Lawsuit accuses IBM of hiding China risks amid NSA spy scandal

NEW YORK Thu Dec 12, 2013 9:19pm 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 sooner the risks of its lobbying and its NSA ties.

"These allegations are ludicrous and irresponsible and IBM will vigorously defend itself in court," IBM spokesman Doug Shelton said in an e-mail.

The Louisiana fund is represented by Bernstein, Litowitz, Berger & Grossmann, a prominent class-action specialist law firm. 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.

(Editing by Andrew Hay and Matt Driskill)

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Comments (2)
NashTN wrote:
It would be easier to prove that CNBC caused the decline in IBM’s stock price. Go watch Cramer’s Madmoney and Fast Money to see what they said. They do not like IBM and mention the revenue as a problem, while they overlook the decline in revenue at JPMorgan, Goldman Sachs,Lockheed Martin, GE and many other companies.
I believe that IBM would be justified if they used customer’s data to protect their intellectual property rights. I have no inside information to share but I do believe that some customers only order IBM equipment to tear it down and copy it for sale which is a violation of patent law. Also ordering software or fixes for your IBM machine and then replicating it to non-IBM equipment is a violation. IBM is not going to put up with this, and neither should Microsoft or Apple or any other vendor.
Few people want their financial transactions to occur in China or be open to Chinese hackers. I have been told that we cannot even use our credit cards in China unless we get prior approval. I doubt anyone is going to fault IBM for protecting their business from China, just as an individual wants to protect what they own from China. China’s stated goal is to make more of their own technology and if they continue to allow illegal activity to do so, it is likely global companies will avoid China altogether.
Recently IBM has stated they are building a public cloud in Hong Kong. I do not think they would be doing this if China was going to stop doing business with IBM. IBM stated that their business was down in China last quarter because China was revising their central plan. We have heard that other companies have had lower sales in China also, which doesn’t help the plaintiff’s case. It is up to the plaintiff to prove their case and I don’t think the NSA is going to help them either.

Dec 13, 2013 10:28am EST  --  Report as abuse
StigTW wrote:
IBM id a deal with the devil, the devil won.

Dec 14, 2013 5:19am EST  --  Report as abuse
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