Dell has received a class action lawsuit from investors
accusing the company of improper accounting in its longtime partnership with chipmaker
Intel Corp., reports the Wall
Street Journal. Specifically, the lawsuit alleges that Dell's profits
were inflated by hundreds of millions of dollars in “secret and likely illegal”
kickbacks by Intel to ensure the exclusive use of its chips inside Dell
computers. The lawsuit also accuses Dell of misleading investors about “serious
accounting, quality and customer-service problems.”
The 251-page complaint filed on Wednesday coincided
with the surprise resignation
of Kevin Rollins -- who at the time held the title of CEO at Dell. Rollins, along
with now CEO Michael Dell, were both named as participants in the suit. The
complaint states that 15 senior people at Dell were privy to the information
about the alleged secret agreement with Intel.
According to the lawsuit, Dell was receiving as much as $1
billion a year, or approximately $250 million a quarter, from Intel for guaranteed exclusivity. The money is said to have
been spread unevenly throughout the four quarters to reduce Dell’s reported
costs of goods sold. The complaint alleges that payments were made by Intel
near the end of Dell’s fiscal quarters, having a “direct, material impact” on reported
operating profits or profit margins.
“The numbers of more than a $1 billion (annually) of what I
would call marketing incentives (paid by Intel to Dell) is probably right on
track,” said ThinkEquity Partners analyst Eric Ross to Reuters.
“They don't disclose that at all, either of them, so it's hard to really dig it
out.”
“The low cost advantage and high margins that Dell was
enjoying ... may not be the brilliance of the direct (marketing) model,” said
Ross. “It may have been the brilliance of having a single supplier that pays
you.”
Dell's exclusive relationship with Intel ended last year when
it announced that it would be using AMD Opteron chips in
its servers. Since then, AMD chips have made their way into Dell’s lineup
of desktops and notebooks.
Although Dell’s foray into AMD chips appears to be a recent
one, the complaint believes that the computer maker had been secretly designing
systems around AMD processors. Those designs would eventually be scrapped as
Dell and Intel negotiated over private terms. For obvious reasons, Intel and
Dell did their best to keep their agreements secret over fears that government
bodies would take antitrust actions against the chip giant, claims the
complaint.
A Dell spokesman said the company does not comment on
pending litigation and that the company has not seen the lawsuit.
Intel refused to comment on specific points raised by the
lawsuit, but Chuck Mulloy, an Intel spokesman, did offer a brief blanket
statement: “We've conducted a preliminary review of this claim. At first glance
it appears that some of the allegations ... appear to have been completely made
up,” Mulloy said. “We deny the plaintiffs' allegations and plan to move quickly
to defend ourselves,” he said.
Intel also said that some of the complaints brought up in
the lawsuit appear to rehash some of the monopoly allegations
brought upon it by AMD in 2005.