IBM executives artificially boosted stock price by reclassifying revenues, lawsuit claims
IBM investors claim the company misled them by shifting mainframe revenue to more modern departments like cloud and mobile technology, in order to prop up its stock price.
In a new securities class action lawsuit, the claimants allege that IBM made false and misleading statements to the market and moved billions of dollars in revenue from its non-strategic mainframe business to its strategic business segments: namely Strategic Imperatives and Cloud, Analytics, Mobile, Security, and Social (CAMSS).
The lawsuit, which was filed on the 5th April in a federal court in southern New York, claims that IBM violated the Securities Exchange Act of 1934, which was created to ensure greater financial transparency and reduce instances of fraud.
The claimants go a step further, as well: the filing names not only IBM but many current and former executives, including former CEO Ginni Rometty, current CFO James J. Kavanaugh, current CEO Arvind Krishna, and former CFO (and now CEO of IBM spin-off Kyndryl) Martin J. Schroeter as defendants.
Investors who bought or acquired IBM stocks between 4th April 2017 and 20th October 2021 are represented in the action.
The case reportedly stems from years of allegedly illegal and unethical business activities such as revenue shifting, unfair layoffs and sales commission manipulation, among other things, all done to inflate executives' bonuses.
According to the lawsuit, IBM provided false statements to the market and fraudulently inflated its Strategic Imperatives and CAMSS revenue and growth, as well as other relevant business metrics, by reclassifying non-strategic revenues.
The plaintiffs claim IBM deceived the market by portraying the financial performance and future prospects of its Strategic Imperative unit as more favourable than they really were. When the truth was revealed, the company's investors incurred losses.
IBM announced its Q3'21 results after the market closed on 20th October last year, reporting total revenues of $17.6 billion for the quarter; a deficit of $191.8, million based on analyst estimates.
Over 42 per cent of the deficit was attributed to IBM's Cloud & Cognitive Software business, which traditionally allegedly received the majority of the strategic income generated by the fraudulent scheme and incorrect reclassification of sales from non-strategic to strategic.
The lawsuit also describes how IBM executives and even sales staff were 'motivated' to participate in this behaviour by the bonus and commissions system, which were partly tied to Strategic Imperatives revenue.
Multiple lawsuits against the company in recent years, claiming age discrimination and capped sales commissions, may be explained by executives' motivation in maintaining IBM's stock price to maximise payouts.
In February, internal IBM documents made public by a US District Court revealed how IBM senior executives discussed plans to shrink the company's older staff population and replace them with millennial workers.
The documents were unsealed in an age discrimination lawsuit brought by former IBM employees against the company in 2018, after thousands of employees over the age of 40 were laid off.
As per the filing, IBM executives expressed dissatisfaction over the fact that the company had a smaller percentage of millennials in its staff than a rival firm, and said that the situation would change following the lay-offs.