Super Micro Breaks Silence on Hindenberg Misconduct Allegations – Claims Report ‘Misleading’
Super Micro CEO Charles Liang has been accused of overseeing major corporate mispractice. Photo by Walid Berrazeg/SOPA Images/LightRocket via Getty Images
Key Takeaways
- Super Micro Computer has responded to a damning report by the strategic short seller Hindenberg Research.
- The Hindenberg report accused the Silicon Valley server maker of multiple governance and compliance failures.
- In a letter to customers, Super Micro CEO Charles Liang said the allegations are based on “false” and “misleading” statements.
For a week after Hindenberg Research released a scathing report accusing the company of fraud, Super Micro Computers Inc. (SMCI) remained silent. Investors feared the worst when the firm delayed filing its annual report on Wednesday, Aug. 28, adding fuel to the fire created by Hindenberg’s allegations.
But in a statement on Tuesday, Sept. 3, CEO Charles Liang accused the short seller of publishing “false or inaccurate statements” that misrepresented Super Micro’s position.
Accounting Red Flags
The Hindenberg report, which shocked the tech and investment communities, claimed that SMCI engaged in unethical business practices to mislead shareholders and artificially inflate its earnings. The investigation reveals a series of alleged accounting irregularities dating back years.
According to the report, SMCI’s financial statements show “signs of questionable revenue recognition,” which presented an overly optimistic view of the firm’s financial health.
The Securities and Exchange Commission (SEC) already fined SMCI $17.5 million in 2020 for “widespread accounting violations.” The latest allegations suggest SMCI has failed to stamp out the dodgy practices.
According to Hindenburg, less than three months after settling the SEC’s charges, Super Micro began re-hiring executives who were directly involved in the accounting scandal.
A former salesperson quoted in the report said, “Almost all of them are back. Almost all of the people that were let go were the cause of this malfeasance.”
Some of the most egregious practices allegedly used include channel stuffing, in which a firm inflates its sales figures by forcing more products through a distribution channel than it is capable of selling.
One former sales director interviewed by Hindenberg described the use of “dark warehouses” where Super Micro would ship products to inflate its quarterly sales numbers, only to bring them back in the next quarter.
Accusations of Nepotism
Hindenburg also painted a picture of a nepotistic network of business relationships centered around Charles Liang, Super Micro’s co-founder, chairman, president, and CEO.
For instance, the report points out that Ablecom, which builds server chassis for data centers, is partly owned by Liang and his wife. Meanwhile, Liang’s brothers control Ablecom and another supplier, Compuware.
The relationship between the companies is described as “oddly circular,” with SMCI providing components to Ablecom and Compuware, which they assemble and then sell back to Super Micro.
“The related parties seem to do little other business: ~99.8% of Ablecom’s exports to the U.S. since 2020 were to Super Micro, and ~99.7% of Compuware’s U.S. exports were to Super Micro,” the report claims.
Undisclosed Related-Party Transactions
In addition to concerns around disclosed related parties, Hindemberg found evidence of shady dealings with undisclosed parties.
For instance, it claims one of Liang’s brothers owns two entities that operate out of the Super Micro Science and Technology Park in Taiwan, yet neither company has ever reported the relationship.
Another brother reportedly operates undisclosed Hong Kong and Taiwanese entities, which appear to resell Super Micro products and operate out of the same building as Compuware.
Alongside these “major corporate governance red flags,” Hindenburg also accused SMCI of covertly supplying products to countries that are subject to US sanctions.
Sanctions Evasions
As a manufacturer of data center hardware and AI infrastructure, Super Micro, which is headquartered in Silicon Valley, is restricted in what it can ship to Russia.
Per the report, almost two-thirds of Super Micro’s exports to Russia since the invasion of Ukraine correspond to “high priority” components that require special export licenses due to their potential military uses.
Since the introduction of sanctions against Russia, SMCI products have reportedly been routed through a network of shell companies set up to evade sanctions.
Specifically, the importer Niagara Computers, which provides components to the Russian State, has allegedly received at least $46.3 million worth of Super Micro products since the start of the Russia-Ukraine war.
The Hindenberg report deduced that Super Micro used “a web of Turkish shell companies” to “knowingly supply one of its longstanding Russian customers” after they were added to the Office of Foreign Asset Control’s sanctions list.
Impact on Stock Price and Investor Confidence
Before publishing its damning report, Hindenburg took a short position on SMCI–one that has likely been very profitable for the trading firm given that SMCI’s stock price remains depressed a week later.
At the time of writing on Wednesday, Sept. 4, Super Micro was down 14.8% over 7 days, having collapsed from around $550 per share to lows of $400 in the immediate aftermath of the allegations.
Investor confidence in SMCI has been shaken, with many questioning the validity of the company’s financial reports and the potential legal repercussions if Hindenburg’s allegations are proven true.
Such anxieties were further compounded when the company delayed filing its 10-K Form for the 2023-24 financial year.
CEO Charles Liang Denies Allegations
In a letter intended to reassure Super Micro’s customers and investors, Liang attempted to downplay the allegations, accusing Hindenberg of publishing “false or inaccurate statements about our company including misleading presentations of information that we have previously shared publicly”.
“Short seller reports are designed to drive the stock price downwards to serve the short seller’s interests to the detriment of the company’s shareholders,” he added.
While SPMCI stock has stabilized since last week, most shareholders are still in the red, and several law firms have already declared their intention to seek compensation for investors.
These include Rosen, which is preparing a class action lawsuit seeking recovery of investor losses, and Hagens Berman, which has called for investors to submit their losses ahead of potential legal action.
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