Plaintiff-investors commenced a class action suit alleging a violation of the Securities and Exchange Act of 1934 on behalf of all persons who purchased shares of defendant NVIDIA’s stock during a 9-month period. The plaintiff alleged that NVIDIA and its employees had misrepresented or omitted material facts related to manufacturing defects in its computer processors, and that they were damaged when the NVIDIA stock price dropped once the extent of the defects became known. The U.S District Court for the Northern District of California dismissed the plaintiffs’ action because the complaint failed sufficiently to plead scienter as required for securities fraud.

The court found that plaintiffs in securities fraud claims brought in the Ninth Circuit and governed by the Private Securities Litigation Reform Act (PLSRA) must allege that defendants “made false or misleading statements either intentionally or with deliberate recklessness” in order to satisfy the element of scienter. The court found that the plaintiff must plead “a highly unreasonable omission…[which is] an extreme departure from ordinary care.”

The court held that none of the plaintiffs’ allegations met this high burden. None of the statements from confidential witnesses on which the plaintiffs relied in their complaint demonstrated that the defendant acted with the requisite intent. Statements from outside sources which suggested that NVIDIA should have acted differently in hindsight also did not establish the necessary scienter. A change in manufacturing procedure that suggested that NVIDIA knew that its materials may have contributed to the defects was also not sufficient to create the necessary inference that NVIDIA knew the scope of its liability for potential defects and chose to hide that fact. Given the plaintiffs’ inability to meet the high pleading standard requirement for PLSRA securities violations, the court dismissed the complaint.

In re NVIDIA Corporation Securities Litigation, No. C 08–04260 RS, 2011 WL 4831192 (N.D.Cal. Oct. 12, 2011).