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. ( Case: 1: 1O-cv-01245 DELL INC., MICHAEL S. DELL, KEVIN B. Assigned To: Leon, Richard J. ROLLINS, JAMES M. SCHNEIDER, LESLIE L. Assign. Date: 7/22/201.0. 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 Inc. ("Dell") from 2001 to 2006. Dell's disclosure violations, which relate primarily to Dell's receipt oflarge payments from Intel Corporation ("Intel"), fraudulently misrepresented the basis for Dell's impr~ving profitability. Dell's separate fraudulent and improper accounting during this tirrie 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 ("Du~ing"),Finance Director ofDell's Europe, Middle East, and Africa region ("EMEA") aided and abetted Dell's improper accounting. 2. From2002 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, DeWs increasing profitability was largely attributable to an unusual source offunds: payments from Intel, a microprocessor manufacturer that was one ofDell's largest vendors. During this period, Intel effectively paid Dell not to use processors manufactured by Advanced Micro Devices, Inc. ("AMD"), Intel's arch-rival. Intel's payments to Dell, which were the subject ofvarious antitnist investigations and claims, grew significantly. When measured as a percentage ofDell's operating income, these payments grew from about 10% in fiscal year 2003 ("FY03") t038%in FY06, peaking at 76% in the first quarter offiscal 2007 ("QIFY07"). While almost all ofthe Intel funds were incorporated into Dell's component costs, Dell did not disclose the existence, much less the magnitude, ofthe Intel exclusivity payments. 3. In May 2006 (Q2FY07), Dell announced that it intended to begin using AMD microprocessors in certain ofits products later that year. Intel responded by cutting its exclusivity payments. In that same quarter Dell reported a 36% drop in itsoperating income. In dollar terms, the reduction in Intel exclusivity payments was equivalent to 75% ofthe decline in DeWs operating income. Michael Dell, Rollins, and Schneider had been warned in the past that Intel would cut its funding ifDell 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 2 pricing too aggressively in the face ofslowing demand and to component costs declining lessthan expected. 4. In addition 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) ofthe Securities Act of 1933 ("Securities Act") [15 U.S.C. § 77q(a)] and Sections lOeb), 13(a), 13(b)(2)(A) and 13(b)(2)(B) ofthe Exchange Act [15 U.S.C. §§ 78j(b), 78m(a), 78m(b)(2)(A) and 78m(b)(2)(B)] and Rules 10b-5, 12b-20, 13a-l, and 13a-13 [17 C.F.R. §§ 240.10b-5, 240.12b-20, 240. 13a-l, and 240:13a-13], promulgated thereunder. Unless restrained and enjoined, Dell will in the future violate such provisions. (ii) Michael Dell violated Section 17(a)(2) and (3) ofthe Securities Act [15 U.S.C. § 77q(a)(2) and 77q(a)(3)] and Rule 13a-14 ofthe Securities Exchange Act of 1934 ("Exchang~ 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-l, and 13a-13 [17 C.F.R. §§ 240. 12b-20, 240. 13a-l, 240. 13a-13], promulgated thereunder, pursuant to Section 20(e) of the Exchange Act [15 U.S.C. § 78t(e)]. Unless restrained and enjoined, Michael Dell will in the future violate or aid and abet violations of such prOVISIOns. (iii) Rollins 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 Exchange Act [17 C.F.R. § 240.13a-14] 3 and aided and abetted Dell's violations ofSection 13(a) ofthe Exchange Act [15D.S.C. §§ . 78m(a)] illld Rules I2b-20, 13a-I, and 13a-13 [17 C.F.R. §§ 24Q.l2b-20, 240.13a-l, 240.13a-13], promulgated thereunder, pursuant to Section 20(e) ofthe Exchange Act [15 U.S.C. § 78t(e)]. Unless restrained and enjoined, Rollins will in the futUre violate or aid· and abet violations ofsuch provisions. (iv) Schneider violated Section 17(a)(2)and (3) of the Securities Act[15 U.S.C. § 77q(a)(2) and 77q(a)(3)], Section 13(b)(5) of the Exchange Act [15 U.S.C. § 78m(b)(5)] and Rules 13a-I4, 13b2-I and 13b2-2 [17 C.F.R. §§ 240.I3a-14, 240.13b2-1 and 240. 13b2-2], promulgated thereunder, and aided and abetted Dell's violations ofSections 13(a), 13(b)(2)(A) and 13(b)(2)(B) ofthe Exchange Act [15 U.S.C. §§ 78m(a), 78m(b)(2)(A) and 78m(b)(2)(B)] and Rules I2b-20, 13a-I, and 13a-13 [1 TC.F.R. §§ 240.I2b-20, 240.I3a-l, and 240.13a-13],promulgated thereunder, pursuant to Section 20(e) oftheExchange Act [15 U.S. C. § 78t(e)]. Unless restrained and enjoined, Schneider will in the future violate or aid and abet violations ofsuch provisions. (v) Jackson violated Section 13(b)(5) ofthe Exchange Act [15 U.S.C. § 78m(b)(5)] and Rules 13b2-I and 13b2-2 [17 C.F;R. §§ 240.13b2-I 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) ofthe Exchange Act [15 U.S.c. §§ 78m(a), 78m(b)(2)(A) and 78m(b)(2)(B)] and Rules 12b-20, 13a-l, and 13a-13 [17 C.F.R. §§ 240. 12b-20, 240.13a-l, and 240. 13a-13], promulgated thereunder, pursuant to Section 20(e) of the Exchange Act [15 U.S. C. § 78t(e)]. Unless restrained and enjoined, Jackson will in the future violate or aid and abet violations ofsuch provisions: 4 (vi)Dunningviolated Section 13(b)(5) ofthe 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) ofthe Exchange Act [15 U.S.C. §§78m(a), 78m(b)(2)(A)and 78m(b)(2)(B)] and Rules 12b-20, 13a-l, and 13a-13 [17 C.ER. §§240.12b-20, 240. 13a-l, and 240.13a-13]~ promulgated thereunder, pursuant to Section20(e) of the Exchange Act [15 U.S.c. § 78t(e)]. Unless restrained and enjoined, Dunning will in the future violate or aid and abet violations ofsuchprovisions. JURISDICTION AND VENUE 6. TIlls Court has jurisdiction over this action pUrsuant to Sections 20(b) and 22(a) of the Securities Act [15 UOS.C.§§ 77t(b) and 77v(a)], and Sections 21 (d), 21(e) and 27 of the Exchange Act [15 U.S.C. §§ 78u(d), 78u(e) and 78aa]. 7. TheDefendants, directly or indirectly, have made use.ofthe means and instrumentalities ofinterstate commerce, of the mails, or ofthe facilities of a national securities exchange in connection with acts, practices and courses ofbusiness alleged in this Complaint. 8. Venue is proper in this District pursuant to Section 22 ofthe 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. ("Dell") is a Fortune 100 company in the business ofproviding 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 5 based in Round Rock, Texas. Since July 2006, Dell's common stock was registered with the Commission pursuant to Section 12(b) ofthe Exchange Act and is traded on the NASDAQ Global Select Market. During the prior relevant period; Dell's common stock was registered with the Commission under Section I2(g) ofthe Exchange Act and quoted on the Nasdaq National Market System.