by Michael Connor

Dell Inc., several former executives, and Chairman and CEO Michael Dell agreed to pay more than $100 million to settle Securities and Exchange Commission charges that they failed to disclose material information to investors and used fraudulent accounting to make it falsely appear that the company was consistently meeting Wall Street earnings targets.

Dell_Michael Dell_FeatureThe SEC charged that Dell did not disclose to investors large “exclusivity payments” the company received from Intel Corporation to not use central processing units (CPUs) manufactured by Intel’s main rival, Advanced Micro Devices Inc. (AMD).

“It was these payments rather than the company’s management and operations that allowed Dell to meet its earnings targets,” the SEC said.  “After Intel cut these payments, Dell again misled investors by not disclosing the true reason behind the company’s decreased profitability.”

Dell had disclosed last month that the company and Mr. Dell were in negotiations with the SEC and that it had established a $100 million reserve in anticipation of a settlement.

Mr. Dell, former CEO Kevin Rollins, and former CFO James Schneider were charged by the SEC in connection with the disclosure violations. Mr. Schneider, former regional Vice President of Finance Nicholas Dunning, and former Assistant Controller Leslie Jackson were charged for their roles in the improper accounting.

Dell Inc. agreed to pay a $100 million penalty to settle the SEC’s charges. Michael Dell and Mr. Rollins each agreed to pay a $4 million penalty, and Mr. Schneider agreed to pay $3 million, to settle the SEC’s charges against them.

Dell Inc. and the individuals agreed to the settlements without admitting or denying the SEC’s allegations, “as is consistent with SEC standard practice,” the company noted.  The agency said its “investigation is continuing as to other individuals.”

The SEC’s complaint charged that the exclusivity payments made by Intel to Dell for not using CPUs made by AMD grew from 10 percent of Dell’s operating income in fiscal year 2003 to 38 percent in fiscal year 2006.  It peaked at 76 percent in the first quarter of FY 2007.

In fiscal year 2007, after Dell announced its intention to begin using CPUs made by AMD, the company and the individuals charged failed to disclose the basis for the company’s sharp drop in its operating results.  “In dollar terms, the reduction in Intel exclusivity payments was equivalent to 75 percent of the decline in Dell’s operating income” the SEC said, and Messrs. Dell, Rollins, and Schneider told investors in an earnings call “that the sharp drop in the company’s operating results was attributable to Dell pricing too aggressively in the face of slowing demand and to component costs declining less than expected.”

Intel is the subject of antitrust lawsuits brought by the Federal Trade Commission and several states.  In November 2009, Intel agreed to pay AMD $1.25 billion as part of a settlement in a private antitrust suit brought by AMD.

In a statement yesterday, Dell Inc. said Mr. Dell’s settlement “does not involve any of the separate accounting fraud charges being settled by the company and others. Moreover, Mr. Dell’s settlement is limited to claims in which only negligence, and not fraudulent intent, is required to establish liability, as well as secondary liability claims for other non-fraud charges.”

Sam Nunn, presiding director of the Dell Board, said, “The Board believes that this settlement is in the best interest of the company, its customers and its shareholders, as it brings a five-year SEC investigation to closure. Dell’s Board reaffirms its unanimous support for Michael Dell’s continued leadership, and the management team in its ongoing commitment to transparent accounting, integrity in financial reporting and strong corporate governance.”

Mr. Dell said, “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.”

Post to Twitter