particulars of claim hp vs lynch et al
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IN THE HIGH COURT OF JUSTICE laim No. HC-2015-001324
CHANCERY DIVISION
BETWEEN
1) AUTONOMY CORPORATION LIMITED
2)HEWLETT-PACKARD VISION BV
3)AUTONOMY SYSTEMS LIMITED
4)AUTONOMY INC
Claimants
- and -
1) MICHAEL LYNCH
2) SUSHOVAN HUSSAIN
Defendants
PARTICULARS OF CLAIM
A.
PARTIES
The C laimants
The D efendants
B.
SUMMARY OF THE CLAIMS
C. DUTIES OWED BY LYNCH AND HUSSAIN TO AUTONOM Y, ASL,
AUTONOMY INC AND ZANTAZ 9
Fiduciary duties
9
Duties as employees
0
D. FALSE ACCOUNTING AND IMPROPER TRANSACTIONS 4
Autonom y s published inform ation
4
Overview 5
Loss-making hardware transactions 6
Imprope r revenue recognition 7
IDOL OEM Revenue
7
Cum ulative effect of the false accounting 1
E. INVOLVEMENT OF LYNCH AN D HUSSAIN AND THEIR BREACHES OF
DUTY
6
Involvement of Lynch and Hussain in the transactions themselves
76
Knowledge and involvement of Lynch and Hussain in false accounting 4
Breaches of duty
00
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F.
THE AUTONOMY ACQUISITION
05
G.
NEGOTIATIONS WITH HP — MISREPRESENTATIONS BY LYNCH AND
HUSSAIN
07
The January S lides
107
The 3 February 2011 video-conference
09
The 4 Marc h 2011 meeting
12
The Valuation Model
16
The 29 June 2011 meeting
17
The 29 July 2011 meeting
18
The 1 August 2011 due diligence call
9
The 2 August 2011 due diligence call
22
The 4 August 2011 due diligence call
124
Know ledge or recklessness of Lynch and Hussain
25
Reliance by HP/Bidco upon misrepresentations
25
H.
AUTONOMY'S, AUTONOMY INC'S AND ASL'S CLAIMS AGAINST
LYNCH AND HUSSAIN
28
Liabili ty of Autonom y to Bidco under Sch 10A FS MA
28
Transaction-based losses
29
I. BIDCO'S CLAIMS AGAINST LYNCH AND HUSSAIN
31
Bidco s claims against Lynch and H ussain
31
J. INTEREST
32
K. PRAYER
33
SCHEDULE 1: PURE HARDWARE TRANSACTIONS
SCHEDULE 2: ADJUSTMENTS TO ACCOUNTING FOR PURE HARDWARE
SCHEDULE 3: CONTRIVED VAR TRANSACTIONS
SCHEDULE 4: ADJUSTMENTS TO REVENUE AND PROFITS DUE TO
IMPROPER TRANSACTIONS
SCHEDULE 5: RECIPROCAL TRANSACTIONS
SCHEDULE 6: HOSTING ARRANGEMENTS
SCHEDULE 7: OTHER TRANSACTIONS
SCHEDULE 8: TRANSACTIONS INCORRECTLY CATEGORISED AS IDOL
OEM
SCHEDULE 9: ANALYSIS OF IDOL OEM REVENUE
SCHEDULE 10 IMPROPERLY RECOGNISED REVENUES AND ORGANIC
GROWTH 2009-H12011
SCHEDULE 11: IMPACT OF IMPROPERLY RECOGNISED REVENUES AS
AGAINST MARKET EXPECTATIONS
SCHEDULE 12: PARTICULARS OF TRANSACTION-BASED LOSSES
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A PARTIES
The Claimants
Autonomy
1
The First Claimant, Autonomy C orporation Lim ited
( Autonomy ),
was
incorporated under the laws of England and W ales on 21 M arch 1996. The
registered office of A utonomy is situated at Amen Corner, Cain Road,
Bracknell, Berkshire, United Kingdom RG 12 1HN .
2
At all material times, Autonom y acted as the holding company of a group of
comp anies which, according to the B usiness Overview section in its 2009
Annual Report and Accounts p6), was:
a globa l leader in infrastructure sof tware for the enterprise that helps
organizations to derive mea ning and va lue from their business information
wh ether unstructured, semi-structured or structured, as w ell as mit igate
the risks associated with those same a ssets.
3
Autonom y became a public company on 16 July 1998. In Novem ber 2000 its
shares were adm itted to trading on the main mark et of the London Stock
Exchange. From 8 Novem ber 2006 until its shares ceased to be traded on the
main market on 14 N ovemb er 2011, Autonomy w as, for the purposes of
section 90A of the Financial Services and Markets Act 2000
( FSMA ) ,
an
issuer of securit ies .
As such, it was potentially liable to pay compensation to a
person who acquired its securities in reliance on its
published information
( published information )
and suffered loss in respect of those secu rities as a
result of any untrue or m isleading statements in that published information or
the omission from it of any matter required to be included in it. For the
avoidance of dou bt, references to published information herein include
publications to which section 90A of FSM A app lied prior to 1 October 2010).
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Bidco
4
The Second Claimant, Hew lett-Packard Vision BV ( Bidc o ), was
incorporated in the Netherlands on 1 5 Au gust 2011. The registered office of
Bidc o is situated at Startbaan 16, 1187 XR Am stelveen, the Netherlands.
5
Bid co has at all material times since its incorpo ration been an indirect who lly-
owned subsidiary of Hewlett-Packard Company
( HP ), an Am erican
corporation which, through its operating subsidiaries, is a leading provider of
com puting and im aging products, technologies, software and services
throughout the world
6
Pursuant to a recom mend ed offer that was announced on 18 A ugust 2011 and
became unc onditional on 3 October 2011, Bidco (the corporate vehicle used by
HP to effect the acquisition) acquired all of the outstanding sh ares and
conve rtible loan notes in Autono my for a total price of approxim ately £7.15
billion (equivalent to approxim ately US$11 .1 billion)
( the Autonomy
Acquisition ).
On 10 January 2012, following the Autonomy Acquisition,
Autonom y was re-registered as a private com pany.
ASL
7 The Third Claimant, Autonom y Systems Limited
( ASL ),
was incorporated
in England on 31 M ay 1995. The registered office of ASL is at Am en Corner,
Cain Road, B racknell , Berkshire, United K ingdom, RG 12 1HN .
8
At all material t imes, ASL was an indirect wholly-owned subsidiary of
Autonom y. It carried on the business of software developm ent and
distribution, and operated as licensor of A utonom y software to other entities
in the Autonomy group
9
Pursuant to transfer pricing arrangements with some other Autonomy group
com panies including A utonomy Inc, amounts equal to, typically, 100% of the
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costs incurred by those other group com panies and 96.5% of their revenues
were transferred from those other group comp anies to ASL.
Autonomy Inc
10.
The Fourth Claimant, Autonom y, Inc ( Autonom y Inc ), was incorporated
under the laws of New Jersey, USA, on 21 M arch 1996. Autonomy Inc's
principal place of business is at 1140 E nterprise Way, Building G , Sunnyvale,
California 94 089.
11.
Autonom y Inc was at all material times an indirect wholly-owned subsidiary
of Autonom y. It carried on the business of software development and
distribution and was the Autonomy group s main operating company in the
USA.
ZANTAZ
12.
ZA NT AZ Inc ( ZA NT AZ ) was incorporated under the laws of California,
US A. Its principal business address was at 5758 Las Positas Blvd, Pleasanton,
CA 94588 and thereafter at 5671 Gibraltar Drive, Pleasanton, CA 94588.
13.
At all material times after July 2007, ZA NTA Z was an indirect wholly-owned
subsidiary of Autonom y. It carried on the business of supplying consolidated
archive managem ent technology and services, including the hosting of
customers' data. ZAN TA Z had (in addition to the routine transfer pricing
arrangem ents referred to in paragraph 9 ab ove) a profit share arrangement
with AS L w hereby a percentage of the amoun ts initially transferred to A SL
were transferred back from ASL to ZA NTA Z.
14.
W ith effect from 1 N ovember 2014, ZA NTA Z m erged with and into HP on the
basis that HP assumed all the liabilities and obligations of ZA NTA Z and was
the surviving corporation. Prior to the merger, on 31 October 2014, Z AN TAZ
assigned to Autonomy Inc all of its rights, title to and interest in, amongst
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other matters, any claims, rights and causes of action that ZAN TA Z had
against any third parties. Notice of such assignment w as given to the
Defendants on 27 M arch 2015.
15
Autonom y Inc therefore pursues its claims in these proceedings both on
behalf of itself and as assignee of rights assigned to it by ZA NT AZ.
