FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

IN RE: NVIDIA CORPORATION

SECURITIES LITIGATION,

ROBERTO COHEN; NEW JERSEY

CARPENTERS PENSION AND ANNUITY

FUNDS, on behalf of themselves and

all others similarly situated,

Plaintiffs-Appellants,

v.

NVIDIA CORP.; JEN-HSUN HUNAG;

MARVIN D. BURKETT,

Defendants-Appellees.

No. 11-17708

D.C. No.

3:08-cv-04260-

RS

OPINION

Appeal from the United States District Court

for the Northern District of California

Richard Seeborg, District Judge, Presiding

Argued and Submitted

January 14, 2014—San Francisco, California

Filed October 2, 2014
2 IN RE: NVIDIA CORP. SEC. LITIG.

Before: Richard C. Tallman and Sandra S. Ikuta, Circuit

Judges, and Beverly Reid O’Connell, District Judge.*

Opinion by Judge O’Connell

SUMMARY**

Securities Fraud

The panel affirmed the district court’s dismissal of a

securities fraud action against NVIDIA Corp., a publicly

traded semiconductor company, and other defendants under

§§ 10(b) and 20(a) of the Securities Exchange Act of 1934

and Securities Exchange Commission Rule 10b-5.

The amended complaint alleged that NVIDIA should

have informed investors of product defects earlier and that

absent such a disclosure, the company’s intervening

statements regarding its financial condition were misleading

to investors. 

The panel held that the plaintiffs failed adequately to

allege scienter by stating with particularity facts giving rise

to a strong inference that the defendants acted with the

required state of mind, as required by the Private Securities

Litigation Reform Act, because they intentionally misled

* The Honorable Beverly Reid O’Connell, United States District Judge

for the Central District of California, sitting by designation.

** This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.
IN RE: NVIDIA CORP. SEC. LITIG. 3

investors, or were at least deliberately reckless. Agreeing

with the Third Circuit, the panel held that the district court

did not err by failing to consider plaintiffs’ allegations of

scienter in the context of Item 303 of Regulation S-K, C.F.R.

§ 229.303, because Item 303’s disclosure duty is not

actionable under § 10(b) and Rule 10b-5. The panel held that

none of the plaintiffs’ allegations of scienter created a strong

inference of scienter individually and that, together, they did

not give rise to a strong inference of scienter holistically. The

panel concluded that neither the corporate scienter doctrine

nor the core operations doctrine supported a strong inference

of scienter.

COUNSEL

David Brower (argued), Brower Piven, New York, New

York, for Plaintiffs-Appellants.

James Kramer (argued) and Michael Torpey, Orrick,

Herrington & Sutcliffe, LLP, San Francisco, California, for

Defendants-Appellees.

OPINION

O’CONNELL, District Judge:

This case involves allegations of securities fraud. 

Defendant NVIDIA Corporation is a publicly traded

semiconductor company. In the spring of 2008, it disclosed

to investors information about defects in two of its products. 

A little over one month later, it further disclosed that it would

be taking a $150–$200 million charge to cover costs arising
4 IN RE: NVIDIA CORP. SEC. LITIG.

from those product defects. As a result, NVIDIA’s share

price dropped 31% and its market capitalization contracted by

$3 billion. According to Plaintiffs, who had purchased

NVIDIA’s stock in the preceding eight months, the company

knew it would be liable for the defective products long before

its 2008 disclosures. They claim that NVIDIA should have

informed investors about the defects as early as November

2007. They further contend that, absent a disclosure about

the product defects, NVIDIA’s intervening statements

regarding its financial condition were misleading to investors,

and consequently in violation of Section 10(b) of the

Securities Exchange Act of 1934 and corresponding

Securities Exchange Commission (“SEC”) Rule 10b-5.

The district court below dismissed Plaintiffs’ amended

complaint without further leave to amend, holding that it

failed to adequately allege scienter, a necessary element for

a claim under either Section 10(b) or Rule 10b-5. We have

jurisdiction under 28 U.S.C. § 1291.

On appeal, Plaintiffs essentially raise three distinct

arguments, all directed to the element of scienter. First, they

argue that the disclosure duty under Item 303 of Regulation

S–K, 17 C.F.R. § 229.303, is actionable under Section 10(b)

and Rule 10b-5. A proper analysis, they contend, should

ascertain whether Defendants acted with scienter in violating

Item 303’s disclosure duty. Second, Plaintiffs assert that the

district court failed to consider their allegations holistically. 

They contend that, when considered holistically, their

allegations give rise to a strong inference of scienter. Third,

Plaintiffs argue that the district court erred in finding that

neither the corporate scienter doctrine nor the core operations

doctrine supports a strong inference of scienter.
IN RE: NVIDIA CORP. SEC. LITIG. 5

For the reasons discussed below, we affirm.

I

A.

NVIDIA Corporation is a publicly traded semiconductor

company founded in 1993 by Jen-Hsun Huang, its current

CEO. Its core business involves the design and sale of two

similar semiconductor chips. One is a graphics processing

unit (“GPU”); the other is a media and communications

processor (“MCP”). In essence, GPUs are designed to

process the vast amount of data necessary to render images to

a computer’s visual display. MCPs are similar to GPUs in

that they function as a GPU in addition to various other

devices, such as a system memory interface, Ethernet

communications controller, and audio signal processor. 

Original equipment manufacturers (“OEMs”), such as

Hewlett-Packard (“HP”) and Dell Computer (“Dell”),

purchase these chips and incorporate them into the

motherboards of computers they assemble and sell to

consumers.

In addition to their similar functions, GPUs and MCPs

also share a similar configuration, which comprises two main

parts: (1) a “die,” or the silicon chip itself; and (2) a

“substrate,” or wafer, which is a green circuit board that

ultimately connects the die to the motherboard’s electrical

components. To manufacture the GPUs and MCPs, the die is

mounted onto the substrate. Importantly, the die

electronically connects to the substrate through “bumps” of

solder that relay electrical signals between the die and the rest

of the computer. The bumps are attached to the substrate

using a solder paste. Between the die and substrate is an
6 IN RE: NVIDIA CORP. SEC. LITIG.

“underfill,” which is a glue-like material that acts as an

additional bonding agent to fortify the connection between

the die and substrate. Together, the solder and underfill are

referred to as the “Material Set.”

Given the highly complex and technical nature of

NVIDIA’s GPU and MCP products, there is an inherent risk

that some will fail. As a result, NVIDIA routinely includes

in its SEC forms a statement explaining that “[its] products

may contain defects or flaws,” and warning investors that

“[it] may be required to reimburse customers for costs to

repair or replace the affected products.” To cover costs

relating to inevitable defects, NVIDIA automatically records

a reduction to revenue as a cash reserve. As product return

and replacement costs accrue, NVIDIA withdraws cash from

that reserve.

B.

According to the complaint, in September 2006, NVIDIA

began experiencing problems with certain of its GPU and

MCP products, particularlywith those products’ Material Set. 

Plaintiffs allege that some of NVIDIA’s chips experienced

cracks in the solder bumps when subjected to excessive

pressure during product testing. At that time, NVIDIA had

been using a “eutectic” solder1(which has a relatively low

lead content) together with eutectic solder paste. In an

attempt to remedy the cracking problem, NVIDIA switched

some of the solders used in the chips from a eutectic solder to

1 Solder is a compound mixture of lead and tin. A particular mixture has

a “eutectic” composition if it has a specific ratio of lead to tin. See Donald

Askeland & Wendelin Wright, Essentials of Materials Science &

Engineering 359–63 (2013).
IN RE: NVIDIA CORP. SEC. LITIG. 7

a high-lead solder, which is more malleable and therefore less

susceptible to cracking from the pressure in product testing. 

It continued to use the eutectic solder paste, however. 

According to Plaintiffs, varying thermal properties of the

new, high-lead solder and the eutectic solder paste

contributed to new problems with NVIDIA’s chips. 

