UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

CITY OF STERLING HEIGHTS POLICE & FIRE RETIREMENT SYSTEM, Individually and on Behalf of All Others Similarly Situated,
Plaintiff,
vs.
INTERNATIONAL BUSINESS MACHINES CORPORATION, VIRGINIA M. ROMETTY, MARTIN J. SCHROETER and JAMES J. KAVANAUGH,
Defendants. / x
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x / Civil Action No. 1:15-cv-01513-WHP
CLASS ACTION
COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS
DEMAND FOR JURY TRIAL

Plaintiff makes the following allegations based upon the investigation undertaken by plaintiff s counsel, which included a review of U.S. Securities and Exchange Commission ("SEC") filings by International Business Machines Corporation ("IBM" or the "Company"), as well as securities analysts' reports and advisories about the Company, press releases, media reports and other public statements issued by or about the Company. Plaintiff believes that substantial additional evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for discovery.

NATURE OF THE ACTION

1.  This is a federal securities class action on behalf of purchasers of IBM common stock between April 17, 2014 and October 17, 2014, inclusive (the "Class Period"), seeking to pursue remedies under the Securities Exchange Act of 1934 (the "Exchange Act").

2.  Defendant IBM is a multinational technology and consulting corporation that manufactures and markets computer hardware and software products and provides its customers with various information technology ("IT") related services. IBM's System and Technology business segment, which sells mainframes, servers, storage and other hardware devices, was once a strong cash generator for the Company. Recently, however, IBM has been unable to sustain the segment's growth as its hardware devices have been subject to quick commoditization. As a result, IBM's System and Technology business segment, which generated 25% of the Company's revenues during 2006, accounted for only 14% of IBM's revenues in 2013.

3.  During the past several years, IBM initiated a strategy to systematically divest its less profitable, capital intensive hardware businesses so that the Company could focus its efforts on selling high margin services. To that end, in January 2014, Lenovo Group Ltd., the world's largest personal computer vendor by unit sales, with headquarters in Beijing, China, agreed to purchase IBM's x86 server division for $2.3 billion. In addition, since at least 2013, IBM has sought a buyer for its micro-chip manufacturing operations, its so-called Microelectronics business.

4.  During the Class Period, defendants fraudulently misrepresented the true value of IBM's Microelectronics business by disseminating materially false and misleading financial statements that failed to record an impairment in the value of the Company's Microelectronics business in conformity with applicable accounting standards. Defendants' fraudulent conduct materially inflated IBM's earnings during the Class Period and rendered the Company's 2014 earnings guidance materially false and misleading.

JURISDICTION AND VENUE

5.  The claims asserted herein arise under and pursuant to § § lO(b) and 20(a) of the Exchange Act [15 U.S.C. §§78j(b) and 78t(a)] and Rule lOb-5 promulgated thereunder by the SEC [17 C.F.R. §240. l Ob-5].

6.  This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C. § 1331 and §27 of the Exchange Act.

7.  Venue is proper in this District pursuant to §27 of the Exchange Act and 28 U.S.C. §139l (b). Many of the acts charged herein, including the preparation and dissemination of materially false and misleading information, occurred in substantial part in this District.

8.  In connection with the acts alleged in this Complaint, defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including, but not limited to, the mails, interstate telephone communications and the facilities of the New York Stock Exchange ("NYSE"), a national securities exchange located in this District.

PARTIES

9.  Plaintiff, as set forth in the accompanying certification and incorporated by reference herein, purchased IBM common stock during the Class Period and has been damaged thereby.

10.  Defendant IBM provides information technology products and services worldwide. Headquartered in Armonk, New York, defendant IBM had more than 989.6 million common shares outstanding as of September 30, 2014. The Company's common stock is listed and trades on the NYSE under the ticker symbol "IBM."

11.  Defendant Virginia M. Rometty ("Rometty") is, and was at all relevant times, the President, Chief Executive Officer ("CEO"), a director and the Chairman of the Board of IBM.

12.  Defendant Martin J. Schroeter ("Schroeter") is, and was at all relevant times, Senior Vice President and Chief Financial Officer ("CFO"), Finance and Enterprise Transformation at IBM.

