IBM top brass accused again of using mainframes to prop up Watson, cloud sales

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Special report IBM, on pinch 13 of its existent and erstwhile executives, has been sued by investors who declare nan IT elephantine utilized mainframe income to fraudulently prop up newer, much trendy parts of its business.

In effect, IBM deceived nan marketplace astir its advancement successful processing Watson, unreality technologies, and different caller sources of revenue, by deliberately misclassifying nan money it was making from mainframe deals, assigning that money alternatively to different products, it is alleged.

The accusations emerged successful a lawsuit [PDF] revenge precocious past week against IBM successful New York connected behalf of nan June E Adams Irrevocable Trust. It alleged Big Blue shifted income by its "near-monopoly" mainframe business to its newer and little celebrated cloud, analytics, mobile, social, and information products (CAMSS), which bosses promoted arsenic maturation opportunities and designated "Strategic Imperatives."

IBM is said to person created nan quality of request for these Strategic Imperative products by bundling them into three- to five-year mainframe Enterprise License Agreements (ELA) pinch ample banking, healthcare, and security institution customers. In different words, it is claimed, mainframe income agreements had Strategic Imperative products tacked connected to thief boost nan income capacity of those newer offerings and springiness investors nan belief customers were clamoring for those technologies from IBM.

"Defendants utilized steep discounting connected nan mainframe portion of nan ELA successful return for nan customer purchasing catalog package (i.e. Strategic Imperative Revenue), unneeded and unused by nan customer," nan suit stated.

IBM is besides alleged to person shifted gross from its non-strategic Global Business Services (GBS) conception to Watson, a Strategic Imperative successful nan CAMSS merchandise set, to person investors that nan institution was successfully expanding beyond its bequest business.

Last April nan plaintiff Trust revenge a akin case, which was joined by at least five other law firms representing different IBM shareholders.

A period prior, nan IBM committee had been presented pinch a request missive from shareholders to analyse nan supra allegations. Asked whether immoderate action has been taken arsenic a consequence of that letter, IBM has yet to respond.

Due to nan measurement analyzable securities litigation works, nan patient representing nan largest group of investors – Ironworkers Local 580 Joint Fund – took complete nan handling of nan case, past successful September, 2022, moved to person nan lawsuit voluntarily dismissed without prejudice [PDF], meaning nan charges could beryllium refiled. The Register understands this was a consequence of disagreements pinch nan initiating rule patient astir really nan lawsuit should beryllium handled.

The caller title expands upon nan 1 revenge past twelvemonth while besides omitting erstwhile allegations that nan expected securities fraud allocated gross for nan intent of maximizing executive prize compensation.

It names arsenic defendants 4 antecedently accused firm leaders – erstwhile CEO Ginni Rometty, erstwhile CFO Martin J Schroeter (now CEO of IBM spin-off Kyndryl), existent IBM CFO James J Kavanaugh, and existent CEO Arvind Krishna – arsenic good arsenic 9 further existent and past executives.

These include: Bridgette Van Kralingen (former SVP of IBM world markets; Shanker Ramamurthy (current IBM world managing partner banking); Pablo Suarez (VP & world leader, financial services assemblage centers of competence and integer banking astatine IBM); Sarah Diamond (former IBM world managing director, financial services sector), Alistair Rennie (former IBM wide manager, blockchain); Mark Andrews (former VP of IBM Watson financial services solutions); Don India (former VP of IBM Watson financial services solutions); Chris Johnston (former North American business portion executive for Watson financial services); and Mark Foster (current world president IBM consulting).

Two members of this expanded formed of defendants, Shanker Ramamurthy and Pablo Suarez, were besides named successful an intelligence spot theft case revenge by erstwhile GBS advisor Gerald Hayden against IBM successful March 2021. That case, still being litigated, focuses connected events that occurred principally during nan play from 2018 to 2020, astir nan clip Rometty stepped down arsenic main exec. It describes IBM's alleged efforts to co-opt a proprietary business method for accelerating nan lengthy endeavor income process and to transportation GBS gross to Watson.

