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`COOLEY LLP
`JOHN C. DWYER (136533) (dwyerjc@cooley.com)
`PATRICK E. GIBBS (183174) (pgibbs@cooley.com)
`SARAH M LIGHTDALE (4395661) (slightdale@cooley.com)
`CLAIRE A. MCCORMACK (241806) (cmccormack@cooley.com)
`SAMANTHA A. KIRBY (307917) (skirby@cooley.com)
`3175 Hanover Street
`Palo Alto, CA 94304-1130
`Telephone:
`(650) 843-5000
`Facsimile:
`(650) 849-7400
`Attorneys for Defendants
`NVIDIA CORPORATION, JENSEN HUANG,
`COLETTE M. KRESS, and JEFF FISHER
`UNITED STATES DISTRICT COURT
`NORTHERN DISTRICT OF CALIFORNIA
`OAKLAND DIVISION
`
`In re NVIDIA CORPORATION
`SECURITIES LITIGATION
`______________________
`
`This Document Relates to:
`
`ALL ACTIONS
`
`
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`
`
`
`
`
`
`Case No. 4:18-cv-07669-HSG
`DEFENDANTS’ NOTICE OF MOTION AND
`MOTION TO DISMISS CONSOLIDATED CLASS
`ACTION COMPLAINT
`
`Date:
`Time:
`Judge:
`Courtroom:
`
`October 31, 2019
`2:00 p.m.
`Hon. Haywood S. Gilliam, Jr.
`2
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`DEFENDANTS’ MOTION TO DISMISS CCAC
`CASE NO. 4:18-CV-7669-HSG
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`Case 4:18-cv-07669-HSG Document 123 Filed 08/02/19 Page 2 of 42
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`TABLE OF CONTENTS
`
`
`Page
`
`NOTICE OF MOTION AND MOTION TO DISMISS ...................................................................... 1
`STATEMENT OF RELIEF SOUGHT ................................................................................................ 1
`STATEMENT OF ISSUE TO BE DECIDED..................................................................................... 1
`MEMORANDUM OF POINTS AND AUTHORITIES ..................................................................... 1
`I.
`INTRODUCTION ................................................................................................................... 1
`II.
`STATEMENT OF ALLEGATIONS AND FACTS SUBJECT TO JUDICIAL
`NOTICE ................................................................................................................................... 4
`A.
`NVIDIA’s Business ..................................................................................................... 4
`B.
`Distribution of NVIDIA’s GPUs ................................................................................. 4
`C.
`The 2017-2018 Cryptocurrency Opportunity .............................................................. 5
`1.
`The First Cryptocurrency Spike: March to July 2017 ..................................... 7
`2.
`Cryptocurrency Levels Off: August to October 2017 ...................................... 8
`3.
`The Second Cryptocurrency Spike: November 2017 to March 2018 ............ 10
`The 2018 Inventory Challenges ................................................................................. 11
`1.
`NVIDIA Works to Replenish Channel Inventory to Serve Gaming
`Demand .......................................................................................................... 11
`Channel Inventory Levels Increase, But NVIDIA Believes “Pent-Up”
`Gaming Demand Remains ............................................................................. 12
`The Crypto Hangover .................................................................................... 13
`3.
`LEGAL STANDARDS ......................................................................................................... 14
`ARGUMENT ......................................................................................................................... 15
`A.
`Plaintiffs Fail to Adequately Plead Loss Causation ................................................... 15
`B.
`Plaintiffs Fail to Plead Falsity .................................................................................... 18
`1.
`Plaintiffs’ Allegations Based on “Expert” Opinion Cannot be Credited ....... 19
`2.
`Fisher’s May 10, 2017 Statement Regarding PC Gaming Industry............... 22
`3.
`Company’s Statements Following Second Quarter of FY2018 ..................... 23
`4.
`Company’s Statements Following Third Quarter of FY2018 ........................ 25
`5.
`Huang’s Press Interviews Following Fourth Quarter of FY2018 .................. 27
`6.
`August 16, 2018 Statement: “Masters at Managing Our Channel” ............... 29
`Plaintiffs Fail to Raise a Strong Inference of Scienter ............................................... 30
`1.
`The Former Employees Do Not Support an Inference of Scienter ................ 31
`2.
`The Core Operations Theory Does Not Apply Here ..................................... 32
`3.
`Stock Transactions Negate An Inference of Scienter .................................... 33
`4.
