On Feb. 9, one of the plaintiffs in the federal securities class action against Nvidia Corp., Roberto Cohen, filed a petition for writ of certiorari with the U.S. Supreme Court, seeking review of the U.S. Court of Appeals for the Ninth Circuit's Oct. 2, 2014, decision affirming dismissal of the action, specifically, the court's holding that Item 303 of U.S. Securities and Exchange Commission (SEC) Regulation S-K does not create a duty to disclose for purposes of an omission actionable under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. Cohen's petition (Cohen v. Nvidia, Petition No. 14-975) argues that this holding by the Ninth Circuit in In re Nvidia Securities Litigation, 768 F.3d 1046 (9th Cir. 2014), conflicts with the Second Circuit's recent holding in Stratte-McClure v. Morgan Stanley, No. 13-0627, 2015 U.S. App. LEXIS 428 (2d Cir. Jan. 12, 2015), and the Third Circuit's 15-year-old decision in Oran v. Stafford, 226 F.3d 275 (3d Cir. 2000). Although the Ninth Circuit's opinion states that its holding regarding Item 303 disclosures is consistent, not in conflict, with Oran, a split among these circuits exists nonetheless.

According to Cornerstone Research's “Securities Class Action Filings: 2014 Year in Review,” since 1997, most federal securities class actions have been filed in these three circuits; indeed, 114 of the 170 new cases brought in 2014 were filed in the Second (52 cases), Ninth (40 cases), and Third circuits (22 cases). With the majority of securities class actions pending in these circuits, the Supreme Court may grant Cohen's petition in order to resolve this conflict so that public companies will have clear guidance for complying with their disclosure obligations under Item 303.

The Ninth Circuit's Decision In 'Nvidia'

According to the Ninth Circuit's opinion, on May 22, 2008, Nvidia, a semiconductor company, disclosed in its Form 10-Q filed with the SEC that it had received customer complaints regarding certain product defects and that the company was unable to estimate the amount of costs that it might incur to resolve these complaints. On July 2, 2008, Nvidia disclosed in an SEC Form 8-K that it would be taking a $150 million to $200 million charge to cover costs arising from these product defects. After this disclosure, Nvidia's stock price dropped 31 percent, resulting in a $3 billion decrease in its market capitalization. The court's opinion describes the claims Cohen and other shareholders asserted against Nvidia for alleged violation of Section 10(b) and Rule 10b-5, including their allegations that the company knew about the product defects and customer complaints at issue as early as Nov. 8, 2007, and that Item 303 required that Nvidia disclose these matters in the quarterly reports and annual report the company filed between that date and July 2, 2008. As the court noted, Item 303 requires that publicly held companies describe in the “Management's Discussion and Analysis of Financial Condition and Results of Operations” section of their Forms 10-K and 10-Q:

“Any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations. If the registrant knows of events that will cause a material change in the relationship between costs and revenues (such as known future increases in costs of labor or materials or price increases or inventory adjustments), the change in the relationship shall be disclosed.”