IBM Shareholder Sues the Company Over NSA Cooperation

Spying is not good for business. That’s been the message from many U.S. tech companies and industry groups in recent months following revelations last summer that several companies were cooperating with the National Security Agency over its Prism surveillance program. The industry says it stands to lose tens of billions of dollars as customers in other countries turn to homegrown technology instead.

Now one such company, IBM, is facing a lawsuit over its cooperation with the NSA. IBM was sued yesterday by a shareholder claiming it violated federal securities laws in seeking to hide losses that stemmed from disclosures of its relationship with the NSA.

In a complaint filed in federal district court in Manhattan on Thursday, the Louisiana Sheriffs’ Pension and Relief Fund claims IBM defrauded investors by allegedly concealing a decline in hardware sales in China following reports in the Guardian about the NSA program.

“IBM knew that disclosures of the Prism scandal and IBM’s involvement in Cispa [the Cyber Intelligence Sharing and Protection Act] caused the Chinese government to abruptly halt its business with the Company, and that the Country forced businesses in China to stop contracting with IBM, leading to an immediate and precipitous decline in sales,” the complaint states. “As a result, the security and privacy breaches that IBM couched as potential risks had already materialized with drastic consequences for the Company’s business.”

The plaintiff alleges that IBM lobbied in favor of Cispa, a bill that would allow it to share customers’ personal data, including data from customers in China.

IBM’s cooperation with the NSA presented a “material risk” to the company’s sales, especially in China for its Systems and Technology hardware division, the pension fund says in the complaint. “The company knew but misrepresented or concealed from investors that the disclosures of its lobbying and its association with the Prism and NSA spying scandal caused businesses in China as well as the Chinese government to abruptly halt doing business with IBM, leading to an immediate, and precipitous decline in sales.”

IBM reported in the Guardian a 22 percent drop in sales in China compared with the previous quarter as a result of disclosures about its relationship with the NSA last summer, the complaint says.

The lawsuit—brought as a class action representing all IBM shareholders who purchased common stock from June 25 to Oct. 16 of this year—is seeking compensatory damages for losses sustained as a result of IBM’s alleged wrongdoing, as well as lawyers’ fees and expenses, and other injunctive relief the court deems appropriate.

IBM spokesman Doug Shelton wrote in an e-mail: “These allegations are ludicrous and irresponsible, and IBM will vigorously defend itself in court.”

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