«Case 1:10-cv-01465-RJL Document 1 Filed 08/27/10 Page 1 of 35 UNITED STATES DISTRICT COURT DISTRICT OF COLUMBIA SECURITIES AND EXCHANGE COMMISSION, ...»
Case 1:10-cv-01465-RJL Document 1 Filed 08/27/10 Page 1 of 35
UNITED STATES DISTRICT COURT
DISTRICT OF COLUMBIA
SECURITIES AND EXCHANGE COMMISSION, Civil Action No.
100 F Street, N.E. Washington, D.C. 20549
RANDALL D. IMHOFF,
Plaintiff Securities and Exchange Commission (the “Commission” or “SEC”)
alleges as follows:
1. From 2001 to 2004, Dell Inc. (“Dell”) engaged in fraudulent and improper accounting that wrongfully made it appear that Dell was consistently meeting Wall Street earnings targets and reducing its operating expenses as a percentage of revenue. Dell committed the accounting violations through the conduct of its most senior former accounting executives. The SEC brings this action against Randall D. Imhoff (“Imhoff”), a former Assistant Controller at Dell, for various accounting violations by Dell from 2001 to 2003.
2. Imhoff and others maintained a number of “cookie jar” reserves that they used to cover shortfalls in Dell’s operating results. Through this improper accounting, Dell materially misrepresented its financial results. Dell was subsequently forced to restate its financial statements for its fiscal years 2003 through 2006, with a cumulative balance sheet adjustment for periods before fiscal year 2003 (the “Restatement”).
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3. By engaging in the conduct alleged below, Imhoff violated Section 13(b)(5) of the Exchange Act [15 U.S.C. § 78m(b)(5)] and Rules 13b2-1 and 13b2-2 [17 C.F.R. §§ 240.13b2-1 and 240.13b2-2], and aided and abetted Dell’s violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act [15 U.S.C. §§ 78m(a), 78m(b)(2)(A) and 78m(b)(2)(B)], and Rules 12b-20, 13a-1, and 13a-13 [17 C.F.R. §§ 240.12b-20, 240.13a-1, 240.13a-13], promulgated thereunder, pursuant to Section 20(e) of the Exchange Act [15 U.S.C. § 78t(e)]. Unless restrained and enjoined, Imhoff will in the future violate such provisions.
JURISDICTION AND VENUE
4. This Court has jurisdiction over this action pursuant to Sections 21(d), 21(e) and 27 of the Exchange Act [15 U.S.C. §§ 78u(d), 78u(e) and 78aa].
5. Defendant, directly or indirectly, has made use of the means and instrumentalities of interstate commerce, of the mails, or of the facilities of a national securities exchange in connection with acts, practices and courses of business alleged in this Complaint. Venue is proper in this District pursuant to Section 27 of the Exchange Act [15 U.S.C. § 78aa], because, among other reasons, certain of the acts, practices and courses of business constituting the violations alleged herein occurred within this District.
6. Randall D. Imhoff, CPA, 48, resides in Austin, Texas. Imhoff joined Dell in February 2000 as Corporate Assistant Controller, was named Finance Director for U.S. Small and Medium Business in September 2003, and was named Finance Director for Global I/T in November 2005, a position he retained until he left Dell in April 2007. From 1984 to 2000, prior to working at Dell, Imhoff, a CPA licensed in Texas, worked as an auditor at Arthur Andersen LLP, rising to the level of partner. Imhoff holds a bachelor’s degree in Accounting from Iowa State
University. During his time as Corporate Assistant Controller, Imhoff reviewed and edited Dell’s annual reports on Forms 10-K and quarterly reports on Forms 10-Q filed with the Commission.
Imhoff served as a member of Dell’s Disclosure Review Committee from November 2002 to April 2003.
