Dell Investors Sue PC Maker Over
Accounting Practices

Ben Ames,
IDG News Service
Fri Feb 2, 2:00 PM ET

Shortly after the resignation of its chief executive, Dell reeled from another blow as a group of investors filed a lawsuit 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 Wednesday asked the U.S. District Court in Austin, Texas, to give the case class-action status, saying that Dell shareholders were harmed when Dell inflated its profits.

The investors claim that Dell's profits were inflated by hundreds of millions of dollars, The Wall Street Journal reported today.
Intel Denies Charges

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

The new accusation echoes several ongoing lawsuits against the two companies. In August, regulators from the U.S. Securities and Exchange Commission (SEC) and the U.S. 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 August 4, 2006, and November 3, 2006, leading the Nasdaq stock exchange to decree it will drop Dell from its listing board unless the company opens its books by March 14.

In December, a U.S. 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 said the Dell lawsuit allegations 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.
Not Dell's Best Year

Dell is struggling through a brutal series of events, culminating in the resignation Wednesday 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 Hewlett-Packard.
Lawsuit Details

The shareholders' lawsuit also leveled 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 per share to $42.57 before selling a total of $3.3 billion worth of shares, according to the lawsuit, which was brought by the firm of Lerach Coughlin Stoia Geller Rudman & Robbins, of San Diego.

"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 percent or virtually 100 percent of its microprocessor requirements from Intel," the suit says.

The suit names Dell's Chairman and CEO Michael Dell, former CEO Kevin Rollins, former Chief Information Officer Randall Mott, former Chief Financial Officer 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 $2.8 billion, followed by $74.2 million for Rollins, $57.8 million for Schneider, $55.2 million for Marengi, $51.3 million for Parra, and similar amounts for the others, the suit claims.

"The sell-off of $3.3 billion in inflated stock--oftentimes over 90 percent of the insiders' holdings--is the largest insider bail-out in the history of any U.S. 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 $12 billion of Dell's corporate funds to repurchase 350 million 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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