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Comment by capableweb | Hacker News Reader

Now I'm no lawyer nor taxman, and know not a lot of laws in the US, but judging only by the contents of this press release, it seems they were charged with not disclosing that the sales were for cryptocurrency mining, not for doing the business in the first place.

Which begs the question, does Nvidia have a responsibility to know exactly what their equipment is being used for, no matter if that activity is legal or not? Seems they would have to add a mandatory question asking "What are you gonna use this GPU for?" every time they sell a GPU, which seems weird (to me).

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I'm reading this the same way as others but I've got a little bit different context. It is the responsibility of publicly traded companies to disclose known risks to their investors. Nvidia effectively got major market growth by knowingly selling and presumably prioritizing sales to an target audience that is known to be _extremely_ volatile.

It looks to me like Nvidia downplayed where their growth was coming from so investors (conjecture based on my own observations) couldn't accurately gauge the risk associated with their growth and that is where the SEC starts paying attention.

This is exactly right. You have to disclose risks to your business and if a really big part of your growth is coming from a new, volatile customer base, that's a big risk and you should disclose it. It has nothing to do with a specific requirement for GPUs or something; publicly traded companies _in general_ have a responsibility to understand where their revenue comes from and disclose that understanding to the public.

This is very run-of-the-mill stuff for the SEC. I think the only reason it's getting play on HN is that, if you aren't familiar with this sort of thing, it looks like the SEC is picking on Nvidia for doing business with crypto miners. But that isn't what the complaint is actually about.

What's surprising to me about this, is that if you ever read the risk section of a 10-k it is basically a bunch of non sense, where they imagine every possible risk no matter how small a business might have. It's filled with so many low probability scenarios it's barely worth reading. If they put in a blurb about this in the risks section I'm not sure who would even notice.

At first glance, I suspect that they just copy pasted the risk section from the last 10-k and this was just some mistake rather than an intention to deceive. Anybody who knew anything about the business understood that crypto mining was a sizable part of that demand.

And enforcement actions like these are why the 10Ks are full of stuff like that.

I wouldn't say it's "exactly right" because the investors knew that's where the growth was coming from. Just because it wasn't in the 10-K doesn't mean that investors didn't know it was a risk.

The implication is how it holds for the most recent cryptomining cycle, since this settlement was for 2018 and we've definitely seen another surge in demand in 2021. Coupled with the chip shortage, this most recent cycle could well be bigger than this 2018 one.

Nvidia arguably hedged their bets better this time by 1) releasing their cryptomining-specific versions of GPUs, and 2) releasing drivers that tried to cripple the mining performance on the GeForce 3000-series lineup. But whether this was done in good faith is debatable and whether they disclosed properlyin the eyes of the SEC will be interesting to see.

A risk to someone else is an opportunity for others. Risk is very subjective here

What? The premise is very clear - NVIDIA stock has seen a meteoric rise off hugely increased sales, investors are concerned that nvidia is hiding the share of sales attributed specifically to a new volatile demographic (crypto in this case).

It’s like if Intel had 50% of their business from Apple and investors wanted to predict the impact of the M1 chip on their sales.

My goodness though, anyone with a brain knew the cards weren’t going to gamers. Was this not known to the average investor?

I guess it doesn’t even matter because the $5.5 million fine is so laughably small for the rewards they reaped that I’m sure they are still laughing.

Not necessarily. There actually was significant growth in gaming with covid and there were lots of improvements with Nvidia's cards so it would be reasonable to assume most the growth is coming from that.

Public companies need to be ahead of risks for investors. If they weren't mentioning crypto mining in earnings reports then that doesn't look good at all.

It was for 2017-2018 though.

> anyone with a brain knew the cards weren’t going to gamers

Gamers, and industry insiders, knew this. The general public (i.e. most investors) didn't. Most non-desktop gamers couldn't give two figs about the intricacies of the videocard market, they just invest in growing companies/stocks.

Or, to put it another way, NVidia Stocks go brrr, buy. Nvidia stock no longer go brrr, complain.

