Dell Pays $100 Million to Settle Accounting, Material Disclosure Dispute with SEC

Company chairman Michael Dell and other execs consent to penalties totaling more than $11 million for involvement in accounting trickery, failing to disclose key financial information to investors.

Dell Computer Inc. said it will pay $100 million to settle a civil dispute with the U.S. Securities and Exchange Commission (SEC) that it used accounting sleight-of-hand and withheld material information from investors to give the impression that it was meeting Wall Street earning targets and reducing its operating expenses over a four-year period.

The SEC said that Dell failed to disclose to investors that it had received substantial payments from Intel Corp. for exclusively using its processors and not those of rival chip maker Advanced Micro Devices Inc. from 2002 through 2006 and, in so doing, distorted its financial performance.

“Accuracy and completeness are the touchstones of public company disclosure under the federal securities laws,” said Robert Khuzami, SEC Director, Enforcement Division.

“Michael Dell and other senior Dell executives fell short of that standard repeatedly over many years, and today they are held accountable,” he said.

The SEC charged that by not disclosing to investors the payments from Intel—in amounts that grew from 10 percent of Dell’s operating income in FY 2003 to 76 percent in Q1 FY 2007, which the computer maker counted as revenue—Dell made it appear as though it had achieved its earnings bar through normal operations.

The SEC alleged that without the Intel payments, the company would have failed to reach analysts’ estimates in every quarter during the four-year period.

In Q2 FY 2007 when Dell said it planned to use AMD’s chipsets, Intel abruptly cut off payments, following through on warnings it previously had issued to the computer maker.

Dell’s operating results subsequently fell by 36 percent yet it declined to disclose to investors the real reason behind the drop—the absence of Intel’s payment--attributing it instead to overly aggressive pricing in response to slowing demand.

“Dell manipulated its accounting over an extended period to project financial results that the company wished it had achieved, but could not,” said Christopher Conte, SEC Associate Director, Enforcement Division.

“Dell was only able to meet Wall Street targets consistently during this period by breaking the rules,” he said. “The financial results that public companies communicate to the investing public must reflect reality.”

Execs pay $11 million to settle charges

Specifically, the SEC accused Michael Dell, Dell chairman and chief executive, Kevin Rollins, former chief executive, and James Schneider, former chief financial officer for failing to disclose material information. The agency charged Nicholas Dunning, former regional vice president, Leslie Jackson, former assistant controller, and Schneider for faulty accounting.

To settle the SEC’s charges against them, Michael Dell agreed to pay a $4 million fine as did Rollins while Schneider agreed to pay $3 million. Dunning and Jackson also agreed to settle, the former for a $50,000 fine.

Michael Dell said that the company is “pleased to have resolved this matter. We are committed to maintaining clear and accurate reporting of our periodic results, supporting our customers, and executing our growth strategy.”

As a condition of the settlement, and consistent with SEC practices, neither the company nor Michael Dell admitted nor denied the allegations. The computer maker said that the settlement does not include any restrictions on Michael Dell’s ability to serve as an officer or director of the company.

Sam Nunn, presiding director of the Dell Board, supported Michael Dell and said the settlement was in the “best interest of the company, its customers and its shareholders.”

Dell said that it will pay the civil penalty in Q1 fiscal 2011 from a reserve it established for that purpose.

The settlements must be approved by a U.S. District Court.

TAGS: Dell,SEC,Securities and Exchange Commission

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