Specifically, because the two materials undergo thermal

expansion at varying rates, the high-lead solder is susceptible

to fatigue and cracking over time.

At some point, these new problems began manifesting in

laptop computers incorporating NVIDIA’s GPU and MCP

products that were made using high-lead solder. After HP

(and later Dell) began investigating these problems, it

observed new cracking of the solder bumps connecting the

die to the substrate (the “Material Set Problem”). At first,

NVIDIA attributed the problem to “‘customer-induced

damage or [OEM] design issues.’” HP hypothesized that heat

cycling was the root cause of the problem.2 Specifically, HP

believed that the solder bumps would weaken over time due

to repeated thermal expansion caused by heat cycling.

To reduce the stress on the chips’ solder bumps, and thus

ameliorate the cracking problem, HP and Dell, with the help

of NVIDIA, issued software updates (“BIOS”3updates) to

their laptop computers. These BIOS updates altered a

2 Heat cycling is a fluctuation of a computer’s internal temperature. As

the computer’s internal components generate heat from usage, the internal

temperature rises. When the computer’s sensors detect a certain,

preprogrammed temperature, the computer’s program activates internal

fans to lower the temperature.

 

3

 BIOS stands for Basic Input/Output System.
8 IN RE: NVIDIA CORP. SEC. LITIG.

computer’s fan algorithm, causing the internal cooling fans to

run continuously, thereby eliminating heat cycling. 

Evidently, HP believed that by maintaining a fairly constant

temperature, the solder bumps would not undergo thermal

expansion as often and thus not be as susceptible to fatigue

and failure.

Ultimately, after significant testing, HP concluded that the

root cause of GPU and MCP failures in its computers was not

caused by cracking due to heat cycling, but by cracking due

to operation of the chips within a narrow temperature range. 

Apparently, the stress on the solder bumps caused by varying

thermal properties of the high-lead solder and eutectic solder

paste was especially acute in this temperature range. HP

shared with NVIDIA its data demonstrating this problematic

thermal profile, and, at some point, NVIDIA reproduced the

data in its own laboratories.

In May and June 2008, NVIDIA issued to its OEM

customers Product Change Notifications (“PCNs”), indicating

that it would be transitioning back to eutectic solder.

C.

Between November 8, 2007, and May 22, 2008, NVIDIA

filed several forms with the SEC, as required by law. 

According to Plaintiffs, those forms contained materially

false and misleading statements, principally because they

omitted information regarding the Material Set Problem.

For example, in the November 8, 2007 Form 8-K,

Plaintiffs point to NVIDIA’s claim that “[its] core businesses

are continuing to grow as the GPU becomes increasingly

central to today’s computing experience.” In NVIDIA’s
IN RE: NVIDIA CORP. SEC. LITIG. 9

February 13, 2008 Form 8-K, it highlights the assertion that

“Fiscal 2008 was another outstanding and record year for us. 

Strong demand for GPUs in all market segments drove our

growth.” Plaintiffs argue that these statements and others

made in NVIDIA’s March 21, 2008, Form 10-K and May 8,

2008, Form 8-K are materially false and misleading because

NVIDIA failed to disclose reported defects in its products as

well.

D.

On May 22, 2008, NVIDIA disclosed in its quarterly

report that it had received claims for reimbursement from one

of its OEMs for incremental costs due to an “‘alleged

die/packaging material set defect.’” The report also indicated

that the product was included in a significant number of the

customer’s computer products and had been shipped to other

customers in significant quantities. NVIDIA explained that

it was “evaluating the potential scope” of the problem “and

cause of the alleged defect and the merits of the customer’s

claim.” It further indicated that it was “unable to estimate the

amount of costs that may be incurred” at that time.

Just over one month later, on July 2, 2008, NVIDIA filed

an SEC Form 8-K indicating it would be taking “a $150 to

$200 million charge to cover warranty, repair, return,

replacement, and other costs ‘arising from a weak

die/packaging material set in certain versions of [its] previous

MCP and GPU products used in notebook systems.’”4 After

4 Nevertheless, the form also stated that NVIDIA had “not been able to

determine a root cause for these failures, [but] testing suggests a weak

material set of die/package combination, system thermal management

designs, and customer use patterns are contributing factors.”
10 IN RE: NVIDIA CORP. SEC. LITIG.

NVIDIA’s July 2, 2008 disclosure, the market reacted

accordingly, causing a 31% decline in NVIDIA’s share price

and a decrease of over $3 billion in its market capitalization.

E.

Plaintiffs invested in NVIDIA’s stock between November

8, 2007 and July 2, 2008 (the “class period”). They allege

that, beginning November 8, 2007, NVIDIA knew of the

defect in the GPU and MCP Material Set, this knowledge was

material to investors, and failure to disclose it made other

statements in NVIDIA’s SEC filings misleading.

Believing that Defendants violated federal securities laws,

Plaintiffs filed three separate lawsuits, which the district court

consolidated into a single action. In the consolidated

complaint, Plaintiffs allege three distinct but related counts. 

In the first and second counts, they allege that NVIDIA and

Huang, respectively, are liable for violations of both Section

10(b) of the Securities Exchange Act of 1934 and

corresponding SEC Rule 10b-5. In the third count, they aver

that Huang is further liable for violations of Section 20(a) of

the Securities Exchange Act of 1934.

Upon Defendants’ motion, the district court dismissed

Plaintiffs’ first consolidated class action complaint with leave

to amend. Plaintiffs then filed a second consolidated class

action complaint. Upon a second motion by Defendants, the

district court dismissed that complaint without leave to

amend. In its order of dismissal, the district court specifically

held that Plaintiffs failed to sufficiently plead scienter, an

element required for each count.
IN RE: NVIDIA CORP. SEC. LITIG. 11

II

We review dismissals under Federal Rule of Civil

Procedure 12(b)(6) de novo. In re Daou Sys., Inc., 411 F.3d

1006, 1013 (9th Cir. 2005). In doing so, we accept as true all

factual allegations and determine whether they are sufficient

to state a claim for relief; we do not, however, accept as true

allegations that are conclusory. Ashcroft v. Iqbal, 556 U.S.

662, 678 (2009). Moreover, “[f]actual allegations must be

enough to raise a right to relief above the speculative level.” 

Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). There

must be “more than a sheer possibility that a defendant has

acted unlawfully.” Iqbal, 556 U.S. at 678.

In reviewing the sufficiency of a complaint, we limit

ourselves to the complaint itself and its attached exhibits,

documents incorporated by reference, and matters properly

subject to judicial notice. Tellabs, Inc. v. Makor Issues &

Rights, Ltd., 551 U.S. 308, 322–23 (2007); Lee v. City of Los

Angeles, 250 F.3d 668, 688 (9th Cir. 2001).

III

A.

1.

Section 10(b) of the Securities Exchange Act of 1934

declares it unlawful to “use or employ, in connection with the

purchase or sale of any security . . . , any manipulative or

deceptive device or contrivance in contravention of such rules

and regulations as the [SEC] may prescribe as necessary.” 

15 U.S.C. § 78j(b). As the Supreme Court has indicated,

there is an “implied [] private cause of action” in
12 IN RE: NVIDIA CORP. SEC. LITIG.

Section 10(b). Matrixx Initiatives, Inc. v. Siracusano, 131 S.

Ct. 1309, 1317 (2011). Additionally, “SEC Rule 10b-5

implements [Section 10(b)] by making it unlawful to . . .

‘make any untrue statement of a material fact or to omit to

state a material fact necessary in order to make the statements

made . . . not misleading.’” Id. (quoting 17 C.F.R. § 240.10b5). Thus, to prevail on a claim for violations of either Section

10(b) or Rule 10b-5, a plaintiff must prove six elements:

“(1) a material misrepresentation or omission by the

defendant; (2) scienter; (3) a connection between the

misrepresentation or omission and the purchase or sale of a

security; (4) reliance upon the misrepresentation or omission;

(5) economic loss; and (6) loss causation.” Stoneridge Inv.

Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 157

(2008).

Section 20(a) of the Securities Exchange Act of 1934

provides for liability of a “controlling person.” 15 U.S.C.

§ 78t(a). To establish a cause of action under this provision,

a plaintiff must first prove a primary violation of underlying

federal securities laws, such as Section 10(b) or Rule 10b-5,

and then show that the defendant exercised actual power over

the primary violator. Howard v. Everex Sys., Inc., 228 F.3d

1057, 1065 (9th Cir. 2000). Accordingly, our analysis

focuses on Plaintiffs’ allegations under Section 10(b) and

Rule 10b-5.

2.

When alleging violations of federal securities laws, a

plaintiff must satisfy the pleading requirements pronounced

in the Private Securities Litigation Reform Act of 1995

(“PSLRA”). Zucco Partners, LLC v. Digimarc Corp.,

552 F.3d 981, 990–91 (9th Cir. 2009). In passing this act,
IN RE: NVIDIA CORP. SEC. LITIG. 13

Congress “significantly altered pleading requirements in

securities fraud cases [by] . . . requir[ing] that a complaint

plead with particularity both falsity and scienter.” Id. at 990

(internal citations and quotation marks omitted). More

precisely, now a complaint must “state with particularityfacts

giving rise to a strong inference that the defendant acted with

the required state of mind.” 15 U.S.C. § 78u-4(b)(2)(A).

To assist courts in determining whether a plaintiff has

satisfied this heightened pleading standard, the Supreme

Court has provided three points of instruction: (1) “courts

must, as with any [12(b)(6)] motion to dismiss . . . , accept all

factual allegations in the complaint as true”; (2) “courts must

consider the complaint in its entirety, as well as other sources

courts ordinarily examine when ruling on Rule 12(b)(6)

motions to dismiss”; and (3) “in determining whether the

pleaded facts give rise to a ‘strong’ inference of scienter, the

court must take into account plausible opposing inferences.” 

Tellabs, 551 U.S. at 322–23. In discussing the third point, the

Court explained that, although “[t]he inference [of scienter]

need not be irrefutable, . . . or even the ‘most plausible of

competing inferences,’” it “must be more than merely

‘reasonable’ or ‘permissible’—it must be cogent and

compelling, thus strong in light of other [countervailing]

explanations.” Id. at 324 (citations omitted). Ultimately, the

Court held that “[a] complaint will survive . . . only if a

reasonable person would deem the inference of scienter

cogent and at least as compelling as any opposing inference

one could draw from the facts alleged.” Id.

3.

Having outlined the lens through which we must consider

Plaintiffs’ allegations of scienter, we now turn to the
14 IN RE: NVIDIA CORP. SEC. LITIG.

definition of scienter itself. In Ernst & Ernst v. Hochfelder,

the Supreme Court explained in a footnote that “the term

‘scienter’ refers to a mental state embracing intent to deceive,

manipulate, or defraud.” 425 U.S. 185, 193 n.12 (1976). The

Court recognized that some Courts of Appeals include within

their definition of scienter a form of recklessness, but it did

not address whether those courts are correct in doing so. Id.

As recently as in its decision in Matrixx Initiatives, the Court

stated that it “ha[s] not [yet] decided whether recklessness

suffices to fulfill the scienter requirement.” 131 S. Ct. at

1323.

In this circuit, we have “held that recklessness may satisfy

the element of scienter.” Hollinger v. Titan Capital Corp.,

914 F.2d 1564, 1568–69 (9th Cir. 1990) (en banc). We

defined recklessness “‘as a highly unreasonable omission,

involving . . . an extreme departure from the standards of

ordinary care, and which presents a danger of misleading

buyers or sellers that is either known to the defendant or is so

obvious that the actor must have been aware of it.’” Id. at

1569 (quoting Sundstrand Corp. v. Sun Chem. Corp.,

553 F.2d 1033, 1044–45 (7th Cir. 1977)).5 We added that

“the danger of misleading buyers must be actually known or

so obvious that any reasonable man would be legally bound

as knowing.” Id. at 1569–70 (internal quotation marks

omitted). In In re Silicon Graphics Inc. Securities Litigation,

we opined that the wording of our previous decisions

discussing recklessness—including our decision in

Hollinger—indicates that the standard for recklessness is

actually much closer to one of intent: “These cases indicate

that recklessness only satisfies scienter under § 10(b) to the

5

In Hollinger, we expressly “adopt[ed] the standard of recklessness

articulated by the SeventhCircuit in Sundstrand Corp.” 914 F.2d at 1569.
IN RE: NVIDIA CORP. SEC. LITIG. 15

extent that it reflects some degree of intentional or conscious

misconduct.” 183 F.3d 970, 977 (9th Cir. 1999). 

Accordingly, we explained that scienter requires “a strong

inference of, at a minimum, ‘deliberate recklessness.’” Id.

(emphasis added).6 Since then, we have consistently applied

the “deliberate recklessness” terminology and standard

articulated in Silicon Graphics. See, e.g., In re VeriFone

Holdings, Inc. Sec. Litig., 704 F.3d 694, 702 (9th Cir. 2012);

Zucco Partners, 552 F.3d at 991; In re Daou Sys., Inc., 411

F.3d at 1022.7

We now address Plaintiffs’ arguments on appeal.

6

It appears that the term “deliberate recklessness” was coined by the

district court that we affirmed in Silicon Graphics. Our opinion in that

case was the first time we ever used the term. The only other appellate

court to have used the term previously did so less than one month before

we did, and it cited to the district court’s decision that we affirmed, In re

Silicon Graphics, Inc. Securities Litigation, 970 F. Supp. 746 (N.D. Cal.

1997). See In re Advanta Corp. Sec. Litig., 180 F.3d 525, 530 (3d Cir.

1999).

7

In their reply brief, Plaintiffs cite In re Oracle Corp. Securities

Litigation, 627 F.3d 376, 390 (9th Cir. 2010), and argue that the standard

for deliberate recklessness does not include an element of intent or

conscious misconduct. Oracle, however, concerned the scienter standard

for summary judgment, and we had previously held that “[b]ecause the

PSLRA did not alter the substantive requirements for scienter under

§ 10(b), [] the standard [for establishing scienter] on summary judgment

or JMOL remains unaltered by In Re Silicon Graphics.” Howard,

228 F.3d at 1064. Unlike Oracle or Howard, this case comes to us

following a motion to dismiss. We therefore apply the standard set forth

in In re Silicon Graphics.
16 IN RE: NVIDIA CORP. SEC. LITIG.

B.

Plaintiffs first argue that the district court erred by failing

to consider their allegations of scienter in the context of Item

303 of Regulation S–K, 17 C.F.R. § 229.303.8 They correctly

assert that Item 303 requires disclosure of certain

information. But then they contend that, if the information is

material, failure to disclose it constitutes a material omission

for purposes of Section 10(b) and Rule 10b-5. Ultimately,

Plaintiffs argue that the district court’s analysis should have

focused on whether NVIDIA acted with scienter in failing to

make the Item 303 disclosure.

We have never directly decided whether Item 303’s

disclosure duty is actionable under Section 10(b) and Rule

10b-5. We now hold that it is not.

