I am amazed that no one is talking about the SEC settlement with DELL. In a nutshell, DELL computer was committing fraud, on a grand scale, between the years 2002-2006. They were being bribed by INTC, so that they would use pentium chips exclusively, then used said cash to meet earnings. Let me be clear: the SEC unveiled internal emails that revealed the conspiracy to “use INTC money” to meet estimates. Furthermore, without the INTC money, the company would have missed estimates every single quarter during that time frame.
As a result, DELL got a slap on the wrist and a 100 million dollar fine. In addition, Michael Dell and several top executives were fined a few mill and that’s it! Nothing to see here, just motherfucking fraud on a big dicked scale. To think, during that time frame, when DELL’s share price was ripping off tits to the upside, people wrongly lauded them for having “superior supply chain management” and “top of the line leadership.” Bullshit!
DELL, like Enron, cheated. Unlike Enron, no one at DELL is going to jail. Why the fuck not?
Since DELL started using AMD chips, DELL’s income has declined by 75%. They attributed that to slashing prices, when in reality it is because the INTC bribes stopped flowing into the company coffers. Those motherfuckers have been lying to investors for nearly a decade and no one takes them to task for it. Michael Dell should resign immediately. He is not some sort of genius in supply chain management, only cooking the books.
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amen
TEH FLY IS GOD
Mike Dell is obviously not as cool as Martha Stewart. The gov’t attorneys like cool perp walks.
Typical corporate mother-fuckery. One more reason to buy AAPL instead!
hey fly.tell me where he lives.i’ll make sure he sleeps wit da fishys. besides, dell products are sub par gear
Interesting, do you have any sources?
Read the SEC settlement docs. When I post something, I assume most of you are not lazy and on occasion read news.
A true capitalist and American hero. Don’t hate the playa hate the game.
Anger should be at those who create/enforce the rules.
http://dealbook.blogs.nytimes.com/2010/07/22/dell-settles-s-e-c-accounting-suit-for-100-million/?partner=yahoofinance
So what’s all the fuss about!?? Dell effectively purchased with discount from Intel in exchange for exclusive deal. That discount was shown as operational earnings. What’s wrong with that?
Ask the SEC.
What’s wrong with that? THEY FUCKING LIED ABOUT THEIR EARNINGS. Do you have any morals?
Essentially they didn’t lie. Just used a different label. Actually I think Dell’s scheme was smart and beautiful. I am outraged that they did it not because it was good for the company, but to fucking meet EXPECTATIONS!!! Now how wrong is that!? A classic case of Soros’ reflexivity theory–expectations affecting the fundamentals…
As for the morals–I am flexible. I am from sales.
Fly,
What is the proper way to book that cash, or was the entire deal illegal?
It’s illegal. Not for Dell, but, surprisingly, for Intel. They cannot demand exclusivity–it’s what’s called anti-competitive practices according to some stupid laws.
I don’t believe that’s true. INTC can sign a long term contract w. Dell w. exclusivity language, as Dell is not the only PC seller out there, and doesn’t even dominate the market anymore.
I also think this is much ado about nothing, except for the “face” saving bullscheiss. I am on the side of business owners NOT disclosing every last little to and jittle about their operations for strategic reasons.
This was NOT an illegal transaction, and no one was “cooking the books.” The particular discount contract was not disclosed, to which I say “so what?”
Is Dell a worse supply chain manager because he negotiated a discount deal with his largest supplier?
Please.
Full disclosure — I have never had anything except a minor short position in Dell, and wouldn’t buy it with your money.
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So Michael Dell settled things by giving SEC $100 Mil of shareholders money. What a great country!
The essence of the deal, as I understand it, was Dell’s promise to Intel to use their chips exclusively in all of Dell’s products. In other words Intel, in exchange for a kick-back, got rid of competitor’s threat and defended/expanded its market share. That is prohibited under US laws as an anti-competitive practice. A buyer can decide to buy from a single source, but the seller cannot demand that in exchange for, e.g. lower prices.