13.  Defendant James J. Kavanaugh ("Kavanaugh") is, and was at all relevant times, Vice President and Controller of IBM. Defendant Kavanaugh signed IBM's Form 10-Qs filed with the SEC during the Class Period.

14.  Defendants Rometty, Schroeter and Kavanaugh are collectively referred to herein as the "Individual Defendants."

15.  During the Class Period, the Individual Defendants, as senior executive officers and/or directors of IBM, were privy to confidential and proprietary information concerning IBM, its operations, finances, financial condition and present and future business prospects. The Individual Defendants also had access to material adverse non-public information concerning IBM, as discussed in detail below. Because of their positions with IBM, the Individual Defendants had access to non-public information about its business, finances, products, markets and present and future business prospects via internal corporate documents, conversations and connections with other corporate officers and employees, attendance at management and/or board of directors meetings and committees thereof and via reports and other information provided to them in connection therewith. Because of their possession of such information, the Individual Defendants knew or recklessly disregarded that the adverse facts specified herein had not been disclosed to,_ and were being concealed from, the investing public.

16.  The Individual Defendants are liable as direct participants in the wrongs complained of herein. In addition, the Individual Defendants, by reason of their status as senior executive officers and/or directors, were "controlling persons" within the meaning of §20(a) of the Exchange Act and had the power and influence to cause the Company to engage in the unlawful conduct complained of herein. Because of their positions of control, the Individual Defendants were able to and did, directly or indirectly, control the conduct of IBM's business.

17.  The Individual Defendants, because of their positions with the Company, controlled and/or possessed the authority to control the contents of its reports, press releases and presentations to securities analysts and through them, to the investing public. The Individual Defendants were provided with copies of the Company's reports and press releases alleged herein to be misleading, prior to or shortly after their issuance and had the ability and opportunity to prevent their issuance or cause them to be corrected. Thus, the Individual Defendants had the opportunity to commit the fraudulent acts alleged herein.

18.  As senior executive officers and/or directors and as controlling persons of a publicly traded company whose common stock was, and is, registered with the NYSE and governed by the federal securities laws, the Individual Defendants had a duty to promptly disseminate accurate and truthful information with respect to IBM's financial condition and performance, growth, operations, financial statements, business, products, markets, management, earnings and present and future business prospects, and to correct any previously issued statements that had become materially misleading or untrue, so that the market price of IBM common stock would be based upon truthful and accurate information. The Individual Defendants' misrepresentations and omissions during the Class Period violated these specific requirements and obligations.

19.  The Individual Defendants are liable as participants in a fraudulent scheme and course of conduct that operated as a fraud or deceit on purchasers of IBM common stock by disseminating materially false and misleading statements and/or concealing material adverse facts. The scheme: (i) deceived the investing public regarding IBM's business, operations and management and the intrinsic value of IBM common stock; (ii) allowed certain of the Individual Defendants and other Company insiders to collectively sell their personally held IBM common stock for proceeds in excess of $23 million; and (iii) caused plaintiff and members of the Class to purchase IBM common stock at artificially inflated prices.

CLASS ACTION ALLEGATIONS

20.  Plaintiff brings this action as a class action pursuant to Federal Rule of Civil Procedure 23(a) and (b)(3) on behalf of a class consisting of all those who purchased the common stock of IBM between April 17, 2014 and October 17, 2014, inclusive, and who were damaged thereby (the "Class"). . Excluded from the Class are defendants and their families, the officers and directors of the Company, at all relevant times, members of their immediate families and their legal representatives, heirs, successors or assigns and any entity in which defendants have or had a controlling interest.

21.  The members of the Class are so numerous that joinder of all members is impracticable. Throughout the Class Period, IBM common stock was actively traded on the NYSE. While the exact number of Class members is unknown to plaintiff at this time and can only be ascertained through appropriate discovery, plaintiff believes that there are thousands of members in the proposed Class. Record owners and other members of the Class may be identified from records maintained by IBM or its transfer agent and may be notified of the pendency of this action by mail, using the form of notice similar to that customarily used in securities class actions.