Doesn't matter.

Nvidia needs to provide accurate information on revenues no matter if it obvious or not.

AMD doesn't even report sales of semiconductors for gaming consoles under gaming because it's misleading.

Maybe, maybe not. But the point isn't who the products were going to, it's just that the explosive growth was driven by an unusual, unpredictable customer base, and Nvidia should have disclosed that future growth would be affected if the cryptocurrency mining landscape (something far more volatile than the "regular" market for GPUs) were to change.

I agree that it seems dumb for the average investor not to know this, but this is just how this sort of thing works.

What's confusing to me is I swear I've read press releases from Nvidia that have clearly said "we're not adding new GPU production capacity because cryptocurrency miners are creating a demand bubble that's going to pop." Maybe from 2019 though, so maybe they were just waking up to it in 2018.

They got themselves in terrible in 2018 because they had a lot of excess inventory from over building when the crypto boom happened. I believe the stock dropped 20+% because of this.

They don't want to make that same mistake.

> My goodness though, anyone with a brain knew the cards weren’t going to gamers. Was this not known to the average investor?

If it was so obvious, why did Nvidia never say it? This is a quote from a transcript, and seems representative of how they put it:

> ... I would say the large majority of the cryptocurrency demand [is for those] specialized products. There are still small miners that buy GeForces here and there, and that probably also increased the demand of GeForces.

While it may be true that everyone knew they were lying or being misleading, that isn't a very good defense.

Most people don't know what a graphics card is.

>anyone with a brain knew the cards weren’t going to gamers.

you answered this yourself.

A funny thing that nvidia was rumored to have done at the end of last year involved them shutting down production of cards. It being the holiday season, people may have settled and bought a card at a higher price, and them stopping production would make the item scarcer. Thats one way to look at it, but I also wondered if nvidia stopped production because they knew that their sales and revenues and profits would all take a hit in q4 2022 and didn’t want the decline to look uncontrollably drastic to investors in the earnings report that would come out in early 2023…

That ended up being completely fake. NVIDIA revenue and volumes have actually been on the incline ever since 2020, there was no reduction in production, and this shows up both in their financials and in actual measurements like the Jon Peddie Research GPU market reports (which are the gold standard for this) and Steam Hardware Survey (more granular but perhaps less accurate numbers). They are actually pumping volume even more this quarter on top of not having reduced them as some previously predicted.

> Q4’21 sees a nominal rise in GPU and PC shipments quarter-to-quarter

https://www.jonpeddie.com/press-releases/q421-sees-a-nominal...

NVIDIA is like Apple, there's a certain clique that really really hates them and is willing to make shit up and see what sticks, and there's a huge number of people willing to automatically believe the worst, because "green man bad". It's utterly irrational and goes far beyond the technical merits, people have a viscerally negative emotional reaction to these companies and it's mostly not fact-based, it's just the result of two decades worth of fanboyism and grudges.

(I expect this reply will be followed by a bunch of people trying to list off everything bad they think NVIDIA has ever done, a lot of which will have been "massaged" by that same clique. Like bumpgate... but AMD had tons of GPU failures due to bad solder bumping in the 2012 timeframe too, that's why "baking your GPU" was a thing for everyone. Etc etc. NVIDIA is the hillary clinton of companies... they're a broadly competent competitor who does a decent job, but a decade worth of propaganda has convinced everyone that gosh, there must be something there, because I keep hearing about them!)

Yep, why I pointed this out to be a rumor. The linux gaming community makes nvidia cards out to being total bricks on linux, and so far I haven't had any issues I could tie to exclusively using an nvidia card (it actually runs some older games better than the AMD I had before it).

> It is the responsibility of publicly traded companies to disclose known risks to their investors.

Legally maybe(?) but practically this makes no sense. In the real world it is the responsibility of an investor to understand what they are investing in while maintaining skepticism and scrutiny of their investment. If you can't identify the correlation between massive gains in crypto value with massive gains in NVDA, you shouldn't be investing in NVDA.

