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Lawsuit accuses IBM of hiding China risks amid NSA spy scandal

An IBM Central Processor Unit (CPU) is seen on a Hard Disk Drive (HDD) controller in Kiev, March 5, 2012. REUTERS/Gleb Garanich
An IBM Central Processor Unit (CPU) is seen on a Hard Disk Drive (HDD) controller in Kiev, March 5, 2012. REUTERS/Gleb Garanich

By Jonathan Stempel

NEW YORK (Reuters) - IBM Corp has been sued by a shareholder who accused it of concealing how its ties to what became a major U.S. spying scandal reduced business in China and ultimately caused its market value to plunge more than $12 billion.

IBM lobbied Congress hard to pass a law letting it share personal data of customers in China and elsewhere with the U.S. National Security Agency in a bid to protect its intellectual property rights, according to a complaint filed in the U.S. District Court in Manhattan.

The plaintiff in the complaint, Louisiana Sheriffs' Pension & Relief Fund, said this threatened IBM hardware sales in China, particularly given a program known as Prism that let the NSA spy on that country through technology companies such as IBM.

The Baton Rouge pension fund said the revelation of Prism and related disclosures by former NSA contractor Edward Snowden caused Chinese businesses and China's government to abruptly cut ties with the world's largest technology services provider.

It said this led IBM on October 16 to post disappointing third-quarter results, including drops in China of 22 percent in sales and 40 percent in hardware sales.

While quarterly profit rose 6 percent, revenue dropped 4 percent and fell well below analyst forecasts.

IBM shares fell 6.4 percent on October 17, wiping out $12.9 billion of the Armonk, New York-based company's market value.

The lawsuit names IBM, Chief Executive Virginia Rometty and Chief Financial Officer Mark Loughridge as defendants, and says they should be held liable for the company's failure to reveal sooner the risks of its lobbying and its NSA ties.

"These allegations are ludicrous and irresponsible and IBM will vigorously defend itself in court," IBM spokesman Doug Shelton said in an e-mail.

The Louisiana fund is represented by Bernstein, Litowitz, Berger & Grossmann, a prominent class-action specialist law firm. It seeks class-action status on behalf of shareholders from June 25 to October 16, 2013, and damages for shareholder losses.

Loughridge is retiring as CFO this month at age 60, which IBM calls its traditional retirement age. Martin Schroeter, who has been IBM's head of global finance, is replacing him.

The case is Louisiana Sheriffs' Pension & Relief Fund v. International Business Machines Corp et al, U.S. District Court, Southern District of New York, No. 13-08818.

(Editing by Andrew Hay and Matt Driskill)

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