Top IBM executives, including former chief executive Ginni Rometty and current CEO Arvind Krishna, are being sued for allegedly misleading investors about cloud revenues. In January, a class action lawsuit was filed against IBM in the southern district of New York on behalf of the company’s shareholders accusing 13 IBM executives of fabricating cloud and other modern service revenue numbers by including mainframe figures in with cloud, analytics, mobile, social and security products. The suit claims the executives wanted to demonstrate momentum for more modern product areas in which the company had invested heavily in recent years, including its Watson AI platform. The suit seeks damages for investors who purchased IBM stock between 18 January 2018 and 16 October 2018.
The lawsuit acknowledges that while IBM’s mainframe still takes in billions of revenues annually through licensing fees, data processing charges, and associated services and support, sales have been on the decline for decades. IBM’s own revenue and income receded after hitting a high in 2011.
The filing says that IBM executives attempted to transform the company ‘from a mainframe supplier to a ‘cognitive solutions’ and cloud computing platform company, highlighting its ‘networked, modularised and embedded technologies, as well as business intelligence and analytics’ software offerings’. To this end, in 2011 IBM started pitching its Watson computing platform as a foundation for artificial intelligence applications. An immediate payoff came from investors with a jump in its per-share stock price from $123.48 on 1 April 2010 to $208.65 on 1 January 2012.
Rometty is said to double down on this new direction when she takes on the CEO role in 2012 as the company grapples with falling revenues and declining stock prices. Rometty and the other 13 executives named in the suit focus on “strategic imperatives” which include ‘Cloud’, ‘Analytics’, ‘Mobile’, ‘Security’, and ‘Social’, collectively referred to as ‘CAMSS’. The suit claims that to drive a new perception of the company as shifting from its legacy mainframe business to the more transformational cloud, the executives ‘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 revenues, enabling Defendants to report publicly materially distorted segment’. The suit alleges that executive categorised revenue from mainframe Enterprise Licensing Agreements (ELA) from its healthcare, banking and insurance clients as CAMSS revenues.
The lawsuit also accuses executives of categorising revenues from its ‘non-strategic’ Global Business Services unit to Watson, to prop up the failing Watson brand that the Company touted.” The result, according to the lawsuit, was a distorted revenue picture.
On October 16, 2018, IBM announced that quarterly earnings were below expectations, specifically acknowledging disappointing CAMSS earnings with cloud sales particularly dismal. IBM ended up breaking out revenues for those segments.
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By GlobalDataIBM has long been under fire for lack of transparency in reporting cloud computing revenues specifically. A class action suit was initially filed last year and later withdrawn due to a disagreement within the legal firms on how to pursue the case. The new suit, filed by the Rosen Firm, leaves out an earlier claim that the executives inflated CAMSS revenue figures to increase bonus payouts.
