Okay, Here's what the Fraud Drama is About

I think it's worth simplifying the story what is actually being investigated by the SEC. Basically, in March 2025 Gotham City Research accused Kyndryl and namely CEO & chairman Martin Schroeter of major issues surrounding cash flow. Firstly, it is important to note that Martin, as chairman, created a pay package for himself based mostly on the metric of free cash. Over 50% of his compensation is based on free cash. Since the report came out almost a year ago, Martin cannot claim ignorance.

So, what is free cash? Free cash is essentially the extra spending money a business has. So, they are free to use it as they please.

Now, the issues are that Kyndryl was sure doing a lot of gymnastics to inflate this number.

One allegation is that Kyndryl sold receivables to the bank and called that "revenue". Receivables are essentially IOUs for one-time payments. Kyndryl sold those to the bank and made it look like these loans are recurring revenue.

The allegations that the SEC are investigating also stem from the Gotham City report. This allegation says Kyndryl aggressively timed vendor payments to increase cash holdings and called that cash "free". This is like showing your spouse how much "spending money" you have in your bank account but failing to tell them you have that money because you missed your house payments. They have admitted to abnormalities in delaying vendor payments between quarters, which means they were punting expenses into away to call the cash to pay those expenses "free cash". That is clearly fraud.

Recently, Kyndryl, upon disclosing this information fired their CFO and general counsel, while claiming these two executives were not transparent with the CEO or the board. However, Kyndryl has decided NOT to let CEO Martin Schroeter lead any remediation plan, which will instead be led by the brand new interim CFO and interim general counsel. This is an obvious break showing they don't think shareholders trust Martin anymore.

Basically, if these allegations prove true, Martin will have to argue in court that he was an oblivious id--t instead of a criminal.

#Vendor #Pay #Leadership #Company

Comment! It's anonymous!

16 replies (most recent on top)

@1dg I suspect the poster sees that Chugh negotiated a package that has a very short term high payout. This is typically a sign that the individual has no intent to be at the company for the long term. Or the company has no intent to keep the individual for the long term. Time will tell, Chugh is about to hit 55 which seems to be a push out age.

@cn Raising my hand because I'm not really seeing it. Do you mean Chugh will also be here temporarily leaving the mess to Doegar?

https://www.prnewswire.com/news-releases/kyndryl-holdings-kd-files-amended-quarterly-and-fiscal-year-reports-detailing-material-internal-control-weaknesses-after-3-key-executives-depart-securities-class-action-pending-hagens-berman-302695267.html

SOX is toothless

@x8 Many of us wondered how the books would be squared with the Kyndryl spin-off. Since at least the 2010s there has been “adjustment of revenue”. Oh we gave the customer product X for free when they bought product Y. Product Y being whatever senior management was claiming would be IBM’s newest wonder-product. The customer did not want product Y and never installed Y, they wanted X and installed and used X.
Similarly when the customer wanted software services, the revenue would be booked as a sale of some product that had the highest commission structure (i.e cloud/analytics products) and the desired software services would be free. Again the software product was shelf-ware.
When the behavior started we were all shocked, but then after years of the behavior it just becomes a running joke.

It would be interesting to see an audit of "vendor payments". When GTS was part of IBM, there was a lot of "vendor payments" (to IBM) that were either concealed or treated as funny money...for example, charging periodic mainframe licensing fees to customers (and booking as revenue), but not really "paying them" because GTS was part of IBM. The books were cooked, so all anyone was doing was transferring numbers from one side of the ledger to the other.

But with the Kyndryl outsourcing, all those numbers became externalized. All of those "vendor payments" now have to be paid, on time, or else customer stuff stops working.

It's a mess.

That was a good explanation, thanks for posting!

@OP From what I understood, Gotham’s commentary seemed centered more on how revenue is being classified between consulting and managed services, rather than on cash flow specifically.

The details you shared regarding Martin’s compensation are particularly notable. I’m interested in knowing what sources or analysis led you to that information.

Separately, I’ll admit that questions around revenue recognition practices have been something I’ve wrestled with internally for some time.

I’d appreciate more context on how you’ve formed your perspective on this.

You can drink your way to the top!!

@cn Can't wait for Harsh Chugh to be the new CEO.

Marty was CFO of IBM from January 1, 2014, to early 2018 and personally reported financial results to Wall Street for 12 quarters. He knows the drill.

https://newsroom.ibm.com/2021-01-07-IBM-Appoints-Martin-Schroeter-as-CEO-of-NewCo-Independent-Managed-Infrastructure-Services-Business-to-Spin-Out-from-IBM

And meanwhile interim CFO, Harsh Chugh receives a grant of $500K and a monthly supplemental cash payment of $35K and interim corporate controller, Bhavna Doegar receives a $864K grant. Chugh’s grant vests in 6 months; Doegar’ grant vests in 3 years.

Anyone who cannot see how things will play out, raise your hand.

Hmm I wonder if Smarty has a track record of doing these kind of things 🤔

Oh wait...yes!

https://www.theregister.com/2022/04/07/ibm_securities_lawsuit/

Did someone once say that Marty's new-ish beach house will end up confiscated?

https://www.reuters.com/technology/kyndryl-shares-slump-after-gotham-city-alleges-it-manipulated-metrics-2025-03-27/

Initial post regarding the allegations that Gotham levied: @OP+1jqcc3knh

Thread regarding Kyndryl layoffs

Okay, Here's what the Fraud Drama is About

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