UNITED STATES DISTRICT COURT DISTRICT OF COLUMBIA SECURITIES AND EXCHANGE COMMISSION, _| Civil Action No. 100 F Street, N.E. Washington, D.C. 20549 Plaintiff, COMPLAINT vs. f Case: 1:10-cv-01245 DELL INC., MICHAEL 8. DELL, KEVIN B. Assigned To : Leon, Richard J ROLLINS, JAMES M. SCHNEIDER, LESLIE L. Assign. Date : 7/22/2010 JACKSON, NICHOLAS A. R. DUNNING Description: General Civil Defendants. Plaintiff Securities and Exchange Commission (the “Commission” or “SEC”) alleges as follows: SUMMARY 1 ‘The SEC brings this action for various disclosure and accounting violations involving Dell Ine. (“Dell”) from 2001 to 2006. Dell's disclosure violations, which relate primarily to Dell’s receipt of large payments from Intel Corporation (“Intel”), fraudulently misrepresented the basis for Dell’s improving profitability. Dell's separate fraudulent and improper accounting during this time period wrongfully made it appear that Dell was consistently meeting Wall Street earnings targets and reducing its operating expenses through the company’s ‘management and operations. Dell’s Intel-related disclosure violations involved the conduct of senior executives, including Michael Dell, Chairman and, at various times, Chief Executive Officer (“CEO”); Dell’s former CEO Kevin Rollins (“Rollins”); and Dell's former Chief Financial Officer (“CFO”) James Schneider (“Schneider”). Dell separately committed the accounting violations through the conduct of defendant Schneider and other senior former accounting executives, Defendants Leslie Jackson (“Jackson”), Assistant Corporate Controller, and NicholasDunning (“Dunning”), Finance Director of Dell’s Europe, Middle East, and Africa region (“EMEA”) aided and abetted Dell’s improper accounting. 2. From 2002 to 2006, Dell failed to disclose the significant benefits it received from large payments from Intel and materially misrepresented the basis for its improving profitability. In Dell’s Forms 10-Q and 10-K for this period, and in other public statements, Michael Dell, Rollins, Schneider and others repeatedly cited certain “cost reduction initiatives” and.“declining component costs” as the bases for Dell’s increasing profit margins. In fact, Dell’s increasing profitability was largely attributable to an unusual source of funds: payments from Intel, a microprocessor manufacturer that was one of Dell’s largest vendors. During this period, Intel effectively paid Dell not to use processors manufactured by Advanced Micro Devices, Inc. (CAMD”), Intel’s arch-rival. Intel’s payments to Dell, which were the subject of various antitrust, investigations and claims, grew significantly. When measured as a percentage of Dell’s operating, income, these payments grew from about 10% in fiscal year 2003 (“FY03”) to 38% in FY06, peaking at 76% in the first quarter of fiscal 2007 (“QIFY07”). While almost all of the Intel funds were incorporated into Dell’s component costs, Dell did not disclose the existence, much less the magnitude, of the Intel exclusivity payments. 3. In May 2006 (Q2FY07), Dell announced that it intended to begin using AMD microprocessors in certain of its products later that year. Intel responded by cutting its exclusivity payments. In that same quarter Dell reported a 36% drop in its operating income. In dollar terms, the reduction in intel exclusivity payments was equivalent to 75% of the decline in Dell's operating income. Michael Dell, Rollins, and Schneider had been warned in the past that Intel would cut its funding if Dell added AMD as a vendor. Nevertheless, in the Q2FY07 earnings call, Dell told investors that the sharp drop in the company’s operating results was attributable to Dellpricing too aggressively in the face of slowing demand and to component costs declining less than expected. 