Dell adjusts earnings by $100 million for Intel-related SEC settlement

Dell said today that it has recorded a $100 million liability in its first quarter 2011 earnings to establish a reserve for a potential settlement of a SEC investigation that dates back to 2005.

The company has been the subject of an investigation over alleged violations of federal securities law, including anti-fraud provisions related to accounting and financial reporting. The investigation also involves negligence-based fraud charges, as well as other non-fraud charges, relating to "Dell's disclosures and alleged omissions prior to Fiscal 2008 regarding certain aspects of its commercial relationship with Intel Corp.," according to a company statement.

In addition, Chairman and CEO Michael Dell recently began discussions with the SEC related to his involvement with the charges, the company said. A settlement would not include any bar against Michael Dell serving as chairman and CEO. The settlement also would be made without admission or denial of the SEC's allegations.

In its statement, the company explained why the first quarter results are being revised:

Because this latest development in Dell’s discussions with the SEC staff occurred before Dell filed its Quarterly Report on Form 10-Q for its first quarter of Fiscal 2011, the company revised its previously announced financial results and recorded a liability for the potential settlement involving the company. The Form 10-Q report for the company’s first fiscal quarter was filed today.

The company said the first quarter net income on a GAAP basis has been reduced by $100 million, or 5 cents per share, but that the results on a non-GAAP basis did not change.

Here's the exact language from the 10-Q report filed today:

In August 2005, the SEC initiated an inquiry into certain of Dell’s accounting and financial reporting matters and requested that Dell provide certain documents. The SEC expanded that inquiry in June 2006 and entered a formal order of investigation in October 2006. In August 2006, because of potential issues identified in the course of responding to the SEC’s requests for information, Dell’s Audit Committee, on the recommendation of management and in consultation with PricewaterhouseCoopers LLP, Dell’s independent registered public accounting firm, initiated an independent investigation, which was completed in the third quarter of Fiscal 2008. During the first quarter of Fiscal 2011, Dell learned that, in connection with the SEC investigation, several former Dell employees received “Wells Notices” from the SEC staff, which indicate that the SEC staff has made a preliminary decision to recommend that the SEC commence a civil or administrative action against the recipients of the notices. In connection with ongoing settlement discussions between the company and the SEC staff, the parties have discussed a settlement framework. This settlement would involve a civil injunctive action against the company for alleged violations of certain federal securities laws, including the antifraud provisions of the federal securities laws, relating to certain accounting and financial reporting matters. The settlement would also include non-scienter (negligence) based fraud charges, as well as other non-fraud based charges, relating to the company’s disclosures and alleged omissions prior to Fiscal 2008 regarding certain aspects of its commercial relationship with Intel Corp. Dell has recorded a liability as of April 30, 2010 for a potential settlement of $100 million covering all of these matters. In addition, subsequent to the close of the first quarter of Fiscal 2011, the SEC staff and counsel for Michael Dell, Chairman and Chief Executive Officer of Dell, commenced discussion of a settlement framework. This settlement would include a civil action for alleged violations of the non-scienter (negligence) based fraud provisions of the federal securities laws, as well as other non-fraud based provisions of the federal securities laws, with respect to the company’s disclosures and alleged omissions prior to Fiscal 2008 regarding certain aspects of the company’s commercial relationship with Intel Corp. With respect to Mr. Dell, the remedies under such a settlement would include injunctive and monetary relief, but would not include any bar against his service as an officer and director of a public company. The independent directors of the Board of Directors of Dell have determined that, in the context of such a settlement, Mr. Dell will continue to serve as Chairman and CEO of the company. Discussions concerning the potential settlements involving the company and Mr. Dell are ongoing. Any settlement would be made without admitting or denying the Commission’s allegations. No assurance can be given as to when any settlement might occur or as to the final terms and conditions of any settlement. Any settlement recommended by the SEC staff would be subject to approval by the Commission.