Bloomberg News

HP Board, Auditors Sued by Investors Over Autonomy Deal

November 28, 2012

Hewlett-Packard Co. (HPQ:US)’s directors and auditors, along with Autonomy Corp. founder Mike Lynch, were sued by investors over alleged misstatements related to last year’s purchase of the British software maker.

The lawsuit was filed Nov. 27 in federal court in San Jose, California, on behalf of the company. Deloitte LLP, KPMG LLP, Barclays Plc (BARC) and Perella Weinberg Partners UK LLP were named as defendants, along with Chief Executive Officer Meg Whitman and former Hewlett-Packard officers and directors including ex-CEO Leo Apotheker.

Hewlett-Packard said Nov. 20 that $5 billion of an $8.8 billion writedown was due to falsified accounting practices at Autonomy, which were disclosed by a senior Autonomy executive. Hewlett-Packard said it referred the matter to U.S. and U.K. securities regulators and will also pursue civil litigation.

“Simply stated, HP grossly overpaid for Autonomy,” according to the complaint. During and after the acquisition (HPQ:US), the defendants “consistently misled the public with improper statements” concerning the due diligence performed to value Autonomy, and the benefits and assets of the purchase, according to the complaint.

‘Consciously Disregarded’

Deloitte and KPMG, as auditors and accountants during the acquisition, and Barclays and Perella Weinberg as financial advisers on the deal all “consciously disregarded numerous red flags” that alerted them to Autonomy’s potential accounting improprieties and the resulting overvaluation, according to the complaint.

The defendants’ misleading statements about the acquisition artificially inflated Hewlett-Packard’s stock price, and led to wasteful spending of billions of dollars when they directed the company to overpay for its own stock through “massive” repurchases, according to the complaint.

The lawsuit seeks unspecified damages and corporate governance reforms based on claims of financial misstatements, breaches of fiduciary duties, waste of corporate assets, unjust enrichment and negligence.

Michael Kuczkowski, a spokesman for Palo Alto, California- based Hewlett-Packard, declined to comment yesterday on the lawsuit.

Manuel Goncalves, a spokesman for KPMG, said the company acted responsibly and with integrity “within the narrow scope of non-audit tasks” it performed.

`Incorrect Understanding'

“The claims made against KPMG are based on incorrect understandings about the firm’s role in this matter and are without merit,” he said today in an e-mail. “KPMG was not engaged by HP to perform any audit work on this matter. The firm’s only role was to provide a limited set of non-audit related services.”

Kara Findlay of Perella Weinberg didn’t immediately return a phone call after regular business hours yesterday seeking comment on the complaint. A Barclays representative couldn’t immediately be reached for comment after regular business hours. Jonathan Gandal of Deloitte referred calls to its member firm in the U.K.

Deloitte has said that it didn’t find any evidence of improper accounting methods or misrepresentations when it last looked at Autonomy’s finances before Hewlett-Packard bought the software company. Deloitte, which said it wasn’t employed to do due diligence on the deal, last audited Autonomy’s finances for the year ended Dec. 31, 2010.

Lynch's Challenge

Lynch challenged Hewlett-Packard’s board to explain allegations that Autonomy falsified financial statements, leading to the $8.8 billion writedown.

Hewlett-Packard rejected the request, saying it has uncovered extensive evidence of improper accounting at Autonomy as part of an “intense” internal investigation and that the matter is now in the hands of authorities.

“Autonomy’s finances, during its years as a public company and including the time period in question, were handled in accordance with applicable regulations and accounting practices,” Lynch wrote. “I utterly reject all allegations of impropriety.”

Whitman ousted Lynch in May, citing a “significant decline in license revenue” at Autonomy. The division’s underperformance adds to challenges facing the Palo Alto, California-based company, which is already buffeted by management turmoil and slowdowns in its personal-computer, printer and technology-services businesses.

The case is Ricciardi v. Lynch, 12-cv-06003, U.S. District Court, Northern District of California (San Jose).

To contact the reporters on this story: Joel Rosenblatt in San Francisco at jrosenblatt@bloomberg.net Karen Gullo in San Francisco at kgullo@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net


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