back to article Autonomy trial judge gets SaaSy with HPE's lawyer over vital accounts fraud claim

The judge in the Autonomy trial at London's High Court has questioned a key plank of HPE's case against former execs Mike Lynch and Sushovan Hussain, asking whether Autonomy's accounting practices were in fact fraudulent – which is what HPE has alleged. I just got here – what's it all about? In 2011, HP bought Autonomy – a …

  1. Anonymous Coward
    Anonymous Coward

    So far it sounds like the judge has get his head screwed on. Nice to see.

    1. SuccessCase

      Yes, I very much have the impression this entire case was fabricated because Meg Whitman was about to be sacked for destroying HP’s profitability. She had an awful Analyst call to navigate with massively missed targets and claimed there had been accounting irregularities with Autonomy which lead to all the targets being missed. The whole thing appeared a distraction tactic and she quite unashamedly tried to throw Lynch under a bus. Yet Lynch, it seems, had done nothing more than successfully window dressed his business for sale. That is not necessarily in any way illegal and it is the responsibility of HP’s auditors executing due diligence before the sale to present the true position of the business. HP claimed there were massive irregularities that were to be fully detailed at a later date. They then later failed to account for anything like the magnitude of their missed targets in relation to the Autonomy purchase. The whole case stinks of deliberate distraction. Having made the accusation it now seems Whitman has had to move forward with a weak case. If the case is lost I trust Whitman will be treated as the complete slimy a-hole pariah someone trying to blame others (not just blame - JAIL others) for their failures should be treated as.

      If I remember rightly there are different revenue recognition standards in Europe versus the US, and Lynch’s autonomy adhered to the EU laws. As an EU business it is of course entirely correct that they should do so. The auditors job in doing due diligence is to highlight such factors and differences.

      Reading this I now suspect the judge has already seen enough to have this figured out.

      1. BebopWeBop Silver badge

        If these are the findings, I do hope that US deportation attempts will be squashed

      2. gbshore

        Gbshore

        Bravo on this comment!!! Not sure why Meg received such high praise. As a former employee

        of 5 years, her strategy was never clear except confusion. What was clear was that EVERY move she made was about maximizing share price, which aligned to her pay and bonuses. IMHO, she was a horrible Executive and was all about the share price. Never got the feeling she cared much for customer success, despite her claims....

        1. JimboSmith Silver badge

          Re: Gbshore

          Ebay with MW at the helm bought Skype so that buyers and sellers could talk to each other. That went well too as they sold it at a loss.

  2. Anonymous Coward
    Anonymous Coward

    Yawn...

    I would hate to be on a jury for a trial like this. Would lose count of the number of times I would be found in contempt for falling asleep.

    1. gazthejourno (Written by Reg staff)

      Re: Yawn...

      a) No juries in English civil cases

      b) Someone genuinely just snored, once, loudly enough to be heard across the whole courtroom.

  3. Roland6 Silver badge

    Evidence to back up accusations

    HPE said: "The obvious and inevitable consequence of this ... – was to inflate Autonomy's current hosting revenue and profits at the expense of future hosting revenue and profits."

    I wonder if HPE kept Autonomy as a fully separate business post-acquisition and so can provide audited evidence that supports this contention. HPE must have several years worth of financials now; naturally the court would be well advised to do their own due diligence, as we wouldn't want it to be found that HPE had artifically depressed Autonomy's revenues...

    1. Gordon 10 Silver badge

      Re: Evidence to back up accusations

      Knowwing HP they fully integrated it just in time to split it out again to flog most of it to Microfocus.

      Though if Microfocus did their due diligence there should be some estimated adjusted revenues somewhere

      1. Nick Kew

        Re: Evidence to back up accusations

        Micro Focus was hit hard, too. Perhaps they should accuse HP of fraud?

        But Micro Focus is getting on with its business, and bouncing back.

    2. eldakka Silver badge

      Re: Evidence to back up accusations

      naturally the court would be well advised to do their own due diligence

      With respect to finding such evidence, no, it wouldn't.

      It would be up to the defence to do its own due diligence and present that evidence (if it existed) to the court.

