PHOENIX - "I keep reading in the papers about the stock setting records all the time, but how come I am not getting any more money?" a "golden age" IBM shareholder voiced her concern recently. "In the old days, I used to get more coupons to clip, as the companies that did well increased their dividends."

Well, those were the good old days; the days of the "buy and hold" shareholders. Today, it's "buy and sell" investors that are making money, often by selling the stock back to the company. Which includes insiders. As for the small general shareholders, like the above retired lady, well they can read in the papers about how well their company is doing. Or join the crowd and sell, while the selling is still good.

If the latter day Armonk connotes "Greed Inc." (and most indicators point that way), then the latter day Wall Street stands for "Incest Inc." (as most signals also suggest). And where Armonk meets Wall Street, greed evidently breeds incest. While the Big Blue was buying back its stock by the tens of billions of dollars, IBM insiders were selling their shares by the tens of millions of dollars. Talk about self-dealing. And NOT putting their money where their mouths were.

Since September 1996, roughly the time the Era of Greed was ushered into Armonk, the insiders have sold about $185 million of their IBM shares for about a $116 million pretax gain. Yet the Big Blue's stock surged to another record ($170) today (Friday, Nov. 27), up from about a $60-level in September 1996.

How's that possible? Have the investors gone mad? Insiders selling; the stock surging? Well, maybe not mad; but certainly duped by both Wall Street and IBM.

The scam went like this. The Big Blue has taken over $23 billion out of its business and put it mostly in the Wall Street institutions' pockets (through stock buybacks). The grateful Street, in turn, kept issuing glowing research reports about IBM, helping create an illusion of prosperity despite its mediocre business results. In turn, this attracted the gullible suckers to buy the Big Blue stock, while the insiders cashed in on their own hype.

Who says America's "Robber Baron" days are over? It's just that they have merely mutated to a more perfidious strain. At least the America's 19^th century "Robber Barons" created jobs and products. From 1865 to 1913, the U.S. economy grew at 4% per year, overtaking most of the industrialized countries. Yet here is IBM, along with a number of other Fortune 500 companies, turning over to Wall Street more than $600 billion in the 1990s without creating a single new job or a product.

The Journal which keeps a close watch on goings on in the street called Wall from which it borrows its name, also reported on Nov. 11, that IBM earnings may be at their peak now that the Armonk insiders were selling.

"The timing of this round of selling is a little inconsistent with the Street's almost wild optimism for the (IBM) stock right now," said Craig Columbus, vice president of research at Disclosure Inc., which tracks the insider trades for institutional investors.

"A little inconsistent?" The Main Streeters might have chosen the terms like a "scam;" a "financial perversion;" or at the very gentlest - a "dichotomy."

Speaking of dichotomies, also worthy of note is the fact that only three IBM insiders bought the company's stock on the open market since October 1997. And at that, it was a miniscule amount (1,900 shares). On the other hand, the insiders sold over 850,000 IBM shares worth about $108 million during the same period - for about a $76 million pretax gain. Which means that about two-thirds of all IBM insider trading gains in the last two years were realized in the first 10 months of the 1998 "bull market."

"Fish always stinks from the head," says an old Eastern European proverb. Given its apparent loss of sensory perception, except for the smell of money, Wall Street keeps mistaking a stench for a perfume nowadays. Kind of the way the 18^th century French aristocrats treated the BO. They perfumed and powdered themselves rather than take a shower. And their courtiers took the hint and did likewise.

The same is true at Armonk today. To find out where the stench of greed is the strongest from, follow your nose to the corner offices. Our analysis of IBM insider trading, based on the latest Vickers' report and SEC filings, reaffirms that Armonk '98 and Greed Inc. are virtually synonimous (for our earlier analyses - see Annex Bulletins 98-16, 4/07/98; 97-31, 7/24/97 and 97-22, 5/27/97).

Lou Gerstner, the CEO, cashed in to the tune of about $31 million in pretax gains in the last six months. Since the Big Blue insider trading spree started over two years ago, Gerstner has disposed of almost $47 million of IBM stock, for a pretax gain of nearly $38 million (he sold no shares on the open market in 1996 and 1997, but had exercised stock options for gains of $3.5 million and $6.7 million respectively).

One should bear in mind that this IBM chairman's insider trading gains were over and above his salary and bonus, which in 1997 amounted to $6 million.

It didn't take long for other insiders to get a clue from the IBM chief that the era of Greed had arrived at Armonk. Some had even preceded Gerstner in insider selling. Kind of testing the waters for the boss? Like the "silver medallist" among the 16 IBM insiders who sold the stock, the IBM "software czar," John Thompson. He raked in about $13 million in pretax gains during the last two years on over $26 million of stock option or open market sales. Most of Thompson's gains occurred in 1996 and 1997, when he profited from insider trades to the tune of $6.1 and $6.6 million respectively, according to the IBM Proxy Statement. But he hasn't done too badly in 1998, either. We estimate that Thompson has realized a pretax gain of about $2.8 million by the end of October.

Perhaps a surprising "bronze medal" winner in Armonk's two-year insider selling spree was Nick Donofrio, IBM's senior vice president and chief technology officer, who benefited to the tune of over $10 million from his insider trades in the last two years. We say "surprising" because IBM's Mid-Hudson Valley engineers are better known for their "salt of the earth" Main Street pride than for their greed. Guess there are exceptions to any rule, especially in a world ruled by greed.

Here's what Donofrio told us in May 1997, for example, when we first started investigating IBM's insider trading activities (see Annex Bulletin 97-22, 5/27/97):

"When asked why he chose to exercise his stock options in 1996, Donofrio said that, 'the rules have changed. IBM’s interpretation has also probably changed. I mean the stocks are worth something'. Donofrio added that he was 'complying with all of IBM’s rules and regulations that tell me when I can and when I can’t buy and sell stock and the SEC's (rules)'."

Spoken like a true lawyer or a Wall Street broker, but hardly as an IBM Watson-era engineer.

"Asked in what respect did the IBM rules change, Donofrio replied: 'I am not an expert here. But we were very rigorous about things like that in the past, suggesting very narrow windows as to when we (the insiders) could sell or buy' (the stock)."

Indeed, a former IBM executive said that in the old days (i.e., the pre-Gerstner era), the insiders were discouraged from 'selling the stock at all' without clearly identifiable personal reasons. 'So that even any hint of insider selling was frowned upon,' this executive added'."

Evidently no longer.

Nor was Donofrio the only one among the pre-Gerstner era IBMers who took advantage of the "new rules." According to IBM's 1996 and 1997 Proxy Statements, Ned Lautenbach and Bob Stephenson, for example, each realized $10.4 million and $8.4 million gains respectively from their insiders trades during those two years.

To find out who the rest of the 16 IBM insiders were, and by how much they profited from insider stock trading, please refer to the charts on pages 3 and 4 of the print Bulletin.

SUMMARY

Tom Watson Sr., the legendary IBM leader in its first 40 years, one of America's famed "Robber Barons," is probably turning in his grave right about now. For, if a business leader bent a rule or two back in his days, he did it while hustling for the good of the company. Which included the small shareholders, like the one from our opening paragraph.

Nowadays, the message from where Armonk meets Wall Street is that greed breeds incest; that the "rules have changed;" that now it's each man for himself.

As for the "buy and hold" little old lady-shareholders... well, they can always buy a newspaper and read to their bankers about how great things are at Armonk.