That’s, most probably, why Intel didn’t just discount its prices and offered this semi-legal scheme. I think it’s because they wanted to make sure Dell was bound to its informal promise, and to make the payments “performance-based”. So the real culprit here is Intel, not Dell. And the real question is not how Dell recorded this in their books (after all it IS a “cost reduction initiative” from their point of view), but rather how these illegal payments were recorded in Intel’s books. And, again, if they can execute such payments, what prohibits them from doing real kick-backs to personal accounts in exchange for award of a big order?
The corollary is that everyone should be long in DELL (for this deal in effect confirms Dell’s core competency of squeezing suppliers dry) and go short INTC, for they are crooks.
I am not aware of such rules, but I’m not an expert in anti-trust law either. I would agree to you the onus is on INTC here, and I’m wondering why Dell is paying and they are not.
That said, I have multiple clients who deal w. big squeezers like WMT and GE on a daily basis, and I know that WMT and GE demand exclusivity contracts on a number of sourced products. I have never heard anything about any of that being illegal, but I can tell you it makes those guys a lot harder to sell.
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Buyer can demand exclusivity. It’s just that the seller cannot exert its monopoly power and demand that. Dell is paying because the kick-backs from Intel technically could not be recognized as operating income, though we understand that they had every right to report it that way. So I understand why Fly is pissed. On the other hand it doesn’t subtract from their performance, only adds to it IMO. As for Intel, I won’t touch them for a long period, that’s for sure. These guys ain’t clean.
It’s because the case is securities accounting/disclosure fraud. Dell in fact creates very little IP. They put together parts from many different manufacturers and sell the package. My question is why would INTC be the only one paying DELL and why are they that threatened?
If you remember throughout the late 90s and 2000s, AMD was an inferior product to INTC but AMD was becoming more favored because its price was far below INTC’s and their performance was becoming increasingly closer to Intel’s. My thought is that Intel obviously noticed this and used the “bribes” as a way of discounting to Dell without decreasing its overall market prices.
Think about it, if it was a case of blocking competitors, or some kind of anti-trust, these issues would have been addressed with memory, hard-drive, video card, etc. suppliers. Not to mention the one component that is really a sole contributor MSFT! Dell’s margins are created by choosing cheap components and repackaging it for a market dictating decreasing price point. I believe my point in the second paragraph is why INTC and DELL were compelled to keep the lower negotiated prices quiet.
The difference here is that Intel has significant market share in combination with its exclusivity payments, that triggers the antitrust dogs of war. Wouldn’t be surprised to hear of a Department of Justice action Microsoft style in the next year.
Possible, but no mention of anti-trust was made in the Dell allegations. It was all about mis-representing their discount.
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Morals? They don’t exist in most of the business world. And you act surprised?
Please explain to me the moral issue? Are business owners not supposed to seek out the best prices from their suppliers possible?
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Jake
They were not supposed to count INTC cash payments as operating earnings. Period.
They lied about how their business was operating. I suppose you think it’s okay to muddy the waters about how DELL earned their money. But, when a company is publicly traded, it is their DUTY and fiduciary responsibility to be 100% transparent about how they are making money.
If you can say with a straight face that the stock would have doubled anyway, had this been disclosed back then, then you are lying to yourself.
Are you saying that if Dell had announced that they had negotiated a better deal w. INTC, the stock price would not have appreciated?
Why not?
I mean, I could see INTC being pissed about such an announcement, but how does it hurt Dell?
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Lots of companies double in stock price when they miss earnings targets for ~20+ quarters. Right?
Explain to me how they “missed” earnings for 20 quarters? They got a discount on their price of chips from INTC that INTC did not want disclosed. Perhaps for pricing reasons they did not want AMD to know this (dell I eman) but that does not mean they did not get the discount!
