Semiconductor equipment manufacturer, Lasertec Corp, was attacked by Scorpion Capital. The short seller alleged that Lasertec has fraudulently inflated profits via overvalued inventory and the rundown of deferred revenues. It believed inventory impairments could wipe out 85% of retained earnings, and this fraud was necessitated by fundamental flaws in Lasertec’s products. After our review, we shared Scorpions concerns about excessive inventory and falling advances which probably indicated demand was weaker than expected. However, we did not believe Scorpion was able to demonstrate fraudulent accounting. After the Scorpion report was released, an independent investigation was conducted by Lasertec which found no evidence of irregularities with work-in-progress inventory, which was the focus of the accounting allegations made by Scorpion. We conclude the allegations were not proven.

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