A European Union official will tell antitrust regulators they failed to consider potentially exculpatory evidence in a ruling against chip maker Intel Corp, according to a source who had seen a confidential report.

The European official, its ombudsman, cannot overturn the European Commission's decision in May to fine Intel a record 1.06 billion euros for antitrust violations. But his remarks may lend ammunition to Intel's appeal against that decision, to be heard over coming years.

The Commission in May ruled that Intel had illegally used its power to squeeze rival Advanced Micro Devices Inc out of the market, underscoring its resolve in going after big corporations such as Microsoft that have long drawn antitrust scrutiny. [ID:nLM380346]

In his report, the EU's ombudsman blasted the regulatory body for failing to record in its case a formal account of an August 2006 meeting between the Commission and a senior Dell Inc executive.

European Ombudsman P. Nikiforos Diamandouros cannot reverse the fine, but accused the Commission of maladministration, according to a source who had read a confidential version of his report. The source was not authorized to comment on the record.

Diamandouros is one of the few independent checks on the Commission's antitrust agency, which has drawn fire for being judge, jury and prosecutor against corporations.

The Wall Street Journal, which first reported the ombudsman's views on Friday, said:

The report says that the executive, who is not identified, is believed to have told investigators that Dell viewed the performance of Intel rival Advanced Micro Devices Inc. (AMD) as 'very poor.'

Such a statement may suggest Dell chose Intel chips for technical reasons, rather than being strong-armed. Although the statement would have been unlikely to have radically swayed the EC from its decision, it could have impacted the direction of the investigation.

The Commission has fully respected Intel's right of defense, EC spokesman Alain Bloedt said from Brussels on Friday, declining further comment.

MOVING ON...

Intel has begun a years-long appeal process to the European Union's Court of First Instance, in which it is free to cite the ombudsman's views.

Intel in the second quarter took a 25 cent per share charge for the fine, which turned an 18 cent per share profit into a net loss of 7 cents per share -- its first quarterly loss since 1986. [ID:nN14260734]

Intel has significant balance sheet strength. They have very deep pockets. I think the way the market is interpreting the EU fine is 'okay, that's water under the bridge. Let's go back to focusing on the operations of the company,' Collins Stewart analyst Ashok Kumar said.

The question now is, is there any precedent for the EU losing the appeal?

The Court of First Instance has complete review authority and has often cut fines for firms found to have colluded to fix prices. By contrast, the Intel case is a single firm abuse of dominance, as in the Microsoft case where the fine was not cut.

Shares in Intel rose 1 percent in after-hours trading after closing down 1.1 percent at $18.50 on the Nasdaq.

The report is expected to bolster the views of European Commission critics, who say the body wields too much power.

The two United States antitrust agencies usually must bring their evidence before courts and win the approval of a judge. Most competition agencies around the world, however, have chosen the European model over that of the United States.

Dell said it cooperated with the European Union but would not comment on the details of its business discussions or discussions with EU personnel.

Intel spokesman Chuck Mulloy also declined to comment. There is nothing publicly available from the ombudsman at this time, he said.

AMD could not immediately be reached for comment.

(Additional reporting by Bate Felix in Brussels and Gabriel Madway and Alexei Oreskovic in San Francisco; Editing by Edwin Chan, Robert MacMillan and Carol Bishopric)

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