You pay for volume and you get paid for volume… the way the world works.
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As a CPA, I am in total agreement with what you have posted. Also, where were the independent auditors here? I cannot image how they missed this…The payments from Intel should not have been treated as revenue, simple audit tests by the CPA firm could have uncovered this. With SARBOX, company CEO/CFOs have to attest to having proper controls over financial reporting and sign a statement that financial statements are fairly stated. In many fraud cases it is hard to prove intent, in this case it appears obvious, I hope the DOJ looks into this.
QJ
How was the money accounted for?
If the cash was recorded as lower COGs (ie, a discount), I don’t understand the problem? Now, if it didn’t show up anywhere, that’s a problem…
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NEWSFLASH:
The company has acknowledged ACCOUNTING IRREGULARITIES.
They should have retained your services as special counsel. I bet you could have saved them a cool 111 million.
Big deal. The SEC shakes down companies regularly, even more so with your guy from Chicago in office.
I want someone to explain to me what the irregularity was. I am not a Dell fan, and have no dog in this fight., but it strikes me that INTC was getting the strategic benefit of not announcing the discount, while Dell could’ve done so with little market penalty.
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Also, where were the independent auditors here?
They were busy in the Arthur Andersen offices shredding Enron documents.l
I knew there was a reason I didn’t like Dell computers.
Saw that earlier…amazing. I posed the question yesterday of what would INTC do after they post the highest quarterly earnings in 10 years. Answer: get involved in a fraud case. Hubris should always raise a flag. Oh well, nothing more than a shuffling of the deck chairs and munching of a bag of silicon chips.
Operating income is down 76% not revenue as far as a can tell. It does change the picture slightly. But none of that changes your other points.
I meant income. Thanks.
No problem, love your work.
Because DELL is in Austin, TX
The BBQ and the music is fine.
Fly,
Some commenters to this post deserve asshat of the week. Un-ba-frickken-lievable. Thanks.
as soon as I doubted my NDX 1875, it came to me in exactly 30 minutes, from the low of the day.
the market is there to comfort me in my time of need.
happy as a clam, good weekend all
They’re waiting until they need a scape goat, then it will blow up all over the news and they’ll supposedly “make an example” out of them. For now, they’re connected, so “everything’s fine”. I know this crony capitalism bullshit pisses me off sometime, but nothing we can do about it that I know of.
Michael Dell asshat of the week
I think Charlie Rangle should look into this immediately!
ha!!!
good one..
DELL DIDN’T LIE. THEY JUST TOLD THE TRUTH IN A PARALLEL UNIVERSE.
Mr. Rollins, in a December 2004 message to Mr. Dell, laments that for three quarters “Intel money” made the quarter. “A bad way to run a railroad,” Mr. Rollins wrote, according to the complaint.
The SEC alleges Mr. Dell and other executives repeatedly cited to investors “cost reduction initiatives” and “declining component costs” as the reason for Dell’s growing profit margins when they knew the increase was due to Intel’s payments.
Without the Intel payments, the SEC said, Dell would have missed Wall Street analysts’ profit estimates in every fiscal quarter from 2002 to 2006. In the first quarter of fiscal 2007, for example, the payments amounted to more than $720 million, or 76%, of Dell’s operating profit, according to the SEC
When Dell began using AMD chips, the reduction in Intel payments resulted in about a 75% decline in Dell’s operating income. Yet during an earnings conference call, the SEC alleges, the company’s chief financial officer told investors the drop in operating results was attributed to Dell’s aggressive pricing with no mention of the role of Intel’s payments. The SEC said his comments were in a script that was circulated to Mr. Dell.
Fly- how about a swap of TEVA for CEPH? They are exerting pricing power on their Provigil line in the US and their cancer drugs are gaining momentum. There have been large upward EPS revisions recently and of 17 brokers providing estimates on Yahoo Finance, the average price target is $77 with the low being $56. Only two analysts have taken action so far this year with initiations of average and outperform. If you use a P/E of 11 (near the ttm number) and earnings revision of 6.75 for FY10 you get a price of around $74 or about a 30% discount from current price.
is CEPH gonna get poop shooted too?
