SEC Files Complaint Against Dell for Failure to Disclose that Income from Intel Included Anti-AMD Exclusivity Payment

July 22, 2010. The Securities and Exchange Commission (SEC) filed a civil complaint [61 pages in PDF] in the U.S. District Court (DC) against Dell, and several of its officers, alleging violation of federal securities laws in connection with its failure to disclose receipt of exclusivity payments from Intel for not using AMD processors.

The SEC alleged in the complaint that for the time period of 2001-2006 Dell "fraudulently misrepresented the basis for Dell's improving profitability. Dell's separate fraudulent and improper accounting during this time period wrongfully made it appear that Dell was consistently meeting Wall Street earnings targets and reducing its operating expenses through the company's management and operations."

The SEC elaborated that "Intel effectively paid Dell not to use processors manufactured by Advanced Micro Devices, Inc. ("AMD"), Intel's arch-rival. Intel's payments to Dell, which were the subject of various antitrust investigations and claims, grew significantly. When measured as a percentage of Dell's operating income, these payments grew from about 10% in fiscal year 2003 ("FY03") to 38% in FY06, peaking at 76% in the first quarter of fiscal 2007 ("Q1FY07"). While almost all of the Intel funds were incorporated into Dell's component costs, Dell did not disclose the existence, much less the magnitude, of the Intel exclusivity payments."

Then, in 2006, "Dell announced that it intended to begin using AMD microprocessors in certain of its products later that year. Intel responded by cutting its exclusivity payments. In that same quarter Dell reported a 36% drop in its operating income." Nevertheless, the complaint alleges, "Dell told investors that the sharp drop in the company's operating results was attributable to Dell pricing too aggressively in the face of slowing demand and to component costs declining less than expected."

The complaint also names as defendants Michael Dell (Ch/CEO of Dell Inc.), former CEO Kevin Rollins, former CFO James Schneider, former regional Vice President of Finance Nicholas Dunning, and former Assistant Controller Leslie Jackson.

The SEC simultaneously announced in a release that it has settled this case, without defendants admitting to any wrongdoing. It wrote that "Dell Inc. agreed to pay a $100 million penalty to settle the SEC’s charges. Michael Dell and Rollins each agreed to pay a $4 million penalty, and Schneider agreed to pay $3 million, to settle the SEC’s charges against them. Dunning and Jackson also agreed to settle the SEC’s charges."

Dell, Inc. stated in a release that "Under his settlement, Mr. Dell has consented to a permanent injunction against future violations of these negligence-based provisions and other non-fraud based provisions of certain federal securities laws and SEC rules. In addition, Mr. Dell has agreed to pay a civil monetary penalty of $4 million. The settlement does not include any restrictions on Mr. Dell’s continued service as an officer or director of the company."

Former Sen. Sam Nunn (D-GA), the presiding director of the Dell Board, stated in this release that "The Board believes that this settlement is in the best interest of the company, its customers and its shareholders, as it brings a five-year SEC investigation to closure. 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."

This case is SEC v. Dell, Inc., et al., U.S. District Court for the District of Columbia, D.C. No. 1:10:cv-01245.