October 14, 2010, 1:24 PM — When a company is worth $27.7 billion and generates annual revenue of $60 billion, how is a $100 million settlement any kind of meaningful punishment or deterrent?
But that's what Dell Inc. managed to pull off in negotiations with the Securities and Exchange Commission over charges that, from 2001 to 2006, the computer manufacturer used payments from chip maker Intel to artificially inflate profits. The point of the alleged exercise was to meet Wall Street estimates and thus maintain favorable analyst ratings and boost Dell's stock price.
Without the fancy accounting, the SEC says, Dell would have missed estimates in every single quarter, which is something Wall Street tends not to receive favorably.
U.S. District Court Judge Richard Leon on Wednesday approved the settlement following promises from founder and CEO Michael Dell in a hearing that the company would implement reforms to prevent the kind of fraud he won't admit it perpetrated in the first place.
The judge's decision is being received favorably in the stock market, with Dell shares (NASDAQ: DELL) up 13 cents, or 0.9 percent, to 14.26 in mid-day trading Thursday. Investors no doubt are relieved to see Dell's legal woes behind it, plus they must be comforted in the knowledge that the $100 million easily can be offset with a few thousand layoffs.
Michael Dell himself, by the way, hardly emerged unscathed. As part of the settlement, he was slapped with a $4 million fine. Let's see, Dell's total compensation from 2000 to 2009 was $453.8 million, including stock option exercises, according to the Wall Street Journal. And Forbes's latest list of 400 richest Americans shows that Dell is worth $14 billion. In other words, the fine he's paying is exactly 0.0286 percent of his net worth. That'll really put a crimp in his lifestyle! Looks like Ramen noodles in the Dell household for awhile.
In an superb analysis of this case at Forbes.com, University of Virginia business professor Edward D. Hess writes, "Without meaningful downsides for corporate executives, it is difficult to imagine that we won't see another scenario like Dell in the future."
Now there's an understatement for you. Don't worry, Professor Hess. When that does happen, the executives will be appropriately contrite about what they won't admit they did. And then everybody will feel better.