What could the legal fallout be for Nvidia, Jensen Huang and the board after affair scandal?

Reports that Jensen Huang, the co-founder of AI powerhouse Nvidia, had an extramarital affair with a company executive and ties to a suspected Chinese spy have led to his resignation as CEO and 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 U.S. authorities investigated and concluded was a Chinese intelligence asset. Megaspeed has faced U.S. scrutiny over suspicions that it helped Beijing gain access to Nvidia’s advanced AI chips whose export to China is restricted.

On Nov. 8, 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. U.S. President Donald 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.

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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” U.S. national security or company secrets were affected, though an independent committee of directors will review all available information and hired the Wachtell, Lipton, Rosen & Katz law firm to assist it.

On Wednesday, the New York Times reported that Huang had also had an extramarital affair with a company executive who reported to him. Reuters could not verify the report. Nvidia announced on Thursday that Huang had resigned.

Nvidia sits at the centre 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 Nov. three 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 Oct. 9, when Nvidia denied claims in a New York Times report about Megaspeed ties to China, and Nov. 8, when the board announced its investigation and Huang acknowledged he had an affair. The period includes Oct. 30, when Huang told Bloomberg that 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.

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The lawsuit was filed before Huang resigned. If Huang resigned because he lied about the Megaspeed relationship, that could strengthen a securities fraud case.

The lawsuit did not specify damages but the stock lost around 20 per cent during the class period, a decline of around US$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 US$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.

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Could the board be held liable?

An investor filed a so-called derivative lawsuit on Wednesday seeking to hold the board liable for allegedly breaching its fiduciary duties and failing to make a good-faith effort to oversee the business and Huang. The lawsuit said the board allowed Nvidia to make repeated assurances about the company’s dealings with Megaspeed and the board did not act on warning signs about Huang’s relationship with Alice Huang until it was public.

The lawsuit, filed in federal court in the Northern District of California, also said the board lacked independence to investigate Huang.

Huang’s resignation could strengthen the board’s defences against derivative lawsuits by showing the directors were acting on signs of misconduct.

Investors, including state pension funds, can also use their rights as Nvidia shareholders to seek internal records to investigate the board and look for potential conflicts.

The board could sue Huang for any fines or securities fraud settlements that result from the scandal. For example, electric truck maker Nikola took legal action and got a judgment of US$168-million against its former CEO Trevor Milton.

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.