To prevail on a claim under Section 10(b) or Rule 10b-5,

a plaintiff must demonstrate that the defendant made a

misleading statement or omission of material fact. Matrixx

Initiatives, 131 S. Ct. at 1318. Thus, a statement might be

misleading because it affirmativelymisstates information. Or

a statement might be misleading because it is made outside

 

8

 Item 303, 17 C.F.R. § 229.303(a)(3)(ii), requires registrants to:

Describe 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.
IN RE: NVIDIA CORP. SEC. LITIG. 17

the context of other material information. Yet neither

Section 10(b) nor Rule 10b-5 “create[s] an affirmative duty

to disclose any and all material information. Disclosure is

required under these provisions only when necessary ‘to

make . . . statements made, in the [sic] light of the

circumstances under which they were made, not

misleading.’” Id. at 1321–22 (alteration in original) (quoting

17 C.F.R. § 240.10b-5). In Basic Inc. v. Levinson, the

Supreme Court noted that “[s]ilence, absent a duty to

disclose, is not misleading under Rule 10b-5.” 485 U.S. 224,

239 n.17 (1988). The Court did not explain what would give

rise to a duty to disclose, but it is this language in Basic that

Plaintiffs cite in support of their argument. They assert that

Item 303 creates “a duty to disclose,” and failure to disclose

it is therefore misleading for purposes of Section 10(b) and

Rule 10b-5.

We have confronted a similar argument before. See In re

VeriFone Sec. Litig., 11 F.3d 865, 870 (9th Cir. 1993); In re

Lyondell Petrochemical Co. Sec. Litig., 984 F.2d 1050,

1053 (9th Cir. 1993); In re Convergent Techs. Sec. Litig.,

948 F.2d 507, 516 (9th Cir. 1991). In each instance, we

strongly suggested that a violation of Item 303 cannot be used

to show a violation of Section 10(b) and Rule 10b-5. We

noted that, “[w]hile § 229.303(a)(3)(ii) provides that ‘known

trends or uncertainties’ be disclosed in certain SEC filings,”

Instruction 7 to Item 303(a) “states that forward-looking

information need not be disclosed.” In re VeriFone, 11 F.3d

at 870. Without further discussion, we rejected the plaintiffs’

argument.9

9 Citing In re VeriFone, we recently noted that failure to comply with

Regulation S–K is insufficient for a claim under Rule 10b-5. Police Ret.
18 IN RE: NVIDIA CORP. SEC. LITIG.

In Oran v. Stafford, the Third Circuit decided this issue

more directly. 226 F.3d 275, 287–88 (3d Cir. 2000). We are

persuaded by its reasoning. There, the court explained that

Item 303’s disclosure requirement “varies considerably from

the general test for securities fraud materiality set out by the

Supreme Court in Basic Inc. v. Levinson.” Id. at 288. In

relevant part, Item 303 requires corporate management to

“[d]escribe [in 10-K and 10-Q forms] 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.” 17 C.F.R. § 229.303(a)(3)(ii). The SEC shed

further light on this requirement in an interpretive release:

Where a trend, demand, commitment, event or

uncertaintyis known, management must make

two assessments:

(1) Is the known trend, demand, commitment,

event or uncertainty likely to come to

fruition? If management determines that it is

not reasonably likely to occur, no disclosure is

required.

(2) If management cannot make that

determination, it must evaluate objectivelythe

consequences of the known trend, demand,

commitment, event or uncertainty, on the

assumption that it will come to fruition. 

Disclosure is then required unless

management determines that a material effect

Sys. of St. Louis v. Intuitive Surgical, Inc., 759 F.3d 1051, 1061 n.4 (9th

Cir. 2014).
IN RE: NVIDIA CORP. SEC. LITIG. 19

on the registrant’s financial condition or

results of operations is not reasonably likely

to occur.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations, Exchange Act Release

No. 34-26831, 54 Fed. Reg. 22427, 22430 (May 24, 1989). 

On the other hand, in Basic, the Supreme Court stated that

materiality of forward-looking information depends “upon a

balancing of both the indicated probability that the event will

occur and the anticipated magnitude of the event in light of

the totality of the company activity.” 485 U.S. at 238

(internal quotation marks omitted).

As the court in Oran also determined, these two standards

differ considerably. 226 F.3d at 288. Management’s duty to

disclose under Item 303 is much broader than what is

required under the standard pronounced in Basic. The SEC

intimated this point as well: “[Item 303] mandates disclosure

of specified forward-looking information, and specifies its

own standard for disclosure—i.e., reasonably likely to have

a material effect. . . . The probability/magnitude test for

materiality approved by the Supreme Court in Basic, Inc., v.

Levinson, 108 S. Ct. 978 (1988), is inapposite to Item 303

disclosure.” Exchange Act Release No. 34-26831, 54 Fed.

Reg. at 22430 n.27. The SEC’s effort to distinguish Basic’s

materiality test from Item 303’s disclosure requirement

provides further support for the position that Item 303

requires more than Basic—whatmust be disclosed under Item

303 is not necessarily required under the standard in Basic. 

Therefore, “[b]ecause the materiality standards for Rule 10b5 and [Item 303] differ significantly, the ‘demonstration of a

violation of the disclosure requirements of Item 303 does not

lead inevitably to the conclusion that such disclosure would
20 IN RE: NVIDIA CORP. SEC. LITIG.

be required under Rule 10b-5. Such a duty to disclose must

be separately shown.’” Oran, 226 F.3d at 288.

Plaintiffs’ reliance on Litwin v. Blackstone Group, L.P.,

634 F.3d 706 (2d Cir. 2011), and Panther Partners Inc. v.

Ikanos Communications, Inc., 681 F.3d 114 (2d Cir. 2012), is

unavailing. Those cases involved alleged violations of

Sections 11 and 12(a)(2) of the Securities Act of 1933, not

Section 10(b) or Rule 10b-5. And, as we acknowledged in

Steckman v. Hart Brewing, Inc., “Section 10(b) of the

Exchange Act . . . differs significantly from Sections 11 and

12(a)(2) of the Securities Act.” 143 F.3d 1293, 1296 (9th Cir.

1998). Liability under Sections 11 and 12(a)(2) of the

Securities Act may arise from “omitt[ing] to state a material

fact required to be stated.” See 15 U.S.C. §§ 77k(a), 77l(b). 

To put it differently, liability arises from “an omission in

contravention of an affirmative legal disclosure obligation.” 

Panther Partners, 681 F.3d at 120. There is no such

requirement under Section 10(b) or Rule 10b-5. As discussed

above, for purposes of Section 10(b) and Rule 10b-5, material

information need not be disclosed unless omission of that

information would cause other information that is disclosed

to be misleading. Matrixx Initiatives, 131 S. Ct. at 1321. 

Furthermore, as noted in Panther Partners, scienter is not an

element of either a Section 11 or Section 12(a)(2) claim. 

681 F.3d at 120. Such claims are not subject to the PSLRA’s

heightened pleading standards unless based on allegations of

fraud. Id. Accordingly, neither Panther Partners nor Litwin

affects our analysis here.

Also unavailing is Plaintiffs’ reliance on Simon v.

American Power Conversion Corp., 945 F. Supp. 416 (D.R.I.

1996). In that case, then-Chief Judge Laguex opined that

Item 303 imposes “an affirmative duty to disclose,” and
IN RE: NVIDIA CORP. SEC. LITIG. 21

found that the defendant’s failure to disclose in that case was

actionable. Simon, 945 F. Supp. at 431. Subsequently,

however, Judge Laguex clarified his opinion: “As this Court

noted in Simon, the disclosure rules are probative of what

defendants are otherwise obliged to disclose but do not,

themselves, provide an independent duty of disclosure.” 

Kafenbaum v. GTECH Holdings Corp., 217 F. Supp. 2d 238,

249 (D.R.I. 2002). He went on to say that “plaintiffs may not

rely solely upon Item 303 to prove that defendants failed to

disclose material information as a matter of law [in violation

of Rule 10b-5].” Id. at 250.

In sum, we hold that Item 303 does not create a duty to

disclose for purposes of Section 10(b) and Rule 10b-5. Such

a duty to disclose must be separately shown according to the

principles set forth by the Supreme Court in Basic and

Matrixx Initiatives.

C.

Next, Plaintiffs contend that the district court erred by not

considering their allegations of scienter holistically.