  4. Dvon of Edzore

    Optional title goes here

    The judge is correct that paying £12 up front for a subscription to a £2.50 cover price magazine seems like a good deal from the consumer standpoint. These are businesses, however, and business rules for publishers and others who sell items for future delivery requires one to treat that sale as a liability to produce the goods, not an asset, until one actually ships the item. Counting the entire subscription receipts as an asset while sweeping the cost of actually delivering same under the rug seriously overstates the income side of the balance sheet.

    That said, HPE's accountants are presumably adults who were trained in such things and should have asked about the cost of goods or services behind those brightly-shining sales figures.

    1. a_yank_lurker Silver badge

      Re: Optional title goes here

      It sounds like the key issue is the correct interpretation of some accounting rules as they relate to properly accounting sales and future liabilities for sale. Then, even if the rules were incorrectly applied, were they do in a fraudulent manner. Just because the interpretation may have been wrong does not automatically make it a crime. His Lordship's question seemed to getting at this; there may be serious technical violations of accounting rules but was there any real criminal intent or action.

    2. Jellied Eel Silver badge

      Re: Optional title goes here

      I don't quite get this, which is why I find the case strangely fascinating, especially in a 'SaaS' world. So

      If Digital Safe and eDiscovery were services that were instead sold as products, HPE alleged, Autonomy should not have accounted for those as upfront revenues.

      I'm not an accountant, but have been involved in similar deals, with revenue recognition being a hot topic with the finance types. And also our possible commissions..

      So I design a solution that includes hardware, 'Cloud' components (sometimes dedicated, ie servers, racks, switches, storage), software licensing and ongoing support/services.

      Customer wants a 3 or 5 year deal. They're given the option of paying up front, potentially hedging inflation, forex etc, or monthly/quarterly. That's pretty standard. A deal worth X has been closed, and how revenue is (or should be) recognised seems to be the crux of the dispute. As I understand it, there are common accounting standards to treat revenue recognition etc in both cases.

      (then again, having read through the summary of the successful US prosecution, there appears to have been some more.. questionable transactions)

      1. BebopWeBop Silver badge

        Re: Optional title goes here

        What successful US case - the accountant. Given the US approach to plea bargaining and intimidation, it is not surprising they have prosecution ‘success’ rates that approach China

        1. Jellied Eel Silver badge

          Re: Optional title goes here

          I referred to this document-

          https://gov.uscourts.cand.305114.419.0.pdf

          And agree with your points. Plus would add cherrypicking what to indict, and that the US Wire Fraud statutes are perhaps too broadly applied. Especially when this largely comes down to differences of opinion regarding accounting treatments.

          Again of note and interest to me were some of the VAR/reseller transactions. That's sometimes been a thorny issue when I've worked for companies with VARs. It can be common (and frustrating) to be bidding on a deal directly, and your VAR also bidding. That's kind of the point of having a VAR/reseller channel to expand sales potential. Where it can get painful is when the VAR expects you to also write their bid, which means you're not getting the SG&A benefit, plus obvious conflict of interest. HPs argument though seems to be that some of the VAR deals were synthetic.

  5. Mark 85 Silver badge

    Curiouser and curiouser

    Why would HPE sue Autonomy and not also sue the accountants who supposedly did the "due diligence"? As for writing off the "lost" money, they got a nice tax break in return. Then again, I'm not an accountant nor a lawyer.

    1. Gordon 10 Silver badge

      Re: Curiouser and curiouser

      Because if they do that its one megaglobo corp against another rather than just 1 or 2 very rich but still limited men.

      Plus the accoubting firm is a probably a client assuming they also aren't their auditors.

    2. Velv Silver badge
      Terminator

      Re: Curiouser and curiouser

      Perhaps the Due Dilligence did identify the accounting practises and someone chose to either ignore the report or bury it. Happens more often than you’d think, the ego of an Executive getting ahead of the reality.

    3. eldakka Silver badge

      Re: Curiouser and curiouser

      Because first they have to prove that there was in fact accounting fraud.

      If such accounting fraud did happen, it was Autonomy who would have committed the fraud.

