SMCI Stock Spikes 30% as Independent Special Committee Finds "No Evidence of Misconduct
You should know that "special committees" rarely find evidence of misconduct - even if they're independent. SMCI is far from out of the woods.
Super Micro Computer (SMCI) is navigating a turbulent period, marked by accusations of accounting irregularities, an auditor resignation, and regulatory scrutiny.
While a recent independent review from a special committee reported no evidence of misconduct, questions remain about the company's financial reporting integrity.
About a week or so ago I analyzed whether SMCI stock is worth a gamble - given the fact that it tanked rapidly from ~$120 to ~$20 after getting the axe from Ernst & Young (EY).
Why? SMCI has substantial potential for rapid upside (2-3x) as a rebound trade/investment - and each additional piece of “good news” will likely lead more speculators to throw money at SMCI in hopes of hitting pay dirt.
SMCI’s December 2024 Development: Independent Review Findings
Today (Dec 2, 2024) SMCI announced the completion of an investigation by an independent Special Committee, which concluded there was no evidence of fraud or misconduct in SMCI's financial practices.
This led to a stock price jolt of ~30% for SMCI.
The review, initiated in response to Ernst & Young's (EY) resignation as the company's auditor, was conducted with the support of:
Cooley LLP as outside legal counsel.
Secretariat Advisors, LLC, a forensic accounting firm.
The investigation included:
68 interviews with current and former employees, management, advisors, and board members.
A review of 52 sales transactions spanning April to June 2024.
Over 9,000 hours of counsel work and 2,500 hours of forensic accounting.
This conclusion helped propel SMCI’s stock price upward, recovering from earlier losses.
However, the review does not equate to a full financial audit, leaving room for further scrutiny.
SMCI to Replace CFO (Chief Financial Officer) & CAO (Chief Accounting Officer)
In addition, Super Micro Computer (SMCI) announced a series of leadership changes aimed at addressing governance concerns and restoring investor confidence.
These actions come as part of recommendations by the Special Committee following its independent review of the company's accounting practices.
Key changes include:
CFO Replacement: SMCI has initiated a search for a new Chief Financial Officer to replace David Weigand. This move underscores the company’s acknowledgment of the need for stronger financial oversight.
Chief Accounting Officer: Kenneth Cheung has been appointed as the new Chief Accounting Officer, tasked with ensuring greater accuracy and transparency in financial reporting.
Compliance and Legal Leadership: The company is expediting its search for a new Chief Compliance Officer and General Counsel, emphasizing its commitment to rigorous adherence to legal and regulatory standards.
These management changes are a critical step in SMCI’s effort to rebuild its reputation following a turbulent period marked by the resignation of its previous auditor, Ernst & Young (EY), and ongoing regulatory scrutiny.
While these shifts signal a proactive approach to addressing governance shortcomings, their effectiveness will ultimately depend on the caliber of the new hires and the implementation of structural improvements.
Context: Why EY Resigned from SMCI…
EY's departure in late July 2024 was abrupt and heavily scrutinized.
The firm cited its inability to rely on the representations of SMCI's management and Audit Committee, as well as concerns about the company's "commitment to integrity and ethical values."
This strong language suggested deeper issues, prompting investor skepticism.
EY’s resignation also coincided with:
A DOJ investigation into allegations of accounting violations.
Allegations in a Hindenburg Research report accusing SMCI of related-party transactions, potential sanctions violations, and other misconduct.
Failure to submit SMCI’s annual 10-K SEC report on time (they got an extension).
Given these unresolved concerns, EY’s decision to step away raised significant red flags and crashed SMCI’s stock price.
The Role of BDO & SMCI’s Pending Audit
Following EY’s exit, SMCI appointed BDO as its new auditor.
BDO’s upcoming audit is critical for several reasons:
Full Financial Assurance: BDO will perform a comprehensive review, providing a higher level of confidence than the Special Committee’s findings.
Regulatory Compliance: SMCI must file its delayed annual and quarterly reports within the timeline allowed by Nasdaq to avoid delisting.
Investor Confidence: Only a full audit can truly restore confidence among shareholders.
Does an “independent review” mean much of anything for SMCI?
Not really. Research suggests internal reviews often underreport issues compared to independent audits.
