Oh, Good. Supermicro Board Probe Clears Server Slinger Of Misconduct Claims

Supermicro said an independent special committee formed earlier this year at the request of the server maker's board found no evidence of corporate misconduct or fraud.

Nonetheless, the San Jose, California-based hyperscale supplier has begun looking for a new chief financial officer to replace David Weigand, who will remain in place until a successor has been found. The biz said it's also looking to hire a chief compliance officer and a general counsel.

The server giant does not expect to restate its financial results.

The possibility that it might have to do so was raised in July when public accounting firm Ernst & Young (EY) warned the SMCI audit committee that it had concerns about internal financial controls that might delay the filing of the company's annual report for the fiscal year that ended June 30, 2024.

In response, the board formed a special committee to conduct an investigation with the help of law firm Cooley LLP, and forensic accounting firm Secretariat Advisors, LLC.

On August 28, one day after Hindenburg Research revealed that it had taken a "short position" in company stock while alleging financial impropriety, SMCI said it would delay its annual report.

Following interim findings reported by the special committee on October 2, EY resigned on October 24, as SMCI's auditor. Shortly thereafter, SMCI shares lost about a third of their value.

In a letter sent to SMCI, EY explained, "we are resigning due to information that has recently come to our attention which has led us to no longer be able to rely on management's and the audit committee’s representations and to be unwilling to be associated with the financial statements prepared by management, and after concluding we can no longer provide the audit services in accordance with applicable law or professional obligations."

But according to SMCI, the special committee found no evidence of misconduct by management or the board and endorsed the work of the audit committee.

The special committee looked at: the outfit's decision to rehire certain employees who resigned in 2018 following a 2017 audit committee investigation of sales and revenue recognition practices; current sales and revenue recognition practices; potential export control violations; and related party disclosures.

Ultimately, what it found not much had gone awry. As to the rehiring of nine individuals who had resigned in the wake of the 2017 investigation as either employees or consultants, the special committee concluded that had been done with "reasonable business judgment" since none of the individuals had been implicated in misconduct. The special committee did allow that procedural lapses had occurred and laid those at the feet of the outgoing CFO.

The special committee found no reason to disagree with SMCI's revenue recognition practices.

With regard to related party disclosures – revealing that entities in a transaction have a relationship, the special committee found that except for one case, disclosures were adequate or not required. "In one case, the party became a related party during fiscal year 2024 and will be fully disclosed in the Company’s annual report on Form 10-K when filed," SMCI said.

As to the export control violation concerns, SMCI did not deny that export rules may have been violated. Rather the special committee found no evidence that anyone tried to circumvent export control restrictions or that anyone was aware its products might be diverted to a prohibited customer or location. The special committee found that SMCI's export control program is reasonable.

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Hindenburg Research, citing data from Tradesparq, said SMCI appears to have sold about $210 million worth of IT products to Russia in contravention of US export rules.

According to the SMCI, the special committee "did not identify products that were sold to Russian customers or shipped to Russia in violation of export controls or sanctions laws that were in place when products were shipped."

Hindenburg Research did not immediately respond to a request for comment.

SMCI stock was up over 30 percent on Monday, but remains far below its March 13 closing price of $118.81. ®