IBM accused of fraud

A case started in a Pennsylvania district court in which IBM and several of its employees are accused of violating the Racketeer Influenced and Corrupt Organizations (RICO) act.

The case was brought by Devon IT and its European subsidiary and alleges that IBM’s hardware division, known as the System Technology Group (STG) defrauded the company of $12 million it had invested in blade technology. Individuals named along with IBM in the case are Thomas Bradidich, Bernard Meyerson, James Gargan and Rodney Adkins.

Devon claims that around September 2005, senior IBM executives met its CEO John Bennett and its president Joe Makoid, to discuss an investment in an IBM server scheme called the Aspen Project. The project involved the development of a blade PC in a cabinet connecting over LANs and WANs.

Devon said it was attracted to the project because it would let it enter the PC market with a server product that meant IBM would return to the PC market, following the sale of its PC business to Lenovo.
It’s alleged that Bradicich “falsely represented to Bennett and Makoid that.. Blade would be introduced into the market during the first quarter of 2006 and at a competitive price of approximately $1,500 a unit”. IBM claimed that Devon IT could expect 500,000 Blade units would be sold over the first three years. As well as royalties Devon would get when a Blade unit was sold, it would also take revenues for sales of terminals and connection manager software. IBM is alleged to have projected earnings of $33,800,000 in year one, $50,086,000 in year two and $79,250,000 in year three.

Devon and IBM signed a Blade Agreement on November the 7th 2005, and that obligated it to make development payments to IBM for $4 million when three milestones happened. Devon made these payments using funds from Claret Capital Blade Limited, which took a 10 percent equity interest in  Devon Europe.

Devon also pitched a project for a large scale data centre server complex called iDataPlex.  It’s alleged that defendants confirmed that Intel had renewed a funding commitment to the iDataPlex project to the tune of $9 million. Devon borrowed more money from Claret with it getting a 33 percent equity stake in return.

Subsequently, IBM advised Devon that the Blade product was not selling because Big Blue had terminated the project in early 2008 without telling Devon. Partner Foxconn was told in early 2008 that the project was cancelled but Devon only learned this in June 2008.

IBM also discussed a partnership with Devon for other projects including the spin off from IBM of a semiconductor foundry that would need a $1 billion investment, a green IT project in Iceland, a super computing operation in Connecticut and a partnership at the Mayo Clinic. It’s alleged these discussions were a “carrot to keep Devon involved with the RICO defendants so that money would continue to flow from Devon to STG”.

Devon alleges: “The RICO defendants used a substantial portion of Devon’s investment money to inflate the earnings of other projects with other business partners, or for some purpose other than the projects involving Devon. While leading Devon down this road of deceit and as part of their scheme, the RICO defendants improperly  included the funding provided by Devon on the financial reports of STG, thereby exaggerating its performance.”

IBM is alleged to have entered into development agreements with investment partners “with no real intention of completing the development of the projects…To keep the scheme alive, the RICO defendants must continue bringing in new development partners so that money invested by the new parters can pay their obligations to prior development partners”.

The so-called Ponzi scheme and the individuals named in it were in 2008 and until February 2009 under the direction of former IBM senior VP Robert Moffatt.  “Moffatt was recently indicted and plead guilty to securities crimes in connection with his position as an officer at IBM, and as the head of the STG division,” the filing alleges.

“Over a five year period through numerous meetings, telephone calls, emails and letters, the RICO defendants promoted this enterprise to benefit themselves and IBM through illegally obtained funding and related investments that were procured by deception, artifice and fraud. By fraudulently enticing Devon to enter into the one sided contracts… the RICO defendants could guarantee that they would meet their division’s aggressive profit requirements and then use those very agreements to mask and shield their liability for this racketeering enterprise,” the filing continues.

Devon wants damages from IBM and the other defendants.

* Claret versus Devon. And this.