By Tom Hals
WILMINGTON, Delaware, Nov 11 (Reuters) - Reported ties between Jensen Huang, the CEO of AI powerhouse Nvidia, and a suspected Chinese spy have sparked an investigation by the FBI, calls for congressional hearings, a review by the company's independent directors and a proposed investor class action lawsuit.
Below is a look at the potential legal exposure for Huang, Nvidia and the directors of the company, which dominates the global market for computer chips that power the AI economy.
WHAT
ARE THE ALLEGATIONS?
The New York Times reported last month that Huang had a relationship with Alice Huang, an unrelated former executive of Singapore-based company Megaspeed, whom US authorities investigated and concluded was a Chinese intelligence asset. Megaspeed has faced US scrutiny over suspicions that it helped Beijing gain access to Nvidia's advanced AI chips whose export to China is restricted.
On Sunday, Nvidia's Huang admitted he was unfaithful to his wife without providing details about the relationship, which led to a drop in Nvidia's stock price. Trump said Huang told him that he had no idea that the woman was a spy and Huang has not been accused of criminal wrongdoing.
Reuters could not independently verify the intelligence allegation, which China's foreign ministry has said was "groundless," nor has it verified Alice Huang's current employment status with Megaspeed.
Nvidia has said its board has "no reason to believe" US national security or company secrets were affected, though an independent committee of directors will review all available information. The company said on Tuesday the independent directors hired the Wachtell, Lipton, Rosen & Katz law firm to assist with its investigation.
Nvidia sits at the center of the technological rivalry between the United States and China. Washington has imposed restrictions on exports of advanced AI chips to China since 2022. News of the affair has emerged as Democrats seized control of Congress in the November 3 midterm elections, propelled in part by anti-AI and anti-corruption sentiment.
WHAT ABOUT FEDERAL SECURITIES FRAUD?
A proposed class action was filed in San Jose, California, federal court on Monday alleging the company and Huang defrauded shareholders by concealing Huang's alleged relationship. The proposed class would cover Nvidia investors who bought the stock between October 9, when Nvidia denied claims in a New York Times report about Megaspeed ties to China, and November 8, when the board announced its investigation and Huang acknowledged he had an affair. The period includes October 30, when Huang told Bloomberg Nvidia's relationship with Megaspeed was "normal and not unusual."
Securities fraud plaintiffs must show, among other things, that Nvidia and Huang knowingly misled investors, that investors relied on those misleading statements and that those misleading statements artificially inflated the stock.
The lawsuit did not specify damages but the stock lost around 20% during the class period, a decline of around $1 trillion in market value.
Such lawsuits are often filed in the wake of a company's stock suffering a large drop, and more are likely.
WHAT ABOUT STATE SECURITIES LAWS?
Some states have their own securities laws and their attorneys general have used those laws to pursue investigations of alleged violations. New York's Martin Act is considered the most powerful and the state's attorneys general have used it to police Wall Street, including an insider trading case brought this year. The Martin Act also allows the attorney general to pursue criminal claims.
No states have brought claims and the New York attorney general did not immediately respond to a request for comment.
COULD THE SEC STEP IN?
The US Securities and Exchange Commission could investigate to determine if Nvidia made false or reckless disclosures that misled investors. The regulator would have a lower burden of proof than a private investor class action and the SEC can obtain alternative remedies, such as barring individuals from serving as officers or directors of public companies.
In 2022, during the administration of Democratic President Joe Biden, Nvidia settled allegations by the SEC that in 2018 it had made inadequate disclosures regarding the growth of its processors for the gaming market. The company paid a $5.5 million fine but did not admit or deny the allegations. An investor class action lawsuit over the same allegations is ongoing.
The SEC declined to comment.
COULD THE BOARD BE HELD LIABLE?
If the investigation by the independent committee reveals the board didn't have a proper system for monitoring the business or ignored warning signs of misconduct around Megaspeed or chip smuggling or Huang's relationship, shareholders could sue. Directors could be ordered to reimburse the company for fines or settlements paid by Nvidia.
Investors, including state pension funds, can use their rights as Nvidia shareholders to seek internal records to investigate the board and look for potential conflicts. Several of the directors have served on the board for decades and amassed enormous wealth from their Nvidia stock, which judges have cited in questioning the independence of corporate directors.
CAN SECURITIES FRAUD CARRY CRIMINAL PENALTIES?
Only a small fraction of all securities fraud cases lead to criminal charges, as most violations are handled through civil or administrative enforcement rather than criminal prosecution.
But a federal statute, enacted as part of the Sarbanes-Oxley Act of 2002, criminalizes schemes that knowingly defraud investors through false pretenses. Prosecutors would need to show that Huang intentionally lied to the public about the affair in order to keep Nvidia's stock price from falling, rather than for personal reasons such as avoiding embarrassment.
Trump confirmed the existence of an FBI probe but his remarks were vague and he did not say who the target was or anything about the scope of the investigation. "I know the FBI is looking into it in terms of something else, and I think that he'll be in good shape," Trump said on Monday at a White House briefing.
If Huang knew about Alice Huang’s alleged intelligence connection, he could face criminal liability under the Economic Espionage Act, a 1996 law that punishes the misappropriation of trade secrets to benefit a foreign government.
(Reporting by Tom Hals in Wilmington, Delaware; Additional reporting by Jan Wolfe and Steve Holland; Editing by Nick Zieminski)