7. Dell Inc. (“Dell”) is a Fortune 50 company in the business of providing electronic products, including mobility products, desktop PCs, peripherals, servers, networking equipment, and storage. Dell also offers services, including software, infrastructure technology, consulting and applications, and business process services. Dell was incorporated in Delaware in 1984 and is based in Round Rock, Texas. Since July 2006, Dell’s common stock was registered with the Commission pursuant to Section 12(b) of the Exchange Act and is traded on the NASDAQ Global Select Market. During the prior relevant period, Dell’s common stock was registered with the Commission under Section 12(g) of the Exchange Act and quoted on the Nasdaq National Market System.
8. PricewaterhouseCoopers LLP (“PWC”) is a national public accounting firm with its headquarters in New York, New York. PWC audited Dell’s financial statements throughout the relevant period.
10. For several years beginning in or about FY02, Dell engaged in improper accounting involving “cookie jar” reserves and other reserve accounts. As explained more fully below, these
manipulations were undertaken to meet consensus earnings targets or to misstate materially other important financial metrics. These practices not only materially misstated Dell’s financial results, but caused additional material misstatements in Dell’s annual and quarterly reports filed with the Commission during the period.
11. Contrary to generally accepted accounting principles (“GAAP”), Dell created and maintained excess accruals in multiple reserve accounts. Dell used the excess accruals in these reserves to offset the financial statement impacts of future expenses. From FY02 to FY04, Imhoff was actively involved in these practices.
12. As set forth in detail below, Dell improperly managed reserves including a) the Strat Fund and other “Corporate Contingencies;” b) the Accrued Relocation Account; c) an improperly-established and used restructuring reserve; d) several reserves in EMEA, one of Dell’s overseas business units; e) cookie jar reserves in bonus and profit-sharing accounts; and f) an under-accrued restructuring Las Cimas reserve.
13. The Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards No. 5, Accounting for Contingencies (“SFAS 5”), and the related interpretations are among the principal GAAP provisions that govern the recognition of loss accruals and reserves. These accounting principles provide, among other things, that a loss accrual should be recognized with a charge to income when a loss is probable and reasonably estimable.
The maintenance of reserves for general or unspecified business risks (sometimes called “general reserves” or “cookie jar reserves”) is not permitted under GAAP. Further, the accounting principles generally provide, among other things, that any over-accrual of a reserve should be reversed into the income statement as soon as the over-accrual is discovered.
14. The impacts of Dell’s reserve manipulations materially misstated Dell’s operating results. In certain quarters, the manipulations enabled Dell to meet analyst consensus estimates for earnings per share (“EPS”). The manipulations also enabled Dell to misstate materially the trend and amount of operating income from Q3FY03 through Q1FY05 of its EMEA segment, an important business unit that Dell highlighted. Instead of increasing every quarter from Q2FY03 through Q1FY05, EMEA’s operating income varied substantially.
15. The reserve manipulations also allowed Dell materially to misstate its operating expenses (“OpEx”) as a percentage of revenue (“OpEx percentage” or “OpEx ratio”), and the quarter to quarter trend in this ratio, for over three years, from about Q2FY02 through about Q2FY05. The OpEx ratio was an important financial metric that the Company itself highlighted.
As reported, Dell’s OpEx ratio during this period was an artificial and fabricated pattern, as shown
In the MD&A of every Form 10-Q from Q1FY03 through Q2FY05, and in other public statements, Dell highlighted each decrease in the ratio as achieving a “record low,” and each instance where the ratio remained flat as maintaining or continuing the “record low.” Dell attributed such “records” to reported decreases in the ratio of 0.3% in Q1FY03 (from 10.2 % to 9.9%); 0.2% in Q2FY04 (from 9.8% to 9.6%), and just 0.1% in Q1FY04 from (9.9% to 9.8%). Dell attributed achieving or continuing the “record lows” to “cost reduction initiatives” or a “focus on cost controls.” In fact, Dell’s reported OpEx ratio during this period was impacted by accounting manipulations, and the actual ratio generally varied materially from quarter to quarter during this period.
