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Aug 30

Two former Dell finance execs settle fraud charges

Posted by Stephen Taub in settlementSecurities and Exchange Commissionsecfraudcookie jar accountingcomplianceAccounting

Stephen Taub

More problems for Dell.

The Securities and Exchange Commission settled civil charges with two former Dell finance executives for their role in the company's alleged accounting fraud.

Former chief accounting officer Robert Davis agreed to pay a penalty of $175,000, disgorgement of $19,080, and prejudgment interest of $9,078. He also agreed to a five-year suspension from appearing or practicing before the SEC as an accountant.

Former assistant controller Randall Imhoff agreed to pay a $25,000 penalty, disgorgement of $12,852 and prejudgment interest of $6,197. He agreed to a three-year suspension.

Both individuals agreed to the settlements without admitting or denying the SEC's allegations.

Last month, the SEC charged Dell with fraud for materially misstating its operating results from fiscal year 2002 to fiscal year 2005.

The regulator alleges Davis materially misrepresented Dell's financial results by using various "cookie jar" reserves to cover shortfalls in operating results and engaged in other reserve manipulations from 2002 to 2005. The actions made it appear that Dell was consistently meeting Wall Street earnings targets through the company's management and operations.

The SEC also alleges that the reserve manipulations allowed Dell to materially misstate its operating expenses as a percentage of revenue, an important financial metric that Dell highlighted to investors. The manipulations also enabled Dell to materially misstate the operating income of its Europe, Middle East and Africa (EMEA) segment.

The SEC alleges that Imhoff aided and abetted Dell's improper use of "cookie jar" reserves and other reserve manipulations to cover shortfalls in Dell's operating results from 2002 to 2004. The regulator claims that Imhoff, acting under his supervisors' general direction, planned and issued instructions regarding Dell's build-up and use of "cookie jar" reserves.

In July, the SEC charged Dell 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 alleged that Dell did not disclose to investors large exclusivity payments the company received from Intel not to use central processing units manufactured by Intel's main rival. 

The regulator said these payments, rather than the company's management and operations 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, according to the SEC.

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 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.

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