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HP knew Autonomy was a duff buy, claim HP shareholders in $1bn suit

Apotheker ignored accounting irregularities and outdated tech

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HP ignored numerous warning signs about the state of Autonomy's finances and accounting irregularities at the firm before acquiring it for $11bn, shareholders have alleged in a $1bn lawsuit.

The investors are suing HP's current CEO Meg Whitman, her predecessor Leo Apotheker, former HP chairman Ray Lane and Autonomy founder Mike Lynch, along with other senior execs and HP's banking aides, Barclays Capital and Perella Weinberg Partners.

The respondents are claimed not to have checked out Autonomy properly and then hiding the truth about the botched deal and the resulting $8.8bn writedown from the investors.

In a heavily redacted court filing, the shareholders said that HP's board had "performed no technical due diligence" and its fiduciaries "consciously decided to proceed with eyes closed shut, ignoring the warnings of their own professional advisors".

They claim that HP knew about accounting shenanigans at Autonomy before it bought the firm and is now pretending that the issues are news to the management.

The suit accuses Autonomy of engaging in "round-trip transactions" - buying and selling between two companies that ultimately cancel each other out, but allows both firms to list revenues. It also claims that HP knew about at least some of these transactions.

"One example is the deal that Autonomy entered with VMS Information, a transaction that was known to HP, its auditor KPMG and its financial advisors Barclays and Perella," the filing said.

"According to Peter Wengryn, the former CEO of VMS Information, in July of 2009, Autonomy sold $9m in software to VMS Information while at the same time Autonomy agreed to buy about $13m worth of licenses for data from VMS Information.

"According to three people familiar with the matter, Autonomy recognised the $9m in software sales as top line revenue, a key indicator for Autonomy. Autonomy then buried the cost of the data licenses from VMS Information as part of Autonomy’s sales, marketing or other expenses, a part of the income statement that is usually not considered a key indicator for growing technology companies like Autonomy."

"While HP now claims it “discovered” that revenue recognition was a problem post-transaction, this is disingenuous," the filing added.

Since announcing the write-down in November last year, more than $5bn of which is said to have stemmed from accounting practices at Autonomy, HP has insisted that it used audited financial statements and "representations of Autonomy's management and its auditors" in its decision to acquire the British company.

CEO Meg Whitman said at the time that KPMG was hired to review the work of Autonomy's own auditor Deloitte and didn't find anything wrong, but KPMG has denied doing a full audit, saying its review was limited to publicly available documents and it never audited Autonomy or looked at Deloitte's work.

Shareholders also claimed that HP knew it was getting outdated technology with Autonomy, not popular products.

"When HP made the decision to buy Autonomy, it knew… that it was acquiring an outdated product that was not user-friendly," the filing said.

"Autonomy was known for having a product that was difficult to use and needed to be highly customised for specific clients. This was not a product that could be easily sold.

"Nevertheless, HP paid an unprecedented premium to acquire Autonomy and its outdated product. HP was desperate to be able to claim that the acquisition gave it a competitive advantage in the 'Big Data' field by having a next generation integrated information platform."

The case is being brought on behalf of all investors who were shareholders from the day after the takeover was announced until the day HP 'fessed up about the writedown, including some big name funds. Damages in the case could exceed $1bn if enough investors hop onboard. ®

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