In Re: NVIDIA Corp. Sec. Litig.

Claims under Section 10(b) of the Securities Exchange Act of 1934 and Security Exchange Commission Rule 10b-5 must adequately allege a cogent and compelling inference of scienter to survive dismissal.

“NVIDIA Corporation is a publicly traded semiconductor company” that designs and sells two types of chips. The chips are purchased by “[o]riginal equipment manufacturers” to be used in the assembly of their computers. Beginning in September 2006, NVIDIA had problems with its chips. NVIDIA worked to find the cause and a solution. During this time, “NVIDIA filed several forms with the SEC, as required by law,” but did not disclose the defects. In May 2008, NVIDIA disclosed in its quarterly report a claim by a customer regarding product defects, and that NVIDIA was working at “evaluating the potential scope,” cause, and merits of the claim. One month later, NVIDIA filed an SEC form “indicating it would be taking ‘a $150 to $200 million charge’” to cover costs associated with the product defects. As a result of this disclosure, NVIDIA’s share price and market capitalization decreased. Several stockholders who had invested between November 2007 and July 2008 sued NVIDIA for failing to disclose the defects to investors and providing misleading information in the meantime, thus violating Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. The district court dismissed the stockholders’ complaint, “holding that it failed to adequately allege scienter.” On appeal, the Ninth Circuit reviewed whether scienter was adequately alleged by determining if the inference of scienter was cogent and compelling. The panel determined that the stockholders had not established that NVIDIA had acted with “intent to deceive, manipulate, or defraud” or “deliberate recklessness.” Specifically, the panel noted that NVIDIA had “routinely include[d] in its SEC forms” a warning statement for investors regarding potential defects and the associated costs. The panel therefore affirmed the district court’s dismissal for failing to adequately allege scienter. AFFIRMED.