The Defendants
Lynch
16
The First Defendant, Michael Lynch
( Lynch ),
was a director of Autonom y at
all times from its incorporation in 1996 until 30 N ovem ber 2011 .
17
Lynch was em ployed by Autonomy as its M anaging Director and Chief
Executive Officer under the terms of an agreement set out in a letter dated 9
July 1998
( Ly nch's Em ploym ent Contract ) . Lynch s Em ployment Contract
was terminated by letter dated 23 M ay 201 2, with effect from 23 November
2012.
18 Lynch w as at all material times the chief decision-maker within the Autonomy
group and the C laimants rely upon the facts and m atters set out in Section E
in support of the contention that:
18.1. Ly nch acted as if he were a director of ASL, Autono my Inc and
ZANTAZ;
18.2. The formally appointed directors of AS L, nam ely the Second
Defendant, Sushovan Hussain
( Hussain ),
and Andrew Kanter
( Kanter ),
were accustom ed to act in accordance w ith directions or
instructions given by Lynch such that Lyn ch was a shadow director of
ASL within the meaning of section 251 of the Companies Act 2006
( the
Act );
and/or
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18.3. Lynch acted for and on behalf of ASL in relation to transactions which
had a financial imp act on ASL in circumstances which gave rise to a
relationship of trust and confidence such that Lynch assum ed the
obligations of a fiduciary towards ASL.
19
Further, Lynch was the P resident of Autonom y Inc and, as pleaded in Section
C below, owed that comp any fiduciary duties.
20
Upon his resignation as a director of Autonom y, Lynch p rovided a letter
dated N ovember 2011, u nder which he agreed to indemnify Autonomy
against any claims, dem ands or liabilities that had occurred or m ight occur in
future in connection with his role as a director of the comp any
( the Lynch
Indemnity ).
21
Prior to the Autonom y Acquisition, Lynch w as a substantial shareholder in
Autonom y. He held 20,288,320 shares and share options as at 22 Augu st 2011.
Lynch sold all of his shares in Autonom y to Bidco for approxim ately £517
million. Lynch continued to hold office as Chief E xecutive O fficer of
Autonomy after comp letion of the Autonom y Acquisition until 23 May 2012.
Hussain
22
Hu ssain is a qualified chartered accountant. He w as the Autonom y group s
Chief Financial Officer from June 2001 until 30 Novem ber 2011. He was a
director of Autonom y from 1 June 2003 un til 30 November 2011 and at all
relevant times a director of each of ASL, Autonomy Inc and ZA NTA Z.
23
Hussain was em ployed by ASL under the terms of an agreement dated 27
June 2001
( Hussain's Em ployment Contract ),
pursuant to which he was
appointed as Finance Director (Europe). After 30 Novem ber 2011, when he
ceased to hold office as Chief Financial Officer of the Autonom y group , he
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acted as President of ASL with responsibility for all of the Autonom y group's
sales activities. Hussain ceased to be an em ployee of ASL on 31 M ay 2012 .
24
Prior to the Autonom y Acquisition, Hussain was a shareholder in Autonom y.
He held 399,274 shares and share options as at 22 A ugust 2011. H ussain sold
all of his shares in Autonom y to B idco for approximately £10 m illion.
Managerial responsibilities
within Autonomy
25
At all material times, by v irtue of their status as directors of Autono my , each
of Lynch and Hussain was a
person d ischarging m anag erial responsibi li ties
within Autonom y for the purposes of paragraphs 3(2) and 3(3) of Schedule
10A of FSMA (and for the purposes of the predecessor provisions of section
90A o f FSM A w hich applied at all relevant times prior to 1 O ctober 2010)
(collectively, Sch
10A FSMA ).
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B . SUMM RY OF THE CL IMS
26.
Over the p eriod from (at least) the first quarter of 2009 until the second
quarter of 2011
( the Relevan t Period )
(Autonom y s financial quarters
corresponded to calendar quarters and are referred to herein as Q1, Q2 , Q3
and Q4 as appropriate), Lynch and H ussain caused A utonomy group
comp anies to engage in im proper transactions and accou nting practices that
artificially inflated and accelerated Autonom y s reported revenues,
understated its costs of goods sold
( CO G S ) (thereby artificially inflating its
gross m argins), misrepresented its rate of organic growth and the nature and
quality of its revenues, and overstated its gross and net profits.
27.
Lynch and H ussain caused Autonom y to issue published information that, by
virtue of the said im proper transactions and accoun ting practices, included
many statements which they knew were untrue and/or misleading or they
were reckless as to the same) or which om itted m atters that were required to
be included in it, in circumstances where they knew the om issions to involve
the dishonest concealment of material facts.
28.
This conduct by Lynch and H ussain was systematic and was sustained over
the Relevant Period. Its purpose w as to ensure that the Autonom y group s
financial performan ce, as reported in Autonom y s published information,
ppe red to be th t of r pidly growing pure softw re comp ny whose
performance w as consistently in line with m arket expectations. The reality
was that the group w as experiencing little or no growth, it was losing m arket
share, and its true financial performance consistently fell far short of market
expectations.
29.
Furthermore, from no later than January 2011 w hen Lynch and Hu ssain began
taking steps with a view to the sale of Autonom y, the falsification of
Autonom y s financial performance was (it is to be inferred) further motivated
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by a desire to achieve a sale of their own shareholdings in Autonomy at a
price in excess of their true value.
30.
he improper transactions and accounting practices can broadly be divided
into the following three catego ries:
30.1. Undisclosed, loss-making hardware sales: Autonomy presented itself
as a company that derived its revenues from licensing its Intelligent
Data Op erating Layer
( IDOL ) software and related services.
How ever, from Q 2 20 09 Autonomy Inc engaged in substantial sales of
third-party computer hardware, without modification and
unaccompanied by any A utonomy software
( pure hardware sales ).
These pure hardw are sales generated revenue of approximately
US 200 million over the Relevant Period and comprised approximately
11% of A utonomy's total reported revenue during the period Q3 20 09
to Q2 2011. A utonomy disclosed neither the existence nor the amount
of such sales in its published information (or anywhere else). This non-
disclosure contributed significantly to the false appearance of a rapidly
growing so ftware business. The fact that these substantial pure
hardware sales were consistently made at a significant loss was also
concealed in Autonom y's published information. CO GS was artificially
reduced, thereby inflating Autonomy s reported gross margins.
30.2. Improper revenue recognition: A number of forms of contrived
transactions were deployed by Lynch an d Hussain in order to
recognise revenues which w ere either improperly accelerated or
fabricated:
30.2.1. VAR transactions:
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30.2.1.1. Ordinarily, value-added resellers ( VARs ) purchase
another business s product, add value to (or provide
services with) that product, and then resell the
resulting product to an end-user. Howev er, in
Autonomy's case, certain VAR s were used to
fabricate or accelerate what was then held out by
Autonom y to be revenue and profits.
30.2.1.2. For example, where an Autonomy group com pany
had attempted to license an Autonomy product to a
prospective end-user, but had been unable to finalise
a transaction by the end of a financial quarter, Lynch
and Hussain caused the sale to a VAR of a licence to
use that (or another) product, ostensibly for onw ard
licensing to the end-user, even though the VAR had
had no prior involvement in the prospective
transaction with the end user.
30.2.1.3. In fact, the VAR did not bear com mercial risk in
relation to its ostensible liability to pay for the
software licence, because it had been agreed and/ or
was understood between the Autonomy group
company and the VAR that the VAR w ould not be
required to pay for the software licence from its own
resources. In the event the Autonom y group
com pany either forgave this supposed liability or
ensured that the VAR was pu t in funds to enable it to
effect payment.
30.2.1.4. The arrangement w ith the VA R w as purely a pretext
for the recognition of revenue. In som e instances, the
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arrangement accelerated revenue recognition because
the Autonom y group company not the VA R)
continued to negotiate w ith the end-user after
entering into the arrangem ent with the VA R, and w as
eventually able to effect a transaction with that end-
user. In other instances, no revenue sho uld ever have
been recog nised or reported at any time , because
neither the VA R nor the Autonomy group com pany
ever sold a licence to the end -user. In these latter
situations the V AR was, by one means or another, put
in funds or relieved by the A utonomy group
com pany of its purported obligation to pay for the
software licence.
30.2.1.5. In many cases, the Autonomy g roup compan y mad e
a paym ent, described as, amo ngst other things, a
marketing assis tance fee ,
to reward the VAR for
participating in the arrangement even though the
VA R had provided no actual marketing assistance to
the Autonomy group com pany, and had had no
contact with the end -user in relation to the propo sed
transaction.
