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July 22, 2010 5:28 PM

Skadden, Wachtell on $100M Dell Settlement

Posted by Zach Lowe

With a pile of evidence showing Dell used some pretty nakedly fraudulent accounting, the company and its founder turned to Skadden, Arps, Slate, Meagher & Flom and Wachtell, Lipton, Rosen & Katz to talk settlement with federal regulators, according to lawyers who worked on the matter. Those talks bore fruit today, to the degree that you can call more than $100 million in fines "fruit" for the computing giant, according to Bloomberg, The Wall Street Journal and this statement from the SEC.

The company, represented by David Zornow and Charles Walker of Skadden, did not admit or deny wrongdoing in the case. The case, as you probably know, centers around payments Intel made to Dell in order to ensure that Dell exclusively used Intel's processors in Dell computers. The payments ballooned to as much as $720 million in a single quarter, and Dell needed them badly in order to meet earnings estimates from roughly 2001 through 2006, according to the SEC's complaint, which you can read here. The SEC alleged that Dell misled the market by failing to disclose the importance of the Intel payments to its balance sheet. When Intel stopped the payments in 2007, Dell's earnings suffered badly, but the company again failed to disclose the real reason behind its problems in public statements and regulatory filings, the SEC says. 

The complaint is a great read for its portrayal of a tug-of-war between two companies struggling for leverage and profits. Dell believed it could wring more money from Intel by threatening to buy processors from Intel's chief rival, Advanced Micro Devices, and they successfully convinced Intel to jack up its payments in 2006, the complaint says. (Intel called the payment plan "Mother of All Payments," or the MOAP plan, at one point.) But Dell executives also expressed fear over the course of several years that it would suffer hugely if it began using AMD chips and Intel reduced or cut off payments to Dell in retaliation. As early as 2003, Michael Dell admitted to AMD officials that he would have preferred to use AMD's processors but that Dell could not do so at that point because it "could not bridge the loss" of the Intel payments. 

Dell (the company, that is) agreed to pay $100 million in fines and submit to various heightened disclosure requirements, including the retention of an independent disclosure consultant. Michael Dell and Kevin Rollins, a former Dell CEO, both agreed to pay $4 million to settle charges against them. Other Dell executives agreed to pay lesser amounts.

Zornow and John Savarese, the lead Wachtell partner representing Michael Dell, declined to comment on the matter. 

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