- A $US5 billion fraud trial involving Hewlett-Packard and the former executives at software company Autonomy kicked off on Monday in London’s High Court.
- HP has accused Autonomy’s former CEO Mike Lynch and its former CFO Sushovan Hussain of overstating the software firm’s value.
- On Monday, HP published internal Autonomy emails showing Lynch swearing at colleagues. It said this showed that he was a hands-on CEO.
- HP also argued that Lynch and Hussain perpetrated several “improper transactions” that made Autonomy’s software business look healthier than it really was.
- Lynch and Hussain have denied all of HP’s allegations.
Hewlett-Packard’s $US5 billion legal battle against two of its own former executives kicked off on Monday in London’s High Court. It’s the UK’s biggest fraud trial, centring on HP’s $US11 billion acquisition of British software firm Autonomy.
The Silicon Valley giant has accused Autonomy’s former CEO and cofounder Mike Lynch and its ex-CFO, Sushovan Hussain, of fraud and inflating Autonomy’s value in the run-up to the sale, leading HP to wildly overpay. The $US11.1 billion price tag was a 79% premium on Autonomy’s share price at the time.
In its opening arguments on Monday, HP argued that Autonomy’s executives knowingly cooked the firm’s books in preparation for a possible mega-sale, between the beginning of 2009 to early 2011. HP acquired the firm in October 2011, and subsequently wrote $US8.8 billion off its value.
Laurence Rabinowitz QC, for HP, argued that Hussain and Lynch gave a “deliberately false and misleading impression as to what [Autonomy’s] sources of revenue were.”
Lynch heard HP’s arguments from the court’s public gallery, wearing a sombre expression and dressed in a dark suit and blue tie. His co-defendant Hussain remains in the US, where he was convicted in a separate criminal trial over the HP-Autonomy deal and awaits sentencing.
HP published early Autonomy emails showing former CEO Lynch swearing at staff
HP will seek to persuade the judge that Autonomy lied about how it was really making money, that HP’s leadership didn’t discover this until after the acquisition, and that Lynch and Hussain specifically were responsible for defrauding the company.
Lynch’s camp will argue that any loss in Autonomy’s value happened after the acquisition, and that it was HP’s own fault for not managing the integration between the two firms properly. Lynch’s lawyers will also argue that he, as CEO, was not responsible for the company’s finances at a granular level and wasn’t monitoring every deal.
On Monday, HP attempted to unravel the idea that Lynch was a hands-off CEO.
In its opening submission, the firm described Lynch as a “controlling and demanding individual” who did take a close interest in individual deals and the detail of sales.
HP published an email from Lynch to highlight his close interest in a US government deal that was in danger of collapsing. “If there is any problem I WANT TO KNOW ABOUT IT IN A F***ING MILLISECOND from all of you,” Lynch wrote, according to the documents.
HP added in its submission: “This is not the stance of a statesman viewing the business from 10,000 feet.”
HP added that Lynch was responsible for creating an “oppressive work environment” where employees felt huge pressure to make money.
In another email from 2010, Lynch wrote to a sales representative: “[You] ever send me an email like this again AFTER the event and you are f**ing toast, I swear if I could squeeze down a telephone line to California you would get to know directly how the f*** I feel about this.”
HP alleged Autonomy used transactions to make its core software business look healthier
Speaking at the High Court on Monday morning, HP’s QC Rabinowitz focused closely on how Autonomy recorded its revenue in the run-up to acquisition.
At the time of its acquisition, HP said, Autonomy billed itself as a software firm that analysed structured and unstructured data.
But, the firm argued, Autonomy didn’t really make all of its revenue by licensing out or selling that software, and instead recorded several types of “improper transactions” that made its core business look healthier than it really was.
For example, HP said, Autonomy bought and resold “substantial” amounts of servers, laptops, keyboards, and mice at a loss, which had little to do with its core software business.
Most of this hardware did not come pre-loaded with Autonomy’s software, HP said, and there was no “commercial rationale” for selling this kit except to inflate revenue figures. The hardware business accounted for about $US200 million of Autonomy’s revenue between 2009 and 2011, or 11% of its total business.
HP said it wasn’t aware of this substantial underlying hardware business until after it acquired Autonomy. HP also took issue with Autonomy’s use of resellers, and short-term deals that made immediate revenue growth look good but would cost the company in the long run.
The firm argued in its opening submission:
“Far from being a high margin, ‘pure software company’, Autonomy was meeting its revenue and revenue growth targets by simply buying and selling third party hardware, without any connection to Autonomy software. Autonomy was also using a variety of other fraudulent devices to accelerate revenue that should have been recognised in a later quarter or to invent revenue that never existed in the first place. Once these fraudulent practices are stripped away, it becomes clear that, in truth, the Autonomy group was experiencing little growth and was falling consistently short of market expectations.”
But Lynch’s lawyers, in their opening submission, say HP did know about the hardware sales. They didn’t deny the firm sold hardware, but couched this as a marketing strategy to safeguard its business.
Lynch and Hussain have denied all of HP’s allegations, and their lawyers will make their opening arguments later this week. Lynch has countersued HP for $US160 million.
The trial continues.
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