According to a 2018 Global Study on Fraud & Abuse:
Internal audits detect fraud 15% of the time
External audits uncover fraud in just 4% of cases (often due to limited access or constraints)
It is also known that Fortune 500 companies are nearly 4x more likely to commit securities fraud than smaller non-Fortune 500 firms.
These statistics underscore the importance of BDO’s independent audit in providing a definitive assessment of SMCI’s financial health.
While the findings of the Special Committee are encouraging, they come with limitations.
Limited Assurance: Unlike a full audit, the review provides only a partial assessment of SMCI's financial practices.
Potential Bias: Although labeled "independent," reviews led by company-appointed committees may lack the thoroughness and objectivity of external audits.
Contradictory Signals: The committee’s findings contrast sharply with EY’s resignation and the firm’s inability to endorse SMCI’s financial statements.
What Comes Next for SMCI?
Despite the positive news, SMCI remains under scrutiny:
BDO’s Audit: The results will be pivotal in confirming or refuting the Special Committee’s findings.
Regulatory Investigations: The DOJ’s inquiry could uncover additional information not addressed by the review.
Market Sentiment: While the stock has rebounded, investor confidence will depend on transparent and verifiable financial reporting.
A Step in the Right Direction, But Far From Out of the Woods
The independent review marks progress, but it is not the final word on SMCI’s challenges.
Ernst & Young’s resignation, paired with ongoing regulatory investigations, suggests deeper issues that require resolution.
Investors should view the Special Committee’s findings with cautious optimism, awaiting the more rigorous conclusions from BDO’s full audit.
Until then, SMCI remains in a precarious position, balancing the need to rebuild trust with the lingering impact of past controversies.
Is SMCI’s Potential Upside Worth the Risk?
It’s your call.
The Bull Case for SMCI
Historical Resilience: Despite previous SEC charges and accounting violations, SMCI has a track record of recovering from setbacks. As a key player in the AI server market, demand for their products remains strong, with AI adoption driving tailwinds across the tech sector.
Undervalued Potential: If SMCI can clear the air with BDO’s audit and demonstrate financial stability, the current valuation may represent a significant discount. The company’s fundamentals in a booming AI industry could easily support a 2-3x upside over the next few years, especially if growth trends persist.
Market Context: SMCI’s position as a supplier to Nvidia and other tech giants ties its future closely to the broader success of AI technologies. Investors betting on the AI boom may see SMCI as a high-risk, high-reward play.
CFO & CAO changes: SMCI was recommended to replace the CFO and CAO by the independent special committee. This may go a long way towards improving investor confidence and may strengthen the company when it rebounds.
The Bear Skepticism of SMCI
EY’s Resignation: Big Four firms rarely walk away from engagements, particularly with language as strong as EY’s. Their inability to rely on management’s integrity raises serious questions about the reliability of SMCI’s financial statements.
Hindenburg Research Allegations: Accusations of related-party transactions and potential sanctions violations add another layer of uncertainty. Even if not fully substantiated, these claims could spark regulatory scrutiny and class-action lawsuits.
Pending BDO Audit: While the Special Committee’s findings are positive, BDO’s full audit will carry much more weight. If BDO identifies discrepancies, the fallout could be severe, further eroding investor confidence.
History of Missteps: SMCI’s history of accounting violations and SEC settlements makes it clear that past issues have not been isolated incidents. A repeat of similar problems could permanently damage its credibility.
Risk vs. Reward: A Dice Roll for Investors
For investors, the decision comes down to weighing the potential upside against the substantial risks.
Optimistic Case: If SMCI’s financials pass BDO’s scrutiny, the stock could recover sharply, leveraging its strong market position and AI-driven growth. In such a scenario, today’s prices could appear undervalued in hindsight.
Pessimistic Case: On the other hand, a less-than-clean audit report or further regulatory findings could send the stock spiraling, eroding gains and possibly leading to severe penalties or restatements.
Final Take: SMCI Remains a Decent Gamble
SMCI has historically bounced back from past SEC penalties and accounting mishaps and is a major player in AI infrastructure.
SMCI’s tech is legit, but they have a longstanding history of royally effing up with accounting practices.
However, it’s bizarre that they haven’t learned by now to play by the rules… and since I’m not much of a gambler, I’m staying away.
The recent price surge may have priced in more optimism than warranted, given the lingering risks.
For the Gambling Enjoyers, SMCI is a smarter bet than buying lottery tickets or investing in certain altcoins… but it’s far from a sure-fire lock.