Dell Inc. announced that the company and CEO Michael Dell have reached a settlement with the Securities and Exchange Commission.SEC confirmed that it had charged the company with disclosure and accounting fraud. Officials alleged that the firm did not disclose information to its investors about large exclusivity payments it received from Intel…….
Looks like Dell might finally be at peace with the US Securities and Exchange Commission — for now at least. The company has announced that it’s reached a settlement for “alleged omissions prior to Fiscal 2008” regarding both its relation with Intel and some accounting this-and-that. In a nutshell, Dell was receiving payments from Intel (who had some nasty payouts of its own) to not use AMD chips, which the company didn’t disclose to investors, and then failed to explain why profitability dropped once the payments stopped coming in.
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.
Dell did not disclose to investors that it was receiving these special payments, which were in the form of rebates that allowed the company to reduce its costs of goods sold and made it look more profitable. The S.E.C. said Dell failed to disclose a material piece of information to investors.
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.”
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.
Remember that $100 million set aside in June for such a civil monetary penalty? Yep, this is exactly what it was for, and it’s exactly what Dell is paying out. Additionally, CEO Michael Dell is paying $4 million out of pocket. Lesson learned, right guys?