Hewlett-Packard unveils details of $5bn Autonomy fraud case

http://www.theguardian.com/business/2015/may/05/hewlett-packard-unveils-details-of-5bn-autonomy-case

http://www.telegraph.co.uk/finance/financial-crime/11583498/HP-claims-Mike-Lynch-sacked-Autonomy-finance-boss-to-silence-concern-over-sales.html

http://www.ft.com/intl/cms/s/0/35db8c1e-ef2d-11e4-87dc-00144feab7de.html#axzz3ZKz9hlwC

HP’s lawyers have outlined five main sources of allegedly wrongly claimed income:

  • $194m of supposedly hidden hardware sales. HP said it found Autonomy resold hardware such as servers made by other companies, often at a loss, and claims its directors allowed investors to believe this was software revenue.
  • $196m in apparently wrongly reported sales of Autonomy’s core software product, IDOL, to other software companies.
  • $205m in supposedly questionable transactions with software resellers.
  • $80m of claimed incorrectly reported hosting deals, in which Autonomy renegotiated contracts to host other companies’ data on its own servers
  • $33m in other alleged improper transactions.

Hewlett-Packard unveils details of $5bn Autonomy fraud case

US firm claims Mike Lynch inflated revenues by $700m, but Autonomy founder says HP has failed to produce ‘smoking gun’

Of particular interest to Hewlett-Packard are 37 deals with small IT contractors that bought Autonomy’s software. Photograph: Jim Young/Reuters

Juliette Garside

Tuesday 5 May 2015 19.54 BSTLast modified on Wednesday 6 May 201500.10 BST

Hewlett-Packard has unveiled full details of its $5bn (£3.3bn) fraud case against the founder of the UK software company Autonomy, claiming that Mike Lynch inflated the revenues of his business by about $700m over a two-and-a-half-year period.

HP, which bought Autonomy in 2011 for $11bn, has filed a claim against Lynch and his finance director, Sushovan Hussain, in the high court in London, alleging they engaged in improper transactions with software resellers and in questionable accounting practices.The filing contains new allegations, denied by Lynch, that Autonomy dismissed its US chief financial officer Brent Hogenson after he raised concerns about the company’s transactions to its UK based auditor, Deloitte, and UK regulator the Financial Services Authority (FSA). HP has previously said it is considering taking legal action against Deloitte.

HP claims that Lynch and Hussain breached their fiduciary duties as directors, that Lynch breached his contractual duties as an employee of Autonomy, and that Hussain repeatedly misled the Autonomy audit committee.

The dispute has seen the HP chief executive, Meg Whitman, who joined the company after its disastrous Autonomy deal, lock horns with Britain’s most successful software boss.

Lynch hit back against the claims, saying HP had failed to produce a “smoking gun” to support its accusation of fraud. In a statement on his blog he said: “HP’s claim is finally laid bare for what it is – a desperate search for a scapegoat for its own errors and incompetence. The contents of the claim are a simple rehash of previous leaks and insinuations that add up to one long disagreement over accounting treatments, and have nothing to do with fraud.”

Lynch and Hussain, who also dispute the charges, acknowledged receiving the particulars of the claim on Tuesday, allowing the full details of HP’s forensic trawl through Autonomy’s accounts to become public for the first time.

Between the first quarter of 2009 and the second quarter of 2011, the Cambridge-based company reported revenues totalling more than $2bn. HP claims that a third of that was wrongly reported, misleading Autonomy’s shareholders on the London Stock Exchange and later HP.

“This conduct by Lynch and Hussain was systematic and was sustained for more than two years prior to the acquisition of Autonomy by HP,” the Californian software group said. “Its purpose was to ensure that the Autonomy group’s financial performance … appeared to be that of a rapidly growing pure software company … The reality was that the group was experiencing little or no growth, it was losing market share, and its true financial performance consistently fell far short of market expectations.”

HP’s lawyers have outlined five main sources of allegedly wrongly claimed income:

$194m of supposedly hidden hardware sales. HP said it found Autonomy resold hardware such as servers made by other companies, often at a loss, and claims its directors allowed investors to believe this was software revenue.

$196m in apparently wrongly reported sales of Autonomy’s core software product, IDOL, to other software companies.

$205m in supposedly questionable transactions with software resellers.

$80m of claimed incorrectly reported hosting deals, in which Autonomy renegotiated contracts to host other companies’ data on its own servers.

$33m in other alleged improper transactions.

After the release of Autonomy’s results for the first half of 2010, US executive Hogenson allegedly blew the whistle. He raised concerns – about reseller deals – with the FSA in an email sent on 26 July of that year. On 28 July 2010, HP claims, he was summarily dismissed by US chief operating officer Joel Scott, “acting at the direction of Lynch”.

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Lawyers for Lynch said in a letter to HP’s legal team that Hogenson was actually dismissed by Autonomy’s chairman. His concerns had been investigated by Deloitte and UK accounting body the Financial Reporting Review Panel, they said, but neither organisation had taken issue.