In Tellabs, the Supreme Court explained that, when

assessing allegations of scienter, a “court’s job is not to

scrutinize each allegation in isolation but to assess all the

allegations holistically . . . . [T]he reviewing court must ask:

When the allegations are accepted as true and taken

collectively, would a reasonable person deem the inference of

scienter at least as strong as any opposing inference?” 

551 U.S. at 326 (citations omitted). We apply this same

standard but in a dual inquiry. First, we determine whether

any of the plaintiff’s allegations, standing alone, is sufficient

to create a strong inference of scienter. Zucco Partners,
22 IN RE: NVIDIA CORP. SEC. LITIG.

552 F.3d at 992. If none is sufficient alone, we then consider

the allegations holistically to determine whether they create

a strong inference of scienter taken together. Id.

We have reviewed Plaintiffs’ allegations in their entirety. 

We find that none creates a strong inference of scienter

individually. And, together, they do not give rise to a strong

inference of scienter holistically. The most compelling

inference that we can reasonably draw is that NVIDIA was

first investigating the root cause, and then the scope, of the

Material Set Problem; once it determined that its liability

would exceed its normal reserves, NVIDIA disclosed the

problem to investors. Any inference of scienter requires more

than this. Thus, while the complaint may plausibly allege

knowledge of the Material Set Problem, it does not plausibly

allege that NVIDIA and Huang intentionallymisled investors,

or acted with deliberate recklessness, by not disclosing the

problem sooner. We discuss our reasoning below.

Plaintiffs contend that NVIDIA acted with scienter in

withholding from investors certain information regarding the

Material Set Problem. They allege that, between November

2007 and July 2008, NVIDIA made various statements in its

SEC forms regarding its financial performance and the

quality of its products. Plaintiffs argue that those statements

were materially false and misleading because NVIDIA did

not also disclose that certain of its products were failing at an

abnormal rate and that NVIDIA ultimately would be

financially responsible for replacement costs. According to

Plaintiffs, NVIDIA first determined that it would be

financially liable for the chip failures by the middle of 2007;

nevertheless, it did not disclose this to investors until July

2008. From these facts, Plaintiffs infer that NVIDIA

intentionally misled investors by waiting to disclose its
IN RE: NVIDIA CORP. SEC. LITIG. 23

liability for almost an entire year, until it had prepared

replacement products.

In evaluating Plaintiffs’ inference of scienter, we bear in

mind that NVIDIA includes in its SEC forms a statement

explaining that “[its] products may contain defects or flaws”

and warning investors that “[it] may be required to reimburse

customers for costs to repair or replace the affected

products.” Moreover, we are mindful that, because product

defects are so common, NVIDIA automatically records a

reduction to revenue as a cash reserve to cover costs relating

to the inevitable product failures. Bearing these facts in

mind, we must determine whether Plaintiffs’ allegations

create a strong inference of scienter that Huang and NVIDIA

intentionally misled investors, or were at least deliberately

reckless, by not disclosing NVIDIA’s liability for chip

failures prior to July 2008.

1.

Plaintiffs allege that NVIDIA first became aware of the

Material Set Problem sometime in 2006, and then determined

the root cause of the problem—and therefore that it would be

financially responsible for it—by the middle of 2007. Then

they contend that the one-year delay between NVIDIA’s root

cause determination in mid-2007 and its disclosure of the

problem in 2008 was motivated by an intent to mislead

investors until it had prepared replacement products. 

Nevertheless, Plaintiffs’ allegations that NVIDIA first

determined the root cause of its chip failures by the middle of

2007 are implausible. In so alleging, Plaintiffs rely most

directly on the accounts of Confidential Witness No. 1

(“CW1”), Confidential Witness No. 7 (“CW7”), and articles

written by Charlie Demerjian.
24 IN RE: NVIDIA CORP. SEC. LITIG.

According to CW1, “‘communications between HP and

NVIDIA began in 2006, with HP asking questions, and

asking NVIDIA to conduct [a] failure analysis.’” When

NVIDIA initially resisted, HP began to engage it at a higher,

executive, level. By early 2007, HP had determined that

NVIDIA’s chips sustained physical damage through normal

use, and therefore making NVIDIA responsible. HP

developed “‘overwhelming data demonstrating root cause’”

and “identified the thermal profile” that would cause

NVIDIA’s chips to experience cracking at the solder bumps. 

CW1 asserts that HP shared the data and thermal profile with

NVIDIA sometime in early 2007 and NVIDIA reproduced it

by the middle of 2007.

The timing of CW1’s account conflicts with the account

of Richard Hunt Hodge, HP’s Director of Engineering and

Quality for the Notebook Division.10 According to Hodge,

HP itself did not determine the thermal profile that would

significantly increase the probability of chip failures until the

middle of 2008: “Ultimately, by mid-2008, HP determined

that operation of the NVIDIA part through a narrow

temperature range . . . was the cause of” chip failures due to

solder bump cracking. If HP did not determine the

problematic thermal profile until the middle of 2008, any

inference of scienter is significantly reduced, as NVIDIA

disclosed the information in July 2008.

10 Because Plaintiffs incorporate by reference Mr. Hunt’s declaration,

relying on portions of it in their complaint, we may properly consider the

declaration in its entirety. See Tellabs, 551 U.S. at 322; see also City of

Roseville Emps.’ Ret. Sys. v. Sterling Fin. Corp., 963 F. Supp. 2d 1092,

1107 (E.D. Wash. 2013) (“Once a document is deemed incorporated by

reference, the entire document is assumed to be true for purposes of a

motion to dismiss, and both parties—and the Court—are free to refer to

any of its contents.”).
IN RE: NVIDIA CORP. SEC. LITIG. 25

The notion that HP had determined the problematic

thermal profile in early 2007 is implausible when considered

together with Plaintiffs’ other allegations. Plaintiffs allege

that HP and Dell, with the help of NVIDIA, issued BIOS

updates in November 200711and February2008, respectively. 

Those BIOS updates altered a computer’s fan algorithm so

that its internal cooling fans would run continuously, thereby

eliminating heat cycling and maintaining a fairly constant

temperature inside the computer. Hodge explains in his

declaration that the HP BIOS update “keeps [a GPU or MCP]

outside of [the problematic] temperature range (usually

around 50oC at idle). Because it runs constantly, it obviates

the thermal mini-cycle through the problematic narrow

temperature range.” If HP had determined the problematic

thermal profile in early 2007, as Plaintiffs and CW1 allege, it

is implausible that HP would have waited until November

2007 to issue a BIOS update that greatly reduces the

probability of a chip failure due to solder bump cracking.

12

The implausibility of the timing in CW1’s account of events

further detracts from any inference of scienter.

11 According to Hodge, HP’s BIOS update “was released on or about on

December 3, 2007.”

12 Indeed, Hodge’s timing of events is much more plausible than CW1’s. 

He explains that HP hypothesized in November 2007 “that repeated

temperature mini-cycling could result in solder cracks . . . and believed

eliminating that temperature cycling would correct the issue.” 

Accordingly, HP developed the BIOS updates to maintain a constant

temperature within its computers. Nevertheless, as HP continued testing,

it discovered that temperature cycling itself would not induce chip

failures, but operating the NVIDIA chip within the specific problematic

thermal profile would induce chip failures. Fortuitously, the BIOS update

maintained NVIDIA’s chips at a constant temperature outside of the

problematic temperature range.
26 IN RE: NVIDIA CORP. SEC. LITIG.

Plaintiffs’ reliance on Charlie Demerjian and CW7 to

corroborate CW1’s timing of events does not restore

plausibility to their allegations. Demerjian is “a reporter with

25 years experience working with computers.” He “covered

NVIDIA’s chip defects and spoke to dozens of people about

the problems.” Clearly, Demerjian’s information is

secondhand. In any event, Demerjian merely indicates that

“HP started a ‘root cause analysis’ and by summer 2007, HP

employees knew that NVIDIA’s GPUs were having problems

associated with heat cycling.” This account does not indicate

that HP had determined the root cause or problematic thermal

profile by summer 2007. According to CW7, “Dell saw

problems with NVIDIA GPUs in early 2007.” CW7

indicated that NVIDIA “eventually admitted that it was their

chip causing the problem, and that it was not a Dell issue.” 