16. Dell repeatedly told investors and analysts that its business model was superior to its competitors’ models. Dell’s senior management used the company’s ability to meet or exceed analysts’ consensus to support this claim.
17. Analyst reports reflect that Dell’s apparent ability to consistently meet analysts’ consensus for EPS was important to investors. For example, in February 2003, a Goldman Sachs research report stated, “consistency is the hallmark of Dell’s financials.” In May, 2003, Dell’s Head of the Investor Relations department informed Dell senior management, commenting on a prior email from the department forwarding analyst comments for Q1FY04: “The consistency of messaging throughout these notes is at a level I have never seen for any company. While I know at times we grow weary of saying the same thing over and over again, this consistency of message and performance drove analysts to raise price targets absent an increase in estimates....” Dell’s CEO replied: “It’s a beautiful thing. ☺” In November 2003, Dell’s Investor Relations department informed the company’s senior management that “there have been no upgrades or downgrades, but [an analyst] reduced his risk rating to medium risk from high risk based on our historical earnings Case 1:10-cv-01465-RJL Document 1 Filed 08/27/10 Page 7 of 35 consistency.” Also, in February 2005, a Bear Stearns report lauded Dell “as a core holding in any tech portfolio given its consistency in achieving operating targets.” a. The Strat Fund and Other “Corporate Contingencies”
18. From about FY02 to FY05, Dell maintained a cookie jar reserve, contrary to GAAP, called the “Strat Fund” (short for “Strategic Fund”). Members of Dell’s corporate finance group referred to the Strat Fund and other specified improper cookie jar reserves maintained by Corporate as “contingencies,” and they will be referred to herein as “Corporate Contingencies.” The Corporate Contingencies consisted of excess, unsupported balances that resided in Corporate accounts, including an “other accrued liabilities” account that Dell personnel sometimes referred to by its number, 24990. The Strat Fund was a “sub-account,” or subset, of account 24990. Dell used the Corporate Contingencies primarily to reduce its future operating expenses by releasing these excess accruals to offset unforeseen expenses.
19. Imhoff reported to a former Dell official who was named Vice President of Corporate Planning and Reporting in FY02 and who served as Chief Accounting Officer from Q4FY03 through Q4FY05 (“Senior Finance Executive”). Acting under the Senior Finance Executive’s general direction, Imhoff planned and issued instructions regarding Dell’s build-up and use of the Corporate Contingencies. The Senior Finance Executive’s and Imhoff’s accounting decisions and actions concerning the reserves were contrary to GAAP. The Senior Finance Executive and Imhoff instructed subordinates that when excess reserves were identified – e.g., previously-reserved amounts no longer needed for bona fide liabilities – the subordinates were to check with them about the disposition of the excess reserves instead of releasing them to the income statement. When the excess accruals were significant, the Senior Finance Executive and Imhoff often directed the subordinates to transfer them to account 24990. The Senior Finance Case 1:10-cv-01465-RJL Document 1 Filed 08/27/10 Page 8 of 35 Executive and Imhoff viewed the Corporate Contingencies as a way to offset future liabilities and “earmarked” the excess accruals for various purposes.
20. Dell tracked the Corporate Contingencies in schedules entitled “Estimated Contingencies in Corporate” (hereinafter “Corporate Contingency Schedules”) that employees produced at least once per quarter. The improper reserves were reflected in the schedules in a column labeled “Available Balance.” The Corporate Contingency Schedules typically reflected total available balances in the range of $20 million to $30 million. The highest available balance was $39 million in June/July 2003. The lowest available balance was $3 million in September 2002.
21. In the 11 quarters that Imhoff was Assistant Controller (from Q1FY02 to Q3FY04), Dell made at least 17 releases from the Strat Fund and other Corporate Contingencies, 11 of which were recorded after the end of a quarter while Dell was in the process of closing its books. In its Restatement, Dell reversed all Strat Fund activity and all “Available” balances for the other reserves that appeared on the Corporate Contingency Schedules.