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Investors sold shares in Cree Inc. (NASDAQ:CREE) Tuesday after news that CFO John Kurtzweil quit for a smaller technology firm. The LED lighting company's financial statements have reflected the high risk of surprises since June 2010.

Kurtzweil resigned yesterday as CFO, but he plans to continue as a Cree employee until June 15 to assist with the transition of his responsibilities. "The decision to leave Cree was a very difficult one for me as the past six years have been personally rewarding," Mr. Kurtzweil said in a company statement Tuesday.

At this point in my career, however, I decided to move to Extreme Networks, a smaller firm where I can have a more hands-on role in growing the business.

Cree said it is now searching for Kurtzweil's replacement. In the interim, Cree has appointed Michael McDevitt, who joined the firm in 2002 as corporate controller and has also served as Cree's director of financial planning and as director of sales operations. McDevitt had another stint as interim CFO in September 2006, after Cynthia B. Merrell resigned from the role in August 2005.

Turnover in senior management, particularly CFO turnover, can bode ill. The stock fell 5.6% to $27.38 per share intraday on Tuesday.

It wasn't the first time investors sold the stock lately. Cree's earnings per share forecast on April 17 for the fourth quarter missed analyst estimates, according to news reports. As the management copes with transition and struggles to set prices in a competitive market, Cree also reportedly disappointed analysts with its guidance in January this year, in October, August, April, March and January 2011, and in October 2010.

Cree's managers have been taking aggressive steps lately that increase the chance of mistakes. For example, Cree said on August 17, 2011 that it was buying the outdoor lighting company Ruud Lighting, Inc. for around $525 million. Since the company paid more than Rudd's market value, it reported intangible assets that it expects to have someday later amounting to $613.8 million as of Sept. 2011, up from $326.2 million as of June 2011. If it turns out that Cree overestimated what Ruud Lighting will eventually do for its earnings, the company will have to surprise investors with that news someday.

That's not the only area of uncertainty. In April, for example, Cree said it will be selling LED streetlights to municipalities. As the company bets its future on such new products, it estimated in June 2011 that its inventory will be worth $176.5 million once sold. That's up from $112.2 million in the same period of 2010.

CEO Charles M. Swoboda said in a conference call on April 17 that his team is now working to convince people who are used to buying the traditional technology to use his new streetlights. He's trying to cut the cost of his product in half by making changes such as using higher performance LED technology and building more efficiently. He said:

Obviously, we're always making a tradeoff of how much can we -- how aggressive can we be on the new lighting systems, to not only take costs out but also get the customers to think differently about how quickly to move to LED.

And I think as we start to get closer to some of these price points that make the economics much more obvious, I think we'll have a chance to let some of the innovation on the LED systems side give us a little bit more traction.

In the meantime, Cree's stock has unusually high accounting and governance risk. Its financial statements reflect an AGR score of 4, indicating more risk than 96% of comparable companies. The AGR has been aggressive since June 2010, when it was a 21. We give the company a C on its corporate governance overall.

Cree didn't immediately respond to a request for an interview.

(click to enlarge)

Region: North America
Sector: Technology
Industry: Semiconductors
Market Cap: $ 3,725.0mm (Mid Cap)

ESG Rating: C
AGR: Very Aggressive (4)

Source: Cree's Corporate Governance Issue

Additional disclosure: I am a corporate governance specialist at GMI.