      If HPE wins against Autonomy, then they have a decision that says fraud was indeed committed. Then they could go after the accounting firm for not detecting such fraud since that was their job. In this case, they would be suing for fee recovery of what they paid the consultants as they didn't do their job, as they should have gotten that 'making whole' compensatoin from the case against the former Autonomy execs as they were the ones who, in this unproven scenario, would have been the ones who committed the fraud.

      However, even if HPE loses, if they lose because of the accounting differences between the two different countries accounting systems, something that the accounting consultants HPE hired should have been aware of and accounted for (pun intended), then HPE could sue them for more than just recovering the fees they spent on the consultants. In this case, it is possible (depending on the contract between HPE and the accounting consultants hired) that HPE could recover the writedown cost from the accountants if it was found they acted negligently.

      In either case, first the former Autonomy execs need to be sued to determine which path to follow against the accountants - just a fee recovery, or a fee recovery plus compensation.

  6. ToddRundgrensUtopia

    Why would HPE sue Autonomy and not also sue the accountants

    Because once Apotheker had been removed they had no one who understood software. Both HP's and IBMs record at acquiring SW firms and them not growing them is appalling.

    It doesn't change whether Lynch and Sushovan were guilty or not, it just feels like, " hey we made a huge mistake, so lets find someone else to blame".

  7. Borg.King

    Whichever way this goes

    this will end up going to appeal.

    [I think it'll eventually go against HPE who failed in their due diligence.]

  8. Anonymous Coward
    Anonymous Coward

    Thru foggy stockmarket aspirations

    So much lipstick, but as it turns out, much more pig.

    Accurate financials are more than skin deep (yeah, yeah, yeah)

    1. eldakka Silver badge

      Re: Thru foggy stockmarket aspirations

      If it looks like the lipstick has been applied with a trowel, then its either time to look much more closely and carefully, or just to turn around and walk away...

  9. DCFusor Silver badge

    As a single percent

    They are talking about ~ 125 mil in revenue brought forward when it would have actually been paid them over time.

    But paid how many billions for the company? 11 bil?

    Anyone numerate would be having quite a chuckle over ~ a 1% issue.

    Sure, a bad day at the office, and one any sort of due diligence should have caught but...

    1. Dvon of Edzore

      Re: As a single percent

      Bringing revenue forward makes it look like the company is growing faster than it is, meaning stock market investors may now believe HPE is worth more. When reality hits, confidence in HPE is shaken and the market reacts like a Boeing 737 Max.

  10. don't you hate it when you lose your account Bronze badge
    Unhappy

    Due diligence

    Buyer beware. How much did they pay, how much did they pay an accounting firm to check the figures. The seller played fast and lose with their books but nothing hidden or illegal as far as I can see from the facts available so far. Sue your accountant HP for failing their jobs.

    I wish

  11. The Nazz Silver badge

    Curious and curiouser.

    IANAA either but it seems to me that :

    HPE's case seems to be that Autonomy "pumped" sales ( US term Revenue) so as to misrepresent their true volume, and profitability of the business therefore their worth.

    In a simple example, Autonomy may well have made a number of "deals" , totalling say £200m, for contracts for upto 5 years duration.

    And even if they did, and booked the whole £200m up front in the P & L year in which the deal was made**, (which seems to be HPE's main grumble) the Balance Sheet would show Debtors of £200m and the notes to the accounts would give a breakdown of the years in which the £200m was due.

    And if that wasn't obvious to HPE how difficult would it have been for HPE, or their due diligence professionals, to actually examine some or all of the contracts making up the £200m to see precisely what was involved. Not difficult.

    ** there again, from limited knowledge, i cannot see how booking all of the revenue upfront (or indeed accelerating a major part of it) complies with UK accounting standards nor how on earth it would be allowed by the auditors. HPE do seem correct in saying that revenue should be booked (roughly) in line with the provision of that service.

    A £12 magazine subscription, a £1200 National Trust lifetime membership (how many years is that gonna be?) actually paid and settled up front, with immediate benefits, no-one is going to quibble about that being booked at the point of sale. That's what it is.

    But £200m with a well defined contractual period of service provision? Different kettle of fish. Hence the long term development of accounting standards.

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