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nVidia's Exuberant Deal Announcement Earns Frown From SEC

Spreading good news too soon opens a can of worms for Silicon Valley firm.

Remember the time, as a child, when you couldn't wait to get home to tell your parents about that good grade you got on an English test?

Jen-Hsun Huang, president and chief executive of

nVidia

(NVDA) - Get Report

, a Santa Clara, Calif., software developer, must have felt the same urge last March. He gushingly emailed news to employees --- at that time unannounced to the public --- that the company had won a big contract from

Microsoft

(MSFT) - Get Report

.

Trouble is, Huang's exuberance backfired. Not only did an employee allegedly dash out and unlawfully make a surreptitious investment to profit from the deal, but the

Securities & Exchange Commission

later took the unusual step of chastising the company for tempting the worker by telling tales out of school.

The case has raised eyebrows in Silicon Valley, where some corporate officials and legal experts wonder what Huang was thinking. Observers said that while some companies in the region might engage in practices similar to those at nVidia, the predominant policy is to avoid company-wide announcements of deals before they are officially announced.

"Senior management in more experienced companies would not make such mistakes," said Norman Blears, a

Heller Ehrman White & McAuliffe

attorney who's had a securities litigation practice in Silicon Valley for 20 years. "Most of the companies that have been public for some time ... keep this kind of material within a small group on a need-to-know basis."

Or as one Valley insider said, with a roll of his eyes, "This is a sad example of the Internet growing up too fast."

The case also coincides with the approval of new SEC policies against selective corporate disclosure. Rules adopted by the commission last month essentially prohibit companies from giving big investors important information ahead of everyone else.

On March 5, nVidia won a hotly contested contract to supply components for Microsoft's new video game console, the "X-box." It was a big deal for nVidia, which stood to gain a $200 million fee up front.

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Huang promptly alerted more than 400 employees. "X is Ours!" his email exulted. "If X-box becomes as big as

Sony

PlayStation, we generate about $2B in sales over five years."

Among those who got the email was Manu Shrivastava, a 31-year-old nVidia engineer. It is alleged that despite having agreed to follow company policy not to act improperly on inside information, he promptly used an online brokerage account to buy nVidia call options, giving him the right to buy the company's shares between $60 and $65 a share, according to the SEC. The stock, on a presplit basis, was then just under $59.

When Microsoft confirmed the deal on March 10, the stock almost doubled. In a week, the SEC said, Shrivastava turned a $31,000 investment into a profit of $446,724.

He now faces both criminal and civil charges of insider trading. The SEC and the

U.S. Attorney's Office

in San Francisco want to fine him and force him to repay his profits with interest. Douglas Young of San Francisco, an attorney for Shrivastava, declined comment on the case until he has a chance to study it further.

In questioning the company's decision to leak news of the Microsoft deal, the SEC stressed that while nVidia was not charged, it considered Huang's actions inappropriate.

"When you discuss information that broadly, the chances that someone will misuse it are probably high, as happened in this case," said Robert Mitchell, assistant district administrator for the SEC. "This case is important in that it will hopefully raise the issue about the handling of this kind of information."

Other Valley businesses concurred. At 2,650-employee

Excite@Home

(ATHM) - Get Report

, a cable and broadband provider, spokeswoman Melissa Walia said that the company releases "any material or sensitive information internally at the same time as externally."

Prior to release, she said, key information is known only within an exclusive group. "We're very conservative," she said.

When it learned of the federal investigation, nVidia fired Shrivastava. Despite the SEC's criticism, however, the company apparently isn't budging on its practice of letting employees know what's going on.

Michael Hara, vice president for investor relations, said the company feels that having a policy against trading on inside information is the best deterrent. Just because one employee allegedly violated the policy, that doesn't suggest the system needs to be thrown out, he said.

He added, "Everyone here is involved in working on these projects. The purpose is not to have a split between employees who know and ones who don't know. You don't know where to stop."