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Dell is accused of secretly receiving illegal rebate kickback payments from Intel in return for an exclusive deal

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.

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Wow
By lazyinjin on 2/2/2007 3:42:41 PM , Rating: 5
This sounds like a new rock for AMD to throw against the Intel Goliath in its lawsuit.

quote:
The money is said to have been spread unevenly throughout the four quarters to reduce Dell’s reported costs of goods sold.


How do you hide a billion dollars of income and get away with it!?!?! This along with the CEO Rollins stepping down smells of great conspiracy that seems to stem from the absolute top of each company.




RE: Wow
By TomZ on 2/2/07, Rating: 0
RE: Wow
By Pythias on 2/2/07, Rating: -1
RE: Wow
By encryptkeeper on 2/2/2007 4:28:02 PM , Rating: 3
rebates have to be reported for them to be legal. it sounds like these weren't reported in the account balances, therefore, they would be illegal. Imagine you owned a publicly traded company (like Dell or Intel) and as part of the information you MUST give your investors, you HAVE to report operating costs. If those are being padded by rebates from your supplier, you have to adjust your accounting sheets to show those adjusted costs for your bottom line to show your investors, the IRS etc. If not, it's illegal.


RE: Wow
By Pythias on 2/2/07, Rating: 0
RE: Wow
By encryptkeeper on 2/2/2007 4:37:23 PM , Rating: 3
In layman's terms Dell's investors are saying that Dell did not adjust it's operating costs for these rebates (the rebates themselves may have been legal, but if this lawsuit holds, Dell and Intel are both likely in trouble for bribery. Gifts of money to exclusively use one product without telling investors=bribery). The real question is where did this supposed money go? If they find that out, Dell won't have a prayer.


RE: Wow
By Pythias on 2/2/07, Rating: 0
RE: Wow
By alifbaa on 2/2/2007 5:38:42 PM , Rating: 4
It's not a bribe, it's failing to account for things properly. If you call it a rebate, then Intel would be liable for antitrust litigation. If you bury it in your cost structure, Intel's problem is solved while Dell gets to point to their higher profit margins as being a good reason to for investors to buy their stock, buy their corporate bonds, give them loans, etc. It is also very likely that Dell got a better deal by keeping things quiet. Essentially, there are generally accepted accounting rules that the plaintiffs are alleging the company violated. It is not a criminal matter, just a civil one.

Legal or not, this story really isn't much of a surprise. I remember a year ago when Dell using AMD was just a rumor there was a Dailytech article postulating that Dell was getting an extra good deal on its Intel chips in exchange for an exclusivity agreement. When you think about it, it makes sense that there would be a special deal given that, at the time AMD's chips were better performers in just about every respect and cost about 2/3 the price of Intel's offerings. Also, the accounting rules began getting enforced a lot more stringently in the last year or two, which likely made Intel and Dell feel a little skittish about continuing their involvement in the deal.


RE: Wow
By TomZ on 2/2/07, Rating: 0
RE: Wow
By Hawkido on 2/2/2007 5:57:35 PM , Rating: 4
It would be Anti-Trust. The terms of the rebate require that the vendor shut out their competition. "No big deal" you say, but Dell investors wanted AMD chips to be sold, however Intel also retains the right to remove Bulk purchase discounts from anyone who sells more than 20% AMD chips. Which Dell would not be able to compete with other brands. Dell, instead of being a victem of Intel's plan went along with them in order to recieve larger discounts, the fact that they hid the procedes with shady accounting is proof of their guilt.

The old maxim is key here: "If they try to hide the evidence before someone suspects them, then they knew it was wrong before they began."


RE: Wow
By smitty3268 on 2/2/2007 6:02:00 PM , Rating: 3
Liable is the wrong word there. What he means is that AMD would be using this as evidence in their court case - if Intel is declared a monopoly, then that kind of rebate is illegal and they would be held liable. Of course, I'm pretty sure it's perfectly legal if the court rules that Intel is not a monopoly.


