Lawsuit: IBM, 13 execs used mainframe dollars to boost cloud, other businesses

RESEARCH TRIANGLE PARK – IBM faces a new lawsuit over how mainframe computer revenues were allocated to back newer technologies such as Watson and cloud. IBM Chair and CEO Arvind Krishna as well as 12 other current and former executives also are part of the suit.

Media sites The Register and Bloomberg reported the class action suit on Tuesday.

“In effect, IBM deceived the market about its progress in developing Watson, cloud technologies, and other new sources of revenue, by deliberately misclassifying the money it was making from mainframe deals, assigning that money instead to other products, it is alleged,” according to The Register.

Cloud, analytics, other revenues questioned

In the suit the plaintiffs allege:

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

Adds Bloomberg: “IBM is facing a proposed securities class action alleging it deceived investors into believing that its transition from legacy mainframe revenues was successful.”

For a copy of the lawsuit, read at the filing at; https://regmedia.co.uk/2023/01/13/ibm_securities_claim.pdf

“IBM is also alleged to have shifted revenue from its non-strategic Global Business Services (GBS) segment to Watson, a Strategic Imperative in the CAMSS product set, to convince investors that the company was successfully expanding beyond its legacy business,” The Register added.

IBM internal probe

A similar suit was filed a year go. The new one revamps original claims, The Register noted.

Last year IBM’s board also was presented with a demand to review the revenue claims, the news site said. Among questions raised were whether revenues were allocated to increase executives’ bonus.

“A special committee of independent directors has been formed to investigate the issues raised in the letter,” IBM said in a securities filing.

According to reporting from Thomas Claburn of The Register, IBM received a demand letter from attorneys who were representing shareholders in March that alleged the company under both current CEO Arvind Krishna and former CEO Ginny Rometty “deceived shareholders by unlawfully manipulating mainframe revenues in a way that misled investors and inflated executive bonuses.”

IBM operates one of its largest corporate campuses in RTP, owns Raleigh-based Red Hat, and employs thousands of people across North Carolina.