Why Dell Will Pay the SEC a $100M Fine

Why? The computer manufacturer makes amends for accounting fraud

Settling a five-year investigation, computer manufacturer Dell has agreed to pay $100 million in fines to the U.S. Securities and Exchange Commission. The company had been charged with using fraudulent accounting practices involving its exclusivity agreement with Intel. For years, Dell had been receiving big payoffs from Intel after agreeing to use Intel's computer chips exclusively. In the first quarter of 2007, for instance, these payoffs amounted to 76% of Dell's operating income. Dell's failure to report this revenue stream got the company into hot water. Here are the highlights of the case, according to the journalists who have been following it:

• The SEC's Complaint  The New York Times' Cyrus Sanati sheds light on what Dell executives were doing:

Mr. Dell and other executives at the company attributed Dell’s growing profit margin to “cost-cutting measures” and “declining component cost” when it was actually a result of these large payments from Intel, the S.E.C. said.

The S.E.C. said that the company would often seek additional payments from Intel in order to close the gap between its expected results and its earnings targets. In 2004, Kevin Rollins, then Dell’s chief executive, sent an e-mail to Mr. Dell saying that the company had become too dependent on the Intel payments, calling it a strategic "problem."

• Here's What's Illegal About This, explains Dan Nosowitz at Fast Company: "The payoffs, as shady as they may seem to customers who might want AMD chips (or, for that matter, to AMD itself), aren't illegal. What's illegal is failing to adequately inform investors of the source of income. That Dell remained stable was due in large part to money that had nothing to do with the sales of any of Dell's products, giving an inaccurate view of how successful the company was."

• Dell Executives Took a Hit, reports Antone Gonsalves at Information Week. Company founder Michael Dell paid a $4 million penalty and former CEO Kevin Rollins and ex-chief financial officer James Schneider had to pay up too: "Rollins and Schneider agreed to pay $4 million and $3 million, respectively. Nicholas Dunning, former regional VP of finance, and Leslie Jackson, former assistant controller, also agreed to settle SEC charges. Dunning and Jackson were each barred from appearing or practicing as an accountant before the SEC for three years."

• Dell Has a History of This, points out Jeffrey Burt at eWeek: "Intel's business practices have been under scrutiny for years. The chip giant has been fined or sued in several countries over the past several years for allegedly using its dominance in the x86 processor market to coerce OEMs, including Dell and Hewlett-Packard, to limit their use of AMD products. Dell was the last of the top-tier systems makers to use AMD processors."