Question about Dell’s settlement timeline …

July 23, 2010

Now that Dell (company and founder alike) has settled with the Securities and Exchange Commission, no doubt investors and management will forge ahead. But we want to take one moment to look back — not to the sordid accounting gimmicks and misleading disclosure laid out in the SEC’s case, but rather to Dell’s disclosures about the case.

The fact of the investigation had been known for some time before events began snowballing this spring. In its filings, Dell typically dispatched the inquiry with a chunky paragraph calling it a formal investigation into “certain of Dell’s accounting and financial reporting matters,” accompanied by an internal investigation the results of which weren’t explicitly detailed.

Then Dell slipped a cryptic disclosure into an 8-K it filed with the SEC after 5 p.m. on April 1 — the Thursday before the three-day Good Friday market weekend. As subscribers to our FootnotedPro service know (we issued a report that afternoon), it read in relevant part:

“Dell has learned that, in connection with the resulting SEC investigation, several former employees of Dell have been contacted by the SEC staff and been provided with —Wells Notices. … It is possible that other individuals have received or will receive such notices.”

Wells notices, of course, warn recipients that the SEC plans to sue, unless they can be convinced otherwise.

But then all was quiet on the disclosure front until the company’s quarterly report on June 10, when Dell laid it all out: Not only was the company itself negotiating a settlement of as much as $100 million (exactly what it turned out to be), but founder and CEO Michael Dell was negotiating to settle “alleged violations of the non-scienter (negligence) based fraud provisions of the federal securities laws,” and more. As if to reassure investors, the company added that a settlement “would not include any bar against his service as an officer and director of a public company,” and that the board would want him to stay chairman and CEO.

All well and good, but it prompts a discomfiting question: Just when did the company know that Michael Dell might be in hot water? And was there ever any question about whether he could continue to serve at the company’s helm?

These aren’t simply idle musings. We think it’s fair to say that Michael Dell represents more to the company than a name on the boxes it ships to customers. This is clear from reading about his role in the events detailed in the SEC’s lawsuit, as well as from his much-heralded return to the helm of the company in 2007, at the board’s request. (He had stepped aside in 2004, but remained chairman.) Nor is the $4 million that Michael Dell must pay trivial in the circumstances, as Floyd Norris argues on his blog.

In other words, Michael Dell’s fate in this case seems to have been pretty important to Dell and its shareholders. And yet, even a fairly dedicated reader of Dell’s filings would have had little clue that he was in the SEC’s cross-hairs until the 10-Q was filed. This despite the fact that the company’s own internal investigation was complete in fiscal 2008, and that Dell characterized discussions with the SEC as “ongoing” at least as far back as mid-March.

We’ve called Dell for a comment, but didn’t immediately hear back. We’ll update the post once we do.

All told, Dell’s shares are still down 10% since that cryptic after-hours disclosure on April 1, trailing the Nasdaq by a good 4.5 points. Would investors have been better off knowing more, sooner, even though there was more uncertainty about the outcome? It’s impossible to say for sure, of course, but as the matter at the heart of the SEC’s case suggests, we tend to think more disclosure is better.

Image source: D Sharon Pruitt via Flickr.

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