So That's How Dell Did It?

One billion dollars is one heck of a bribe. But if a class-action lawsuit filed by the firm of legendary shareholder plaintiff's lawyer Bill Lerach is accurate, that's what Intel (Nasdaq: INTC  ) routinely paid Dell (Nasdaq: DELL  ) to keep away from the chips of Advanced Micro Devices (NYSE: AMD  ) .

The 251-page complaint alleges that Dell misrepresented the state of its business by, among other things, failing to properly account for and disclose kickbacks from Intel. From the filing:

"Dell's statements regarding its ability to quickly benefit financially from declines in component part prices was false and misleading. The true reason for Dell's reported superior operating margins was, in large part, the hundreds of millions of dollars of secret and likely illegal rebate/kickback payments." [Emphasis mine.]

While no proof is offered, the allegations are remarkably detailed. Once again from the filing:

"There were meetings to discuss how much Dell would receive in [rebates], how these rebates would be spread out and how Dell would account for them. These meetings typically took place behind 'closed doors' at the top executive level. Only about 15 people were involved in handling the Intel rebates, including [Michael] Dell and [former CEO Kevin] Rollins. Intel's co-founder, former Chairman and CEO, Andy Grove, was also involved. One reason these meetings were so exclusive was because there were questions about how the rebates affected fair trade."

I called Lerach's firm to ask how it planned to substantiate its accusations, but the attorney working the case was unavailable. Intel, meanwhile, already told The Wall Street Journal that the allegations appear to be made up, which leaves us investors to draw our own conclusions.

For me, the tale is unsurprising. Class-action filings are frequently bombastic. What's more, no one who's followed the PC industry for any amount of time can say they're surprised Intel was supplying money to Dell. Intel has long provided marketing dollars to those who sell products with its chips -- hence the famous "Intel Inside" campaign. Moreover, the filings allegations of kickbacks seem consistent with a 2005 ruling by the Japanese Fair Trade Commission that Intel had made payments to keep PC makers from using rivals' chips.

But did the chipmaker also offer kickbacks? The suit claims Intel's payments were applied against cost of goods sold. If true, then Dell's margins would take a hit by selling AMD products, which they have.

So, the pattern fits, even if proof is thus far lacking.

What should investors do? First, don't panic and remember that all-star stock pickers, including our own Philip Durell of Motley Fool Inside Value, still have faith that there's money to be made in the stock.

Second, keep your eye on the financials. If Dell's margins continue to erode, you may yet have reason to sell. Till then, Dell, for all its faults, remains a market leader whose top executives are now accused of malfeasance. Whether they're actually guilty is anyone's guess.

Boot up your portfolio with related Foolishness:

Dell is a selection of both the Inside Value and Stock Advisor newsletter services. Try either of them free for 30 day -- there's no obligation to subscribe.

Fool contributor Tim Beyers, who is ranked 1,648 out of more than 22,700 in our Motley Fool CAPS investor intelligence database, wishes someone would pay him $1 billion to not sell AMD. Any takers? Tim didn't own shares in any of the companies mentioned in this article at the time of publication. All of his portfolio holdings can be found at Tim's Fool profile. His thoughts on tech stocks, Foolishness, and investing in general may be found in his blog. Intel is also an Inside Value pick. The Motley Fool's disclosure policy is one in a billion.


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