July 23, 2010 12:37 am

Dell settles with SEC over fraud charge

Dell agreed to pay a $100m penalty on Thursday to settle a fraud charge by the Securities and Exchange Commission alleging false accounting based on undisclosed payments from Intel.

The SEC said in a court filing that Dell would have missed Wall Street expectations for every quarter in a five-year period from 2002 to 2007, but for the payments from Intel to secure the exclusive use of its chips in Dell computers.

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Michael Dell, the company’s founder and chief executive, and Michael Rollins, a former chief executive, agreed to pay a further $4m and $3m, respectively, to settle accusations that they failed to disclose the real reason for Dell’s winning streak.

Neither the company nor Mr Dell admitted to the alleged fraud, detailed in a 61-page suit filed along with the proposed settlement in a Washington federal court.

Dell has restated its financial results for the period in question and this year set aside the amount of the penalty when it disclosed settlement talks.

The details of the case had been aired in a suit brought against Intel by rival chipmaker AMD, settled last year for $1.35bn.

But the SEC charges made public on Thursday were severe enough to prompt Dell’s board to issue a statement. “Dell’s Board reaffirms its unanimous support for Michael Dell’s continued leadership and the management team in its ongoing commitment to transparent accounting, integrity in financial reporting and strong corporate governance,” Sam Nunn, presiding director, said.

The SEC lawsuit has damaged the image of Mr Dell, who founded the company in his college dorm in 1984 and became a business icon when his pioneering direct sales approach took his company to the top of the industry in revenue terms.

During the period of improper payments, in part disguised as rebates, Dell revenues rose from $35bn to $57bn. At one point in 2003, when Dell was discussing potential contracts with AMD, Mr Dell and Craig Barrett, Intel’s chief executive, shook hands on a proposal for the chipmaker to pay $258m to Dell over four quarters. Two days later, Mr Dell told Mr Rollins and others to “close down” the discussions with AMD, the suit says. It says that Dell, when faced with the prospect of missing profit targets, would ask Intel for more money.

According to the SEC, Intel regularly paid Dell to remain the sole supplier of some chips until the first fiscal quarter of 2007, contributing as much as $720m, or 76 per cent of the manufacturer’s operating income.

Dell executives told investors and analysts that cost controls were behind the company’s consistently strong margins. After Dell started to buy from AMD as well as Intel, cutting off the payment stream, it blamed the 36 per cent drop in profits on “pricing too aggressively in the face of slowing demand and to component costs declining less than expected”, the SEC said.

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