According to an announcement from the regulator, IBM created misleading information during an April 5, 2005 conference call with analysts about the stock options expense, which then caused analysts to lower their earnings-per-share (EPS) estimates for the company.
Particularly, IBM led analysts to believe that the company expected stock options expenses to reduce Q1 earnings by $0.14 cents a share and earnings for the year, by $0.55 a share. According to the SEC, the April 5 announcement prompted the majority of analysts to reduce the EPS estimates by these amounts.
The SEC later found those figures to be inaccurate. IBM had actually expected stock option expenses to cut earnings by $0.10 per share for Q1 and $0.39 for the year.
IBM disclosed the true cost of its equity compensation expense on April 14, as well as first quarter results that came in under analyst expectations. Its stock price dropped 8% the next day.
“IBM misled investors by failing to disclose information that would have allowed them to accurately determine the impact that the company’s decision to expense stock options would have on its financial results,” said Scott W. Friestad, SEC Associate Director of Enforcement, in the announcement. “The facts here are particularly troubling because the disclosure decision was driven, in part, by management’s perception of how the news would be interpreted by analysts.”
The regulator found that IBM did not disclose the options expense because it feared analysts would add back to their EPS estimates any year-to-year reduction to offset a pension expense that was announced previously – a move that would have set a growth rate for the company that would be difficult to achieve.
IBM did not admit to or deny the SEC’s findings. More information about the settlement is here .