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The Securities and Exchange Commission (SEC)has begun an informal inquiry into the recent earnings warning from EDS and how it traded options on its common stock.

The world's second largest outsourcing company has said it will "cooperate fully" with the SEC and is confident that the inquiry will confirm its actions were above board.

Rumours that investigation would commence began almost as soon a EDS issued a profits warning on 18 September which said its third-quarter profits would be between $58m and $74m, down from a July forecast of $364m. This warning triggered a sell-off in traditionally strong EDS stock and the following week analysts began to issue critical reports, one of which noted sour stock-market transactions.

Following that, Electronic Data Systems said it had borrowed $225m to buy back stock options issued to employees last year. The move was designed to bolster the firm's slumping share price, but instead EDS stock deteriorated further, falling to less than $20 per share.

The news comes hot on the heels of an announcement by the company that it is considering serious cost-cutting measures and spinning off some of its divisions. Chief Executive Dick Brown said in a letter to shareholders that the company was reviewing its central strategy of chasing multi-million dollar contracts that take years to produce revenues.

"While the market has spoken, you should know we believe it to be a substantial overreaction," Brown said in the letter. "Though many of our previous investors may have left us for the moment, our clients and our colleagues have not."

Brown said that the company was financially stable and had the resources to continue operations and attract new clients. The company is also investigating how it failed to foresee the huge decline in earnings and revenue it recently issued warnings on.

In the earnings warning, the firm said it expects revenue in its current quarter to be $5.3bn to $5.5bn. Its prior forecast was for revenue of $5.8bn to $5.9 bn. The news had taken investors by surprise as it was felt that the company still offered strong revenue growth as corporations seek to save money during lean times by outsourcing their IT functions.

The company is thought to be particularly vulnerable because of problems with bankrupt customers such as WorldCom and US Airways and delays in revenue from its contract with the US Navy.

© ENN

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