SEC launches informal inquiry on EDS

SEC launches informal inquiry on EDS

The US Securities and Exchange Commission (SEC) has launched an informal inquiry into embattled services giant Electronic Data Systems.

EDS said the SEC is asking for information on two issues: first, the causes of the steep revenue and earnings shortfall EDS announced last month; and second, the investment-banking bets EDS made on the value of its stock, which eventually backfired and cost the company about $US225 million to settle.

EDS, the world's second largest provider of IT services after IBM, is cooperating voluntarily with the SEC and "is confident the inquiry will confirm its actions were proper", it said in a statement on Tuesday.

EDS shocked investors when it announced after the close of the markets on September 18 that it would miss by a wide margin earnings and revenue expectations for its third and fourth quarters. It blamed a variety of factors, including a soft global economy, few new sales, weak spending from existing clients, asset write-downs and increased internal costs.

The company said that third-quarter revenue will come in between $US5.3 billion and $5.5 billion, instead of the previously expected $5.8 billion to $5.9 billion. EDS will report third-quarter results on October 30.

The warning and subsequent analyst downgrades sent the stock tumbling, prompted questions about top management's credibility, and led to shareholder lawsuits.

On September 24, the company addressed the issue of the losing bets on its stock when it said in a statement that the "recent settlement of prior hedging transactions for its employee stock option benefit plans has no impact on earnings". In Tuesday's statement, EDS referred to these complicated transactions as "forward contracts related to its common stock".

Those transactions and other uncertainties affecting EDS prompted a blistering downgrade from Merrill Lynch financial analyst Stephen McClellan, who wrote on September 24 that "there remains great uncertainty surrounding EDS's near-term earnings and cash-flow generation. The various impacts and ramifications from the recent earnings shortfall are unpredictable so we are suspending earning estimates."

In an open letter he sent to investors and which is posted on the company's Web site, EDS chairman and CEO Dick Brown on Monday unveiled a plan to cut overhead costs company-wide and increase earnings and revenue. An EDS spokesman on Tuesday said the efforts to cut costs could involve layoffs.

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