We continue our exploration of the continuing saga of the most disastrous business deal of the 21st century, the HP acquisition of Autonomy. Yesterday, I took up the story of some of the legal fallout after the closing. Basically, recriminations started flying back and forth across the Atlantic after Léo Apotheker was fired and Meg Whitman became the new Chief Executive Officer (CEO). They continued in a wide variety of areas and legal claims.
Shareholder Lawsuit Against HP
In 2012, disgruntled shareholders filed suit against HP, its Board and certain officers over the Autonomy deal. In it, they claimed current and former HP executives and directors, including the CEO Whitman, who was on the HP Board at the time of the acquisition, failed to heed warning signs about problems with Autonomy’s business. HP attempted to settle this claim, going into federal district court for approval at least three times. According to the Wall Street Journal (WSJ), in the first instance in August 2014, the Court said the plaintiffs’ attorneys fees were too high “in part citing what he said were up to $48 million in potential financial windfalls for attorneys representing the shareholder plaintiffs.” The second time HP went to Court for approval was in December 2014 and once again, according to the WSJ, the Court rejected the settlement. The article stated, “District Judge Charles Breyer said the proposed settlement improperly protected the HP directors, officials and professional firms from a wide swath of potential future shareholder litigation, including some suits that might not be related to the Autonomy deal. “The court cannot be sure just how far” the protections extend, Judge Breyer wrote.”
However, the third time was the charm as in July 2015, the WSJ reported that the Court had given approval to the settlement. The article stated, “Judge Breyer gave the green light to a revised settlement that would limit prohibitions on future shareholder litigation and extend policy changes in how H-P considers future acquisitions.” Interestingly, part of the settlement required HP to revise its internal policies regarding Mergers and Acquisitions (M&A). An attorney representing the lead shareholder plaintiff in the case said, “The parties were able to negotiate a resolution that will benefit H-P and its shareholders now and in the future, as HP implements the reforms to its acquisition policies.” This final statement indicated that HP’s compliance policies around M&A were lacking and that a compliance solution was a part of the shareholder settlement.
Sushovan Hussain Criminal Conviction
As I noted yesterday, in 2019 former Autonomy Chief Financial Officer (CFO), Sushovan Hussain, was found guilty by a San Francisco jury. He was sentenced to a prison term of 5 years. As noted by the DOJ Press Release, the Court also “ordered a fine in the amount of $4 million, the forfeiture of assets in the amount of $6.1 million, a three year term of supervised release and a special assessment of $1,600.”
The jury found that for more than two years prior to the sale, Hussain had “used sophisticated accounting methods to falsely inflate Autonomy’s revenues to make it appear Autonomy was growing when it really was not. Specifically, Hussain used backdated contracts, roundtrips, channel stuffing, and other forms of accounting fraud to fraudulently inflate Autonomy’s publicly-reported revenues by as much as 14.6% in 2009, 17.9% in 2010, 21.5% in the first quarter of 2011, and 12.4% in the second quarter of 2011. In addition, Hussain, and his co-conspirators, fraudulently concealed from investors and market analysts the scale of Autonomy’s hardware sales, which were used to boost the company’s reported revenue. The evidence demonstrated Autonomy’s sales were inflated by $53.3 million in 2009, $99.08 million in 2010, $20.09 million in the first quarter of 2011 and $20.85 million in the second quarter of 2011.”
Mike Lynch was originally charged in 2018 with artificially inflating Autonomy’s revenues by overstating them and making misleading statements to regulators and market analysts covering the company. According to the BBC, “The charge sheet also says they “intimidated, pressured and paid off persons who raised complaints about or openly criticised Autonomy’s financial practices and performance”.” According to Reuters, these charges were amended the next year. The article stated, “Lynch faces a new charge of securities fraud, which carries a maximum prison term of 25 years, as well as additional charges of wire fraud and conspiracy in the 17-count indictment filed with the federal court in San Francisco.” The DOJ then sought to have Lynch extradited to the US to stand trial in San Francisco, corporate home to HP.
A UK Court granted the extradition request in July 2021. This extradition was granted based upon the treaty between the UK and US, which according to the BBC, Lynch described as ““We have this imbalance and this default extradition treaty which can be used [in] any dispute that’s going on with American companies and their interests. The insanity of this extradition treaty [is that] it doesn’t rely on any facts. Dr Lynch added that he felt the extradition treaty was “imbalanced” and that the British public did not realise that the US justice system works entirely differently to the UK’s.” Lynch UK counsel said, “At the request of the US Department of Justice, the court has ruled that a British citizen who ran a British company listed on the London Stock Exchange should be extradited to America over allegations about his conduct in the UK. We say this case belongs in the UK. If the home secretary nonetheless decides to order extradition, Dr Lynch intends to appeal.”
All of this went on while HP is in the middle of its civil claim against Lynch and other former officers of Autonomy for the same conduct that is alleged in the US criminal case. Indeed, Lynch said the extradition was ““particularly egregious” that the DoJ was not waiting to see the full judgement from the UK High Court, which will be due in nine weeks’ time.”
Just think of that anomaly, if a UK court finds no liability in a civil case against Lynch and other former Autonomy officers and then there is a successful prosecution of those same persons in the US, under a much higher criminal law standard. While certainly the laws of the US and UK are different around securities offering; fraud is still fraud, whether in the US or UK. Moreover, you would also have the Serious Fraud Office (SFO) not finding anything prosecutable for a UK company in its home country and the DOJ then bringing a criminal claim in HP’s backyard of San Francisco. That may be an anomaly too far.
Join us tomorrow where we consider some of the lessons learned for compliance and corporate governance.