back to article US prosecutors whack another three charges on list against ex-Autonomy boss Mike Lynch over $11bn HP biz gobble

US prosecutors have slapped three more criminal charges on ex-Autonomy chief exec Mike Lynch, accusing him of securities and wire fraud regarding HP's acquisition of his company. Lynch, once dubbed Britain's answer to Bill Gates, flogged Autonomy, a software company he founded, to the American tech titan in 2011 for $11bn (£ …

  1. sanmigueelbeer Silver badge

    In lay-man's-term

    In short, it is alleged the pair inflated Autonomy's sales numbers to hit quarterly targets so as to pocket fat performance-linked bonuses

    In english, the US Government wants to prosecute these two because HP didn't do a proper "due diligence" audit?

    1. DavCrav Silver badge

      Re: In lay-man's-term

      I think it's worse than that. Even at the time many people were commenting that it was a really stupid acquisition. So HP went mad, bought all the candy in the shop, ate it, and then felt really ill. Now they are suing the shop owner for letting them buy all the candy.

    2. Primus Secundus Tertius Silver badge

      Re: In lay-man's-term

      The "due diligence" indeed looks like idle accountants just generating bills. After all, lots of people (including me) always had their doubts about Mr Lynch.

      So I blame the accountants -- but then, I'm a techie.

      1. Anonymous Coward
        Anonymous Coward

        Re: In lay-man's-term

        Surely HP could just publish their board notes and supporting material to show why they paid significantly above market rate for Autonomy.

        That's the majority of the difference between what HP paid and the eventual value they assigned post-writedown.

        Having talked to accountants that have done due diligence, you are looking at the companies records to make sure they match what they have said publicly within a margin of error. Ie. If the company reports £740m revenue/£480 cost of operations and the books show £700m/£470m with some disputes over the differences, it won't trigger any major issues other than a report to the HP board.

        Or would that hinder the prosecution?

  2. BebopWeBop Silver badge

    You never know

    There is an outside chance that British courts might even conclude that US justice is even worse than ours and refuse to extradite (although it might be part of a trade 'deal' requirement). HP have a lot off clout (remarkably they still do) and protecting them from their stupidity being exposed seems to be their call on the state. I am not defencing Lynch, but HP have behaved like ignorant childish bullies.

    1. sanmigueelbeer Silver badge
      Holmes

      Re: You never know

      and refuse to extradite

      And that is what I am implying.

      Extradite terrorist. Check. Extradite war criminals. Check.

      Extradite someone who cooked the books?

      It's not as if this scam defrauded the US Government or something. I think HP "reached out" (and paid someone) in the US Justice Department because HP cannot extradite someone.

      Seriously, the person HP should go after is the person who signed off on this deal (and not just Mike Lynch).

      1. Fatman Silver badge
        FAIL

        Re: You never know

        <quote>Seriously, the person HP should go after is the person who signed off on this deal (and not just Mike Lynch).</quote>

        Close, but no cigar.

        What make me wonder is why no charges have been brought against the HP BoD, and executive officers for their breach of their fiduciary duty to HP's stockholders.

        Their incompetence and inattentiveness to this costly matter led to HP pissing away a serious amount of pocket change, IOW - stockholder's equity.

        Why haven't any of them been indicted???

        1. Anonymous Coward
          Anonymous Coward

          Re: You never know

          What make me wonder is why no charges have been brought against the HP BoD, and executive officers for their breach of their fiduciary duty to HP's stockholders.

          Their incompetence and inattentiveness to this costly matter led to HP pissing away a serious amount of pocket change, IOW - stockholder's equity.

          I suspect this is te exact reason they're so noisy about this prosecution - keep the attention away from that question.

          I'm also still wondering why the auditors got off scot free here - isn't that the exact thing you pay them for to investigate? I can understand accounting being 10% out (already much, but cumulative errors and a certain degree of creativity can be expected), but this was out by some factors - not exactly the most subtle difference. Surely someone actually doing their job should have spotted that - or was it spotted and then quickly ignored?

