Tech Industry

THE DAY AHEAD: EDS blunder should make investors nervous

Electronic Data Systems admitted Wednesday that a group of con artists got their hands on "tens of millions of dollars" worth of computer audio and video equipment that was supposedly going to be used for a top-secret project abroad.

It was such a secret that no one was around to pick up the check.



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For a company as huge as EDS (NYSE: EDS) this little fiasco isn't that big of a deal.

In fiscal 1999, the computer services company earned $957 million and change on sales of $18.5 billion. Losing $10 million or $20 million or even $30 million is just a drop in the bucket.

Unfortunately, it appears a couple other smaller companies were sucked into this web of deceit.

EDS, according to company officials, was merely serving as the coordinator for what the thieves called "a highly sensitive voice recognition project for NATO."

While details are still very sketchy at this point, it appears that a group of individuals posing as NATO and U.S. Air Force officers worked a procurement scam for this bogus voice recognition project supposedly taking place in the Netherlands.

This all began back in 1997, EDS said.

Once the equipment was shipped to the Netherlands, it and the "customers" disappeared.

EDS said it promptly notified the FBI and other local and international authorities after it figured out something was amiss sometime late last year.

Whether that was immediately after the goods were shipped or after the company realized it couldn't track these guys down is unclear at this point.

EDS can easily absorb a loss like this. They deserve to eat this one.

Where was the invoice on this order? Didn't anyone check these alleged customers' stories?

Maybe EDS has a policy or some kind of handbook lying around that they refer to when negotiating "top secret" deals.

More likely it was the allure of selling to a nameless, faceless entity with bottomless pockets like the Air Force or NATO that seduced them.

I'd be interested to see the paper trail.

Did EDS count this as revenue in 1997 or 1998? Did it record the transaction at all?

Despite the embarrassment, EDS bravely stepped forward to reassure investors that its butt was covered, claiming the scandal would have no material impact on its financial results.

It also said that it had "good and meritorious defenses" against two lawsuits filed by two vendors who got suckered in as well.

One of those lawsuits, according to various reports, was filed in Fort Worth, Texas, by Akai Musical Instrument Corp.

It's safe to say whatever losses Akai and the other unnamed company suffered will be of greater consequence than whatever EDS might have lost. But when you get a chance to fulfill a contract headed up by a company like EDS, you leap first and ask questions later.

Let's not forget that even in this era of multibillion-dollar mergers and paper millionaires disguised as administrative assistants, $10 million or $20 million is still a lot of scratch.

But with so much money flying around everywhere, I guess missing "tens of millions of dollars" worth of equipment is simply the cost of doing business.

Now that the story's hit the press, the hunt will commence (if it hasn't already) for some unfortunate sales rep or middle manager who likely regrets the day he or she ever stumbled upon this unbelievable order.

Better odds of finding the fools that gave away the store than the crooks who knew how to exploit a Fortune 100 company that was na?ve and sloppy.

Investors can only hope this is an isolated incident.