Litigation Release No. 18343 / September 11, 2003
Auditing and Accounting Enforcement Release No. 1860 / September 11, 2003
Securities and Exchange Commission v. Christine B. Hoberg, United States District Court for the Northern District of California, Civil Action No. C 03-04135 HRL
The United States Securities and Exchange Commission announced today the filing of financial reporting fraud charges against Christine B. Hoberg, former chief financial officer of Nvidia Corporation, alleging that she purposefully failed to record $3.3 million in expenses relating to a deal with a supplier. As a result of that transaction, the complaint alleges, Nvidia materially overstated its gross profit and income for the quarter ended April 30, 2000.
Hoberg, 48, of Los Altos, California, was charged in a complaint filed in the U.S. District Court for the Northern District of California. Simultaneous with the filing of the complaint, and without admitting or denying the allegations, Hoberg consented to a court order directing her to pay $671,694.99 (including $596,694.99 in disgorgement of ill-gotten gains and prejudgment interest and $75,000 in penalties), prohibiting her from serving as an officer or director of any public company for five years, and enjoining her from violations of the antifraud and other provisions of the securities laws.
According to the complaint against Hoberg, in early 2000 Nvidia was lagging behind expectations for its financial performance for the quarter ended April 30, 2000. In order to meet those expectations, Nvidia entered into an agreement with a supplier in which the supplier granted Nvidia $3.3 million in cost reduction credits for the April 30 quarter. In exchange, though, Nvidia agreed to repay the supplier this same amount by paying artificially higher prices on purchases later in the year.
Under generally accepted accounting principles ("GAAP"), Nvidia's explicit agreement to repay the costs to its supplier created a liability that Nvidia was required to record in its accounting records. Thus, under GAAP, Nvidia should have recorded both the cost reductions and an offsetting liability for its agreement to repay the costs in the future.
Instead, Hoberg directed that Nvidia record only the cost reductions portion of the transaction on its books for the April 30 quarter. By failing to record the offsetting $3.3 million liability for the second portion of the deal, Hoberg led Nvidia to overstate its gross profit and income for the quarter by 6.4% and 15.3%, respectively.
To facilitate the fraud, Hoberg directed that Nvidia document the deal in two separate agreements, with the cost reductions described in one agreement, and Nvidia's promise to repay described in another. During a subsequent review of Nvidia's quarterly results by its outside auditors, Hoberg provided the auditors with the agreement relating to Nvidia's cost reductions, but withheld the agreement that described Nvidia's promise to repay the costs in the future.
The complaint charges Hoberg with financial reporting fraud (Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder), withholding material facts from auditors (Rule 13b2-2 under the Exchange Act), and falsifying Nvidia's books and records (Section 13(b)(5) of the Exchange Act an Rule 13b2-1 thereunder). Simultaneous with the filing of the complaint, Hoberg agreed, without admitting or denying the allegations, to a judgment permanently enjoining her from violations of these provisions and to the other relief described above.