IBM’s early shift toward cloud infrastructure and analytics products from mainframe sales was partly a deception, according to a class action lawsuit filed in New York recently. The allegations raise questions about IBM’s place in the cloud infrastructure ecosystem, where the company boasted a small (3% of the global market as of Q3 2022) but profitable market share.
The lawsuit, filed against IBM and 13 executives who worked there between 2017 and 2021, alleges the once-dominant technology company misled investors about demand for its cloud, mobile, security and Watson products by bundling them into mainframe sales deals.
Cloud rises as mainframe sales drop
The complaint claims mainframe sales, which made IBM a dominant force in the IT world for decades, have been dropping due to the rise of powerful cloud storage and computing options for businesses in recent years.
IBM, the lawsuit says, sought to reinvent itself as a cloud computing platform company to investors in an effort that “misled the market, engaging in a fraudulent scheme to report billions of dollars in mainframe segment and other non-strategic revenues” as revenue from cognitive solutions and cloud computing business lines.
The company did this, the complaint alleges, by adding what it called cloud, analytics, mobile, social, and security (CAMSS) products to mainframe sales deals with large health care, banking and other customers. It then misled investors by claiming it was selling CAMSS products, not mainframes.
The allegedly misclassified sales were meant to “deceive investors into believing that its transition from legacy mainframe revenues was successful” when it wasn’t, according to the lawsuit. IBM, the complaint says, sold cloud infrastructure and analytics products that were “unneeded and unused by the customer.”
If the claims have substance, it could have lasting damage to IBM’s place in the technology market and prompt attention from regulators like the Securities and Exchange Commission, Samuel May, a research specialist with the Association of Certified Fraud Examiners, said.
“If anything is found it could certainly rise to damaging the company’s reputation and the value of the company,” May told Silverlinings, speaking generally about cases such as the one against IBM. He said it’s not unusual for companies the size of IBM to face lawsuits from investors.
Where IBM sits in the cloud ranks
IBM sits among several IT giants like Microsoft, SAP, and Oracle trying to get its massive customer base onto its software-as-a-service offerings. IBM in October, its most recent earnings statement, reported hybrid cloud revenue over the previous year was up 15%, reaching $22.2 billion.
Laurence Rosen of the Rosen Law Firm, which filed the lawsuit, declined to comment to Silverlinings.
IBM didn’t respond to a request from Silverlinings to fully respond to the allegation.
Tim Davidson, a spokesman for the company, said in a statement that IBM’s “long-standing commitment to trust, integrity and responsibility extends across all aspects of our business operations. He noted a “similar complaint” had been voluntarily dismissed recently.
That complaint, filed in New York in 2022, was dismissed at the request of those who filed it against IBM so it could be refiled by another firm, according to a lawyer who worked on the case but asked not to be named because they weren’t permitted to comment publicly.