Autonomy Chief Says Whitman Is Watering Down HP Fraud Claims

McGruber writes "Possibly the wierdest tax-writeoff of the year happened when Meg Whitman claimed that her US-based multinational corporation HP had been defrauded by British-software firm Autonomy; Ms. Whitman and HP claimed an 8.8 billion dollar write-down. As the Los Angeles Times explains, 'HP acquired Autonomy in 2011 for $11 billion, a move it hoped would turn it away from its dependence on sales of computer hardware with its low profit margins, and into the more profitable business of software. However, the price HP paid was widely criticized for being too high, and in part led to the subsequent ouster of Chief Executive Leo Apotheker.' The wierdness continues — in its annual report filed with the U.S. Securities and Exchange Commission, HP claims that the U.S. Department of Justice has opened an investigation into HP's allegations that HP has uncovered widespread accounting fraud at Autonomy. However, The Guardian points out that former Autonomy CEO Mike Lynch claims that HP 'is watering down the accusations it had levelled against him over the accounts filed by his old software company.' Mr. Lynch also says that he has not been contacted by the U.S. Department of Justice, which HP claims is investigating the alleged fraud. Perhaps Slashdot's users can help make sense of this mess and help explain it to me?"

Re:the real fraud

[Anonymous Coward]

Meanwhile she keeps taking millions for an inability to run a once great company.

Hewlett Packard split into two pieces a long time back: one became HP, the other became Agilent. HP got the PC/inkjet/etc. part of the business. Agilent got the "cool" part of Hewlett Packard - you know, oscilloscopes, logic analyzers, etc., etc., etc.

"HP" hasn't been a great company since Agilent was split off. Agilent, on the other hand, still makes great equipment for electrical engineers (and more.)

Re:the real fraud

[Anonymous Coward]

Carly Fiorina was the CEO when HP bought Compaq. I've noticed a tendency for posters to conflate her with Meg Whitman, as if they're one person. Y'know, that chick...

Please, use names. FIORINA did this (Compaq merge). APOTHEKER did that (bought Autonomy). WHITMAN did another thing (allege fraud).

Re:the real fraud

[swalve]

HP would be dead if they hadn't bought Compaq. The only good computers/servers they make are still from the Compaq pedigree.

Re:Smoke and mirrors

[greg1104]

This is a useful overview, but it doesn't cover the details of the confusing part.

My take is that the whole DOJ angle is part of HP looking for a scapegoat to cover both their own mismanagement and lack of ability to due anything useful with Autonomy's IP. It's a fishing expedition to find one, but they have no hard evidence yet of who's to blame. Autonomy itself used aggressive accounting measures to inflate its sale price, as all companies being acquired will try to do. What HP really wants is to ignore the whole thing and write off the loss, since catching any accounting mess should have happened before the purchase. But they can't just do that due to class action lawsuits saying it's HP who is at fault. So they're going through the motions of prosecuting other people to shift the blame, but so far they don't have any hard evidence of that fraud. If they did, they'd be leading with that.

Here's how I sequenced all the events here to sort out what happened:

• August 22, 2012: earnings are terrible, and we're going to blame the Enterprise Services division.
• November 20, 2012: The scapegoat picked for the bad performance of Enterprise Services is the Autonomy aquisition. HP wants to write off a 8.8B loss right now for that. They can't admit "we fucked up", so they blame accounting issues at Autonomy.
• November 21, 2012: The U.S. Department of Justice is called in to help push blame toward Autonomy, along with the U.K. Serious Fraud Office (Autonomy was originally a British company) and the SEC.
• November 26, 2012: a class action lawsuit [stanford.edu] is filed by HP stockholders. That claims this is all bullshit, and HP itself is the source of fraud here. Similar class action lawsuits are filed against the accounting firms involved [yahoo.com].
• December 28, 2012: Former Autonomy head Mike Lynch points out that HP hasn't actually given out any detailed accounting for where that 8.8B figure comes from. And the US Justice department hasn't actually gotten him involved in things yet.

It may be the case that HP's forensic accounting here finds something lawsuit worthy. It's telling that so far, all they've done is contact the DOJ. If they had a smoking gun, they'd have sued the responsible partly directly instead. That's why I suspect this is just fishing without solid evidence so far.

Re:Nothing to explain

[tri44id]

Well, that too, but it's a lot more complicated. There are several things going on:

• Meg Whitman is doing something that competent CEO's do routinely, and HP hasn't done in decades, which is cleaning up the books and writing down the value of non-performing assets, like brand names that will never be used again, such as "Compaq", "EDS", "Palm" and now "Autonomy". There's still "3Com" left to go...
• Whitman is also playing the CEO spin game, which is that when you have bad news about profitability, you pair the announcement with some other announcement to act as distracting red meat to all the short-attention-span tech journalists who can't follow more than one story at a time. If you're Apple, you just need to mumble about some innovative new interaction modality and everyone goes crazy, if your're HP's CEO, you can actually demo a slick new product and everyone ignores you. Unfortunately HP's heritage of selling sushi as "cold, dead fish" has not been purged from their DNA.
• The actual Autonomy core software is an undeniably superior technology for doing multimedia search and unstructured text search, but it was never actually productized. Apparently every sale was a bespoke one-off, never to be reused or broken apart and recycled the way most complex software is handled. This means that the combinatorial growth of value to expanding customer bases that potentially existed in the software base turned out to be extremely difficult to realize. HP didn't discover this until the deal was closed and HP engineers had spent some time with the code.
• Nevertheless, during the sales negotiations with HP, the future cash flow of Autonomy was apparently computed as if the future growth of revenue was assured to be as exponential as the combinatorial math of modular software recombination would predict. Autonomy founder Mike Lynch is brilliant enough to make such a prediction in just those terms, and it surely would have gone right over the heads of then-CEO Leo Apotheker and most of the HP board, maybe including Shane Robison, chief strategy officer at the time. Now, is a statement about the finances of a software company based on whether that company's code is an impenetrable rat's nest, or not, a legally actionable, material misrepresentation? Is it something that would be expected to be uncovered by the legions of high-priced accountants deployed by the big name accounting firms during the "due diligence" phase of negotiations? I'm not a forensic accountant or a securities regulator, so I wouldn't venture to guess.
• There were numerous other red flags http://www.guardian.co.uk/commentisfree/2012/nov/21/hewlett-packard-red-flags-autonomy [guardian.co.uk] around Autonomy that led HP's CFO Cathie Lesjak to vote against her boss and all the rest of the board on the purchase, but she was overruled.
• Finally, HP claims that while there were accounting irregularities having to do with the way future revenue streams for software support were booked all at once, right now. Lynch claims that this is allowed under European rules even if it may be illegal under US GAAP rules. How would that change when Autonomy becomes owned by a US company? Should those high-priced accountants have caught that? Even so, HP claims to have testimony from a former Autonomy executive that those numbers were not merely tweaked, but were completely wack. HP is saying "nyah, nyah, we're not giving out details, and we're not saying who it is" and Lynch must be furious that he doesn't have enough information to try the case in the press and prejudice any legal outcome. HP wants to get Lynch under oath, so a jury can decide who's lying and who's not.

The wheels of the law grind exceedingly slow, so this will take years to play out. Meanwhile, HP has some decent software to play with, and they are already doing innovative things, like building search into the printers themselves