768 F.3d 1046 (9th Cir. 2014), 11-17708, In re NVIDIA Corp. Securities Litigation
|Citation:||768 F.3d 1046|
|Opinion Judge:||O'CONNELL, District Judge:|
|Party Name:||IN RE: NVIDIA CORPORATION SECURITIES LITIGATION, ROBERTO COHEN; NEW JERSEY CARPENTERS PENSION AND ANNUITY FUNDS, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. NVIDIA CORP.; JEN-HSUN HUNAG; MARVIN D. BURKETT, Defendants-Appellees|
|Attorney:||David Brower (argued), Brower Piven, New York, New York, for Plaintiffs-Appellants. James Kramer (argued) and Michael Torpey, Orrick, Herrington & Sutcliffe, LLP, San Francisco, California, for Defendants-Appellees.|
|Judge Panel:||Before: Richard C. Tallman and Sandra S. Ikuta, Circuit Judges, and Beverly Reid O'Connell, District Judge.[*] Opinion by Judge O'Connell.|
|Case Date:||October 02, 2014|
|Court:||United States Courts of Appeals, Court of Appeals for the Ninth Circuit|
Plaintiffs, purchasers of NVIDIA's stock, filed suit alleging that the company violated Section 10(b) of the Securities Exchange Act of 1934 and corresponding SEC Rule 10b-5, 15 U.S.C. 78j(b), 17 C.F.R. 240.10b-5. The district court dismissed plaintiffs' amended complaint because they failed to adequately allege scienter. The court held that Item 303 of Regulation S-K did not create a duty to... (see full summary)
Argued and Submitted, San Francisco, California: January 14, 2014.
Appeal from the United States District Court for the Northern District of California. D.C. No. 3:08-cv-04260-RS. Richard Seeborg, District Judge, Presiding.
The panel affirmed the district court's dismissal of a securities fraud action against NVIDIA Corp., a publicly traded semiconductor company, and other defendants under § § 10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities Exchange Commission Rule 10b-5.
The amended complaint alleged that NVIDIA should have informed investors of product defects earlier and that absent such a disclosure, the company's intervening statements regarding its financial condition were misleading to investors.
The panel held that the plaintiffs failed adequately to allege scienter by stating with particularity facts giving rise to a strong inference that the defendants acted with the required state of mind, as required by the Private Securities Litigation Reform Act, because they intentionally misled investors, or were at least deliberately reckless. Agreeing with the Third Circuit, the panel held that the district court did not err by failing to consider plaintiffs' allegations of scienter in the context of Item 303 of Regulation S-K, C.F.R. § 229.303, because Item 303's disclosure duty is not actionable under § 10(b) and Rule 10b-5. The panel held that none of the plaintiffs' allegations of scienter created a strong inference of scienter individually and that, together, they did not give rise to a strong inference of scienter holistically. The panel concluded that neither the corporate scienter doctrine nor the core operations doctrine supported a strong inference of scienter.
This case involves allegations of securities fraud. Defendant NVIDIA Corporation is a publicly traded semiconductor company. In the spring of 2008, it disclosed to investors information about defects in two of its products. A little over one month later, it further disclosed that it would be taking a $150-$200 million charge to cover costs arising from those product defects. As a result, NVIDIA's share price dropped 31% and its market capitalization contracted by $3 billion. According to Plaintiffs, who had purchased NVIDIA's stock in the preceding eight months, the company knew it would be liable for the defective products long before its 2008 disclosures. They claim that NVIDIA should have informed investors about the defects as early as November 2007. They further contend that, absent a disclosure about the product defects, NVIDIA's intervening statements regarding its financial condition were misleading to investors, and consequently in violation of Section 10(b) of the Securities Exchange Act of 1934 and corresponding Securities Exchange Commission (" SEC" ) Rule 10b-5.
The district court below dismissed Plaintiffs' amended complaint without further leave to amend, holding that it failed to adequately allege scienter, a necessary element for a claim under either Section 10(b) or Rule 10b-5. We have jurisdiction under 28 U.S.C. § 1291.
On appeal, Plaintiffs essentially raise three distinct arguments, all directed to the element of scienter. First, they argue that the disclosure duty under Item 303 of Regulation S-K, 17 C.F.R. § 229.303, is actionable under Section 10(b) and Rule 10b-5. A proper analysis, they contend, should ascertain whether Defendants acted with scienter in violating Item 303's disclosure duty. Second, Plaintiffs assert that the district court failed to consider their allegations holistically. They contend that, when considered holistically, their allegations give rise to a strong inference of scienter. Third, Plaintiffs argue that the district court erred in finding that neither the corporate scienter doctrine nor the core operations doctrine supports a strong inference of scienter.
