Response to HP out of context court filing

Responding to a court filing made by HP today, a spokesperson for the former Autonomy management team said:

“What we see here is one email taken out of context. The emails around it, which HP has decided not to disclose, show that, although Mr Hussain was extremely frustrated with the unreliability of forecasting of certain sections of the sales force, the company’s forecast for the quarter, even taking out these deals, was still ahead of target. And indeed, the quarter was successfully delivered three weeks later. It is not hard, when going through hundreds of thousand of emails to pick a misleading example if you are prepared not to release other emails around it. The radical action referred to, was the termination of the unreliable sales reps.”

“HP is trying to smear us by leaking partial information and half-truths, here behind the defamation shield of a court filing. After three years, when HP finally starts putting out a case, it turns out to be built on a handful of assumptions that can all be explained, have never been put to the Autonomy team, and prove absolutely nothing. A large number of documents they have chosen not to release show the reality of the situation: that Autonomy was completely open with its auditors, and all accounting details were known to HP and its advisers long before they decided to take a write down. The real story here is HP’s utter mismanagement of Autonomy, which Meg Whitman is attempting to cover up through an increasingly bitter attack campaign. We will not be her scapegoat.”

Response to details in the filing:

HP has posted a long court filing containing many partial pieces of information, taken out of context and used to draw false conclusions. Much of this information has already been selectively leaked to the media. (It should be noted that this information has nothing to do with the actual issue before the court, which is whether HP should be allowed to pay up to $48 million to a group of lawyers to settle a case against it by HP’s shareholders, a settlement Sushovan Hussain has challenged as corrupt.)

Within the document, four further things are mentioned that we respond to below:

Due Diligence

The due diligence information was provided to HP in the format it requested. It was not interested in which resellers’ deals had gone through, but the industries of the intended end users.

Vatican and VAR deals

The fact that a VAR had not sold through to its intended end user is not relevant under IFRS. The VAR decided to become part of this deal so that when the project got underway, it could undertake the services contracts. The Vatican project was substantive and well publicized by the Vatican at the time, including on TV. To claim that the Vatican deal was fake is unsupportable: emails show a large amount of work with the Vatican and that at the time, they were on the verge of signing the deal.

Hosted contracts

The handling of hosted contracts was fully and transparently handled by Deloitte, who concurred with the accounting treatment. Furthermore, the methodology by which these were recognized was discussed with HP and its advisors in detail before the acquisition. Emails show that HP’s CFO and other senior accounting staff were also intimately aware of how Autonomy accounted for hosted deals early on in the acquisition, and played active roles in discussing how this would be converted using US GAAP. The HP CFO expressed no concern about the accounting treatment.

OEM

The definition of OEM is made clear in Autonomy’s annual report and is not the definition now being used by HP. Furthermore, this was discussed in detail with HP before the acquisition.

Hardware

We know that in compiling its adjustments to revenue HP has excluded Autonomy’s hardware sales. This is at odds with its own version of the Autonomy accounts filed with the UK statutory regulator, in which they handled the hardware in exactly the same way. Furthermore, a number of emails and documents show that the highest levels of HP management were well-aware of Autonomy’s hardware sales long before any alleged whistleblower came forward. HP also continued to do the same after it owned the company. The hardware sales were fully disclosed to the auditors and covered in the audit packs, which HP and its advisers had access to. In fact, prior to the acquisition, HP even supplied some of the hardware Autonomy re-sold.

The ledgers of the company and the audit packs show that hardware was correctly booked as “hardware” under the heading “hardware”. These ledgers were reviewed in detail by Hewlett Packard and its advisers.

In short, on 20 November 2012, HP made unsubstantiated allegations in order to justify a rushed write down within that financial year. But it simply hadn’t substantiated those allegations at the time and now can’t back out of that story. HP’s own version of the Autonomy accounts shows that there is no cash missing. This is the simplest fact that shows these allegations are untrue. This was real business and Autonomy got paid for it. On 20 November 2012, HP claimed the alleged wrongdoing was incredibly well-concealed. Since then, many internal HP emails have surfaced showing they were well aware of Autonomy’s accounting practices, and were comfortable with them. The Autonomy audit packs, which HP had access to immediately and were reviewed by it and its advisers, also surfaced all of these items in full clarity.

What we see here is a resumption of partial leaking and smear tactics, which have characterized HP’s behaviour from the outset. We note that Deloitte continues to state that it is fully confident in its work in relation to Autonomy.