30.2.2. Reciprocal transactions:
30.2.2.1. Lynch and Hussain fabricated revenue by causing
Autonom y group com panies to enter into improper
reciprocal transactions under which an Autonomy
group company i) granted a software licence to a
counterparty at one price and ii) purchased produc ts
including softw are), rights and/or services from that
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counterparty at a greater price. In almost all cases, the
products, rights and/or services purchased were of
no discernible value to the Autonom y group (or the
Autonomy group com pany overpaid for them). The
purpose of the purchase from the cou nterparty was to
provide the counterparty with both the incentive and
the funds to acquire a licence to Autonom y software
that the counterparty would not otherwise have
acquired. These contrived transactions meant that the
Autonomy group was funding the purchase by
counterparties of its own software in order to allow
Autonomy inappropriately to report revenue and
profits.
30.2.3. Acceleration of hosting revenue:
30.2.3.1. One aspect of the A utonomy group s business was
the hosting of customer data on hardware owned or
controlled by Autonomy group companies
(principally ZANT AZ) using Autonom y (and other)
software and managed by Autonomy personnel.
Hosting services were typically provided over a
period of years. They resulted in a stream of revenue
which, historically, Autonom y and ZA NTA Z (prior
to its acquisition by Autonom y) had recognised
(correctly) over the entire period during w hich the
data hosting service was provided. This aspect of the
group s business was represented in Autonomy s
published information to be a growing source of
recurring revenue.
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30.2.3.2. For the improper purpose of accelerating the
recognition of revenues into the then-current period,
Lynch and Hussain caused Autonomy group
com panies to structure new h osting arrangem ents,
and to restructure existing hosting arrangem ents, by
charging a substantial upfront fee ostensibly for a
licence to use Autonom y s Digital Safe or eDiscovery
software and a greatly reduced fee for data hosting
services over the term of the hosting relationship.
30.2.3.3. The licence to use D igital Safe software was of no, or
no substantial, independent value to the customer.
The incentive to the customer w as the reduction in
the aggregate fees payable over the term of the
arrangement. In relation to ho sting arrangem ents
utilising Au tonomy s eD iscovery software, whilst this
was cap able, in principle, of operating indepen dently
of the hosting service provided by Autonom y group
compan ies, no reliable fair value could be attributed
to the individual value of the eDiscovery software.
30.2.3.4. For Autonom y, such arrangements created the
ppe r nce of r pid revenue growth in the short
term, but damaged the future profitability of
Autonom y s data hosting business by significantly
reducing the future recurring revenue to be derived
from individu l customer rel tionships nd the d t
hosting business as a w hole. It also rendered cu rrent
revenue unrepresent tive of future recurring revenue
nd m de the description of the d t hosting business
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in Autonomy s published information untrue and/or
misleading.
30.3. Misrepresented IDOL OEM revenue:
30.3.1. Autonomy s published information stated that an important
type of revenue for Autonom y was
IDOL OEM , OEM
derived revenues or IDOL OEM derived reve nues (together,
IDO L OEM Revenue ). IDOL w as described in each of
Autonomy's 2009 and 201 0 Annual Reports and Accounts as
Autonomy s core technology . IDOL OE M R evenue meant
revenue obtained from bu sinesses known as Original
Equipm ent M anufacturers ( OE M s ). In theory, OE M s were
software companies that embedded Autonomy software in
their own produ cts, and then licensed those products to their
own customers. Autonomy s published information
represented that transactions w ith O EM s (and the associated
IDOL OEM Revenue) reflected the wide acceptance and use of
Autonomy s software in the software industry and resulted in
a growing an d recurring stream of royalties paid by the O EM s
to Autonomy.
30.3.2. Lynch and Hussain knowingly included within Autonomy s
reported IDO L OE M Revenue revenue derived from sales to
non-software com panies (i.e. comp anies which could not
emb ed Autono my software in their own software products),
revenue derived from licences that required the licensee to use
the Autonom y software for internal purposes only, and
revenue derived from sales of hardware and revenue arising
from contrived VAR, reciprocal and hosting transactions.
M any of the remaining OEM transactions generated only a
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single upfront payment and no other material royalty payment.
Autonom y's published information over the R elevant Period
overstated IDOL OE M Revenue by at least 390 and portrayed
this aspect of its business as growing rapidly w hen, in fact, it
was shrinking.
31
In causing Autonomy group com panies to engage in these improper
transactions and accounting p ractices:
31 1 Lynch and Hussain breached fiduciary duties that they owed under the
Act as directors of Autonom y;
31 2 Lynch breached fiduciary duties owed as a de facto director of
ZANTAZ;
31 3 Lynch breached fiduciary duties owed as a de facto or shadow director
or assumed as a fiduciary of AS L and as an officer of Autonom y Inc;
31 4 Lynch further breached his contractual duties as an employee of
Autonomy;
31 5 Lynch is liable to indemnify Autonomy under the Lynch Indemnity;
and
31 6 Hussain breached fiduciary duties owed under the Act as a director of
ASL and breached the fiduciary and contractual duties that he ow ed as
an employee of ASL and fiduciary duties owed as a director and officer
of Autonomy Inc and ZAN TAZ.
32
W hen proceeding with the Autonomy A cquisition, HP and thus Bidco
reasonably relied upon Autonomy's published information, which, by reason
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loss suffered by Autonom y that was caused by the wrongful conduct of Lynch
and Hussain
35
Accordingly, Autonom y in turn claims against Lynch and H ussain for this
damage, w hich was caused to it by their breaches of fiduciary duties as
directors of Autonom y and, in the case of Lynch, under Lynch's Em ployment
Contract. Autonomy also seeks to recover from L ynch under the Lynch
Indemnity
36
In addition, ASL , alternatively Autonom y Inc and/or ZAN TAZ , have
suffered losses attributable to the imp roper transactions that L ynch and
Hussain wrongfully caused to be entered into. ASL and Autonom y Inc bring
claims to recover these losses from Lynch and Hussain on g rounds of their
breaches of duties as directors and/or employees and/or as fiduciaries of
Autonom y Inc, ASL and/or ZANT AZ as pleaded at paragraph 203 below.
Particulars of such transaction-based losses appear in Schedule 12. Based on
the information set out in Schedule 12, the Claimants estimate that such losses
are in excess of £62.5 million (approximately US 100 million)
.
2
Based on an exchange rate of US 1.6 : £1.
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C DUTIES OW ED BY LYNCH AND HUSSAIN TO AUTONO MY ASL
AUTONOMY INC AND ZANTAZ
Fiduciary duties
37
At all material times L ynch and H ussain, as directors of A utonomy, each
owed A utonom y the following duties under the Act:
37.1. The duty under section 171 of the Act to act in accordance with the
company s constitution and to exercise his powers as a director only for
the purposes for which they were con ferred;
37.2. The duty under section 172 of the A ct to act in the way he con sidered in
good faith would be m ost likely to promote the success of the company
for the benefit of its mem bers as a whole; and
37.3. The du ty under section 175 of the Act not to place him self in a situation
in which h e had, or cou ld have, a direct or indirect interest (or duty)
that conflicted or possibly m ight conflict with the interests of the
company.
38
At all material times, Hussain as a director, and Lynch as a de facto director,
of ASL each owed A SL the duties set out in paragraphs 37.1 to 37.3 above.
Further or in the alternative in respect of Lyn ch, he undertook to act for and
on behalf of ASL in relation to transactions which had a financial impact on
AS L pursuant to the transfer pricing and profit sharing arrangements referred
to in paragraphs 9 and 13 above in circumstances which gave rise to a
relationship of trust and confidence such that Lynch assum ed the obligations
of a fiduciary towards A SL and thereby assum ed fiduciary duties equivalent
to the statutory duties set out in paragraphs 37.1 to 37.3 above . In the further
alternative in respect of L ynch, he acted as a shadow director of AS L within
the meaning of section 251 of the Act and, in that capacity, owed A SL the
duties set out in paragraphs 37.1 to 37.3 above.
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39
At all material times, Lynch , as an officer, and H ussain, as a director and
officer, of Autonom y Inc each ow ed Au tonomy Inc the following fiduciary
duties (as a matter of the law of N ew Jersey):
39 1 A duty to act with utmost fidelity in their dealings with the company;
and
39.2. A du ty of loyalty, i.e. to act in the best interests of the com pany, rather
than for their own benefit.
40
At all material times, Lyn ch as a d e facto director, and H ussain as a director
and officer of ZAN TA Z each ow ed ZAN TA Z a fiduciary duty of loyalty (as a
matter of the law of California), which required each of them to place the
interests of ZA NT AZ and its shareholders over any personal interest.
