HPE's orders to expert accountant in Autonomy trial revealed HPE instructed its accounting expert to assume that Autonomy was knowingly engaged in transactions to falsely inflate its accounts, according to court documents seen by The Register. Expert witness Peter Holgate was given a set of working assumptions by HPE for most of the transactions he analysed for the Autonomy trial. I …
From Holgate's table, it appears that hardware was increasingly the driver of Autonomy's growth in the runup to its buyout by HP.
Are you sure? It looks like the percentage of growth "lost" if you remove hardware is lower in 2009-10 than in 2008-9? So that's a decreasing effect.
Also there's a really important question here. How do you define which sales are growth? Because if you can claim all the hardware sales are in the "growh" bucket of Autonomy's sales, then you can make it look like Autonomy's sales were 10% hardware - but it could be that their total sales were 2% hardware and he, or HP, have selected all the hardware sales as "growth"? Unless there's a standard definition of growth use to break down sales - which seems problematic. Surely growth is just the difference between one year's turnover and the next?
But this looks pretty bloody shaky, if it's all the evidence HPE have got. We've got the one self-reported case of "fraud" from the US, with the witness who got immunity if he would allow his testimony to be agreed in advance - and that's not at all dodgy oh no!
But other than that we're talking about a moderate percentage of sales being entirely legally booked, but HPE being sad because they're low margin hardware, not high margin software. But even on their definitions of the accounts (which I would want to see confirmed independently) is at worst is reducing 47% growth to 36% growth. And that's on sales figures - so the effect on growth of profits is going to be less - given the assumption that this hardware is low-to-no margin and most of the profits come from the software.
Split between software and hardware revenue and margins should have been the first question asked in due dilligence. And if Autonomy lied about that - then HPE would have a case. Was there any evidence of that? I don't remember it, and in fact remember the opposite. I'm going to be fascinated by what the judge says at the end of all of this.
Split between software and hardware revenue and margins should have been the first question asked in due dilligence.
I'd take a different approach. I'd want to see the anatomy of the top-10 deals, ideally both direct and indirect sales. That would give an understanding of how effective those channels are, and help identify revenue/margin/cost of sales.
That can be a big problem, ie there are 'good' VARs, and bad ones. Theory goes a VAR adds value because they take on pre/post-sales activities. Where that theory breaks down is if the channel doesn't do that, so costs are carried by the supplier, especially if the sale is discounted because it's via a reseller. Or if the VAR gets commission. That's a great way to lose margin and also hamper the company's direct sales because resources are doing the VAR's work.
Looking at a simple hardware/software split might be misleading. Hardware-only sales may raise eyebrows, but there could be good reasons for that, ie increasing hardware volumes to get better discounts or support from suppliers. For me, this saga still seems to boil down to a lack of due diligence, especially given the deal size.
Are you sure? It looks like the percentage of growth "lost" if you remove hardware is lower in 2009-10 than in 2008-9? So that's a decreasing effect.Not quite.
(using round numbers, and based on the supplied information, not concluding the accounts numebrs as right or wrong)
In 2009-2010, 6 percentage points of the total 17% growth was tied to hardware. That is 35% (1/3rd-ish) of the reported growth was attributable to hardware.
In 2008-2009, 10 percentage points of the total 47% growth was tied to hardware. That makes it roughly 21% (1/5th-ish) of the reported 47% growth attributable to hardware.
Therefore a 35% portion of Autonomy's growth attributable to hardware in 2009-2010 is a larger proportion of its growth than the 2008-2009 attribution of 21%. Therefore as a proportion of growth, hardware was a greater proportion in 2009-2010.
eldaka,
Good point. I did read that too quickly.
Now I look again what he seems to have done is split out all HW from their sales figures - and then make that a percentage of growth. So:
2009 - $740m - $687m = $53m HW sales
2010 - $870m - $765m = $105m HW sales
So their hardware sales in 2010 are double that of 2009 - when overall growth was only 18%. And have gone from about 7% of total sales to 12%.