`Plaintiffs’ Allegations Do Not Plausibly Suggest that Defendants
`Intentionally Misled Investors ....................................................................... 34
`
`D.
`
`2.
`
`III.
`IV.
`
`C.
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`i.
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`DEFENDANTS’ MOTION TO DISMISS CCAC
`CASE NO. 4:18-CV-7669-HSG
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`Case 4:18-cv-07669-HSG Document 123 Filed 08/02/19 Page 3 of 42
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`TABLE OF CONTENTS
`(continued)
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`Page
`Plaintiffs’ Control Person Claim Fails ....................................................................... 35
`D.
`CONCLUSION ...................................................................................................................... 35
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`
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`V.
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`ii.
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`DEFENDANTS’ MOTION TO DISMISS CCAC
`CASE NO. 4:18-CV-7669-HSG
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`Case 4:18-cv-07669-HSG Document 123 Filed 08/02/19 Page 4 of 42
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`ATTORNEYS AT LAW
`PALO ALTO
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`TABLE OF AUTHORITIES
`
`
`Page(s)
`
`
`Cases
`
`In re Accuray, Inc. Sec. Litig.,
`757 F. Supp. 2d 936 (N.D. Cal. 2010) ...........................................................................................31
`
`Applestein v. Medivation, Inc.,
`561 F. App’x 598 (9th Cir. 2014) ............................................................................................20, 21
`
`Ashcroft v. Iqbal,
`556 U.S. 662 (2009) .......................................................................................................................15
`
`In re Autodesk, Inc. Sec. Litig.,
`132 F. Supp. 2d 833 (N.D. Cal. 2000) ...........................................................................................32
`
`Bell Atl. Corp. v. Twombly,
`550 U.S. 544 (2007) .......................................................................................................................15
`
`Berson v. Applied Signal Tech., Inc.,
`527 F.3d 982 (9th Cir. 2008) ...................................................................................................16, 18
`
`Browning v. Amyris, Inc.,
`No. 13-CV-02209-WHO, 2014 WL 1285175 (N.D. Cal. Mar. 24, 2014) .....................................25
`
`City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Align Tech., Inc.,
`856 F.3d 605 (9th Cir. 2017) .......................................................................................19, 23, 27, 30
`
`City of Royal Oak Ret. Sys. v. Juniper Networks, Inc.,
`No. 5:11-CV-04003-LHK, 2013 WL 2156358 (N.D. Cal. May 17, 2013) ...................................20
`
`Costabile v. Natus Med. Inc.,
`No. 17-CV-00458-JSW, 2018 WL 7134363 (N.D. Cal. Dec. 18, 2018) .......................................34
`
`In re Cutera Sec. Litig.,
`610 F.3d 1103 (9th Cir. 2010) .......................................................................................................19
`
`In re Daou Sys., Inc.,
`411 F.3d 1006 (9th Cir. 2005) .......................................................................................................30
`
`In re Downey Sec. Litig.,
`No. CV 08-3261-JFW(RZx), 2009 WL 2767670 (C.D. Cal. Aug. 21, 2009) ...............................34
`
`DSAM Global Value Fund v. Altris Software, Inc.,
`288 F.3d 385 (9th Cir. 2002) .........................................................................................................15
`
`Dura Pharm., Inc. v. Broudo,
`544 U.S. 336 (2005) ...........................................................................................................15, 16, 17
`
`
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`
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`iii.
