SEC Details Dell's 'Drug' Dependency on Intel's Cash

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Dell has paid a $100 million penalty to settle the years-long Securities and Exchange Commission (SEC) investigation into its financial practices, but the sum is spare change compared to the billions of dollars that Dell received from Intel over the course of several years as a “rebate” for not selling PCs and servers powered by AMD processors, according to the SEC.

Details of the relationship between the two companies were released Thursday in a 61-page document that alleges Dell repeatedly sought more and more cash from Intel to cover earnings shortfalls. It was a habit that former CEO Kevin Rollins eventually referred to as a “drug” that Dell needed to “get off” of, according to the SEC.

In the filing, the SEC alleges that “Intel effectively paid Dell not to use processors manufactured by Advanced Micro Devices” and that Dell executives including chairman and CEO Michael Dell, former CEO Kevin Rollins, former CFO James Schneider and others allegedly failed to disclose significant benefits it received from Intel and materially misrepresented the basis for its improving profitability.

From fiscal 2003 to fiscal 2007, Intel paid Dell an increasingly higher amount of cash each quarter for Intel exclusivity, according to the SEC. Initially, the payments accounted for about 10 percent of Dell’s operating income in fiscal 2003. That figure increased to 38 percent in the 2006 fiscal year and peaked at 76 percent in the first quarter of fiscal 2007, according to the SEC.

“Dell’s most senior former accounting personnel engaged in a wide-ranging accounting fraud by maintaining a series of ‘cookie jar’ reserves that it used to cover shortfalls in operating results from FY02 to FY05,” according to the complaint.

Intel began providing additional “rebates” to Dell and other PC makers at least as early as 2001, money that was different and separate from normal pricing discounts, according to the SEC. The payments were not disclosed and eventually were included in multiple antitrust investigations against Intel.

For Dell, the payments from Intel soared from $61 million in the first quarter of fiscal 2003 to more than $720 million in the first quarter of 2007, as Intel paid off the PC maker for avoiding AMD processors, chips that at the time many believed to be better than Intel’s technology, according to the SEC.

“The increase in Intel payments to Dell coincided almost exactly with AMD’s introduction of its Opteron CPU that was, in the view of many, technologically superior to Intel’s competing CPU,” according to the complaint.


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