SEC Charges NVIDIA with Inadequate Disclosures about Impact of Cryptomining

The Securities and Exchange Commission today announced settled charges against NVIDIA for inadequate disclosures concerning the impact of cryptomining on the company's gaming business. From an SEC press release: The SEC's order finds that, during consecutive quarters in NVIDIA's fiscal year 2018, the company failed to disclose that cryptomining was a significant element of its material revenue growth from the sale of its graphics processing units (GPUs) designed and marketed for gaming. Cryptomining is the process of obtaining crypto rewards in exchange for verifying crypto transactions on distributed ledgers. As demand for and interest in crypto rose in 2017, NVIDIA customers increasingly used its gaming GPUs for cryptomining. In two of its Forms 10-Q for its fiscal year 2018, NVIDIA reported material growth in revenue within its gaming business. NVIDIA had information, however, that this increase in gaming sales was driven in significant part by cryptomining. Despite this, NVIDIA did not disclose in its Forms 10-Q, as it was required to do, these significant earnings and cash flow fluctuations related to a volatile business for investors to ascertain the likelihood that past performance was indicative of future performance. The SEC's order also finds that NVIDIA's omissions of material information about the growth of its gaming business were misleading given that NVIDIA did make statements about how other parts of the company's business were driven by demand for crypto, creating the impression that the company's gaming business was not significantly affected by cryptomining.

Welcome to the world of publicly traded companies

[lsllll]

This is such a minute item to miss in a filing, but I guess they settled because they knew about it and it was obviously required. Seems to me they would have been better off not mentioning cryptominers at all and they would have then been in the clear, because you can't disclose something you "didn't know about." This is probably good for investors who are gonna line up to file suit againt NVidia.

Re: Welcome to the world of publicly traded compan

[bloodhawk]

Would be even less believable to claim they were unaware.

Re:

[LKM]

Yeah, they explicitly put mining limiters into some of their cards, and also sold mining-only cards without video out. Would be a bit weird to do that and then go like "cryptocurrency what?"

Re:

[TechyImmigrant]

>sold mining-only cards

Mining isn't the only use for such things.
  - Machine Learning,
  - cryptographic work (as opposed to the bastardized term 'crypto' for electronic currencies)
  - Simulation acceleration, but to a greater or lesser extend this often doesn't use features that hit the mining filter so can use normal cards.

Re: Welcome to the world of publicly traded compa

[retchdog]

They literally called it the "Lite Hash Rate" (LHR) limiter. Deep learning and simulation do not generally use hashes (unless you are simulating hashing but thatâ(TM)s kind of a silly corner-case), while it is almost the entirety of miningâ¦

Re:

[TechyImmigrant]

I use hashes in simulation models of nondeterministic processes in silicon circuits. If there's a hardware hash handy, that's the one I'll use. There are other ways to do it and it's usually driven by what the hardware offers.

E.G. I've designed hardware gaussian RNGs to be used in graphics chips for perturbing neural networks and adding well formed noise to rendered images. That stuff would be great for my purposes if it was available to software as an instruction.

Re:

[Joce640k]

Seems ridiculous to me. How are they supposed to know exactly what customers do with their video cards after they buy them?

Re:Welcome to the world of publicly traded compani

[LKM]

Some GPU manufacturers sold palettes full of GPUs directly to miners, and given how tightly Nvidia controls the companies they ship their chips to, it's implausible that Nvidia had no idea about this. Everybody involved here knew exactly what was happening.

Re:

[bloodhawk]

They manufactured and marketed too as well as took large orders from mining companies. To say they weren't acutely aware would be idiotic. They even made specialised cards for the sector.

Re:

[TechyImmigrant]

How do they know if I'm going to use my 3090 for mining or gaming?
Actually they know I won't be using it for anything because I can't buy one.

Re:

[anonymouscoward52236]

If you bought a car and most people used their cars for vehicular manslaughter, should the police come knocking at car manufacturer's doors looking for more regulation?

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[Xenx]

They aren't in trouble for people using the cards to mine. They're in trouble for allegedly misreporting the portion of their sales that they knew to be used for mining. If that is true, they were lying to their shareholders. That is what they're in trouble for.

Re:

[Xenx]

Sorry, title said charges. That usually means it hasn't been concluded. I see the SEC found against Nvidia so it's not alleged.

Re:

[bloodhawk]

not remotely relevant. They aren't in trouble for what people used the cards for. They are in trouble for misreporting earnings breakdowns to the Market which is a crime as shareholders and investors are supposed to be given truthful information.