Duties as employees
41
Further, at all material times L ynch ow ed Au tonom y the following duties,
amongst others, pursuant to L ynch s Employm ent Contract
( the Lync h
Em ployment Duties ):
41.1. The duty und er clause 2.2.5 at all times to
serve Autonomy and
the
Group
(as defined in
clause 15, which definition included ASL ,
Autonomy Inc and ZANTA Z)
well and faithfully;
41.2. The duty under c lause 2.3.1 not to do anything w hich in the reasonab le
opinion of the board of directors of Autonomy w ould be or would be
likely to be damagin g or prejudicial to the business and/or com mercial
interests of Autonom y or
the Gro up ;
and
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41.3. Based on h is senior position and role, an imp lied duty to disclose
misconduct by himself and other executives involved in the business of
Autonomy and its group.
42.
Further, at all material times H ussain owed A SL, amongst others, the
following duties as an emp loyee which w ere implied into Hussain s
Employment Contract
( the Hussain Em ployment Duties ) ,
namely:
42.1. The duty to serve ASL with fidelity and good faith; and
42.2. Based on Hussain s senior position and role, a duty to disclose
miscondu ct by himself and other execu tives involved in the business of
ASL.
43. Further, at all material times Lynch and H ussain, as directors of A utonomy,
each ow ed the following statutory duties in relation to the preparation of
accounts (Autonom y w as required to prepare its consolidated accounts for the
Autonomy group
( group accounts )
in accordance w ith the International
Financial Reporting Standards
( IFRS ) and had elected to prepare its stand-
alone accounts ( individual accou nts ) under IFRS):
43.1. The duty, under section 394 of the Act, to prepare individual accounts
for Autonom y for each o f its financial years;
43.2. The duty, under section 399 of the Act, to prepare group accounts for
each of Autonom y s financial years;
43.3. The duty, under section 393 of the Act, not to approve accounts
prepared for the purposes of Part 15, Chapter 4 of the Act unless
satisfied that they gave a true and fair view of the assets, liabilities,
financial position and profit or loss:
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43.3.1. In the case of the individual accounts of Autonom y, of
Autonomy; and
43.3.2. In the case of Autonomy's group accounts, of the undertakings
included in the consolidation as a whole, so far as concerned
members of Autonomy.
In relation to the duty under section 393 of the Act, International
Accounting Standard ( IAS ) 1 required each of the directors to:
43.3.3. Properly select and apply acco unting policies;
43.3.4. Present information, including accounting policies, in a m anner
that provided relevant reliable, comparable and
understandable information; and
43.3.5. Provide additional disclosures where compliance with the
specific requirements in IFRS w as insufficient to enable users to
understand the impact of particular transactions, other events
and cond itions on the entity's financial position and financial
performance.
43.4. The duty, under section 415 of the Act, to prepare a group directors
report for each of A utonomy's financial years relating to the
undertakings included in the consolidation and including the
following:
43.4.1. Pursuant to section 416 of the Act, a statement of the principal
activities of the un dertakings included in the co nsolidation in
the course of the year;
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43.4.2. Pursuant to section 417 of the Act, a business review containing
a fair review of Autonom y s business (being a balanced and
comp rehensive analysis of the development and performance
of Autonom y s business during the financial year and the
position of its business at the end of that year) and a
description of the principal risks and uncertainties facing
Autonomy; and
43.4.3. Pursuant to section 418 of the Act, a statement to the effect that
so far as each of them as directors of Autonom y was aw are,
there was no relevant audit information of which Au tonom y s
auditor was unaware, and that he had taken all the steps that
he ought to have taken as a d irector in order to make him self
aware of any relevant audit information and to establish that
Autonomy s auditor was aware of that information.
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D. FALSE ACCOUNTING AND IMPRO PER TRANSACTIONS
Autonomy's published information
44. Autonomy s individual and consolidated group accounts were published in
an annual report in respect of each financial year. The A nnual Reports and
Accounts for the years ended 31 D ecember 2009 and 31 Decem ber 2010, which
are referred to hereinafter together as the Annua l Reports , included,
amo ngst other things, an Executive Summ ary containing the Chairm an s and
Chief Executive s Statement, a Business Overview, and a Performance section
(containing a F inancial Review), giving a description of the performan ce of
the business over the financial period.
45. In addition, Au tonom y published interim financial results and information on
a quarterly basis in the form of quarterly reports wh ich included, amon gst
other things, a statement of financial highlights, a description of the
performance of the business over the period and a cond ensed set of
consolidated financial statem ents. The quarterly reports that were pu blished
by Autonom y over the course of the Relevant Period (from Q1 2009 to Q 2
2011)
are referred to herein collectively as the Q uarterly Reports .
46.
The Quarterly Reports in respect of Q2 2009, Q 2 2010 and Q2 2011 also
fulfilled the requirements in respect of half-yearly results that A utonom y, as
an issuer whose shares were admitted to trading on a regulated market in the
United Kingdom , was obliged to produce under Chapter 4 of the Disclosure
and Transparency Rules.
47.
In addition, transcripts of earnings calls with analysts in respect of the
Quarterly Reports published after 1 O ctober 2010
( earnings calls )
constituted inform ation which was pub lished by recognised m eans or the
availability of which w as announced by A utonomy by recognised means
within the meaning of paragraph 2(1) of Sch 10A FSM A and hence constituted
published information for the purposes of Sch 10A FSM A.
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verview
48. Over the course of the R elevant Period, the financial performance of
Autonom y which in this context means the Autonomy group) as reported in
the Annu al Reports and in the Q uarterly Repo rts was falsified as a result of a
combination of the following:
48.1. The inclusion in Autonomy s reported results of figures derived from
transactions that w ere not entered into genu inely in the furtherance of,
or pursuant to Autonomy s business, but rather for the improper
purpose of artificially inflating or accelerating revenue;
48.2. The im proper allocation of costs so as to enhan ce reported gross
profits;
48.3. The accounting for transactions (including the said transactions entered
into for the improper purpose of artificially inflating or accelerating
revenue) in a manner that was not in accordance with IFRS and was
designed to present artificially inflated figures for revenu e, gross
profits, gross margin and n et profits;
48.4. The incorrect and incomplete description of Autonomy s business, and
the rate of organic growth o f the compo nents of its business and of the
business as a wh ole.
49. As a result, the Annu al Reports and the Quarterly Reports contained untrue
and/or misleading statements and/ or omitted matters required to be
included in those Repo rts.
50.
Lynch and Hussain knew such statem ents to be untrue or m isleading or were
reckless as to the same) and knew the o missions to involve the d ishonest
concealment of material facts.
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51.
The categories of improper transactions and m ethods of false accounting that
were carried out by or at the behest of Lynch and H ussain, as summarised in
paragraph 30 abov e, are described in m ore detail below.
52.
The falsification of A utonomy s financial performance was orchestrated by
Lynch and Hussain acting in concert during the Relevant Period as part of a
campaign to create the appearance of a com pany wh ose revenues and profits
were grow ing rapidly, were sustainable, and we re consistent with m arket
expectations. Without such false accounting, Autonomy s reported financial
performance in each financial quarter during the Relevant Period wou ld have
fallen short of market expectations and A utonomy w ould have been show n to
be losing market share and enjoying little or no actual growth in software
revenues.
Loss making hardw are transactions
Nature and extent of the transactions
53.
Autonomy w as presented to the market as a company whose revenues were
derived from the sale of its IDOL software and related services. In particular:
53.1. In the 2009 Annual Report:
53.1.1. The B usiness Overview section (p9) stated that the Autonom y
group s business model was
the development and l icensing of
world-leading technology for the automated processing of all forms of
unstructured informa tion, and that its financial model was
one
of the very rare examples of a pure software m odel ;
53.1.2. The Chairman s Statement (p2) explained that
Autonomy
operates in the realm of pure software ;
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53.1.3. The
Revenue recogn ition
section within the
Significant
Accounting Policies
(p41) stated that
The nature o f the
transactions that the group has entered into during 2009 is the same
as in 2008 in all respects.
In 2008 the Autonomy group had not
sold any material amount of hardw are that was
unaccom panied by any Autonomy software.
53.2. In the 2010 Annual Report:
53.2.1. The Financial Review section (p16) explained that
A utonom y
operates a rare 'pure software' mod el ;
53.2.2. The C hief Executive s Review (p6) stated that it was
Autonomy s strategy to
retain a pure high margin software
business model ;
53.2.3. The Business Overview section (pp12-13) again stated that the
Autonomy group s
business is the development and licensing of
wo rld-leading technology for the autom ated processing of all forms of
unstructured information
and explained that:
Autonomy operates a rare pure software mod el. Many
software comp anies have a large percentage of revenues that
stem from professional services, because they have to do a lot
of customisation work on the p roduct for every single
implementation. In contrast, Autonomy ships a standard
product that requires little tailoring, with the nec essary
implementation work carried out by approved partners such
as IBM Global Services, Accenture and others. ;
from which the reader would reasonably infer that: (i) if the
fees from any professional services were not large, fees from
sales of other goods and services aside from pure software
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would be even smaller; and (ii) the
standard product
shipped
by Autonomy was A utonomy software.
