Expertized

To what extent can plaintiffs commission an expert report based on public information and rely on it in their complaint to adequately plead securities fraud?  The Ninth Circuit recently addressed this issue in E. Ohman J:or Fonder AB v. NVIDIA Corp., 2023 WL 5496507 (9th Cir. Aug. 25, 2023).  A majority of the panel (Judge Fletcher and Judge Wallace) found that the expert report was credible and could be relied upon, even though it did not reference any internal corporate data or witness statements.

In NVIDIA, the plaintiffs alleged that NVIDIA failed to disclose the impact of crypto-related sales of its gaming products on the company’s financial performance so as to conceal the extent to which its revenue growth depended on the volatile demand for cryptocurrency.  Accordingly, the key question in the case was whether and when NVIDIA became aware that crypto-related sales were a significant driver of its revenues.

To answer that question, the plaintiffs primarily relied upon two analyses conducted by outside entities after NVIDIA missed revenue projections in November 2018 (the end of the putative class period).  First, RBC Capital Markets published an investigative report concluding that NVIDIA had significantly understated the amount of its crypto-related sales.  Second, the plaintiffs hired an economic consulting firm, the Prysm Group, that issued a report coming to the same conclusion.

On appeal from the dismissal of the complaint, the Ninth Circuit concluded that based on the RBC and Prysm reports, statements from confidential witnesses discussing bulk purchases of the company’s gaming products for cryptocurrency mining, and the fact that NVIDIA’s earnings collapsed when cryptocurrency prices collapsed, “there is a sufficient likelihood that a very substantial part of NVIDIA’s revenues during the Class Period came from sales . . . for cryptocurrency mining.”  Moreover, the court found, the plaintiffs had adequately plead a strong inference of scienter (i.e., fraudulent intent) as to NVIDIA’s CEO based on confidential witness statements alleging that the CEO received detailed sales reports, closely monitored them, and these reports would have shown the portion of sales used for cryptocurrency mining.

The majority opinion was the subject of a strong dissent from Judge Sanchez (and there is a significant amount of back-and-forth between the judges in their opinions).  The dissent argued that the majority “essentially concluded that Plaintiffs have adequately alleged falsity merely by showing that Defendants’ statements concerning cryptocurrency-related revenues diverged from Prysm’s post hoc revenue estimates.”  The problem with that approach, according to Judge Sanchez, is that the Ninth Circuit has “never before allowed an outside expert to serve as the primary source of falsity allegations under the PSLRA where the expert relies almost exclusively on generic market research and without any personal knowledge of the facts on which their opinion is based.”  As to the scienter of NVIDIA’s CEO, the dissent carefully went through the confidential witness statements and concluded that none of them demonstrated that the CEO reviewed internal information that conflicted with the company’s public statements.

Holding:  Affirmed in part, reversed in part, and remanded.

Quote of note (majority opinion): “Prysm and RBC performed rigorous market analyses to reach their independent but nearly identical conclusions.  Contrary to our colleague’s contention, the PSLRA nowhere requires experts to rely on internal data and witness statements to prove falsity.  It merely requires that ‘the complaint state [] with particularity all facts on which [the] belief [underlying an allegation of falsity] is formed.’  Prysm did exactly that.  To categorically hold that, to be credible, an expert opinion must rely on internal data and witness statements would place an onerous and undue pre-discovery burden on plaintiffs in securities fraud cases.”