Wednesday Morning Rant

That chart is from Yahoo! Finance, for a major company many have never heard of. That company is called Supermicro, and it builds, among other things, servers for datacenters. It is a big player in server hardware. Unlike some of its competitors, however, it is not a household name. Supermicro is an American company based in San Jose, founded by Taiwanese entrepreneurs. Like most outfits in the datacenter hardware business, it has been going gangbusters in the current AI mania. Given the market environment, why that staggering price decline with surging trading volume on the 20th?

The decline has to do with the indictment and arrest of some of its executives due to allegations of smuggling and violating US export control laws regarding Red China. As you may recall, the US has - since the Biden administration - proscribed the export of certain high-end computer chips useful for AI processing to that country. Trump made that a bit more aggressive once he took office. In the presence of any ban, a black market inevitably forms and it appears that, per the indictment, certain SMCI executives allegedly operated in that black market. Supermicro is not named directly, nor is the Asian company that allegedly helped run the operation. But the people involved are Supermicro people, a "U.S. Manufacturer" is referenced, and the stock tanked as a result.

The scheme does not appear to have been particularly sophisticated. From the indictment:

Beginning in or about 2024, certain executives, employees, and third-party affiliates of a U.S.-based manufacturer that designs and builds high-performance computer servers for artificial intelligence and cloud computing applications (the "U.S. Manufacturer"), including YIH-SHYAN "Wally" LIAW, RUEI-TSANG "Steven" CHANG, and TING-WEI "Willy" SUN, the defendants, conspired to divert billions of dollars' worth of the U.S. Manufacturer's servers to China, many of which were assembled in the United States. The U.S. Manufacturer's flagship products - servers integrating graphics processing units ("GPUs") manufactured by Nvidia Corporation ("Nvidia") - are subject to strict U.S. export controls barring their sale to China without a license.

The defendants and their co-conspirators used a particular company ("Company-1") based in Southeast Asia as a pass-through entity to give the U.S. Manufacturer's transactions that they arranged the appearance of legitimate commercial activity and to obscure their China-based end customers. YIH-SHYAN "Wally" LIAW, RUEI-TSANG "Steven" CHANG, and TING-WEI "Willy" SUN, the defendants, worked with and directed executives of Company-1 to submit purchase orders to the U.S. Manufacturer to reserve and purchase large allocations of the servers from the U.S. Manufacturer containing Nvidia GPUs and coordinate their onward transshipment to China. To ensure that the allocations were approved internally at the U.S. Manufacturer, the defendants and executives at Company-1 prepared false documents and records, and transmitted false communications, purporting to show that Company-1 was the end user of the servers. Once Company-1 received the servers, at the direction of and in coordination with the defendants and others, including third-party brokers who worked closely with the defendants to order the U.S. Manufacturer's servers for customers in China, it shipped them to those customers in China. In furtherance of the scheme, Company-1, in consultation with the defendants, used a shipping and logistics company to repackage the U.S. Manufacturer's servers and place them in unmarked boxes to conceal their content prior to shipping them to their final destinations in China

For example, to deceive the U.S. Manufacturer's compliance team, which was responsible for conducting audits of Company-1's purchases of servers to ensure adherence to U.S. export control laws, the defendants staged "dummy" servers - non-working, physical replicas of the U.S. Manufacturer's servers - for inspection at the locations where Company-1 was purportedly storing the servers it had purchased from the U.S. Manufacturer. However, the actual servers from the U.S. Manufacturer had already been unlawfully shipped to China.

In the wake of his arrest and the subsequent dramatic drop in SMCI's stock price, Liaw resigned from Supermicro's board. The company also appointed a new Chief Compliance Officer. And that brings up the other point that is driving some of this price move, namely that Supermicro has had trouble in the past when it comes to internal controls and processes. Back in 2024, Ernst & Young resigned as Supermicro's auditor, touching off - this is becoming a trend - a major stock price fall. When it resigned, Ernst & Young said that it was "unwilling to be associated with the financial statements prepared by the management," along with asserting that the board was the plaything of the company's founder and some other executives and that the company lacked effective internal controls. Before that, in 2020, the company paid a small fine to the SEC over accounting practices.

Supermicro has had some ... problems. Now, it is possible that its executives Liaw and Chang will do some time but that is not the only consideration. If the indictment is accurate, SMCI moved $2.5 billion in product to Red China. In all of 2025 (fiscal year ending in June of that year), the company had around $22 billion in net sales. The timing doesn't line up exactly, but it's close enough. Somewhere from 5%-10% of the company's sales came from this alleged scheme to violate US export controls and send high-tech equipment to a sanctioned country. That is a lot of revenue, and too much to be missed. A single outfit sending you a big chunk of your total revenue could not have been a secret. Customers that big are well known. Vendors buy customers like that dinner at least, and often have teams dedicated to them. This fake company wouldn't have had a normal relationship with Supermicro, and people inside Supermicro would have known that. If these allegations are true, it is so unlikely that it borders on impossible that the scheme was not widely known among senior executives and probably within at least the sales and logistics groups.

There is a reason that SMCI saw its price fall so dramatically: investors know it, too, and a lot of them got out. All of this, however, invites a question: assuming that the allegations are true, what is an appropriate punishment for a corporation in this case? How does one punish a corporation with controls so bad that it might be intentional, that has played fast and loose with its accounting, and that raked in billions selling proscribed products to a country that is, depending on one's perspective, a rival or an enemy? Jailing its executives would be a welcome change, but is it enough? An organization as corrupt as Supermicro is alleged to be will simply continue as it was. What punishment actually fits the crime, and what punishment can encourage better behavior in the future? Ruinous fines, like "50% of revenues for the past five years, payable over the next ten years?" Nationalization followed by divestiture to new owners after firing everyone with executive authority?

Assuming that the allegations are accurate, what is an appropriate punishment for a firm that has a long track record of misbehavior and helped violate - and profited handsomely for violating - major US sanctions?

posted by Joe Mannix at 11:00 AM

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