① Investors sued Nvidia between 2017 and 2018, alleging that the company knew that crypto mining had a significant impact on its performance, but did not admit it until the end of 2018 when the financial report crashed. ② This investor lawsuit against Nvidia began in 2018 and went all the way to the US Supreme Court, and today it is still arguing over whether it can enter the actual litigation process.
On June 18th, Caixin reported that the US Supreme Court has approved the hearing of a case where investors are suing Nvidia and its management for misleading the market. This case is also considered one of the key cases that defines the boundary of whether US stock investors can hold listed companies and their management accountable.
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To explain this, we need to start with the candlestick chart of Nvidia and Bitcoin.
From the end of 2017 to the beginning of 2018, Bitcoin experienced crazy fluctuations, such as a tenfold increase in half a year and a plummet in two months. Nvidia's share price only began to fall sharply at the end of 2018 when the financial report was significantly exposed. Nvidia is now the leader in the global AI computing market, and at that time, computing power was often associated with cryptocurrency mining. Due to the volatile and unpredictable nature of cryptocurrencies, this association was somewhat dubious.
The plaintiffs in this case, investors from California, claim that Nvidia and CEO Huang Renxun deliberately concealed the company's reliance on the cryptocurrency industry for mining before the stock price plummeted at the end of 2018.
According to the documents posted on the US Supreme Court website, the plaintiffs stated that Nvidia's graphics card product revenue reached a record high in 2017, and multiple reports also confirmed that Nvidia and Huang Renxun knew that a significant portion of the record sales came from mining in the cryptocurrency industry. However, for more than a year, Huang Renxun denied that mining activities drove the company's GPU sales growth, as he knew that the market's perception of such sales growth factors (due to the volatility of the cryptocurrency industry) was largely negative.
The plaintiffs claimed that by the end of 2018, with the collapse of cryptocurrency prices and a large number of mining operations shutting down, Nvidia's GPU demand suddenly dropped, and the company then admitted that the record revenue came largely from the demand for mining, contrary to its previous statements.
From historical data, when Nvidia's financial report blew up at the end of 2018, Huang Renxun blamed it on the 'crypto hangover'. As a result, Nvidia's share price fell by almost 30% in just two days.
The plaintiffs claimed that when Huang Renxun made that statement, analysts immediately realized that the company had overturned its previous statement that mining-related demand accounted for only a small part of its revenue.
What made the plaintiffs feel even more justified was that in May 2022, Nvidia reached a settlement agreement with the US Securities and Exchange Commission (SEC) and paid $5.5 million to settle the charges, without admitting or denying them.
According to the SEC's announcement, Nvidia did not disclose in two consecutive financial reports in 2017 that mining was a significant reason for the growth of its gaming graphics card business, thereby depriving investors of important information to evaluate the company's key business. The SEC also stated that the information Nvidia had showed that the growth of its gaming graphics card business was largely driven by mining, but the company did not disclose it in Form 10-Q, which was misleading to investors and gave the impression that the gaming graphics card business was not significantly affected by the cryptocurrency industry.
This lawsuit is not easy.
The plaintiffs have been pursuing this case since 2018, and to this day, the US judicial system has not made a final ruling on whether this class action can proceed.
By the way, it was Nvidia who sent this lawsuit to the Supreme Court. In 2021, a lower court revoked the case, but the US Ninth Circuit Court of Appeals later overturned the lower court's decision by a vote of 2-1, saying that the plaintiffs fully alleged that Huang Renxun made 'false or misleading statements' and did so 'deliberately or recklessly,' so the case should proceed to trial.
Nvidia quickly appealed to the US Supreme Court, claiming that the Second Circuit Court of Appeals' decision 'opened the door to rampant litigation and speculative litigation.' Regarding the accusation of false statements, Nvidia argued that none of the content quoted by the plaintiffs supported their accusations that the CEO made misleading statements, nor did it prove that the CEO knew that his statements were misleading.
So Monday's decision cannot be interpreted as entirely bearish for Nvidia, as the US Supreme Court justices are still interested in hearing Nvidia's arguments before deciding whether to proceed with this case. At least for now, Nvidia still has the opportunity to kill the entire case before it enters the class action phase. According to the schedule, this case will be included in the US Supreme Court's 2024-2025 hearing plan, with the earliest possible date being October of this year.
Considering the US Supreme Court's agreement to review the lawsuit against Meta (Facebook's parent company) for misleading investors in the Cambridge Analytica scandal last week, the Supreme Court's impact on the securities market in the next year will continue to grow stronger.
Editor/Somer