Meta, Nvidia put shareholder rights in crosshairs with SCOTUS push for business protections

WASHINGTON (CN) — Tech giants will square off with investors at the Supreme Court in November, getting two shots at curbing consumer protections in favor of business interests.

Social media behemoth Meta, formerly Facebook, and chip systems titan Nvidia want to restrict investor securities fraud lawsuits.

The cases follow a similar narrative on the high court’s docket: conservative business groups forewarning of abusive litigation and increasing regulatory compliance costs for businesses, and the government and watchdog groups ringing alarm bells for regulatory compliance.

Shareholders sued Facebook after the 2018 Cambridge Analytica scandal, arguing that the company committed securities fraud by omitting a prior user data breach. Investors say that vague disclosures about data security risks were misleading when Facebook knew such a breach already occurred.

“The [Securities and Exchange Commission] has instructed issuers that risk-factor statements appropriately address both future and past events that make an investment risky and that treating a materialized risk as a merely hypothetical possibility can be misleading,” the shareholders wrote in their brief.

A federal court dismissed their case, but the Ninth Circuit reversed, holding that treating third-party data misuse as a hypothetical prospect was misleading even if the first breach hadn’t yet resulted in follow-on business harm.

Meta asked the Supreme Court to reverse the Ninth Circuit’s ruling, claiming that risk disclosures are understood as forward-looking and probabilistic.

“A reasonable investor would not interpret such forward-looking, probabilistic statements as implicitly certifying that the triggering event identified had never occurred in the past and that the company faced no present risk of harm from such an occurrence,” Meta wrote.

The regulatory group Washington Legal Foundation threw its weight behind Meta, claiming that the Ninth Circuit transformed risk disclosures into actionable statements of current or historical fact. The policy group warned the ruling would invite meritless securities litigation based on “fraud-by-hindsight,” forcing companies to over-disclose risks to ward off litigation.

“This result increases compliance costs, complicates an already complex disclosure regime, and ultimately harms investors who look to SEC filings to find information relevant to their investment decisions,” the foundation wrote.

The Biden administration said Meta’s bright-line proposal would arbitrarily narrow securities law protections.

“The antifraud provisions of the securities laws prohibit half-truths, not just flat-out lies, and there is no exception to that principle for risk-factor statements,” U.S. Solicitor General Elizabeth Prelogar wrote in an amicus brief.

Securities law scholars said in an amicus brief Meta and its friends misrepresented the Ninth Circuit’s ruling, noting that the appeals court followed precedent on misleading half-truths. Meta wanted to litigate requiring immaterial disclosures in risk disclosure statements, the scholars said, but all parties already agreed that was wrong.

“Petitioners are asking instead for blanket immunity for Item 105 disclosures that reference past events,” the scholars wrote.

Similarly, Nvidia and its shareholders disagree over what the appeals court held in their challenge.

Investors filed a class action against Nvidia after the 2018 cryptocurrency crash, claiming that the computer chip company committed securities fraud by misleading investors that its revenues derived from gaming and not volatile crypto sales.

The Ninth Circuit revived the shareholders’ suit after it was dismissed by a lower court. Nvidia asked the justices to reverse the appeals court’s ruling, arguing that it flouted strict prerequisites under the Private Securities Litigation Reform Act.

Shareholders claim that Nvidia’s CEO Jensen Huang gave public statements contradicting the company’s internal reports. However, Nvidia says those claims weren’t based on the company’s records, but instead on a hired expert to create data.

“Far from serving Congress’s goal of guarding against fishing expeditions by vexatious litigants, the Ninth Circuit’s opinion declares it open season so long as a plaintiff has funding to hire an expert,” Nvidia wrote.

The shareholders and the Justice Department dispute this characterization, claiming that the accusations came from two former Nvidia employees.

Former Securities and Exchange Commission officials said Nvidia wanted to erect higher barriers to private enforcement, which they note is an essential and effective way to hold wrongdoers accountable.

The Anti-Fraud Coalition warned that a higher bar for these suits would undermine federal law.

“Always requiring a defendant to slip, or a plaintiff to surreptitiously gain access to internal documents, would substantially curtail the efficacy of many anti-fraud laws to the detriment of investors and the public,” the group wrote.

The Chamber of Commerce of the United States and the Securities Industry and Financial Markets Association joined the Washington Legal Foundation’s amicus brief in Nvidia’s case. The groups said the rule would encourage baseless securities fraud lawsuits.

“If plaintiffs’ lawyers can procure an expert to produce made-for-litigation opinions based on generic information and with the benefit of hindsight, a PSLRA complaint need not be tethered to company-specific facts giving rise to a claim of fraud,” the organizations wrote.

They would require courts to engage in arbitrary line-drawing, parsing complaints to assess which allegations are “based on” documents or when expert analysis “substitutes for” particularized allegations.

Chief Justice John Roberts’ Supreme Court has been considered very pro-business. A 2023 study revealed that the Roberts Court sided with business interests in 63% of the cases heard since 2005. This is compared to businesses’ 29% win rate under former Chief Justice Earl Warren’s court.

The court will hear arguments in Facebook v. Amalgamated Bank on Nov. 6, and Nvidia Corporation v. E. Ohman J on Nov. 13.

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