Arne Alsin
Nov 29, 2016 · 5 min read

Bribery is a big deal to investors, and it’s not just because of ethics. It’s a big deal to investors because it’s a warning signal about a company’s product.

For example, when a company secretly transfers sackfuls of cash to Polish authorities in order to persuade them to buy their IT equipment — as in the case of HP — it’s a sign that the company’s IT equipment is nothing special, that it doesn’t sell itself, and that some extra help is required.

Bribery is also a warning to investors about management. In order to pull off a bribery scheme, accounting personnel need to set up a subterfuge to get around internal controls. This process invariably involves senior management, a lot of off-the-books cash, and numerous employees to coordinate the effort.

In the China and Korea bribery allegations against IBM settled with the SEC in 2011, over 100 IBMers were alleged to have been involved, and four different sets of corporate books and records.

So when a company gets involved in bribery, it’s fair for investors to ask the CFO plenty of additional questions. Such as:

IBM CFO Martin Schroeter

-How far did it go?

-Did you root it out?

-Are there any other accounting games that you’re involved in?

-What sort of changes did you make to internal controls to ensure it doesn’t happen again?

The vast majority of corporate CFO’s are no-nonsense types. At the first indication that there might be separate books and records — or other games going on — most CFO’s will volcanically erupt. To a no-nonsense type, accounting impropriety is a personal affront, and it’s never acceptable. At the first whiff, this sort of CFO attacks the problem, roots it out and cleans it up, to make sure it never happens again.

And then there is the other extreme, the “soft” CFO.

In contrast to a no-nonsense person, this CFO sees internal controls as fungible, as something that can be modified or altered based on what suits his needs. With this sort of CFO, you tend to see repeat violations, with same or similar behaviors.

CFO Schroeter: Why are we seeing widespread and repeated violations?

What is the state of internal controls at IBM, anyway? Because we’re seeing numerous allegations of wrongdoing, many of which are repeats. In the case of bribery, the trail begins with a notorious case in Argentina in the 90’s, after which several years of bribery allegedly occurred in China and South Korea, with the SEC eventually settling the cases in 2011.

Today, in Poland, there is an ongoing (and never-ending) SEC investigation into IBM bribes and bidrigging that also involves the U.S. Department of Justice. IBM has skated on Poland accusations for over four years, while there are more bribery allegations being investigated in Argentina (repeat), Bangladesh, and Ukraine. Add to the pile: more bidrigging charges, this time in Canada.

Whew. Each allegation of bribery, as we mentioned at the outset, involves an intentional effort to deceive, usually by senior management, and it requires planning, including the setting up of separate books and records.

Questions about your cloud reporting: How much mainframe?

Investors have a right to ask Schroeter questions about IBM’s cloud reporting. We can’t find evidence backing up IBM’s claim of $10 billion in cloud revenue and a #1 position in the world. First of all, where are the customers? We see a long line of enterprise customers moving workloads to Amazon’s cloud, but we can’t find a single big-name customer moving production to SoftLayer.

Secondly, there isn’t compelling evidence of real cloud revenue in IBM’s financials. Are we supposed to take management cloud numbers at face value? In fact, in the last four years, the SEC has launched two separate investigations into IBM over how it records revenue. Martin Schroeter has already admitted that, of all things, IBM’s zSeries mainframe is included in IBM’s cloud reporting.

Martin Schroeter speaking in a Q3 2015 earnings call.

This admission, all by itself, means IBM’s cloud reporting is incomplete. And it leads to even more questions, which necessitate more disclosure. If IBM is counting mainframe in its cloud numbers, that’s pretty important information for investors, and they will want it broken out in understandable fashion.

One more thing: Isn’t it normally the founder or creator of a new vertical that gets to define its boundaries? Amazon launched cloud services back in 2006. On what basis does someone several years late to the party, like IBM, think they have standing to define cloud? Shouldn’t we ask Amazon, the originator of a cloud technology about definitions? Would they tell us what is technically inclusive and what is not?

On what basis does someone several years late to the party, like IBM, think they have standing to define cloud?

Last time we did the calculation, about a month ago, we figured Amazon’s world-covering cloud contains about 10 million highly optimized, workload-specific servers, all connected together.

So we’ll ask, just for the sake of curiosity: Is there a zSeries mainframe hidden in there too?

Questions? Contact us:


The opinions expressed herein are those of Worm Capital, LLC and are subject to change without notice. The company (or companies) identified or referenced herein is an example of a current or potential holding or investment target and is subject to change without notice. This information should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the investments or strategies referenced were or will be profitable, or that investment recommendations or decisions we make in the future will be profitable. Past performance is no guarantee of future results. Worm Capital reserves the right to modify its current investment views, strategies, techniques, and market views based on changing market dynamics. This article contains links to 3rd part websites and is used for informational purposes only. This does not constitute as an endorsement of any kind.

Arne Alsin and Worm Capital clients are currently long Amazon and also own options positions in IBM and stand to benefit if the trading price of Amazon increases and/or the trading price of IBM decreases.

Worm Capital, LLC does not accept any responsibility or liability arising from the use of this document. No document or warranty, express or implied, is being given or made that the information presented herein is accurate, current or complete, and such information is always subject to change without notice. Shareholders and other potential investors should conduct their own independent investigations of the relevant issues and companies involved in this article. This document may not be copied, reproduced or distributed without prior written consent of Worm Capital.

Worm Capital, LLC is an independent investment adviser registered in the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Worm Capital including our investment strategies, fees, and objectives can be found in our ADV Part 2, which is available upon request. WRC-16- 10

Worm Capital

Worm Capital, LLC is a SEC registered investment advisor. The firm is led by our founder and Portfolio Manager, Arne Alsin. For more information, visit us at:

Thanks to Zachary Lash

Arne Alsin

Written by

Arne Alsin is the founder and principal of Worm Capital, a California-based investment adviser.

Worm Capital

Worm Capital, LLC is a SEC registered investment advisor. The firm is led by our founder and Portfolio Manager, Arne Alsin. For more information, visit us at:

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