Dell to Pay $100M to Settle SEC Accounting Probe

 
 
By Jeffrey Burt  |  Posted 2010-07-22
 
 
 

Dell will pay $100 million and CEO Michael Dell will pay $4 million to settle investigations by federal regulators into accounting issues surrounding the computer maker's relationship with Intel.

Dell and the Securities and Exchange Commission announced the settlement July 22, six days after company officials announced they had given the SEC a settlement proposal.

Dell already had revised its fiscal 2011 first-quarter financial numbers to reflect a possible $100 million fine.

In charges filed in U.S. District Court July 22, the SEC claimed that from 2001 to 2006, Dell violated federal securities laws and SEC rules and anti-fraud regulations in its accounting practices. In particular, according to the SEC, Dell executives failed to let investors know about large payments from Intel that had been made to convince Dell not to use processors from Advanced Micro Devices in its systems.

"It was these payments rather than the company's management and operations that allowed Dell to meet its earnings targets," the SEC said in a statement July 22. "After Intel cut these payments, Dell again misled investors by not disclosing the true reason behind the company's decreased profitability."

Michael Dell, former CEO Kevin Rollins and other Dell executives were charged for their roles in the disclosure violations, the SEC said.

Intel's business practices have been under scrutiny for years. The chip giant has been fined or sued in several countries over the past several years for allegedly using its dominance in the x86 processor market to coerce OEMs, including Dell and Hewlett-Packard, to limit their use of AMD products. Dell was the last of the top-tier systems makers to use AMD processors.

The Federal Trade Commission announced July 22 that it will review a proposed settlement of a suit against Intel over the next two weeks. Intel also is being sued by the New York Attorney General's Office and graphics chip maker Nvidia. The N.Y. Attorney General's Office has focused much of its attention on the relationship between Intel and Dell.

Intel was fined $1.45 billion in 2009 by the European Commission and paid AMD $1.25 billion in the same year as part of a settlement of legal disputes between those two companies.

Intel officials have denied any wrongdoing, saying the company's aggressive business practices were well within the limits of the law.

Along with the fine, Dell officials were required to agree not to violate SEC accounting laws and to bring in an independent consultant to improve the company's disclosure practices. Michael Dell also agreed to not violate SEC regulations in the future.

Neither he nor his namesake company admitted or denied the SEC's allegations.

"We are pleased to have resolved this matter," Michael Dell said in a statement. "We are committed to maintaining clear and accurate reporting of our periodic results, supporting our customers, and executing our growth strategy."

Robert Khuzami, director of the SEC's Division of Enforcement, said Dell's actions called for punishment.

"Accuracy and completeness are the touchstones of public company disclosure under the federal securities laws," Khuzami said in a statement. "Michael Dell and other senior Dell executives fell short of that standard repeatedly over many years, and today they are held accountable."

According to the SEC, the exclusivity payments from Intel accounted for 10 percent of Dell's operating income in fiscal year 2003, and grew to 38 percent in fiscal year 2006 and then to 76 percent in fiscal year 2007.

Intel cut its payments in 2007, after Dell officials announced that the company was going to start using AMD products in its systems, according to the SEC. That led to a drastic drop in Dell's operating budget in the second quarter of that year-the cut in Intel payments equaled 75 percent of the decline in Dell's operating income, the agency said. Dell, Rollins and others had been warned by Intel that those payments would be cut should they opt to use AMD chips.

Despite all that, no Dell executive admitted to investors that the drastic drop in the company's operating budget was due to the reduction of payments from Intel. Instead, they said during the quarterly earnings call that it was due to Dell cutting prices to bolster slowing demand, and component costs remaining higher than expected.

The SEC also claimed that Dell executives manipulated the company's reserves to enable them to misstate earnings and operating expenses.

"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."

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