
Every participant in the world economy currently faces an environment fraught with geopolitical risk, with a war in the Middle East showing a dangerous potential to expand, a war in Ukraine that continues to flame, tensions in the South China Sea, and many other concerns. While companies’ operating risks in these environments in many cases may seem apparent, it may not always be obvious how geopolitical risks can translate into corporate and securities litigation. A recent securities class action lawsuit filed against technology company Super Micro Computer provides some insight into these litigation risks. Although the lawsuit involves a host of issues, among the principal concerns are allegations that the company misrepresented its compliance with trade control regulations restricting exports to Russia. These allegations illustrate how trade issues, for example, can contribute to securities litigation activity. A copy of the new complaint in the Super Micro Computer case can be found here.
Background
Super Micro Computer manufactures server and storage devices. The company was the subject of a harsh August 27, 2024, short seller report. Among other things, the report accused the company of accounting manipulation and intra-corporate self-dealing. The report alleged that the company had engaged in improper revenue recognition and other accounting improprieties to artificially inflate the company’s apparent profitability.
In addition to the accounting misconduct, the report also alleged that the company had violated U.S. export controls. The report alleged that despite the company’s claims of having halted sales to Russia following the 2022 invasion of Ukraine, the company, the report alleged, had circumvented U.S. export controls between February 24, 2022, and June 30, 2024. During this period, the report alleged, the company’s sales to Russia surged, allegedly with $210 million in products shipped to the country.
The company’s share price declined upon publication of the short seller’s report. The next day the company announced it would delay the filing of its annual report, to assess the effectiveness of its internal controls. The company’s share price declined further. On September 26, 2024, the Wall Street Journal reported that the U.S. Department of Justice had initiated an investigation of the company following whistleblower reports that the company had engaged in accounting violations. The company’s share price declined further on this news.
The Lawsuit
On October 4, 2024, a shareholder plaintiff filed a securities class action lawsuit in the Northern District of California against the company and certain of its executives. The complaint purports to be filed on behalf of a class of investors who purchased the company’s securities between February 2, 2021, and September 25, 2024.
The complaint alleges that during the class period, the defendants issued reports highlighting the company’s growing revenues and shipped product volumes, while also assuring investors of the effectiveness of its internal controls over financial reporting. The company also represented that it was in compliance with relevant trade control regulations, assuring investors that it had sold no products in the Russian Federation during its 2023 and 2024 fiscal years, and that neither the company nor its subsidiaries sold products or provided services to the Russian Federal Security Service. The complaint alleges that these misrepresentations caused the company’s share price to surge.
The complaint alleges that during the class period, the defendants misled investors by: “(a) materially misstating Super Micro’s reported revenues, earnings, and other financial figures in violation of GAAP; (b) failing to disclose that Super Micro’s internal controls over financial reporting were ineffective; (c) concealing material information about related parties and related party transactions; and (d) claiming to have been in compliance with trade control regulations restricting exports to Russia.”
The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the class.
Discussion
The new complaint against Super Micro Computer contains a host of allegations, only some of which involve alleged trade control violations. There would be a serious lawsuit here even if there were no trade control violations alleged. But by the same token the trade control violations are a significant part of the complaint, as they were a significant part of the short seller report on which the complaint relies.
I emphasize this point about the significance of the trade control violations because I believe it is important to understand the extent to which geopolitical factors contributed to the facts and circumstances on which this complaint is based. I have long thought that increasing numbers and growing importance of geopolitical risks could represent not only an important area of operating risk for companies participating in the global economy, but also present companies with a significant area of securities and litigation risk as well.
This is not the first securities suit to involve problems arising out of geopolitical risk. As I discussed in a post I published late last year, in which I also addressed my concerns about litigation risk arising from geopolitical issues, I discussed the securities class action lawsuit filed against memory storage device company Seagate Technology Company, after the company agreed to a $300 million Department of Commerce penalty for violation of export control violations pertaining to the Chinese company, Huawei. I also discussed in the prior post other examples where trade control-related allegations featured in securities class action lawsuit complaints.
The litigation risk arising from geopolitical concerns is not limited just to issues involving export controls. International trade regulatory regimes have become increasingly important for companies and their executives. These regulatory regimes include U.S. sanctions, anti-money laundering (AML), and anti-bribery and corruption laws. Recent developments, such as the War in Ukraine, trade tensions with China, and issues involving digital assets have heightened these concerns. Violations of these regimes can result in regulatory enforcement actions as well as in related civil litigation. The cases discussed above and in my prior post on the topic show how these concerns can translate into securities litigation.
As I have previously pointed out, the prospect for securities litigation arising out of trade sanctions and export control-related issues is not necessarily new; there have been examples of corporate and securities lawsuits arising out of trade sanction and export control issues over the last several years. However, in the current tense geopolitical environment, all of these concerns seem to loom larger. The increasing tensions with China and the ongoing “hot” wars in Ukraine and in Gaza heighten the concerns surrounding geopolitical risk.
I think it is important to note that many of the allegations in this complaint, including the allegations concerning Russian trade control violations, first appeared in a short seller report. For many years, I have been raising concerns about securities lawsuit complaints filed in reliance on short sellers. A recent guest post on this site (here) detailed the problems and concerns that abound when securities complaints are filed based on allegations in short seller reports; among other things, the short sellers have obvious conflicts of interest in making damaging reports concerning companies. These kinds of concerns give considerable reasons to be cautious about the allegations on which this complaint is based. Time will tell whether these allegations withstand judicial scrutiny.
One final note. I am well aware that the complaint that was filed on October 4, 2024, against Super Micro Computer – the complaint I discuss above — was not the first securities lawsuit complaint filed against the company based on the allegations in the short seller’s report. There was an earlier lawsuit filed against the company in August 2024. I saw the earlier complaint at the time it was filed, and even saw the allegations in the earlier complaint about the alleged Russian export violations. I did not write about the lawsuit or the trade violations issues at the time for the simple reason that sometimes it is a lot for me to try to maintain this blog and keep up with my day job. I didn’t write about the earlier complaint then, but when I saw this new complaint, it refreshed my recollection about the issues I had noted at the time of the earlier complaint’s filing, and it provided me with the opportunity to write about those issues now. I hope no one takes it amiss that I am taking up an issue now that could have and maybe should have been discussed earlier. My points are, in any event, the same.