However it's pretty hard to develop a pattern out of just 2 years data - and I'd also like to see the effect on profits - because Autonomy were still pretty profitable. However a maturing software company with 12% of sales being hardware isn't exactly what I'd call unusual.
... instructed its accounting expert to assume that Autonomy was knowingly engaged in transactions to falsely inflate its accounts ...
What?
Nah, no way ...
Must be fake news.
Just think about it.
Why would an expert accountant actually do such a thing?
And most important, what motives would HPE have had to instruct its accounting expert to assume Autonomy was doing something dodgy?
Makes no sense, after all, it was HPE who hired the chap to find out if that was so.
Oh, I see ...
O.
oiseau,
The accounting expert in this case means HPE's expert witness. Unlike in US court cases (where things are different and I don't know the details), in UK cases there's normally only one expert witness that both prosecution and defence share. In the US you hire your own I think. So a UK expert witness is supposed to be "assisting the court" and therefore impartial. People tend to get registered in some way, and get used repeatedly once they've built up their reputation. I know a couple of people that do this professionally - including one building design engineer who's almost entirely retired from practising and just writes reports and gives testimony when construction contracts go titsup. He sometimes comes to me for advice on the Water Regulations. So does that make me an expert witness to an expert witness, and should the courts be paying me?
Anyway in some cases, such as this one, defence and prosecution insist on having expert witnesses of their own. Or this could just be because HPE are used to the US system? However, they're still assisting the court, and if they don't want to torch their reputations, that means they still have to stay impartial - but in this case can be given a remit to make things look worse for the other side. However, as with this witness, he still came out and said in his report that there was no legal reason for Autonomy not to report hardware and software sales together, just that he wouldn't have done it. And also, he has listed the assumptions HPE told him to make in that report.
I'm told by my construction expert witness that judges can get very hard on witnesses who have been brought in to do a hatchet job for one side, and start cross-examining them in court themselves and getting very sarcastic at them. He was talking to me about a case last year where the other side in case's expert witness got taken apart by the judge, not the lawyers. Probably career-endingly.
I thought this was a civil case, not a criminal case. Therefore there would not be a prosecution but rather a plaintiff and a defendant. What surprises me is that the case has gotten this far. HP is a big company, and I am sure that it has bought lots of other companies. Did it not do it's due diligence on this one?
Many years ago I was an expert witness in a patent infringement claim in the USA; each side can have as many expert witnesses as they want and in a civil case they are deposed by the opposing counsel.
In a civil case in the USA, virtually all the answers are known prior to the case ever getting near a courtroom due to disclosure - one attorney I know told me that none of the lawyers would ask a question where they did not already know what the answer would be. He also told me that in technical cases, the most believable expert would carry the case.
Two (or more) subject matter experts can differ on things (one thing I had to explain was that a battery and a capacitor are not the same thing at least in that particular application).
In the end the plaintiff gave up.
"in UK cases there's normally only one expert witness that both prosecution and defence share"
Having spent about 14 years in a job where it was my role to be an expert witness I don't recognise that situation at all. True we were usually called by the prosecution but there were a number of instances where defence experts came in to examine my or my colleagues' work. Sometimes we had to show them how to operate the microscopes & so forth...
Maybe things are different in the civil world but as I read it it doesn't seem to have been the case here.
With the US Department of Justice starting extradition proceedings to force Lynch out of the UK and into the hands of American prosecutors, there is a possibility that the entire High Court proceedings may become what lawyers call a "moot point" – or, as you and I might say, "irrelevant".
However could one not say then the UK is as a lapdog and cuckold to an Upstart Bully of a USA Administration?
I was wondering if the judge could make an order preventing Lynch's extradition before he has made his judgement.
In the event Lynch is not found culpable, that should have an effect on the extradition proceedings.
