HP defends shareholder deal and accuses former Autonomy executives of fraud

Out-Law News | 05 Aug 2014 | 2:30 pm | 2 min. read

Hewlett Packard (HP) has directly accused two former executives of a UK software company it bought of fraud in legal filings submitted to a US court.

HP said Autonomy founder and former chief executive Mike Lynch and the company's former chief finance officer Sushovan Hussain "should be held accountable" for fraud it claims was perpetuated before HP purchased Autonomy in 2011.

HP has previously claimed that it paid more money than it should have when it bought Autonomy as a result of "serious accounting improprieties, disclosure failures and outright misrepresentations at Autonomy". In 2012, HP wrote off $8.8 billion of the £11.1bn it paid for Autonomy, attributing $5bn of that write down to the alleged practices carried out by Autonomy prior to its acquisition.

Earlier this year HP struck a deal with some shareholders to avoid legal action being brought against it over alleged failings the shareholders had claimed the company had been responsible for during the process of buying Autonomy. As a result, the shareholders agreed, among other things, to be joined with HP in a legal challenge against the former Autonomy executives.

Hussain has challenged HP's settlement before a district court in California. However, in legal papers opposing Hussain's case, HP directly accused Hussain and Lynch of fraud (8-page / 69KB PDF).

"Sushovan Hussain, Autonomy’s CFO from 2001 to May 2012, was one of the chief architects of the massive fraud on HP that precipitated this litigation," HP's legal filing said. "The notion that he should be permitted to intervene and challenge the substance of a settlement designed to protect the interests of the company he defrauded is ludicrous."

"The shareholder plaintiffs who originally sued HP’s directors and officers now agree that Hussain, along with Autonomy’s founder and CEO, Michael Lynch, should be held accountable for this fraud. The settlement, therefore, provides for the shareholder plaintiffs to drop their claims against the victims of Lynch and Hussain’s fraud, and for their counsel to assist HP in pursuing the perpetrators of the fraud, who inflicted billions of dollars of harm on the company," it said.

Both Hussain and Lynch reject the allegations against them.

"This breathless ranting from HP is the sort of personal smear we’ve come to expect," a spokesperson for Hussain and Lynch said, according to a BBC report. "As the emotional outbursts go up, the access to facts seems to go down."

UK accountancy watchdog the Financial Reporting Council announced last year that it had launched an investigation into the published accounts of Autonomy. Deloitte, which audited the accounts during the period covered by the FRC's investigation, has said that it had "no knowledge of any accounting improprieties or misrepresentations in Autonomy's financial statements" and that it had "conducted [its] audit work in full compliance with regulation and professional standards".

The Serious Fraud Office (SFO) is also investigating the alleged fraud at Autonomy, and other investigations into the alleged "accounting improprieties, disclosure failures and misrepresentations at Autonomy that occurred prior to and in connection with HP's acquisition of Autonomy" are also being conducted by the US Department of Justice (DoJ) and Securities and Exchange Commission (SEC).

Anti-corruption law specialist Barry Vitou of Pinsent Masons, the law firm behind Out-Law.com, previously said that the dispute between HP and Autonomy and news of the SFO's probe had highlighted the importance of not bowing to the temptation to "cut corners on mergers and acquisitions due diligence" to close transactions faster and reduce costs.

"In our experience a tick box approach is a false economy though we have noticed an increasing commoditisation and a reluctance to pay for anti-fraud due diligence in recent years," Vitou said. "The inevitable result is that less detailed anti fraud due diligence is done, if any is done at all."

"Considering the eye-watering regulatory penalties and the potential commercial damage that result from fraud, it is a surprise when little detailed due diligence work on fraud is carried out. If businesses want to avoid nasty surprises in the form of alleged or suspected criminal activity crawling out of the woodwork after the deal is done, proper anti-fraud due diligence needs to be done up front," he said.