IBM Misled Investors by Overstating Stock Option Expenses, SEC Says

IBMmisled investors by overestimating the impact of stock-based compensation expenses on quarterly earnings in 2005, the U.S. Securities and Exchange Commission said.

The securities regulator made the statement as it reached a settlement with International Business Machines , in which the company agreed not to commit future disclosure violations.

The SEC did not impose any monetary penalties and IBM, the world's largest technology services company, did not admit or deny the SEC's findings in the settlement announcement.

"IBM misled investors by failing to disclose information that would have allowed them to accurately determine the impact that the company's decision to expense stock options would have on its financial results," SEC Associate Director of Enforcement Scott W. Friestad said in a statement.

"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," Friestad said.

In an April 5, 2005, conference call, IBM led analysts to believe that the company expected stock option expenses to reduce first-quarter earnings by 14 cents a share and to reduce full-year earnings by 55 cents a share, the SEC said.

IBM, however, actually expected stock options expenses to reduce earnings by only 10 cents per share in the first quarter and by only 39 cents for the full year, the SEC found.

IBM's first-quarter earnings, reported nine days after the conference call, fell short of average analysts' estimates by 5 cents a share, a big miss for the company. Some analysts later complained that IBM, in effect, had led them to believe that the stock options' impact would be larger than it actually was, disguising the magnitude of the earnings shortfall.

The SEC said IBM had wanted the gap in its stock options expense estimates to offset a previously announced, unrelated increase in pension expenses.

IBM did not want analysts to reduce their estimates for the stock option expenses because it would have increased their expected growth rate for the company, which would have been hard to achieve because of the pension expense, the SEC said.

"By engaging in this conduct, IBM violated the reporting provisions of the federal securities laws," the SEC said in its order.

The SEC order contains no finding that IBM had committed securities fraud or violated antifraud provisions of the federal securities laws, IBM said in a separate statement.

An SEC enforcement agent said the two sides had had discussions over several months before reaching the settlement.