Relevant paragraphs

[enriquevagu]

are omitted from the summary:

âoeNVIDIAâ(TM)s disclosure failures deprived investors of critical information to evaluate the companyâ(TM)s business in a key market,â said Kristina Littman, Chief of the SEC Enforcement Divisionâ(TM)s Crypto Assets and Cyber Unit. âoeAll issuers, including those that pursue opportunities involving emerging technology, must ensure that their disclosures are timely, complete, and accurate.â

The SECâ(TM)s order finds that NVIDIA violated Section 17(a)(2) and (3) of the Securities Act of 1933 and the disclosure provisions of the Securities Exchange Act of 1934. The order also finds that NVIDIA failed to maintain adequate disclosure controls and procedures. Without admitting or denying the SECâ(TM)s findings, NVIDIA agreed to a cease-and-desist order and to pay a $5.5 million penalty.

It has nothing to do with crypto. From an investing point of view, it's not the same to invest in a company that sells to gamers than a company that sells to cryptominers (or something else), because those markets will have different regulations and evolution.

Re:

[JBMcB]

From an investing point of view, it's not the same to invest in a company that sells to gamers than a company that sells to cryptominers (or something else),

You'd have a point if nVidia was *marketing* to cryptominers, or building gear designed for cryptominers, but I haven't seen any evidence of them doing so until rather recently. They've always positioned, and optimized, their consumer-facing cards for games.

Re:Relevant paragraphs

[splutty]

Irrelevant. If they were aware that a significant portion of their sales were not going to a relatively stable market, but instead to a volatile market, they, by law, would have had to disclose that.

Re:

[Joce640k]

OK, I guess that makes sense.

TLDR; Investors have to be made aware that if "crypto" collapses then it's going to affect their shares in NVIDIA.

Re:

[splutty]

Exactly. The law requires companies to disclose anything that might negatively affect their share price. And I would say this definitely counts :)

Re:

[Stolovaya]

But they have awareness, which is why they nerfed the mining capabilities for many cards. You could position that as them specifically NOT marketing to cryptominers, but they are aware that miners buy many of their cards.

Hardware market for crypto is highly volatile

[sinij]

I had a conversation with someone in business of supplying hardware to crypto miners. According to what I was told, sales are prone to extreme boom and bust cycles, to the point that they often require prepaying for any large order to safeguard from getting stuck with unclaimed inventory during bust cycles. NVIDIA chasing crypto miners to the detriment of gamers would result in substantial exposure to these cycles that have to be disclosed as a business risk.

Failure to state the obvious

[jpschaaf]

I realize that SEC filings are supposed to be comprehensive, but any investor who doesn't realize that graphics cards are being used for cryptocurrency mining has their head in the sand... or plainly doesn't care.

Re:

[splutty]

This isn't about investors. This is about an Nvidia report that's not legally sound. The fact the investors are the target of this report doesn't really matter, other than the fact the laws were written to enforce companies to tell the truth about their exposure to risks.

Re: Failure to state the obvious

[reanjr]

It wasn't a secret. They stated they were being gobbled up by miners and that it was hard for gamers to find GPUs. I'm not sure what responsibility companies have for teaching their investors basic economics.

Re:

[splutty]

They have a responsibility to the law to report things that could negatively affect their share price. As I said, the investors in this case don't matter at all. They're bystanders, basically.

What the investors think/know/know they think/think they know has no consideration for whether the report Nvidia produced breaks any laws or not.

Re:

[bloodhawk]

exactly it wasn't a secret so Nvidia was legally obligated to detail their risk exposure.

Don't invest in what you don't understand

[reanjr]

I barely pay any attention to the PC gaming market. I've always been a console fan. I certainly don't pay attention to NVidia's stock price.

But I was well aware that NVidia's business was being propped up for years by miners. Their statements made that very clear. The rising prices of GPUs made that very clear.

If you actually invested in NVidia but weren't paying attention well enough to understand the dynamics of the GPU market, then you were willfully ignorant. No corporate reporting would have been suffi

Why?

[mmell]

Is nVidia doing the cryptomining themselves? Why are they accounting for how law-abiding customers choose to use their legal, safe, effective products? That's vaguely like making me responsible for software I explicitly and legally provide "as is".

Low hanging fruit only

[bubblyceiling]

Meanwhile the SEC remains completely oblivious to the financial crimes it is actually supposed to be investigating. Unless ofcourse like Madoff they turn themselves in.