I doubt it, as this is a civil case - and the trial is now finished. The judge is just going to take until May to do his actual judging. And extradition is dealt with by the criminal courts - but they may take this trial into account, given that any US prosecution is going to be relying on mostly the same evidence.
However our stupid treaty with the US doesn't give the Home Secretary the normal public interest grounds to stop extradition - hence a bunch of the recent high profile ones have been done on possibly spurious medical/welfare grounds.
One of the upsides of Brexit, in my opinion of course, is that it's looking likely we won't be allowed to stay in the European Arrest Warrant system, which is the other extradition treaty that works this way. Whereas I believe that it's one of the fundamental roles of government to protect its citizens - and that includes from foreign governments. So I think we should only be extraditing people when we're totally happy that they're getting a fair trial, and that it's also in the public interest that they should face trial - which is the system our law requires for trials in this country. So I'm hoping that the EAW gets killed off, and then the US extradition treaty follows closely on its heels.
Chris G "In the event Lynch is not found culpable, that should have an effect on the extradition proceedings."
Go check up on the UK/US extradition treaty. The US just needs to present a valid US warrant to the UK court and then off you jolly well go.
It's a great treaty. Very well negociated. Signed to deal with those nasty terrorists.
What's that? It only gets used for jailing UK citizens for whitecollar crimes in the US that are not crimes in the UK? Whoops. Ah well there is always the ECHR...
Anon,
As much as I dislike the US treaty, and have complained about it and the EAW for years - you're not quite right. I believe that in the case of both treaties someone can only be extradited on offenses that are also offenses under UK law. They also don't have to show as much evidence as you do for a normal extradition treaty. But the real killer is the loss of the power for the Home Secretary to not allow extradition on public interest grounds. And that power needs to be restored to our system.
While the assumption does appear unfair, stating it and the attempt to argue the prosecutions side of the case likely justifies it.
Plus it would appear that the expert has actually disproved the assumption....
While there is a decline in growth with the removal of the hardware sales, it doesn't justify the extent of HP's write down which bring's into question the validity of HP's claims.
Combined with the disclosures in the KPMG due diligence (in-spite of it being rushed and incomplete) and the post-acquisition management of Autonomy, the majority of the errors (90%+) appear to be on HP's side AND within HP's control.
Failing to exercise that control and account for differences is NOT the same as being the victim of fraud.
...calls the tune.
No surprise in the instructions given to HPE's expert - I am sure instructions were given by Mike Lynch to his team explaining their rationale and how what they did was proper and legal.
Cannot wait for the outcome of these proceedings, but in the end this whole saga comes down to HPE's woefully inadequate due diligence.
As an expert witness you are supposed to come in and look at the details as an independent. i.e. assume nothing and see what comes out.
To go in with that lot of assumptions and not push back and say "hey, I'll decide what assumptions I need to make!" is pretty poor form. It seems a very good way to have your expert testimony called in to question and that for a consultant is a very good way to ensure you lose a ton of business in future.
Very poor work from the expert, very poor!
Seems to have been very poor work from everyone on the HP side from the very first day it was suggested they buy Autonomy.
Either that, or someone on the HP side is burying the good work done by some experts in order to protect someone else in HP.
Very poor work from the expert, very poor!
Actually I'd say the reverse. HPE's expert made the assumptions he was required to work under clear to the court and seemed to me to state clearly when questioned that his own view was that Autonomy had not acted against accepted practice.
Scarcely very poor.
No, an expert can be asked to explain what it would mean if certain things were true - that is, a report is written assuming they're true, with that assumption clearly stated. It doesn't mean the expert thinks the assumption is likely to be true.
The danger for the litigants in commissioning a report of that nature is that if the conclusions are ludicrous, they cast strong doubt on the truth of the underlying assumptions; if the conclusions are insufficient to support the case, they cast doubt on the relevance of the assumptions.
"They are either paid by the defence or persecution - the bias is built in."
