Northern District of California Dismisses Putative Class Action Against Technology Company For Failure To Adequately Allege Scienter
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  • Northern District Of California Dismisses Putative Class Action Against Technology Company For Failure To Adequately Allege Scienter

    On March 2, 2021, Judge Haywood S. Gilliam, Jr. of the United States District Court for the Northern District of California dismissed with prejudice a putative class action asserting claims under the Securities Exchange Act of 1934 against a technology company and certain of its executives.  Iron Workers Loc. 580 Jt. Funds v. NVIDIA Corp., No. 18-CV-07669-HSG, slip op. (N.D. Cal. Mar. 2, 2021).  Plaintiffs alleged that the company made misrepresentations regarding its sales of graphic processing units (“GPUs”) for computer gaming and the proportion of such sales that were actually made to cryptocurrency miners—for which demand was allegedly more volatile.  As discussed in our prior post, the Court dismissed plaintiffs’ original complaint for failure to adequately allege misrepresentations or scienter, but granted leave to replead.  After plaintiffs amended their complaint, defendants moved again to dismiss and also moved to strike certain allegations attributed to a confidential witness.  The Court denied the motion to strike but concluded that the amended complaint failed to cure the prior deficiencies with respect to scienter, and therefore dismissed the complaint with prejudice.

    As a threshold matter, the Court addressed defendants’ motion to strike certain allegations attributed to a newly identified confidential witness, who defendants argued had signed a declaration “disavowing key statements attributed to him.”  Id. at 11.  Defendants argued that these allegations were therefore “unreliable and immaterial,” but the Court disagreed, holding that it was improper to resolve the factual dispute at the motion-to-dismiss stage, particularly as plaintiffs cited the disputed statements in support of their scienter argument, which was the subject of the motion to dismiss.  Id. at 11-12.

    With respect to scienter, the Court noted that under the PSLRA, confidential witnesses “must be described with sufficient particularity to establish their reliability and personal knowledge” and their statements “must themselves be indicative of scienter.”  Id. at 14.  The Court further observed that the scienter allegations in the amended complaint were “largely based on accounts of the same former employees detailed in the [prior complaint],” which the Court had already found did not adequately support a strong inference of scienter.  Id. at 14-15.  Specifically, the amended complaint identified one new confidential witness and added new statements by two previously identified confidential witnesses, which plaintiffs used to argue that defendants had “access to copious sales and technical usage data showing [a] dramatic surge in cryptocurrency-related sales.”  Id. at 15.

    The Court held that none of these allegations raised the required strong inference of scienter.  For example, plaintiffs alleged, based on confidential witness statements, that one executive had access to a database which “expressly identified crypto-miners as purchasers of large blocks of [the company’s] GPU products,” that the executive received information through regular meetings, and that regional managers’ reports “showed that over 60% of [the company’s] GPU sales … were to miners.”  Id. at 15-17.  While the amended complaint attempted to add certain details, such as allegations that confidential witnesses participated in meetings with the executive, the Court concluded that the amended complaint still failed to specifically allege that the executive actually received information that was contrary to the alleged misstatements.  Id. at 17.

    As in its prior decision, the Court also considered and rejected plaintiffs’ argument under the “core operations” theory, in which “in rare circumstances” certain corporate officers may be deemed to have knowledge of the critical core operations of the company.  Id. at 20.  The Court again held that merely alleging that gaming was the company’s “core business” was insufficient to establish scienter.  Moreover, the Court emphasized that the data in question regarding the use of the company’s products by cryptocurrency miners involved end users—who were not the company’s direct customers—and the amended complaint failed to include “particularized allegations indicating [defendants’] detailed involvement with this level of secondary data.”  Id. at 20-21.

    Because the Court determined that the amended complaint failed to adequately allege scienter, the Court declined to consider plaintiffs’ allegations regarding falsity.  Moreover, the Court noted that leave to amend had previously been granted, and therefore denied further leave to amend as futile.
    Category: Scienter

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