54.
How ever, beginning in Q2 200 9, Lynch and Hussain caused Autonomy Inc to
purchase substantial amounts of computer hardware including laptop and
desktop com puters and accessories, servers and server equipm ent, and
electronic storage and associated equipment) from vendors such as D ell Inc
( Dell ),
EMC Corporation ( EMC )
and Hitachi Data Systems ( Hitachi ).
Autono my Inc then resold this hardwa re without modification and
unaccompanied by any Autonomy software.
55.
Schedule 1 contains a table setting out the amount of pure hardw are sales
identified by the C laimants over the Relevant Period and the percentage of
total reported revenue that such sales represented on a quarter-by-quarter
basis. The total revenue generated by pure hardware sales over the R elevant
Period amounted to approximately US 200 m illion and constituted 11% of the
total reported revenues during the period between Q3 20 09 and Q 2 2011, and
a very significant proportion of reported revenue growth in 2009 as compared
to 2008 and in 2010 as com pared to 2009.
56.
Substantially all of the pure hardw are sales were carried out at a significant
loss. In Q3 200 9, for example, Autonomy purchased hardware from EM C (and
its reseller, Associated Com puter Systems) and Hitachi for US 47.3 million
and sold that hardware, without adding any software, for US 38 million. In
many instances in 2010 an d Q1 and Q 2 2011 , Dell identified customers that
wished to purchase Dell hardware. Autonomy was then introduced to the
transaction. It purchased Dell hardw are at one price, sold the same hardw are
to Dell's customer at a low er price, and then recognised the revenue
associated w ith its sale.
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57.
The costs of purchasing pure hardware over the Relevant Period exceeded the
revenue from the sale of that hardware by US 32.4 million. The losses were
incurred by A utonomy Inc and, as a result of the transfer pricing
arrangements referred to in paragraph 9 above, caused a corresponding loss
to ASL , further details of which are p rovided in Table 12A of Schedule 12. In
addition, a further loss of US 250,000 was suffered by ZAN TAZ and A SL
(under the transfer pricing and profit share arrangements referred to in
paragraphs 9 and 1 3 abov e) as a result of the improper bonuses referred to in
paragraph 135.6 below and in the Summ ary in Schedule 12.
False accounting for loss-making hardware transactions
58. As set out b elow, Autonom y o mitted to disclose in its published information
(as it was required to do) the material fact that it was engaging in significant
amo unts of pure h ardware sales; nor did it disclose that a substantial amo unt
of the costs of those sales was not being accou nted for as COGS . As a result,
Autonomy s published information contained:
58.1. Statements about its revenues that were untrue and/or misleading,
because they gave the im pression of
organic growth
in what was
stated to be Autonomy s
pure
software business;
58.2. Statements about its costs that were untrue and/or misleading, because
they gave the impression of high and steady gross m argins, which
were then held out in the Annual Repo rts to be a
key performance
measure and an
[i]ndicator of success of the company's business model .
Revenue
59.
Pure hardw are sales are to be distinguished from sales of hardware o n wh ich
Autonom y software had been pre-installed
( appliance sales ).
Appliance
sales were specifically referred to and explained in Autonom y's published
information. They were described in the B usiness Overview section of the
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2010 A nnual Report as being a small part of Autonom y's business
conducted at
margins that we re not dissimilar to those of A utonom y s software licensing
business (p12).
60
By contrast, the Annual R eports, the Quarterly Reports from Q2 200 9 to Q2
2011 (inclusive) and transcripts of earnings calls omitted the material fact that
Autonom y Inc was carrying out a mu ch larger volume of pure hardware sales
at margins that were very different from tho se of Auton omy s software
licensing business. The revenues from pure hardw are sales were included
without disclosure or differentiation in the aggreg ate revenu es reported in
Autonom y s financial statements and elsewhere in the Annu al Reports and
Quarterly Reports (and in information provided during earnings calls) even
though:
60 1 The undisclosed revenues derived from pure hardware sales were
significantly greater than the revenues from the disclosed app liance
sales; and
60.2. The e conom ic characteristics of the pure hardware sales (nam ely, that
they were inherently loss-making) w ere very different from high
margin software and appliance sales.
61
The revenu es derived from pure hardw are sales were a significant category of
revenue for Autonomy for the purposes of IAS 18, paragraph 35, and
therefore should have been separately disclosed. Further, IFRS 8, paragraph
32, required revenues from external custome rs for each product or service, or
each group o f similar products and services, to be disclosed. Pure hardw are
was not similar to the other products and services sold by A utonomy and
ough t therefore to have b een sep arately disclosed. In this regard, the
Claiman ts rely upon the following facts and ma tters:
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61.1. According to Autonomy Inc s general ledger, revenues from pure
hardware sales amounted to approximately 7.3 of total reported
revenue for the Autonomy group in 2009, 12.1 in 2010 and 8.6 in the
first half of 2011. Such reven ues constituted a significantly larger
percentage o f total reported revenues in particular individual quarters
as appears from the table in Sch edule 1.
61.2. Pure hardware sales were a new product offering for Autonomy in
2009 and a clear departure from its publicised
pure software model .
Thus the statement pleaded at paragraph 53.1.3 abov e (that the nature
of Autonomy's transactions was the same in 2009 as for 2008) was
untrue and/or misleading.
61.3. The pure hardware sales were carried out at an overall loss, and thus at
margins that were very different from those achieved by A utonomy on
sales of software.
61.4. Autonomy reported high levels of what was said to be
organic growth
(increases in revenue excluding the effect of acquisitions and foreign
exchange) and
organic IDOL growth
(increases in revenu e excluding
the effect of acquisitions, foreign exchan ge, services revenues and
deferred revenue release). Despite characterising
organic IDOL growth
in the Financial Review section of the 2010 A nnual Report (p16) as the
most meaningful organic performance metric for understanding the
momentum within the business ,
A utonomy did not disclose that a
significant part of that supposed grow th was the result of selling third-
party hardware, containing no Autonomy software (and thus not
I D O L
at all), at a loss. The level of pure hardw are sales was m anaged
on a quarter-by-quarter basis to create the desired appearance of
growth.
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61.5. The Quarterly Reports from Q3 20 09 to Q2 20 11 (inclusive) included a
separate disclosure of total reported revenues broken down into the
following categories: IDOL Product; IDO L O EM ; Services; and
Deferred Revenue Release; and (in the case of the Financial Review
section of the 2010 Annu al Report (pp15-16) and the Quarterly Reports
from Q1 2010 onwards) IDO L C loud. Revenue from pure hardware
sales was greater than revenue from Services, one of these categories,
but was no t separately disclosed, thereby rendering the breakdown of
revenue m isleading (by om ission). In addition, the revenues derived
from pure hardw are sales were included within one or more of the
identified categories of revenue, thereby causing the revenue in those
categories to be overstated (and thus untrue and/or misleading). In
fact, revenues from pure hardw are sales did not properly fall within
any of the five identified categories.
62.
In short, the statements in the An nual Reports and in the Q uarterly Reports
from Q4 2010 to Q 2 2011 (inclusive) to the effect that Autonomy w as a pure
software company were untrue and/or misleading and/or omitted a material
fact (namely that Autono my w as engag ed in the business of selling significant
amo unts of pure hardware at a loss) that was required to have been included
in Autonomy s published information.
63.
For its part, HP (and thus Bidco) understood from A utonom y s published
information that Autonomy was a business whose revenues derived from the
sales of software and associated services. Insofar as Autonom y m ade sales of
hardware, HP (and thus Bidco) understood that these were high margin
appliance sales that were not m aterial to A utonom y s financial statements (as
if they had been m aterial, the associated revenues would have been separately
disclosed). HP (and thus Bidco) did not know, and could not have discovered
from the published information, that Au tonom y sold material amounts of
pure hardware.
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Costs and Expenses
64
The costs of purchasing the pure h ardware w ere included in the financial
statements the Annual Reports and in each of the Q uarterly Reports from Q 2
2009 to Q2 20 11 (inclusive) but were divided between CO GS an d sales and
marketing expenses.
65
In the Financial Review section of the 2009 Annual Rep ort (pH), COG S were
said to have increased by US 42.7 million from 2008 to 2009. The increase was
said to have been:
driven by the increased reve nues, together with a shift in the mix of
revenues at the beginning of 200 9 as a resul t of [ the acquisit ion o f a
company nam ed In terwoven] and the IDOL SPE [so ftware] Quick Star t
program.
