Nvidia's stock fell over 4% after its board opened a probe of CEO Jensen Huang, and several law firms are moving to sue. Shareholders could end up paying.
Nvidia's stock fell more than 4% on Monday, the first trading day after its board said it would investigate CEO Jensen Huang. The probe concerns his relationship with Alice Huang, an executive U.S. intelligence believes was spying for China. Within hours, several law firms announced they were looking at suing the company on behalf of investors.
Alice Huang is an executive at Megaspeed, a Singapore data center company. The New York Times first reported her ties to Jensen Huang last month. An Nvidia spokesperson told The Hill the relationship was "not unusual or unexpected." Since then, Huang has told the board the relationship was intimate. The Times also reports that U.S. intelligence had been monitoring Alice Huang for more than a year.
Under federal securities law, the first complaint triggers a public notice. Investors then have 60 days to ask the court to make them lead plaintiff. A firm that files early gets a head start on signing up investors with big losses. Stanford law professor Robert Bartlett expects a filing, and likely in federal court in Northern California. Firms that announced action Monday:
Bartlett called Nvidia's earlier statement "clearly a misleading statement." He said a CEO's knowledge is treated as the company's knowledge. The likely claim is called fraud on the market. Investors argue they paid prices based on false or incomplete public information, then lost money when the truth came out. Damages are tied to the stock's drop, and Nvidia is one of the most valuable companies in the world.
These cases usually run a long time and then settle. The payment comes from the company and its directors-and-officers insurers. Typically there are no personal consequences for the CEO or the board. It is a civil case, so Huang is not facing prison over it. The irony, Bartlett noted, is that the suit is filed in shareholders' name, yet shareholders ultimately pay, directly or through insurance premiums. That includes anyone who owns Nvidia through a fund or retirement account.
A law firm's announcement is not proof of a strong case. Schall, Brown & Schwartz files many such notices. The court decides which firm leads, usually based on which investor lost the most. The board probe could matter more. If it finds Huang knew about the intelligence connection, Bartlett said, that would be "a whole other ball game." The board said it has no reason to believe national security or Nvidia secrets were compromised. Bartlett doubts the SEC will act.
If you own Nvidia through a fund or retirement account, a future settlement would come out of the company, and so out of shareholders' pockets.
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