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IBM Shareholder Sues Company, Alleging It Overvalued Chip Unit

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IBM Corp was sued on Monday by a shareholder that said it committed securities fraud by failing to write down a money-losing semiconductor unit before agreeing to pay another company $1.5 billion to take that unit off its hands.

The lawsuit filed in Manhattan federal court arose from IBM's announcement last Oct. 20 that it would sell the unit to GlobalFoundries Inc, and take a related $4.7 billion pre-tax charge.

IBM also announced third-quarter results that day. Its share price fell 9 percent over the next two trading days, wiping out more than $18 billion of market value.

The Armonk, New York-based company did not immediately respond to requests for comment on the suit. Warren Buffett's Berkshire Hathaway Inc is among IBM's largest shareholders.

According to the complaint, IBM inflated its stock price before selling the semiconductor unit by carrying the unit's property, plant and equipment assets on its books at $2.4 billion, when it should have known the assets were worthless.

The complaint said potential bidders had been unwilling to pay much more than $1 billion for the entire unit, including intellectual property and personnel, suggesting that the hard assets had no or negative market value.

The lawsuit by the City of Sterling Heights Police & Fire Retirement System in Michigan also named three IBM officials as defendants, including Chief Executive Virginia Rometty.

It seeks class-action status on behalf of shareholders from April 17 to Oct. 17, 2014.

“Defendants presented a misleading picture of IBM's business and prospects,” the complaint said. “When the truth about the company was revealed to the market, the price of IBM common stock fell precipitously.”

GlobalFoundries is an affiliate of Mubadala Development Co, an Abu Dhabi state investment fund.

The case is City of Sterling Heights Police & Fire Retirement System v. IBM Corp et al, U.S. District Court, Southern District of New York, No. 15-01513.