IBM facing double legal trouble

Mainframe antitrust inquiry, insider trading charges add up to headaches for Big Blue

IBM's lawyers have a busy winter ahead of them as Big Blue attempts to fight off antitrust accusations related to its mainframe business and an IBM employee faces allegations of insider trading.

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The U.S. Department of Justice has issued formal requests for information related to a complaint lodged by the Computer and Communications Industry Association (CCIA) about IBM's actions in the mainframe market, as the IDG News Service reported Oct. 8. In a separate incident, the U.S. Securities and Exchange Commission last week charged IBM executive Robert Moffat with insider trading.

Moffat, the head of IBM's Systems and Technology Group, was placed on a leave of absence.

Big Blue will suffer a blow to its reputation, but ultimately survive these legal problems, says Bob Djurdjevic, a longtime industry analyst who founded Annex Research in 1978, and was an IBM employee for eight years performing technical, sales and management functions.

"If there's any company that's always been a model of pristine behavior, being above it all, it was IBM," Djurdjevic says. "I don't think it will have an effect on IBM's business because it has deep talent. However, it is a black eye to IBM's reputation."

Djurdjevic writes that IBM is dealing with "triple trouble," referring to the two legal incidents and a beating taken by IBM stock. Out of the three, the insider trading allegation "probably hurt the most," he writes.

According to the IDG News Service, "Moffat allegedly provided insider information when IBM was considering acquiring Sun Microsystems to Danielle Chiesi, a portfolio manager at New York-based New Castle Funds. Chiesi allegedly made trades on behalf of New Castle Funds based on the tips and generated about $1 million in illegal profits."

Djurdjevic notes that "accused doesn't mean convicted," but he writes about what seems to be a negative shift in IBM culture. Oct. 16 may go down as a "Black Friday" in IBM history, he says.

"When this writer worked for IBM in the 1970s, we had to be holier than thou," he writes. "No disparaging of competition. No special deals. Selling only at list prices. … Being lily white and pure as mountain spring water was ingrained as part of the Big Blue culture. No longer. Not after what Bob Moffat, senior IBM vice president in charge of all of company's hardware, has been accused of doing -- passing proprietary company information to his Wall Street co-conspirators for personal gains."

As for IBM's mainframe problem, the company is accused of refusing to issue licenses for its z/OS mainframe operating system to competitors. The CCIA trade group says this alleged tactic is limiting competition and preventing mainframe customers from finding less expensive alternatives.

IT analyst Joe Clabby criticizes the CCIA complaint in an article titled "Mainframe Monopoly?" for a weekly newsletter issued by the Pund-IT research firm. One could argue that IBM does have a monopoly, owning more than 90% market share in the mainframe world, Clabby writes. But a mainframe is a type of server, and "mainframes represent only .03% of the server market by volume," he notes.

Even if IBM has a monopoly, that doesn't automatically make the company guilty of anti-competitive behavior, Clabby continues.

"Ultimately, the biggest question on the table is whether other vendors should have a right to deploy z/OS on other platforms," Clabby writes. "If allowed to do so, competing vendors could undermine IBM's mainframe pricing structure by delivering lower-cost alternatives to mainframe hardware. And, to us, that would be unfair."

The Department of Justice has not commented on the complaint, so it's difficult to tell when it will be resolved. The Moffat case could be tied up in the court system for months or years, as is typical with large criminal investigations. Moffat was one of six people charged with insider trading, a group that included an Intel executive, and there could be more arrests coming.

IBM continued on its usual path this week, announcing software for management of virtual servers and a desktop package to compete against Microsoft's Windows 7. Whether Big Blue's legal troubles bring any long-lasting harm to the company remains to be seen.

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Jon Brodkin

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