Nevertheless, CW7 does not allege when NVIDIA admitted

responsibility for the problems. Thus, even if Dell had

notified NVIDIA of problems in early 2007, CW7 provides

no basis to infer that NVIDIA also knew it would be liable at

that time.

Even accepting as true CW1’s timing of events, the fact

that NVIDIA had reproduced the problematic thermal profile

by the middle of 2007—and thus had determined the root

cause of the chip failures—does not create an inference of

scienter. Plaintiffs assert that HP provided NVIDIA with

what HP believed demonstrated root cause of, and NVIDIA’s

liability for, the chip failures. Their allegations do not

provide any basis to infer what NVIDIA concluded from the

profile or other data, nor do they plausibly suggest that

NVIDIA must have determined it was at fault at that time. 

Furthermore, Plaintiffs never allege that Huang or anyone

else at NVIDIA knew at that time (or any time prior to July

2008) that NVIDIA’s liability would exceed its normal
IN RE: NVIDIA CORP. SEC. LITIG. 27

reserve set aside for costs associated with product failures. 

Accordingly, these allegations do not give rise to a strong

inference that Huang and NVIDIA acted with intent to

mislead investors, or recklessly disregarded an obvious

danger of misleading investors, by not disclosing information

regarding the Material Set Problem prior to July 2008.

2.

After alleging that HP provided NVIDIA with all of its

data demonstrating root cause and the problematic thermal

profile, Plaintiffs assert that determining the cause of the

problem should have been easy for NVIDIA. They rely on

several sources to support this allegation.

CW1, Demerjian, and John Rigg, Plaintiffs’ consultant in

this case, assert that “failures of the GPU are easily

identifiable.” Confidential Witness No. 2 explains that it

“takes about a month” to determine whether a GPU or MCP

is generating more heat than specified. Hodge indicates that

“it took HP less than two months to hypothesize that

temperature cycling caused the problematic cracks in the

solder bumps.”

But even if GPU failures are easily identifiable, it does

not necessarily follow that NVIDIA would be responsible for

those failures or should have known that it would be

responsible. As NVIDIA initially contended, the failures

could have been caused by OEM design issues. And

Plaintiffs’ reliance on Hodge’s declaration for the contention

that NVIDIA should have easily determined that it was liable

for the chip failures is misplaced. Plaintiffs ignore the timing

of Hodge’s account—HP did not hypothesize temperature

mini-cycling as the root cause until November 2007. Then,
28 IN RE: NVIDIA CORP. SEC. LITIG.

HP did not begin to test its hypothesis until January 2008. 

After 13 weeks of testing, HP determined that temperature

mini-cycling was not the root cause, as its testing did not

induce a single chip failure. It was not until sometime around

the middle of 2008 that HP ultimately discovered the specific

cause of chip failures: operation within the problematic

thermal profile.

Plaintiffs also rely on two articles for the proposition that

NVIDIA must have known that it was going to be liable

sooner than it admitted. Both articles were published after

NVIDIA’s July 2008 disclosure. One article provides

AMD’s (one of NVIDIA’s competitors) opinion on

NVIDIA’s chip failures. “According to the article, ‘AMD

thinks [high-lead bumps are] more prone to fatigue and need

“comprehensive reliability engineering to be used

successfully.”’” AMD also notes that a high-lead solder and

eutectic solder paste have varying thermal expansion

coefficients, which places significant stress on the solder

bumps. The other article discusses a research report written

by K.N. Tu, a professor affiliated with the Department of

Materials Science and Engineering at the University of

California, Los Angeles. In essence, the report discusses the

same issues discussed by AMD.

These articles do not contribute to an inference of

scienter. They were written in hindsight and do not reflect

Huang or NVIDIA’s knowledge prior to July 2008. Simply

because scientists were able to explain in retrospect the

science behind NVIDIA’s chip failures, it does not mean that

NVIDIA knew or should have known it would be liable for

those failures during the class period or that its liability would

exceed its normal reserve.
IN RE: NVIDIA CORP. SEC. LITIG. 29

Plaintiffs also point to an email authored by HP’s Richard

Hodge in May 2007, wherein Hodge indicated that NVIDIA

had moved away from eutectic solder in its chips. From this

email, Plaintiffs conclude that there are “known industry

concerns with . . . the use of high-lead solder.” They also

conclude, “Defendants knew and/or deliberately disregarded

that their GPU and MCP problems likely stemmed from this

hasty, under-tested manufacturing change initiated in 2006.” 

Nevertheless, there is no basis for this conclusion. Certainly,

Hodge’s email suggests that he had some concern about using

noneutectic solder. But there is nothing more to indicate an

industry-wide concern with noneutectic solder, nor is there

anything to suggest that NVIDIA should have known that its

use of noneutectic solder was the root cause of its chip

failures. Accordingly, this allegation does not appreciably

add to any inference of scienter.

3.

Next, Plaintiffs contend that NVIDIA delayed disclosure

of its chip failures until it had prepared replacement chips. 

They support this contention with very few factual

allegations, however.

Plaintiffs rely on statements made by CW1. After HP

provided NVIDIA with data that HP believed demonstrated

the root cause of the chip failures and the problematic thermal

profile that would cause those failures, “‘NVIDIA confirmed

to HP that it was able to reproduce the problem.’” Yet,

according to CW1, NVIDIA “‘never admitted to getting to

root cause, and they peddled the same story for as long as

possible, that they were still investigating.’” CW1 also

alleges that “NVIDIA would do the ‘PhD runaway’ to appear

cooperative while trying to slow HP down.” In essence, CW1
30 IN RE: NVIDIA CORP. SEC. LITIG.

asserts that NVIDIA’s Ph.D. employees would ask HP to

conduct additional tests merely to buy more time.

As we discussed above, the timing of CW1’s account is

implausible, especially in light of Hodge’s more-detailed

declaration. CW1 provides no specific examples of when

NVIDIA attempted to slow down HP by having it conduct

meaningless tests or experiments, nor does CW1 explain why

those tests and experiments were meaningless. From CW1’s

assertions alone, a reasonable factfinder could not infer that

NVIDIA was conducting needless testing or attempting to

delay disclosure of its product defects. As a matter of law,

CW1’s account to this end does not add to an inference of

scienter.

Plaintiffs also rely on a statement made by NVIDIA’s

Vice President of Investor Relations, Michael Hara. In

September 2008, after NVIDIA’s disclosure, Hara explained

to investors that the failing chips were past or near the end of

their useful life and that NVIDIA was “‘not even shipping

these parts anymore.’” From this statement, Plaintiffs infer

that “Defendants stalled the disclosure of the material,

adverse facts for several months, if not a full year, until the

failing products were at the end of their life-cycle and the

Company had new products to market.”

We agree that the coincidence of NVIDIA’s disclosure

with the apparent end-of-life of its failing chips could, under

some circumstances, arouse suspicion. But this statement

alone does not create an inference that NVIDIA strategically

delayed disclosure of its chip failures until those chips were

past their useful life.
IN RE: NVIDIA CORP. SEC. LITIG. 31

Finally, Plaintiffs rely on the fact that NVIDIA

participated in preparation of BIOS updates and issued PCNs. 

As we discussed above, the uncontested evidence shows that

in November 2007, NVIDIA helped HP (and later Dell) issue

BIOS software updates that altered a computer’s fan

algorithm. In May and June 2008, NVIDIA issued PCNs that

indicated it would be changing back to a eutectic solder in its

GPUs and MCPs. Plaintiffs allege that significant

engineering is required to transition from one Material Set to

another. From these facts, Plaintiffs conclude that NVIDIA

must have known it was liable for the product defects long

before its disclosure. But these facts do not mandate such a

conclusion. The BIOS updates were intended to ease stress

caused by heat cycling, which, as NVIDIA first contended,

could have been caused by OEM design issues. Even if

NVIDIA decided to transition back to eutectic solder long

before it issued PCNs in May and June 2008, it does not

necessarily mean that NVIDIA knew it was responsible for

the failures. A more plausible inference is that NVIDIA

believed that high-lead solder was a contributing factor and

switched back to eutectic solder to eliminate it.

