Hewlett-Packard sued in securities fraud class action

Posted on: December 5th, 2012 by Steve Larson

Hewlett-Packard is facing a class action lawsuit alleging that after it agreed in principle last August to acquire Autonomy in a $10.2 billion deal it attempted to “unwind the deal” in light of “accounting irregularities.”

The lawsuit, filed in the U.S. District Court for the Northern District of California, comes after HP last week stunned investors by disclosing that it was taking an $8.8 billion charge in large part as a result of allegedly being duped into overpaying for Autonomy, an enterprise software maker that HP at one time touted as a potential game-changer in the battle for cloud computing supremacy.

The accounting write-off sent HP shares down 12 percent last Wednesday to $11.71, the lowest level in more than a decade. HP shares were up 2 percent on Monday to $12.74. 

The complaint alleges that HP “concealed from the investing public” that Autonomy’s “operating results and historic growth were the product of “accounting improprieties” including “the mischaracterization of low-margin hardware as software and the improper recognition of revenue on transactions with Autonomy business partners, even where customers did not purchase the products.”

The lawsuit also alleges that HP “concealed known negative business trends” concerning its HP Enterprise Services Division, formerly known as EDS, which HP acquired in August 2008 for $13 billion.  The class action lawsuit points to HP Enterprise Services’ operating margins collapsing from “10 percent in 2010 to approximately 6 percent as of April 30, 2011, 4 percent as of October 31, 2011, and 3 percent as of April 30, 2012, due to various reasons including unfavorable revenue mix and underperforming contracts.”

The lawsuit is seeking to recover damages on behalf of HP shareholders that purchased shares between August 19, 2011, and November 20, 2012. 

In an interview with CNBC last week, HP CEO Meg Whitman said the company first heard of potential accounting issues after the deal was announced last August. “After we announced the acquisition there were a number of blogs that came to the fore about potential issues at Autonomy,” she said. “The former management team ran that to ground [investigating the claims] and came up with the conclusion that there was nothing there.”

Whitman told Wall Street analysts that a member of Autonomy’s leadership team told HP about the alleged accounting improprieties. “These improprieties were discovered through an internal investigation after a senior member of Autonomy’s leadership team came forward following the departure of [Autonomy founder and former CEO] Mike Lynch on May 23,” she said. “Based on this information, HP initiated an intense internal investigation into the allegations including a third-party forensic review of Autonomy’s historical financial results.

“Autonomy remains a work in progress as we move this business from start-up to grown-up,” Whitman told analysts. “There is a big market opportunity for this business but operational improvements are needed to take full advantage of these opportunities.”