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Lawsuit claims IBM falsely used mainframe sales to boost AI, cloud businesses

Lawsuit claims IBM falsely used mainframe sales to boost AI, cloud businesses

A securities fraud lawsuit filed against IBM accuses the tech giant of deceiving investors by shifting mainframe revenue to make its cloud and AI-based Watson products appear to be in high demand.

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A lawsuit has been filed against 13 current and former IBM executives, including CEO and Chairman Arvind Krishna and former CEO Ginni Rometty, accusing the company of securities fraud — bundling mainframe sales together with those of poorly performing products in order to make them appear more profitable than they actually were.

The lawsuit was filed on January 13 in the U.S. District Court for the Southern District of New York and seeks class action status for anyone who purchased IBM shares during the period April 4, 2017, to Oct. 20, 2021.

The lawsuit alleges that the company and some of its executives “knowingly or recklessly engaged in a device, scheme, or artifice to defraud, engaged in acts, practices, and courses of business conduct designed to deceive investors.”

Essentially, it’s alleged that IBM promoted its less popular cloud, analytics, mobile, social, and security products (CAMSS) products as “growth opportunities,” allowing investors to think they were much in demand when, in fact, they were being tacked onto three- to five-year mainframe Enterprise License Agreements (ELA) that were popular with large banking, healthcare, and insurance company customers.

“Defendants misled the market, engaging in a fraudulent scheme to report billions of dollars in mainframe segment and other non-strategic revenues as Strategic Imperatives and CAMSS [Cloud, Analytics, Mobile, Security, and Social] revenues, enabling Defendants to report publicly materially distorted segment information,” the lawsuit states.

“Defendants portrayed Strategic Imperatives and CAMSS as growing materially beyond actual growth, materially misrepresenting IBM’s shift away from its stagnant legacy mainframe segment.”

According to IBM, “strategic imperatives” are products and initiatives that provide “differentiation driven growth and value.”

IBM is also alleged to have reallocated revenue from its non-strategic Global Business Services (GBS) segment to the company’s Watson-branded AI products — a strategic imperative included in the CAMSS product portfolio — in an attempt to convince investors that the company was successfully expanding beyond its legacy business. 

As a result, “IBM securities traded at artificially inflated prices” resulting in financial damage to people purchasing company shares during the period covered by the lawsuit, according to the lawsuit.

In response to a request for comment, IBM emailed a statement that said, “IBM’s long-standing commitment to trust, integrity and responsibility extends across all aspects of our business operations. A similar complaint has already been voluntarily dismissed.”

In fact, the same complainant who filed the lawsuit last week filed a similar lawsuit last April, then filed a notice in September moving for voluntary dismissal of the case “without prejudice,” reserving the ability to refile the suit.

The reason behind the move to abandon that case was due to disagreement with the lead law firm at the time about how to handle the case, according to The Register, which first reported on the new case filed last week. 

The law firm submitting the new lawsuit, The Rosen Law Firm, declined to comment.

The case filed last April alleged that IBM had bolstered its stock price and deceived shareholders by moving revenue from its non-strategic mainframe business to its strategic business segments. 

This previous lawsuit further alleged that by misrepresenting the true nature of CAMSS revenue, it allowed IBM executives to take home larger bonuses than they otherwise would have received.

While this new lawsuit once again alleges that IBM strategically shifted revenue, it omits the accusation related to executive bonuses.

According to the PACER electronic records system, the new case has been referred to District Judge Vincent L. Briccetti, who will have to decide whether to certify class-action status for the lawsuit.

Briccetti is currently adjudicating another ongoing lawsuit filed against IBM. 

In that case, filed in March last year, Gerald Hayden, an ex-IBM employee, accuses IBM of theft of trade secrets and intellectual property. 

Hayden alleges that, while he worked for IBM, the company unlawfully used his proprietary business method — A2E — that he had developed to streamline enterprise sales.

Hayden’s lawsuit alleges that IBM, after promising it would protect his trade secrets, used A2E on projects that he was not working on, moving some of his clients to new projects in areas of the company including cloud and Watson — essentially transferring clients that he had attracted via the A2E methodology from GBS to newer strategic projects.

“IBM thus used A2E’s value proposition to drive IBM’s claimed reinvention of itself as a leader in the hybrid cloud computing industry and as an invaluable consultant to the financial services,” according to the lawsuit. “To add insult to injury, after stealing Plaintiff Hayden’s proprietary A2E business methodology and stripping him of his client base, IBM shortly thereafter terminated Plaintiff for ‘lack of work.’ “

(Additional reporting by Marc Ferranti.)

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