New York (NY) – Shalov Stone Bonner & Rocco said it has filed a securities fraud class action against Nvidia, selflessly representing all investors who purchased or otherwise acquired the common stock of Nvidia between November 8, 2007, and July 2, 2008. The law firm believes that Nvidia and especially chief executive Jen-Huang and chief financial officer Marvin Burkett have been aware about the chip defects long before they were published and the company may even be hiding the true extent of this problem – causing monetary damages for investors.

The complaint filed in the U.S District Court of Northern California, accuses Nvidia of a series of misrepresentations and omissions that “actively concealed and failed to disclose the unusually high failure rates of Nvidia's mobile video adapters and the impact of these defects on the company’s financial condition and results and future business prospects.” When Nvidia announced the defect and a $150 - $200 million charge it would have to take, the firm’s stock plunged, wiping off $3 billion from Nvidia’s market capitalization. The stock was unable to recover from that impact and currently trades at about $11, down from about $18 when the chip failures and a replacement program were announcement.

The suit filed, however, covers a period that dates back to November of 2007 – when the stock was trading at almost $37, which coincidentally would not only be the most profitable period for damages that are sought by the suit (Nvidia’s stock was trading at records highs in November 2007), but also the time when Shalov Stone Bonner & Rocco believes Nvidia became aware of potential material issues. The law firm’s argument is mainly based on Nvidia press releases talking about the health of the company as well as quotes in a ZDNet article, in a Wall Street Journal piece questioning the reserve set by Nvidia as well as comments to an article published by ZDNet author Adrian Kingsley-Hughes.  

By all accounts, Shalov Stone Bonner & Rocco suit may be walking on thin ice as far as the evidence goes.

While only Nvidia truly knows what was going on in the background and we heard some voices from the company that the issues could have been handled differently and probably much better in the public, the simple fact that Nvidia may have known about this issue in November 2007 may not be reason enough to conclude that Nvidia maliciously concealed a problem from investors and whether Huang and Burkett in fact are the appropriate defendants is an entirely different question. As outlined in one of our previous articles (which Nvidia did not especially like, but did not request any retraction whatsoever either), the main problem of the problem is buried in a high-lead solder bump that suffers from fatigue cracking under extreme heat. Transitioning to a different solder bump material requires substantial engineering effort, testing and qualification and that may have been the case here.

We are aware that G84, 86, 92 and 94 GPUs used this high-lead bump and are potentially exposed to the problem and have recently been transitioned to a new eutectic solder bump.

The fact of the simple presence of a high-lead solder bump does not mean that there will be chip failures. Failures apparently only happen in notebooks where these solder bumps are exposed to much more stress. Only Nvidia knows what the true failure rates are, but we were assured that the recently announced $196 million charge will be sufficient, which would mean that about 6-8% of Nvidia’s 15 million-or-so notebook GPUs potentially carrying the problem are actually affected. That is, of course, if not more notebook manufacturers come along complaining about failure rates.       

We are also a bit surprised that Shalov Stone Bonner & Rocco go after Huang and Burkett, which we find highly unlikely to have concealed any information. If they did, they deserve the full brunt of the suit, but such an action would expose the executives to SEC charges and we doubt they would play that game – even if the company would engage in such action to contain the financial impact of the problem.  If anything was concealed, then it is much more likely to have happened on much lower company levels. To prove that Huang and Burkett were maliciously hiding information may be a tough one to prove and it will be interesting to see the outcome of this allegation.

If Nvidia in fact concealed critical information, the impact of this suit could go far beyond the “compensatory damages” the law firm is seeking – and expand to a much broader recall that not only could cost Nvidia billions of dollars, but drive the company into bankruptcy. Replacing 15 million chips at a notebook repair cost of $150 - $250 is expensive and can’t be covered by the company’s cash reserve of $1.6 billion.   

There is no doubt in our mind that Nvidia should have disclosed more information than it did and we are certain there is information that may be very inconvenient to disclose for Nvidia. But the evidence the law firm presented in this complaint is very thin and it surely looks like a lawsuit that is based on pure speculation at this time.