HP wins UK fraud claim against Autonomy's Lynch and Hussain

28 January 2022 11:57 by Annie Robertson, Martin Coyle

HP

Hewlett-Packard has won its multibillion-dollar damages claim against Autonomy’s founder, Mike Lynch, and former chief financial officer, Sushovan Hussain, whom it accused of accounting fraud prior to the British software company's sale to HP for $11.1 billion in 2011.

In a ruling at the High Court in London today, Judge Robert Hildyard said HP had "substantially succeeded," with the amount it will be awarded to be decided later. The ruling ends two years of waiting for the parties since the end of a nine-month trial that began in March 2019.

While saying HP had won, however, the judge stressed in his summary ruling that he anticipated it would be awarded "considerably less" than the $5 billion it had claimed.

HP had been “induced” to buy Autonomy through Lynch and Hussain’s “dishonest practices,” Hildyard said, and both set out an “exaggerated fiction” of Autonomy’s business, with its reselling revenues “disguised and concealed” by the pair. Auditor Deloitte, which had reviewed the company's accounts, “did not see the full picture” of its revenues, the judge said.

Citing evidence in the trial from HP's former chief executive, who described Autonomy's software as "almost magical," Hildyard acknowledged the quality of the company's products and said it would still have been considered a takeover target despite the fraud.

A draft judgment will be delivered to the legal teams this evening but will remain under embargo for the time being.

The judge said that Lynch would be given additional time to appeal the judgment as it was "exceedingly long."

A spokesman for Lynch didn't immediately respond to a request for comment.

Lynch is facing a related criminal action by the US Department of Justice, which is seeking to confiscate $815 million generated by the alleged fraud. This week he lost a court bid to delay the decision, and home affairs minister Priti Patel has until midnight tonight to decide whether or not he should be extradited. If she rules against Lynch, he could take his case to the Court of Appeal.

Trial

HP lodged its suit against Lynch and Hussain in 2015. In the UK’s biggest civil fraud proceedings to date, the US computing giant accused the two men of artificially inflating Autonomy’s revenue between 2009 and 2011, ahead of the sale in October 2011. The pair denied the allegations.

HP claimed that Lynch and Hussain had “deliberately” and “dishonestly” inflated Autonomy’s revenue figures to the wider market to give the appearance it was profitable. They achieved this by purchasing and selling “pure hardware” at a loss to fulfill its financial targets, HP said at a March 2019 hearing.

Hardware sales represented 11 percent of the company’s total reported revenue of approximately $200 million between 2009 and 2011.

“The purpose of these [purchases] was simply a revenue-pumping exercise, in order to bump up the figures. Lynch and Hussain suggest this is part of a marketing exercise,” HP’s lawyer Laurence Rabinowitz said at the hearing.

Autonomy’s “deception only came to an end in October 2011,” when the company was acquired by HP. “That’s when … the true position of Autonomy started to emerge,” Rabinowitz said.

Just 12 months after HP's takeover of Autonomy — once the UK's second-largest software provider — it was forced to publicly write down its value by $8.8 billion and blamed accounting improprieties.

HP has previously faced claims that it was aware of Autonomy’s hardware sales being sold at a loss, but only launched legal action when the conduct was raised by a whistleblower in May 2012 — to the chagrin of HP’s shareholders.

Lynch's arguments

During the civil fraud trial, Lynch had argued that HP used Autonomy as a “scapegoat for its failings” for poor management following its acquisition of the company. “HP destroyed one of the most successful and promising software companies of its time due to management incompetence, politics and infighting,” Lynch told the court.

He claimed that prior to its acquisition, Autonomy’s hardware sales depressed revenue growth instead of inflating it. The company had also instructed Deloitte, one of the “Big Four” audit companies, to review its accounts and provide further assurance of its value.

“I knew that Deloitte vetted Autonomy’s organic growth figures and agreed that it was appropriate to include hardware, because it was not revenue derived from an acquisition,” Lynch added.

HP’s claims of accounting impropriety are “perplexing in circumstances where, as soon as the acquisition closed, HP had full access to Autonomy’s books and records, as well as Deloitte’s work papers, all of which discuss hardware sales extensively,” Lynch told the court.

“I sincerely wanted the acquisition to work. I had sold the company I spent my life creating … It would have been a futile effort to attempt to hide hardware from HP,” he added.

Hussain's defense

Hussain, 54, did not appear during the civil fraud trial, as he is currently serving his five-year prison sentence in the US for wire-fraud convictions related to Autonomy’s sale to HP. He had sought to overturn his conviction and $4 million fine, but lost his appeal bid in August 2020.

Hussain's lawyer, Paul Casey, was present during the UK trial and scolded HP over its "exaggerated" and "unfair" trial against his client.

“An allegation was made at trial that Hussain was in the habit of improperly deferring hardware revenue from one quarter to the next, to the tune of millions of dollars … While no loss is claimed as a result, it is a serious allegation and one without a proper foundation," Casey told the court.

Casey added that Deloitte "never identified any revenue which was improperly deferred … If any such conduct occurred there would be evidence of it. There is none."

But one of HP’s witnesses — Meg Whitman, the HP executive responsible for purchasing Autonomy — told the High Court that "the audit by Deloitte over the summer was found to be inaccurate."

"It should have known that fraud was going on at Autonomy, and it did not … I hold Deloitte accountable. Part of the reason you buy a big public company is that they are audited by Big Four accounting firms. [Deloitte] should have known, and they did not," she said.

Deloitte’s record-breaking penalty

In September 2020, Deloitte was fined a record-breaking penalty of 15 million pounds ($19 million) by the UK's Financial Reporting Council over its "serious and serial failures" in its review of Autonomy before its takeover by HP.

The FRC launched an investigation into Deloitte's audits of the company in January 2013, which also resulted in financial penalties against two audit partners — Richard Knights and Nigel Mercer — for the Autonomy audits between January 2009 and June 2011.

But “this is not a ‘single rotten apple’ case … the non-disclosure of the hardware sales were involving lack of care and competence by the whole of the audit team,” the FRC's independent tribunal said at a hearing in July 2020.

"The pressure on Autonomy to meet market expectations gave rise to a risk of misstatement through manipulation of the financial results to achieve a desired position," the tribunal added.

As part of Deloitte's reprimand, it has agreed to provide analysis of the reasons for the misconduct, and of whether its current processes would result in a different outcome. Deloitte confirmed to MLex it would not appeal the ruling.

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