Of particular interest are 37 deals with small IT contractors that bought Autonomy’s software. Deals with these outfits, known in the industry as “value added resellers”, were key to Autonomy’s ability to present itself as a fast-growing software business.

The resellers were presented as acquiring the rights to sell on Autonomy software to end users including UBS bank, General Motors, the Vatican library, accounting firm KPMG and even Hewlett-Packard itself. But HP claims many of these deals were fictional in that no agreement with an end user was ever concluded, and that the resellers were simply warehousing Autonomy’s software.

Other deals were recorded as revenue too early, before the end user had agreed to buy the Autonomy products.

The resellers involved were located in countries including the US, Italy and the UK.

In a point-by-point rebuttal, Lynch and Hussain have dismissed HP’s claims, saying: “Out of 23,000 deals and $2.2bn in revenue that took place at Autonomy during the period, Whitman makes assertions concerning only six specific reseller transactions, which add up to under $40m in revenue, and for which almost all the cash was, in fact, received. Whitman provides scant supporting evidence even for these few assertions.

“She raises questions over fully paid hosted deals, the form of which HP’s own accountants approved, and in a structure HP itself also used. She now admits that hardware sales were correctly recorded as revenue and that HP was fully aware of this when they valued the company at $11bn. Meg Whitman has been playing a delaying game, promising a smoking gun that has never materialised.”

HP claims Mike Lynch sacked Autonomy finance boss to silence concern over sales

Silicon Valley giant files detailed High Court allegations on £3.2bn fraud damages claim

By Christopher Williams, Technology, Media and Telecoms Editor

5:00PM BST 05 May 2015

Hewlett-Packard has alleged that Mike Lynch ordered the sacking of Autonomy’s finance chief in the United States after he raised questions about accounting practices that the Silicon Valley giant claims were part of a £3.2bn fraud.

The allegation is contained in court documents that set out the detailed case against Dr Lynch, the founder and former chief executive of Autonomy, and Sushovan Hussain, its former chief financial officer, for the first time.

HP is suing the pair in London for £3.2bn in damages, including £269m it claims they made personally by falsifying Autonomy accounts.

Dr Lynch and Mr Hussain, both shareholders, sold the FTSE 100 software company to HP for $11.1bn in 2011. A year later it wrote off $8.8bn of the value of the deal, blaming $5.5bn on “accounting improprieties”.

According to the detailed claims filed at the High Court on Tuesday, in 2010, Brent Hogenson, chief financial officer of Autonomy’s US arm, attempted to raise concerns over the way the company was reporting sales via resellers. HP said that when he tried to raise the matter with the company’s audit committee and then with Deloitte, Autonomy’s auditor, he was criticised via email by Dr Lynch.

Soon after, HP said, he was sacked on the chief executive’s orders.

Its court filing said: “Lynch’s knowledge of the false accounting… is further to be inferred from the manner in which he attempted to suppress concerns raised by Hogenson.”

Dr Lynch said in an interview that Mr Hogenson’s concerns reflected a lack of understanding of the differences between International Financial Reporting Standards (IFRS) used by Autonomy and the Generally Accepted Accounting Principles (GAAP) used by US companies.

The same misunderstanding is at the heart of HP’s detailed fraud claims and renders them “a simple re-hash of previous leaks and insinuations that add up to one long disagreement over accounting treatments and have nothing to do with fraud”, he said.

In a response his lawyers said in a letter to HP’s legal team that Mr Hogenson was in fact sacked by Autonomy’s chairman, that his concerns had been investigated by Deloitte and UK accounting authorities, and not pursued.

Mr Hogenson’s concern centred on deals between Autonomy and US resellers, who sold its software on to corporate and government clients.

He queried reciprocal transactions, which HP now alleges Dr Lynch and Mr Hussain used to falsely inflate sales. According to the court filing, a reseller would buy software without having a customer to sell it on to, allowing Autonomy to book the sale, and at a later date buy something without real value from the reseller to compensate.

For instance, HP alleges that in late 2010 Autonomy paid one reseller, MicroTech, $9.6m for what amounted to little more than a van.

Dr Lynch’s lawyers said the vehicle was part of a strategy to sell more software to sensitive US Government clients and the value of the licence it bought to use it was checked for fair value by Deloitte.

Dr Lynch and Mr Hussain are due to formally respond to HP’s filing next month. They also deny allegations they hid low-margin computer hardware sales, wrongly accounted for a software licensing component in service contracts and failed to properly ensure the sales Autonomy was booking would translate into cash.

An HP spokesman said: “This conduct by Lynch and Hussain was systematic and was sustained for more than two years prior to the acquisition of Autonomy by HP.

“Its purpose was to ensure that the Autonomy group’s financial performance, as reported in Autonomy’s published information, appeared to be that of a rapidly growing pure software company whose performance was consistently in line with market expectations.

“The reality was that the group was experiencing little or no growth, it was losing market share, and its true financial performance consistently fell far short of market expectations.”

Dr Lynch said: “This all came under UK takeover rules, which say caveat emptor.”

“Meg Whitman [HP’s chief executive] has been playing a delaying game, promising a smokling gun that has never appeared.”