How we sewage to this point: Let's spell backmost a fewer years

In 2018, things were starting to look up for IBM. In April that year, nan one-time firm colossus reported gross maturation for nan 2nd 4th successful a statement aft 22 consecutive quarters of gross retreat.

But Big Blue had a problem. Mizuho Bank, portion of nan 3rd largest financial group successful Japan, was looking for an IT supplier. Mizuho's Request for Proposal (RFP) elaborate nan bank's request for KYC (Know Your Customer) solutions – because banks are obligated to place and verify their clients to mitigate fraud – and an liking successful nan provider's level strategy.

IBM astatine nan clip allegedly didn't person either a KYC-AML (anti-money laundering) offering nor a level strategy.

But AML Partners (AMLP), a New Hampshire-based consequence mitigation firm, did. And it submitted its exertion successful a consequence to Mizuho's RFP and agreed to cooperate pinch IBM to create a suitable level strategy that incorporated KYC capabilities.

Goodwill betwixt nan 2 companies would not past long.

When it came clip for IBM to coming nan financial solution to Mizuho, institution executives trim AMLP retired of nan woody by claiming AMLP's exertion arsenic their own, according to Frank Cummings, CEO of AMLP, and erstwhile IBM labor who worked connected nan RFP.

Cummings raised concerns astir nan handling of nan woody connected April 15, 2018, successful an email to Michael Henry, who astatine nan clip was nan IBM Global Business Services executive overseeing nan engagement.

Henry replied promptly and said he would investigate. But that probe evidently was not satisfactory.

On May 1, 2018, Cummings escalated nan issue, hoping to talk "grave matters of business" related to imaginable fraud. He wrote to Mark Foster, IBM's SVP of Global Business Services astatine nan time, and copied successful then-CEO Ginni Rometty, her assistant, and AMLP co-founder Jonathan Almeida.

"First and foremost, IBM progressive my patient and our package successful IBM's efforts to resoluteness its problems astatine Mizuho, but successful a last draught of nan Mizuho connection not shared pinch me. Mr Henry apparently altered nan connection purposely to misidentify AML partners' package arsenic 'Watson Financial Crimes' products," Cummings wrote successful an email now seen by The Register.

"This misrepresentation of our package – and misrepresentation to nan customer Mizuho – was done without our support aliases general agreement."

"By adding Watson Insights to nan Mizuho proposal, this woody is now astatine awesome risk; a viable replacement would person been to do an up-sale aft implementation," nan missive continues.

"To beryllium clear, IBM does not person an operational AML (anti-money laundering)/KYC system, and it is misrepresenting that declare to Mizuho successful a measurement that harms my company."

More troubling still, Cummings said he had since learned Henry wanted to bring successful replacement exertion from Ireland-based competitor Fenergo, adding that sources astatine IBM had informed him IBM unit progressive successful nan woody had ties pinch Fenergo anterior to being recruited to subordinate IBM's Watson team.

As elaborate successful 1 of respective OSHA complaints against IBM revenge by whistleblowers and seen by The Register, Henry allegedly had received compensation astatine 1 constituent from Fenergo for helping nan slope tech patient get millions of dollars successful finance funds.

Michael Henry, nary longer pinch IBM, has not replied to inquiries seeking comment. The aforementioned Hayden-filed suit [PDF] besides elaborate Henry's alleged interference successful nan AMLP deal.

Cummings offered IBM's activity an opportunity to prevention look by saying "this cannot beryllium a firm strategy, not astatine IBM," and went connected to tease nan anticipation of a mutually remunerative narration – if nan Mizuho business could conscionable beryllium resolved.

When The Register said pinch Cummings connected nan telephone to corroborate nan authenticity of nan email messages, he nary longer lauded nan company's leadership.

"Literally, a cabal of nan worst of nan worst sewage successful complaint of IBM and destroyed its reputation," Cummings said.

Big Blue defends itself

On May 2, 2018, Sarah Diamond, past Global Managing Director of Banking and Financial Markets and among those named successful nan caller securities lawsuit, responded to Cummings's connection connected behalf of Foster to say, "IBM takes these matters seriously, and is looking into them successful detail."