This statement was untrue and/or misleading and/or omitted a material fact
in that, even though (as explained below) a large portion of the costs of pure
hardware had been w rongly allocated to sales and marketing expenses, 77%
of the reported increase in CO GS was attributable to the costs of purchasing
the pure hardware that was sold in 2009.
66
In the Financial Review section of the 2010 Annual Report (p16), CO GS were
said to have increased by US 23.8 million from 2009 to 2010. The increase was
attributed to
increased revenues and a cha nge in the sale mix discussed throughout
this report.
The 201 0 A nnual Report omitted the material fact that, even
though (as explained below) a large portion of the costs of pure hardware h ad
been wrongly allocated to sales and marketing expenses, the entire increase in
reported COG S du ring the financial year was attributable to the costs of pure
hardware, wh ich was not men tioned anywhere in the Report. Further, the
statemen t about the increase in CO GS was un true and/ or misleading in that
the costs of all other revenues had actually decreased.
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67.
The Financial Review section in the 2009 A nnual Report (p11) stated that the
increase in sales and marketing expenses in 2009 had been c aused
primarily
by
increased advertising, additional headco unt and an increase in sales commissions
due to an increase in sales and a chang e in the ge ographic and size-of-transaction
mix .
This was untrue and/or misleading because the increase in sales and
marketing exp enses was entirely attributable to the im proper allocation in
2009 of the m ajority of the costs of purchasing pure hardw are to sales and
marketing expenses (a m aterial fact omitted from the 2009 A nnual Repo rt). In
2009, US 35.8 million of the costs of purchasing pure hardware was treated as
sales and ma rketing expenses. The total reported increase in sales and
marketing expenses was only US 35.6 million. Actual sales and marketing
expenses declined slightly in 2009.
68.
Accou nting for a significant portion of the costs of purchasing pure hardw are
as sales and marketing expenses rather than COG S w as not in accordance
with the required accounting standards and so rendered the information in
the Annual Rep orts and Quarterly Reports from Q3 2009 to Q2 2 011 untrue
and/or misleading because:
68.1. No part of the costs of purchasing pure hardware was in fact
attributable to sales and marketing activities. Autonom y Inc purchased
com puter equipment from EM C, Hitachi and Dell, and nothing else.
EM C, Hitachi and Dell had no obligation to provide marketing services
for the Autono my grou p's benefit. It was therefore who lly
inappropriate to account for the purchase transactions as anything
other than the purch ase of goods. It was irrelevant to the accou nting
treatment for the purchase transactions whether A utonom y Inc
decided to sell those goods at a profit or a loss. Those sales w ere
separate econom ic events from the pu rchase of the hardware, and
therefore could not affect the proper acco unting treatment of the co sts
of purchase.
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68.2. In accordance with IAS 2, paragraphs 10 and 38, COG S should have
included all costs of purchase of an y hardw are that was sold and
recognised as revenue during the relevant accounting period.
68.3. Alternatively, if any part of the purchases from EMC, Hitachi or Dell
involved the provision of marketing services which is denied),
allocating such costs to sales and m arketing expenses would have been
permissible under IFR S only if the fair value of the proportion of the
costs attributable to marketing activities or the costs attributable to the
hardware could be measured reliably and supported with adequate
evidence.
68.4. In fact, no such reliable measurement was possible or undertaken). In
the absence of any form of written understanding as to the m arketing
services to be provided, it would have been impossible to assess the
fair value of such services. There was also no reliable evidence of the
fair value of the hardware that was purchased other than the price that
was actually paid by Autonom y Inc for that hardware.
69.
Even if which is denied) an element of the costs of the pure hardware
purchases could properly have been a ccounted for as sales and marketing
expenses the Annual Reports were untrue and/or misleading and/or omitted
material facts because they m ade no reference to the fact that the costs of
purchasing the pure hardware were allocated between C OG S and sales and
marketing expenses and because the reasons given for the increases in CO GS
and sales and m arketing expenses w ere incorrect.
70. Gross m argin is an important measure of the success of a software com pany
and was recognised as such in the Annual Reports see, for example,
paragraph 58.2 above). The improper allocation of a significant portion of the
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costs of purchasing pure hardware to sales and marketing expenses materially
increased the gross profits and gross m argin stated in the An nual Reports and
the Quarterly Reports from Q3 2009 to Q 2 201 1 and stated during earnings
calls. The allocation of a portion of the costs of pure hardware to sales and
marketing expenses reduced the impact of the pure hardware sales on gross
margin an d thereby assisted in concealing both the fact that the pure
hardware sales were being m ade and the variation in the am ount of those
sales from quarter to quarter. For exam ple:
70.1. The gross profits in the financial statements in the 2009 Annual Report
included US 20,585 ,268 in respect of pure hardware sales. Had the full
costs of purchasing hardware been accounted for as C OG S (as they
should have b een) rather than allocating a large portion of those costs
to sales and marketing expenses, a gross loss of US 15,215,32 9 on pure
hardware transactions would have been recorded The reported
adjusted
gross margin for 2009 of 88 .1%would have been reduced to
83.3% (without correcting for the other matters of which complaint is
made in these proceedings).
70.2. The gross profits in the financial statements in the 2010 Annual Report
included US 23,900 ,424 in respect of pure hardware sales. Had the full
costs of purchasing hardware been properly accounted for as COG S, a
gross loss of US 7,310,594 on pure hardware sales would have been
recorded and the reported
adjusted
gross margin of 87.2% would
have been reduced to 83.6% (without correcting for the other matters of
which complaint is made in these proceedings).
71. ccordingly, the figures for COGS, gross profits, gross margin and sales and
marketing expenses in the Annual Reports, in the Quarterly Reports from Q3
2009 to Q2 2011 (inclusive), and as stated during earnings calls, were untrue
and/ or misleading
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72.
Schedule 2 sets out the figures for COG S, gross profits, gross margin and sales
and m arketing expenses as they were in fact reported in the Annual Rep orts
and in the Quarterly Reports com pared to the true figures as they should have
been reported if the correct accounting treatment of the co sts of purchasing
pure hardware had been adopted but without correcting for the other matters
of which com plaint is made in these proceedings).
Improper revenue recognition
(1) ontrived VAR Transactions
ature of the transactions
73.
From at least Q2 2009 Ly nch and Hussain caused Autonom y group
comp anies to engage in the practice of entering into transactions with V ARs
that were not genu inely in the furtherance of Autono my s business, but were,
rather, for the improp er purpose of providing a pretext for the inappropriate
or prem ature recognition of revenu e. Particulars of the specific transactions
with VA Rs that the Claiman ts contend were entered into for this improp er
purpose
( the contrived VA R transactions ) are set out in Schedule 3.
74.
The transactions typically had the following characteristics:
74.1. An Autonomy group company had attempted to sell a licence to use
Autono my softw are to a particular end-user, but was unable to
conclude su ch a sale before the end of the relevant quarter.
74.2. Having failed to conclude a deal with the end-user, Autonomy
purported to sell a licence for the software in question to a VA R on the
last day of the qu arter, ostensibly for onw ard licensing to the p articular
end-user.
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74.3. The purported sale of the licence to the V AR was not, howev er, a
genuine arm s length comm ercial transaction. Instead, the V AR and the
Autonom y group com pany (represented for this purpose by Lynch,
Hussain and/or Autonomy group employees acting at their behest
agreed and/or understood that the VAR would not in fact be required
to satisfy any liability to Au tonomy from its ow n resources, and would
not otherwise bear any comm ercial risk in relation to the arrangem ent.
Such is to be inferred from the follow ing:
74.3.1. There had been no communication between the Autonomy
group com pany and the VAR in relation to the transaction in
question until immediately prior to the end of the relevant
quarter.
74.3.2. The V AR had m ade no prior efforts to sell such a licence to,
and in almost all cases had had no prior contact with, the
identified end-user.
74.3.3. Nor did the VAR undertake or propose to provide any added
value, or any service, to the end-user.
74.3.4. In many cases, the VA R did not have the m eans to pay the
Autonom y group comp any in the absence of an onward sale of
the relevant licence to the iden tified end-user.
74.3.5. The notion that a software com pany like Autonom y, in the
process of seeking to conclude an agreement on a significant
sales opportunity involving complex software products and
solutions, wo uld, on the last day of the quarter, abandon those
sales negotiations and instead sell the software produc ts and
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services to a V AR which w ould then take responsibility for
concluding the transaction, makes no com mercial sense.
74.3.6. It also mak es no com mercial sense for a VA R that had no
know ledge of, or relationship w ith, the end-user, no
know ledge of the end-user's requirements and no insight as to
the likelihood of concluding a transaction, to have taken on the
risk of concluding such a transaction, which, if unsuccessful,
wou ld result in a significant loss to (and in som e cases the
potential insolvency of) the VAR.
