Lawsuit accuses IBM of hiding China risks amid NSA spy scandal

NEW YORK Thu Dec 12, 2013 6:11pm EST

An IBM Central Processor Unit (CPU) is seen on a Hard Disk Drive (HDD) controller in Kiev, March 5, 2012. REUTERS/Gleb Garanich

An IBM Central Processor Unit (CPU) is seen on a Hard Disk Drive (HDD) controller in Kiev, March 5, 2012.

Credit: Reuters/Gleb Garanich

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NEW YORK (Reuters) - IBM Corp has been sued by a shareholder who accused it of concealing how its ties to what became a major U.S. spying scandal reduced business in China and ultimately caused its market value to plunge more than $12 billion.

IBM lobbied Congress hard to pass a law letting it share personal data of customers in China and elsewhere with the U.S. National Security Agency, in a bid to protect its intellectual property rights, according to a complaint filed in the U.S. District Court in Manhattan.

The plaintiff in the complaint, Louisiana Sheriffs' Pension & Relief Fund, said this threatened IBM hardware sales in China, particularly given a program known as Prism that let the NSA spy on that country through technology companies such as IBM.

The Baton Rouge pension fund said the revelation of Prism and related disclosures by former NSA contractor Edward Snowden caused Chinese businesses and China's government to abruptly cut ties with the world's largest technology services provider.

It said this led IBM on October 16 to post disappointing third-quarter results, including drops in China of 22 percent in sales and 40 percent in hardware sales.

While quarterly profit rose 6 percent, revenue dropped 4 percent and fell well below analyst forecasts.

IBM shares fell 6.4 percent on October 17, wiping out $12.9 billion of the Armonk, New York-based company's market value.

The lawsuit names IBM, Chief Executive Virginia Rometty and Chief Financial Officer Mark Loughridge as defendants, and says they should be held liable for the company's failure to reveal the risks of its lobbying and its NSA ties sooner.

IBM spokesman Doug Shelton did not immediately respond to requests for comment.

The Louisiana fund is represented by Bernstein, Litowitz, Berger & Grossmann, a prominent class-action specialist. It seeks class-action status on behalf of shareholders from June 25 to October 16, 2013, and damages for shareholder losses.

Loughridge is retiring as CFO this month at age 60, which IBM calls its traditional retirement age.

Martin Schroeter, who has been IBM's head of global finance, is replacing him.

The case is Louisiana Sheriffs' Pension & Relief Fund v. International Business Machines Corp et al, U.S. District Court, Southern District of New York, No. 13-08818.

(Reporting by Jonathan Stempel in New York; editing by Andrew Hay)

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Comments (3)
unionwv wrote:
IMO, this is another demonstration that Teddy Roosevelt was wrong when, during his trust-busting activities vs. Standard Oil, he said he wasn’t against bigness per se. Business size correlates with power and power corrupts. Corrupted power centers naturally collude – Hitler and the Krupp industrial empire, for example.

To the extent that libertarians see evil only in size of government, they are seeing only part of the problem, IMO.

Recently, “too big to fail” caused financial powers to be rescued by government power. Individuals were adversely affected in reverse correlation with their wealth (power).

Dec 15, 2013 10:34am EST  --  Report as abuse
Nothing to see here, nobody will lose their job, nobody will go to jail, business as usual.

Dec 15, 2013 1:03pm EST  --  Report as abuse
Ekofisk wrote:
I suspect the Stellar Winds / Prism scandal will give rise to a new tranche of software companies, in the U.S. and globally. Whenever an incident or revelation offends billions of paying customers it becomes an opportunity for entrepreneurs.

Dec 15, 2013 1:34pm EST  --  Report as abuse
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