NSA Spying: Companies Back Down Under Shareholder Pressure

Espionage can be a hot topic in the news, as the National Security Agency and companies it allegedly partnered with for spying access continue to find out. Revelations by former CIA analyst Edward Snowden that the NSA had been cozying up with private businesses to gain intelligence access both here in the U.S. and abroad has made ‘business as usual’ a bit more difficult for the country’s premier security agency.

But it hasn’t been a picnic for companies accused of saddling up with the NSA, either. International profits for multinational companies like AT&T and IBM have suffered just as much as their rapport with many U.S. based customers. The result, say some business analysts, is a re-think on whether cooperating with the NSA is worth the public ire.

Cloud networks have also felt the pinch. The Information and Technology Innovation Foundation (ITIF) estimated earlier this year that U.S. cloud companies could stand to lose as much as $35 billion in sales over the next three years.

But this week’s revelation indicates that analysts may not have plumbed to the depth of this fallout. In August, after learning of the NSA’s spying program, PRISM, the Chinese government cancelled sales with IBM, Shortly after that, the company’s network with private companies in China “collapsed.” Although IBM isn’t the only U.S. company to find itself cut off from  Chinese markets, its image problem seems to be affecting more than its rapport in China.

On Thursday, Dec. 12, a U.S.-based shareholder filed suit against IBM, alleging that the company hid the fact that its worldwide sales were being impacted by the NSA scandal. The Louisiana Sheriffs’ Pension and Relief Fund has accused the company of violating federal securities laws by not disclosing required information about the precipitous decline in sales that are alleged to be the result of its cooperation with the PRISM program. IBM is denying the accusations.

IBM has already been criticized for not being forthright about its financial status. According to one source, revelations about the extent of its losses only came out after repeated questioning by the press. So IBM’s ability to deflect this legal challenge may be difficult.

“Now is the time for these companies to demonstrate that they will protect user privacy, because it is in the interest of everyone – investors, citizens, our nation and the companies.”

And for other U.S. computer and telecom companies that have had their sights on international markets, IBM’s developing woes may be one more reason for why helping out the NSA is risky business. Companies like Lavabit, which, with great public fanfare, closed down its email service rather than partner with the NSA, have gained public support and admiration. Meanwhile, ATT and Verizon are under pressure from shareholders to provide more consistent transparency on such dealings with the government.

“Verizon and AT&T are not managing this crisis effectively,” Jonas Kron, director of Shareholder Advocacy at Trillium Asset Management recently said.   “Now is the time for these companies to demonstrate that they will protect user privacy, because it is in the interest of everyone – investors, citizens, our nation and the companies.” Trillium pointed out in a press release last November that a host of companies including LinkedIn, Google and Yahoo have published transparency reports. It’s a move that Verizon said last week it is reluctant to take and may try to block.

For some, the words of Justice Louis D. Brandeis never seemed more apt: “Sunlight is said to be the best of disinfectants.” U.S. Supreme Court Justice Brandeis, who served during the early 20th century, was a champion for balancing personal liberties with the ever-changing demands on government powers. “Publicity is justly commended as a remedy for social and industrial diseases.” I suspect that he would say this applies even to the debacles we create with the best of intentions.

Ed Note: After this story went to press, IBM released the following statement: 

Statement by Robert C. Weber, IBM Senior Vice President and General Counsel

ARMONK, N.Y.--Yesterday, IBM (NYSE:IBM) learned of a lawsuit pushing a wild conspiracy theory (Louisiana Sheriffs’ Pension and Relief Fund v. IBM). This lawsuit seeks to confuse IBM's support for a U.S. cybersecurity legislative proposal -- which has yet to be enacted -- with the completely unrelated NSA surveillance program called PRISM. Even a cursory reading of the legislative proposal, known as CISPA, makes clear that it has nothing to do with the recently disclosed NSA surveillance program. The legislation is designed to help protect companies from cyber attacks by encouraging the sharing of technical cyber threat information, such as malware code. The ability for those under attack to work together to help prevent cybercrime is a modern business requirement and an important goal, which is why many companies, including IBM, support such legislation. This bill does not refer to China, and it does not authorize government surveillance, facts that the plaintiff and its attorneys could have easily determined had they bothered to do the slightest fact checking.

Starting from this fictitious connection between CISPA and PRISM, the complaint proceeds to make numerous specious and false accusations, and IBM calls upon the law firm that filed this action to do the right thing and dismiss this action immediately. To fail to do so is a profound disservice to the judicial system, to the public, and in this case, to IBM.

IBM will vigorously fight this baseless lawsuit.

Image of National Security Agency sign provided by the NSA.

Image of presentation by Ladar Levinson regarding Lavabit email shutdown courtesy of mav.mbecker.net