Autonomy paid its own customers to pump up revenues, claims HPE Mike Lynch's Autonomy Corporation pumped up its value by paying its own customers to buy its products so Autonomy could inflate its accounts, London's High Court was told this morning. Laurence Rabinowitz QC, counsel for HPE, told Mr Justice Hildyard that under Lynch and former CFO Sushovan Hussain, Autonomy "engaged in a …
Don't forget all the accounts were previously analysed by HP's auditors as part of a due diligence process. It's fine to offer inducements to make sales as long as the costs of doing so are entered properly somewhere legally acceptable. Now, being clever about where you enter that cost, such that others might not immediately realise it is related to sale x, is called painting yourself in the best possible light rather than fraud. HP only launched a complaint about Autonomy "fraudulent" accounting, when Meg Whitman had to go before Wall Street analysts with completely declining revenues and missed targets way beyond what could be explained by the figures they gave in relation to the Autonomy purchase. It seemed to me she would have been sacked there and then but she suddenly pointed at Mike Lynch and shouted "Squirrel!".
I'm sure Lynch has been "guilty" of painting a piece of crap gold. But if you haven't anywhere said it is solid gold, and that the centre isn't crap, you haven't necessarily done anything illegal. In fact, your shareholders are likely to think you have just been a good salesman. Caveat Emptor and all that.
Anyway, this will all be looked at in detail by the judges and I'm happy to accept they will have a better view of this than us here and their judgement is far more likely to be the right call than mine. It will be interesting to see the outcome.
I guess you could assume all auditors are of corrupt cohort and.... sue them all...?
Reasonable assumption, and you could try. But most of this type of advisors are adept in disclaiming any responsibility, or especially liability.
Otherwise it can be a case of experience, and a sniff test. "These numbers don't look right, or justify the valuation.. Can you explain this?" Which is where the litigation comes in. If HP was told they'd been given all material information to do their due diligence, and critical information was witheld, or altered, then there's a problem. Again I think the issue was the diligence didn't reflect the difference between Autonomy's book value, and HP's offer.
Basically that they were selling stuff at less than they could buy it for. So whilst impacting their profit and loss in a bad way, making their revenue apparently be growing.
Probably based on the reasoning that a startup isn't supposed to be making any profit in the early days, and is trying to gain market share.
I don't get that either. Or this bit-
"the practice of buying and selling hardware at a loss with a view to revenue pumping, to reflect revenue which in fact is obtained by selling hardware at a loss which wasn’t disclosed".
That's also something I'd have thought easy to spot in the accounts, so revenue from hardware sales vs cost of buying that hardware.. Especially as it would seem to have needed a LOT of tin. And some financial engineering, because part of Autonomy's attraction was very high margin claims. Selling a lot of tin at a loss would (or should) obviously impact that.
I also don't necessarily see anything wrong with reselling naked tin. Waay back, I worked for a company that sold Internet appliances. Appliances we sold direct were obviously bundled, but we also supplied seperate hardware and licences so our resellers/VAR's could build their own systems. We had confidence the licences would work on the tin we supplied, and also increased our volume so we got better prices on that tin. Difference I guess is we were very much focused on margin rather than revenues, so didn't want too much volume reselling the tin.
> Paying a VAR a 10% markup to incentivise sales does not seem a problem
I wonder whether part of this revolves around how commission, incentives and cashback were paid and recorded.
So did Autonomy sell stuff to Resellers/customers at say £x, customer/var wrote cheque for £x, Autonomy recorded this in their accounts and also recorded a payment of £y commission/cashback to reseller/customer. Which is what HMRC expects; HMRC don't like businesses putting one figure on the invoice and a different adjusted figure in the accounts.
In which case the turnover/revenue figure would be larger than expected, but then this would have been balanced by the increased costs.
Or are HP alleging there are phantom transactions recorded in the accounts, in which case why isn't HMRC prosecuting.
Suspect HP got fixated on the revenue figure and didn't read any further.
If you want the details of what the CFO has already been convicted, read the indicments here: https://www.courtlistener.com/recap/gov.uscourts.cand.305114/gov.uscourts.cand.305114.419.0.pdf
If you want to know what will happen next? The Dr Lynch will say "I was never involved in any of this... I wasn't involved in the details"
>but you forget that the CFO has already been convicted. Its hard to forget the facts:
Interesting read, however, I do get the feeling that the 'facts' aren't necessarily the real facts. As was pointed out in the court document, there was no expert accountancy witness called by either side. So I get the distinct impression the standard of 'facts' is much lower than you would have expected, because if the 'facts' really are what the prosecution say then you have to ask why has there been no criminal case brought in the UK...
If they were "cooking the books" to meet all their expectations, then the stock price didn't suffer a hit for not meeting them. Since HP had to presumably purchase x million shares to acquire the company, having a fraudulently inflated share price means that they overpaid due to fraud. There is a multiplier affect going on. Say the stock price is 40/share too high and HP had to purchase 70M shares to acquire it. That would result in an overpayment of 2.8B. These are just sample numbers, but you can see how it could get out of hand quite easily due to the multiplying affect.
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