Dell Settles S.E.C. Accounting Suit for $100 Million

Dell Settles S.E.C. Accounting Suit for $100 Million

5:18 p.m. | Updated Dell agreed on Thursday to pay $100 million to settle civil charges by the Securities and Exchange Commission that its senior executives used fraudulent accounting tricks to make it appear that the computer maker was meeting Wall Street earnings targets. Michael Dell, the company’s founder, chairman and chief executive, agreed to pay a $4 million fine as well.
“Accuracy and completeness are the touchstones of public company disclosure under the federal securities laws,” Robert Khuzami, director of the S.E.C.’s enforcement division, 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.”
The S.E.C. said that Dell received large special payments from 2002 through 2006 by the computer chip maker Intel for exclusively using Intel chips in Dell computers. Dell did not disclose to investors that it was receiving these special payments and ran the money through its revenue line. By doing so, the S.E.C. said, Dell failed to disclose a material piece of information to investors.
Mr. Dell and other executives at the company attributed Dell’s growing profit margin to “cost-cutting measures” and “declining component cost” when it was actually a result of these large payments from Intel, the S.E.C. said.
The S.E.C. said that the company would often seek additional payments from Intel in order to close the gap between its expected results and its earnings targets. In 2004, Kevin Rollins, then Dell’s chief executive, sent an e-mail to Mr. Dell saying that the company had become too dependent on the Intel payments, calling it a strategic “problem.”
“For three quarters now, Intel money has made the quarter,” Mr. Rollins said in the e-mail, which was included in the S.E.C. complaint. Mr. Rollins then said that this was “a bad way to run the railroad.”
But Dell continue taking the Intel payments. On a company conference call a year later, Mr. Rollins attributed the company’s success at meeting Wall Street quarterly estimates to Dell’s execution, failing to mention the Intel payments.
When Dell announced in 2007 that it would start using chips from Advanced Micro Devices in its machines to stay competitive with other computer makers, Intel cut its payments to the company. By then, the Intel payments were equivalent to 76 percent of Dell’s operating income. Dell missed its earnings target that quarter and its stock fell, burning investors who had no idea that the company was receiving money for maintaining this exclusivity arrangement with Intel.
Dell settled the case without admitting or denying the S.E.C.’s allegations.
In the settlement, Mr. Rollins also agreed to pay a $4 million fine, while Dell’s former chief financial officer, James Schneider, agreed to pay $3 million.
Sam Nunn, the presiding director of Dell’s board, said the settlement was in the best interests of the company and its shareholders. He said in a statement that the board had reaffirmed its unanimous support for Mr. Dell.
– Cyrus Sanati
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