Hewlett-Packard wrote down the value of Autonomy by $8.8bn to protect the reputation of the former HP chief executive Meg Whitman and to find a scapegoat for the “botched” acquisition of the British firm, a court heard on Wednesday.
At the start of the defence of the Autonomy founder Mike Lynch in a $5bn fraud trial in London’s high court, the court heard that successor companies to HP and Autonomy are suing Lynch and his former chief financial officer, Sushovan Hussain, accusing them of fraudulently inflating the value of Autonomy ahead of HP’s disastrous £8bn acquisition in 2011. Lynch and Hussain deny all the allegations.
Robert Miles QC, representing Lynch, told the court that the US firm HP had taken an “aggressive approach designed to protect Meg Whitman and others in HP”. The case is an attempt to find someone to blame for HP’s business struggles, the defence said.
The 2012 announcement of irregularities at the software firm Autonomy was accompanied by a public relations campaign to protect HP executives’ reputations, the court heard.
That campaign included early warning and a phone call with the then prime minister, David Cameron, and letters to multiple coalition government cabinet members of the time, including the chancellor George Osborne, the business secretary Vince Cable and the defence minister Philip Hammond, according to internal HP documents revealed in the trial.
HP also ran a “truth squad” checking media reports, the communications plan showed. The “AU [Autonomy] writedown and underlying story could have a very negative impact,” said the plan. “Potential traction-killing event – ‘the drama is back at HP’.”
The defence argued on Wednesday that Lynch had intended to stay on to lead Autonomy as part of HP after the deal was complete, making it very unlikely that he would try to commit fraud against his future colleagues.
“The case they’re advancing entails that Dr Lynch must have been monumentally dim,” said Miles.
The claimants this week argued that Lynch and Hussain misled HP ahead of the deal, including misrepresenting transactions and committing accounting fraud to inflate revenue figures and make HP pay more in the acquisition. This allegedly included the concealment of hardware sales used to inflate revenues.
Miles argued that HP’s top executives knew of many of the accounting issues highlighted by the claimants well before they accused Lynch and Hussain of fraud.
In a post-deal audit in November 2011, the accountants Ernst & Young (now called EY) highlighted $115m in hardware revenues, the defence’s opening submission said. HP chief financial officer Catherine Lesjak responded, “Looks good” in an email responding to the Ernst & Young presentation, the documents showed.
HP’s acquisition of Autonomy had been designed to shift the business away from relatively low-margin hardware sales towards more profitable software sales.
“They pretty much gave up on those ambitious plans,” Miles said. “The acquisition was botched.”
Lynch, who was present in court for the first three days of the civil fraud trial, also faces separate criminal charges in the US. He vigorously denies the 17 charges from the Department of Justice, which include conspiracy and wire fraud and carry a maximum prison sentence of 25 years.
Hussain was convicted on similar charges in the US on April 2018 and is currently awaiting sentencing in the San Francisco area. He is expected to appeal against his conviction.