4, Inaddition to Dell’s disclosure violations, Dell’s most senior former accounting personnel engaged in a wide-ranging accounting fraud by maintaining a series of “cookie jar” reserves that it used to cover shortfalls in operating results from FY02 to FY05. ‘ 5. Defendants, by engaging in the conduct alleged as to each below, violated the following: (i) Dell violated Section 17(a) of the Securities Act of 1933 (“Securities Act”) [15 USS.C. § 774(a)] and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange ‘Act [15 U.S.C. §§ 78)(b), 78m(a), 78m(b)(2)(A) and 78m(b)(2)(B)] and Rules 10b-5, 12b-20, 13a-1, and 13a-13 [17 C.F.R. §§ 240.10b-S, 240.12b-20, 240.13a-1, and 240.13a-13], promulgated thereunder. Unless restrained and enjoined, Dell will in the future violate such provisions. (i) Michael Dell violated Section 17(a)(2) and (3) of the Securities Act (15 U.S.C. § 77q(a)(2) and 77q(a)(3)] and Rule 13a-14 of the Securities Exchange Act of 1934 (“Exchange Act”) [17 C.F.R. § 240.13a-14] and aided and abetted Dell’s violations of Section 13(a) of the Exchange Act [15 U.S.C. §§ 78m(a)] and Rules 12b-20, 13a-1, and 13a-13 [17 CFR. §§ 240.12b-20, 240.13a-1, 240.13a-13], promulgated thereunder, pursuant to Section 20(e) of the Exchange Act [15 U.S.C. § 78((¢)]. Unless restrained and enjoined, Michael Dell will in the future violate or aid and abet violations of such provisions, (ii) Rollins violated Section 17(a)(2) and (3) of the Securities Act [15 U.S.C. § ‘T7q(a)(2) and 77q(ay(3)] and Rule 13a-14 of the Exchange Act [17 C.F.R. § 240.13a-14]and aided and abetted Dell’s violations of Section 13(a) of the Exchange Act (15 U. 78m(a)] and Rules 12b-20, 134-1, and 13a-13 [17 CFR. §§ 240.12b-20, 240.13a-1, 240.13a-13], promulgated thereunder, pursuant to Section 20(e) of the Exchange Act [15 U.S.C. § 78i(¢)]. Unless restrained and enjoined, Rollins will in the futtire violate or aid and abet violations of such provisions. (iv) Schneider violated Section 17(a)(2) and (3) of the Securities Act [15 U.S.C. § Tiq(a)(2) and 774(a)(3)], Section 13(b)(5) of the Exchange Act [15 U.S.C. § 78m(b)(5)] and Rules 134-14, 13b2-1 and 1362-2 [17 CER. §§ 240.13a-14, 240.1362-1 and 240.13b2-2], promulgated thereunder, and aided and abetted Dell’s violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act [15 U.S.C. §§ 78m(a), 78m(b)(2)(A) and 78m(b)(2\(B)] and Rules 12b-20, 13a-1, and 132-13 [17 CER. §§ 240.12b-20, 240.13a-1, and 240.13a-13], promulgated thereunder, pursuant to Section 20(e) of the Exchange Act [15 U.S. C. § 781(e)]. Unless restrained and enjoined, Schneider will in the future violate or aid and abet violations of such provisions. (v) Jackson violated Section 13(b)(5) of the Exchange Act [15 U.S.C. § 78m(b)(5)] and Rules 1362-1 and 13b2-2 [17 C.F-R. §§ 240.13b2-1 and 240.1362-2], promulgated thereunder, and aided and abetted Dell’s violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act [15 U.S.C. §§ 78m(a), 78m(b)(2(A) and 78m(b)(2)(B)] and Rules 126-20, 13a-1, and 13a-13 [17 CFR. §§ 240.12b-20, 240.13a-1, and 240.13a-13], promulgated thereunder, pursuant to Section 20(e) of the Exchange Act [15 US. C. § 78i(e)]. Unless restrained and enjoined, Jackson will in the future violate or aid and abet violations of such provisions(vi)Dunning violated Section 13(b)(5) of the Exchange Act [15 U.S.C. §78m(b)(5)] and Rule 13b2-1 [17 C.F.R. §§ 240.13b2-1], promulgated thereunder, and aided and abetted Dell’s violations of Sections 13(a), 13(b)(2)(A) and 13(b\(2)(B) of the Exchange ‘Act [15 U.S.C. §§78m(a), 78m(b)(2)(A) and 78m(b)(2)(B)] and Rules 12b-20, 13a-t, and 13a-13 [17 CER. §§240.12b-20, 240.13a-1, and 240.13a-13], promulgated thereunder, pursuant to Section 20(e) of the Exchange Act [15 U.S.C. § 78t(¢)]. Unless restrained and enjoined, Dunning will in the future violate or aid and abet violations of such provisions. JURISDICTION AND VENUE 6. This Court has jurisdiction over this action pursuant to Sections 20(b) and 22(a) of the Securities Act [15 U.S.C. §§ 77t(b) and 77¥(a)], and Sections 21(d), 21(e) and 27 of the Exchange Act [15 U.S.C. §§ 78u(d), 78u(e) and 78aa]. 7. The Defendants, directly or indirectly, have made use of the means and instrumentalities of interstate commerce, of the mails, or of the facilities of a national securities exchange in connection with acts, practices and courses of business alleged in this Complaint. 8. Venue is proper in this District pursuant to Section 22 of the Securities Act [15 U.S.C. § 77v] and Section 27 of the Exchange Act [15 U.S.C. § 78aa] because, among other reasons, most of the conduct constituting the violations alleged herein occurred within this, District. DEFENDANTS 9. Dell Inc. (“Delt”) is a Fortune 100 company in the business of providing electronic products, including mobility products, desktop PCs, peripherals, servers, networking equipment, and storage. Dell also offers services, including software, infrastructure technology, consulting and applications, and business process services, Dell was incorporated in Delaware in 1984 and is