In its next term, the United States Supreme Court will hear two cases from the Ninth Circuit that concern the standards for the dismissals of securities class actions, one involving Meta and the other Nvidia. In both cases, the Ninth Circuit went a plaintiff-friendly route, declining to dismiss shareholder class actions that likely would not have been deemed to meet the pleading standards in other circuits. 

In the Nvidia case, Stanford Law School Professor Emeritus Joseph Grundfest, a former commissioner of the Securities Exchange Commission, recently filed an amicus brief on behalf of the company urging the Court not to let the Ninth Circuit’s decision stand. Doing so would have “far reaching consequences for securities litigation” and would “open the floodgates to a new form of securities fraud pleading in which plaintiffs recruit paid experts to generate opinions based on sources of questionable reliability, and then rely on those opinions masquerading as ‘facts’ to defeat motions to dismiss,” he argues.

In the case, the shareholder-plaintiffs alleged that Nvidia had fraudulently understated the extent to which its revenues depended on sales to crypto-miners, as opposed to gamers. The Private Securities Litigation Reform Act (PSLRA) requires plaintiffs to meet certain standards when pleading the required elements of a securities class action, namely scienter (fraudulent intent) and falsity. The plaintiffs relied on an expert witness report analyzing public data, as well as interviews with Nvidia employees, but put forth no data or facts from internal company memos.  

Grundfest, a senior faculty member of Stanford’s Rock Center for Corporate Governance, says this should be a slam-dunk, unanimous decision on the part of the High Court. The issues are so straightforward, he argues, that he even has a little fun in the opening part of his brief, citing the Babylonian Talmud in support of his assertion that the case can be decided merely on one of his points. “The rest is commentary,” he says.  

Here, Grundfest discusses the case and what he expects will happen.

If the Ninth Circuit’s decision were to stand, allowing a plaintiff’s expert opinion to substitute for particularized factual allegations of falsity, what would be the impact on securities litigation going forward?

We would likely see a sharp increase in the number of class action securities lawsuits filed. It will often be easy to find experts who will, for a fee, conduct post-hoc analyses supporting a plaintiff’s’ theory of fraud. The Stanford Class Action Clearinghouse tracks all federal class action securities fraud lawsuits. It documents 215 federal securities fraud class actions filed in 2023. That’s a bit more than four lawsuits a week. That number will only increase. 

Why, from your vantage point, did the Court decide to hear this case? Is it unusual for the Supreme Court to agree to take a securities case of this type?

It’s impossible to know why the court granted cert in this case, but my speculation is that the Court did not grant cert to congratulate the Ninth Circuit for a job well done. I suspect the Court is concerned that the opinion below is in error and that, unless corrected, the error is consequential because it will cause the volume of securities fraud litigation to increase in a manner directly opposed by the text of the PSLRA. 

The Second Circuit and the Fifth Circuit have held that a plaintiff’s expert opinion could not substitute for particularized factual allegations of falsity. Why do you think the Ninth Circuit went the other way? 

Great question. I wonder about that myself. Judge Sanchez dissented and probably also wonders how he could possibly have found himself in the minority. I am with Judge Sanchez here.  

In arguing for the Supreme Court to take the case, Nvidia said the Ninth Circuit’s decision amounts to a circuit split on an important aspect of securities class action litigation. You have developed a methodology to measure the quantitative importance of circuit splits on particular issues. Can you talk a little about your methodology and the impact it has here? 

The idea is simple. When it comes to a circuit split, not all circuits are equal. Some circuits hear a particular type of case frequently while others address the same question infrequently. The methodology proposes two statistics to quantify the significance of a split. The first simply aggregates the “market shares” of the circuits that have split. In the case of class action securities fraud litigation, the Second Circuit hears about 37% of claims and the Ninth Circuit hears about 23%. These two circuits have the largest market shares in class action securities fraud litigation. A 2-9 split therefore implicates 60% of the market. That’s a powerful argument that the split is economically significant. It immediately implicates more than half the market for class action securities fraud litigation. 

The second statistic calculates the “split ratio” and is designed to test whether a split is caused by a small outlier circuit, or an outlier collection of circuits, or by circuits with a more balanced set of market shares on both sides of a question. Put another way, the proposition is that a 50-50 split is more important than a 95-5 split, where the 5 represents an outlier circuit’s market share. In Nvidia, the split was closer to 50-50. Thus, the aggregate share measure and the split ratio both supported the grant of cert. 

Since 1995, the federal law governing shareholder class actions–the Private Securities Litigation Reform Act–has required plaintiffs to plead both fraudulent intent (scienter) and falsity with greater particularity in order to survive defense motions to dismiss their cases. Has the PSLRA worked well and achieved its goal of limiting frivolous securities litigation? If the Ninth Circuit’s decision were to stand, would we need a rethinking of the PSLRA?

I would be surprised in the extreme if the Supreme Court upholds the Ninth Circuit. Indeed, I expect a 9-0 opinion and will be disappointed by anything less than that. On the other hand, if this opinion survives, it would presage an anti-textualist interpretation of the statute that could support the additional unraveling of many other precedents interpreting other provisions of the PSLRA. In other words, if the NInth Circuit is upheld, the plaintiffs’ bar will, intelligently, attempt to expand that precedent to attack other interpretations of the PSRLA that have long been on the books. There will then be a snowball effect to weaken the PSLRA’s pleading constraints. 

Other former SEC officials have filed amicus briefs in this case. Is it safe to say that you and your other former SEC colleagues are of the same mind about this case and what the Supreme Court should do?

Absolutely correct. We are very much of the same mind. The panel’s opinion is a prescription for chaos in class action securities fraud litigation, and experienced practitioners clearly see the risk. It’s obvious on the face of the pleading and from the text of the Ninth Circuit’s opinion. 

Joseph A. Grundfest, JD ’78, is a nationally prominent expert on capital markets, corporate governance, and securities litigation. Professor Grundfest founded the award-winning Stanford Securities Class Action Clearinghouse, which provides detailed, online information about the prosecution, defense, and settlement of federal class action securities fraud litigation. He launched Stanford Law School’s executive education programs and continues to co-direct Directors’ College, the nation’s leading venue for the continuing professional education of directors of publicly traded corporations. He is also a senior faculty member with the Arthur and Toni Rembe Rock Center for Corporate Governance. Before joining the Stanford Law School faculty in 1990, Professor Grundfest was a commissioner of the Securities and Exchange Commission, served on the staff of the President’s Council of Economic Advisors as counsel and senior economist for legal and regulatory matters, and was an associate at Wilmer, Cutler & Pickering.