SEC Probe of EDS Stock Deal Becomes Formal Investigation
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PLANO, Texas -- The U.S. Securities and Exchange Commission's informal inquiry into Electronic Data Systems Corp.'s third-quarter earnings shortfall and bets that the computer-services company made on its own stock has become a formal investigation.
The company, which installs and runs computers for large companies and governments, disclosed the informal SEC inquiry on Oct. 1. At the time, the company said the SEC requested information pertaining to the company's purchase and settlement of forward contracts related to its common stock, and on events leading up to an earnings warning.
EDS said Sept. 18 that third-quarter earnings would be about 80% below its July estimate. The magnitude of the miss was striking in an industry known for long-term contracts and predictable revenue. Two days later, EDS paid $225 million to settle derivative contracts to buy 3.7 million of its own shares at prices above $60 each. The company said it entered agreements beginning in December 2001, hoping to reduce the cost of its employee stock-options program. EDS would have benefited if its stock price rose, but the price fell.
MORE COVERAGE
See an infographic showing how EDS's strategy to sell put options on its stock backfired. Consult our glossary, which explains "spinning," "round-tripping" and other jargon. And find continuing coverage of corporate-accounting issues at the Called to Account page.
In a statement Friday, EDS said it was advised of the change in the status of the investigation on Friday afternoon.
EDS said on Oct. 1 that it was confident the inquiry will conclude that its actions were proper. The company said Friday it will continue to cooperate fully with the SEC in this matter.
The announcement came after the close of regular trading. EDS shares were down $1.17, or 5.9%, to 18.82 in 4 p.m. composite trading Friday on the New York Stock Exchange.
Updated January 17, 2003 9:10 p.m. EST |
