IBM Settles SEC Probe of Options Report

An investigation of IBM Corp. by the Securities and Exchange Commission ended Tuesday without penalty, although the government found that the technology company misled analysts about employee stock-option expenses in 2005.

The SEC investigation, originally revealed in June 2005, looked at whether IBM manipulated expectations for its first-quarter earnings announcement that year.

Nine days before the company released its quarterly earnings, IBM's chief financial officer, Mark Loughridge, held a conference call that was accompanied by a chart showing that if IBM had been accounting for options as an expense a year earlier, the cost would have been 14 cents per share. Loughridge indicated that the 2005 quarter would be similar, and analyst forecasts incorporated a 14-cent charge for options.

As it turned out, the cost from expensing options was 10 cents per share.

The difference mattered when IBM said its first-quarter earnings amounted to 84 cents per share, or 85 cents based on continuing operations. Analysts had been expecting 90 cents, but the forecast would have been 94 cents had the precise options-expensing figure been known. Some analysts suggested that IBM had misled Wall Street about the options figure so as to cushion the disappointing results and hide weakness in the business.

The SEC said IBM's conduct "violated the reporting provisions of the federal securities laws."

"The facts here are particularly troubling because the disclosure decision was driven, in part, by management's perception of how the news would be interpreted by analysts," said Scott W. Friestad, the SEC's associate director of enforcement.

However, the agency stopped short of finding that fraud had been committed, and it imposed no fine.

IBM essentially promised not to do it again -- it agreed to "cease and desist" from any future violations of the securities-reporting law. Officially, the company says it neither admits nor denies wrongdoing.

IBM shares were down 49 cents to $105.74 in afternoon trading.


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