Dell quietly settles shareholder suit…

December 4, 2009

You wouldn’t have picked this up in Dell’s (DELL) earnings announcement a few weeks ago or in the follow-up conference call, but it was buried in the 10-Q that Dell filed yesterday afternoon: Dell has agreed to settle a long-standing shareholder lawsuit over accounting issues and insider trading by executives to the tune of $40 million. Here’s the key sentence from the filing, which is a new disclosure:

On November 20, 2009, the parties to the appeal entered into a written settlement agreement whereby Dell would pay $40 million to the proposed class and the plaintiff would dismiss the pending litigation.

What’s interesting here is that judging from Dell’s earlier disclosures, Dell was winning this one. So why did they agree to pay $40 million? Granted, $40 million to a company of Dell’s size — revenues were $12.9 billion during the third quarter and earnings were $337 million — may not necessarily be material (hence the reason why the disclosure was quietly buried in the Q), but it’s still a chunk of change.

The lawsuit dates back to late 2006 and early 2007 when four groups of shareholders claimed that Dell and certain of its former executives made misleading statements or disclosures about the company’s financial condition in the early part of this decade. At the time, Dell stock was trading in the high 20s and 30s — a far cry from today’s price of under $14. There’s a good background piece on the lawsuit in this article, which notes that the plaintiffs’ lawsuit was very complicated and included 241 pages of allegations. Here’s a key snip from that article in betanews:

So the suit claims that Dell’s own executives, including Michael Dell and Kevin Rollins, tried to personally capitalize on their own company’s downturn by propping up their corporate reports, including to the SEC, with false information. This led to a rise in stock value, enabling them to sell off tremendous amounts of their shares prior to the release of any bad news, which the company put off as long as possible. Many executives, the suit details, sold off between 90% and 100% of their personal stock holdings, with Rollins allegedly selling 98.6% of his personal holdings in Dell Computer – figures such as this were not attributed and have not been verified.

Still, given that the state court dismissed all of the plaintiff’s claims with prejudice last year, something just isn’t making sense here. The only answer is that the appeal — heard by the Fifth Circuit Court on September 1 — had to have gone really really poorly.

UPDATE 12/8: The AmLaw Daily provides some additional details on this settlement here.

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