable.
Following a trio of Supreme Court rulings in June that weakened federal regulators, including the Securities and Exchange Commission responsible for overseeing securities fraud, the justices may now aim to limit the power of private plaintiffs in enforcing federal regulations designed to punish corporate wrongdoing.
Andrew Feller, a former SEC lawyer now in private practice, noted that the Supreme Court’s recent trend of issuing business-friendly rulings that curtail federal regulators’ authority suggests that Facebook and Nvidia may find “a receptive audience” among the justices.
The Supreme Court holds a 6-3 conservative majority.
“I believe business interests will continue their recent strategy of vigorously contesting rules meant to hold them accountable, including challenging any remaining private rights of action,” Feller said.
A private right of action allows individuals or groups to sue for alleged harm.
Both Facebook and Nvidia have appealed to the Supreme Court after the 9th U.S. Circuit Court of Appeals in San Francisco permitted separate class action securities fraud lawsuits to move forward against them.
On Wednesday, the Supreme Court is set to hear arguments in Facebook’s effort to dismiss a lawsuit that accuses the company of misleading investors in violation of the Securities Exchange Act, a 1934 federal law mandating that publicly traded companies disclose their business risks.
The plaintiffs, a group of Facebook investors led by Amalgamated Bank (NASDAQ:AMAL), accused the company in a 2018 class action of failing to inform investors about a 2015 data breach involving British political consulting firm Cambridge Analytica, which impacted over 30 million Facebook users.
The lawsuit was prompted by a decline in Facebook’s stock price following media reports in 2018 that Cambridge Analytica had misused Facebook user data during Donald Trump’s successful 2016 presidential campaign. The suit seeks unspecified monetary damages to help recover the lost value of the Facebook shares held by the investors.
The key issue is whether Facebook violated the law by not disclosing the earlier data breach in its subsequent business-risk statements, instead presenting the risk of such incidents as merely hypothetical.
In its Supreme Court filing, Facebook argued that it was not obligated to disclose that the warned-about risk had already occurred because “a reasonable investor would understand (risk disclosures) to be forward-looking and probabilistic in nature.”
In 2019, the SEC initiated an enforcement action against Facebook regarding this matter, which the company settled for $100 million. Facebook also paid a separate $5 billion penalty to the U.S. Federal Trade Commission related to the Cambridge Analytica issue.
Michael Perino, a professor at St. John’s University School of Law in New York, characterized private rights of action as “a necessary supplement” to public enforcement efforts.
“The SEC is arguably under-resourced given the broad scope of its responsibilities,” Perino noted. “Securities class action lawsuits effectively empower private attorneys to take action on behalf of affected investors.”
NVIDIA CRYPTO-RELATED PURCHASES
On November 13, the Supreme Court is set to hear arguments in Nvidia’s attempt to dismiss a securities class action that accuses the Santa Clara, California-based company of misleading investors about the proportion of its sales derived from the volatile cryptocurrency market.
The 2018 lawsuit, led by the Stockholm-based investment management firm E. Ohman J:or Fonder AB, claims Nvidia violated the Securities Exchange Act by making statements in 2017 and 2018 that downplayed the significance of revenue growth linked to crypto-related purchases.
The plaintiffs argue that these omissions misled investors and analysts seeking to understand the effects of cryptomining on Nvidia’s business.
In its Supreme Court filing, Nvidia contended that the plaintiffs failed to meet the legal standards set by the 1995 Private Securities Litigation Reform Act, which outlines the requirements for filing private securities fraud lawsuits.
In 2022, Nvidia agreed to pay $5.5 million to U.S. authorities to resolve allegations that it inadequately disclosed the impact of cryptomining on its gaming business.
David Shargel, a private practice lawyer with experience representing clients before the SEC, noted that private securities litigation may become more prominent due to recent Supreme Court decisions that have weakened federal regulators.
He referenced a June 27 ruling that found the SEC’s in-house enforcement of investor protection laws against securities fraud violated the U.S. Constitution’s Seventh Amendment right to a jury trial.
“This could further strain the SEC’s resources, as well as those of other agencies pursuing fraud-related claims, potentially leading to an increase in private litigation,” Shargel remarked regarding the SEC’s situation.
