This memorandum analyzes Dell, Inc.’s (“Dell”) alleged securities and accounting violations from fiscal years 2002-2006. During this time period, Dell failed to disclose exclusivity payments it obtained from Intel – a dominant manufacturer of CPUs for personal computers. These payments “amounted to “$61 million in the first quarter of 2003 (about 10% of operating income) and $720 million in the first quarter of 2007 (about 76% of operating income).” This memorandum will show that Dell’s failure to disclose Intel’s exclusivity payments was a violation of basic accounting principles. Additionally, it will address and disprove any potential defenses Dell may advance for its failure to disclose the Intel payments. Lastly, the memo will discuss the real motivation for Dell’s actions both while receiving the payments, and for coming forward when it did and will specifically discuss whether the $100 million settlement was excessive, a slap on the wrist, or just right.
I. Was Dell’s Actions Wrong?
Dell’s failure to disclose the exclusivity payments they were receiving from Intel was wrong and should be subject to punishment. The purpose of financial statement is to provide accurate information on a business’ revenues and expenses so that “shareholders, creditors, and anyone else who deals with the business,” can evaluate the company’s financial condition and performance. Furthermore, “the objective of accounting is to present relevant and reliable financial statements that are meaningful to users by providing a consistent basis for comparing the performance of an entity over time…” As the SEC press release explains, “accuracy and completeness are the touchstones of public company disclosures…” Taking into account the above statements, it becomes clear that Dell’s failure to disclose the exclusivity payments was contrary to these basic principles of accounting. Dell’s failures to disclose portrayed an inaccurate picture of Dell’s business and mislead investors. In fact, without the exclusivity payments Dell would have missed all EPS forecasts from 2002-2006. To make matters worse, during this time frame, Dell attributed their success to the superiority of their product, marketing strategy, operating efficiencies, and customer value proposition. This is problematic because not only did Dell fail to disclose, but they mislead investors by attributing their success and ability to meet Wall Street expectations to factors other than the exclusivity payments despite knowing that the only reason they were able to meet these expectations was because of the Intel payments.
With that being said, it can be argued that Dell’s actions were problematic not because of the payments themselves, but because Dell failed to disclose the payments in any of its financial statements. There is certainly nothing wrong with Dell vigorously negotiating for rebates to reduce its Cost of Goods Sold (“COGS”). This is especially so in this case because Dell was willing to use...