Disclosure: long NVDA

Not defending nvidia but most people who own a single gpu also play games and occasionally use it for mining.

I think most is doing a lot of work there. No one I know who games or does CAD is mining crypto because it's in no way worth it and I imagine there's nothing but anecdata for your statment either.

Orthogonal to the issue at hand, but for what little it's worth, literally nobody I know who games is mining. And this includes a lot of tech-savvy IT professionals.

(half a decade ago, one person I knew was getting excited/contemplating it; but he was looking to build a dedicated mining rig, and I don't think he ever followed up)

> most people who own a single gpu also play games and occasionally use it for mining.

Most people with 1 GPU use it to mine? I would have guessed that even with things going crazy in the cryptocurrency space pure gamers were a vastly bigger group.

This risk is the risk of people not wanting the product a company is selling. Philosophically speaking, it is the job of investors to figure that one out, not the company. Capitalists are meant to decide where the capital gets deployed and all that. Customers deciding to do things differently isn't the sort of operational risk that companys are meant to be experts in.

I don't see how Nvidia can reasonably be expected to know who is using their graphics cards for what either. Unless they are actively courting a specific segment, and even then these things are general purpose cards.

>Philosophically speaking, it is the job of investors to figure that one out, not the company

It's less about who should know, and more about the fact that NVidia does know. And, in knowing, it is obligated to provide accurate information.

NVidia is also actively courting a specific segment. They have introduced crypto-specific chips as well as hash rate limiters in GPU gaming chips, so they are clearly aware of how mining may be a factor in gaming GPU sales.

Yes. Everything is a securities fraud. Expect sooner or later(mostly after a bad quarter) may be investors would sue.

> prioritizing sales to an target audience that is known to be _extremely_ volatile.

Every crypto growth cycle is assumed (by enthusiasts) to be more resilient than the prior growth cycle, on the path to steady growth, and this has turned out to be true, with longer and longer steadier growth cycles, with less and less amplitude in the growth and troughs.

in 2018 there was the same optimism, that culminated in a long steep crypto bear market, the longest one so far. Although I think it is obvious that bubbles pop, especially crypto bubbles, I don't think it was obvious or relevant that sales to miners would disrupt so immediately that Nvidia investors needed to know this level of nuance. miners have such high profit margins (if integrated properly) that steep declines in crypto prices shouldn't affect them, but in this case it did.

Especially when looking at the resilience and structure of the mining sector now.

I think this is an odd demand by the SEC, but Nvidia settled it for pennies so moving on.

>>Which begs the question, does Nvidia have a responsibility to know exactly what their equipment is being used for, no matter if that activity is legal or not?

They are being charged not for not knowing, they are being charged for knowing and not disclosing it. The "knowing" part seems to be a forgone conclusion, or at least SEC must have ironclad proof.

>> Seems they would have to add a mandatory question asking "What are you gonna use this GPU for?"

No, but if they are selling thousands of GPUs to cryptominers, they don't need to ask to know. Same how if the US Airforce purchased 100k GPU chips, you can safely assume they won't be using them to play Fortnite, no questionnaire necessary.

> The "knowing" part seems to be a forgone conclusion, or at least SEC must have ironclad proof.

The SEC doesn't need ironclad proof for a civil fine. The standard is preponderance of the evidence, not beyond a reasonable doubt.

The Airforce has flight simulators and other video games for which it must use GPUs. Additionally there are ML models to build and so on. Of the things I would predict, crypto mining would be the least of them.

Of course, but when you are disclosing your business activities, selling to the military is a pretty major thing to mention, no? You wouldn't just lump it all under "gaming", because your gpus might be used to play video games.

I accept lower salaries to never have to care about reporting to the SEC. The lost revenues are offset by doing work that matters.

I don't think the parent was implying they were.

> Same how if the US Airforce purchased 100k GPU chips, you can safely assume they won't be using them to play Fortnite, no questionnaire necessary.