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`DEFENDANTS’ MOTION TO DISMISS CCAC
`CASE NO. 4:18-CV-7669-HSG
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`Case 4:18-cv-07669-HSG Document 123 Filed 08/02/19 Page 5 of 42
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`TABLE OF AUTHORITIES
`(continued)
`
`Page(s)
`
`
`Fadia v. FireEye, Inc.,
`No. 5:14-CV-05204-EJD, 2016 WL 6679806 (N.D. Cal. Nov. 14, 2016) ....................................29
`
`Fialkov v. Microsoft Corp.,
`72 F. Supp. 3d 1220 (W.D. Wash. 2014) .......................................................................................34
`
`Fleming v. Impax Labs. Inc.,
`No. 16-cv-06557-HSG, 2018 WL 4616291 (N.D. Cal. Sept. 7, 2018) ..............................16, 17, 25
`
`In re Fusion-io, Inc. Sec. Litig.,
`No. 13-CV-05368-LHK, 2015 WL 661869 (N.D. Cal. Feb. 12, 2015) .........................................23
`
`Gammel v. Hewlett-Packard Co.,
`905 F. Supp. 2d 1052 (C.D. Cal. 2012) .........................................................................................33
`
`Irving Firemen’s Relief & Ret. Fund v. Uber Techs.,
`No. 17-cv-05558-HSG, 2019 WL 3457804 (N.D. Cal. July 31, 2019) .........................................15
`
`In re Leapfrog Enter., Inc. Sec. Litig.,
`200 F. Supp. 3d 987 (N.D. Cal. 2016) .....................................................................................29, 30
`
`Lipton v. Pathogenesis Corp.,
`284 F.3d 1027 (9th Cir. 2002) .......................................................................................................32
`
`Lloyd v. CVB Fin. Corp.,
`811 F.3d 1200 (9th Cir. 2016) .................................................................................................15, 16
`
`Martin v. Quartermain,
`732 F. App’x 37 (2d Cir. 2018) .....................................................................................................27
`
`McCasland v. FormFactor, Inc.,
`No. C 07-5545-SI, 2009 WL 2086168 (N.D. Cal. July 14, 2009) .................................................35
`
`Metzler Inv. GMBH v. Corinthian Colleges, Inc.,
`540 F.3d 1049 (9th Cir. 2008) .......................................................................................................33
`
`Mineworkers’ Pension Scheme v. First Solar Inc.,
`881 F.3d 750 (9th Cir. 2018) ...................................................................................................15, 16
`
`Nathanson v. Polycom, Inc.,
`87 F. Supp. 3d 966 (N.D. Cal. 2015) .............................................................................................31
`
`Norfolk Cty. Ret. Sys. v. Solazyme, Inc.,
`No. 15-cv-02938-HSG, 2018 WL 3126393 (N.D. Cal. June 26, 2018) ..................................30, 31
`
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`iv.
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`DEFENDANTS’ MOTION TO DISMISS CCAC
`CASE NO. 4:18-CV-7669-HSG
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`Case 4:18-cv-07669-HSG Document 123 Filed 08/02/19 Page 6 of 42
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`TABLE OF AUTHORITIES
`(continued)
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`Page(s)
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`Nuveen Mun. High Income Opportunity Fund v. City of Alameda,
`730 F.3d 1111 (9th Cir. 2013) .......................................................................................................18
`
`In re NVIDIA Corp. Sec. Litig.,
`768 F.3d 1046 (9th Cir. 2014) .......................................................................................................33
`
`Omnicare, Inc. v. Laborers Dist. Council Const. Indus. Pension Fund,
`135 S. Ct. 1318 (2015) ...................................................................................................................19
`
`In re OmniVision Techs., Inc. Sec. Litig.,
`937 F. Supp. 2d 1090 (N.D. Cal. 2013) ...................................................................................20, 21
`
`Or. Pub. Emps. Ret. Fund v. Apollo Grp. Inc.,
`774 F.3d 598 (9th Cir. 2014) ...................................................................................................15, 16
`
`Paracor Fin., Inc. v. Gen. Elec. Capital Corp.,
`96 F.3d 1151 (9th Cir. 1996) .........................................................................................................35
`
`Police Ret. Sys. of St. Louis v. Intuitive Surgical, Inc.,
`759 F.3d 1051 (9th Cir. 2014) .................................................................................................19, 32
`
`In re Rigel Pharm., Inc. Sec. Litig.,
`697 F.3d 869 (9th Cir. 2012) .........................................................................................................18
`
`Rok v. Identiv, Inc.,
`No. 15-cv-5775-CRB, 2017 WL 35496 (N.D. Cal. Jan. 4, 2017) .................................................16
`
`Ronconi v. Larkin,
`253 F.3d 423 (9th Cir. 2001) ...................................................................................................30, 34
`
`S.E.C. v. Todd,
`642 F.3d 1207 (9th Cir. 2011) .......................................................................................................35
`
`S. Ferry LP, No. 2 v. Killinger,
`542 F.3d 776 (9th Cir. 2008) ...................................................................................................30, 33
`
`In re Silicon Storage Tech., Inc.,
`No. C 05-0295 PJH, 2006 WL 648683 (N.D. Cal. Mar. 10, 2006) ...............................................31
`
`In re Silicon Storage Tech., Inc., Sec. Litig.,
`No. C-05-0295PJH, 2007 WL 760535 (N.D. Cal. Mar. 9, 2007) ............................................20, 21
`
`In re Solarcity Corp. Sec. Litig.,
`274 F. Supp. 3d 972 (N.D. Cal. 2017) ...........................................................................................23
`
`
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`
`
`v.
