Dell, 45, and the personal-computer maker failed to tell investors about “exclusivity payments” received from Intel Corp. in exchange for not using products made by the chipmaker’s main rival, the Securities and Exchange Commission said in a complaint at federal court in Washington yesterday. The payments allegedly helped Dell reach earnings targets from 2001 to 2006.
“Accuracy and completeness are the touchstones of public company disclosure under the federal securities laws,” SEC Enforcement Director Robert Khuzami said in the agency’s statement. “Michael Dell and other senior Dell executives fell short of that standard repeatedly over many years.”
The settlement helps Dell resolve inquiries about the role payments from Intel played in its financial results and those of other PC makers. The payments were at issue in a private antitrust lawsuit filed against Intel by chipmaker Advanced Micro Devices Inc., a New York state probe of Intel’s business practices, and a Federal Trade Commission lawsuit filed against Intel in December. Dell, based in Round Rock, Texas, said on June 10 that it had set aside $100 million for the settlement.
Dell’s former CEO, Kevin Rollins, 57, and James Schneider, 57, the company’s former chief financial officer, agreed to pay fines of $4 million and $3 million, respectively. Schneider was suspended from appearing or practicing before the SEC as an accountant for five years. The SEC, as urged by the company in its settlement proposal, spared Michael Dell similar punishment.
“We are pleased to have resolved this matter,” Michael Dell said in a statement. “We are committed to maintaining clear and accurate reporting of our periodic results, supporting our customers, and executing our growth strategies.”
Calls to Michael Mann, an attorney for Rollins, and Neil Eggleston, a lawyer for Schneider, weren’t returned.
“In similar cases, you’d expect the SEC to seek a bar against a senior officer,” said Peter Henning, a professor at Wayne State University Law School. “He’s probably too important to the company and it would have caused too much harm to shareholders,” Henning said of Michael Dell.
In November 2009, Kenneth Mueller, the former chief financial officer of SafeNet Inc., was barred for five years from serving as a director or officer in a public company over SEC claims he was involved in improper accounting that helped the company meet analysts’ earnings estimates in 2004 and 2005.
The SEC last year sought a bar against Beazer Homes’ former chief accounting officer for allegedly improperly recording accounting reserves to meet analysts’ estimates.
Intel, which accounts for more than 80 percent of global computer-processor sales, was sued by the FTC for using its dominant market position to “stifle competition.” The firm’s payments amounted to 10 percent of Dell’s operating income in 2003 and grew to 76 percent by 2007, the SEC said.
Without the payments, Dell would have missed the earnings- per-share consensus in every quarter from fiscal years 2002 through 2006, the SEC said.
When Intel cut the payment by $263 million in the second quarter of 2007, Schneider told analysts and investors the drop in operating earnings had resulted from slowing demand and higher-than-expected prices for components, according to the SEC. His statements were included in a script circulated to Michael Dell and others before an earnings conference call.
Cookie Jar Reserves
From 2002 to 2005, the company also used a variety of so- called cookie jar reserves to meet earnings shortfalls, the SEC said. Michael Dell and Rollins weren’t accused of participating in that misconduct.
After the agency opened an investigation of Dell, the company was forced to restate results, fire workers and change its corporate governance policies.
“We’re relieved to see that the framework Dell had outlined previously is coming to fruition,” said Bill Kreher, a senior technology analyst at Edward Jones & Co. who has a “buy” rating on Dell shares.
“Any time you can put something like this behind you, it removes the uncertainty,” said Kreher. The announcement is unlikely to have a significant effect on Dell’s stock price, he said.