Rollno. M2210
SEC Charges Michael Dell and Senior Executives with Accounting and Disclosure Fraud; Company to Pay $100 Million Penalty; FOR IMMEDIATE RELEASE 2010-131 High-Res
View a snapshot of Robert Khuzami, Director of SEC Enforcement, in high resolution Under the federal securities laws, public corporate disclosure must adhere to strict standards of accuracy and completeness. Over a period of many years, Michael Dell and other senior officials at Dell frequently fell short of that standard, and now they are being held accountable.
Robert Khuzami
Director
SEC Enforcement
On July 22, 2010, Washington, D.C. The Securities and Exchange Commission today filed charges against Dell Inc. alleging that the business failed to disclose important information to investors and engaged in dishonest accounting to give the impression that it was constantly beating Wall Street profit projections and cutting operating costs. SEC Complaint in Additional Materials Litigation Release No. 21599 According to the SEC, Dell failed to disclose to investors the sizeable exclusivity fees it got from Intel Corporation in exchange for refraining from using central processing units (CPUs) made by Intel’s main rival. Dell was able to reach its earnings projections thanks to these payments rather than the company’s management and operations. After Intel stopped making these payments, Dell again deceived investors by hiding the real cause of the company’s decling profitability.
For their roles in the disclosure violations, the SEC filed charges against Michael Dell, the chairman and CEO of Dell, as well as previous CEO Kevin Rollins and CFO James Schneider. The SEC filed charges against Schneider, Nicholas Dunning, a former regional vice president of finance, and Leslie Jackson, a former assistant controller, for their involvement in the incorrect accounting. Dell Inc. agreed to settle the SEC’s allegations by paying a $100 million fine. To resolve the SEC’s allegations against them, Michael Dell, Rollins, and Schneider each agreed to pay a $4 million fine, while Michael Dell also agreed to pay a $3 million fine. Jackson and Dunning also consented to resolve the SEC’s claims. According to the federal securities rules, “accuracy and completeness are the cornerstones of public company disclosure,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.
The SEC’s Division of Enforcement Associate Director Christopher Conte continued, “Dell distorted its accounting over a sustained period to predict financial results that the business desired but was unable to accomplish. During this time, Dell was only able to routinely achieve Wall Street targets by breaking the law. Realistic financial outcomes must be communicated by public corporations to the investing public.
According to the SEC’s lawsuit, Dell Inc., Michael Dell, Rollins, and Schneider misrepresented the foundation for the business’s capacity to regularly meet or surpass consensus analyst EPS expectations from fiscal years 2002 through 2006. The case was filed in federal district court in Washington, D.C. Dell would have failed to meet the EPS consensus every quarter during this time period without the Intel payments.
The most senior former accountants at Dell, including Schneider, Dunning, and Jackson, are accused of engaging in fraudulent accounting by keeping a number of “cookie jar” reserves that were utilised to make up operating results gaps from FY 2002 to FY 2005, according to the SEC’s complaint. Through deceptive accounting, Dell gave the impression that its management and operations were successfully achieving Wall Street earnings forecasts and lowering operational costs. In order to prevent Dell from using CPUs made by its rival Advance Micro Devices, Inc. (AMD), Intel allegedly paid exclusivity fees to Dell.
Nevertheless, in Dell’s second quarter FY 2007 earnings call, they told investors 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.
In addition, according to the SEC’s complaint, reserve manipulations enabled Dell to grossly overstate its earnings and operating expenses as a percentage of revenue for more than three years, a crucial financial statistic that the company itself highlighted. The adjustments also allowed Dell to dramatically understate the trend and volume of operational income for its EMEA segment from the third quarter of FY 2003 through the first quarter of FY 2005, a significant business unit that Dell notably highlighted.
Without admitting or denying the SEC’s allegations, Dell Inc. consented to the entry of an order that permanently restrains and enjoins it from violation of Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, and 13a-13.
Dell Inc. also committed to strengthen its Disclosure Review Committee and disclosure procedures, including by hiring a consultant who can make recommendations for changes to those procedures and increase training on the federal securities laws’ disclosure requirements. Without admitting or disputing the SEC’s allegations, Michael Dell and Rollins agreed to pay the $4 million fines and consented to the entry of an order permanently restraining and prohibiting each of them from violating Sections 17(a)(2) and (3) of the Securities Act as well as other federal securities laws or assisting in their violations. This resolved the SEC’s disclosure charges. Without admitting or disputing the SEC’s claims, Schneider agreed to resolve the disclosure and accounting fraud charges against him and agreed to pay the $3 million fine, $83,096 in disgorgement, and $38,640 in prejudgment interest. Dunning and Jackson agreed to resolve the SEC’s allegations of illegal accounting without acknowledging or disputing the SEC’s claims. Dunning consented to pay a $50,000 fine. Schneider, Dunning, and Jackson agreed in their settlement proposals to the issuance of administrative orders under Rule 102€ of the Commission’s Rules of Practise prohibiting each of them from appearing or practising as accountants before the SEC, with Schneider having the option to apply for reinstatement after five years and Dunning and Jackson having three years to do so. The SEC’s inquiry of more people is still ongoing.
The SEC’s Investigation into this problem was carried out by James Blenko, Shelby Hunt, Jonathan Jacobs, Ian Rupell, Robert Peak, Brian Palechek, and Jeffrey Anderson.
The Federal Trade Commission’s cooperation in this investigation is acknowledged by the SEC.