HP and Its CEO Must Answer Shareholder Lawsuit Over Disastrous Autonomy Deal
Computing giant certainly appeared to have a good day yesterday. On the same day that it reported quarterly earnings that beat expectations, a federal judge in California ruled that HP will have to defend itself against a shareholder lawsuit.
What do shareholders have to be unhappy about? Perhaps you’ve forgotten about the Autonomy acquisition. It was this time, a year ago, that HP said it would take a charge of almost $9 billion that included a $5 billion write-down on the value of Autonomy, the British software firm it had acquired in 2011 for about $11 billion.
HP has alleged several accounting improprieties at Autonomy, and has accused its CEO, Mike Lynch, of essentially cooking the books in order to inflate the company’s valuation. Regulators on both sides of the Atlantic, including the U.S. Department of Justice and the Serious Fraud Office in the U.K., are said to be investigating the matter. Lynch and Sushovan Hussain, Autonomy’s former CFO, were reported in March to have hired criminal-defense attorneys.
You may recall that the deal was done under HP’s previous CEO, Léo Apotheker, though its current CEO, Meg Whitman, was a member of the board of directors, and signed off on it. To this day, she insists that it was a bad deal for an otherwise good company with what she has called “magical” software technology.
The lead plaintiff in the case is PGGM Vermogensbeheer B.V., a pension fund based in the Netherlands. The primary allegation is that HP executives made misleading statements about Autonomy, and knew more than they let on about its finances.
The judge, Charles Breyer, ruled yesterday that HP and Whitman will have to defend themselves against the lawsuit. He denied motions that would have also required several other former HP executives to defend themselves. They include Apotheker, Lynch, former HP chairman Ray Lane, and HP’s former chief strategy officer, Shane Robison. Robison is now CEO at Fusion-io.
If you’ve been following the whole Autonomy matter, then the judge’s decision, which I’ve embedded below, is essentially a preview of what could turn out to be a very interesting lawsuit. There is still a great deal about the inside deliberations leading up to the close of the Autonomy acquisition — maybe some juicy memos or meeting notes — that haven’t come to light, and which could turn up as evidence.
For instance, in her first days as HP’s CEO, did Whitman — as the plaintiffs allege — really want to pull HP out of the deal she had previously voted in favor of? And, if so, what prompted that? What did she know about Autonomy’s books, and when did she know it?
In singling Whitman out, the judge zeroed in on statements the CEO made on conference calls on May 23 and on June 5 of 2012, where she discussed why she thought that the Autonomy acquisition was dragging down HP’s results. None of the reasons Whitman gave included the possibility of accounting fraud when she knew might be the case, Breyer writes.
One important fact that’s likely going to be established at trial is exactly when the anonymous former Autonomy exec referred to as “Whistleblower No. 4″ came forward with allegations of accounting improprieties. HP didn’t reveal what it knew about this until six months later. Breyer writes that speaking out about the ways that Autonomy was dragging down HP’s results, and not mentioning accounting fraud as a possible reason, might amount to a “material omission” about which shareholders had a right to know.
Breyer sums it up nicely in a footnote: “Whitman could have honestly answered the question by saying she did not know the explanation for Autonomy’s underperformance but was actively investigating its cause.” Instead, she said it was a case of “classic entrepreneurial company scaling challenges,” with no mention of possible accounting fraud.
The judge’s ruling is below: