Guttman v. Huang
Decision Date | 05 May 2003 |
Docket Number | C.A. No. 19571-NC. |
Citation | 823 A.2d 492 |
Parties | Josh GUTTMAN, Plaintiff, v. Jen-Hsun HUANG, Tench Coxe, James C. Gaither, Harvey C. Jones, William J. Miller, A. Brooke Seawell, Mark A. Stevens, Chris A. Malachowsky, Christine B. Hoberg, and Jeffrey Fisher, Defendants, and NVIDIA Corporation, a Delaware Corporation, Nominal Defendant. |
Court | Court of Chancery of Delaware |
Joseph A. Rosenthal, Herbert W. Mondros, Rosenthal Monhait Gross & Goddess, P.A., Wilmington, Delaware; Peter Bull, Bull & Lifshitz, LLP, New York, New York, for Plaintiff.
Gregory V. Varallo, Kelly A. Green, Richards, Layton & Finger, P.A., Wilmington, Delaware; Michael D. Torpey, James N. Kramer, Penelope A. Graboys, Jonathan Gaskin, Christopher A. Garcia, Clifford Chance U.S. LLP, San Francisco, California; David M. Shannon, Stephen Pettigrew, Nvidia Corporation, Santa Carla, California, for Defendants.
STRINE, Vice Chancellor.
In this case, the plaintiffs bring a derivative action on behalf of NVIDIA Corporation, a technology firm. They allege that the defendants — all NVIDIA directors and/or officers — either sold stock at a time when they knew material, non-public information about the company and/or are culpable for failing to prevent accounting irregularities that caused the company to restate its financial statements for the period during which the stock sales took place. The plaintiffs seek relief for NVIDIA for harm relating to this supposed malfeasance and nonfeasance.
The defendants have moved for dismissal for failure to make a demand under Court of Chancery Rule 23.1. In support of that contention, they point to the conclusory allegations of the amended complaint1 as being insufficient to cast a doubt on the impartiality of NVIDIA's majority independent board.
In this opinion, I conclude that the defendants' motion must be granted. Having failed to heed the numerous admonitions by our judiciary for derivative plaintiffs to obtain books and records before filing a complaint, the plaintiffs have unsurprisingly submitted an amended complaint that lacks particularized facts compromising the impartiality of the NVIDIA board that would have acted on a demand. When the case most cries out for the pleading of real facts — e.g., about the board's knowledge of the accounting problems at the company or the company's audit committee process — the complaint is at its most cursory, substituting conclusory allegations for concrete assertions of fact.
The following recitation of facts is drawn entirely from the amended complaint filed by the plaintiffs. That complaint is quite lengthy and contains substantial excerpts from NVIDIA financial statements and press releases. The bulk of the complaint, however, is misleading because in many materially consequential ways the complaint is wholly conclusory, if not entirely silent.
NVIDIA makes and markets three-dimensional ("3D") graphics processors and related software. Its customers are other technology companies that incorporate NVIDIA products and software into their own computer products — e.g., "mother-boards" — which are, in turn, sold to other downstream industry members — e.g., personal computer manufacturers.
NVIDIA went public in January 1999 and its stock is listed on the NASDAQ. As of the time it went public, the company had not achieved profitability. In 2000, NVIDIA raised $400 million in additional capital by way of a secondary offering of debt and common stock.
The plaintiffs allege that the defendants engaged in a variety of misconduct related to NVIDIA's failure to accurately account for and disclose its financial results for the period from February 15, 2000 to July 30, 2002 — what I shall call the "Contested Period." During the Contested Period, NVIDIA allegedly released bullish disclosures regarding its results and future prospects.
These optimistic statements were, the plaintiffs contend, materially misleading because they were premised on improper accounting. According to them, NVIDIA "used `cookie jar' reserves (bad debt, sales returns, and account[s] payable) to even out earnings in bad times, used `back-in' accounting to ensure that forecasted margins were achieved and managed profit margins by manipulating shipments at the end of quarters."2 The plaintiffs contend that this conduct was intended to inflate NVIDIA's stock price.
Also during the Contested Period, the defendants as a class sold $194.6 million in company stock at diverse times. Four of the defendants were responsible for over $157 million of this sum:
Although the bulk of the disputed sales resulted from these sales by NVIDIA managers — only one of whom, defendant Huang, was on the NVIDIA board — the plaintiffs have also pointed to large sales during the Contested Period by the following defendants, all of whom are members of the NVIDIA board:
According to the plaintiffs, at some point in 2001, the SEC commenced an investigation into NVIDIA's accounting practices during the Contested Period. In February 2002, the company announced that it was conducting an internal review of its financial statements for the Contested Period in response to the SEC inquiry. After this disclosure, NVIDIA's stock price dropped significantly.
On April 29, 2002, the internal review resulted in a restatement of the company's financial results for the first three quarters of fiscal year ("FY") 2002, and for FY 2001 and 2000. NVIDIA's CFO, defendant Hoberg, resigned that same day.
Unhelpfully, the complaint fails to detail specifically the net result of these restatements. Of course, the very fact that the financials were restated suggests that the original filings for those periods were materially deficient. Still, as we shall see later, the plaintiffs' omission was no doubt tactical, leaving the court without a way to assess the magnitude of the corrections.
Allegedly, during the same time frame the company was reacting to the SEC's inquiry, NVIDIA continued to provide bullish reports regarding its prospects for calendar year 2002 (i.e., NVIDIA's FY 2003), despite adverse news reports and the filing of a lawsuit against the company by a former accounting manager, claiming, among other things, that NVIDIA's accounting practices were improper in the following respects:
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