Friday, October 3, 2014
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Panel Upholds Dismissal of Investors’ Suit Against Chipmaker
Ninth Circuit Says Plaintiffs Failed to Plead Specific Claims of Willful Deception
By KENNETH OFGANG, Staff Writer
Investors who sued chipmaker NVIDIA Corporation failed to plead their claims of willful misrepresentation or recklessness with the specificity required by federal law, the Ninth U.S. Circuit Court of Appeals ruled yesterday.
The panel affirmed a district judge’s ruling that the plaintiffs failed to meet the heightened pleading standard required by the Private Securities Litigation Reform Act to state claims under the Securities Exchange Act of 1934 and Securities Exchange Commission rule 10b-5.
The suit was filed in 2008 by shareholders who claimed they had been investing in the company over the preceding eight months. They alleged that they were not warned about defects in the company’s products that led to a 31 percent drop in the company’s share price and about a $3 billion contraction in market capitalization.
NVIDIA has been making chips for computer makers, including Hewlett-Packard and Dell, since 1993.
In 2006, the plaintiffs explained in the complaint, the company switched from the “eutectic” solder it was using—a solder with a specified ratio of lead to tin—in its material set to a more high-lead solder. The change was made in response to a discovery that some chips experienced cracks in the solder bumps when subjected to excessive pressure during product testing.
Cracking Chips
It was subsequently discovered, the complaint alleged, that some of the chips in HP and Dell computers were cracking. While the company for a time blamed these on misuse by consumers or problems with the manufacturers’ designs, it eventually notified the manufacturers it would be transitioning back to eutectic solder.
In 2010, it settled a class action with purchasers of affected laptops.
In the securities class action, the plaintiffs claimed that the company should have included information about the problem in various SEC filings between November 2007 and May 2008, and that they would not have invested had the required disclosures been made.
U.S. District Judge Richard Seeborg of the Northern District of California dismissed the action, and the Ninth Circuit upheld that ruling yesterday. District Judge Beverly R. O’Connell of the Central District of California, sitting by designation, wrote the opinion.
Item 303
O’Connell rejected the argument that a finding of scienter may be based on the apparent failure to disclose information required by Item 303 of SEC Regulation S–K.
The judge explained that Item 303 does not create a duty to disclose for purposes of §10(b) or rule 10b-5, “because for purposes of Section 10(b) and Rule 10b-5, material information need not be disclosed unless omission of that information would cause other information that is disclosed to be misleading.”
O’Connell went on to agree with the district judge that the plaintiffs’ allegations, taken as a whole, do not amount to a case of willful or reckless misrepresentation.
She explained:
“The most compelling inference that we can reasonably draw is that NVIDIA was first investigating the root cause, and then the scope, of the Material Set Problem; once it determined that its liability would exceed its normal reserves, NVIDIA disclosed the problem to investors. Any inference of scienter requires more than this. Thus, while the complaint may plausibly allege knowledge of the Material Set Problem, it does not plausibly allege that NVIDIA…intentionally misled investors.”
O’Connell specifically rejected, as “unspecific and speculative,” allegations based on the statements of confidential witnesses, who claimed that the company had a history of delaying disclosure of manufacturing defects. The judge noted that these witnesses either were not working at NVIDIA during the period relevant to this lawsuit, or were working in unrelated parts of the company.
The case is In re Nvidia Corporation Securities Litigation, 11-17708.
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