`
`DEFENDANTS’ MOTION TO DISMISS CCAC
`CASE NO. 4:18-CV-7669-HSG
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`Case 4:18-cv-07669-HSG Document 123 Filed 08/02/19 Page 7 of 42
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`TABLE OF AUTHORITIES
`(continued)
`
`
`In re Splash Tech. Holdings, Inc. Sec. Litig.,
`160 F. Supp. 2d 1059 (N.D. Cal. 2001) ...................................................................................19, 27
`
`Page(s)
`
`Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
`551 U.S. 308 (2007) .......................................................................................................................30
`
`In re Textainer P’ship Sec. Litig.,
`No. C-05-0969 MMC, 2006 WL 3247425 (N.D. Cal. Aug. 10, 2006) .........................................20
`
`Vanleeuwen v. Keyuan Petrochemicals, Inc.,
`No. CV 11-9495 PSG ....................................................................................................................19
`
`In re Vantive Corp. Sec. Litig.,
`110 F. Supp. 2d 1209 (N.D. Cal. 2000) .........................................................................................18
`
`In re Vantive Corp. Sec. Litig.,
`283 F.3d 1079 (9th Cir. 2002) .................................................................................................32, 34
`
`Vess v. Ciba-Geigy Corp. USA,
`317 F.3d 1097 (9th Cir. 2003) .......................................................................................................15
`
`Zucco Partners, LLC v. Digimarc Corp.,
`552 F.3d 981 (9th Cir. 2009) ................................................................................................. passim
`
`Statutes
`
`15 U.S.C. § 78u-4(b) ..............................................................................................................................1
`
`Securities Exchange Act of 1934 ................................................................................................. passim
`
`Other Authorities
`
`Fed. R. Civ. P. Rule 8 ............................................................................................................................1
`
`Fed. R. Civ. P. Rule 9(b) ............................................................................................................1, 15, 16
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`Fed. R. Civ. P. Rule 12(b)(6) ...........................................................................................................1, 14
`
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`vi.
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`DEFENDANTS’ MOTION TO DISMISS CCAC
`CASE NO. 4:18-CV-7669-HSG
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`NOTICE OF MOTION AND MOTION TO DISMISS
`TO ALL PARTIES AND THEIR ATTORNEYS OF RECORD:
`PLEASE TAKE NOTICE that on October 31, 2019, or as soon thereafter as this Motion may
`be heard, defendants NVIDIA Corporation (“NVIDIA” or the “Company”) and Jensen Huang, Colette
`Kress, and Jeff Fisher (collectively, “Individual Defendants” and with NVIDIA, “Defendants”) will
`and hereby do move to dismiss with prejudice all claims asserted in Plaintiffs’ Consolidated Class
`Action Complaint (the “Complaint” or “AC”), pursuant to Fed. R. Civ. P. 8, 9(b), and 12(b)(6) and
`Section 21D(b) (“PSLRA”) of the Securities Exchange Act of 1934, as amended, 15 U.S.C. § 78u-
`4(b). This Motion is based on the pleadings; Defendants’ Memorandum of Points and Authorities;
`Request for Judicial Notice and Consideration of Documents Incorporated by Reference (“RJN”); the
`Declaration of Samantha A. Kirby and exhibits thereto; and other matters as may be presented to this
`Court at the hearing.
`
`I.
`
`STATEMENT OF RELIEF SOUGHT
`Defendants seek an order dismissing the Complaint for failure to state a claim.
`STATEMENT OF ISSUE TO BE DECIDED
`Whether the Complaint states a claim under Exchange Act Sections 10(b) and 20(a).
`MEMORANDUM OF POINTS AND AUTHORITIES
`INTRODUCTION
`The Complaint does not state a claim for securities fraud.
`This case arises from a buildup of inventory in the distribution channel for NVIDIA’s GeForce
`graphic processing units (“GPUs”), and NVIDIA’s decision to address that buildup by holding off on
`further sales until inventory levels normalized. Between May and October of 2018, NVIDIA’s channel
`customers purchased over $3.5 billion of GeForce GPUs from NVIDIA. However, because the
`products were not selling through to end users at the same rate, the channel—which includes many
`layers of manufacturers, distributors, resellers, and retailers—had, in Plaintiffs’ words, “flooded” by
`October 2018. To give the channel time to sell the excess inventory, the Company announced it would
`stop selling its mid-range GeForce GPUs to the channel customers until inventory levels normalized.