22.  Plaintiff s claims are typical of the claims of the members of the Class as all members of the Class are similarly affected by defendants' wrongful conduct in violation of federal law complained of herein.

23.  Plaintiff will fairly and adequately protect the interests of the members of the Class and has retained counsel competent and experienced in class action and securities litigation.

24.  Common questions of law and fact exist as to all members of the Class and predominate over any questions solely affecting individual members of the Class. Among the questions of law and fact common to the Class are:

(a) whether the federal securities laws were violated by defendants' acts as alleged herein;

(b) whether statements made by defendants to the investing public during the Class Period misrepresented material facts about the business and operations of IBM;

(c) whether the price of IBM common stock was artificially inflated during the Class Period; and

(d) to what extent the members of the Class have sustained damages and the proper measure of damages.

25.  A class action is superior to all other available methods for the fair and efficient adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the damages suffered by individual Class members may be relatively small, the expense and burden of individual litigation make it impossible for members of the Class to individually redress the wrongs done to them. There will be no difficulty in the management of this action as a class action.

SUBSTANTIVE ALLEGATIONS

Background

26.  Defendant IBM is a multinational IT company that manufactures and markets hardware and software products and offers infrastructure, hosting and consulting services in areas ranging from mainframe computers to nanotechnology.

27.  IBM operates its business via five business segments: (i) Global Technology Services, (ii) Global Business Services, (iii) Software, (iv) Systems and Technology, and (v) Global Financing.

28.  Global Technology Services primarily provides clients with IT infrastructure and business process services; Global Business Services provides clients Consulting and Application Management services; Software consists primarily of middleware and operating systems software; Systems and Technology provides clients with business solutions requiring advanced computing power and storage capabilities; and Global Financing facilitates the acquisition IBM systems, software and services by providing clients with necessary financing.

29.  IBM's System and Technology business, which sells mainframes, servers, storage and other hardware devices, was once a strong cash generator for the Company. Recently, however, IBM has been unable to sustain the segment's growth as its hardware devices have been subject to quick commoditization. As a result, IBM's System and Technology business segment, which generated 25% of the Company's revenues during 2006, accounted for only 14% of IBM's revenues in 2013.

30.  This action primarily concerns IBM's micro-chip manufacturing operations, which the Company refers to as its Microelectronics business. Microelectronics was part of IBM's Systems and Technology segment and engaged in semiconductor design and manufacturing, primarily for use in IBM systems and storage products. Microelectronics incorporated two major fabrication facilities-a newer 300mm production facility in East Fishkill, New York, and an older production complex in Burlington, Vermont.

31.  During the past several years, IBM has begun to systematically divest its less profitable, capital intensive hardware businesses and has begun focusing its efforts on selling high margin services.

32.  In 2007, IBM's former CEO, Sam Palmisano, promised to deliver IBM earnings of at least $10 a share by 2010. The Company handily beat that number, delivering earnings per share ("EPS") of $11.52. IBM was able to achieve its objectives by ditching businesses that did not grow and by betting big on analytics and doubling down on software and services.

33.  In May 2010, IBM made another promise about its future earnings and published a report outlining its "2015 Roadmap," which set a pledge for IBM to reach adjusted profits per share (a non-GAAP figure) of $20 by 2015. The 2015 Roadmap accelerated IBM's previously successful model by, as Sam Palmisano stated, "not chas[ing] things that are commoditizing," but rather, by focusing on IBM's analytics and its software and services businesses.

34.  Defendant Rometty inherited and sustained the pledge to transition IBM from a hardware company to an IT services focused company when she succeeded Palmisano in 2012. According to IBM's 2013 annual report, since 2010, the Company had spent $7 billion on 17 cloud acquisitions and planned to spend an additional $3.2 billion to expand its footprint in the data center and cloud space. During 2013, IBM acquired Softlayer, a dedicated server managed hosting and cloud service provider, for $2 billion.

35.  In addition, IBM continued to jettison less profitable, capital intensive hardware businesses. To that end, in January 2014, Lenovo Group Ltd. agreed to purchase IBM's x86 server division for $2.3 billion.