Nvidia faces shareholder investigations after stock drops 4%

Schall, Brown & Schwartz, a Los Angeles shareholder-rights firm, announced Monday that it was examining whether Nvidia made false or misleading statements or withheld information important to investors. Rosen Law Firm, Levi & Korsinsky, Bronstein, Gewirtz & Grossman and the Law Offices of Frank R. Cruz also announced investigations; Rosen said it was preparing a class action lawsuit.

Stanford law professor Robert Bartlett expects a complaint to be filed. Under federal securities law, the first complaint prompts a public notice, after which investors have 60 days to ask the court to appoint them lead plaintiff. Filing early can help a firm recruit investors with large losses and shape the case. Nvidia is based in Santa Clara, making the Northern District of California a likely venue. Newly filed cases can take up to 24 hours to appear online.

The potential claim centers on Nvidia’s earlier description of the relationship. After The New York Times reported on Huang’s ties to Alice Huang last month, an Nvidia spokesperson told The Hill it was “not unusual or unexpected,” adding that Megaspeed was like other regional cloud customers and that Huang met with thousands of customer executives each year. Huang has since acknowledged to the board that the relationship was intimate. The Times has also reported that U.S. intelligence monitored Alice Huang for more than a year.

Bartlett called the company’s earlier statement “clearly a misleading statement” and said Huang’s knowledge would be imputed to Nvidia. He described the likely legal theory as “fraud on the market”: investors could argue they bought shares at prices shaped by false or incomplete disclosures, then lost money when the truth emerged. Damages in such cases are linked to the stock’s decline, and Bartlett said Nvidia’s size could make a settlement exceedingly expensive.

The board’s inquiry could also raise governance questions about what directors knew and when. A more serious issue would arise if investigators found Huang knew about the intelligence connection. The board said Sunday it had no reason to believe national security or Nvidia secrets were compromised.

Bartlett said the SEC could technically seek to bar an officer or director over intentional securities fraud, but doubted the agency under Chairman Paul Atkins would pursue that route. He said a roughly two-year period after discovery of the facts could leave a future administration time to act, though he considered that unlikely. Securities cases often take years and end in settlements paid by companies and directors-and-officers insurers; they are civil matters and do not expose Huang to prison. Shareholders ultimately bear settlement costs, directly or through insurance premiums.

An investigation announcement alone does not establish that a case is strong. The court later selects a lead plaintiff, usually based on which investor suffered the largest loss.