back to article Yes, I may have advised 'some' investors to flog their Autonomy shares, analyst tells High Court

A City analyst was accused of being "seriously unethical" after selectively telling investors in Autonomy to sell their stocks in the firm, London's High Court heard earlier this week. "I may have told some investors to sell Autonomy while I had a hold recommendation, yes," one-time Peel Hunt analyst Paul Morland testified on …

  1. Doctor Syntax Silver badge

    "He advised his clients to sell its stocks – a move that cost them in the short term when HP bought the company."

    Why just in the short term? Surely there wasn't any mechanism to recoup later.

    1. Anonymous Coward
      Anonymous Coward

      Was there an opportunity missed? "Do you often advise the majority of your clients to hold their positions while informing a select few to sell?" I'm sure the explanation would have been interesting - if not for the case, at least for his clients. And an analyst offering accounting opinion needs to be careful he doesn't overstep.

      Then we move onto Mr "software vendors don't sell hardware, except when they do" Khan - while he has a point about the percentage of revenue, the initial statements sound a little amateurish.

      And if the analysts offered these opinions (and they are opinions - they are unlikely to have had access to anything more than the rest of the market via briefings and financial releases) at the time, doesn't that put the emphasis on HP's due diligence?

      1. DCFusor Silver badge

        I know nothing about this guy in this case.

        However, it's often the case that financial advisors, even those with fiducial responsibilities, will make different recommendations to different clients based on the client's goals and risk appetites.

        In this game, what's sauce for the goose is most definitely not sauce for the gander.

        I could also point out that if all these guys agreed to say, buy - the supply would run out, ditto sell, there'd be no buyers. This shows a (deliberate?) misunderstanding of how markets work.

        It could have been honest good advice in both cases. A company going down - sell that thing.

        If he knew it was going to be bought by HP (almost all targets of acquisition make big gains in the process), that'd be insider trading, which is illegal except for lawmakers.

        If you like risk, you like things that swing like crazy, and hope to time buys and sells accordingly (which of course, doesn't always work and isn't proven to be the best way to make money).

        A more conservative investor will just buy and hold for long term, missing temporary dips and once in awhile getting a big winner or a big loser - knowing that is the reason you diversify.

        An advisor's role often is to determine where on that spectrum their client lies, and advice accordingly.

        If a stock you own suddenly goes up due to being acquired (or traded for a large value's worth of the stock of the buyer) - the recoup is that you sell it straightaway Dr S. Because, more often than not, the stock of the acquirer then goes down...due to "you name it" but debt burden, "false synergies" and a long list of other things come to mind. There are few exceptions. Selling the stock of the buyer is one of the more sure things in trading.

        1. Anonymous Coward
          Anonymous Coward

          Mr Morland issued guidance to hold while advising clients to sell - he considered himself well informed about Autonomy but missed the HP bid and cost his clients who sold a lot of money. While your point about insider trading is valid, Autonomy had been actively seeking a buyer for more than a year and were rumoured to have approached Oracle and others.

          I'm just trying to work out if he's an unbiased witness or an affected party trying to justify his bad decisions particularly if they didn't match his public advice.

          This isn't a cross-section of financial advisors providing a balanced view of Autonomy, this is self-interested parties (HP and the financial advisors) saying they knew something was wrong in-spite of their customers and shareholders losing an awful lot of money. If they were wrong then...

          1. DCFusor Silver badge

            "I'm just trying to work out if he's an unbiased witness or an affected party trying to justify his bad decisions particularly if they didn't match his public advice."

            That would be true almost all the time of most advisors.....

            Financial advisors, economists, weathermen - choice occupations where you get paid to be wrong and people listen anyway. I never did manage to get a juicy position like that. I quit as a trader not because I wasn't successful (happily retired with "enough") - but because of the sheer amount of BS.

            I didn't say it was a cross section, I was just trying to put things in context of a cross section, inform about what it's like "out there". This guy wasn't a standout.

      2. katrinab Silver badge

        If your assessment is that the stock is a lottery ticket that might generate a massive return, then whether or not you recommend it to a particular client depends on what your client is looking for, and which section of their portfolio it is held in.

  2. Aladdin Sane Silver badge

    Popcorn anybody?

    1. Pascal Monett Silver badge

      Oh yeah. Now we get an account of the seedy underbelly of high-level finance, and it is disgusting.

      I can't wait to see what other cockroaches are scuttling about.

      1. DCFusor Silver badge

        You may not have to wait long. We're in more financialized and leveraged debt as a planet than ever before, both totally and per capita. No way this level of debt, created to cover up the unpayable debt causing the previous crash, works out or gets paid back. Even if it were, it's a total case of taxation without representation, as we won't live long enough to pay - we're taxing the unborn - at best.

        1. David 164

          That been the case for centuries, the UK still have debts from 17th century that still haven't been fully paid back, believe it or not.