  3. hammarbtyp Silver badge

    Double Standards

    A once heard of a property tycoon who continually inflated his self worth so that he could get business loans to prop his business empire.

    But of course being a American, rather than being prosecuted he was lauded as a great business man and got promoted to president.

  4. Anonymous Coward
    Anonymous Coward

    Due diligence

    I once went and did some due diligence on some computer systems for a company that was buying another company which 'used the same core software'. Their plan was to merge platforms to create cost savings.

    After a week I came back and said... "it is physically impossible to run their database on our platform and software version. It's not possible to merge the two. Theirs will always be separate. They also have contracts which require segregation within their own systems."

    Management chose to disregard my report and bought the company, insisting they could merge the platforms. Five or six years (and some large losses) later they resold that company for a fraction of the price. The platforms were still resolutely separate.

    With zero knowledge of the reality, I don't doubt someone told HP that that Autonomy didn't quite measure up, and HP will have chosen to ignore that.

    1. EPurpl3

      Re: Due diligence

      Usually some people get some bonuses on this kind of merges and acquisitions. To hell with the investors, just aim for the bonus!

  5. Sam Adams the Dog

    Not necessarily!

    It's interesting to me that virtually all the commentators so far believe that HP simply failed to do its due diligence.

    However, the allegation is that Autonomy cooked the books and lied about their sales and revenue.

    Lots of mergers and acquisitions don't go well, but very few lead to allegations of fraud against the principals of the purchased company.

    Therefore, I'm inclined to give at least equal credence to the allegation: that HP did perform due diligence, but that the principals of Autonomy lied and committed fraud, perhaps in depth, i.e., by concocting and presenting fictitious accounting records.

    1. Jellied Eel Silver badge

      Re: Not necessarily!

      It's interesting to me that virtually all the commentators so far believe that HP simply failed to do its due diligence.

      However, the allegation is that Autonomy cooked the books and lied about their sales and revenue.

      They're connected. So Autonomy opened their books to HP's due diligence team so HP could figure out a valuation, and if that matched what Autonomy might have been asking. Given the amounts claimed to be involved, that's some serious cooking that HP's team didn't spot. Basic due diligence would be to crawl through the sales ledger to look at typical (and especially atypical) deals and their costs, margins and general P&L stuff.

      From memory, one of HP's complaints was some deal revenues were made up of high value/low margin tin, not the high value/high margin software & services. That's the kind of thing that should be easy to spot during a deal's dissection.. Especially if HP had also been selling Autonomy that tin. Anyone that just looks at revenues and sales projections is likely to be in for a spot of buyer's remorse.. Especially given the amount HP (over)paid for Autonomy. Industry and market reactions to the floated deal size should have raised alarm bells at HP.

      I've not read the latest transcript, but previous ones seemed to show pretty standard and easily spotted financial engineering. I'm also curious how the trials pan out because I'm not sure delaying booking deals to pad quarterly sales/revenues figures is illegal.

      (I'm also curious about being sued for $5bn. It may be HP's claimed loss, but generally a lot more than an individual could hope to repay.)

    2. Anonymous Coward
      Anonymous Coward

      Re: Not necessarily!

      "It's interesting to me that virtually all the commentators so far believe that HP simply failed to do its due diligence.

      However, the allegation is that Autonomy cooked the books and lied about their sales and revenue."

      There are two key numbers that make me point the finger at HP (ref: https://www.ft.com/content/964fb710-c9d3-11e0-b88b-00144feabdc0):

      - HP paid a 79% premium on the Autonomy share price at the time of the announcement

      - the price HP paid amounted to around 23x projected 2011 earnings multiple.

      that was the publicly available information, not something available only through due diligence. The rumours/disclosures of cooked numbers indicate maybe a 10%-15% difference between the actual results and the publicly disclosed information.