I'm not sure that my role was being paid by the persecution as you put it but there have been numerous occasions when I would say either I couldn't find any evidence or the evidence was contrary to what was assumed. I've also been in the position in the witness box where I was fending off the prosecuting counsel's attempts to make me put more weight on the evidence than I considered it would bear and ultimately rescued by an objection from the defence.
One of my former colleagues went into private practice. Last time I called in to see the old firm I found he was back in the fold. His explanation was that he couldn't think of enough reasons why bad boys shouldn't be in gaol.
My thought entirely. I should think that the judge could now stop the case and order a retrial on the basis that Holgate's expert opinion was not his own. I would have thought that if the judge ruled in Lynch's favour then HPE could easily appeal on the basis that Holgate had been compromised, albeit by them.
Either way it's trebles and refreshers all round!
With the US Department of Justice starting extradition proceedings to force Lynch out of the UK and into the hands of American prosecutors, there is a possibility that the entire High Court proceedings may become what lawyers call a "moot point" – or, as you and I might say, "irrelevant".
I'm not clear why this should be the case. If the Judge finds against HPE then why would we look favourably on a extradition request for something our courts have already found against? Alternatively why would we consider and acquiesce to an extradition request when our court hasn't completed consideration of the case?
Personally I'd think long and hard before turning Harold Shipman over to US "Justice" as it stands at the moment, never mind someone in a case like this where the facts are so clouded in technicality and doubt, on both sides.
It's a race condition...
If Lynch is extradited BEFORE this case is decided, he will likely be imprisoned in the US regardless of the outcome of the case and anything he avoids in the UK case he will get in the US regardless (i.e. prison and lose assets).
Lynch's chances of avoiding extradition likely depend on the outcome of this case - something HP may choose to delay if they can to get a better verdict in the US.
Lynch's chances of avoiding extradition likely depend on the outcome of this case - something HP may choose to delay if they can to get a better verdict in the US.
Which strongly suggests Lynch should be lobbying for extradition to be delayed until the current trial is completed. I suppose it comes down to which court has priority.
Timing...
Currently, things are decoupled, so it is possible that the extradition request gets a legal sign-off before the UK judge delivers his verdict in this case...
However, it is possible that the extradition request (and all its supporting documentation) can be taken to be new evidence and so cause the current case to be re-opened...
The US case would be decided under the law of the US, or whichever state is applicable. The UK case is decided under UK law.
Of course it's not impossible, or even unlikely, for those two bodies of law to say different things and be interpreted by different authorities, and thus lead to different outcomes. Even if the UK (civil) court says that no civil remedy should be applied, US (criminal) law may see the matter differently.
"The US case would be decided under the law of the US, or whichever state is applicable. The UK case is decided under UK law.
Of course it's not impossible, or even unlikely, for those two bodies of law to say different things and be interpreted by different authorities, and thus lead to different outcomes."
This is exactly why it would be a travesty of justice if Lynch was extradited. I have no idea about the man himself but the point is that he sold a British company, liste don teh London stock exchange, teh sale taking place in England. US laws may be different from UK laws and that difference may even be significant but the applicable law is clearly English law. If when any of us do something in Britaian that annoys a rich american we can be extradited to be tried under american laws whcih we have no awareness of then the british state has abandoned any pretence to protect its citizens or to have an sovereignty at all.
This would be true even if there was some significant evidence against Mike Lynch the civil case as reported so far has been pathetic with HP failing to provide even a plausible case that there was any fraud, let alone proof it to a criminal standard, let alone tie it to Mike Lynch.
Addded to that we have the deeply unsatisfactory conviction of Sushovan Hussain on the basis of fraud committed by A US salesman who received immunity for testifying against him. Given the paucity of evidence of fraud presnted b y HP so far that conviction reinforces the impression that teh US legal system is incapable of providing fair trials paticularily for foreigners.
Makes you wonder if there be any more real need for all of this pregnant waiting for a judgemental High Court decision?