74 4 The fact that these arrangements were not genuine is further to be
inferred from the actions of the Autonom y group com pany and the
VA R once the sale between them had been ostensibly concluded:
74.4.1. The V AR did not thereafter make any effort to sell a licence for
the relevant software to the end-user. Instead, the Autonom y
group com pany con tinued its own efforts to achieve a sale of
the licence directly with the end -user (and withou t
consultation with the V AR ).
74.4.2. In certain cases, the Autonomy group company succeeded in
selling a licence to the end-user in a later accounting period; in
others, no such transaction w as ever concluded.
74.4.3. The V AR in question was subseque ntly relieved of its
ostensible liability to pay the p rice for the Au tonom y software
licence that it had purchased by one of the following mean s:
74.4.3.1. The p urported sale agreement betw een the
Autonomy group company and the VAR w as
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cancelled or a credit note was issued to the VA R
wh ich discharged its ostensible liability to pay the
price; or
74.4.3.2. Where the relevant Autonomy group company
subsequently achieved a direct licensing transaction
with the end-user, the Autonomy group company
arranged for the end-user to pay the V AR so that the
VA R could then pay the relevant Autonomy group
company; or
74.4.3.3. An Autonom y group company was caused to make a
paym ent to the VA R to purchase rights, goods or
services that the utonomy group company did not
need and which had no discernible value to it), but
which had the pu rpose and effect of putting the VAR
in funds which it then used to p ay some or all of the
purchase price for the Autono my software licence
( reciprocal VA R transactions ) .
In these situations,
the sum paid to the V AR for its product, right or
service usually exceeded the amount owed by the
VA R in respect of the failed transaction.
75.
n man y instances, the VA R w as paid a fee, described variously as a
marketing assistance fee ,
a
referral partner commission
or a
sales comm ission
fee
together, a
MAF ) .
The V AR did not in fact provide any genuine
assistance to the Au tonomy group com pany in identifying the end-user as a
proposed customer for the relevant Autonomy software or provide any
genuine assistance in co ncluding a transaction w ith that end-user. Instead, the
MA F w as a payment to the VA R to reward it for engaging in a transaction
that would not otherwise have benefited the VA R, but which allowed
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Autonom y (improperly) to recognise revenue in respect of a transaction that
the Autonomy group com pany it was unable to comp lete with its actual
intended end-user. The losses incurred by Autonom y group com panies as a
result of the said MAF paym ents were in the sum of approximately US 7.7
million, of which US 0.2 million was suffered by ZAN TAZ , and the
remainder resulted in a corresponding loss to A SL by virtue of the transfer
pricing and profit sharing arrangemen ts referred to in paragraphs 9 an d 13
above . Details of such losses are particularised in Table 12C of Schedule 12 .
76
M ost of the contrived VA R transactions were entered into with one of only
five VARs, namely Capax Discovery LLC
( Capax Discovery ) ,
Discover
Technologies LLC
( DiscoverTech ) , FileTek Inc
( FileTek ),
MicroTech LLC
( MicroTech )
and Microlink LLC
( Microlink ).
At all material times:
76.1. The sam e individual, D avid Truitt, was the Chief Ex ecutive O fficer of
both DiscoverTech and M icrolink. He was the brother of an Autonomy
group employee
76.2. Ano ther brother in the sam e family, Stephen Truitt, was the Chief
Operating Officer of M icroTech.
76.3. The President of FileTek, Gary Szuk alski, was a form er Autonom y
group employee
Example of a contrived VAR transaction - Capax Discovery/the FSA Schedule 3,
Transaction 10
77
On 31 M arch 2010, Capax D iscovery submitted a purchase order to Autonomy
Inc
( the Cap ax Discovery/FSA purchase order ) .
The end
user was
identified as the Financial Services Authority
( the FSA ).
The amount due
from Capax Discovery was US 4.5 million, consisting of US 4.3 million for a
software licence and US 200 ,000 for one year of support and maintenance.
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The am ount was ostensibly payable by Capax D iscovery in four instalments:
US 450,000 by 30 April 2010, US 1.05 million by 31 March 2011 and US 1.5
million by each of 31 M arch 2012 and 31 M arch 2013. Autonom y recognised
licence revenue of U S 4.3 million as revenue in Q1 2 010 and support and
maintenance of U S 20 0,00 0 on a quarterly basis over the following year. In
reality, the Capax D iscovery/FSA purchase order was a con trived transaction
entered into for the purpose of enabling the p remature recognition of revenue
by A utonom y and on the basis of an agreem ent or understanding (as set out
in paragraph 74.3 above) that Capax D iscovery would not in fact be required
to satisfy any liability to Autonom y Inc from its ow n resources and w ould not
otherwise bear any com mercial risk in relation to the arrangem ent:
77.1. This was the fourth occasion on which Capax Discovery, purporting to
act as a VA R, had subm itted a purchase order to Autonom y Inc on the
last date of a quarter in relation to an end-user w ith which an
A utonomy group com pany had been cond ucting negotiations. On each
of the three prior occasions (i) Capax D iscovery had not been involved
in the negotiations with the end-user, (ii) revenue w as recognised
imm ediately by A utonomy in the relevant quarter, (iii) Capax
Discovery did not subsequently becom e involved in negotiations with
the end-user, (iv) A utonom y Inc subsequently entered into a direct
agreem ent with the end-user, (v) A utonom y Inc then either caused the
relevant end-user to pay Capax D iscovery so that it could in turn pay
A utonomy Inc or simply relieved Capax D iscovery of its payment
obligations, and (vi) Autonom y Inc either procured that the relevant
end-user paid Capax D iscovery a sum in excess of the amount to be
paid to Autonom y Inc or simply paid a M A F to Capax Discovery so as
to reward Capax Discovery for participating in the arrangem ent:
77.1.1. In Q2 and Q3 200 9 Capax Discovery entered into two purchase
orders with A utonom y Inc, in respect of which the end-user
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was stated to be TX U Energy ( TX U ). The aggregate amou nt
of the purchase orders was US$1.4 m illion. Capax D iscovery
did not p y the sums due under those purch se orders when
they fell due. Autonomy Inc entered into a direct agreement
with TXU Energy Retail Company LLC ( TXU E nergy Retail )
in a total amount of U S$1.7 million. On 30 September 2 009, the
same day that Cap ax Discovery entered into the second
purchase order with Autonom y Inc, Autonomy Inc directed
TXU Energy Retail to pay Capax D iscovery the US $1.7 million
due under the direct agreem ent. Capax Discovery
subsequently made payments totalling US$1.3 million to
Autonom y Inc in relation to the two purchase orders and
retained the balance of approximately US $370,000 (see
Schedule 3, T ransaction 2).
77.1.2. In Q 3 20 09, C apax D iscovery entered into a purchase order in
the amoun t of US $4.2 million with Autonom y Inc for end-user
Kraft Foods Global, Inc ( Kraft ). On 22 Decem ber 2009,
Autonom y Inc entered into a direct transaction w ith Kraft for
US$4.2 m illion. A week later, on 29 Decem ber 2009, Autonomy
Inc issued a credit note to Capax D iscovery in the amount of
US$4 .2 million and paid Capax D iscovery a one time fee
(i.e., a
MAF) of US$400,000 in respect of the Kraft transaction (see
Schedule 3, Transaction 3).
77.1.3. On 31 D ecember 2009, C apax Discovery entered into a
purchase order with Autonom y Inc for end-user Eli Lilly and
Com pany ( Eli Lilly ) for US$6.3 million. Capax Discovery did
not make paym ent when it fell due on 31 M arch 2010.
Autonom y Inc thereafter (i) entered into a direct transaction
with Eli Lilly, (ii) caused Eli Lilly to make p ayment to C apax
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Discovery so that Capax Discovery could pay Autonomy, and
(iii) paid Capax Discovery a MA F in the amount of US 629,000
(see Schedule 3, Transaction 4).
77.2. As relates to the intended transaction with the FSA Hussain and others
acting at his direction attempted to persuade the FS A to enter into a
licence and data hosting transaction with an Autonom y group
comp any throughout Q12010 . Capax Discovery did not participate in
those efforts.
77.3. It became clear in late March 2 010 that a transaction with the FSA could
not be comp leted before the end of the quarter. Late in the day on 31
M arch 2010, Autonomy Inc asked Capax Discovery to enter into a VAR
transaction pursuant to which Capax Discovery wou ld acquire a
licence for the same software as Autonom y Inc was proposing to
license to the FSA directly. There had been no prior contact between
Capax D iscovery and the FSA , nor had there been any prior contact
between an Autonomy group com pany and Capax D iscovery
regarding the FSA. T here was no price negotiation between C apax
Discovery and Autonom y Inc. Instead, Autonomy Inc merely prepared
a purchase order for Capax Discovery in the total sum of US .5
million, and Capax Discovery execu ted that purchase order as
requested. Autonom y then recognised licence revenue of US 4.3
million as revenue immediately in Q12010 and recognised support and
maintenance of US 200 ,000 on a quarterly basis over the following
year.