RE: Wow
By Targon on 2/3/2007 12:27:47 AM , Rating: 2
The issue also goes to how far back this "rebate" program extends. It has only been in the past 2.5-3 years that AMD has gotten enough market share to question if Intel is a monopoly.

If, as many believe, this rebate program were in place 5 years ago, then it would clearly show that Intel was using illegal tactics to maintain their monopoly status(by shutting out competition).

So, not only would it be a huge issue in terms of accounting rules, but it would feed into the AMD vs. Intel legal battle.

On that topic, picture how things might have been if Dell had sold AMD based systems back in 2000 or 2001. AMD might be at a 35 percent market share rather than the 25ish percent they are at today. Some people may point to the number of AMD based machines Dell is currently selling, but when the Athlon 64 was kicking the Pentium 4's butt, the number of AMD based machines Dell sold would probably have been MUCH higher. AMD even had some problems getting other companies to make AMD based machines, so a Dell deal would have been the tipping point for many people.

It's the snowball effect where things start small, but grow and grow. The sooner a company starts to sell an AMD based machine, the greater the chance that competitors would see that, and want to offer a similar product.

So, how far back does all of this go?


RE: Wow
By Khato on 2/3/07, Rating: 0
RE: Wow
By Targon on 2/4/2007 4:18:06 AM , Rating: 2
Which is why I keep saying that it's not just a function of what has been done, but when it happened. AMD has managed to gain market share, but most of the gains were due to companies like HP which you may know, beat Dell in terms of sales several quarters in 2006, but have been selling AMD based machines both retail and direct for a while now.

As I said, it's the snowball effect I was talking about. First one or two big companies get on board, then another, then another. Before too long, AMD has enough market share to have people questioning WHY a company would be Intel only.

So, how long ago did Dell first WANT to sell AMD based systems but was held back by the Intel "under the table" rebate? If Dell was ready to back in 2000 or 2001, but they held off until 2006, that seriously delayed the snowball getting BIG by several years.


RE: Wow
By OrSin on 2/5/2007 1:03:28 PM , Rating: 3
It seems people are not explain this si easy to understand terms.

First it doesn't matter if Intel is a monopoly. They committed illegal business pratices. It is not illegal to offer a rebate, it illegal to base the size of the rebate on not using someone else product.
Example: I can pay Bestbuy $1,000,000 and buy up all of their MP3 player shelf space. I can't pay them the same money not to let any other M3P players have shelf space.
The diffenernce is you are actively keeping people out of the market.

For the dell law suit it very different. They are say I got stock thinking the company is running a profitable business.
But in reallty they are only making a profit by hiding how they got thier money.

Real world example (I worked for this company)- They was in health care and they made a 44,000,000 profit when all thier competors was lossing money. So everyone thought they was better company and had a better business plan. Thier stocks shot up becuase more people wanted them. In reality they made 200,000,000 in a single stock trade (this is still begin investested), but never told the investors how the money was made. So the company was really losing crazy money but I (as an investor) thought it was good company. Dell refruaded thier investor by not disclosing how they made some of their profits.


RE: Wow
By Furen on 2/2/2007 7:19:56 PM , Rating: 2
I wouldn't say Intel is liable for anything unless Intel itself encouraged Dell's practices (if they're even true). This could be used in court against Intel since it does seem a bit shady but that's still another case for another day.

The big thing here is whether or not Dell's management violated its fiduciary duty to its owners. Everyone out there believed that Dell had significantly-lower costs due to its effective management, many people, I'm sure, invested in Dell because of this. If it's lower cost of goods sold was just due to the fact that Intel gave it huge kickbacks then management had little to do with it besides just receiving the check.


RE: Wow
By dagamer34 on 2/2/2007 10:00:09 PM , Rating: 2
You don't pay $1 billion to another company and have BOTH companies "hide" the fact. Obviously something fishy went on.