The U.S. Supreme Court will hear requests from two tech giants – Meta’s Facebook and Nvidia – to head off securities fraud lawsuits in separate cases that could make it harder for private plaintiffs to hold companies accountable.
After three Supreme Court rulings in June that weakened federal regulators – including the Securities and Exchange Commission, which is responsible for combating securities fraud – the justices could now limit the power of private plaintiffs to enforce federal rules punishing corporate misconduct .
Andrew Feller, a former SEC lawyer who now works in private practice, said that the Supreme Court’s recent track record of passing pro-business decisions that limit the power of federal regulators suggests that Facebook and Nvidia are similarly ” could find a “receptive audience” among the judges.
The Supreme Court has a conservative 6-3 majority.
“I think companies will continue their recent practice of aggressively challenging regulations designed to hold them accountable, including by challenging remaining private rights of action,” Feller said.
A private right of action refers to the ability of an individual or group to sue for an alleged injury.
Social media platform Facebook and artificial intelligence chip maker Nvidia have turned to the Supreme Court after the 9th U.S. Circuit Court of Appeals in San Francisco approved separate securities fraud class actions against them.
The Supreme Court on Wednesday will rule on Facebook’s request to dismiss a lawsuit accusing the company of misleading investors in violation of the Securities Exchange Act of 1934, which requires publicly traded companies to disclose their business risks .
The plaintiffs, a group of Facebook investors led by Amalgamated Bank, accuse the company in a 2018 class action lawsuit of withholding information from investors about a 2015 data breach involving the British political consulting firm Cambridge Analytica and by the More than 30 million Facebook users were affected.
The lawsuit arose after Facebook shares fell following media reports in 2018 that Cambridge Analytica had used unlawfully collected Facebook user data in connection with Donald Trump’s successful 2016 presidential campaign. The lawsuit seeks unspecified damages, some of which are intended to restore the lost value of the Facebook shares held by investors.
At issue is whether Facebook broke the law when it failed to detail the previous data breach in subsequent business risk communications and instead portrayed the risk of such incidents as purely hypothetical.
In its submission to the Supreme Court, Facebook argued, among other things, that it was not required to disclose that the warned risk had already materialized because “a reasonable investor would understand (the risk disclosures) to be forward-looking and probabilistic.”
The SEC filed an enforcement action against Facebook over the matter in 2019, which the company settled for $100 million. Facebook has paid a separate $5 billion fine to the US Federal Trade Commission in connection with Cambridge Analytica.
Michael Perino, a professor at St. John’s University School of Law in New York, called private rights of action a “necessary complement” to government enforcement actions.
“The SEC is arguably underfunded given the breadth of its mission,” Perino said. “Securities class actions are a great way for private attorneys to litigate on behalf of injured investors.”
NVIDIA CRYPT-RELATED PURCHASES
The Supreme Court will hear arguments on Nov. 13 in Nvidia’s attempt to thwart a securities class action lawsuit accusing the Santa Clara, California-based company of misleading investors about how much of its revenue was in the volatile cryptocurrency industry has flowed.
The 2018 lawsuit, led by Stockholm asset management firm E. Ohman J:or Fonder AB, accuses Nvidia of violating the Securities Exchange Act by making statements in 2017 and 2018 that falsely downplayed how much of the company’s revenue growth came from cryptocurrency purchases.
These omissions misled investors and analysts interested in understanding the impact of crypto mining on Nvidia’s business, the plaintiffs said.
In its filing to the Supreme Court, Nvidia said the plaintiffs had failed to overcome the legal hurdle set by a 1995 federal law, the Private Securities Litigation Reform Act, that sets the standard for bringing private lawsuits over securities fraud.
Nvidia agreed in 2022 to pay $5.5 million to US authorities to resolve allegations that the company did not properly disclose the impact of crypto mining on its gaming business.
David Shargel, an attorney in private practice who has represented clients before the SEC, said private securities lawsuits could become more important because of recent Supreme Court rulings weakening federal regulators.
Among the cases cited by Shargel was a June 27 decision striking down the SEC’s internal enforcement of laws protecting investors from securities fraud as a violation of the right to a jury trial enshrined in the Seventh Amendment to the U.S. Constitution.
“This could further strain the resources of the Commission and other agencies seeking to bring fraud-like lawsuits, thereby opening the door to more private litigation,” Shargel said of the SEC.
“I think it’s hard to predict what direction private lawsuits will take,” Shargel added, “but it’s not hard to imagine that they will become more important.”