Nvidia’s stock slid more than 4% on Monday, the first trading day after its board said it would investigate CEO Jensen Huang over his relationship with Alice Huang, an executive U.S. intelligence believes was spying for China. Securities lawyers were already moving. Schall, Brown & Schwartz, a Los Angeles shareholder-rights firm, was among the first to plant a flag, announcing Monday morning that it’s investigating whether Nvidia made false or misleading statements, or failed to disclose information pertinent to investors.
Robert Bartlett, a Stanford Law professor and securities law expert, expects it to have plenty of company. Plaintiffs’ lawyers have good reasons to be first in line; under federal securities law, the first complaint triggers a public notice, and investors then have 60 days to ask the court to be named lead plaintiff. A firm that files early gets a head start on signing up investors with large losses, as well as on shaping the story of the case.
Nvidia is headquartered in Santa Clara, so it’s likely we’ll see this in the Northern District of California. (It’s very possible a case has already been filed; newly filed cases can take up to 24 hours to be discoverable online.) While much remains unknown, the legal theory here doesn’t depend on anything the board’s investigation turns up about Huang’s private life. When The New York Times first reported on Huang’s ties to Alice Huang last month, the executive at the Singapore data center company Megaspeed, an Nvidia spokesperson described the relationship to another outlet, The Hill, as “not unusual or unexpected.” The company representative added, “Megaspeed has been no different than many other regional cloud customers. Meetings with customers are part of a CEO’s job; Jensen talks with thousands of customer executives every year.” Since then, Huang has acknowledged to the board that the relationship was intimate.
Meanwhile, The Times reports that U.S. intelligence had been monitoring Alice Huang for more than a year. From a securities perspective, Bartlett said, the company’s earlier statement was “clearly a misleading statement.” And because Huang is CEO, Bartlett said, “his knowledge gets imputed to the company.” In other words, Nvidia is treated as having known what its chief executive knew. Bartlett says the likely vehicle is a “classic fraud on the market” claim, in which investors argue they paid prices that reflected false or incomplete public information, and lost money when the truth emerged.
Monday’s drop gives them a lot to work with. Damages in such cases are tied to the stock’s decline, and Nvidia is one of the most valuable companies in the world, so you can imagine a settlement could prove exceedingly expensive. The usual path is that the case is litigated for a long time and then settles, Bartlett notes.
That means a large payment from the company and its directors-and-officers insurers, but typically no personal consequences for the CEO or the board. It is also a civil matter, so Huang isn’t facing prison over it. The irony, as Bartlett noted, is that the suit is brought in the name of Nvidia’s shareholders, and shareholders ultimately pay for the settlement, directly or through insurance premiums.
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