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SEC goes formal with IBM probe

A more polite look at options issue

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The US Securities and Exchange Commission (SEC) has gussied up and gone formal with its IBM probe.

IBM today revealed that the SEC had upgraded from "informal" to "formal" its investigation into how IBM disclosed its expensing of stock options. The informal probe arrived last June, as the government examined an unusually large discrepancy between IBM's first quarter figures and the financial analysts' forecasts.

Following IBM's first quarter earnings miss in April 2005, Sanford Bernstein's analyst Toni Sacconaghi explained his take on the issue saying,

"EPS including options expense was $0.85; ex-options, EPS was $0.95, a nine cent miss vs. consensus estimates ($1.04) prior to last week, when IBM told analysts to lower estimates $0.14 due to options expense. We note that IBM’s guide-down of earnings by $0.14 last week did not reflect the true expected cost of options in the quarter of $0.10."

A number of analysts noted that IBM seemed to indicate that expensing options would have a larger impact on its first quarter performance than it actually did. The SEC took notice as well.

"As previously disclosed in June 2005, IBM has been cooperating with the SEC in an informal investigation of this matter, and will continue to do so," IBM said. "The SEC has informed IBM that the investigation should not be construed as an indication that any violations of law have occurred."

Shares of IBM barely moved on the day, dropping just 60 cents to $83.57. Investors appeared unmoved by the formality of the SEC's probe. ®

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