HP Ignored Autonomy Accounting Warnings, Shareholders Say

Hewlett-Packard Co. ignored warnings about accounting irregularities at Autonomy Corp. and failed to properly vet its finances before acquiring the British software maker, shareholders said in a lawsuit.

Hewlett-Packard board members performed “no technical due diligence” and the company’s executives and advisers “misrepresented facts to conceal their own failings,” Joseph Cotchett, an attorney for investors, said in a complaint filed yesterday in federal court in San Francisco.

Autonomy engaged in “round trip transactions” in which it bought goods from its customers, and engaged in other forms of aggressive revenue recognition to inflate its financial health, according to the complaint.

Hewlett-Packard, the largest personal computer maker, faces shareholder lawsuits stemming from its Nov. 20 announcement that it was taking an $8.8 billion writedown on the value of British software maker Autonomy, which it agreed to buy for $10.3 billion in 2011. More than $5 billion of the writedown was the result of accounting practices at Autonomy, Hewlett-Packard said.

“As we have continually said, HP relied on the audited financial statements and the representations of Autonomy’s management and its auditors regarding Autonomy’s business and revenue,” Michael Thacker, a spokesman for Palo Alto, California-based Hewlett-Packard, said yesterday in an e-mailed statement. “Those facts and figures appear to have been willfully manipulated by certain Autonomy employees prior to the company’s acquisition, to mislead investors and potential buyers.”

Whitman, KPMG

Former Hewlett-Packard Chief Executive Leo Apotheker told investors in September 2011 that Autonomy was examined in great detail, while current CEO Meg Whitman said in November that during extensive due diligence, auditor KPMG LLP, hired to review the work of auditor Deloitte LLC, didn’t uncover any problems, according to the complaint.

KPMG denied being hired by HP to audit Deloitte and said it did “a limited set of non-audit related services,’” Cotchett said in the complaint.

Cotchett is the lead attorney for investors who filed lawsuits on behalf of the company that have been combined. The consolidated complaint filed yesterday is based on public documents, internal company records and witness interviews, some of which are confidential. Portions of the complaint are redacted.

The company was warned about accounting problems, including the use of “round trip transactions,” by analysts, other companies and investment firms, according to the complaint.

Autonomy sold one customer $9 million in software in 2009 and at the same time agreed to purchase $13 million worth of licenses for data, according to the complaint.

$9 Million

“According to three people familiar with the matter, Autonomy recognized the $9 million in software sales as top line revenue, a key indicator for Autonomy,” according to the complaint, which didn’t name the people. “Autonomy then buried the cost of the data licenses” as part of its sales, marketing or other expenses, a part of the income statement that is usually not considered a key indicator for growing technology companies like Autonomy.

Hewlett-Packard said in November that former members of Autonomy’s management team used accounting improprieties, misrepresentations and disclosure failures to inflate the underlying financial metrics of the company, prior to Autonomy’s acquisition. Autonomy managers denied the allegations.

The case is In Re Hewlett-Packard Shareholder Derivative Litigation, 12-06003, U.S. District Court, Northern District of California (San Francisco).

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