IBM board investigates sales fraud allegations • The Register

Exclusive IBM’s board has opened an investigation into allegations that its sales figures were manipulated, leading to executives getting big bonuses. If the board takes no action, it may face legal action to recover millions of dollars from top employees.

In late March, just days before IBM was sued for securities fraud, the IT giant’s board received a formal notice from attorneys representing shareholders.

The letter, according to sources familiar with the matter, asked the board to investigate allegations that surfaced later in the securities lawsuit: that the company, under former CEO Ginny Rometty and the current CEO Arvind Krishna, deceived shareholders by illegally manipulating mainframe earnings in a way that deceived investors and inflated executive bonuses.

Our sources tell us that if IBM’s board of directors does not address the allegations, a derivatives lawsuit is expected to follow in which the plaintiffs will seek to recover millions of dollars in bonuses paid to executives.

A shareholder derivatives lawsuit is brought by shareholders on behalf of a company. It is filed against corporate executives – board members, executives or otherwise – suspected of having neglected their fiduciary duty.

We are told that IBM’s board of directors has hired a law firm to investigate the fraud allegations. If the board takes no action to remedy the alleged fraud, then plaintiffs should be able to file a derivatives claim on behalf of the company.

Assuming the court finds sufficient merit in the plaintiffs’ claim to allow a derivatives case, and if the plaintiffs prevail, most of the damages awarded would belong to the company – which would benefit shareholders, but not them. would not go directly.

A lawyer who spoke with The register on the basis of unfamiliarity with this specific case said that it is unusual for shareholders to present the board with a formal notice, because unless you can show that the board is in conflict or acts in its own interest, shareholders are generally not permitted to initiate a derivatives case.

IBM did not respond to two requests to confirm or deny the existence of the formal notice.

Buried on page 38 of a 10-Q deposit with the SEC last week, however, Big Blue disclosed that he had received and responded to such a missive.

“On March 25, 2022, the Board of Directors received a formal notice from shareholders making similar allegations [to the securities class-action lawsuit] and requiring the company’s board of directors to take action to enforce the company’s rights,” IBM noted in the submission, a detail that has so far not been reported.

“A special committee of independent directors has been formed to investigate the matters raised in the letter.”

The securities fraud claim [PDF] against IBM was filed on April 5 in New York, on behalf of the June E. Adams Irrevocable Trust. It names as defendants not only IBM, but also current and former business leaders, including Rometty, former CFO Martin J. Schroeter (now CEO of IBM spin-off Kyndryl), current CFO James J. Kavanaugh and current CEO Arvind Krishna.

Since the trial was originally filed by the law firm Milberg Coleman Bryson Phillips Grossman, LLC, he was joined by at less five other right companies representing other IBM shareholders. In June, the court recognized Iron Workers Local 580 Joint Funds as the lead plaintiff.

The complaint alleges that IBM, between April 4, 2017 and October 20, 2021, “unduly and in violation of generally accepted accounting principles (“GAAP”), engaged in a fraudulent scheme to transfer billions of dollars revenue from its mainframe business line to its CAMSS Strategic Imperatives and Line of Business.”

…a fraudulent scheme to shift billions of dollars in revenue from its mainframe business line to its Strategic Imperatives and CAMSS business line

CAMSS stands for Cloud, Analytics, Mobile, Security and Systems, business segments that have been designated as strategic imperatives by IBM management. The complaint alleges that IBM instituted a bonus program that rewarded executives and encouraged IBM salespeople to sell CAMSS products. As a result, revenue generated from mainframe sales has been reclassified as CAMSS sales, which has boosted bonuses while misleading investors – giving shareholders the wrong picture of the IT giant’s business performance – claims -we.

The register spoke with two former IBM sales employees who were unaffiliated with the litigation and between them had more than forty years of experience with Big Blue. They described manipulative sales reports — not all of which are necessarily illegal — as common practice, not just at IBM but at other major enterprise software companies.

“Consider it the worst-kept secret,” said one, who described one way IBM salespeople adjust sales numbers to their own advantage. “It all starts with the CRM system, the customer relationship management system. IBM uses SugarCRMbut they make it really easy when you get a deal.

“You go through a bunch of checkboxes and you tick off what categories relate to that deal and how many services, how much hardware, how much in particular is cloud-based or analytics. And that’s the big thing with CAMSS , right? To tick all the boxes relating to CAMSS and then you allocate a percentage to that.”

That is, you only have to assign a small portion of the sales agreement to CAMSS to register it as CAMSS earnings.

The other described various questionable guidelines that sellers had to follow that steered sellers towards achieving management goals and discouraged them from rocking the boat.

For example, this individual described manipulation of the IBM Z Linux part number. “A very common practice was to create a duplicate part number,” explained this former IBMer. “It’s a unique part number but there is no difference in product or delivery.”

It makes no difference to the customer, we were told, but how products were categorized affected sales staff and executive compensation.

The question before the New York court is whether such flexible accounting, to the extent that it can be documented, violated the law or whether IBM misled investors. If IBM’s board of directors decides no corrective action is needed, a successful derivatives complaint could send millions in unwarranted executive bonuses back into the company’s coffers. ®

Editor’s note: This article has been updated to clarify that the demand letter was sent in late March, just before the securities lawsuit was filed in April, as confirmed by the 10-Q filing.

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