4.

After alleging that NVIDIA delayed disclosure until it had

prepared replacement chips, Plaintiffs attempt to buttress that

allegation by contending that NVIDIA has a history of

delaying disclosure of known problems. Nevertheless, they

rest their contention on the accounts of several confidential

witnesses whose experiences do not contribute to an inference

of scienter. Their accounts are unspecific and speculative. 

More problematic, some witnesses never worked for

NVIDIA. And those who did either stopped working there

long before the Material Set Problem arose or worked in an
32 IN RE: NVIDIA CORP. SEC. LITIG.

area unrelated to it, such as environmental engineering or

“Staffing Systems and Compliance.”

For example, Confidential Witness No. 11 (“CW11”)

worked for NVIDIA as a senior engineering manager

between December 2002 and March 2006, months before the

product failures arose. CW11’s declaration maintains that

NVIDIA is “arrogant, [and] think[s it] never do[es] wrong,”

and “operated with a ‘failure to recognize real problems.’” 

Confidential Witness No. 12 (“CW12”) was a sales director

for one of NVIDIA’s vendors. CW12 “stated that NVIDIA

was notorious for blaming other entities for product related

problems. . . . ‘Some of the time they were right in [blaming

others] and some of the time they were wrong, but their

default was always to say, “This is not our problem. This is

your problem.”’”

Confidential Witness No. 13 (“CW13”) worked at

NVIDIA as an environmental compliance engineer. CW13

“stated that NVIDIA has a history of failing to take

responsibility for Company problems.” CW13 believes that

NVIDIA “‘had the following mentality: “Don’t say anything

to muck the waters.”’” “[Confidential Witness No. 15

(“CW15”)], a former NVIDIA Staffing Systems and

Compliance Analyst, stated that s/he was told: ‘I don’t care

what you do, just make us look good.’” CW15 provides no

context, however, as to who made the statement or why the

statement was made. Confidential Witness No. 16 (“CW16”)

worked for a website that sold NVIDIA products. CW16

stated, “‘I’ve seen a lot of hostile actions from [NVIDIA] . . .

‘NVIDIA tends to be a little “scrooge-ish” when it comes to

scrapping their failure percentage rates. . . . They’ve had a lot

of fiascos in the past with like the GeForce 2 Ultra, a lot of

overheating issues.’”
IN RE: NVIDIA CORP. SEC. LITIG. 33

These statements do not give rise to an inference of

scienter individually. The testimony of Confidential Witness

No. 14 (“CW14”) provides the most probative evidence

indicating that NVIDIA had a culture of failing to take

responsibility for known problems. CW14 was a “Director of

IC Quality and Reliability for NVIDIA.” According to

CW14, there was an instance where employees at NVIDIA

knew of a design flaw in one of its products, but did not

reveal it until after NVIDIA’s customer had discovered and

contained the problem. CW14’s testimony is less significant,

however,when considering that his/her period of employment

was at most one year, from 2000 to 2001, long before the

product defects giving rise to this lawsuit.

Accordingly, these allegations that NVIDIA has a history

of delaying known problems do not give rise to a strong

inference of scienter.

5.

As further evidence of scienter, Plaintiffs rely on the

existence of other lawsuits filed against NVIDIA by its

insurers. Apparently, after it disclosed to investors

information regarding its defective products, NVIDIA

submitted claims to its insurance companies to cover the

losses sustained as a result. Foreseeably, the insurance

companies did not want to pay NVIDIA’s claims. Thus, they

alleged that NVIDIA knew of the defective products before

January 2008 and had failed to provide information that the

insurers had requested. These allegations do not significantly

add to an inference of scienter, as the insurers litigating

claims would attempt to avoid liability.
34 IN RE: NVIDIA CORP. SEC. LITIG.

Evidently, one of NVIDIA’s insurers also alleged the

existence of a class action lawsuit filed against HP in

November 2007. The insurer argued that NVIDIA knew the

lawsuit related to problems with NVIDIA’s defective chips

and that HP would seek indemnification from NVIDIA. 

Nevertheless, Plaintiffs never explain with any particularity

when or how NVIDIA became aware that HP would seek

indemnification from NVIDIA. Accordingly, the existence

of this additional lawsuit does not add to an inference of

scienter.

6.

Plaintiffs also contend that, when considered with all

other allegations, the departure of some of NVIDIA’s

executives adds to the inference of scienter. We do not agree.

Plaintiffs allege that three individuals left NVIDIA after

it disclosed the defective products. On May 27, 2008,

NVIDIA’s CFO, Marvin Burkett, announced his retirement. 

Significantly, Burkett continued as interim CFO until a

replacement was hired, and in February 2009, he became a

senior advisor to NVIDIA. In June 2008, NVIDIA’s Senior

Director and Head of Internal Audit left the company. 

Plaintiffs do not explain, however, how this executive played

any role in allegedly delaying the disclosure of the defective

products. In January 2009, NVIDIA replaced David Kirk, its

Chief Scientist. Plaintiffs fail to provide any detail as to why

Kirk was replaced; notably, Kirk continued to work with

NVIDIA as a research fellow.

In short, Plaintiffs fail to provide any facts to connect

these departures with the problems at issue in this lawsuit. 

More detrimental to their allegations, however, is that two of
IN RE: NVIDIA CORP. SEC. LITIG. 35

the three individuals remained at NVIDIA in some type of

advisory role. Therefore, the most reasonable inference is

that these departures were benign.

7.

Plaintiffs argue that their allegations give rise to an

inference of scienter under the corporate scienter doctrine. 

“‘In most cases, the most straightforward way to raise [an

inference of scienter] for a corporate defendant will be to

plead it for an individual defendant.’” Glazer Capital Mgmt.,

LP v. Magistri, 549 F.3d 736, 743 (9th Cir. 2008) (quoting

Teamsters Local 445 Freight Div. Pension Fund v. Dynex

Capital Inc., 531 F.3d 190, 195 (2d Cir. 2008)). Yet, the

collective scienter (or corporate scienter) doctrine recognizes

that it is possible to raise the inference of scienter without

doing so for a specific individual. Id. In the Ninth Circuit,

we “ha[ve] not previously adopted a theory of collective

scienter.” Id. at 744. Nevertheless, in Glazer Capital, we

opined that the doctrine might be appropriate in some cases. 

Id. “For instance, as outlined in the hypothetical posed [by

the Seventh Circuit], there could be circumstances in which

a company’s public statements were so important and so

dramatically false that they would create a strong inference

that at least some corporate officials knew of the falsity upon

publication.” Id. (citing Makor Issues & Rights, Ltd. v.

Tellabs Inc., 513 F.3d 702, 710 (7th Cir. 2008)).

We do not believe the facts alleged in this case would

give rise to an inference of scienter under the collective

scienter doctrine. Here, Plaintiffs contend that statements

made by NVIDIA in its SEC filings were misleading because

NVIDIA did not also disclose information regarding the

Material Set Problem. Those statements were not “so
36 IN RE: NVIDIA CORP. SEC. LITIG.

dramatically false”—as in the example posed by the Seventh

Circuit in Makor13—to create an inference of scienter that at

least some corporate officials knew of the falsity upon

publication.

Plaintiffs also contend that their complaint raises a strong

inference of scienter under the core operations doctrine. 