Ah, AMD
Nothing like chips with less perfomance and more overheating issues. They’re like the 1991 Ford Tempo of microchips.
As far as the market
The SLX IYT JJC XLB EEM all showing the risk trade is crowded on 30 min charts, while VXX and UUP still refuse to breakdown. Not chasing long up here.
It’s painfully obvious that you lack any real knowledge about current technology.
So, are you an AMD employee, or shareholder then?
from a senior CompEng friend of mine: “Between that and the recent revelations that Dell was knowingly selling motherboards with defective capacitors (and adopted a policy of blaming the resulting failures on the users), Dell is really starting to sound like a company on the decline”. Didn’t know about this, but have to agree with that last comment…
I wonder what these payments look like on Intel’s books?
What is interesting to me is that people think that what DELL did is OK!
They got away with the very thing that fucks up capitalism the most! They should FRY and michella dell should be playing servant to bubba for the next 25 years.
Short SP now! Stop loss 1113
I miss the old Dell,where as a reseller they provided rebate checks to the company unaccounted for. What this meant to me was $ 4000-5000 bonus TAX FREE during the years they offered the rebate.
I always wondered how they got around this without reporting the amounts to the IRS with my EIN #, but now I know… #Hity accountants.
Wow, parallel universe, I went to IBC and found this story that looks like something on ZeroHedge. It would probably be bigger news if it was in this decade.
Bigger news, we are rallying today and I nailed it.
Harsh, though not harsh enough, but certainly fair.
Washington, D.C, Jul 23, 2010 (M2 PRESSWIRE via COMTEX) —
The Securities and Exchange Commission
today charged Dell Inc. with failing to disclose material information to investors and using fraudulent accounting to make it falsely appear that the company was consistently meeting Wall Street earnings targets and reducing its operating expenses.
The SEC alleges that Dell did not disclose to investors large exclusivity payments the company received from Intel Corporation to not use central processing units (CPUs) manufactured by Intel’s main rival. It was these payments rather than the company’s management and operations that allowed Dell to meet its earnings targets. After Intel cut these payments, Dell again misled investors by not disclosing the true reason behind the company’s decreased profitability.
The SEC charged Dell Chairman and CEO Michael Dell, former CEO Kevin Rollins, and former CFO James Schneider for their roles in the disclosure violations. The SEC charged Schneider, former regional Vice President of Finance Nicholas Dunning, and former Assistant Controller Leslie Jackson for their roles in the improper accounting.
Dell Inc. agreed to pay a $100 million penalty to settle the SEC’s charges. Michael Dell and Rollins each agreed to pay a $4 million penalty, and Schneider agreed to pay $3 million, to settle the SEC’s charges against them. Dunning and Jackson also agreed to settle the SEC’s charges.
‘Accuracy and completeness are the touchstones of public company disclosure under the federal securities laws,’ said Robert Khuzami, Director of the SEC’s Division of Enforcement.
‘Michael Dell and other senior Dell executives fell short of that standard repeatedly over many years, and today they are held accountable.’
Christopher Conte, Associate Director of the SEC’s Division of Enforcement, added,
‘Dell manipulated its accounting over an extended period to project financial results that the company wished it had achieved, but could not. Dell was only able to meet Wall Street targets consistently during this period by breaking the rules. The financial results that public companies communicate to the investing public must reflect reality.’
