The $1 trillion question facing Nvidia and Jensen Huang: Who lied to whom?

NEW YORK — Jensen Huang, an alleged subordinate and a suspected Chinese spy are at the center of a soap opera captivating Wall Street, Silicon Valley and Washington.

And, like every other soap opera, this one appears to involve at least a dose of deception. Did Nvidia's rockstar CEO mislead his bosses on the board of directors? Did Nvidia and its board conceal from investors what was really going on?

Unlike a typical daytime drama, the stakes here are epic. Untangling who lied to whom could determine the fate of trillions of dollars.

Huang is viewed as so critical to Nvidia's success that the chipmaker could lose $1 trillion of market value if the CEO is pushed out, according to estimates from Dan Ives, partner and senior managing director at Yorkville Ives & Co.

"Jensen has created a black eye moment for himself and Nvidia and now has created a spider web of complexity that Wall Street, Silicon Valley, DC and the global tech ecosystem are trying to figure out what is next," Ives wrote in a report to clients on Wednesday night.

Suspected Chinese spy

Huang's enormous value to Nvidia and the AI industry is exactly why Huang would be an obvious high-value target for foreign intelligence as the world engages in an AI arms race.

And that's where the first, and most obvious deception appears to come from.

Intelligence agencies are known to lure their targets through deceptive schemes like the honey trap suspected in this case.

Jensen Huang has admitted to an extramarital affair, and US officials have told CNN that he had a relationship with Alice Huang, who they have concluded is a Chinese spy.

Nvidia's board is investigating whether Huang was the target of a foreign intelligence effort.

US intelligence concluded in a classified memo issued in May that Alice Huang, an executive at Singapore-based Nvidia customer Megaspeed, was a Chinese intelligence asset, according to CNN reporting.

Crucially, Megaspeed was under federal investigation for allegedly diverting highly coveted US semiconductors to entities in China in violation of US export controls.

Did Jensen Huang mislead the board?

But that may not be where the deception stopped.

Gary Gensler, former chairman of the Securities and Exchange Commission, said that Nvidia's board investigation must determine if their rockstar CEO was honest with them.

"If he misled the board, it's likely they remove him from the job even though they don't have a groomed successor," Gensler, now a professor at MIT, told CNN Wednesday night.

Misleading the board is no small matter, especially in this case. Failing to disclose an active romantic relationship with a major customer could be viewed as concealing a glaring conflict of interest.

That's something that could be determined by the independent investigation Nvidia's board has launched.

If that investigation concludes that Huang deliberately misled his bosses on the board about a massive conflict of interest, the board would have clear grounds to fire him, according to Charles Whitehead, professor of business law at Cornell Law School. And failing to do so could open directors to their own legal exposure.

The alleged second affair

Nvidia shares plummeted Wednesday night after The New York Times reported that Huang had an extramarital affair with an employee who reports to him.

Gensler said these allegations raise the question of whether Huang misled the board about this matter, too.

He said board members investigating CEOs typically ask them a "standard" question at the start: "Is there anything else you need to tell us?"

"Fool me once, shame on you. Fool me twice, shame on me," Gensler said.

The imploding corporate defense

Another key question is whether Nvidia and Huang were upfront with the public and investors as journalists were digging into this story.

"Did he participate with his staff in misleading public investors?" Gensler asked.

The former SEC chair noted that Nvidia provided an explanation on this controversy that has aged particularly poorly – even though it was delivered barely two weeks ago.

"Jensen's interactions with Ms. Huang are not unusual or unexpected," an Nvidia spokesman told The New York Times. "Meetings with customers are part of a CEO's job; Jensen talks with thousands of customer executives every year."

That statement appears to be directly contradicted by the fact that Huang has since admitted to an affair and the board has launched an investigation.

'You just can't lie about it'

Of course, it's now clear that this relationship was anything but routine.

Even though an extramarital affair could be looked at as a personal issue, making a false statement to the public would open up Nvidia to allegations of making a material corporate misstatement.

It would be hard to argue this matter is not material. Nvidia's share price plummeted by as much as 9% intraday on Monday after Huang admitted an affair and the board launched an investigation.

"The movement in the stock price tells us that this was material information. So that passes one test of law. And the second test is: Did you mislead the public about material information? And it appears that way," Gensler said.

A shareholder lawsuit, filed Monday in a California court, alleges Nvidia and Jensen Huang deceived investors in their responses to media reports about the affair.

"You can have as many affairs with Chinese spies as you want under federal law, you just can't lie about it," said Ann Lipton, professor at Colorado Law School at the University of Colorado, Boulder.

What did the board know and when did it know it?

Another question is whether Nvidia's board of directors misled investors about this matter.

Federal agents briefed lawmakers roughly a year ago that they suspected Huang was the "target of a foreign intelligence effort."

What's less clear is how much the company knew about these suspicions.

But if Nvidia's board did know, shareholders could argue the board deceived investors by failing to disclose it.

Another major question is whether Nvidia and its CEO knew – or should have known – that Megaspeed was allegedly smuggling cutting-edge AI chips to China in violation of export controls.

"This could, depending on what was said in the bedroom, escalate to a 10b-5 claim (an SEC rule that prohibits securities fraud, material misstatements and deceptive schemes) and potentially even criminal liability to the extent he knowingly aided a violation of the trade restrictions," said Whitehead.

Nvidia said on Sunday the board has "no reason to believe that either national security or NVIDIA secrets were compromised."

'Very awkward' spot for the board

This matter is further complicated by how critical Huang is viewed to Nvidia's success – and the fact he has no heir apparent.

"From the board's point of view, they have a very tough choice in front of them. They have a founder who is at the heart of this company, no groomed successor," Gensler said. "What do they do if they find out that he misled the board? What do they do if they find out that he was aware that some information may have been shared with the Chinese inappropriately."

Nvidia's board announced on Tuesday it has hired Wachtell, Lipton, Rosen & Katz, a prestigious Wall Street law firm, to "conduct a thorough and independent investigation."

Asked about his experience with boards hiring law firms to conduct so-called independent investigations, Gensler said it's not clear how fair and balanced this report will ultimately be.

"Oftentimes, boards of directors would like the lawyers to do a report that doesn't escalate the problem but helps resolve the crisis at the moment," Gensler said.

Lipton, the Colorado professor, said the board is in a "very awkward" position right now.

"It's weird for them because even if they want to investigate it with all appropriate thoroughness," Lipton said, "the worse things they uncover, the more they're opening the company and Huang up to shareholder fraud lawsuits."