Following a series of Supreme Court rulings in June that reduced the authority of federal regulatory bodies, including the Securities and Exchange Commission, which is responsible for overseeing securities fraud, the justices may now be inclined to restrict the capacity of private plaintiffs to enforce federal regulations intended to penalize corporate misconduct.
Andrew Feller, a former SEC attorney now practicing privately, noted that the Supreme Court's recent trend of issuing rulings favorable to business interests, which have restricted the powers of federal regulators, indicates that Facebook and Nvidia might encounter "a receptive audience" among the justices.
The Supreme Court currently holds a 6-3 conservative majority.
"I believe that business interests will persist in their recent strategy of vigorously contesting regulations aimed at ensuring their accountability, including challenging the remaining private rights of action," Feller stated.
A private right of action allows individuals or groups to initiate lawsuits for perceived harm.
Facebook and Nvidia have appealed to the Supreme Court after the 9th U.S. Circuit Court of Appeals in San Francisco permitted separate class action securities fraud lawsuits against them to move forward.
On Wednesday, the Supreme Court is scheduled to hear arguments regarding Facebook's attempt to dismiss a lawsuit alleging that the company misled investors in violation of the Securities Exchange Act, a federal law established in 1934 that mandates publicly traded companies to disclose their business risks.
The plaintiffs, a coalition of Facebook investors led by Amalgamated Bank, accused the company in a 2018 class action of concealing information from investors about a 2015 data breach involving the British political consulting firm Cambridge Analytica, which impacted over 30 million Facebook users.
The lawsuit emerged after a decline in Facebook's stock price, triggered by 2018 media reports indicating that Cambridge Analytica had misappropriated Facebook user data during Donald Trump's successful 2016 presidential campaign. The lawsuit seeks unspecified monetary damages, partly to recover the diminished value of Facebook shares owned by investors.
The central question is whether Facebook violated the law by failing to disclose the earlier data breach in its subsequent business-risk statements, instead framing the risk of such breaches as merely hypothetical.
In its filing to the Supreme Court, Facebook contended that it was not obligated to disclose that the risk it had warned about had already occurred, asserting that "a reasonable investor would interpret (risk disclosures) as forward-looking and probabilistic."
In 2019, the SEC initiated an enforcement action against Facebook regarding this issue, which the company resolved by paying $100 million. Additionally, Facebook incurred a separate $5 billion penalty from the U.S. Federal Trade Commission related to the Cambridge Analytica scandal.
Michael Perino, a professor at St. John's University School of Law in New York, characterized private rights of action as "a necessary supplement" to public enforcement initiatives.
"The SEC is arguably under-resourced given the broad scope of its responsibilities," Perino noted. "Securities class action lawsuits effectively empower private attorneys to pursue actions on behalf of affected investors."
NVIDIA CRYPTO-RELATED PURCHASES
On November 13, the Supreme Court is scheduled to hear arguments regarding Nvidia's attempt to dismiss a securities class action that accuses the company, based in Santa Clara, California, of misleading investors about the proportion of its sales linked to the volatile cryptocurrency market.
The lawsuit initiated in 2018 by the Stockholm-based investment management firm E. Ohman J:or Fonder AB accused Nvidia of breaching the Securities Exchange Act. The firm claimed that Nvidia made misleading statements in 2017 and 2018 that minimized the extent to which revenue growth was driven by crypto-related sales.
According to the plaintiffs, these omissions misled investors and analysts seeking to comprehend the influence of cryptomining on Nvidia's operations.
In its submission to the Supreme Court, Nvidia contended that the plaintiffs did not meet the legal requirements established by the Private Securities Litigation Reform Act of 1995, which outlines the criteria for filing private securities fraud lawsuits.
In 2022, Nvidia reached a settlement with U.S. authorities, agreeing to pay $5.5 million to resolve allegations of inadequate disclosure regarding the effects of cryptomining on its gaming sector.
David Shargel, an attorney in private practice with experience representing clients before the SEC, noted that private securities litigation may become more prominent in light of recent Supreme Court decisions that have diminished the power of federal regulators.
Shargel referenced a June 27 ruling that invalidated the SEC's in-house enforcement of investor protection laws against securities fraud, citing a violation of the Seventh Amendment right to a jury trial.
"This could further strain the resources of the commission and other agencies pursuing fraud-related claims, potentially leading to an increase in private litigation," Shargel remarked regarding the SEC.
"I find it challenging to predict the exact trajectory of private actions," Shargel continued, "but it is reasonable to foresee that they may gain increased importance."