Shareholder Sues Intel Over 'Misleading' Statements About Foundry Business

Intel and 13 officers and board members breached their fiduciary duties to shareholders and the company by making “materially false and misleading statements” about its contract chipmaking foundry business, Intel Foundry Services (IFS), alleged a Securities Exchange Act complaint (docket 1:24-cv-00651) in U.S. District Court for Delaware.

The named defendants in the complaint include Intel CEO Pat Gelsinger and Chief Financial Officer David Zinsner. The May 31 suit was filed by Jeffrey Ly, an Intel shareholder since Jan. 19.

IFS was formed as part of a 2021 Intel reorganization dubbed IDM 2.0 under which the company launched a contract foundry separate from its chip design operations. In October 2022, Gelsinger announced the company was shifting to an internal foundry business model, in which it would take orders from Intel engineers as well as external chip design companies and recognize revenues generated from both.

In June 2023, Intel announced a new financial reporting system under which IFS would be responsible for its own reportable P&L as Intel Foundry, effective Q1 2024, said the complaint. The reporting structure would improve cost saving and margin efficiencies and would provide beneficial tailwinds to IFS, it said.

Despite the “rosy representations” of the foundry business, the growth of IFS “was not indicative of revenue growth reportable under Intel Foundry,” which began to become apparent in an April 2 press release, after market close, announcing a revision to management’s discussion of financial conditions and operating results in Intel's form 10-K for the year ended Dec. 23, it said.

The April release revealed $7 billion in operating losses on sales of $18.9 billion for fiscal ’23 for Intel Foundry, with the Foundry segment’s revenue of $18.9 billion down $8.6 billion from the prior year, said the complaint. “These representations signaled to investors that there was a lower product profit driven by lower internal revenue,” it said. Intel’s stock price fell by 8.2% per share on the news the next day, it said.

Through the relevant period -- Jan. 25-April 25 -- the defendants and Intel made false and misleading statements including failing to disclose that “(1) IFS’s growth was not indicative of revenue growth reportable under the Intel Foundry segment; (2) Intel Foundry experienced substantial operating losses in 2023; (3) Intel Foundry experienced a decline in product profit driven by lower internal revenue; (4) due to the foregoing, Intel Foundry would not be a strong tailwind to Intel’s IFS strategy; and (5) the Company failed to maintain adequate internal controls,” alleged the complaint.

The individual defendants also breached their fiduciary duties by failing to correct or causing the company to fail to correct the false and misleading statements and omissions of material fact to the investing public, the complaint said. They also caused the company to “fail to maintain adequate internal controls,” it said.

In addition to Securities Exchange Act violations, Ly asserts claims of breach of fiduciary duties, unjust enrichment, waste of corporate assets, abuse of control and gross mismanagement. He seeks an award of damages with pre- and post-judgment interest, plus attorneys’ fees and costs. He also requests an order directing Intel and the individual defendants to improve the company’s “corporate governance and internal procedures to comply with applicable laws and to protect Intel and its shareholders from a repeat of the damaging events described.” Intel didn't comment Thursday.