Dell Accused of Inflating Profits by $1B

On the same day that founder Michael Dell returned as CEO of his namesake firm, a class-action lawsuit was filed claiming Dell (Nasdaq: DELL) had used rebates from its main business supplier Intel (Nasdaq: INTC) of about US$1 billion to inflate its profits.

The suit was filed in the U.S. District Court in Austin, Texas. Dell has stated that it has done nothing wrong and the rebates are normal business practices.

A Common Practice

That could well be true, George Gowen III, a securities litigator with Cozen O'Connor, told the E-Commerce Times. Rebates are a common business practice, he said.

However, the crux is how Dell accounted for them.

"It could be argued that Dell should have used them to reduce costs instead of booking them as revenues, if that is what had happened," Gowen noted.

Then there is the matter of whether the rebates are legal or not, he continued. Several industries -- such as government contracting and healthcare -- have anti-rebate statutes, and some practices that can touch upon a rebate transaction can be illegal.

Deceiving Shareholders

Dell received the rebates for only using Intel chips instead of competing products from Advanced Micro Devices (NYSE: AMD), according to the lawsuit, and the result was a false portrayal of the company's financial health to shareholders.

This suit follows earlier legal action filed in the same court where Dell hid accounting and product quality issues -- malfunctioning laptop batteries that were eventually recalled -- as well as a Securities and Exchange Commission investigation from shareholders.

Disclosure Is Key

Nevertheless, the court system will decide whether these charges are accurate. In general, however, it is always better to err on the side of disclosure, John T. Cox III, a partner at Lynn Tillotson & Pinker, told the E-Commerce Times.

"Despite the technicalities of current law, conventional wisdom -- given the recent landscape of enormous corporate frauds -- requires all public companies to disclose, disclose, disclose," he commented.

"The American public, investing public and government regulators are demanding disclosure and transparency from publicly traded companies. Anything that falls short of that is going to be punished legally and in terms of stock price," Cox concluded.

Dell reassumed the reigns to his company after several quarters of lackluster earnings reports and drops in global PC shipments. CEO Kevin Rollins, who had been at the helm of the company since Dell stepped down in 2004, on Wednesday resigned.