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.