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

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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.

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 thirdof 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.

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, but most of the questioned deals involved five companies.

HP says three in particular, MicroTech, DiscoverTech and Capax Discovery, claimed about $7.7m in “marketing fees” from Autonomy. These fees were improper, HP claims, because the reseller was either not involved in negotiations with the intended end user or the whole deal was eventually written off.

In a statement MicroTech said: “As far as we are concerned, MicroTech engaged in bona fide purchases and resale transactions, which is our business. If HP’s allegations about Autonomy are accurate then MicroTech was also a victim.”

DiscoverTech and Capax Discovery did not immediately respond to requests for comment.

HP also claims to have identified circular or round-trip transactions involving resellers, where the smaller businesses agreed to buy Autonomy software, while simultaneously selling products and services to Autonomy of similar value.

One such deal was a MicroTech contract with Autonomy to purchase $7m of software plus $350,000 for support and maintenance in June 2011. The stated end user was HP itself. But HP never purchased the Autonomy software from MicroTech. On 17 August 2011, MicroTech paid its bill. But the day before, on 16 August 2011, Autonomy paid MicroTech $8.2m for a “US Government Federal Cloud Platform for the Autonomy Solution”, a platform that was, HP claims, never delivered. “Autonomy therefore paid MicroTech for software which it did not need.”

HP has also questioned revenue claimed from data hosting deals. Autonomy bought a business called Zantaz, which specialised in storing data for companies on its own servers. The money for these contracts was typically collected in instalments over a number of years. Autonomy says the deals were renegotiated for a lower overall fee in exchange for a bigger upfront payment.

Other allegations centre on sales of Autonomy’s flagship IDOL product, which allowed companies to search their own data such as emails, documents and voice messages. HP says IDOL OEM revenues were overstated. OEMs are software companies that embed Autonomy’s technology in their own products, and then licence it on to their own customers. But Autonomy’s stated OEM revenues included income from non-software companies, or companies that intended to use the software for internal purposes only, HP claims. The revenues were overstated by 390% and “portrayed this aspect of its business as growing rapidly when, in fact, it was shrinking”, according to the filings.

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.”

Powered by Guardian.co.ukThis article was written by Juliette Garside, for theguardian.com on Tuesday 5th May 2015 19.54 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010