Crypto-Mining Stockholder Suit Survives Dismissal

The California Northern District Court has granted in part and denied in part defendant NVIDIA ‘s motion to dismiss. The Iron Workers Local 580 Joint Funds and others filed a complaint against NVIDIA, alleging that they mislead investors by failing to disclose how critical the advent of cryptocurrency mining was to a recent increase in revenue.  The court found that the plaintiffs did not adequately plead falsity, but gave the plaintiffs leave to amend their complaint.

The plaintiffs allege that Nvidia violated the Securities Exchange Act of 1934, specifically Sections 10(b) and 20(a), as well as Rule 10b-5. The purported class is defined as anyone who bought NVIDIA Corporation common stock between May 10, 2017 and November 14, 2018.

NVIDIA makes graphic processing units (GPUs), which are used to generate computer graphics. GPUs are frequently used in cryptocurrency “mining, the process by which a user can generate a unit of cryptocurrency. This resulted in a period of increased demand for GPUs; during this period, NVIDIA reported high revenue for its Gaming segment. However, plaintiffs state that “investors and analysts alike questioned whether those revenues truly derived from sales to gamers or were rather from sales to cryptocurrency miners, whose demand for NVIDIA GPUs was sure to disappear when the economics of mining turned negative.”

The plaintiffs claimed that the defendant’s responses to these concerns were false and misleading and that NVIDIA “concealed from investors the enormous risk that the Company’s outsized exposure to crypto-mining posed to its financial results.” When the truth was revealed, stock prices fell and the Class and investors suffered financially. “NVIDIA stock price ‘plummeted 28.5% over two trading sessions, from a close of $202.39 per share on November 15, 2018, to close at $144.70 per share on November 19, 2019.”

In the company’s SEC Form 10-Q filing, NVIDIA stated that its revenue increase came from the gaming segment, which the plaintiffs alleged was inaccurate.  Similarly, NVIDIA also stated that crypto revenue was counted in its OEM segment, which the plaintiffs dispute.

In partially granting NVIDIA’s motion to dismiss, the court agreed that the plaintiffs did not adequately plead falsity and intent, but did hold that they sufficiently pled loss causation. Defendant NVIDIA argued that “Plaintiffs’ falsity allegations, which rely entirely on an expert opinion by Prysm Group, fail to satisfy the PSLRA pleading standards.” However, the plaintiffs allege that Prysm’s tactics and information fulfill this requirement. The court agreed with the defendant that more information is required about Prysm and its methods and assumptions, finding that, “[b]ecause Plaintiffs fail to describe Prysm’s assumptions and analysis with sufficient particularity to establish a probability that its conclusions are reliable, the Court finds that Plaintiffs fail to allege falsity with the specificity the PSLRA requires.”

The court also held that the plaintiffs “fail to plausibly establish that any particular statement by any Individual Defendant was knowingly or recklessly false or misleading when made.” Plaintiffs “must produce either specific admissions by one or more corporate executives of detailed involvement in the minutia of a company’s operations, such as data monitoring…or witness accounts demonstrating that executives had actual involvement in creating false reports.” The district court stated that this requirement has not been met.

The plaintiffs are represented by Bernstein Litowitz Berger & Grossman, as well as Kessler Topaz Meltzer & Check. NVIDIA is represented by Cooley, as well as Skadden, Arps, Slate, Meagher & Flom. An amended complaint is due by April 13.