  3. BebopWeBop Silver badge

    Glad I bought a good popcorn supply. The analyst appears to have been on the right tracks - BUT - his clients are pissed off because HPE did not take his advice and lost money (in the short term, provided they did not immediately take their money and run).

    My hear bleads, bleads I tell you for the sensitive snowflakes on both sides (although I could think of better ways to use my time than as a jusicial assistant, if that is I had any relevent expertise).

    On the side, The Reg is obviously (or maybe has already) prepared for some jucy comments...... To be moderating in this way.

    1. TonyJ Silver badge

      "...My hear bleads, bleads..."

      Your what, does what now?

      1. The Nazz Silver badge

        re bleads

        Why not, modern schooling, phonetics and all that.

      2. herman Silver badge

        I think he must have listened to country music.

    2. Alan Johnson

      If as an analyst he though Autonomy were overvalued he does not seem a good witness for HP to claim that they reasonably valued Autonomy at far more. That clients purchased licenses up to a year before needed does not seem very damming or even surprising. I have frequently seen thsi sor tof thing when:

      a) a project goes wrong so expected demand is lower or later than planned at short notice.

      b) A client wishes to pay early for their own reasons for example to be in this years rather than next years budget.

      At the end of the day a purchase is a purchase and the revenue that results is real. HP needs to show there was collusion with Autonomy;s clients and they don't seem to have any evidence in this direction yet.

      The whole idea that Autonomy making money on hardware sales indicates fraud is bizarre to me. They had to be reselling hardware and software as platforms for their own software. Given they were doing that it makes sense they should make money on it and if the opportunity came, as it would for good sales people, to resell hardware and software not directly related to their software but on whcih they could make a profit why would they not?

      1. billat29

        "At the end of the day a purchase is a purchase and the revenue that results is real. "

        Well, sort of. There are rules about when software revenue can be recognised for accounting purposes which, thankfully, I don't have to worry about any more. but the comment "But you didn't know, did you, about the correct accounting position under the IFRS?" is relevant.

        Stuffing the channel is an old trick to inflate sales and there are a number of tricks that companies do to inflate revenues and screw down costs when they are up for sale and any prospective purchaser worth their salt (or maybe their advisors) would be able to spot them. Surely HP would have had some experience here?

      2. John Smith 19 Gold badge
        Unhappy

        "They had to be reselling hardware and software as platforms for their own software."

        No.

        That's kind of the point.

        This was straight box shifting.

        And that moves Autonomy from (glamorous) "software, services and consultancy" to "box shifting."

    3. Doctor Syntax Silver badge

      "his clients are pissed off because HPE did not take his advice"

      They should have been more pissed off because he didn't finger Autonomy as a take-over target and advise them to buy. Is there a faint taste of sour grapes?

      1. The Nazz Silver badge

        Total supposition here but ...

        IF i were an analyst ( no Mrs, not that type) and of little to no integrity, and had an inkling, or stronger, that a certain company would be bought out in a massively overpriced deal, then ...

        i may just advise some of my clients, let's say the less than select ones, to actually sell their shares. Whilst i quietly buy said shares knowing that a killing was soon to be made.

        Not saying it ever happens mind.

  4. DontFeedTheTrolls Silver badge
    Boffin

    So the analysts covering the company were taking a dim view of it. Surely that should have been ringing alarm bells to the those appointed to perform due diligence, or at the very least to the purchaser looking to minimise the price it paid?

  5. fwthinks
    FAIL

    HP defense?

    So several external analysts could work out that there were some funny goings on with Autonomy's accounts, but HP couldn't work this out during due diligence. Sounds like HP didn't do their job properly.

    1. a_yank_lurker Silver badge

      Re: HP defense?

      Major publicly traded companies have numerous analysts who follow them. Whether the analysts' recommendations are publicly available varies. But if there is a major split in opinion by the analysts or an overall negative opinion an investor or buyer should be very wary. The analysts' opinions are generally their best guesses of what the numbers mean for the overall health of a company. A split or negative opinion means one needs to very wary of something about the company.

      The analysts seem to have an opinion that Autonomy had some issues with sales breakdowns that bothered each to varying degrees. This should have been a red flag to anyone to look more carefully at the numbers and other options before plunking down money on Autonomy stock at that time. However, no of this suggests fraud on the part of Autonomy only that company may not have been as healthy as Leo the Idiot wanted to believe.

  6. Paul

    Why aren't HPE suing the auditors who they paid to value Autonomy? Provided Autonomy's books were completely laid bare to the auditors, then all fault must lie with them and/or HPE for making an unwise decision.

    1. Anonymous Coward
      Anonymous Coward

      Because KPMG have much much deeper pockets...... and it would be a lot harder to get one of their execs thrown into chokey.

      Plus I suspect KPMG would say they never completed the audit - as came out earlier.

    2. Anonymous Coward
      Anonymous Coward

      "Why aren't HPE suing the auditors who they paid to value Autonomy?"

