A pension investment group has sued IBM, claiming that the company failed to warn investors that sales in China would slow dramatically following revelations that IBM was helping the U.S. National Security Agency spy on the Chinese.
"IBM was well-aware that its association with the U.S. spy program and its sharing of customers' information with the U.S. government would have immediate and adverse consequences on its business in China," reads a lawsuit filed Thursday by the Louisiana Sheriffs' Pension and Relief Fund in the U.S. District Court for the Southern District of New York.
The pension fund lawsuit is "pushing a wild conspiracy theory," said Robert Weber, IBM senior vice president and general counsel, in a short statement. The company attributes the drop off in sales to a recent country-wide economic reorganization on the part of the Chinese government.
Using material first leaked by former NSA contractor Edward Snowden in June, the pension fund cited IBM involvement in NSA's Prism program, which sought to spy on countries such as China with IBM's aid. IBM hardware sales in that country dipped in the months that followed, first showing up in the company's third-quarter balance sheet.
"IBM's association with the NSA presented a material risk to the company's sales," the lawsuit said. "Upon the revelation of Prism (and related disclosures made by Edward Snowden), IBM knew that the government of China would not tolerate the company's cooperation with the NSA, and would prohibit businesses and government agencies in China from purchasing IBM products."
The pension fund charges that IBM did not disclose to shareholders that the Chinese government and businesses would stop buying IBM gear, once learning of the NSA allegations.
For its third fiscal quarter of 2013, IBM reported that overall business in China had declined by 22 percent and that hardware sales in that country had declined by 44 percent.
After sharing the third quarter results, IBM stock declined in value, from US$186.73 per share to $174.83 per share, for over 22 million shares, leading to IBM stock losing approximately $12 billion in value.
In its quarterly earnings conference call with analysts, IBM Chief Financial Officer Mark Loughridge attributed the slow hardware sales in China to a "broad-based economic reform plan" on the part of the Chinese government that began in November, one that seeks to increase domestic consumption of goods and lessen its reliance on companies outside of China.
The slowdown occurred because the standard decision-making and procurement cycles of organizations in China have been extended, Loughridge said. Typical sales volumes should resume after the first quarter of 2014, he said.
The pension fund is not only suing IBM but CEO Virginia Rometty and Loughridge as well.
As further evidence that IBM is cooperating with the U.S. government spying efforts, the suit also identifies IBM's support of Congress' proposed Cyber Intelligence Sharing and Protection Act (CISPA), which would make it easy for IT companies and federal agencies to share security information. IBM took issue with that support as well.
"This bill does not refer to China, and it does not authorize government surveillance, facts that the plaintiff and its attorneys could have easily determined had they bothered to do the slightest fact checking," said the IBM statement.
IBM declined to offer any additional comment of the suit beyond the statement.
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