For the reasons discussed below, we affirm.
NVIDIA Corporation is a publicly traded semiconductor company founded in 1993 by Jen-Hsun Huang, its current CEO. Its core business involves the design and sale of two similar semiconductor chips. One is a graphics processing unit (" GPU" ); the other is a media and communications processor (" MCP" ). In essence, GPUs are designed to process the vast amount of data necessary to render images to a computer's visual display. MCPs are similar to GPUs in that they function as a GPU in addition to various other devices, such as a system memory interface, Ethernet communications controller, and audio signal processor. Original equipment manufacturers (" OEMs" ), such as Hewlett-Packard (" HP" ) and Dell Computer (" Dell" ), purchase these chips and incorporate them into the motherboards of computers they assemble and sell to consumers.
In addition to their similar functions, GPUs and MCPs also share a similar configuration, which comprises two main parts: (1) a " die," or the silicon chip itself; and (2) a " substrate," or wafer, which is a green circuit board that ultimately connects the die to the motherboard's electrical
components. To manufacture the GPUs and MCPs, the die is mounted onto the substrate. Importantly, the die electronically connects to the substrate through " bumps" of solder that relay electrical signals between the die and the rest of the computer. The bumps are attached to the substrate using a solder paste. Between the die and substrate is an " underfill," which is a glue-like material that acts as an additional bonding agent to fortify the connection between the die and substrate. Together, the solder and underfill are referred to as the " Material Set."
Given the highly complex and technical nature of NVIDIA's GPU and MCP products, there is an inherent risk that some will fail. As a result, NVIDIA routinely includes in its SEC forms a statement explaining that " [its] products may contain defects or flaws," and warning investors that " [it] may be required to reimburse customers for costs to repair or replace the affected products." To cover costs relating to inevitable defects, NVIDIA automatically records a reduction to revenue as a cash reserve. As product return and replacement costs accrue, NVIDIA withdraws cash from that reserve.
According to the complaint, in September 2006, NVIDIA began experiencing problems with certain of its GPU and MCP products, particularly with those products' Material Set. Plaintiffs allege that some of NVIDIA's chips experienced cracks in the solder bumps when subjected to excessive pressure during product testing. At that time, NVIDIA had been using a " eutectic" solder1 (which has a relatively low lead content) together with eutectic solder paste. In an attempt to remedy the cracking problem, NVIDIA switched some of the solders used in the chips from a eutectic solder to a high-lead solder, which is more malleable and therefore less susceptible to cracking from the pressure in product testing. It continued to use the eutectic solder paste, however. According to Plaintiffs, varying thermal properties of the new, high-lead solder and the eutectic solder paste contributed to new problems with NVIDIA's chips. Specifically, because the two materials undergo thermal expansion at varying rates, the high-lead solder is susceptible to fatigue and cracking over time.
At some point, these new problems began manifesting in laptop computers incorporating NVIDIA's GPU and MCP products that were made using high-lead solder. After HP (and later Dell) began investigating these problems, it observed new cracking of the solder bumps connecting the die to the substrate (the " Material Set Problem" ). At first, NVIDIA attributed the problem to " 'customer-induced damage or [OEM] design issues.'" HP hypothesized that heat cycling was the root cause of the problem.2 Specifically, HP believed that the solder bumps would weaken over time due to repeated thermal expansion caused by heat cycling.
To reduce the stress on the chips' solder bumps, and thus ameliorate the cracking problem, HP and Dell, with the help of
NVIDIA, issued software updates (" BIOS" 3 updates) to their laptop computers. These BIOS updates altered a computer's fan algorithm, causing the internal cooling fans to run continuously, thereby eliminating heat cycling. Evidently, HP believed that by maintaining a fairly constant temperature, the solder bumps would not undergo thermal expansion as often and thus not be as susceptible to fatigue and failure.
Ultimately, after significant testing, HP concluded that the root cause of GPU and MCP failures in its computers was not caused by cracking due to heat cycling, but by cracking due to operation of the chips within a narrow temperature range. Apparently, the stress on the solder bumps caused by varying thermal properties of the high-lead solder and eutectic solder paste was especially acute in this temperature...
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