Special report 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.
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.
Due to the way complex securities litigation works, the firm representing the largest group of investors – Ironworkers Local 580 Joint Fund – took over the handling of the case, then in September, 2022, moved to have the case voluntarily dismissed without prejudice [PDF], meaning the charges could be refiled. The Register understands this was a result of disagreements with the initiating law firm about how the case should be handled.
The new complaint expands upon the one filed last year while also omitting previous allegations that the supposed securities fraud allocated revenue for the purpose of maximizing executive bonus compensation.
It names as defendants four previously accused corporate leaders – former CEO Ginni Rometty, former CFO Martin J Schroeter (now CEO of IBM spin-off Kyndryl), current IBM CFO James J Kavanaugh, and current CEO Arvind Krishna – as well as nine additional current and past executives.
These include: Bridgette Van Kralingen (former SVP of IBM global markets; Shanker Ramamurthy (current IBM global managing partner banking); Pablo Suarez (VP & global leader, financial services sector centers of competence and digital banking at IBM); Sarah Diamond (former IBM global managing director, financial services sector), Alistair Rennie (former IBM general manager, blockchain); Mark Andrews (former VP of IBM Watson financial services solutions); Don India (former VP of IBM Watson financial services solutions); Chris Johnston (former North American business unit executive for Watson financial services); and Mark Foster (current global chairman IBM consulting).
FYI: Van Kralingen appears to spell her name as "Bridget" in public facing websites. Andrews appears to spell his name "Marc" in public facing websites.
Two members of this expanded cast of defendants, Shanker Ramamurthy and Pablo Suarez, were also named in an intellectual property theft case filed by former GBS consultant Gerald Hayden against IBM in March 2021. That case, still being litigated, focuses on events that occurred principally during the period from 2018 to 2020, around the time Rometty stepped down as chief exec. It describes IBM's alleged efforts to co-opt a proprietary business method for accelerating the lengthy enterprise sales process and to transfer GBS revenue to Watson.
In 2018, things were starting to look up for IBM. In April that year, the one-time corporate colossus reported revenue growth for the second quarter in a row after 22 consecutive quarters of revenue retreat.
But Big Blue had a problem. Mizuho Bank, part of the third largest financial group in Japan, was looking for an IT supplier. Mizuho's Request for Proposal (RFP) detailed the bank's need for KYC (Know Your Customer) solutions – because banks are obligated to identify and verify their clients to mitigate fraud – and an interest in the provider's platform strategy.
IBM at the time allegedly didn't have either a KYC-AML (anti-money laundering) offering nor a platform strategy.
But AML Partners (AMLP), a New Hampshire-based risk mitigation firm, did. And it submitted its technology in a response to Mizuho's RFP and agreed to cooperate with IBM to develop a suitable platform strategy that incorporated KYC capabilities.
Goodwill between the two companies would not last long.
When it came time for IBM to present the financial solution to Mizuho, company executives cut AMLP out of the deal by claiming AMLP's technology as their own, according to Frank Cummings, CEO of AMLP, and former IBM employees who worked on the RFP.
Cummings raised concerns about the handling of the deal on April 15, 2018, in an email to Michael Henry, who at the time was the IBM Global Business Services executive overseeing the engagement.
Henry replied promptly and said he would investigate. But that probe evidently was not satisfactory.
On May 1, 2018, Cummings escalated the issue, hoping to discuss "grave matters of business" related to potential fraud. He wrote to Mark Foster, IBM's SVP of Global Business Services at the time, and copied in then-CEO Ginni Rometty, her assistant, and AMLP co-founder Jonathan Almeida.
"First and foremost, IBM involved my firm and our software in IBM's efforts to resolve its problems at Mizuho, but in a final draft of the Mizuho proposal not shared with me. Mr Henry apparently altered the proposal purposely to misidentify AML partners' software as 'Watson Financial Crimes' products," Cummings wrote in an email now seen by The Register.
"This misrepresentation of our software – and misrepresentation to the client Mizuho – was done without our permission or formal agreement."
"By adding Watson Insights to the Mizuho proposal, this deal is now at great risk; a viable alternative would have been to do an up-sale after implementation," the letter continues.
"To be clear, IBM does not possess an operational AML (anti-money laundering)/KYC system, and it is misrepresenting that claim to Mizuho in a way that harms my company."
More troubling still, Cummings said he had since learned Henry wanted to bring in replacement technology from Ireland-based competitor Fenergo, adding that sources at IBM had informed him IBM personnel involved in the deal had ties with Fenergo prior to being recruited to join IBM's Watson team.
As detailed in one of several OSHA complaints against IBM filed by whistleblowers and seen by The Register, Henry allegedly had received compensation at one point from Fenergo for helping the bank tech firm obtain millions of dollars in investment funds.
Michael Henry, no longer with IBM, has not replied to inquiries seeking comment. The aforementioned Hayden-filed lawsuit [PDF] also detailed Henry's alleged interference in the AMLP deal.
Cummings offered IBM's leadership an opportunity to save face by saying "this cannot be a corporate strategy, not at IBM," and went on to tease the possibility of a mutually remunerative relationship – if the Mizuho situation could just be resolved.
When The Register spoke with Cummings on the phone to confirm the authenticity of the email messages, he no longer lauded the company's leadership.
"Literally, a cabal of the worst of the worst got in charge of IBM and destroyed its reputation," Cummings said.
On May 2, 2018, Sarah Diamond, then Global Managing Director of Banking and Financial Markets and among those named in the new securities lawsuit, responded to Cummings's message on behalf of Foster to say, "IBM takes these matters seriously, and is looking into them in detail."
Three weeks later, Diamond denied Cummings's allegations – that IBM was committing fraud, negotiating in bad faith, misrepresenting AML Partners' software as its own, breaching its NDA with AML Partners, and stealing AML's intellectual property.
"While I will not walk through each of your allegations separately, I want to assure you that, with respect to the Mizuho RFP in particular, IBM has not changed (and does not intend to change) its written RFP response to replace ALP's RegTech Surety Suite solution with a Fenergo solution," Diamond wrote in an email.
"Moreover, the alleged conflict-of-interest with Fenergo identified in your correspondence does not exist. To the extent Mizuho decides to choose a solution other than one from AMLP, it would not be the result of any 'bait- and-switch.' It is our understanding that Mizuho is still in the process of evaluating the bid submissions and determining whether it wants to se Source: The register