      For comparison, IBM paid a 60% premium for Red Hat with a ~12.5x earnings multiple. Personally, I think IBM paid at the top end of the price range for Red Hat but they are likely to see value due to the size of the customer base and there were rumours of other interested parties (i.e. MS). The typical earnings multiple with an acquisition of this size is in the 10-15x.

      What made HP think that the premium/earnings multiple would justify the price? HP were the only bidder, so they didn't need to increase the premium for that reason andthe customer base was not large.

      1. Jellied Eel Silver badge

        Re: Not necessarily!

        Yup, it's a strange case. As well as the.. optimistic PE, there was also the simple 11x revenue metric.. So from memory around $840m annual revenue. 3x is a more conservative value, but hey, this is software. Crazy valuations have never seemed to bother Tesla investors, and oddly, one of the emails referred to in the indictments was an 8th May message referencing Tesla and DD, presumably due diligence. That's appeared in the indictment that was successfully prosecuted, and in the current Lynch case.

        Indictment doesn't go into any more detail about why that email was smoking, and only refers to a transaction where revenue recognition from a licence may have been altered around that time. There's other stuff alledging Autonomy failed to disclose side letters on deals that may have altered the risk profile and valuation of those specific deals. Then there's more serious looking allegations, ie altering licence dates.. Which is presumably a bad thing, if the customer was unaware/not involved.

        But like you say, it didn't make sense. Based on the company filings and statements, there was nothing there that seemed to justify HP's price.. And given the huge premium, would imply that either a) HP went nuts, or b) Autonomy failed to disclose some hefty material information to shareholders/the market that would have attempted to justify HP's price.

        There's also some other oddities, like HP saying they expected Autonomy to be a pure-play, high margin software house, but also mentioning Autonomy's 'appliance' play.. Which ISTR was Autonomy's system on HP tin.

        (ps.. I also tend not to read too much into share prices given that's just what the market thinks something is worth, rather than what the fundamentals suggest it should be worth. Old fashioned thinking when it comes to tech stocks I know.. Plus share value can be even less of a useful metric if trading's illiquid.)

        1. Anonymous Coward
          Anonymous Coward

          Re: Not necessarily!

          A few further facts:

          - HP purchased Autonomy for around US$11.7B

          - Autonomy's stated asset value was around US$3.2B

          - HPE wrote down the Autonomy purchase by US$8.8B to US$2.9B

          i.e. Autonomy wasn't even worth it's stated asset value that included more than US$1B in cash, although a significant part of those assets were US$1.3B in goodwill.

          All of the reported fraud is supposedly in the low ten's of millions over one financial year. Although HPE dispute how some of the revenue was recorded as differences between UK and US accounting requirements, there doesn't appear to have been any actions that .

          Given the relatively inconsequential amounts involved in the fraud (relative to the larger financial picture), combined with an over inflated purchase price and then a very significant write down, the court case appears to largely be a delaying tactic or sideshow to avoid HPE shareholder action directly against HPE once the court action fails or shows former staff were liable for a fraction of the losses HP suffered rather than the ~US5B that HP are seeking.

    3. sanmigueelbeer Silver badge

      Re: Not necessarily!

      It's interesting to me that virtually all the commentators so far believe that HP simply failed to do its due diligence.

      Allow me to explain: Let's say that Mr. Donald T met Stormy Daniels for the first time. The two hit it off and before "entry" to the "horizontal mambo" Stormy turned to Donald and said, "Please be careful. I'm still a virgin."

      And "off he went" and, when morning came, he was sporting a grin that no one can wipe off.

      Let's say that a few days later, he realized that he got "the clams".

      So who's at fault here? Donald T or Stormy Daniel?

  6. Paul 87

    Unfortunately, accounting practices can be incredibly vague and hard to follow to the untrained.

    For example, an annual contract, you can book the cash in immediately, but book the cost out monthly as it's occurred. You *should* record that you have a potential liabilty in the mean time but if you want to boost the profitability, you'll skip that part.

