An investor has sued IBM for allegedly inflating reported revenues for new business segments to conceal their true performance.
The June E. Adams Irrevocable Trust is demanding unspecified damages from the Armonk company, in a complaint filed April 5 in U.S. District Court, White Plains, for itself and others who bought IBM securities from April 2017 to October 2021.
International Business Machines shifted “billions of dollars in revenues from the mainframe, non-strategic side of the business to the strategic side of the business,” the complaint states, “to prop up strategic revenues, increase their long-term incentive compensation and appease the investing community while waiting for their new business model to come to fruition.”
IBM spokesman Chris Mumma did not respond to any specific allegations in the complaint but stated in an email that “IBM’s long-standing commitment to trust, integrity and responsibility extends across all aspects of our business operations. We stand behind our financial reporting.”
The Adams Trust claims that IBM began disseminating false information in 2015 when it dominated sales of mainframe computers but the market was shifting to new services. CEO Virginia Rometty had already begun focusing on a business model that emphasized strategic imperatives, a catchall category for cloud, analytics, mobile, security and social computing.
Strategic imperatives were used as financial metrics to convey to investors how IBM was reinventing itself, according to the complaint, and to demonstrate its success with new products and services.
But the Adams Trust claims that IBM reclassified billions of dollars in mainframe computer revenue as strategic imperatives revenue, to mislead investors about the new business model.
The annual executive bonus program also was based on the new metric, according to the complaint, and allegedly provided another motive to misclassify revenues.
Rometty’s annual bonus in 2017, for example, was $5 million, or more than three times her base salary of $1.6 million.
IBM used the strategic imperatives metric through 2018 and then replaced it with total annual revenue, as the company “waited for the news business model to penetrate the marketplace.”
IBM announced revenues that were nearly $800 million more than financial analysts had expected for the last quarter of 2021, according to the complaint. “The new business model had finally started to produce substantial revenue.”
The Adams Trust claims that IBM securities traded at artificially high prices, due to the alleged distortions of the strategic imperative program, and investors were fooled into paying too much.
The Adams Trust does not identify where it is based or say how much it invested or allegedly overpaid for IBM securities.
It accused IBM of violating federal securities rules by disseminating false information. It is asking the court to certify the case as a class action on behalf of all buyers of IBM securities during the period of alleged misleading financial reports.
Rometty, who has since retired from IBM, current CEO Arvind Krishna, and company officers Martin J. Schroeter and James J. Kavanaugh are also named as defendants.
Garden City attorneys Mitchell M. Breit, Sanford P. Dumain and Jennifer S. Czeisler represent the Adams Trust.