Three weeks later, Diamond denied Cummings's allegations – that IBM was committing fraud, negotiating successful bad faith, misrepresenting AML Partners' package arsenic its own, breaching its NDA pinch AML Partners, and stealing AML's intelligence property.

"While I will not locomotion done each of your allegations separately, I want to guarantee you that, pinch respect to nan Mizuho RFP successful particular, IBM has not changed (and does not intend to change) its written RFP consequence to switch ALP's RegTech Surety Suite solution pinch a Fenergo solution," Diamond wrote successful an email.

"Moreover, nan alleged conflict-of-interest pinch Fenergo identified successful your correspondence does not exist. To nan grade Mizuho decides to take a solution different than 1 from AMLP, it would not beryllium nan consequence of immoderate 'bait- and-switch.' It is our knowing that Mizuho is still successful nan process of evaluating nan bid submissions and determining whether it wants to abstracted nan on-boarding constituent from nan owed diligence constituent aliases what circumstantial solution components it desires. If nan customer selects IBM's RFP consequence that includes AMLP, IBM has afloat volition to move guardant pinch AMLP."

She insisted that IBM had not changed its written RFP to switch AML's exertion and did not intend to do so.

According to nan Hayden title from 2021, "Michael Henry was nether unit from much elder IBM executives to waste Watson. On accusation and belief, this unit came from, among others, Sarah Diamond."

IBM successful its reply to nan Hayden suit denies this [PDF] and different allegations.

That suit describes nan result of IBM's engagement pinch Mizuho. AML Partners was allegedly dropped from nan Mizuho engagement aft Sam Kalyanam, Global Business Head of Watson Financial Crimes and Compliance Group, wrote an email proposing Fenergo's exertion alternatively of AML Partners.

IBM denies this successful its reply filing. The Register inquired to Fenergo astir these allegations, and nan institution did not respond. Mizuho Bank declined to comment.

A root acquainted pinch nan 2018 RFP told The Register that IBM associates successful Japan and elsewhere would not corroborate who won nan woody nor its terms, contempt soul announcements astir a Mizuho success.

By 2020, IBM announced it had joined forces pinch Fenergo to conflict financial crime. "The statement enables IBM and Fenergo to create solutions that harvester Fenergo's [client lifecycle management] offering pinch IBM's RegTech portfolio of anti-money laundering (AML) and know-your-client (KYC) solutions, each built pinch Watson," nan property merchandise declared.

This from an endeavor that, according to Cummings, did not person an operational AML/KYC strategy 2 years earlier.

One of nan OSHA complaints against IBM we've seen recounts a speech successful which Henry allegedly said that Mark Foster, SVP of IBM's GBS division, was a friend of Rometty and served arsenic a figurehead who allowed Rometty and Diamond to do immoderate they had to successful bid to support Watson afloat.

"Henry was acknowledging that IBM elder guidance was illegally 'revenue shifting,' giving GBS woody net to Watson to mislead investors astir Watson," nan OSHA title stated.

The 2021 intelligence spot title focuses connected allegations that IBM stole protected business methods – "Awareness to Execution" (A2E) and "Efficiency, Effectiveness, Real Time" (EERT) – developed by nan plaintiff to accelerate endeavor deals and to support real-time guidance of financial data.

And it describes different IBM engagements wherever GBS gross was allegedly shifted to nan Watson section – thereby depriving nan consultants progressive of commissions.

For example, IBM GBS closed a woody pinch Ocean Bank, nan 2nd largest unit slope successful Florida. But according to Hayden's complaint, "IBM denied in installments for nan Ocean Bank woody to GBS and alternatively awarded it to nan Watson Group," supposedly astatine nan guidance of Diamond, a erstwhile Watson wide manager.

Why Watson?

Watson was portion of CEO Ginny Rometty's translator plan. Rometty took complete from Sam Palmisano successful 2012, and initially followed his "Roadmap 2015" until precocious 2014. She past group astir deemphasizing nan company's bequest hardware, software, and IT services businesses while trying to boost "Strategic Initiatives" – cloud, analytics, mobile, social, and security, aliases CAMSS.

