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Following a week of upheaval at Dell that included the resignation of its CEO and the reappearance of founder Michael Dell, the PC vendor is now being accused of artificially pumping up its profits with help from a secret agreement with Intel.
In the lawsuit, which was filed on Jan. 31 in U.S. District Court in Austin, Texas, several large investors claim that between February 2003 and September 2006, Dell executives manipulated its accounting practices and issued false public claims about the Round Rock, Texas, PC makers financial health.
As part of this manipulation, the lawsuit claims, Dell was the beneficiary of “hundreds of millions of dollars of secret and likely illegal rebate/kickback payments Dell was receiving from Intel at the end of each quarter in return for purchasing 100 percent or virtually 100 percent of its microprocessor requirements from Intel.”
That money helped the company show better profits and helped its stock price, even as it was struggling to compete in the market place as it once did, and executives helped the fraud by issuing positive public statements while hiding possible problems with a federal probe, according to the nearly 400-page lawsuit.
The lawsuit, first reported by the Wall Street Journal, is the second legal action taken against Dell on behalf of shareholders in the last six months. The law firm of Lerach Coughlin Stoia Geller Rudman & Robbins, which filed the recent lawsuit, also filed a lawsuit in September 2006 claiming that company executives had been manipulating the bottom line.
In both lawsuits, attorneys for the shareholders claim that Dell had been hiding the fact that the Securities and Exchange Commission had launched an investigation of its accounting practices in August 2005.
“The complaint alleges that by at least August 2005, the defendants were aware of but concealed from investors the fact that the SEC was investigating the Companys revenue recognition and accounting practices,” according to a statement the San Diego-based law firm issued when the first lawsuit was filed in September.
The lawsuit also names Dells account firm, PricewaterhouseCoopers, as a defendant. Michael Dell and Kevin Rollins have also been named in the lawsuit.
The lawsuit represents another hurdle that Michael Dell will have to overcome as he takes back control of the company from Rollins, who was forced to resign as the CEO on Jan. 31—the same day the second lawsuit was filed.
A Dell spokesperson told eWEEK that the company does not comment on ongoing litigation.
Dell is also dealing with a loss of prestige, as competitors like Hewlett-Packard have made significant headway in the PC market in the past few years. The company has also been forced to deal with the recall of more than 4 million of its notebooks that used faulty lithium-ion batteries made by Sony, as well as the SEC investigation.
Richard Shim, an analyst with IDC, said the lawsuit will not harm the company in the short term, but it could have an impact, especially if it dovetails with the ongoing SEC investigation. “It just adds to the mounting bad press on these guys and it raises more concerns about the Kevin Rollins era at Dell,” Shim said.
The lawsuit could also mean problems for Intel, which is named as a defendant. According to the lawsuit, the company gave Dell a substantial sum—approximately $200 million each quarter—to have the company exclusively use its processors.
An Intel spokesperson told eWEEK, after taking a preliminary look at the lawsuit, “Some of the allegations are completely made up.”
“Overall, we deny the plaintiffs allegations and we plan to move quickly to defend ourselves,” said Chuck Mulloy, a spokesperson for Intel, in Santa Clara, Calif. He added that his company has not been contacted by either the SEC or the Department of Justice in regard to some of the allegations in the case.
On May 18, 2006, Dell announced that it would start to offer computers and servers with processors from Advanced Micro Devices, Intels main rival in the chip market. While the move was seen as a boon for customers, the lawsuit charges that the move hurt Dells profits.
“Due to customer demand for PCs with the advanced features and advantages of the new AMD microprocessor chips, Dell had decided it would have to begin to purchase AMD chips for its computers, which would mean the loss of those hundreds of millions of dollars of rebate/kickback payments from Intel, which would hurt Dells operating profits and margins,” the lawsuit said.
AMD has also filed an antitrust lawsuit against Intel.
No date for either Dell lawsuit has been set.