`NVIDIA’s stock price declined, and the inevitable lawsuits ensued.
`
`
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`1.
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`DEFENDANTS’ MOTION TO DISMISS CCAC
`CASE NO. 4:18-CV-7669-HSG
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`Case 4:18-cv-07669-HSG Document 123 Filed 08/02/19 Page 9 of 42
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`Plaintiffs know they cannot assert a viable securities fraud claim based on this channel
`inventory buildup. Indeed, starting in February 2018, NVIDIA’s executives told investors that its
`GeForce GPUs were in short supply and channel inventory was well below normal levels, and
`announced that they intended to address this by manufacturing and selling additional chips, i.e., by
`increasing supply. They also explained why: they believed short supply, caused in part by demand for
`GeForce GPUs from cryptocurrency “miners,” had left videogamers unable to purchase the GeForce
`GPUs they wished to buy, resulting in “pent-up” gaming demand. Based on that “pent-up” demand,
`as well as the upcoming “back to school” and holiday seasons, NVIDIA expected a strong performance
`by its gaming business for the remainder of calendar 2018. To serve the expected demand, NVIDIA
`sold large amounts of GeForce GPUs into the channel for several months. When the demand did not
`materialize as anticipated, the channel “flooded.” (AC ¶ 135.)1 NVIDIA’s failure to predict that
`inventory buildup does not constitute securities fraud. And in fact, Plaintiffs do not claim NVIDIA or
`its executives misled shareholders about the short supply of GeForce GPUs in early 2018, their strategy
`to increase the supply in the channel, or their optimism about NVIDIA’s gaming business.
`Rather, Plaintiffs claim that NVIDIA and its executives misled investors about a very different
`subject: which end users were buying GeForce GPUs over a year earlier, in 2017. Plaintiffs claim that
`NVIDIA knew, but concealed, the “fact” that many of the GeForce chips NVIDIA sold to channel
`customers in 2017 were eventually purchased by miners. Plaintiffs claim this undisclosed “fact”
`rendered a number of public statements made by NVIDIA between May 10, 2017 and November 14,
`2018 false or misleading and caused Plaintiffs’ losses. This theory fails on every level.
`To start, Plaintiffs seek to recover alleged damages from stock drops in August and November
`2018 that had nothing to do with the fraud alleged in their Complaint. The much larger November
`2018 drop occurred shortly after the Company disclosed, among other things, that it would not ship
`additional mid-range GPUs in late 2018 and early 2019 because the channel was full. And the smaller
`August drop followed disappointing revenue guidance issued by the Company based, in part, on the
`expectation that cryptocurrency mining would not contribute to revenue on a going forward basis.
`
`
`1 All cites to “AC ¶” are to the Complaint filed June 21, 2019 (Dkt. 113).
`DEFENDANTS’ MOTION TO DISMISS CCAC
`CASE NO. 4:18-CV-7669-HSG
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`2.
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`Plaintiffs have failed to allege any plausible link between either of those disclosures and the impact
`mining had on the Company’s revenue in 2017 and early 2018. Indeed, the Company made no public
`disclosures in late 2018 that were in any way “corrective” of earlier alleged misstatements. Nor did
`the Company disclose any new information about its 2017 sales or what percentage of revenues were
`driven by mining demand. This failure to plead loss causation is fatal to Plaintiffs’ claims.
`Plaintiffs have also badly mischaracterized what NVIDIA and its executives actually said
`about miners buying GeForce GPUs in 2017. In that period, NVIDIA’s executives repeatedly noted
`that miners were buying both a new GPU product marketed specifically for mining as well as GeForce
`gaming GPUs, and that, “though difficult to quantify,” a portion of NVIDIA’s reported “Gaming”
`revenue was therefore being driven by mining demand. Indeed, by early 2018, NVIDIA and its
`executives were blaming mining demand for a shortage of GeForce chips and increased prices in the
`channel, which priced many gamers out of the market. In their effort to plead falsity, Plaintiffs have
`ripped various statements out of context and simply ignored what NVIDIA and its executives actually
`said. Further, Plaintiffs have failed to allege with particularity that any of the challenged statements
`were false when made. Plaintiffs rely almost exclusively on opinions tendered by a retained “expert”
`and on a former NVIDIA employee based in China who left the Company in 2017. But neither source
`comes close to meeting the heightened pleading standards of the PSLRA. The opinions attributed to
`Plaintiffs’ “expert” are based on nothing more than some public information about blockchain activity
`and a series of undisclosed (and thus unexaminable) assumptions. They are far too conclusory to plead
`falsity adequately. The allegations attributed to the former China employee do not show falsity as they
`do not directly contradict any of the challenged statements.
