On March 16, 2020, Judge Haywood S. Gilliam, Jr. of the United
States District Court for the Northern District of California
dismissed a putative class action against a technology company and
its executives asserting claims under Section 10(b) of the
Securities Exchange Act of 1934. Iron Workers Loc. 580
Jt. Funds v. NVIDIA Corp., No. 18-CV-07669-HSG, 2020 WL
1244936 (N.D. Cal. Mar. 16, 2020). Plaintiffs alleged that
the company made misrepresentations regarding its sales of graphic
processing units ("GPUs") for computer gaming and the
proportion of such sales that were actually made to cryptocurrency
miners—for which demand was allegedly more volatile.
The Court dismissed the action, holding that plaintiffs failed to
adequately plead that the alleged misstatements were materially
false or made with scienter, while permitting plaintiffs to file an
amended complaint to attempt to cure these deficiencies.
The crux of plaintiffs' theory was that the company allegedly
falsely represented that revenues for sales of GPUs for computer
gaming were largely unrelated to revenues from sales of GPUs to
cryptocurrency miners. Id. at *7. With respect
to falsity, plaintiffs relied entirely on an expert report that
purported to analyze market-wide mining capacity for three
cryptocurrencies, and to assign a portion of increased mining
capacity to sales of the company's GPUs in proportion to its
market share. Id. at *8.
The Court observed that, contrary to plaintiffs' argument that
the complaint contained the underlying facts on which the expert
report relied, the complaint failed to (i) identify the source of
data about cryptocurrency mining capacity or detail the
report's assumptions regarding that capacity, (ii) indicate any
interaction with current or former company employees or a review of
the company's financial data, or (iii) explain why the
company's mining market share would be the same as its gaming
market share. Id. In particular, the Court
emphasized that the complaint alleged that cryptocurrency miners
preferred a competing company's GPUs, an allegation that
undermined the expert report's inference that the company's
mining market share would be the same as its gaming market
share. Id. The Court thus concluded that
plaintiffs' failure to justify assumptions about GPU market
share "precludes [p]laintiffs from meeting the PSLRA's
heightened pleading requirement." Id. The
Court further rejected plaintiffs' argument that the expert
report should be deemed sufficient because it was purportedly
"corroborated" by an independent analysis cited in the
complaint; the Court noted that this was no substitute for
particularized factual allegations and that the independent
analysis arrived at a significantly different figure and may have
had different assumptions. Id. at *9.
With respect to scienter, plaintiffs attempted to establish an
inference of scienter based on statements made by confidential
witnesses, the "core operations theory," and an
executive's stock sales. Id. The Court
disagreed. The Court determined that the allegations based on
confidential witnesses lacked a sufficient link to the executives
accused of wrongdoing. Id. at *10-11. The
Court also held that the core operations theory—under which
certain corporate officers may be deemed to have knowledge of the
critical core operations of the company—would not support an
inference of scienter here, given that plaintiffs failed to allege
specific facts showing the executives were involved in the minutiae
of the company's operations; further, the conclusory assertion
that gaming was the company's "core business" was
insufficient to infer scienter. Id. at *11-12.
Finally, the Court rejected plaintiffs' argument based on an
executive's stock sales, emphasizing that the sales reflected
less than 0.5% of the executive's holdings in the company and
that the sales occurred well before the company's peak
price. The Court further reasoned that, while plaintiffs did
allege that the sales were "highly unusual" for the
executive based on his prior trading patterns, this factor alone
was not enough to support an inference of scienter.
Id. at *13.
Finally, the Court concluded that plaintiffs sufficiently alleged
loss causation by alleging that the truth regarding sales to
cryptocurrency miners was revealed in partial corrective
disclosures which caused the company's stock price to
drop. In particular, plaintiffs pointed to two alleged
corrective disclosures—first, an acknowledgment on an
earnings call that it had "probably happened a great
deal" that miners had begun buying GPUs through retail gaming
channels, and a statement on a subsequent earnings call that demand
from miners had led to increased inventory and elevated prices,
which "took longer than expected to normalize" when that
activity declined. Id. at *13. The Court held
that these allegations were sufficient to plead that the
company's prior statements—which allegedly minimized the
impact of cryptocurrency mining on gaming revenues—were the
proximate cause of plaintiffs' alleged loss.
Id
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