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IBM Faces Two SEC Investigations

IBM's Dollar General relationship and its disclosure of plans for expensing stock options in the first quarter are under scrutiny.
IBM now faces possible Securities and Exchange Commission action on two fronts. The company revealed Monday that the SEC has begun an "informal investigation" into how the company disclosed information about its plan to treat stock options as an expense on its first-quarter income statement. IBM already faced the prospect of civil charges from the SEC relating to an ongoing investigation of its relationship with customer Dollar General Corp.

In a statement, IBM said it is voluntarily complying with the SEC's investigation. IBM also said it has been told by the SEC that the investigation "is not an indication that any violations of law have occurred."

Ahead of its April 26 first-quarter earnings report, IBM officials suggested to Wall Street analysts that the company's stock-option expenses would reduce earnings by about 14 cents per share. Most analysts adjusted their first-quarter earnings estimate for IBM accordingly. When IBM's actual stock-option expense for the period turned out to be only 10 cents per share, a number of analysts complained that they were misled into publishing an artificially low estimate.

The lower estimates provided some cover for IBM's weak first-quarter performance. The company's earnings of 84 cents per share during the period fell about 7% short of the revised estimates of 90 cents per share. However, the earnings miss would have been a more troubling 12% had analysts used IBM's true stock-options expense of 10 cents in constructing their estimates.

An IBM spokesman couldn't immediately explain why the company's implied estimate of stock-option expenses was off by about 40%. The spokesman says IBM is confident that there are no inaccuracies in its first-quarter numbers.

Also in its first-quarter report, IBM disclosed that the SEC continues to mull bringing civil charges against the company over its relationship with Dollar General, which was a customer of IBM's Retail Stores Solutions unit. The SEC is investigating whether IBM is guilty of "aiding and abetting" Dollar General's misstatement of its fourth-quarter 2000 financial results, according to the filing. The SEC served IBM with a so-called Wells Notice related to the issue in January 2004.

The hubbub over stock options reflects an issue of growing concern to technology vendors, which have long relied on stock options as a way to attract top talent. The Financial Accounting Standards Board is requiring publicly traded companies to begin recording stock options as expenses by the third quarter. IBM was the first major tech vendor to adopt the practice.

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