* ... where Autonomous ACTive IT Explores Every Future Virtual Option Freely Available to All Interested.
So, another big company bought some kool-aid with unobtainium flavor, and now they are complaining that it did not taste what they expected?
Have you noticed the number of big companies (publicly traded ones, because we see them) these days that are sitting on huge piles of cash, don't have a clue what to do with it, and then they either: a) buy some unicorn (can't do in-house development anymore??); b) share buybacks (let's burn through cash while that accomplishes nothing except marginally benefiting us, the wealthiest). In any case, what we have is a corporate breed that claim non-stop to be "creating shareholder value". Thank goodness they say that, because they are absolutely not creating value as such. Even if they wanted, how could they? Most of them don't seriously know what the company does! But they will go on talk about earnings per share being up and how much they boosted the dividend...
Boeing was led for many years by an Harvard MBA (what a useless degree) with experience at... Proctor and Gamble (!?!?!), and obviously no clue on how to make airplanes. Now take a good like at that company. Single best example of shareholder value created by actively plundering the underlying value.
Are you saying, P.B. Lecavalier, they be more Zombie/Ponzi Operands now .... big companies (publicly traded ones, because we see them) these days that are sitting on huge piles of cash, don't have a clue what to do with it, and then they either: a) buy some unicorn (can't do in-house development anymore??); b) share buybacks (let's burn through cash while that accomplishes nothing except marginally benefiting us, the wealthiest).?
How very perceptive of you and how disruptive and destructive it be for them. After all, eventually, inevitably, there is the full price to pay .....'You can fool some of the people all of the time, and all of the people some of the time, but you can not fool all of the people all of the time." ....... although prize prime premium fools everywhere always still think they can.
Make sure you set the assumptions to get it.
Which looks to be exactly what HPE did.
TBH I think HP's stockholders should take the whole Board responsible at the time (especially the CEO) to court.
These Aholes flushed $8Bn of their money down the pan for this fiasco.
I's say this expert witness has been the most honest of the bunch by laying out exactly what basis HPE wanted him to work, so letting the court knowing exactly what BS they wanted him to spout.
Diplomatic immunity is a thing. There's no getting around that, and it was never likely that the Trump administration would voluntarily waive it just to placate some foreigners (read: non-voters).
Please don't conflate the Sacoolas case with the legal system, that was a purely political decision. Things are quite bad enough without getting them mixed up like that.
If she really HAD diplomatic immunity, you would be right. BUT she didn't - she didn't qualify and neither did her husband. It was just a lie given to justify an American citizen being allowed to escape proper and correct justice. A bit like Trump's impeachment escape...
So a beancounter has testified that if you make many assumptions about Autonomy's accounting practices you can 'prove' Autonomy was guilty. However, is there any evidence any of these assumptions are valid or just pulled out HPE's collective arse to 'prove' their case. Basically HPE seems to have admitted they really do not have a case and are at best wasting the court's time if not committing fraud themselves.
If Lynch is cleared, then by the doctrine of Autrefois acquit he can't be extradited to the USA to be tried for the same crime as he has already been found not guilty of. (Bliar's hatchet job on Magna Carta doesn't appear to apply here; it was a murderer he was after. In any case, it's way too soon for any "new and compelling" evidence to turn up.)
If he is convicted, then by the doctrine of Autrefois convict he can't be extradited to the USA to be tried for the same crime as he has already been found guilty of and (partially; remember time already spent on remand) punished for.
Either way, HPE have shot themselves in the foot.
Not sure you are correct. I dont believe Double Jeopardy applies between Civil and Criminal cases - as by definition a Civil case is effectively an application for (usually) a cash based remedy not a Crime.
Where it is important is that the burden of proof is generally lower in a Civil case - therefore it can be argued if HP cannot prove the point in a Civil case Uncle Sam will not be able to a criminal case.
Plus there is also the fair trial angle - only the most biased of observers (hello Priti) would agree that he will get one after what happened to Shoshovan.
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