IBM, along with 13 of its current and former executives, has been sued by investors who claim the IT giant used mainframe sales to fraudulently prop up newer, more trendy parts of its business. The Register reports: In effect, IBM deceived the market about its progress in developing Watson, cloud technologies, and other new sources of revenue, by deliberately misclassifying the money it was making from mainframe deals, assigning that money instead to other products, it is alleged. The accusations emerged in a lawsuit [PDF] filed late last week against IBM in New York on behalf of the June E Adams Irrevocable Trust. It alleged Big Blue shifted sales by its “near-monopoly” mainframe business to its newer and less popular cloud, analytics, mobile, social, and security products (CAMSS), which bosses promoted as growth opportunities and designated “Strategic Imperatives.”
IBM is said to have created the appearance of demand for these Strategic Imperative products by bundling them into three- to five-year mainframe Enterprise License Agreements (ELA) with large banking, healthcare, and insurance company customers. In other words, it is claimed, mainframe sales agreements had Strategic Imperative products tacked on to help boost the sales performance of those newer offerings and give investors the impression customers were clamoring for those technologies from IBM. “Defendants used steep discounting on the mainframe part of the ELA in return for the customer purchasing catalog software (i.e. Strategic Imperative Revenue), unneeded and unused by the customer,” the lawsuit stated.
IBM is also alleged to have shifted revenue from its non-strategic Global Business Services (GBS) segment to Watson, a Strategic Imperative in the CAMSS product set, to convince investors that the company was successfully expanding beyond its legacy business. Last April the plaintiff Trust filed a similar case, which was joined by at least five other law firms representing other IBM shareholders. A month prior, the IBM board had been presented with a demand letter from shareholders to investigate the above allegations. Asked whether any action has been taken as a result of that letter, IBM has yet to respond.