Add Dell to the growing list of companies facing SEC probe

Posted by Scott M. Fulton, III

Round Rock (TX) - During today's quarterly conference call for Q2 fiscal 2007 financial results, Dell Computer Chief Financial Officer Jim Schneider admitted his company received a notice in August 2005 from the US Securities and Exchange Commission, regarding what he says regards reporting of Dell's earnings prior to fiscal 2006.

Schneider did not say the SEC notice regarded the practice of options backdating - which is the subject of SEC inquiries recently facing Apple, Nvidia, and Juniper Networks - however, recent events suggest that backdating is the likely subject. Dell already initiated an independent internal audit, he said, the results of which are being reported to the SEC.

Why did Dell wait this long to admit it was the subject of an SEC probe? Schneider told analysts during today's conference call that there wasn't anything secretive in Dell's motive, just that it wasn't that big a deal. "This has gone on in a deliberate process for about a year," he said, "...[and] as this goes on, and more people get involved internally...the more we felt we should disclose this publicly." There should not be a serious restatement of earnings, he added, as a result of this audit.

Does Schneider have a point? With revenues reportedly rising only 3% year-over-year, and 3% over the previous quarter, a potential restatement of earnings from 15 months back or more could conceivably result in restatements for certain quarters, perhaps including the current one, to reflect a net loss.

On the other hand, Dell stock has been trading for progressively lower than its December 2004 high of $42.14. At the end of today's trading, Dell traded for $22.80 per share, slightly higher than its July 2006 low of $21.74. Trading value last bottomed at $18.53 in September 2001, in the wake of terrorist attacks which affected the entire technology market. Backdated options over the past 15 months could conceivably be worthless today to Dell executives; so ironically, a Dell restatement of past earnings might not be as dramatic as it would be for Apple.