From: Austin-American Statesman July 22, 2010
Company, officers admit no fault; unnamed others still under investigation, agency says.
Dell Inc.'s 5-year-long legal entanglement with the Securities and Exchange Commission came to an end Thursday when the regulatory agency agreed to accept $100 million from the computer maker to settle a string of securities fraud charges.
In addition to the company settlement, CEO Michael Dell and several former executives also agreed to settle with the SEC. Michael Dell and former CEO Kevin Rollins agreed to pay $4 million. Former Chief Financial Officer Jim Schneider agreed to pay $3 million.
The SEC accused the company and some of its executives of failing to disclose rebates from Intel Corp., its most important chip supplier, that totaled more than $4.2 billion over a period of five years. It also accused the company of improperly using "cookie jar" reserves to enable it manipulate its earnings for several years in order to meet or exceed estimates by Wall Street analysts.
The SEC complaint quoted internal Dell e-mails that showed how important the Intel payments were.
In March 2004, Dell's chief accounting officer informed Michael Dell, Rollins and Schneider that the company was running behind its financial forecasts. He said Dell would be able to meet Wall Street analyst earnings estimates "as long as we get $75 million from Intel."
On April 2, 2004, Rollins sent Michael Dell an e-mail advocating a different product strategy, also noting that Dell's reliance on Intel payments was a strategic "problem." Rollins stated that "for 3 (quarters) now, Intel money has made the (quarter). A bad way to run the railroad."
Dell, its CEO and the former executives agreed to pay their fines without confirming or denying the SEC's charges.
Michael Dell was accused of violations tied to his failure to disclose Intel's payments but was not accused of the violations tied to the company's improper financial reporting, which stretched from 2002 to 2006. Two other former Dell executives also agreed to settle with regulators, and the SEC said its investigation continues against other unnamed individuals.
Those who settled were former Assistant Controller Leslie Jackson and former regional Vice President of Finance Nicholas Dunning. Dunning agreed to pay a $50,000 penalty. He, Schneider and Jackson all were suspended from practicing as accountants before the SEC for between three and five years.
The settlements are subject to approval by a federal district court.
"Accuracy and completeness are the touchstones of public company disclosure under the federal securities laws," said Robert Khuzami, director of the SEC's enforcement division. "Michael Dell and other Dell executives fell short of that standard repeatedly over many years, and today they are held accountable."
Dell Inc. had announced in June that it had taken a $100 million charge against its first-quarter earnings to set up a reserve to pay the SEC settlement.
Michael Dell, in addition to his fine, agreed to a permanent injunction from any future violations of SEC financial disclosure rules.
But the settlement did not make any restrictions on Michael Dell's ability to keep running his company as CEO and a member of the board of directors.
"We are pleased to have resolved this matter," the CEO said in a statement. "We are committed to maintaining clear and accurate reporting of our periodic results, supporting our customers and executing our growth strategy."
Sam Nunn, the former U.S. senator who is presiding director of the Dell board, said the board "reaffirms its unanimous support for Michael Dell's continued leadership."
The SEC said that Dell over a period of years from 2002 to 2006 "did not disclose to investors large exclusivity payments the company received from Intel Corp." to not use processor chips made by rival Advanced Micro Devices Inc. in Dell computers.
"It was these payments, rather than the company's management and operations, that allowed Dell to meet its earnings targets," the agency said. "After Intel cut these payments, Dell again misled investors by not disclosing the true reason behind the company's decreased profitability."
"Dell manipulated its accounting over an extended period of time to project financial results that the company wished it had achieved, but could not," said Christopher Conte, associate director of the SEC's enforcement division. "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."
Though Dell agreed to the settlement of the SEC disclosure charges, the company has maintained that the payments it received from Intel were not improper.
The company also conducted its own investigation into its financial reporting problems and said they were remedied by changes in personnel, by training and by structural changes that separated the company's accounting function from its finance function.
Analysts said the settlement probably helps rather that hurts the company because it removes the distraction of the long-running investigation, which the SEC began in 2005.
"This is the new business climate today," Ashok Kumar of Rodman & Renshaw said of the settlement. "This is a rearview mirror look at how business was done in the past. They are unlikely to repeat (these violations). I think people are being held to a higher ethical standard going forward."
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