SEC investigation into NVidia centers on Xbox: Analyst

A U.S. Securities and Exchange Commission (SEC) investigation into transactions conducted by graphics-chip maker NVidia likely focuses on how the company accounted for costs associated with its development of graphics chips for Microsoft's Xbox game console, a financial analyst said Friday.

On Feb. 14, NVidia officials revealed that the SEC has begun an investigation into how the company recorded reserves during the fourth quarter of its 2000 fiscal year and the first quarter of fiscal 2001. In addition, the SEC is investigating the possibility that US$3.6 million in product costs should have been recorded by the company during the first quarter of fiscal 2001, but were instead recorded during the second and third quarters of that same year, the company said. NVidia's fiscal 2000 year ended January 30, 2000 and its fiscal 2001 year ended January 28, 2001.

During a conference call with analysts on Feb. 14, Jen-Hsun Huang, NVidia's chief executive officer (CEO) and president, declined to comment on specifics of the SEC investigation, including the nature of the reserves under investigation.

"While the nature of this inquiry is being kept under wraps, we believe the reserves in question relate to the launch of the Xbox," wrote Eric Ross, research principal at Thomas Weisel Partners LLC, in a research note published on Feb. 15. "We believe this because of the method of discovery as stated in the (NVidia) press release: through the separate employee insider trading investigation."

In November, NVidia said that 10 employees had been accused of insider trading by the SEC, with four of them facing criminal charges. The charges brought against the 10 employees, both civil and criminal, stemmed from alleged incidents of insider trading of NVidia stock that occurred in March 2000, the same month that NVidia announced it had been selected by Microsoft to design the graphics chips that would be used in the Xbox.

The SEC charges alleged that the 10 NVidia employees and five others purchased NVidia stock on March 6, 2000, knowing that the company would win a contract to produce graphics chips for Microsoft's Xbox . Following the announcement that NVidia had won the Xbox contract on March 10, 2000, the accused allegedly sold their shares, reaping $1.7 million in profits.

In support of the SEC insider-trading investigation, NVidia handed over e-mails and other materials dating from between December 1999 and March 2000 to government investigators. The current SEC investigation into NVidia's accounting practices stems from a review of those materials, the company said in a statement.

While noting that the final results of the SEC investigation cannot be known, the few details that are publicly available regarding NVidia's handling of the transactions indicate that the company may have delayed recognizing Xbox-related revenue until after Microsoft's official unveiling of the Xbox on March 10, 2000, Ross said. "We believe these revenue and costs (under investigation by the SEC) were associated with the development and launch of the Xbox," he wrote.