IBM Sued for Misleading Investors on Cloud Revenues

Amy Larsen DeCarlo – Principal Analyst, Security and Data Center Services

Summary Bullets:

• A lawsuit, filed on behalf of International Business Machines (IBM) shareholders, claims the tech giant intentionally misidentified revenues from legacy mainframe sales as coming from more cutting-edge products, including cloud.

• Originally filed in 2022 and withdrawn later in the year, the refiled suit alleges a number of executives, including several former CEO Ginni Rometty and the current chief executive officer Arvind Krishna, misled investors to believe that sales of its cloud, analytics, mobile, social, and security products (CAMSS) were making big gains.

A class action lawsuit filed against IBM in January 2023 on behalf of the company’s shareholders accuses 13 executives, including former chief executive Ginni Rometty and current CEO Arvind Krishna, of inflating cloud and other modern service revenue numbers by including mainframe figures in with cloud, analytics, mobile, social, and security products. Both the company and the individual executives were named in the suit. The suit posits 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 January 18, 2018 and October 16, 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, modularized 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 AI applications.

Rometty is said to have doubled down on this new direction when she took on the CEO role in 2012 as the company grappled with falling revenues and a declining stock price. Rometty and the other 12 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 executives categorized revenue from mainframe enterprise licensing agreements (ELAs) from its healthcare, banking, and insurance clients as CAMSS revenues.

The lawsuit also accuses executives of categorizing revenues from its “non-strategic” Global Business Services unit to Watson in order 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 breaking out revenues for those segments.

IBM has long been under fire for lack of transparency in reporting cloud computing revenues specifically. A class action suit was initially filed in 2022 and was later withdrawn due to a disagreement within the legal firms on how to pursue the case. The new suit, filed by Rosen Law Firm, leaves out an earlier claim that the executives inflated CAMSS revenue figures to increase bonus payouts.

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