What happened

Shares of Ubiquiti Networks Inc. (NYSE:UI) fell as much as 13% early Monday, then settled to close down 7.9%, after short-selling firm Citron Research suggested the networking hardware specialist could be a "total fraud."

More specifically, Citron notes that Ubiquiti's operating metrics -- including its trailing 12-month operating margin of 34% and average net margin of 28% over the past three years -- are unusually high for its industry. But rather than viewing this as a bullish sign, Citron believes Ubiquiti's exceptional results are a red flag.

"Either [Ubiquiti's] Robert Pera is the best CEO in networking equipment," the report insists, "or Ubiquiti is committing FRAUD."

Green and red stock-price data on an LED display


So what

Citron also questions the integrity of Ubiquiti's distributors, cash balances, corporate culture, and newest products, and it likens Pera to Bernie Madoff and the CEOs of known frauds Valeant and Enron.

Pera, for his part, took to social media, stating:

Now what

Pera elaborated that he doesn't "have time to entertain accusations of stock manipulators," but did (informally) address a number of questions on his company's research and development efforts, cash allocation, and management team.

I suspect Ubiquiti Networks will be allocating more time to refuting the allegations between now and its next quarterly report in early November. In the meantime, since the market understandably hates the uncertainty created by this sensationalistic report, it's no surprise to see shares pulling back today.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.