The Watson platform, introduced successful 2014, was nan A successful CAMSS. IBM created a abstracted business portion called Watson Health successful 2015.

There was zero – I mean zero – AI successful that merchandise suite. I cognize because I worked straight pinch nan engineering improvement manager

Rometty described nan spinoff arsenic a moonshot, successful nan contented of IBM's activity for NASA. "Our moonshot will beryllium nan effect we will person connected healthcare," she said successful a 2015 interview pinch Charlie Rose.

A root acquainted pinch IBM, citing claimed correspondence betwixt Rometty and a Trump family member, told The Register that Rometty was eager to make Watson Health a precocious floor plan occurrence successful nan dream it could thief her get a governmental appointment.

Coincidentally, IBM's rule firm, Jones Day, had adjacent ties to nan Trump management done partner Donald McGahn, Trump's first White House counsel. In January 2021 IBM hired Garry Cohn, who had been portion of nan Trump administration, and he is now Big Blue's vice chairman.

By 2016, Watson Health looked frail. A University of Texas System audit [PDF] recovered nan $62 cardinal IBM Watson engagement pinch nan school's MD Anderson Cancer Center, which began successful 2013, ducked assemblage procurement rules. By September 2016, nan MD Anderson Watson project, Oncology Expert Advisor, was abandoned.

A erstwhile IBM worker who spent decades pinch nan institution told The Register that he had worked for respective years connected Watson Health, which he said was cobbled together from a fistful of different healthcare institution products.

"I worked successful a group wherever we acquired Truven Health Analytics," he explained. "There was zero – I mean zero – AI successful that merchandise suite. I cognize because I worked straight pinch nan engineering improvement manager. He moreover brought this to Ginni's attention. He said, successful immoderate executive meeting, 'Hey, Ginni, you know, conscionable to make it clear, I'm nan VP of improvement for Truven, and I'm telling you, there's nary AI successful here. And that, he said, that was not received well.

"Just because you slap Watson connected location doesn't make it AI. They telephone it AI and analytics, and beautiful soon it gets each cobbled together. 'Oh, this is our AI division,' aliases 'analytics group' and 'this is what nan gross is.' Everything gets sliced and diced and repackaged up to beryllium immoderate they want it to be."

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But IBM was wished to make nan astir of nan Watson brand. In September 2016, nan tech goliath purchased financial consultancy Promontory Financial Group, which became Watson Financial Services successful 2017. Around that time, financial analysts were questioning why Watson wasn't contributing to revenue.

It was Watson Financial Services, on pinch IBM's GBS consulting arm, that worked connected nan Mizuho Bank deal.

Just because you slap Watson connected location doesn't make it AI. They telephone it AI and analytics, and beautiful soon it gets each cobbled together

But location was different logic Rometty and different IBM leaders wanted Watson to do well: bonuses. From 2015 done nan extremity of 2018, Big Blue tied executive bonuses and worker commissions successful portion to gross for its Strategic Imperatives – CAMSS products.

This was noted successful nan property astatine nan time. For example, connected February 6, 2017, Bloomberg reported that Rometty "got her biggest prize arsenic caput of nan institution past twelvemonth aft nan shares roseate astir 21 percent, nan first yearly summation successful 4 years. … The [$4.95 million] prize was tied to goals for operating nett income, operating rate travel and gross from nan company’s 'strategic imperatives,' according to a March proxy statement."

The April 2022 securities fraud suit revenge against IBM claimed nan company's determination to necktie CAMSS gross to bonuses led executives and likewise incentivized labor to misclassify revenue from various products arsenic CAMSS sales, fraudulently, successful an effort to heighten their compensation.

Executive liking successful inflating bonuses whitethorn besides explicate IBM's $58 cardinal successful banal buybacks, partially paid for with borrowed funds, betwixt 2012 and 2019 nether Rometty. Buybacks boost net per stock – nett income gets divided by less shares – and tin summation performance-based compensation if they thief financial results meet capacity targets group for executives.

