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HP Investors Sue Over Autonomy Deal, Accounting Practices Spotlighted

The HP-Autonomy snowball just keeps gathering momentum. It was predictable that once HP accused the former CEO of Autonomy of dodgy accounting practices, the lawyers would step in. But it seems that the legal mud will be flying in all directions as an investor jumps in to grab the salvage of the HP-Autonomy business wreck.

The latest salvo comes in the shape of a complaint filed in a federal court in San Francisco over the US$ 8.8 billion write-down by HP of the costs incurred with the Autonomy buy-out.

HP Sued

It is not clear who is taking the case, as it is only registered as Nicolow v. 12-05980, U.S. District Court, Northern District of California (San Francisco).

Similarly there is no date for a hearing, so there is no way of knowing when this is all going to come out. However, the complaint alleges that HP issued misleading statements in relation to the acquisition of Autonomy.

Notably, the complaint says, HP had bought the company based on financial statements that were unreliable because of accounting manipulation. It also cites current CEO Meg Whitman and the company’s former CEO, Leo Apotheker as defendants in the case as it does CFO Catherine Lesjak.

As this is an impending legal case, it is unwise to make any comment on it, but it seems unlikely that the claimant would be making the complaint if they did not have evidence to back it up.

And because the nature of the complaint appears to suggest that HP knew there were accounting irregularities at the time, the question arises as to what exactly was going on around this acquisition?

Did HP know there were issues around the financial reporting? Where there really issues around the financial reporting? If there were, why were they not pinpointed by the accounting firms who were responsible for assessing the books?

HP v Autonomy

It seems increasingly likely that once all the different strands of this case come together in the court, it is going to boil down to this; who knew what about Autonomy, and what exactly was known?

As things stand at the moment the US Securities and Exchange Commission are examining the deal, and even the FBI has been called in according to some reports.

How accurate these reports are is still unclear as Mike Lynch, the former CEO of Autonomy said as late as Monday evening that he has not received any legal approaches from HP.

Whitman is insisting though and says that once the investigation starts getting down to the nitty gritty, the process will produce a “multiyear journey through the courts” in both the UK and the US.

Autonomy’s IDOL

At the core of all this is the IDOL technology and its apparent success over the past few years. We say apparent because the whole case has placed a substantial question mark over IDOL and its abilities.

IDOL is the core product from Autonomy, and the one upon which most of its success was built. Using it, enterprise workers can search and sift through all kinds of enterprise content, including video and even phone conversations, and find information based on this.

It does this by understanding the meaning of words and being able to associate those words with the content in enterprise repositories. In short, it can  give content meaning and context — an invaluable attribute in enterprises whose business is built on data.

Looking over the past quarters — certainly at the quarters in the year that preceded the HP deal, it seems that a lot of enterprises found it to be invaluable too. As a result, the large contracts started pouring in.

Accounting Practices

It is at the next stage of the process that the allegations of accounting problems come into play. There are two different kinds of accounting practices; one for the US, one for the UK.

According to Autonomy — and Mike Lynch — the UK practice enables companies to put the entire future value of the contract on the books as revenues. US companies are only allowed to put the revenues in as the money comes in.

Ultimately, there isn’t a huge difference once the money comes in. But if the money doesn’t come in, there is a problem.

And it seems that in some cases the money didn't come in. VMS, a provider of information on TV viewing habits is a good example of this. In 2011 it went bust owing Autonomy US$ 6.4 million, according to Autonomy. This can explain why regulators on both side of the Atlantic are said to be involved.


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