What’s rising for US tech companies like a pile of fuming manure? The costs of working hand-in-glove with the NSA to build the most formidable, seamless, borderless, indiscriminate spy dragnet imaginable. For years, they’ve cashed in on this work, feeding frenetically at the big trough of the government. Revelations bandied about in the media with torturous regularity confirm that they’ve succeeded.
But the world is not a static place. Reactions have been swift – and very costly for our already revenue-challenged corporate tech heroes. Sales have suddenly plunged in the most promising high-growth countries like China and Russia, and share values have dropped because of it. But now there is a new cost to add to the pile, an all-American cost, the redistribution of wealth from corporations to lawyers: class-action lawsuits.
IBM is the first one to get hit. On August 19, I warned about IBM and other high-tech companies getting raked over the coals in China, where the government had launched an investigation based on the revelations of compromised hardware and software. After hours on October 16, IBM announced its earnings, a debacle that included a sudden and ferocious plunge in hardware sales in China. “We were talking 40%, 50%,” CFO Mark Loughridge explained. “Enormous reductions on a year-to-year basis in a geography where we intended to see growth rates.” But he never once mentioned the NSA, IBM’s big customer [NSA Revelations Kill IBM Hardware Sales in China].
The next day, IBM shares, already down from their pre-Snowden high in March of $215.90, swooned 6.4%, sucking another $12.9 billion out of the pockets of its hapless stockholders in a single day. After two more rough days, shares landed at $172.86, and that’s roughly where they closed on Friday.
Aggrieved IBM stockholder Louisiana Sheriffs’ Pension & Relief Fund, represented by class-action specialist law firm Bernstein, Litowitz, Berger & Grossmann, sued IBM last week in the US District Court in Manhattan for shareholder losses. It seeks class-action status on behalf of shareholders from June 25 to October 16.
Spicy allegations: The plaintiff claims that IBM lobbied Congress to pass legislation that allowed IBM to transfer personal data of its customers in China and other countries to the NSA in an effort to protect its intellectual property rights. In doing so, IBM jeopardized its hardware sales in China. Revelations like the “Prism” program, through which the NSA spies on other countries via US tech companies, induced China’s government and companies to suddenly curtail business with IBM. This, the plaintiff claimed, produced a 22% drop in revenues in China, including a 40% plunge in hardware sales.
The plaintiff is not only going after IBM but also after CEO Virginia Rometty and CFO Loughridge, claiming they too should be held liable for keeping stockholders in the dark about the risks of its lobbing activities and its cooperation with the NSA.
“These allegations are ludicrous and irresponsible and IBM will vigorously defend itself in court,” IBM spokesman Doug Shelton wrote Reuters in an e-mail, all evidence to the contrary.
Most of these cases get settled out of court after a few years of expensive wrangling. The plaintiffs’ lawyers get even richer. The plaintiffs themselves – the stockholders – might get a few cents a share, or nothing. But for IBM, it’s going to be expensive.
It was just the first shot. Numerous other tech companies are in the same boat. Cisco CEO John Chambers called the NSA spying scandal, and what it did to revenues in China, “challenging political dynamics in that country.” It was a problem in other countries, too. “Our top five emerging markets declined 21%,” he said, “with Brazil down 25%, Mexico down 18%, India down 18%, China down 18%, and Russia down 30%.” His industry peers had the same issues; the sudden revenues plunges were “an industry phenomenon,” he said [NSA Spying Crushes US Tech Companies in Emerging Markets].
And so class-action lawsuits too will become “an industry phenomenon.” In this manner, the true costs of the all-encompassing spy dragnet are beginning to cascade through corporate income statements – not only in lost sales but now also in legal expenses and settlements.
Corporations were presumably driven by the profit motive into this tight cooperation with the NSA and the rest of the Intelligence Community. Now the blowback has started. Tens of billions will be lost. It will allow non-American competitors to surge into the void. It will be a long drawn-out process that will dog our already revenue-challenged tech companies for years to come.
But it’s doubtful that any lessons will be learned. The government spy-services marketplace is just too juicy. Investors clamor to get in on it, and scores of startups have sprung up to benefit from it. The hottest one is Palantir. Its valuation jumped 50% in three months – to $9 billion! And its technologies, designed for the CIA to track terrorists, have transitioned to track you and me. Read… The Silicon Valley Frenzy of High-Tech Spying
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.