SEC launches informal inquiry on EDS

The US Securities and Exchange Commission (SEC) has started an informal inquiry into Electronic Data Systems (EDS).

The US Securities and Exchange Commission (SEC) has started an informal inquiry into Electronic Data Systems (EDS).

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 $225m (£143m) to settle.

EDS, the world's second largest provider of IT services after IBM, is co-operating voluntarily with the SEC and "is confident the inquiry will confirm its actions were proper".

The company shocked investors when it announced after the close of the markets 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 warned that its earnings per share will be between 12 cents and 15 cents range instead of the 74 cents it had previously forecasted. It also said that third-quarter revenue will come in between $5.3bn (£3.4bn) and $5.5bn (£3.5m), instead of the previously expected revenue of between $5.8bn to $5.9bn. EDS will report third-quarter results on 30 October.

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

On 24 Septmeber 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". EDS referred to these complicated transactions as "forward contracts related to its common stock".

Those transactions and other uncertainties affecting EDS promoted a blistering downgrade from Merrill Lynch financial analyst Stephen McClellan, who said there "remains a great deal of uncertainty surrounding EDS' near-team earnings and cash flow generation. The various impacts and ramifications from the recent earnings shortfall are unpredictable so we are suspending earning estimates".

Meanwhile, EDS chairman and chief executive officer Dick Brown unveiled a plan to cut overhead costs and increase earnings and revenue.

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