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January 12, 2006

IBM now under “formal” SEC scrutiny

IBM Corp is being "formally" investigated by the US Securities and Exchange Commission over disclosures relating to how it treated stock options as an expense on its first-quarter 2005 income statement.

By CBR Staff Writer

The Armonk, New York-based IT giant received notification of the SEC’s move yesterday.

The company has been under an informal investigation over the matter since June 2005. The fact that its now turned formal shows the SEC is getting more serious the matter. But IBM reiterated that it has been told by the SEC that the investigation is not an indication that any violations of law have occurred.

The hubbub started when IBM officials, ahead of its April 26 first-quarter earnings last year, suggested to Wall Street analysts that the company’s stock-option expenses would reduce earnings by about 14 cents per share.

This motivated many analysts to adjust their estimates for the quarter IBM accordingly. But when expense turned out to be only 10 cents per share, several analysts charged IBM with misleading them into issuing artificially low estimates

The charges shed light on a subject of growing concern to IT vendors who have historically relied on favorable stock options to hire the best talent. The US Financial Accounting Standards Board now mandates publicly held firms to record stock options as expenses by their third quarter.

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