IBM's layoffs during this play – nan taxable of galore age favoritism lawsuits, galore of which person softly settled – tin besides beryllium viewed done nan lens of financial engineering to maximize executive compensation awards. So excessively tin galore allegations that Big Blue capped commissions, withholding payments promised to endeavor income unit for nan liking of nan company's equilibrium sheet.

While nan latest securities fraud suit omitted allegations related to motive – financial engineering to maximize bonuses – The Register understands specified claims whitethorn resurface arsenic what's expected to beryllium a lengthy ineligible process plays out.

Confirmation from erstwhile IBMers

After The Register reported connected past year's securities fraud declare involving nan stuffing of endeavor contracts, nan erstwhile IBM worker cited supra wrote to say, "I tin affirm and attest that nan practices you picture successful your article occurred, and your facts are accurate.

"As I'm judge you heard from different IBMers, yes, IBM employed a carrot and instrumentality attack to promote income professionals to prosecute successful this behavior: if you played nan game, you were rewarded by accrued commissions, higher capacity ratings, and guidance approval; if you did not play nan game, you were penalized pinch little committee checks, lowered capacity ratings, and apt either a 'Performance Improvement Plan' (PIP), aliases a 'Resource Action' package (i.e, layoff).

"This is simply a decades-long, Enron-level grift perpetrated by precocious management."

If you played nan game, you were rewarded by accrued commissions

Peter E Greulich, who retired from IBM successful 2011 aft 30 years astatine nan institution and now writes astir IBM and firm management, told The Register successful a telephone question and reply that ELAs started retired being adjuvant for customers.

"In nan Software Group, we utilized to person thing called an Enterprise License Agreement," he explained. "And fundamentally, it was a awesome concept. We would locomotion successful and a customer possibly had important finance successful a group of Tivoli products, right? And a customer executive would say, 'Look, you sewage each these Tivoli products. Let's return a look astatine immoderate different products. Let's get nan magnitude that you bargain up, let's get nan discount down.'"

Greulich explained really that worked astatine a very ample customer relationship wherever he and his colleagues had to make aggregate visits to adjacent nan deal.

"We had to waste individual organizations [within nan company] connected our products, and past a reputable customer exec – nan personification that owns nan relationship and who would suffer if thing bad happened – would would put together an Enterprise License Agreement pinch each nan products that a customer mightiness person request for complete an extended play of time. They mightiness not request it today. But they would judge that they whitethorn request it a twelvemonth aliases 2 aliases 3 years down nan road."

Initially that worked retired well, said Greulich, because customer execs make salespeople beryllium to nan customer that what was being sold mightiness beryllium utilized someday.

"It evolved, though, to nan constituent wherever executives started telling organizations, 'hey, this merchandise needs to beryllium successful nan ELA deal.' Like 'I don't attraction really you get it successful there, but it has to beryllium successful there.' And nan basal unsaid connection was, 'whether nan customer needs it aliases not.'"

When Gartner did their analysis, they said, 'hey, we can't find 1 customer utilizing this product'

He cited Tivoli Provisioning Manager arsenic a merchandise that IBM salespeople tried to sell, though nary 1 wanted it. "When Gartner did their analysis, they said, 'hey, we can't find 1 customer utilizing this product.' We'd been trading nan heck retired of it because of nan Enterprise License Agreements. Executives had issued an bid down to nan customer teams that if they didn't move that product, past they're successful trouble."

The allegations of information fraud were brought to nan IBM committee of board past year, arsenic nan institution acknowledged successful a June 30, 2022 financial filing:

IBM, according to an OSHA whistleblower document, was made alert of allegations of securities fraud and intelligence spot theft backmost successful March 2018 erstwhile an soul title was allegedly revenge pinch nan caput of quality resources and nan company's morals committee. IBM's response, it's claimed, was to retaliate against nan labor who raised nan rumor done firm channels.

The Register doubly asked IBM whether its committee of board has taken immoderate action successful consequence to nan allegations successful nan request missive and we asked nan institution to remark connected nan latest lawsuit. We've not heard back. ®