My intention was to gently counter this statement. I took Fortnite as a proxy for video games and I meant to add to the conversation that it does use video games. For a while the military was even publishing video games.

I wonder if they’re using the GPUs in radars.

The issue here wasn't whether they should have known, but that they (apparently) did know and didn't disclose it. Whether NVIDIA has a duty to know is not at issue here, since they did:

> NVIDIA had information, however, that this increase in gaming sales was driven in significant part by cryptomining

Color me a little surprised that this is what SEC's Crypto Asset is spending resources on when there is such a dumpster fire of obvious fraud in other areas of crypto (looking at you, public mining companies), but I suppose NVIDIA's upswing did catch a lot of retail investors.

You're absolutely right this is the least of the crypto dumpster fires / fraud situations.

But the official disclosures of public equity firms is one of the lampposts the SEC's clearly mandated to look under. In fact, crypto is essentially immaterial here. If NVIDIA knew that a huge part of their GPUs were being used for the new, highly-volatile fad of Quantum Fubaring instead of the gaming market NVIDIA'd previously disclosed was the market target, the SEC would still have the right and responsibility to ding them for deceptive or insufficient disclosures.

No they don't have requirement to know.

But if they do know what their GPUs are used for and then they say something else, that's a problem. And that's what the SEC has a problem with here.

They probably should have said something like:

x units were sold from our gaming line of products, however market research indicates y % of them are likely being used for cryptomining.

I don't think it is even that important whether they specifically enumerate the destination of the cards. The important thing is that they should create an honest projection and risk assessment. When they present their earnings statement they need to indicate not only how much they sold but how much they expect to sell in the future. If they knew that a large portion of cards were going to cryptominers then they need ed to indicate the potential difference in growth stability between those sales and the normal consumer sales.

There’s been prevalent rumors in the gaming community that nvidia sold complete graphics cards to mining operations. A lot of times its waived off as the board partners (Asus, MSI, Zotac, etc) and not nvidia but nvidia does sell reference (they call them founders edition) cards. Also there was this big thing in december where there were rumors of a 12gb 2060 design that would alleviate gamer demand but it turned out the whispers that came out of the rumor mill itself a week before the release was that those gpus were made with the top priority of going to miners and not gamers. When examples of those cards came to market they were going for ~750 dollars in january, but now nvidia and board partners seemingly have pie in their face with those cards rotting on shelves at microcenters for $389 (the 2060 is a previous generation card and its original msrp was 329 in 2019).

The sec may be starting an investigation from the top down to see if nvidia had any involvement in what they are accusing them of and will see what degree of complicity they and board partners had in all of this.

Anyways I’m jumping the gun a bit there but there are distinct differences between cards for typical consumer uses (gaming, and video and machine learning workflows) and mining, and mining was a big part of the reason why prices were insane (a 3070ti which can now be found on sale for 699 was going for 1900+ dollars on amazon at ethereums peak) since January of last year until the recent gradual descent in prices.

The relevant part from the article:

> 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.

You have to disclose what you know. It's fine to say "We know people are buying them, but we do not have metrics as toward their use" assuming that's a factually true statement (your business does not collect metrics from sales channels or consumers giving you an indication toward their use). A terrible way to run a business, but legal!

However, if your data indicates that most of your revenue growth is likely due to crypto mining and you turn around and tell investors it's because of gaming, you are lying and misleading your investors.

Public companies have a responsibility to disclose any known risks that are material to their performance.

It could be argued that they don't have a responsibility, or only a limited one. But in this case they really can't that they're actually unaware of it's use for mining. It's not necessary on an individual person-by-person basis, they know that a substantial amount of hardware is used for it.

Perhaps they don't know exactly how many or what %, but a little bit of market research-- over an issue highly material to their bottom line-- would be expected (and was probably done, but maybe they're bad at their jobs). At a minimum it's trivial to see that sales are correlated to the crypto market.

Also AMD managed to note the risk in its own 10-Q filings.

