EMBARRASSING is the only word I can think of to describe International Business Machines Corp. (NYSE: IBM), the biggest Blue Chip of them all, getting a public tarring and feathering from the Securities and Exchange Commission (SEC) for trying to manipulate earnings expectations with misleading statements.
In a release, the SEC’s Associate Director of Enforcement Scott W. Friestad branded IBM’s actions “particularly troubling because the disclosure decision was driven, in part, by management’s perception of how the news would be interpreted by analysts.”
Basically, the company didn’t think analysts were smart enough to adjust their models to properly account for the options expenses the company decided to realize in 2005. The SEC says IBM “was concerned that analysts would add back to their EPS estimates any year-to-year reduction in the options expense instead of using the reduction to off-set an unrelated, previously-announced increased pension expense.”
Moral of the story? Always tell it like it is and let the chips fall where they may.
Bloomberg says politely IBM Reaches Settlement With SEC on Options Probe and quotes an analyst saying, “at the time, we suspected that IBM was managing its earnings to a large degree.”