The SEC’s complaint, filed in federal district court in Washington, D.C., alleges that Dell Inc., Michael Dell, Rollins, and Schneider misrepresented the basis for the company’s ability to consistently meet or exceed consensus analyst EPS estimates from fiscal year 2002 through fiscal year 2006. Without the Intel payments, Dell would have missed the EPS consensus in every quarter during this period. The SEC’s complaint further alleges that Dell’s most senior former accounting personnel including Schneider, Dunning, and Jackson engaged in improper accounting by maintaining a series of ‘cookie jar’ reserves that it used to cover shortfalls in operating results from FY 2002 to FY 2005. Dell’s fraudulent accounting made it appear that it was consistently meeting Wall Street earnings targets and reducing its operating expenses through the company’s management and operations.
According to the SEC’s complaint, Intel made exclusivity payments to Dell in order for Dell to not use CPUs manufactured by its rival – Advance Micro Devices, Inc. (AMD). These exclusivity payments grew from 10 percent of Dell’s operating income in FY 2003 to 38 percent in FY 2006, and peaked at 76 percent in the first quarter of FY 2007. The SEC alleges that Dell Inc., Michael Dell, Rollins, and Schneider failed to disclose the basis for the company’s sharp drop in its operating results in its second quarter of FY 2007 as Intel cut its payments after Dell announced its intention to begin using AMD CPUs. In dollar terms, the reduction in Intel exclusivity payments was equivalent to 75 percent of the decline in Dell’s operating income. Michael Dell, Rollins, and Schneider had been warned in the past that Intel would cut its funding if Dell added AMD as a vendor. Nevertheless, in Dell’s second quarter FY 2007 earnings call, they told investors that the sharp drop in the company’s operating results was attributable to Dell pricing too aggressively in the face of slowing demand and to component costs declining less than expected.
The SEC’s complaint further alleges that the reserve manipulations allowed Dell to materially misstate its earnings and its operating expenses as a percentage of revenue – an important financial metric that the company itself highlighted – for more than three years. The manipulations also enabled Dell to misstate materially the trend and amount of operating income of its EMEA segment, an important business unit that Dell also highlighted, from the third quarter of FY 2003 through the first quarter of FY 2005.
Without admitting or denying the SEC’s allegations, Dell Inc. consented to the entry of an order that permanently restrains and enjoins it from violation of Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, and 13a-13. Dell Inc. also agreed to enhance its Disclosure Review Committee and disclosure processes, including the retention of an independent consultant to recommend improvements to those processes and enhance training regarding the disclosure requirements of the federal securities laws.
Michael Dell and Rollins settled the SEC’s disclosure charges, without admitting or denying the SEC’s allegations, by each agreeing to pay the $4 million penalties and consenting to the entry of an order that permanently restrains and enjoins each of them from violating Sections 17(a)(2) and (3) of the Securities Act and from violating or aiding and abetting violations of other provisions of the federal securities laws.
Schneider consented to settle the disclosure and accounting fraud charges against him without admitting or denying the SEC’s allegations, and agreed to pay the $3 million penalty, disgorgement of $83,096, and prejudgment interest of $38,640. Dunning and Jackson consented to settle the SEC’s improper accounting charges without admitting or denying the SEC’s allegations. Dunning agreed to pay a penalty of $50,000. In their settlement offers, Schneider, Dunning and Jackson consented to the issuance of administrative orders pursuant to Rule 102(e) of the Commission’s Rules of Practice, suspending each of them from appearing or practicing before the SEC as an accountant with the right to apply for reinstatement after five years for Schneider and three years for Dunning and Jackson.
Jake, read ^^^^
Have read and am now discussing w. my CPA partner….
Both of us landed on this piece as the possible “bad deed” that can not be excused:
The SEC alleges that Dell Inc., Michael Dell, Rollins, and Schneider failed to disclose the basis for the company’s sharp drop in its operating results in its second quarter of FY 2007 as Intel cut its payments after Dell announced its intention to begin using AMD CPUs.
But the information that is missing is how Dell accounted for the “exclusivity payments.” If they were taken as discounts to COGS, I don’t see where the problem is. However, I would argue — from an SEC and disclosure perspective — that the LOSS of the INTC discount is a “material,” and therefore disclosable event.
