Since late August at least four proposed class action suits have been filed by both large and small investors against Super Micro Computer after a series of revelations drew scrutiny of the company’s accounting and governance practices and slammed the company’s stock.
Judge Edward J. Davila of the U.S. District Court in the Northern District of California is scheduled on Dec. 19 to hear arguments on motions asking the court to pick a lead plaintiff and lead counsel to handle the multiple proposed class actions filed against the San Jose, California-based server maker, according to a Nov. 20 stipulation and order signed by Davila.
“It may seem chaotic, but these cases will ultimately get consolidated,” Brian O’Mara, a partner in the law firm DiCello Levitt’s San Diego’s office who specializes in securities and class action litigation, said in an interview. “You’re going to end up with one case that will move forward efficiently on behalf of a single class of investors.”
There is nothing out of the ordinary in terms of how the Super Micro class actions are proceeding, O’Mara said. However, if the allegations in the Super Micro suits prove true, the matter involves “egregious” conduct on the part of the company’s senior executives, he said.
The company faces pressure on several fronts beyond the class action suits, including tardiness on filings with the Securities and Exchange Commission, the risk of delisting and the renegotiation of debt covenants to avoid default, O’Mara said.
The consolidation of the cases could possibly occur before the judge hears arguments about who should become the lead plaintiff later this month.Then at that hearing, the judge could either rule from the bench or issue an order choosing the lead, with it being typical for the shareholder with the biggest losses to be made lead plaintiff. After that, the next step in class actions is for judges to rule on a motion to dismiss made by the company, he said.
O’Mara, whose firm is not pursuing a role in the class action but does represent Super Micro shareholders pursuing state law claims against the officers and directors, expects that the class action, in some form, will move forward as a single suit that would later be certified as a class action by the court.
The suits generally allege that the company provided misleading information to investors that artificially inflated the stock, with investors seeking damages for their losses.
For example, one of the complaints filed Oct. 4 by the Norfolk County Retirement System asserts that between Feb. 2, 2021 and Sept. 25, 2024 the company along with CEO Charles Liang and CFO David Weigand “materially” misstated revenues and earnings, in violation of GAAP; failed to disclose that Super Micro’s internal controls over financial reporting were ineffective; concealed material information about related parties and transactions; and falsely claimed to have been in compliance with trade control regulations restricting exports to Russia.
The Norfolk suit also asserts that senior executives and/or directors of the company, “had actual knowledge of the material omissions and/or the falsity of the material statements set forth above, and intended to deceive Plaintiff and the other members of the Class, or, in the alternative, acted with reckless disregard for the truth.”
Some of complaints were filed shortly after a one-two punch of bad news for the server maker last summer: on Aug. 28 the San Jose, California-based server maker announced it expected to delay its fiscal 2024 10-K filing and was assessing its internal controls over financial reporting, rattling investors and pushing down shares by 19%.
Just a day earlier, short-seller Hindenburg Research released a scathing report asserting that its 3-month investigation of the server maker that had “ridden the wave of AI enthusiasm” found “glaring accounting red flags, evidence of undisclosed related party transactions, sanctions and export control failures, and customer issues.”
This week the company sought to turn the page on the accounting woes. On Monday it reported that an investigation by an independent special committee that reviewed the integrity of Super Micro’s audit committee and company management found “no evidence of misconduct” while noting certain process “lapses." The company also heeded the recommendation of the committee and announced that it would “transition” to a new CFO with current finance chief Weigand staying until his successor arrives.
The company’s volatile shares have risen this week on the news, though they are still roughly 28% below the price where they traded before the Hindenburg report. They likely continue to benefit from some “irrational” optimism from investors that see it as an AI play, one expert said.
A massive project that Super Micro is involved in also got a shoutout Thursday on social media platform X from billionaire businessman Elon Musk, who shared a Reuters article stating that his artificial intelligence startup xAI is set to expand its Memphis, Tennessee supercomputer facility, dubbed “Colossus.” Super Micro, which along with Dell has assembled server racks for the facility, will establish operations in Memphis as part of that growth, according to the report.
The company’s shares on Friday rose nearly 7% to close at $43.93. Super Micro declined to comment on the litigation.
