Dell pays $100m in SEC false accounting case

Texas-based PC manufacturer Dell and senior executives including founder Michael Dell have paid roughly $100m to settle a US Securities and Exchange Commission fraud and false accounting suit.

According to SEC enforcement division associate director Christopher Conte, “Dell manipulated its accounting over an extended period to project financial results that the company wished it had achieved, but could not. Dell was only able to meet Wall Street targets consistently during this period by breaking the rules.”

The SEC charged the company and executives Michael Dell, former CEO Kevin Rollins and former CFO James Schneider for mistrepresenting the company’s financial results during 2002-06 by failing to disclose receipt of exclusivity payments from Intel Corporation for not using rival AMD processors.

Former regional vice president of finance Nicholas Dunning and former assistant controller Leslie Jackson were also charged by the SEC with improper accounting. Instead of declaring the Intel payments for what they were, the SEC alleged that senior Dell accountants including Schneider, Dunning and Jackson channelled them into a series of “cookie jar” reserves that they used to cover shortfalls in operating results.

According to the SEC's press statement, the Intel exclusivity payments accounted for 10% of Dell’s operating income in 2003, rising to 38% FY 2006 and peaking at 76% in the first quarter of 2007. When Dell took on AMD processors and the payments stopped in 2007, Dell, Rollins, and Schneider failed to disclose the real reason for the 75% decline in the company’s operating results, claiming instead that the drop was the result of component costs and overly aggressive pricing. Dell misstated both its earnings during this period and its operating expenses as a percentage of revenue — cited by the company as an important financial metric.

To settle the complaint, Dell paid a $100m penalty and Michael Dell and Kevin Rollins individually had to pay penalties of $4m. Former CFO James Schneider handed over $3m, to settle the SEC’s charges against them. Dunning and Jackson also agreed to settle their charges with the SEC. The cash settlements saved Dell the necessity of having to admit or deny the allegations, but also involve the company consenting to a restraining order not to commit similar offenses again. The company will also have to strengthen its Disclosure Review Committee and disclosure processes.