Dell to pay $100 million fine for fraud and misleading investors
Under the SEC settlement, Chairman and CEO Michael Dell, one of the world's richest men with a net worth of some $13 billion, also agreed to pay a $4 million penalty. Other senior Dell executives were also hit with fines.
The SEC charged Dell with failing to disclose material information to investors and using fraudulent accounting methods to make it look like the company was consistently meeting Wall Street's earnings targets and reducing its operating expenses.
"Accuracy and completeness are the touchstones of public company disclosure under the federal securities laws," said Robert Khuzami, director of the SEC's Division of Enforcement, 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."
According to the SEC's complaint, Dell received exclusivity payments from Intel Corp. not to use central processing units manufactured by Intel's main rival, Advance Micro Devices, Inc.-- a fact Dell hid from investors. These payments grew from 10 percent of Dell's operating income in FY 2003 to 38 percent in FY 2006, and peaked at 76 percent in the first quarter of FY 2007. Dell's operating income for 2007 was $3.4 billion.
It was these payments -- rather than the company's actual performance -- that allowed Dell to meet its quarterly Wall Street earnings targets. Once Intel cut its payments, Dell again misled investors by failing to disclose the true reason behind its decreased profitability.
The SEC charged Michael Dell, former CEO Kevin Rollins, and former CFO James Schneider for their roles in the disclosure violations. The SEC charged Schneider, former regional Vice President of Finance Nicholas Dunning, and former Assistant Controller Leslie Jackson for their roles in the improper accounting. Rollins agreed to pay a $4 million penalty, Schneider agreed to pay $3 million, and Dunning agreed to pay a $50,000 fine.
Neither Dell Inc. nor its executives admitted nor denied any wrongdoing.
"We are 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," Michael Dell said in a statement posted on the company's web site.
The SEC's complaint alleges Dell Inc., Michael Dell, Rollins, and Schneider mischaracterized the company's financial performance from fiscal year 2002 through fiscal year 2006, when it consistently met or exceed analyst expectations. Without Intel's undisclosed payments, Dell would have missed its Wall Street earnings targets for every single quarter during that period.
The SEC also accused Dell's senior accounting personnel including Schneider, Dunning, and Jackson, of shady accounting practices by maintaining a series of "cookie jar" reserves it used to cover shortfalls in operating results from fiscal 2002 to fiscal 2005.
"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, Associate Director of the SEC's Division of Enforcement. "Dell was only able to meet Wall Street targets consistently during this period by breaking the rules. The financial results that public companies communicate to the investing public must reflect reality."