Under this doctrine, the PSLRA’s pleading requirements may

be satisfied, in certain circumstances, by “a scienter theory

that infers that facts critical to a business’s ‘core operations’

or an important transaction are known to a company’s key

officers.” S. Ferry LP, No. 2 v. Killinger, 542 F.3d 776,

783–84 (9th Cir. 2008). In South Ferry, we explained that, in

light of the Supreme Court’s decision in Tellabs, the core

operations inference may be considered when weighing a

complaint’s allegations of scienter holistically. Id. at 784–85. 

Nevertheless, we cautioned that, “‘absent some additional

allegation of specific information conveyed to management

and related to the fraud’ or other allegations supporting

scienter,” the core operations inference will generally fall

short of a strong inference of scienter. Id. We did, however,

 

13 In Makor, the Seventh Circuit illustrated its point that

it is possible to draw a strong inference of corporate

scienter without being able to name the individuals who

concocted and disseminated the fraud. Suppose

General Motors announced that it had sold one million

SUVs in 2006, and the actual number was zero. There

would be a strong inference of corporate scienter, since

so dramatic an announcement would have been

approved by corporate officials sufficiently

knowledgeable about the company to know that the

announcement was false.

513 F.3d at 710.
IN RE: NVIDIA CORP. SEC. LITIG. 37

leave open the possibility that “in some unusual

circumstances, the core operations inference, without more,

may raise the strong inference required by the PSLRA.” Id.

at 785. One example of such unusual circumstances is

“where the nature of the relevant fact is of such prominence

that it would be ‘absurd’ to suggest that management was

without knowledge of the matter.” Id. at 786.

Here, Plaintiffs never plausibly allege that specific

information was conveyed to Huang14or others in NVIDIA’s

management team. They apparently attempt to do so by

relying on the account of CW1, but CW1 lacks personal

knowledge of these facts. “CW1 report[s] that the

communications regarding the [chip] problems were

conducted at a high-level [sic]: ‘These were executive level

guys.’” CW1’s “boss was a senior technical employee, a

Director of Quality.” “‘This guy is not going to be

communicating with guys that are at manager level or

engineering level.’” From this statement, it is evident that

CW1 does not actually know whom from NVIDIA his/her

boss communicated with regarding the chip failures. CW1

surmises that, based on his/her boss’s status in HP’s corporate

hierarchy, he was communicating with executive level

personnel from NVIDIA. Accordingly, CW1 does not appear

to have the requisite personal knowledge to assert that

NVIDIA’s management team received specific information

regarding the defective products.

 

14 Plaintiffs do allege that Huang was heavily involved in the design of

its chips. They support this allegation with the account of Confidential

Witness No. 17 (“CW17”). Nevertheless, CW17 merely indicates that

Huang “did not want an undue number of [solder] bumps” on the chips. 

This description of Huang’s involvement does not indicate that he was

heavily involved in the design of the flawed GPUs and MCPs or in the

decision to use high-lead solder.
38 IN RE: NVIDIA CORP. SEC. LITIG.

Even assuming CW1 did have personal knowledge that

his/her boss communicated with NVIDIA’s executive-level

personnel, the specific information allegedly conveyed

related to chip failures, not the root cause of them or

NVIDIA’s liability. As we discussed above, CW1’s assertion

that HP had determined the root cause in early 2007 is not

plausible.

Again, even assuming HP had determined the root cause

in early 2007, Plaintiffs do not allege any facts to support the

notion that anyone at NVIDIA arrived at the same conclusion

as HP regarding the root cause, or that NVIDIA would be

liable. Nor do Plaintiffs provide a basis to infer that anyone

at NVIDIA was aware that its financial liability would exceed

its normal reserves. Plaintiffs argue that “[k]nowledge of the

financial impact of the chip defect should be presumed when

the nature of the problem concerned [NVIDIA’s] flagship

product and was cause for concern to [NVIDIA’s] two largest

customers.” We do not agree. Without factual allegations

showing that at least someone at NVIDIA had knowledge of

the extent of NVIDIA’s liability, there is no basis to presume

that NVIDIA’s management would have had such

knowledge.

Accordingly, neither the collective scienter doctrine nor

the core operations doctrine alone gives rise to a strong

inference of scienter.

* * * *

Having evaluated Plaintiffs’ allegations individually, we

find that none creates a strong inference of scienter alone. 

Evaluating the allegations together, we find that they do not

create a strong inference of scienter collectively. The most
IN RE: NVIDIA CORP. SEC. LITIG. 39

that a reasonable factfinder could infer from Plaintiffs’

allegations is that NVIDIA was aware that some versions of

its GPUs and MCPs were experiencing problems sometime

in late 2006 or early 2007. At some point, HP determined the

thermal profile that increased the probability that NVIDIA’s

chips would fail due to cracking at the solder bumps. HP

shared with NVIDIA the thermal profile and other data that

it believed demonstrated NVIDIA’s liability. NVIDIA

evidently reproduced these data and thermal profile yet

contested that it was at fault for the chip failures. While

Plaintiffs infer that NVIDIA was merely delaying disclosure

until it had prepared replacement chips, this is not a cogent

and compelling inference. NVIDIA indicated in May 2008

(and even in July 2008) that it had not yet determined the root

cause of the product failures, although it evidently was

working on a solution. Plaintiffs provide no factual basis to

discount those statements. Moreover, product flaws are very

common in the semiconductor industry, and NVIDIA

regularly takes measures to account for this, as reflected in its

disclosures. It warns investors of this possibility and sets

aside a reserve to account for costs related to those flaws. 

Although there is some slight support for an inference that

NVIDIA knew it was responsible for the problem before its

disclosure, and thus acted with intent to deceive at least

customers if not investors, a more compelling inference is

that NVIDIA did not disclose because it was investigating the

extent of the problem, whether it was responsible for it, and

if so, whether it would exhaust the reserve. Accordingly, we

hold that the complaint’s allegations do not give rise to a

strong inference of scienter when considered holistically. See

Tellabs, 551 U.S. at 324.

On appeal, Plaintiffs argue that the Supreme Court has

rejected the “inference that defendants were delaying
40 IN RE: NVIDIA CORP. SEC. LITIG.

disclosure while ‘investigating the scope of the issue.’” It is

true that, in Matrixx Initiatives, the Supreme Court rejected

the assertion that “‘the most cogent inference regarding [the

defendant’s] state of mind is that it delayed releasing

information regarding [a product defect] in order to provide

itself an opportunity to carefully review all evidence.’” 

Matrixx Initiatives, 131 S. Ct. at 1324 n.15. Yet the Court

also “d[id] not doubt that this may be the most cogent

inference in some cases.” Id. In Matrixx Initiatives, the

defendant was a pharmaceutical company that manufactured

and sold Zicam, an over-the-counter remedy for the common

cold. Id. at 1313–14. At some point, a doctor began giving

public presentations indicating that Zicam was a flawed

product and posed dangerous health risks to its users. Id. at

1316. In response to these presentations, the defendant

“issued a press release that suggested that studies had

confirmed” that Zicam was not flawed. Id. at 1316, 1324. 

Nevertheless, the defendant’s press release was false, as no

such studies existed. Id. at 1324. Accordingly, the Court

held that “the misleading nature of [the defendant’s] press

release is sufficient to render the inference of scienter at least

as compelling as the inference [that the defendant was

investigating the evidence].” Id. at 1324 n.15.

Here, there are no similar facts. There is no allegation

that the issue of an inherent defect in NVIDIA’s Material Set

was ever publicly raised prior to NVIDIA’s disclosure, nor is

there any allegation that NVIDIA knowingly issued a false

press release, attempting to discount any public discussion

regarding its chips’ defects. As such, we reject Plaintiffs’

assertion that Matrixx Initiativesforecloses the inference that

NVIDIA delayed disclosure while it investigated the cause of

the chip defects and the extent of its liability.
IN RE: NVIDIA CORP. SEC. LITIG. 41

IV

For the reasons discussed above, we affirm the district

court’s judgment in its entirety.

AFFIRMED.