      From earlier in the case, it appears HP were in a rush and the auditors (KPMG) were unable to complete their checks before completion.

      Even more damning, KPMG didn't provide any formal report.

      I suspect KPMG have been left out of this because what they would report may not be kind to HP.

    3. The Nazz Silver badge

      Couple of weeks back, i didn't bookmark it, but an article on the BBC news site, said IIRC much to the effect that Deloittes would not be appearing in the trial as they had reached an out of court settlement with HP/HPE. One must ask Why?

      I don't know the details, but i suspect that Deloittes were the Auditors of Autonomy at the time and that KPMG were the accounting consultants* employed by HP/HPE to do the due dilligence. More than happy to be corrected if i'm wrong.

      I'm also surprised that KPMG didn't go ahead and publish their Final Report, even if HP had already concluded the deal. If only to cover their arse, and especially so if they thought there was anything improper in A's accounts.

      1. Cederic Silver badge

        It's much easier to CYA if you haven't hung your arse out for everyone to see - e.g. by superfluously publishing a report you can otherwise keep well hidden and pretend was perfect in every possible way.

  7. Stevie Silver badge

    Bah!

    <mode=Clouseau>So ... what you are saying is ... this Autonomy, they had cookéd their books, and the Hewlet Packard, they did not care enough to find out about it before they puchaséd the company?

    Mon Dieu! We must arrest everyone in the name of The Lieu, and question them without mercy until the truth, it is revealéd!</mode>

  8. Anonymous Coward
    Anonymous Coward

    Sounds like there might be something here

    Having worked for software companies for much of the last thirty years, including one which spectacularly exploded in a shower of irregularities, there are a couple of nuggets here that are worthy of further exploration IMHO -

    If you are a software company then selling hardware related to hosting your software on-premise or in your own DC either for processing , storage or networking (appliance) would seem valid, just reselling pure hardware which is un-connected to your core business that makes up 10-20 percent of your overall revenue and not making that clear when reporting sales figures smells like inflating numbers and looks bad to me.

    Selling a huge reseller deal disproportionate of their ability to resell licenses aka 'stuffing the channel' is a shady practice I've seen before in another life, it would be very interesting to know whether the reseller successfully sold those licenses (it is possible after all that they landed a mammoth deal), what the consequences were if they failed to resell them (as that should be related to whether that would be recognisable revenue) and most critically whether there were any 'magic' and highly dodgy side agreements that allowed them to escape those commitments (as when at their most dodgy, these things tend to go together).

    1. Anonymous Coward
      Anonymous Coward

      Re: Sounds like there might be something here

      Must have been a cherry deal for that reseller. I mean who in their right mind spends the bucks to buy a year's supply of licenses? We buy maybe two months at a time and hope that we don't get stuck if there is a sudden update or incompatibility found that leaves us with something we can't return. I am just amazed by the sense of immorality, belief in immortality, and lack of formality in this process. These people (on all sides) really screwed the pooch and deserve each other!

    2. Anonymous Coward
      Anonymous Coward

      Re: Sounds like there might be something here

      "If you are a software company then selling hardware related to hosting your software on-premise or in your own DC either for processing , storage or networking (appliance) would seem valid, just reselling pure hardware which is un-connected to your core business that makes up 10-20 percent of your overall revenue and not making that clear when reporting sales figures smells like inflating numbers and looks bad to me."

      Two points:

      - the case is around improper accounting practices. As long as the hardware sales were accounted for correctly in Autonomy's systems, I'm unclear how HP's "we thought they were just a software company" argument will go. If the accounting records were correct, this should have become clear during due diligence rather than being discovered by HPE over the next 6-9 months.

      - in terms of licence based software deals using hardware, Autonomy's platforms required significant resources to do analyse unstructured data, so that may have weighted large software deals towards large initial hardware installs relative to the software licences, particularly if new applications are being deployed across an organisation and you don't want to pay for software that may be 1-2 years away from being usable as you integrate it into existing systems.

      HP are conveniently painting this issue as very black and white (shock, horror - a software company is moving hardware) when they have to prove Autonomy's accounting practices did not comply with applicable financial regulations. I think it may even go further than that in that HP may also need to prove their witnesses were not the source of the alleged fraud if they want to win the case against Lynch.

  9. John Smith 19 Gold badge
    Coat

    Old rule of the shares game.

    "The first loss is the best loss."* IOW it hurts when the price starts going down, but it'll hurt a whole lot more if you hang on, hoping it rise again.

    Of course if the stock price zoom climbed after these tipsters "analysts" fingered Autonomy as a "wrong un" their mugs clients might be a bit aggrieved at the (paper) profit they didn't make.

    *See "Patel "The Mind of a Trader," Lefevre "Reminiscences of a Stock Operator" etc.

POST COMMENT House rules

Not a member of The Register? Create a new account here.

  • Enter your comment

  • Add an icon

Anonymous cowards cannot choose their icon

Biting the hand that feeds IT © 1998–2019