A high-stakes trial involving whether Santa Clara graphics-chip maker Nvidia owes money to a group of creditors over its 2001 purchase of struggling 3dfx is set to begin Wednesday in bankruptcy court in San Jose.
One issue during the trial will be whether Nvidia, which develops some of the most popular graphics chips and cards for video gamers, properly accounted for its purchase of 3dfx. Nvidia paid $70 million for San Jose's 3dfx, which also makes graphics chips.
Nvidia now claims, according to court filings, that it overpaid for 3dfx's assets. The creditors claim Nvidia underpaid and still owes them 1 million shares of Nvidia stock as part of the merger deal.
The creditors say Nvidia did not make a second payment it was supposed to make as part of the merger agreement, forcing 3dfx into Chapter 11 bankruptcy. A spokesman for Nvidia did not return calls seeking comment on the case.
The trial also will provide a glimpse into some of Nvidia's accounting practices, which have been investigated by the Securities and Exchange Commission. Nvidia also is involved in an ongoing stock-option backdating investigation, which the company voluntarily initiated in August.
"Initially, when they bought 3dfx, they crowed about it," said Bill Brandt, the trustee for the creditors. The creditors claim Nvidia got about $140 million in assets, based on the current price of Nvidia's stock, and paid $70 million in the all-cash deal. Nvidia's attorneys have
"They paid a lot for something that really in the end, with a hard cruel look at the valuation of the assets that were actually conveyed, actually weren't worth that much," Nvidia attorney Karen Johnson-McKewan said last month in court, according to a transcript.
The creditors also are asking why, if the 3dfx assets are worth less than what Nvidia paid, Nvidia hasn't taken charges to account for the difference.
"They have never written it down," said Rick Darwin, an attorney for the creditors. "If indeed you believed that all these assets were worth $14 million and you spent $70 million, you would have to write down $55 million and say that was all money out the window. And they didn't do that."
Another part of the discussions in court will venture into the accounting concept of goodwill, which refers to the difference in what a company's assets are valued at vs. what an acquirer pays for them.
Nvidia's well-regarded chief executive, Jen-Hsun Huang, is on the plaintiff's witness list.
Christine Hoberg, Nvidia's former chief financial officer who was CFO at the time of the 3dfx transaction, settled charges with the SEC in 2003, paying nearly $672,000 amid charges that she fraudulently inflated Nvidia's earnings in 2000. Hoberg, who also has been called as a witness by the plaintiffs, neither admitted nor denied the charges.
At the same time in 2003, Nvidia agreed to a cease-and-desist order from the SEC prohibiting the company from violating federal securities law in the future, including regulations on financial reporting and records provisions. Nvidia agreed to the order without admitting or denying wrongdoing. Nvidia said no penalty or fine was assessed against the company.
The SEC's investigation of Nvidia's accounting was announced in February 2002. It prompted the company to restate its financial performance for fiscal years 2000 and 2001, and for the first three quarters of 2002.
The trial is expected to last through this week and possibly all of next week, said Darwin.
Some testimony may be considered confidential and reporters and spectators unwilling to sign a confidentiality document may have to leave the courtroom, because some testimony will involve documents under seal. The plaintiffs are arguing to lift the confidentiality ruling.
Contact Therese Poletti at tpoletti@mercurynews.com or (415) 477-2510.
