Dell Set for $100 Million SEC Settlement, CEO May Face Fraud Allegations

Michael Dell, founder and CEO of computer maker Dell Inc.
Michael Dell, founder and CEO of computer maker Dell Inc.

Dell (DELL) is gearing up to reach a $100 million settlement with the Securities and Exchange Commission over an accounting scandal that roped in chipmaker Intel (INTC). Dell founder and CEO Michael Dell is expected to face allegations of committing fraud through negligence, according to the company's statement Thursday.

Dell, however, is expected to remain as CEO and chairman of the company he founded.

Drop in the Bucket of Revenue

For Dell, a looming settlement agreement removes a major distraction, one it doesn't need as it struggles to right its business. The company has been steadily losing market share to competitors as it has seemed to lose its footing. There have also been allegations that it got an artificial boost to its earnings by receiving sizable marketing dollars from Intel to maintain an exclusive relationship with the chipmaker -- providing it stayed away from Intel archrival Advanced Micro Devices (AMD).

But even for the struggling computer maker, a $100 million settlement would be less than a third of Dell's $341 million in first-quarter net income -- and a drop in the bucket compared to the $14.8 billion in revenue it generated during the period.

Back in 2005, the SEC launched an informal inquiry into Dell's method and timing for booking revenue at the end of the quarter. Dell also subsequently launched its own internal investigation, which it completed in 2007, finding it needed to revise 17 quarters going back to 2002, which reduced its profits overall by $92 million, according to an American Statesman report.

Potential Settlement Terms

Dell and the SEC have since held talks that are nearing a potential settlement. As its stands now, Dell expects a civil injunction against the company for:

  • Alleged violations of federal securities laws, including antifraud provisions relating to certain accounting and financial reporting matters

  • Negligence-based fraud charges

  • Non-fraud-based charges regarding the company's disclosures and alleged omissions involving its commercial relationship with Intel prior to fiscal 2008.

As a means to get his company off the allegations hook and resolve the matter, the CEO and the SEC are discussing a settlement in which Michael Dell himself would:

  • Face allegations of negligent fraud under federal securities laws and similar non-fraud-based provisions

  • Agree to a settlement without admitting or denying the SEC's allegations

  • Retain the ability to continue as an officer and director of a public company.

Another Downward Revision

Dell's board is also sticking by its man. The presiding director, Sam Nunn, says: "We are hopeful that these settlement discussions will achieve a comprehensive resolution in the near future. The independent directors of the Board have affirmed that Michael Dell will continue to lead the company as its chairman and CEO, and he continues to have our complete confidence and support."

Dell noted that, in light of the recent settlement discussions that occurred after it announced first-quarter performance, it has to revise the figures downward. The potential $100 million settlement pushed Dell into revising its first-quarter net income figures down by $100 million, or 5 cents a share, on a GAAP basis. The non-GAAP figures, however, won't change.

Dell also had to delay filing its formal quarterly report with the SEC because of the settlement discussions, but they had progressed enough to let the company to file on Thursday. Shares of Dell fell 2% in after-market trading to $12.81 a share, after closing up 2.3% to $13.07 in regular Nasdaq trading.