The U.S. District Court for the Northern District of California has dismissed a class action suit against NVIDIA (Nasdaq: NVDA) that accused the company of trying to hide its knowledge of defects in a line of graphics chips, in order to keep the stock price up.

In a strongly worded opinion, Judge Richard Seeborg said the plaintiffs did not establish that there was any evidence that the company knew that its chips were defective. Further, the opinion notes that some of the evidence presented by witnesses was from people who did not work at the company and were not in a position to know if the chips were defective or not.

Judge Seeborg gave the plaintiffs 30 days to file an amended complaint, or have it dismissed and the plaintiffs barred from re-filing another suit.

The original lawsuit was filed in 2008, by Lisa Miller, and the class action suit eventually included two union pension funds and the retirement fund of the city of Pontiac, Mich. The suit covered those who bought NVIDIA's stock between Nov. 2, 2007 and July 2, 2008.

The complaint says the company hid the extent of defects in one of its microprocessor lines until July 2. On that day NVIDIA announced it would take a $150-$200 million charge against its revenue to cover the cost of fixing the problems that were showing up in its chips. The chips involved failed at a high rate when repeatedly heated and cooled. NVIDIA issued a software fix, and eventually distributed new processors to replace those that were defective.

After that announcement, the stock price dropped 31% from its high the day before, and over the next few weeks it went down to $10.55, 71% lower than its high of $36.26 reached in the period covered by the suit. Since the company knew that there were defects in the chips, it should have disclosed that to investors earlier.

The complaint also says the chief executive officer of NVIDIA at the time, Jen-Hsun Huang, and the chief financial officer, Marvin Burkett, both had a financial incentive to make misleading statements as their compensation was tied to NVIDIA's stock price.

In his ruling, the judge noted that there was no evidence Huang had sold stock ahead of the announcement to maximize profits; if anything, he bought more NVIDIA stock during the period in question, and only sold 2% of his holdings at the start.

The ruling also notes that when NVIDIA issued a partial software fix ahead of distributing replacement chips in May 2008, that it could be interpreted as the company not knowing what the problem with the chips was and attempting to come up with a repair, rather than an attempt to buy time in order to defraud investors.

International Business Times, The Global Business News Leader

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