`Finally, Plaintiffs fail to allege particularized facts giving rise to a “strong inference” of
`scienter. Plaintiffs articulate no plausible motive for NVIDIA’s executives to cover up a market
`dynamic that necessarily would come to light as soon as cryptocurrency prices dropped. They note
`one stock sale by NVIDIA’s CEO during the class period, but it took place in September of 2017—
`long before most of the challenged statements were made, and a year or more before any alleged
`“truth” was revealed—and involved less than one-half of one percent of his holdings. Far from
`supporting an inference of scienter, this sale, along with the lack of any suspicious sales by other
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`DEFENDANTS’ MOTION TO DISMISS CCAC
`CASE NO. 4:18-CV-7669-HSG
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`Case 4:18-cv-07669-HSG Document 123 Filed 08/02/19 Page 11 of 42
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`Individual Defendants and a well-publicized $1.77B stock buyback program by the Company, negates
`any such inference. Most importantly, Plaintiffs do not allege any particularized facts showing that
`any Defendant was contemporaneously aware of specific information that contradicted his or her
`public statements. Viewed holistically, the facts alleged are far more consistent with a company trying
`to navigate a complex and rapidly changing business environment, with no way to reliably predict
`what would happen in the future. As a result, the Complaint should be dismissed.
`II.
`STATEMENT OF ALLEGATIONS AND FACTS SUBJECT TO JUDICIAL NOTICE
`A.
`NVIDIA’s Business
`NVIDIA invented the GPU and remains the world’s largest producer of GPUs. (AC ¶¶ 1, 33.)
`NVIDIA developed the GPU to use in rendering computer graphics, but the applications for the GPU
`have since expanded dramatically. (AC ¶ 41.) The Company now reports its financial results based on
`two segments: the GPU business and the Tegra Processor business. (AC ¶ 43 n.2; Ex. W at 72.)2
`NVIDIA’s revenue is also reported by market platforms, which reflect the core and strategic markets
`which the NVIDIA products are branded and marketed toward: (1) Gaming, which includes chips
`designed and marketed to play video-games, and is primarily comprised of the “GeForce” or “GTX”
`product line of GPUs; (2) Datacenter; (3) Professional Visualization; (4) Automotive; and (5) Original
`Equipment Manufacturer & IP (“OEM”), a catch-all category that includes GPUs sold for embedded
`devices and mainstream PCs and notebooks, as well as intellectual property licensing. (AC ¶ 43.)
`Defendant Jensen Huang is the co-founder and Chief Executive Officer of NVIDIA; defendant
`Colette Kress is the Executive Vice President and Chief Financial Officer; and defendant Jeff Fisher
`is the Senior Vice President who “runs NVIDIA’s Gaming business.” (AC ¶¶ 34-36.)
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`B.
`Distribution of NVIDIA’s GPUs
`NVIDIA generally does not sell its GPUs directly to end users. (AC ¶ 42.) Instead, it sells them
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`to other device manufacturers, such as Add-In Card (“AIC”) manufacturers, who incorporate the GPUs
`into their own products, such as plug-in cards or video cards (“GPU cards”). (AC ¶ 42; Ex. W at 8.)
`These device manufacturers then sell the GPU cards into multi-level distribution and reseller channels
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`2 All cites to “Ex.” are to exhibits to the Declaration of Samantha A. Kirby filed herewith.
`DEFENDANTS’ MOTION TO DISMISS CCAC
`CASE NO. 4:18-CV-7669-HSG
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`(including “wholesalers, retailers, or internet platforms”). (AC ¶ 42.) NVIDIA refers to its direct
`customers, together with their distribution networks, as the “channel.”
