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Dell sued over "secret rebates"

Wolverhampton City Council is co-lead plaintiff in expanded class action shareholder lawsuit alleging financial misconduct and hidden income

California-based law firm Lerach Coughlin Stoia Geller Rudman & Robbins LLP has expanded a class action suit against massive computer manufacturer Dell Inc. Originally filed in September 2006, the suit has been amended with new complaints and joined by new lead plaintiffs and Wolverhampton City Council as administrator for the West Midlands Metropolitan Authorities Pension Fund. In addition to Dell, several current and former Dell executives are named as co-defendants, along with Intel and PriceWaterhouseCoopers, Dell's auditor.

The exhaustive investor complaint highlights Dell's unique relationship with Intel as a large computer and server manufacturer which made exclusive use of Intel CPUs. (Dell began buying CPUs from AMD as well as Intel in 2006.) The suit alleges that Dell's strong corporate performance during the past few years is not wholly attributable to its typically perceived strengths in management, procurement, and delivery, but rather to a "secret rebate" program offered by Intel for loyal purchasing patterns.

Although rebates and cooperative marketing between suppliers and manufacturers in IT are not uncommon and co-branding efforts such as "Intel Inside" have been an industry staple for well over a decade, the class action lawsuit alleges that there is a deeper and unreported level of payment. According to plaintiff attorney Mary Blasy, the issue at stake is not the existence of the rebate program itself but the unreported nature of the income and Dell's reliance on that income for operational health.

"They should have been disclosed-there were huge amounts of money involved, and Intel had control over whether or not Dell got them each quarter, and they were very material to Dell's overall business model and financial health," she says. "The point is the impact on the financials." The suit goes on to allege that many Dell executives profited unfairly from knowledge of these arrangements by cashing out of most or all of their Dell shares at or near their peak, and before any loss of exclusivity payments from Intel could be felt in the company's financials.

The lawsuit was originally filed on behalf of an individual shareholder, but the revised complaint filed 30 January replaces him with institutional investors Amalgamated Bank and Wolverhampton City Council. Blasy says that between them, the two organisations lost $6 million on Dell stock during the class period of February 2003 through September 2006.

Investor class-action lawsuits in US courts against companies with falling stock prices are not uncommon. At the close of trading Friday, Dell shares were at $23.52, nearly $9 off their 52-week high and close to 45 percent off the company's five-year best. A Dell spokesperson reached for comment declined to offer any remarks.

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