NVIDIA is required to monitor material risks to its business and disclose them to shareholders. I think in theory the reason for that requirement is so that unsophisticated retail investors don't buy the stock and then lose a bunch of money due to risks they didn't anticipate, though it feels pretty quaint to expect retail investors to read Forms 10-Q.

Importantly, they did (according to the press release) know that a big part of their sales growth was from cryptomining. I have no idea how they measured the magnitude, but miners weren't exactly quiet about scooping up graphics cards.

> [any public company] is required to monitor material risks to its business and disclose them to shareholders

This basically means everything is securities fraud: https://www.bloomberg.com/opinion/articles/2019-06-26/everyt...

The parent question still stands: why would NVIDIA need to police how their products get used? They're not manufacturing weapons or drugs.

They do not need to police it. But how their products are used has an impact on the growth of the company as it can affect future demand; it appears that if the company has this sort of knowledge it is supposed to disclose it to investors.

Right. And not just disclose it as a fact, but incorporate it into their projects and risk outlooks.

Actually… You could potentially consider a GPU an arm subject to EAR/ITAR regulations. EAR/ITAR are overly broad (in a way that could be unconstitutional), so I wouldn’t rule it out. https://wccftech.com/us-government-bans-intel-nvidia-amd-chi...

> 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.

Basically they were dishonest about the nature of the business that was driving the short term growth.

> NVIDIA did not disclose [...] for investors to ascertain the likelihood that past performance was indicative of future performance.

I mean, who am I to argue with SEC, but "past performance is not indicative of future results" should be firmly planted in the minds of everyone remotely capable of understanding the 10-Q.

To me this seems like it was a "hey, you should definitely split out crypto earnings in your gaming division" with a slip on the wrist. Doesn't sound like a big deal.

And going on the tangent, who says earnings due to crypto are more risky than earnings due to gaming? There's been a dearth of new AAA titles and due to the inflation gamers may very well delay their PC upgrade. Sounds as risky as miners to suddenly stop buying equipment, and faster than what the hardware-hungry gaming crowd can get their hands on.

They don't need to police how their GPU's are being used.

They simply need to release fiancial statements which accurately reflect material information they know.

That securities law can be abused unscrupulous profit seeking lawyers is not news, and isn't really germane to this case. The issue at hand was disclosing information essential to financial results rather than fanciful hypothetical risks.

No, the requirement isn’t perfection but NVIDA is charged with failing to disclose significant risk that they where aware of.

> it feels pretty quaint to expect retail investors to read Forms 10-Q

It's not that there's an expectation that retail (or any given) investor reads the 10-Q; it's sufficient that there is a standardized way to publicize that information and, if you lose money because you didn't read the readily available information, well, you're an adult who can make investment decisions on whatever criteria you want and that's on you.

I don’t think this makes sense. The SEC isn’t there to protect the share holders, I don’t know wtf this is.

The only thing they could be required to disclose was the percent of sales THEY KNEW were being used for crypto. They also wouldn’t be required to capture that data really. Plus I’ve been on their quarterly calls, they’ve been pretty open about their exposure to crypto so idk.

This seems well beyond the scope of the SEC... imo it’s their broader plan to go after crypto, but everyone knows they have no legal basis currently to do so.

> does Nvidia have a responsibility to know exactly what their equipment is being used for, no matter if that activity is legal or not?

In aggregate .. yes.

As a company, you should know if the increase in sales for your product was a result of the gaming market growing, or the research market growing, or the crypto market growing.

And as a publicly traded company, you have to communicate this to investors.

>Seems they would have to add a mandatory question asking "What are you gonna use this GPU for?"

They don't need to do that.

I think it's ridiculous. I think if the government wants you to "declare" something they need to make it explicit and how important that is to "declare". This is probably just someone in that department trying to get their name in trade rags in order to get a promotion.

I don't think you HAVE to know, but let's say you don't know, now you better not make a statement like you do know in you're earnings report. Or if you do and you make a false statement ...

Heck, they modified their driver software to make reduce bitcoin mining efficiency.

The issue is that they knowingly misinformed their investors.

>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.

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