Super Micro Computer (SMCI) Accounting Fraud Allegations? Will It Be Delisted?

Before the market opened on August 27, a report from short-selling research firm Hindenburg Research was released. It alleged that there are suspicions of accounting fraud at Super Micro Computer (SMCI) and that customers are cutting ties over product issues. In a way, it feels downright outrageous: issuing a short report right before the opening bell.

But the real problem came the next day. Super Micro Computer announced that it would delay filing its annual report.

...Huh?

Does this mean there really was an accounting problem?

Investors quickly grew anxious, and Super Micro Computer closed at $443.49, down 19.02% from the previous day.

Super Micro Computer maintains that although margins have declined due to server production costs and competitive pressure, there have been no restatements or other adjustments.

So why did they postpone filing the report? What exactly did Hindenburg say?

Super Micro Computer has had accounting-related issues before as well.

In 2018, it failed to file its financial statements on time and was delisted from Nasdaq, and in 2020 it was charged by the SEC with widespread accounting violations. While it parted ways with the executives involved at the time, it paid a $17.5 million settlement to the SEC and then, in less than three months, re-hired most of the senior executives who had caused the problem in the first place.

In April 2024, Super Micro Computer was hit with a new lawsuit alleging that it had once again begun improperly recognizing revenue and circumventing internal accounting controls. According to the complaint, after only partially completing shipments, the company would make excuses and push the remaining products onto distributors. In other words, it allegedly booked revenue by marking shipments as complete when they were not, or by shipping defective products and shifting responsibility to distributors. It appears to be repeating the same behavior seen in 2020.

Transactions with related suppliers have also come under scrutiny.

Ablecom and Compuware have received $983 million from SMCI over the past three years, and these two companies are run by CEO Charles Liang’s brothers, Bill Liang and Steae Liang.

Since 2020, about 99.8% of Ablecom’s exports to the United States and about 99.7% of Compuware’s exports to the United States have gone to Super Micro Computer. In other words, Super Micro Computer supplies components to these companies, and they reassemble and resell them over and over again.

Super Micro Computer claims that its liquid cooling technology will "revolutionize the industry" and is its "competitive edge." Yet at a recent industry conference, Super Micro showcased a liquid cooling solution from Ablecom, an affiliated company, and hid the fact that another company was involved.

On top of that, the report points out that Charles Liang’s two brothers run companies in the same space, yet this is not disclosed. The argument is that this cozy, all-in-the-family setup creates an environment that is ripe for accounting fraud.

In 2006, Super Micro was convicted for selling prohibited components to Iran. And history appears to be repeating itself. Two-thirds of Super Micro’s exports to Russia were high-priority components that the Russian military could deploy on the battlefield, and exports of these advanced parts have roughly tripled since Russia’s invasion of Ukraine.

Since 2016, Super Micro has also been engaged in a joint venture with FiberHome, a Chinese state-owned enterprise.

FiberHome is on a U.S. government watchlist for human rights abuses against ethnic minorities. Even after it landed on that list, Super Micro sold the company roughly $196 million worth of high-end computer components.

The company’s defense is that it didn’t sell to FiberHome itself, but to a joint venture in which FiberHome is a partner—so it considers that acceptable.

When Super Micro was caught selling prohibited parts to Iran, Charles Liang said the company had “learned from its mistakes.” Does that mean it learned how to sell things in secret?

Customers such as CoreWeave and Amazon (AWS) are shifting their business to Super Micro’s competitors like Dell. The company has lost trust over product quality and after-sales support issues.

In May 2024, Nvidia remarked that "no one beats Dell when it comes to building large-scale enterprise systems."

CoreWeave has signed a deal with Dell for thousands of GPU servers, and Elon Musk’s xAI has also entered into major contracts with Dell.

This shift is driven less by Dell’s strengths than by Super Micro’s shortcomings.

Amazon AWS used to be a Super Micro customer but reportedly cut ties over shipping issues. U.S. cloud provider DigitalOcean also switched from Super Micro to Dell due to service problems.

GMI Cloud experienced a 17.5% failure rate out of an order of 256 Supermicro servers, and a NexGen employee stated that about half of the orders they received from Supermicro had firmware issues.

Current and former employees of Genesis Cloud, which Supermicro highlights as a success story on its website, describe Supermicro as disastrous. Supermicro is being shunned by a great many companies.

It is possible that Charles Liang simply wanted to build a family business.
He may have wanted to take care of his family by spinning up a company and handing over some of Supermicro’s technology. Selling components to the joint venture may raise issues, but as Supermicro claims, it is not illegal.

But accounting fraud is something that cannot be overlooked.

For now, these are only allegations raised in a short-seller report, but we should remember that Enron’s accounting fraud in 2001 had a truly massive impact on the market.