Dell pay­ing $100 mil­lion to set­tle SEC fraud case

CEO, sev­eral for­mer ex­ec­u­tives reach sep­a­rate deal to end in­quiry on In­tel re­bates, earn­ings ma­neu­vers

Austin American-Statesman - - FRONT PAGE - By Kirk Laden­dorf

Dell Inc.’s five-year le­gal en­tan­gle­ment with the Se­cu­ri­ties and Ex­change Com­mis­sion came to an end Thurs­day when the reg­u­la­tory agency agreed to ac­cept $100 mil­lion from the com­puter maker to set­tle a string of se­cu­ri­ties fraud charges.

In ad­di­tion to the com­pany set­tle- ment, CEO Michael Dell and sev­eral for­mer ex­ec­u­tives also agreed to set­tle with the SEC. Michael Dell and for­mer CEO Kevin Rollins each agreed to pay $4 mil­lion. For­mer Chief Fi­nan­cial Of­fi­cer Jim Schneider agreed to pay $3 mil­lion.

The SEC ac­cused the com­pany and some of its ex­ec­u­tives of fail­ing to dis­close re­bates from In­tel Corp., its most im­por­tant chip sup­plier, which to­taled more than $4.2 bil­lion over a pe­riod of five years. It also ac­cused the com­pany of im­prop­erly us­ing “cookie jar” re­serves to en­able it to ma­nip­u­late its earn­ings for sev­eral years in or­der to meet or ex­ceed es­ti­mates by Wall Street an­a­lysts.

The SEC com­plaint quoted in­ter­nal Dell e-mails that showed how im­por­tant the In­tel pay­ments were.

In March 2004, Dell’s chief ac­count­ing of­fi­cer in­formed Michael Dell, Rollins and Schneider that the com­pany was run­ning be­hind its fi­nan­cial fore­casts. He said Dell would be able to meet Wall Street an­a­lyst earn­ings es­ti­mates “as long as we get $75 mil­lion from In­tel.”

On April 2, 2004, Rollins sent Michael Dell an e-mail ad­vo­cat­ing a dif­fer­ent prod­uct strat­egy, also not­ing that Dell’s re­liance on In­tel pay­ments was a strate­gic “prob­lem.” Rollins stated that “for 3 (quar­ters) now, In­tel money has made the (quar­ter). A bad way to run the rail­road.”

Dell, its CEO and the for­mer ex­ec­u­tives agreed to pay their fines with-

out con­firm­ing or deny­ing the SEC’s charges.

Michael Dell was ac­cused of vi­o­la­tions tied to his fail­ure to dis­close In­tel’s pay­ments but was not ac­cused of the vi­o­la­tions tied to the com­pany’s im­proper fi­nan­cial re­port­ing, which stretched from 2002 to 2006. Two other for­mer Dell ex­ec­u­tives also agreed to set­tle with reg­u­la­tors, and the SEC said its in­ves­ti­ga­tion con­tin­ues against other un­named in­di­vid­u­als.

Those who set­tled were for­mer As­sis­tant Con­troller Leslie Jack­son and for­mer re­gional Vice Pres­i­dent of Fi­nance Ni­cholas Dun­ning. Dun­ning agreed to pay a $50,000 penalty. He, Schneider and Jack­son all were sus­pended from prac­tic­ing as ac­coun­tants be­fore the SEC for be­tween three and five years.

The set­tle­ments are sub­ject to ap­proval by a fed­eral district court.

“Ac­cu­racy and com­plete­ness are the touch­stones of pub­lic com­pany dis­clo­sure un­der the fed­eral se­cu­ri­ties laws,” said Robert Khuzami, di­rec­tor of the SEC’s en­force­ment di­vi­sion. “Michael Dell and other Dell ex­ec­u­tives fell short of that stan­dard re­peat­edly over many years, and to­day they are held ac­count­able.”

Dell Inc. had an­nounced in June that it had taken a $100 mil­lion charge against its first-quar­ter earn­ings to set up a re­serve to pay the SEC set­tle­ment.

Michael Dell, in ad­di­tion to his fine, agreed to a per­ma­nent in­junc­tion from any fu­ture vi­o­la­tions of SEC fi­nan­cial dis­clo­sure rules.

But the set­tle­ment did not make any re­stric­tions on Michael Dell’s abil­ity to keep run­ning his com­pany as CEO and a mem­ber of the board of di­rec­tors.

“We are pleased to have re­solved this mat­ter,” the CEO 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.”

Sam Nunn, the for­mer U.S. sen­a­tor who is pre­sid­ing di­rec­tor of the Dell board, said the board “reaf­firms its unan­i­mous sup­port for Michael Dell’s con­tin­ued lead­er­ship.”

The SEC said that Dell over a pe­riod of years from 2002 to 2006 “did not dis­close to in­vestors large ex­clu­siv­ity pay­ments the com­pany re­ceived from In­tel Corp.” to not use pro­ces­sor chips made by ri­val Ad­vanced Mi­cro De­vices Inc. in Dell com­put­ers.

“It was these pay­ments, rather than the com­pany’s man­age­ment and op­er­a­tions, that al­lowed Dell to meet its earn­ings tar­gets,” the agency said. “Af­ter In­tel cut these pay­ments, Dell again misled in­vestors by not dis­clos­ing the true rea­son be­hind the com­pany’s de­creased prof­itabil­ity.”

“Dell manipulated its ac­count­ing over an ex­tended pe­riod of time to project fi­nan­cial re­sults that the com­pany wished it had achieved, but could not,” said Christo­pher Conte, as­so­ci­ate di­rec­tor of the SEC’s en­force­ment di­vi­sion. “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.”

Though Dell agreed to the set­tle­ment of the SEC dis­clo­sure charges, the com­pany has main­tained that the pay­ments it re­ceived from In­tel were not im­proper.

The com­pany also con­ducted its own in­ves­ti­ga­tion into its fi­nan­cial re­port­ing prob­lems and said they were reme­died by changes in per­son­nel, by train­ing and by struc­tural changes that sep­a­rated the com­pany’s ac­count­ing func­tion from its fi­nance func­tion.

An­a­lysts said the set­tle­ment prob­a­bly helps rather that hurts the com­pany be­cause it re­moves the dis­trac­tion of the long-run­ning in­ves­ti­ga­tion, which the SEC be­gan in 2005.

“This is the new busi­ness cli­mate to­day,” Ashok Ku­mar of Rodman & Ren­shaw said of the set­tle­ment. “This is a rearview mir­ror look at how busi­ness was done in the past. They are un­likely to re­peat (these vi­o­la­tions). I think peo­ple are be­ing held to a higher eth­i­cal stan­dard go­ing for­ward.”

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