The U.S. Supreme Court is set to hear cases involving two major tech companies—Meta’s Facebook and Nvidia—regarding federal securities fraud lawsuits. These cases could make it more challenging for private plaintiffs to hold corporations accountable for misconduct.
In June, the Supreme Court made three rulings that weakened federal agencies, including the Securities and Exchange Commission (SEC), which oversees securities fraud. Now, the justices may be inclined to limit the power of private litigants in enforcing federal regulations designed to punish corporate wrongdoing. Andrew Feller, a former SEC attorney now in private practice, noted that the Supreme Court’s recent history of issuing business-friendly decisions suggests that Facebook and Nvidia might find a sympathetic audience among the justices. The Court currently has a 6-3 conservative majority.
“I believe business interests will persist in their trend of aggressively challenging rules meant to hold them accountable, including the remaining rights for private 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 will hear arguments regarding Facebook’s attempt to dismiss a lawsuit accusing the company of misleading investors in violation of the Securities Exchange Act of 1934, which mandates that publicly traded companies disclose potential business risks. The lawsuit, led by a group of Facebook investors including Amalgamated Bank, claims that Facebook withheld information about a 2015 data breach involving Cambridge Analytica, which affected more than 30 million users. The suit follows a significant drop in Facebook’s stock price after media reports in 2018 revealed that Cambridge Analytica had improperly accessed Facebook user data in relation to Donald Trump’s presidential campaign in 2016. The investors are seeking unspecified monetary damages to recoup the lost value of their Facebook stock.
At stake is whether Facebook violated the law by failing to adequately disclose the previous data breach in its subsequent business-risk reports, while instead presenting the risk as purely hypothetical. In its Supreme Court filing, Facebook argued that it was not legally required to disclose that the risks it had warned about had already materialized because “a reasonable investor would understand such risk disclosures to be forward-looking and probabilistic.” In 2019, the SEC initiated an enforcement action against Facebook concerning this issue, which the company settled for $100 million.
Additionally, Facebook paid a $5 billion penalty to the U.S. Federal Trade Commission related to the Cambridge Analytica matter. Michael Perino, a professor at St. John’s University School of Law in New York, described private rights of action as “a necessary supplement” to public enforcement efforts, noting that “the SEC is arguably under-resourced given the broad scope of its responsibilities.” He added that securities class action lawsuits effectively empower private attorneys to bring actions on behalf of affected investors. In a related case, the Supreme Court will also hear arguments on November 13 regarding Nvidia’s challenge to a securities class action lawsuit.
This lawsuit accuses Nvidia of misleading investors about the extent of its sales related to the volatile cryptocurrency market. The 2018 lawsuit, led by the Stockholm-based investment management firm E. Ohman J:or Fonder AB, alleges that Nvidia made statements in 2017 and 2018 that significantly downplayed the percentage of the company’s revenue growth attributable to crypto-related purchases. The plaintiffs contend that these omissions misled both investors and analysts seeking insight into how cryptomining affected Nvidia’s business.
Nvidia, in its Supreme Court filing, argued that the plaintiffs did not meet the legal requirements established by the 1995 Private Securities Litigation Reform Act for filing private securities fraud suits. In 2022, Nvidia agreed to pay $5.5 million to U.S. authorities to settle charges related to its failure to properly disclose the impact of cryptomining on its gaming business.
David Shargel, a lawyer in private practice who has represented clients before the SEC, remarked that private securities litigation could become more prominent due to recent Supreme Court rulings that weaken federal regulators. Among the cases he mentioned was a June 27 decision that struck down the SEC’s in-house enforcement of investor protection laws as a violation of the U.S. Constitution’s Seventh Amendment right.