IBM settles with SEC over options probe

Big Blue and SEC reach settlement in stock options expensing disclosure case. No fines or monetary penalties for company.

The Securities and Exchange Commission announced Tuesday it reached a settlement with IBM, over allegations the industry titan issued misleading statements regarding stock options expenses.

The end result: IBM, without admitting or denying the commission's findings, consented to an order that it cease and desist from "committing or causing violations of these provisions." But more importantly, IBM paid no fine, nor faced any monetary penalty.

What was the beef?

Back in April 2005, IBM said during a conference call with analysts it would begin reporting its stock options as an expense, starting with the first quarter 2005. Trotting out a chart, IBM's presentation "conveyed to many analysts" that the affect of this change would result in an expense of 14 cents a share in the first quarter and 55 cents for the full 2005 fiscal year.

SEC investigators, however, allege that IBM was aware the figures would actually be lower, to the tune of 10 cents for the quarter and 39 cents for the year. Regulators allege IBM took this action to provide some cushion to its anticipated, though unrelated, increased pension expense.

Regulators allege that by keeping the stock options expense higher than anticipated, IBM believed it would help offset the previously announced increased pension expense. Without such action, the SEC alleged, IBM's management would have to contend with analysts' higher growth rate expectations.

"According to the order, management wanted to avoid this outcome because it would have increased the expected growth rate that analysts had set for IBM, which would have been difficult for the company to achieve because of the year-to-year increase in pension expense," according to the SEC statement.

In the end, Big Blue posted earnings of 85 cents a share for the quarter, 5 cents less than analysts' expectations following IBM's conference call to Wall Street.

 

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