Reaction to HP’s Settlement of Shareholder Lawsuit

It seems Meg Whitman will be using a large sum of HP’s money to avoid explaining in court why she made false allegations regarding Autonomy in November 2012. We continue to reject HP’s allegations, and note that over recent months a number of documents have emerged that prove Meg Whitman misled her shareholders. We hope this matter will now move beyond a smear campaign based on selective disclosure and HP will finally give a full explanation.

 

 

 

HP is back-tracking

“In a message posted on this website a week ago today, we urged Meg Whitman to use HP’s annual 10-K filing to provide a full explanation of the allegations of alleged accounting impropriety at Autonomy which she made on November 20. Unfortunately, she did not do so. HP finally filed its 10-K yesterday, more than a week later than usual, but again failed to provide any detailed information on the alleged accounting impropriety, or how this could possibly have resulted in such a substantial write down.

HP’s failure to provide us and its own shareholders with clarity on these crucial issues does not come as much of a surprise. Ever since putting out those very serious but non-specific allegations last month, HP has refused to disclose either the substance of its allegations or any supporting evidence.

In fact, HP’s 10-K filing appears to raise many more questions than it answers. Having had further time to study HP’s filing since it was released near midnight last night (UK time), it is apparent that a number of the statements contained within the filing are materially different from HP’s previous commentary on these issues. It also appears that the company is back-tracking on a number of key points that under-pinned its original allegations:

1. How much of the Autonomy write down is actually being blamed on alleged accounting improprieties?

In its November 20 statement, HP stated that “The majority of [the Autonomy] impairment charge, more than $5 billion, is linked to serious accounting improprieties, misrepresentation and disclosure failures” committed by “former members of Autonomy’s management team”. However, HP’s 10-K filing refers much more equivocally to a $5.7 billion goodwill impairment charge that “incorporates” the alleged accounting improprieties at Autonomy. So, how much of the $5.7 billion is being directly attributed by HP to alleged accounting improprieties, and how much should in fact be attributed to other changes in business performance, earnings projections and discount rate?

2. Does HP have facts or beliefs?

In its November 20 statement, HP was definitive in accusing “former members of Autonomy’s management team” of “serious accounting improprieties, misrepresentation and disclosure failures”, stating these matters as fact. However, HP’s 10-K filing is materially weaker, referring to its interpretation of alleged accounting improprieties which it “believes” to have taken place at Autonomy. Why did it make such definitive assertions before any independent assessment of the matter, and why is it less confident now than it was a month ago?

3. Why does the 10-K contain less detail than its last statement?

HP’s November 20 statement clearly leveled the accusations at “former members of Autonomy’s management team”. However, HP’s 10-K filing does not repeat – let alone expand upon – this specific detail, or indicate who it is accusing of wrongdoing. Every time we ask for more information, we get less.

Today we renew the call for HP to release the PwC report on which its allegations are based, along with any other relevant supporting evidence that was behind the statements of November 20, and explain the material differences between those statements and the 10-K.

It is time for Meg Whitman to stop making allegations and to start offering explanations.”

Mike Lynch

An update from Mike Lynch

Thank you for coming to this site over the past few weeks. It has now been over a month since Meg Whitman, the CEO of Hewlett Packard, launched a series of allegations against me and my former colleagues. This site will remain the place where we post information that is relevant for the outside world as we continue to reject these allegations.

I’m glad that people have taken the time to hear from me directly. I would also like to take this moment to thank everyone for the huge amount of support and friendly messages you have sent to us through the site. This has been a very difficult time and we appreciate your support a great deal.

Ever since Meg Whitman launched these accusations we have been asking what she meant. I’m sorry to say we have got no further and we are still waiting for her to explain her claims and provide the material on which they are based.

As I have said before, we do not understand the allegations, or how they could possibly add up to a write down of over $5 billion.

In the absence of greater clarity from Meg, we are looking now to HP’s 10-K filing that is due before the end of the year. This document should  contain information about finances and management that all American businesses are required to lodge each year with the U.S. Securities and Exchange Commission. We look forward to HP providing in it a comprehensive disclosure and explanation of its position and calculations.

I won’t go into the detail of our rebuttal again, for it is set out clearly in the open letter published here on the site. All I will say is that I look forward to this situation being resolved as soon as possible.

The technology industry remains one of the most exciting areas in the world to live and work in. New innovations are taking place every day, all around us. I am looking forward to 2013 being another year of tremendous progress.

Thank you again for your interest and support.

Merry Christmas,

Mike Lynch