Volume 20, Number 11 -- March 21, 2011

IBM Settles Lawsuit with SEC Over Shady Overseas Dealings

Published: March 21, 2011

by Jenny Thomas

A covert meeting in a deserted parking lot. A shopping bag stuffed with nearly $20,000 in cash is exchanged. A quick handshake to seal the deal and the two parties head off in different directions.

It sounds like a scene straight out of the movies. It's also a description from a complaint recently filed by the U.S. Securities and Exchange Commission relating to activities by employees of IBM-Korea, LG IBM PC Co., Ltd., a joint venture in which IBM held a majority interest, IBM (China) Investment Company Limited, and IBM-China.

The complaint, which you can see here, alleges that between 1998 and 2009, employees of certain IBM subsidiaries and a majority-owned joint venture provided cash payments, improper gifts, and improper travel and entertainment to government officials in South Korea and China, which is in violation of the Foreign Corrupt Practices Act of 1977.

Specifically, the suit by the SEC states that between 1998 to 2003, employees of IBM-Korea, an IBM subsidiary, and LG IBM PC Co., Ltd., paid approximately $207,000 in cash bribes to South Korean government officials. According to the complaints, these cash bribes were handed over sealed in IBM-Korea envelopes or unmarked shopping bags. The cash payments were made in exchange for maintaining IBM-Korea as the supplier of mainframe computers to unnamed South Korean government agencies and for helping an IBM-Korea business partner win bids to supply mainframe computers and storage equipment to South Korean government entities worth more than $21 million. LG-IBM also allegedly provided free personal computers to, and paid for the entertainment expenses of, other South Korean officials working for the government to procure PC contracts. The foreign officials involved worked for sixteen South Korean government entities.

The misconduct in China involved more than 100 IBM-China employees, including two key managers. The complaint alleges IBM-China employees created slush funds to pay for travel and entertainment expenses of Chinese government officials. According to the filling, from 2004 to 2009, employees of IBM-China provided overseas trips, entertainment, and improper gifts, such as laptops and cameras, to Chinese government officials.

The SEC filing says that despite its extensive internal operations, IBM lacked sufficient internal controls to prevent or detect these violations of the FCPA. Between 1998 and 2009, IBM had corporate policies prohibiting bribery and procedures relating to compliance with the FCPA, but deficient internal controls allowed employees of IBM's subsidiaries to use local business partners and travel agencies as conduits for bribes or other improper payments over long periods of time.

On Friday, March 18, the same day that the SEC filed suit, IBM filed an 8-K statement with the U.S. SEC, which you can see here, agreeing to settle the civil enforcement action. As part of the settlement, IBM has consented to the entry of a judgment relating to the books and records and internal control provisions of the securities laws. IBM has also agreed to pay a total of $10 million, categorized by the SEC as follows: $5.3 million, representing profits gained as a result of the conduct alleged in the complaint; prejudgment interest on that amount of $2.7 million; and a civil penalty of $2 million.

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Editor: Timothy Prickett Morgan
Contributing Editors: Dan Burger, Joe Hertvik, Victor Rozek,
Jenny Thomas, Hesh Wiener, Alex Woodie
Publisher and Advertising Director: Jenny Thomas
Advertising Sales Representative: Kim Reed
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