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HP Lays Out Detailed Case Against Former Autonomy Execs

HP lays out what it says is "extensive and extraordinary evidence of fraud" by former Autonomy executives.

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Hewlett-Packard today laid out in the most detailed manner yet how it says it was tricked into paying more than $11 billion for the British software firm Autonomy in 2011, an acquisition that eventually led to the firing of HP’s chief executive at the time.

In a series of court filings, HP, for the first time, connected the dots of many previously disclosed allegations into a larger narrative it says amounts to “extensive and extraordinary evidence of fraud on the part of senior management of Autonomy,” including its former CEO Mike Lynch and former CFO Sushovan Hussain.

The alleged fraud included tens of millions of dollars worth of “imaginary deals, accelerated revenues and misrepresentations” regarding Autonomy’s financial situation. The lies, HP alleges, inflated Autonomy’s share price and the perceived fair price for the acquisition. A year later, HP wrote down the value of Autonomy assets by more than $8 billion.

The disclosure is the latest step in a complicated shareholder derivative lawsuit before the court, a case in which HP has proposed a settlement. In July, Hussain, intervened in the case, asking a judge to reject the settlement. HP has said it plans to sue Hussain and other former Autonomy executives, including Lynch.

Aside from the lawsuit at hand, the Autonomy deal and the circumstances leading up to it are under investigation as a criminal matter by the U.S. Department of Justice and the Serious Fraud Office in the U.K. The deal has lingered as a cloud of unfinished business over HP since CEO Meg Whitman took over in 2011.

The filings paint the most detailed picture yet of a company that HP argues was in financial trouble and unable to meet the financial expectations of its shareholders.

We’ll save you from sifting through more than 90 pages of filings. Here are the highlights:

  • In one seemingly panicked December 2010 email to Lynch, Hussain said that “radical action” was required in the face of sales projections that weren’t looking good. That “radical action,” HP argued in the filing, was to sell the entire company.
  • In a response on a website devoted to the case, a spokesman for Lynch dismissed HP’s accusations: “What we see here is one email taken out of context. … The radical action referred to, was to fire ‘unreliable sales reps.’ Hussain was ‘extremely frustrated with the unreliability of forecasting of certain sections of the sales force, the company’s forecast for the quarter, even taking out these deals, was still ahead of target.'”
  • HP disclosed new details about what it says was a phony deal with the Vatican Library for an $11.5 million sale of software to help it digitize some of its records. Included is a letter from the cleric in charge of the library to a middleman company — U.S.-based MicroTech — refusing to pay for software it never bought. Autonomy went on to book the revenue from the sale on the final day of the first fiscal quarter of 2011, and included it in its report to shareholders for that quarter. “The transaction was fake, and the revenue was fake,” HP said in the filing.
  • In response, the statement from Lynch said: “The VAR [MicroTech] decided to become part of this deal so that when the project got under way, it could undertake the services contracts. … To claim that the Vatican deal was fake is unsupportable: Emails show a large amount of work with the Vatican and that at the time, they were on the verge of signing the deal.”
  • Fake or not, the Vatican transaction is important because it was fourth on a list of Autonomy’s 40 largest contracts that was given to HP executives during its evaluation of Autonomy ahead of the acquisition. That list, when first given to HP, had the names of each customer redacted. When an un-redacted copy of the same list surfaced later, it emerged that many of Autonomy’s customers were third-party resellers, commonly known in computer industry parlance as VARs or “value added resellers,” who in many cases hadn’t actually resold Autonomy’s software.
  • About the redaction, Lynch says in the statement: “The due diligence information was provided to HP in the format it requested. It was not interested in which resellers’ deals had gone through, but the industries of the intended end users.” All told, HP says that Autonomy inflated its reported revenue by about 21 percent in 2009, nearly 30 percent in 2010 and by more than 26 percent in the first half of 2011, and that its reported profit margin on an operating basis was “significantly overstated.”
  • HP also accused Autonomy of selling hardware with its software at loss in such a way that it could inflate its revenue in earnings reports while booking some of the costs as marketing expenses. That’s not allowed under U.S. accounting rules, but is in the U.K. “Autonomy executives had inflated gross margins by allocating a large portion of the costs from those loss-making hardware sales to sales and marketing (which does not affect gross revenue), rather than to cost of goods sold (which does),” the filing says.
  • Lynch has admitted to this practice in the past. Today the statement from his camp says: “A number of emails and documents show that the highest levels of HP management were well aware of Autonomy’s hardware sales long before any alleged whistleblower came forward. HP also continued to do the same after it owned the company. … In fact, prior to the acquisition, HP even supplied some of the hardware Autonomy resold.”

In a statement responding to the filing, Hussain’s lawyer, John Keker, said: “Releasing one out-of-context email from 17 million documents is characteristic of HP’s underhanded attempts to assign blame elsewhere for its bungled efforts to integrate Autonomy. The transactions HP complains about were approved by Autonomy’s Audit Committee and its outside auditors, Deloitte UK. HP has said in court documents that its due diligence auditors, KPMG, were given access to Autonomy accounting at a level ‘comparable with other acquisitions involving large U.K. publicly traded companies,’ including speaking with Deloitte. There was no fraud at Autonomy, and HP had every opportunity to assure itself of that as part of its due diligence.”

The Autonomy deal is widely seen as a bad turning point in the history of HP, and one of the low points in its corporate history. The deal was intended to be the linchpin of a since-abandoned strategy by then-CEO Léo Apotheker to turn HP into a software company. Within a month of closing the acquisition, Apotheker had been fired by HP’s board and replaced by Whitman, who had previously served only as a director.

The document drop follows a report in the Financial Times yesterday, citing a statement in a court filing in another shareholder case from May that HP had tried to back out of the deal after Apotheker was gone. Backing out of an acquisition is exceptionally difficult under U.K. law, so once it was announced, HP was stuck with Autonomy.

Here’s the main filing.

HP Memorandum ISO Prelim Approval Settlement and Opposing Intervention

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