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Facebook arguments are on Wednesday; Nvidia Nov. 13

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Cases involve private suits alleging securities fraud

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Supreme Court has weakened regulatory agency powers

By John Kruzel

WASHINGTON, Nov 4 (Reuters) - The U.S. Supreme Court is

set to consider bids by two tech giants - Meta's

Facebook and Nvidia ( NVDA ) - to fend off federal securities

fraud lawsuits in separate cases that could make it harder for

private litigants to hold companies to account.

After a trio of Supreme Court rulings in June that weakened

federal regulators - including the Securities and Exchange

Commission that polices securities fraud - the justices may now

be poised to rein in the power of private plaintiffs to enforce

federal rules aimed at punishing corporate misconduct.

Andrew Feller, a former SEC lawyer now in private practice,

said the Supreme Court's recent track record of handing down

business-friendly decisions that narrowed the authority of

federal regulators suggests that Facebook and Nvidia ( NVDA ) may

similarly find "a receptive audience" before the justices.

The Supreme Court has a 6-3 conservative majority.

"I think business interests will continue their recent

pattern of aggressively challenging rules intended to hold them

accountable, including by challenging the remaining private

rights of action," Feller said.

A private right of action refers to the ability of a private

person or group to sue for an alleged harm.

Social media platform Facebook and artificial intelligence

chipmaker Nvidia ( NVDA ) appealed to the Supreme Court after the San

Francisco-based 9th U.S. Circuit Court of Appeals allowed

separate class action securities fraud lawsuits to proceed

against them.

The Supreme Court on Wednesday is due to hear arguments in

Facebook's bid to dismiss a suit accusing the company of

misleading investors in violation of the Securities Exchange

Act, a 1934 federal law that requires publicly traded companies

to disclose their business risks.

The plaintiffs, a group of Facebook investors led by

Amalgamated Bank ( AMAL ), accused the company in a 2018 class

action of withholding information from investors about a 2015

data breach involving British political consulting firm

Cambridge Analytica that affected more than 30 million Facebook

users.

The suit arose after Facebook's stock fell following 2018 media

reports that Cambridge Analytica had used improperly harvested

Facebook user data in connection with Donald Trump's successful

presidential campaign in 2016. The suit seeks unspecified

monetary damages in part to recoup the lost value of the

Facebook stock held by the investors.

At issue is whether Facebook broke the law when it failed to

detail the prior data breach in subsequent business-risk

disclosures, and instead portrayed the risk of such incidents as

purely hypothetical.

Facebook in its Supreme Court filing argued, among other

things, that it was not required to state that its warned-of

risk had already materialized because "a reasonable investor

would understand (risk disclosures) to be forward-looking and

probabilistic in nature."

The SEC in 2019 brought an enforcement action against

Facebook over the matter, which the company settled for $100

million. Facebook paid a separate $5 billion penalty to the U.S.

Federal Trade Commission over the Cambridge Analytica issue.

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.

"The SEC is arguably under-resourced given the broad scope

of its responsibilities," Perino said. "Securities class action

lawsuits effectively deputize private attorneys to bring actions

on behalf of aggrieved investors."

NVIDIA CRYPTO-RELATED PURCHASES

The Supreme Court on Nov. 13 is due to hear arguments in

Nvidia's ( NVDA ) bid to scuttle a securities class action accusing the

Santa Clara, California-based company of misleading investors

about how much of its sales went to the volatile cryptocurrency

industry.

The 2018 suit, led by the Stockholm-based investment

management firm E. Ohman J:or Fonder AB, accused Nvidia ( NVDA ) 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 crypto-related purchases.

Those omissions misled investors and analysts who were

interested in understanding the impact of cryptomining on

Nvidia's ( NVDA ) business, the plaintiffs said.

In its Supreme Court filing, Nvidia ( NVDA ) said the plaintiffs had

failed to clear the legal bar set in a 1995 federal law called

Private Securities Litigation Reform Act that established the

standard for bringing private securities fraud suits.

Nvidia ( NVDA ) in 2022 agreed to pay $5.5 million to U.S.

authorities to settle charges that it did not properly disclose

the impact of cryptomining on its gaming business.

David Shargel, a lawyer in private practice who has

represented clients before the SEC, said private securities

litigation could gain prominence due to recent Supreme Court

rulings weakening federal regulators.

Among the cases Shargel cited was a June 27 decision that

rejected the SEC's in-house enforcement of laws protecting

investors against securities fraud as a violation of the U.S.

Constitution's Seventh Amendment right to a jury trial.

"This could further tax the commission's resources, as well

as those of other agencies looking to bring fraud-like claims,

opening the door for more private litigation," Shargel said of

the SEC.

"I think it's hard to predict exactly which way private

actions will trend," Shargel added, "but it's not hard to

imagine that they may take on greater significance."