    Nothing illegal per se, but do it often enough and your business position at any one time will look significantly better than you'd expect because the costs are hidden.

    That's not including out and out fraud whereby invoices are manufactured, as appears to have happened to Patisse Valarie

  7. Anonymous Coward
    Anonymous Coward

    Rave from the grave, from 2012

    http://uneasyempires.blogspot.com/2012/11/autonomy-on-trial-what-i-saw-in.html

    Sample:

    "Lynch's coup de grace was to squeeze a $12bn bid out of HP which was rich by even the rarified standards of tech M&A (11x sales; 24x EBITDA). And note this wasn't just any old bid - HP paid up in cash (hint to CFOs: If you're a distressed buyer and the seller has an information edge, probably best to share the downside by paying stock), and the deal was forced through with exquisite timing despite the concurrent defenestration of its architect, Leo Apotheker. Once Autonomy disappeared into HP's gaping maw we assumed it was a done deal. Mike had finally proved, with his $800m payout, that he was cleverer than the rest of us."

  8. Marketing Hack Silver badge

    Translating this story for non-American Regenistas...

    Former CEO of shady Ponzi-ware tech company refuses to cop a plea, so the Feds give it to him with both barrels.

  9. Anonymous Coward
    Anonymous Coward

    Auditors and HP must accept some responsibility

    @Sam Adams the Dog

    It's interesting to me that virtually all the commentators so far believe that HP simply failed to do its due diligence.

    The problem is that HP paid so much more than the market rate and that everyone at the time thoughtthey had paid sunbstantially more than the going rate. The case boils down to HP saying autonomy was mislead into paying too much but has to overcome the fact that base don Autonomy's numbers which HP had everyone though they had overpaid.

    1. Jellied Eel Silver badge

      Re: Auditors and HP must accept some responsibility

      There's nothing wrong with a business overpaying in a transaction. Autonomy's board puts the offer to it's shareholders, who agree/disagree.. And in this case, given the premiums, kinda hard to say 'No'. On the other side of the deal, the purchaser doesn't necessarily need to get shareholder approvals.. But shareholders can (and in this case did) object.

      HP was widely criticised for it's valuation, and shareholders can sometimes use their voting power at AGMs to propose motions, or vote against motions.. But those options can be limited, ie stuff like not approving bonuses/pay deals, or voting for/against board members.. Which can be a bit of a governance issue, so companies are run by their executive (ie the 'C' team') who're meant to be kept in check by the board, who represent the investors. Other actions, like doing something about incompetence or negligence can be a lot harder.

      HP also has a duty to it's shareholders, if they think there was dishonesty.. Which is where the ongoing litigation comes in. They may or may not prove that, but I don't think the claims really offset the premium HP paid.

      (Another issue is the speed this happened, ie an $11bn purchase of a fairly complex asset went from open to closing in <6 months. Act in haste and all that.)

      1. The First Dave

        Re: Auditors and HP must accept some responsibility

        "There's nothing wrong with a business overpaying in a transaction."

        WTF?

        The definition of overpaying may be up for debate, but doing so is definitly poor judgement.

        1. asdf Silver badge

          Re: Auditors and HP must accept some responsibility

          I think he is implying that what seems like overpaying at the time can end up being a great bargain in the end if done by the right person with vision. HP leadership around 2006 to 2012 especially was the definition of neglect of fiduciary duties however. HP's board members were even facing criminal charges for illegal spying at the time. If not the worst board for a company that size in history was definitely top ten.

  10. Yes Me Silver badge

    Not so different from the treatment of Huawei

    Use the civil and criminal justice systems against a British company (& senior employees) that turned out to be an unwise purchase.

    Use the civil and criminal justice systems against a Chinese company (& senior employees) that turned out to be a successful competitor.

    There's a pattern of unfair abuse of justice here. Perhaps the USA should be referred to the WTO.

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