SEC Subpoenas Nu Horizons

Yesterday the SEC issued a subpoena to Nu Horizons (NUHC) for documents related to business with Vitesse Semiconductor (VTSS.pk). The motive for the subpoena is not public but I suspect it is to understand the mechanics of the transactions between the two companies that enabled Vitesse to engage in bad financial behavior.

I examined the relationship between the two companies in the following articles:

• Trickle Down Economics and Channel Stuffing - September 14, 2006
• Others Will Feel Vitesse Semiconductors Pain - December 21, 2006

I’m still negative on Nu Horizons. My personal opinion is that they derive a significant portion of their gross margin from attractive deals placed with suppliers like Vitesse who use distribution as a buffer customer. This buffer allows suppliers to make end of quarter shipments and meet revenue targets. Distributors demand rich margins from suppliers to provide this service.

If this practice were to end, it would have a compelling impact on the financials of all distributors, not just Nu Horizons. It will be interesting to see the outcome of the SEC investigation and if it impacts the accounting behavior of semiconductor suppliers.

My opinion is that Vitesse has rationa