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HP Sues Former Autonomy Execs, Seeking $5 Billion in Damages

HP alleges the two executives engaged in "fraudulent activities" while running Autonomy.

Re/code

Following through on threats it has made in the past, Hewlett-Packard today said it has sued Mike Lynch and Sushovan Hussain, the former CEO and CFO of the British software firm Autonomy, seeking $5.1 billion and alleging that they engaged in fraudulent activities while running that company.

HP has sued the pair in London’s Chancery Division High Court. The company confirmed the suit in a statement:

“HP can confirm that, on March 30, a Claim Form was filed against Michael Lynch and Sushovan Hussain alleging they engaged in fraudulent activities while executives at Autonomy. The lawsuit seeks damages from them of approximately $5.1 billion. HP will not comment further until the proceedings have been served on the defendants.”

Lynch and Hussain, in a statement issued through a PR agency, said they will countersue HP seeking at least $148 million in damages.

“The former management of Autonomy announces today they will file claims against HP for loss and damage caused by false and negligent statements made against them by HP on 20 November 2012 and in HP’s subsequent smear campaign. Former Autonomy CEO Mike Lynch’s claim, which is likely to be in excess of £100 million [$148 million], will be filed in the UK.”

HP acquired Autonomy in 2011 in an $11.7 billion deal engineered by its former CEO Léo Apotheker. In 2012, after Meg Whitman had become CEO, HP attributed most of an $8.8 billion write-down to Autonomy, essentially conceding it had overpaid for the firm by about $5 billion.

HP has since asked regulators in the U.S. and the U.K. to investigate what it has described as financial fraud. The U.K. Serious Fraud Office recently dropped its case, though an investigation by the U.S. Department of Justice is ongoing.

Lynch and Hussain have consistently argued that most of the differences in valuation assumptions can be chalked up to differences in accounting rules in the U.S. and U.K., where requirements for recognizing revenue on software sales are different.

HP has alleged in filings in shareholder suits last year that before it acquired the company, Autonomy engaged in what HP called “imaginary deals” worth tens of millions of dollars and which had the effect of inflating Autonomy’s share price, and thus the price that HP ultimately paid to acquire it.

One such allegedly phony deal called for the Vatican Library to pay $11.5 million for software to a U.S.-based middleman company to help it digitize some of its archival material. Included as an exhibit in the court filings was a letter from the cleric in charge of the library refusing to pay for software it never bought. HP claimed that Autonomy went on to book the revenue from the sale anyway 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.

The Vatican transaction was listed as the fourth largest on a list of its 40 largest contracts that Autonomy execs gave to HP during its evaluation period leading up to the acquisition. When Autonomy first handed over the list, the name of each customer was blacked out. When an unredacted 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, HP alleged, hadn’t actually resold Autonomy’s software.

HP has also alleged that while they still ran Autonomy, Lynch, Hussain and their management team sold the company’s hardware with its software installed at loss and accounted for it in such a way that they could inflate revenue in quarterly earnings reports while at the same time booking some of the associated costs as marketing expenses.

This practice is strictly forbidden under U.S. accounting rules known as Generally Accepted Accounting Practices or GAAP. But accounting rules in the U.K., known as International Financial Reporting Standards or IFRS allows it.

“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),” HP said in the court filing.

Lynch has admitted to this practice in the past. But in more recent statements he has said that HP’s management was aware of it and even continued it after it had taken Autonomy over. “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.”

The Autonomy acquisition is widely seen as a low point in the history of HP one of Silicon Valley’s most storied companies. The deal was intended to be the lynchpin 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.

This article originally appeared on Recode.net.