Dell investors file suit over account practices

Shortly after the resignation of its chief executive, Dell was reeling from another blow when a group of investors filed a lawsuit on 31 January 2007 alleging that the company had used illegal accounting methods to hide secret kickback payments paid by Intel.


Shortly after the resignation of its chief executive, Dell was reeling from another blow when a group of investors filed a lawsuit on 31 January 2007 alleging that the company had used illegal accounting methods to hide secret kickback payments paid by Intel.

The payments from Intel were meant to ensure that Dell used only Intel processors in its PCs, according to the suit. The investors filing the suit asked the US District Court in Austin, Texas, to give the case class-action status, saying that Dell shareholders were harmed when Dell inflated its profits.

Intel denies the charges. A Dell spokeswoman said the company did not comment on pending litigation. In May 2006, Dell announced it would also began selling PCs and servers using chips from Intel’s rival, Advanced Micro Devices (AMD).

The investors claim that Dells profits were inflated by hundreds of millions of dollars, The Wall Street Journal reported on Friday.

Dell is struggling through a brutal series of events, culminating in the resignation on 31 January 2007 of CEO Kevin Rollins after just two years at the helm. The company’s founder and namesake, Michael Dell, will resume that job, taking up the fight to convince Wall Street that he can turn around sinking profits. After missing its earnings targets for recent quarters, Dell lost its mantle as the world’s largest PC vendor to its surging rival HP.

The new accusation echoes several ongoing lawsuits against the two companies. In August, regulators from the US Securities and Exchange Commission (SEC) and the US Attorney for the Southern District of New York launched an investigation of Dell’s accounting practices. Since then, Dell has failed to file its quarterly earnings numbers for the periods ending 4 August 2006 and 3 November 2006, leading the Nasdaq stock exchange to decree it will drop Dell from its listing board unless the company opens its books by 14 March 2007.

And in December, a US judge ordered Intel to share information about its overseas business practices to answer charges by AMD that it paid illegal cash rebates and discounts to dissuade PC vendors and retailers from using AMD’s processors. That case is scheduled to be argued in court in April 2009.

Intel denied the new allegations, saying they were merely a copy of the AMD case, and that it had already refuted those charges.

“We’ve conducted a preliminary review of the matter, and at first glance it appears that some of the allegations with regard to Intel may be made up,” said Intel spokesman Chuck Mulloy. “While they rehash antitrust allegations from other cases, there is no [new] antitrust claim. Intel denies the plaintiffs’ allegations and plans to move quickly to defend itself.”

As evidence that it has no connection to Dell’s accounting practices, Mulloy said that Intel has not been contacted by investigators from the SEC or the Department of Justice.

The shareholders’ lawsuit also levelled charges that were far more personal than mismanaging a public company. According to the 335-page suit, 15 senior executives of the company took huge financial payouts by using an insider-trading strategy to push Dell stock to high levels, then selling their shares and options.

During a period from February 2003 to September 2006, the executives pushed Dell stock from $22.59 (£11.53) per share to $42.57 (£21.73) before selling a total of $3.3 billion (£1.68bn) worth of shares, according to the lawsuit, which was brought by the firm of Lerach Coughlin Stoia Geller Rudman & Robbins.

“Why – if Dell’s business was actually performing as wonderfully as the Dell defendants said it was and if its future prospects were as good as they forecast they were – would these insiders sell off so much of their stock?’ the lawsuit asks.

“The true reason for Dell’s reported superior operating margins was, in large part, the hundreds of millions of dollars of secret and likely illegal rebate/kickback payments Dell was receiving from Intel at the end of each quarter in return for purchasing 100 per cent or virtually 100 per cent of its microprocessor requirements from Intel,” the suit says.

The suit names Dell’s Chairman and CEO Michael Dell, former CEO Kevin Rollins, former CIO Randall Mott, former CFO James Schneider and former Chief Accounting Officer Robert Davis. It also named board director and CFO Donald Carty and director Michael Miles, former senior vice-presidents Thomas Green and Bill Amelio, and seven senior vice-presidents: Joseph Marengi, John Medica, Rosendo Parra, Jeffrey Clarke, John Hamlin, Glenn Neland and Martin Garvin.

Through stock sales in this period, Michael Dell himself earned $2.8bn, followed by $74.2 million (£37.88m) for Rollins, $57.8m (£29.5m) for Schneider, $55.2m (£28.2m) for Marengi, $51.3m (26.2m) for Parra, and similar amounts for the others, the suit claims.

“The sell-off of $3.3bn (£1.68bn) in inflated stock – oftentimes over 90 per cent of the insiders’ holdings – is the largest insider bail-out in the history of any US public company. This ‘pump-and-dump’ was accomplished by defendants’ dissemination of false and misleading statements to artificially inflate Dell’s stock price and then spending over $12bn (£6.1bn) of Dell’s corporate funds to repurchase $350m (£178.6m) shares of Dell common stock on the open market,” the suit says.

Finally, the lawsuit also names Dell’s accounting firm PricewaterhouseCoopers as a defendant, saying that company had audited Dell’s financial statements for fiscal years 2003, 2004 and 2005.

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