Lawsuit claims Nvidia hid serious flaw in graphics chips

Lawsuit charges that Nvidia execs concealed for at least eight months a flaw that caused some of the company's graphics chips to fail at unusually high rates

A lawsuit filed in a California court on Tuesday alleged Nvidia violated U.S. securities laws and concealed the existence of a serious defect in its graphics-chip line for at least eight months "in a series of false and misleading statements made to the investing public."

The lawsuit charged that Nvidia CEO Jen-Hsun Huang and CFO Marvin Burkett knew as early as November 2007 about a flaw that exists in the packaging used with some of the company's graphics chips that caused them to fail at unusually high rates.

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Nvidia did not immediately reply to an e-mail request for comment on the lawsuit.

Nvidia publicly acknowledged the flaw  on July 2, when it announced plans to take a one-time charge of up to $200 million to cover warranty costs related to the problem. That announcement caused Nvidia's stock price to fall by 31 percent to $12.98 and reduced the company's market capitalization by $3 billion, the lawsuit said.

The lawsuit, brought against Nvidia by New York law firm Shalov, Stone, Bonner & Rocco in the U.S. District Court for the Northern District of California, was first reported by The Inquirer, a U.K.-based technology news site.

The lawsuit seeks class-action status against Nvidia and unspecified damages.

Highlighting the seriousness of the charges laid against Nvidia, the lawsuit said Hewlett-Packard issued a BIOS update to mitigate the chip problem eight months before Nvidia revealed its existence to investors. Nvidia and computer makers have used BIOS updates that cause system fans to run more often in an attempt to reduce heat stress on the affected chips and prevent them from failing.

"Nevertheless, for at least eight months, defendants concealed from Nvidia investors these defects and their obvious impact on the company's financial condition and future business prospects," the lawsuit said.

Last month, Nvidia confirmed the one-time charge announced in July, taking a charge of $196 million to cover warranty expenses related to the chip flaw. At the time, Nvidia's Huang announced the company felt confident it had the problem under control, but stopped short of ruling out further charges related to the problem.

"We thought we were relatively conservative, but we'll see how it goes," he said at that time.

Copyright © 2008 IDG Communications, Inc.

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