The “billion-dollar” question facing Nvidia and Jensen Huang: Who lied to whom?

(CNN) - Nvidia and its CEO, Jensen Huang, who announced his resignation alongside one of his subordinates and a woman suspected of being a Chinese spy, found themselves at the center of an exciting drama that is capturing the attention of Wall Street, Silicon Valley, and Washington.

As in any drama, this story appears to have a degree of deception, which is what ultimately led to Huang's sudden departure on Thursday.

Did Nvidia's flamboyant CEO mislead board members? Did Nvidia and its board of directors hide the truth about what was really going on from investors? Unlike traditional soap operas, the stakes here are very high; The fate of trillions of dollars may depend on revealing the truth about who lied to whom.

Huang was seen as essential to Nvidia's success; So much so that his absence from the helm could mean the company losing about $1 trillion in value, according to estimates by Dan Ives, partner and senior managing director at Yorkville Ives & Co. In a statement to CNN on Thursday, Ives described the matter as “a devastating blow to Nvidia and the American technology sector.”

Suspected "Chinese spy". The enormous value that Huang represents to Nvidia and the artificial intelligence sector makes him a valuable target for foreign intelligence services, especially in light of the arms race in the field of artificial intelligence that the world is currently witnessing. Here the first - and most obvious - deceptions appear in this case. Intelligence services are known to lure their targets through deceptive methods, such as “honey traps” where an emotional connection is used to lure the target, which is what is suspected of happening in this case. Jensen Huang admitted to having an extramarital affair, while US officials confirmed to CNN that the relationship was with a woman named Alice Huang, who they concluded was working as a spy for China. Nvidia's board of directors is investigating whether Huang was the target of a foreign intelligence operation. According to CNN reports, US intelligence concluded in a secret memo issued in May that Alice Huang, an executive at Megaspeed, a Singapore-based Nvidia client, was working for Chinese intelligence. More importantly, Megaspeed was under federal investigation on suspicion of transferring critical US semiconductors to entities inside China, in violation of US export control rules.

Did Jensen Huang mislead the board? The matter may not stop at this level of deception, as Gary Gensler, former head of the US Securities and Exchange Commission, believes that the investigation conducted by the “Nvidia” board of directors must determine whether its CEO - who is widely known - has been honest with them. In a statement to CNN on Wednesday evening - before the board announced Huang's departure - Gensler, who currently serves as a professor at the Massachusetts Institute of Technology, said: “If he misled the board, they will likely remove him from his position, even if they do not have a ready alternative to succeed him.” Misleading the board of directors is no easy matter, especially in this case; Failure to disclose an existing romantic relationship with a key client may be considered concealing a blatant conflict of interest. This is something that can be revealed through the independent investigation launched by the Nvidia Board of Directors. Charles Whitehead, a professor of business law at Cornell Law School, explains that if the investigation concluded that Huang had intentionally misled board members about a significant conflict of interest, the board would have clear grounds to remove him and failure to take action could have exposed board members themselves to legal liability.

A "second relationship" is suspected Nvidia shares fell sharply on Wednesday evening, following a New York Times report that Huang had an extramarital affair with an employee working under him. The selling continued on Thursday, as Wall Street tried to anticipate Nvidia's future in Huang's absence. Gensler noted that these allegations raise the question of whether Huang misled the board about this matter as well. He mentioned that, when investigating CEOs, board members usually ask them a “classic” question at the beginning: “Is there anything else you should tell us?” "If you fool me once, shame on you. If you fool me twice, shame on me," Gensler said.

Collapse of the company's defense There is another fundamental question: Were Nvidia and Huang honest and transparent with the public and investors, while journalists were investigating the facts about this issue? Gensler asked: Did he and his team participate in misleading investors? The former head of the Securities and Exchange Commission pointed out that the explanation provided by Nvidia regarding this controversy did not stand up to the facts, even though it had only been reported for two weeks. An Nvidia spokesperson told the New York Times, “Jensen’s dealings with Ms. Huang are not unusual or unexpected; "Meeting customers is part of a CEO's job, and Jensen speaks with thousands of customer executives every year." This statement appears to completely contradict the fact that Huang later admitted to having an affair, and that the board of directors launched an investigation into the matter. It is now clear, of course, that this relationship was anything but normal. Although an extramarital affair may be considered a personal matter, making a false statement to the public could expose Nvidia to charges of making materially misleading statements about the company. It is difficult to say that this issue is not fundamental; Nvidia's share price fell by as much as 9% during Monday's trading, after Huang acknowledged the existence of a relationship and the Board of Directors began an investigation into the matter. “The stock price movement indicates that this was material information, which meets one of the legal criteria,” Gensler says. The second criterion is: Was the public misled about material information? This appears to be the case." In a lawsuit filed by a shareholder on Monday in a California court, Nvidia and Jensen Huang are alleged to have deceived investors through their responses to media reports about the relationship. “Under federal law, you can have as many relationships with Chinese spies as you want, but you can't lie about it,” says Anne Lipton, a professor at the University of Colorado School of Law in Boulder.

What did the board know, and when did it know it? Another question arises: Did Nvidia's board of directors mislead investors on this issue? Federal agents informed lawmakers about a year ago of their suspicions that Huang was the target of foreign intelligence efforts, but what remains less clear is the extent to which the company was aware of these suspicions. If Nvidia's board of directors knew about the matter, shareholders might argue that the board deceived them by not disclosing this information. Another key question: Did Nvidia and its CEO know or should they have known that Megaspeed was allegedly involved in smuggling advanced artificial intelligence chips into China, in violation of export controls? “Based on what was said in that particular relationship, the matter could escalate into a claim under an SEC rule prohibiting securities fraud, material misstatements, deceptive practices, and even criminal liability, if it is proven that he knowingly assisted in the violation of trading restrictions,” Whitehead says. Nvidia said Sunday that its board of directors "sees no reason to believe that national security or company secrets have been compromised."

A “very critical” position for the Board of Directors This issue becomes more complicated given the extreme importance that Huang represents to NVIDIA's success, as well as the lack of a clear successor to him. “From a board perspective, they face a very difficult choice,” Gensler says. “They have a founder who is the core of the company, and there is no successor in place.” He added, wondering: “What will they do if they discover that he misled the board of directors? What will they do if it turns out that he was aware of the possibility of sharing some information with Chinese parties in an inappropriate way?” Nvidia's board of directors announced on Tuesday that it had hired Wactell, Lipton, Rosen & Katz - a prominent Wall Street law firm - to "conduct a comprehensive and independent investigation." In response to a question about his experience with boards of directors dealing with law firms to conduct so-called “independent investigations,” Gensler indicated that it is not clear how fair and balanced the report that will ultimately be issued is. “Boards often want lawyers to prepare a report that does not exacerbate the problem, but rather helps contain the current crisis,” Gensler explains. For his part, Lipton, a university professor in Colorado, believes that the board of directors currently finds itself in a “very critical” position. "It's a strange situation for them to be in," Lipton adds. "Even if they wanted to conduct a very thorough investigation, if they uncovered something worse, it would expose the company and Hwang to greater risks, such as the possibility of shareholders filing lawsuits for fraud."