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Where in the books did Dell record the Intel take? Was it in the revenue line or in the cost of goods sold line? Anyone know?
most likely on the “trips to the french riviera” and or “yachts” or “private jets” funds line.
panama and omen,
That may be true now but it wasn’t always the case. In fact, the years in question were some of the best, technology wise, for AMD. They were beating Intel in Processing power and Temperature/Supply power.
Dell was the major stronghold that AMD was attempting to get into to define them as legitimate to the world. There was speculation at AMD that this was going on but Michael Dell kept denying it. Doesn’t this have the stench of a form of monopoly? I was heavily in AMD at the time and a good friend of mine was one of the head engineers at AMD so I remember it well.
It certainly has that stink from the INTC standpoint, but Dell is a commodity product in a very competitive segment.
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I was heavily in AMD at the time
Me too. I want my reparations.
PPT 3.0… Are we there yet?
Can Anyone share the PPT hybrid score? Are we overbought?
For a small fee monthly fee you can have the answer.
Dennis Kozlowski’s must feel like a real chump now. Some guys have all the luck.
Howabout the poor chump from WorldCom… Bernie Ebbers? That guy was buying the stock til the end, and he still got schtupped.
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So DELL shareholders, who already got fucked by Dell’s lying about revenues, are now doubly fucked by the SEC taking $100 Mil from the Company. Michael Dell and his posse are unharmed and going on about their ways. This really hurts the small investor. I can understand Intel wanting some confidentiality about this arrangement. Other computer makers are probably going ballistic over this news, if they did not get similar rebates from Intel. Maybe Dell should have fought it out with the SEC instead of just forking over $100 Mil of shareholder money to settle things.
Good thing Michael Dell isn’t a shareholder, no?
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Actually had a $100M buy in September 08 that didn’t work out too well…hasn’t sold a share in the last 5 years.
Next time I’ll use a sarcasm tag.
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I was just agreeing with you…he owned a heck of a lot of stock…just adding what I saw as an important fact. Maybe he was just naive or greedy. Certainly not sinister or he would have had an exit strategy.
Is it really very much different that fast food chains having exclusive deals with Coke or Pepsi?
I think we’ve established the problem was not in the exclusivity — ie, “anti-trust” — aspect, or INTC would’ve gotten the hose too.
No, the problem was in the dissembling at some point, but I would argue the LATTER dissembling, not the former.
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Hahaha, where did the glorious analysts of INTC look–SELLER.PAYS.TO.BUYER. Just think about it for a minute. Now go short INTC.
Dell’s profits came from stoner sensibility
“DUDE, you gotta get a Dell”
Fuckin’ hippies, like, for real, man, far out!
Mac is selling w. a similar character now, no?
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Fly
What do you think about KV/B @ $2?
Rumored to be bought out by Qualitest
What is the link between M. Dell, Shnieder and Andy Grove of Intel. I think they all are muslims.
Why no prison terms for them because SEC head, Mary Schapiro is also a muslim.
Check this out…
http://www.radioislam.org/islam/english/jewishp/usa/obama_no_change.htm
I nominate Jake for asshat of the week.
I nominate you for “banned for the month.”
Touche’, mon rabid rodent.
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It’s simple…the unwritten rule on Wall St. is that if you make people money, no matter how you do it, you will not go to jail…but if you lose people money, then anything and everything can happen to you.
There is also the Great Dell Capacitor cover up. They shipped a lot of computers with bad capacitors and tried to stiff their customers . It possibly would have bankrupted them if they had properly made a recall. Don’t buy Dell. TomsHardware.com has all the info you need about Intel vs. AMD.
I just bought a Dell Latitude a month ago, Intel Core duo blah blah…for sure I’m not happy the dang thang is soft plastic instead of more metallic like Latitudes a few years back…pissed…
Great blog, I’m pretty jealous tbh!!