US suspends IBM from seeking new federal contracts

SAN FRANCISCO (Reuters) - IBM(IBM.NY) is under investigation by the U.S. Environmental Protection Agency over bidding on a financial systems overhaul and has been suspended from seeking new contracts with all U.S. agencies, the company said on Monday.

In addition, IBM said the U.S. Attorney's Office for the Eastern District of Virginia had served IBM and certain employees with grand jury subpoenas requesting testimony and documents on interactions between the EPA and IBM employees.

International Business Machines Corp, the world's largest provider of computer services, said it only learned on Friday of the temporary suspension from the Environmental Protection Agency (EPA) tied to possible violations of ethical bidding provisions on an EPA contract IBM had submitted in March 2006.

IBM shares, which closed up 57 cents at $115.14 in regular New York Stock Exchange trading ahead of the disclosure, lost $1.75, or 1.5 percent, to trade at $113.39 in extended trade.

The temporary suspension applies to all federal agencies and IBM business units. IBM may continue work on existing contracts as of the date of the suspension, unless a particular agency directs otherwise, the company said in a statement.

IBM spokesman Fred McNeese said the company had been blindsided by the government suspension. IBM plans to cooperate in the investigation but will fight to limit the scope of its suspension from bidding on new contracts, he said.

"We are going to cooperate with investigators but we are also going to take all appropriate actions to challenge the scope of this action," McNeese said in a phone interview.

The company started receiving calls on Friday from outside parties informing it that IBM's name was on a Government Services Administration site listing parties barred from bidding on federal contracts, McNeese said. After inquiries, IBM received a letter of suspension from the EPA, he added.

The IBM spokesman said the bid covered a financial systems modernization contract that has yet to be awarded by the EPA.

"What we are saying is that the case stems from information provided by an EPA employee to IBM employees," McNeese said. "Prior to Friday, there was not a hint that there were any type of issues with this contract."

McNeese referred questions about the contract to the EPA.

A spokesman for the EPA was unavailable to comment.

IBM said it was unaware of any potential action by the EPA or the U.S. Attorney's office until March 28.

"IBM has initiated discussions with the EPA and the U.S. Attorney's office to obtain additional information and is cooperating with the investigations," IBM said in a statement.

Under federal procurement rules, IBM has 30 days to contest the scope of the suspension. The ban on federal contracts can last up to one year, pending the completion of the government investigation, the Armonk, New York-based company said.

IBM said it has served the federal government for many decades as a vendor in good standing and is "committed to the highest standards of business ethics." All employees receive business conduct training with special training for employees seeking federal government business, it added.

IBM grew up out of a company founded by former U.S. Census bureau employee Herman Hollerith, who developed punch-card tabulation machines to automate counting of the 1890 census. The Computer-Tabulating-Recording Co was renamed IBM in 1924.

(Editing by Braden Reddall/Andre Grenon)