`When NVIDIA sells GPUs to its channel customers, the sales are final, so NVIDIA recognizes
`revenue upon shipment. (AC ¶ 22; Ex. W at 47.) Thus, for GPU products, NVIDIA’s reported revenue
`for a given period is the dollar amount of GPUs that NVIDIA sold to its channel customers. (AC ¶ 22;
`Ex. W at 47-48.) Given the structure of the channel, it typically takes some number of months for an
`NVIDIA GPU to move from the beginning of the channel (when NVIDIA sells a GPU to one of its
`channel customers) to the end of it (when an end user buys a product that incorporates the GPU). (See,
`e.g., Ex. BB at 13; Ex. P at 10.) Thus, at any given time, NVIDIA’s channel customers and the
`companies in their distribution networks will have some volume of NVIDIA products in their
`inventory, often referred to as “channel inventory.” (See, e.g., AC ¶ 121; Ex. BB at 12-13.)
`Managing the flow of GPU cards through the channel is a difficult but important challenge for
`NVIDIA’s business. If sales at the end of the channel accelerate suddenly, before NVIDIA can
`increase the supply coming into it, supplies for end users can get tight and prices can increase beyond
`what some are willing to pay. (See, e.g., Ex. W at 15; Ex. Z at 8.) If, on the other hand, end-user
`demand slows down while NVIDIA continues to sell products into the channel, then channel inventory
`can increase to a point at which NVIDIA’s channel customers might halt their purchases of its GPUs.
`(See, e.g., AC ¶ 135.) This challenge is further complicated by the fact that, while NVIDIA suggests
`a Manufacturer Suggested Retail Price (“MSRP”) to retailers for graphics cards containing its GPUs,
`it does not control what those retailers or others in the channel charge. (See, e.g., Ex. P at 12; Ex. V at
`6.) With their independent purchasing and pricing decisions, these third parties can dramatically
`impact the flow of NVIDIA’s products through the channel. Thus, NVIDIA regularly disclosed that,
`“[i]n estimating demand, we make multiple assumptions, any of which may prove to be incorrect,”
`and that any mistakes in those assumptions could result in excess or insufficient inventory to meet
`customer demands. (Ex. W at 15.)
`C.
`The 2017-2018 Cryptocurrency Opportunity
`to “mine” certain
`GPUs are,
`in certain circumstances,
`the ideal computing tool
`cryptocurrencies. (See AC ¶¶ 49-59 for general background on blockchain technologies and mining.)
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`5.
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`DEFENDANTS’ MOTION TO DISMISS CCAC
`CASE NO. 4:18-CV-7669-HSG
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`Case 4:18-cv-07669-HSG Document 123 Filed 08/02/19 Page 13 of 42
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`“Because cryptocurrency prices have swung wildly over their short history . . . the demand for mining
`hardware—including GPUs—has proven extremely volatile.” (AC ¶ 60.) As the price of a
`cryptocurrency goes up, miners have financial incentives to invest in more processing power (i.e.,
`GPUs). (AC ¶¶ 54-59.) NVIDIA’s primary GPU competitor, AMD, experienced this volatility in 2013,
`when the price of Bitcoin increased 14-fold over a six-month period. (AC ¶¶ 61-62.) As Bitcoin miners
`favored AMD’s GPUs, demand—and retail prices—for them “skyrocketed.” (AC ¶ 62.) When Bitcoin
`prices later plummeted, the demand for AMD’s GPUs collapsed, a problem compounded by Bitcoin
`miners dumping their AMD GPUs on the secondary market at steep discounts. (AC ¶ 63.)
`In the spring of 2017, the price of Ether (a cryptocurrency on the Ethereum network) began a
`“meteoric climb that temporarily peaked at over $400 per token in June,” compared to just $23 three
`months earlier. (AC ¶ 65; Ex. FF.) The price then dropped back to $132 one month later, only to
`skyrocket from $276 in November 2017 to $1,422 in January 2018. The chart below reflects Ether
`prices throughout 2017 and 2018. (Ex. FF.)
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`The rise of Ether prices in early 2017—and to a much greater extent in late 2017 and early
`2018—created a significant business opportunity for NVIDIA: “As AMD processors again became
`increasingly hard to find, miners began turning to NVIDIA—specifically, its enormously popular line
`of GeForce Gaming GPUs.” (AC ¶ 65.) But it also created a challenge, as NVIDIA also wanted to
`provide adequate supplies of GPUs for gamers, at properly calibrated prices, to continue serving that
`core market for NVIDIA’s GPUs. (See, e.g