Dell pays $100M to settle SEC investigation regarding Intel relationship, disclosures

Dell and some of its top executives face penalties to close an SEC (Securities and Exchange Commission) investigation into the company's accounting disclosures and alleged financial omissions regarding its relationship with Intel.

By Suzanne Deffree, Managing editor, news -- EDN, July 23, 2010

Dell Inc will pay a $100 million civil penalty to close an SEC (Securities and Exchange Commission) investigation into its disclosures and alleged financial omissions regarding certain aspects of its commercial relationship with Intel Corp and separate accounting and financial reporting matters.

The SEC Thursday charged Dell with failing to disclose material information to investors and using fraudulent accounting to make it falsely appear that the company was meeting Wall Street earnings targets and reducing its operating expenses.

The SEC alleged that Dell did not disclose to investors large exclusivity payments the company received from Intel to not use CPUs manufactured by Intel's main rival, AMD. "It was these payments rather than the company's management and operations that allowed Dell to meet its earnings targets," the SEC claimed. "After Intel cut these payments, Dell again misled investors by not disclosing the true reason behind the company's decreased profitability."

The SEC charged Dell Chairman and CEO Michael Dell, former CEO Kevin Rollins, and former CFO James Schneider for their roles in the alleged disclosure violations. The SEC charged Schneider, former regional Vice President of Finance Nicholas Dunning, and former Assistant Controller Leslie Jackson for their roles in the improper accounting.

On top of the $100 million penalty the company has agreed to pay, Michael Dell and Rollins each agreed to pay a $4 million penalty and Schneider agreed to pay $3 million to settle the SEC's charges against them. Dunning and Jackson also agreed to settle the SEC's charges.

"Dell manipulated its accounting over an extended period to project financial results that the company wished it had achieved, but could not," Christopher Conte, associate director of the SEC's Division of Enforcement, said in a statement. "Dell was only able to meet Wall Street targets consistently during this period by breaking the rules. The financial results that public companies communicate to the investing public must reflect reality."

The SEC's complaint, filed in federal district court in Washington, DC, Thursday, alleged that the company, Michael Dell, Rollins, and Schneider misrepresented the basis for the OEM's ability to meet or exceed consensus analyst EPS (earnings per share) estimates from fiscal year 2002 through fiscal year 2006. Without the Intel payments, the SEC claimed, Dell would have missed the EPS consensus in every quarter during this period. The SEC's complaint further alleged that Dell's most senior former accounting personnel, including Schneider, Dunning, and Jackson, engaged in improper accounting by maintaining a series of "cookie jar" reserves that were used to cover shortfalls in operating results from fiscal 2002 to fiscal 2005.

According to the SEC complaint, Intel made exclusivity payments to the company in order for it to not use CPUs manufactured by AMD. These exclusivity payments grew from 10% of Dell's operating income in fiscal 2003 to 38% in fiscal 2006, and peaked at 76% in fiscal Q1 2007, the SEC alleged.

The SEC claimed that Dell and its executives failed to disclose the basis for the company's sharp drop in its operating results in its fiscal Q2 2007 when Intel cut its payments after Dell announced plans to use AMD chips. The SEC estimated that the reduction in Intel exclusivity payments was equivalent to 75% of the decline in Dell's operating income.

The company and executives settled without admitting or denying the SEC's allegations. Under its settlement, the company has consented to a permanent injunction against future violations of such federal securities laws and SEC rules. The company has also agreed to perform certain undertakings, including retaining an independent consultant, to enhance its disclosure processes, practices, and controls. The settlement does not include any restrictions on Michael Dell's continued service as an officer or director of the company.

"The board believes that this settlement is in the best interest of the company, its customers, and its shareholders, as it brings a five-year SEC investigation to closure," Sam Nunn, presiding director of the Dell board, said in a company statement. "Dell's board reaffirms its unanimous support for Michael Dell's continued leadership, and the management team in its ongoing commitment to transparent accounting, integrity in financial reporting and strong corporate governance."

In related news, the FTC this week extended its settlement deadline with Intel regarding charges of anticompetitive business practices, including exclusivity payments that would have hindered rival chip makers' market share. The FTC is one of several agencies across the globe that have questioned Intel's exclusivity payments as a business practice.