Last updated: May 5, 2015 6:00 pm

HP says it overpaid by $5bn for Autonomy

Murad Ahmed, European Technology Correspondent

Hewlett-Packard overpaid for Autonomy by at least $5bn after its founder Mike Lynch led a “systematic” effort to “artificially inflate” his company’s revenues, according to a legal filing in which the US technology conglomerate set out its full case against the British entrepreneur for the first time.

HP is suing Mr Lynch and Sushovan Hussain, Autonomy’s former chief financial officer, alleging fraud while seeking damages of $5.1bn in one of the largest civil cases brought in the UK against British nationals. Both Mr Lynch and Mr Hussain deny the claims.

In 2012, HP said it would take an $8.8.bn writedown of its disastrous $11.1bn acquisition of Autonomy, $5.5bn of which was due to alleged “accounting misrepresentations”.

In a claim filed at the High Court in London, HP alleged that the men led efforts over two-and-a-half years to engage in “improper transactions and accounting practices”.

The company did not say this activity would have dissuaded it from buying Autonomy, but said it had an inaccurate picture of UK software group’s financial health when weighing up the acquisition.

The US company alleged that Autonomy’s revenues were about 25 per cent lower than it reported in 2009, 38 per cent lower in 2010 and 36 per cent lower in 2011.

HP also said that its “conservative” projections of Autonomy’s future growth would have been far less.

According to the filing, the US company calculated losses caused by the Autonomy acquisition by working out the difference between “the price that [HP] actually paid for Autonomy (ie approx US $11.1bn) and the lower price that [HP] would have paid in order to acquire Autonomy, had it known the true position (this being a price which the selling shareholders in Autonomy would certainly have accepted or which they would have been likely to accept had they, too, known the true position).

“The quantification of the loss will be a matter of expert evidence in due course, but it is estimated to be at least £3.2bn (equivalent to approx $5bn).”

Mr Lynch told the Financial Times: “HP’s claim is finally laid bare for what it is — a desperate search for a scapegoat for its own errors and incompetence. The contents of the claim are a simple rehash of previous leaks and insinuations that add up to one long disagreement over accounting treatments, and have nothing to do with fraud.”

HP’s claim is finally laid bare for what it is — a desperate search for a scapegoat for its own errors and incompetence

– Mike Lynch, Autonomy’s founder

Mr Hussain added: “When you remove the revenue in the way HP has, you are left with a cash surplus of over $450m, with no explanation. I think that says it all.”

The opposing parties have engaged in a long war of words that broke out when Meg Whitman, HP chief executive, announced the writedown three years ago.

Among the transactions at the heart of HP’s case are $200m of hardware sales made between 2009 and 2011. It said the lossmaking deals were used to make up shortfalls in Autonomy’s bottom line.

HP alleged that Autonomy aggressively pursued such deals, then misled its audit committee and the markets as to their nature.

In one incident in 2009, Mr Lynch allegedly told an Autonomy salesman he would buy him a Porsche if he could sell $10m of pure hardware by the end of third quarter. Later, Mr Hussain allegedly approved a six-figure bonus for the salesman.

Mr Lynch said he never bought the salesman a Porsche. “In the software industry, salespeople are often incentivised with bonuses and 5 per cent is a normal level,” he said.

The US group also questioned multiple transactions that Autonomy made to resellers, intermediaries who hoped to sell its software on to end customers. HP alleged that Autonomy made many sales to these middlemen on the last day of a financial quarter, helping to artificially push up its reported revenues.

HP claimed it was “agreed and/or understood” the reseller was not “on risk” for the transaction. It alleged that this meant there was a gentleman’s agreement that the middleman would not actually pay Autonomy at all.

HP alleged that on some occasions, these reseller transactions were simply cancelled. At other times, it said Autonomy later bought products and services from a reseller at a greater cost than the original deal, meaning the middleman made an overall profit.

Mr Lynch said: “It is normal practice in the software industry for deals to be done at the end of the quarter when customers get the best deals.

“The [resellers] were on risk as is evidenced in the paperwork, the fact was also confirmed by Deloitte [Autonomy’s auditors] and communicated to the audit committee. HP puts forward no evidence to counter this.”

HP has previously said it is in discussions with Deloitte and “continues to exchange information in accordance with the pre-action protocol process in the UK”.

Deloitte argued that any claim against it would be “utterly without merit”.

In the legal filing, HP also contended that Autonomy tended to work with just five resellers, saying top executives at these middlemen groups included family members of Autonomy employees or were former Autonomy staff themselves.

“Many people who were trained at Autonomy have gone out to fill senior positions in the software industry. We don’t understand why this is relevant,” said Mr Lynch.

HP also alleged in the filing that Brent Hogenson, Autonomy’s US finance chief, was fired “at the direction of Lynch”, after raising issues related to accounting practices at the company.

A spokesperson for Mr Lynch said it was Autonomy’s chairman who dismissed Mr Hogenson, and the matter had been investigated by the company’s auditors and UK accounting authorities with no action taken.

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