77.4. After 31 M arch 2010, H ussain, and others acting at his direction,
continued sales efforts directed at the FS A. C apax D iscovery did not
participate in those efforts and did not otherwise comm unicate with
the FSA.
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77.5. Capax Discovery s first payment under the Capax Discovery/FSA
purchase order (in the amount of US 450,000) ostensibly became due to
Autonom y Inc by 30 April 2010. Paymen t was not made.
77.6. On 25 Au gust 2010, AS L entered into a direct licence and ho sting
agreement with the FSA in the amount of US 6.7 million.
77.7. On 7 October 2010, even though Capax Discovery w as then more than
five months in arrears on its paym ent obligation under the Capax
Discovery/FSA p urchase order and had had no contact with the FSA ,
Autonomy Inc paid Capax Discovery a MA F in the amount of
US 50,000 for
Capax's con tribution to the F SA transaction.
Hussain
approved the payment.
77.8. Capax Discovery s second payment under the Capax Discover/FSA
purchase order (in the amount of US 1.05 million) was ostensibly due
to Autonomy Inc by 31 M arch 2011. Again, payment was not made. At
that date, Capax Discovery owed A utonom y Inc a total of US 1.5
million, of which US 450,000 was 11 mon ths overdue. Nevertheless,
Autonom y Inc made no request for payment.
77.9. Instead, on 29 June 2011 , Autonomy Inc and Capax D iscovery (and
other Capax group companies including Capax Global LLC
( Capax
Global ))
entered into an agreement pursuant to which Capax
Discovery was to provide maintenance and support services to
customers of a product that Autonomy proposed to phase out called
NearPoint. The contract provided that Autonom y Inc wou ld pay Capax
Discovery US 2 million (described as the
NearPoint Ramp-up Fee )
within 60 days for
significant, up-front costs and expenses. Significant,
up-front costs and expenses
were n ot, in fact, required.
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77.10. The next day, 30 June 2011, (i) Autonomy Inc paid Capax Global US 2
million u nder the N earPoint agreement (notwithstanding the 60 day
period for paym ent), and (ii) Capax D iscovery paid Au tonom y Inc the
am ount of US 1.5 million that was outstanding under the Capax
Discovery/ FSA purchase order.
77.11. O n 7 S eptemb er 2011, shortly after Bidco's offer to purchase the
outstanding shares of Autonom y was announced, Autonom y Inc
informed Capax Discovery that it was cancelling Capax Discovery's
liability for the entire outstanding balance of US 3 m illion in respect of
the Capax Discovery/FSA purchase order.
77.12. In aggregate, Autonom y recognised US 4.5m of revenue on the Capax
Discovery/FSA transaction. Capax Discovery paid only US 1.5m. That
payment was only made after Autonom y Inc had paid US 2m to Capax
Global un der the NearPoint agreemen t for costs and exp enses mo st of
which w ere not actually incurred.
Example of a contrived VAR transaction - MicroTech/Vatican Library Schedule 3,
Transaction 13
78. On 31 March 2010 the same day that it entered into the Capax Discovery/FSA
purchase order, Autonom y Inc en tered into a software licence and support
purchase order with M icroTech which identified the Vatican Library as the
end-user
( the M arch 2010 purchase order ) .
The fee due from MicroTech
was US 11.55 million, consisting of US 11 million for software licences and
US 550,000 for one year of maintenan ce and custom er suppo rt. These fees
were said to be payable within 90 days. Autonomy recognised licence revenue
of US 11 m illion as revenue in Q12010 and recognised the support and
maintenan ce of US 550,000 on a quarterly basis over the one year period of
the m aintenance and support agreement. In reality, the M arch 2010 purchase
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order was a contrived transaction entered into for the purpose of enabling the
recognition of revenue that should never have been recognised:
78.1. The Autonomy group had been attempting for more than two years
prior to March 20 10 to conclude a direct contract with the Vatican
Library to preserve digitally books and documents in the Vatican
Library.
78.2. The possibility of concluding a direct contract with the Vatican Library
was seen as a p restige project within the Autonom y group, and both
Lynch an d Hussain w ere involved in reviewing and d ictating the
com mercial terms wh ich the Autonom y group offered to, and
negotiated with, the Vatican Library.
78.3. Shortly before the end of Q12010 Lynch and Hussain were aware that
a contract could not be concluded with the Vatican Library by the end
of the quarter. They discussed involving an Italian
partner a VAR)
and in an em ail dated 29 M arch 2010 Hussain stated:
It is a big project and having an Italian partner would b e very
useful to us. How ever, the partner that we wou ld use wo uld have to
be sufficiently strong for us to be able to recognize the revenue and
only if the [Pu rchase Order] and contract is signed this qu arter.
The partner you m entioned last night I think is too sm all for
revenue recognition purposes.
78.4. Within 48 hours of that email, on 31 M arch 2010, A utonomy Inc and
M icroTech entered into the M arch 2010 purchase order. M icroTech was
not an Italian com pany, but was based in V irginia, USA. It had no, or
no material, business in Europe, still less in Italy, and had had no prior
involvement with efforts to sell a licence to the V atican Library prior to
31 March 2010.
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78.5. Moreover, after concluding the March 2010 purchase order under
which it ostensibly assumed a liability to pay Autonom y Inc 11.55
million within 90 days, M icroTech did not attempt to sell a licence to
the Vatican Library and w as not subsequently involved in or even
consulted in relation to A utonomy's continuing efforts to conclude a
transaction with the Vatican Library. Those efforts were conducted
solely by representatives of the Autonom y group, including Lynch and
Hussain
78.6. Although Autonomy im mediately recognised US 11 million of revenue
in Q12010, MicroTech failed to pay such am ount by the due date of 29
June 2010. W hilst it made a small payment (US 0.5 million) in October
2010, MicroTech was not pursued at any stage by Autonom y Inc for
paym ent of the large balance owing under the March 2010 purchase
order
78.7. Instead, on 30 December 2010, Autonomy Inc (with Lynch's express
approval) agreed to pay MicroTech US 9.6 million for a non-exclusive
three year licence to use w hat was described as MicroTech's
Advanced
Technolog y Innovation Center ( ATIC ) which w as essentially to be a
display facility in a room and in a vehicle. In fact, the A TIC licence was
a contrived arrangement intended to put MicroT ech in funds so as to
enable it to pay at least a portion of the outstanding am ount ostensibly
due under the March 2010 purchase order:
78.7.1. The proposal to create an ATIC stated that the ATIC would
enable Autonom y to dem onstrate its products to the United
States Government and others;
78.7.2. The AT IC did not exist at the tim e that the proposal was
accepted;
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78.7.3. Th ere was no written contract detailing the respective rights of
the parties in relation to the construction and operation of the
ATIC;
78.7.4. The price that A utonomy agreed to pay for the non-exclusive
right to use the A TIC also included the advance payment of the
full salaries of five MicroTech employees w ho were to staff the
A TIC for three years after construction was completed;
78.7.5. The entire contract sum was paid in full in adva nce, before the
A TIC was constructed and therefore months before the need
for the MicroTech em ployees to begin their work could have
arisen;
78.7.6. During the period up to the departure of Lynch and Hussain
from Autonomy and thereafter, the Autonomy group made no
use of the A TIC and the five MicroTech employees never
performed any m aterial services for the A utonomy group.
78.8. On 31 December 2010, the day after A utonomy agreed to pay for the
three year non-exclusive licence to use the then non-existent ATIC (and
the salaries of five employees), ASL paid MicroTech the entire amount
of US 9.6 million in respect of that licence. Later that day, M icroTech
paid A utonomy Inc US 6.3 million, of which US 4.3 million was
allocated to the M arch 2010 purchase order (with the remainder
allocated to monies due under other generally similar
Autonomy/MicroTech arrangements .
78.9. During Q2 and Q3 2011, M icroTech paid a further US 4.4 million to
A utonomy Inc in respect of the March 2010 purchase order.
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78.10. The remaining balance of US 2.3 million ostensibly ow ed by
M icroTech under the M arch 2010 purchase order was never paid by
MicroTech. Instead, on 11 October 201 1, after Bidco's offer to purchase
the issued share capital of Autonomy became unconditional,
Autonom y Inc decided to w rite off this balance. No attempt to collect
this sum w as made.
78.11. Despite continuing efforts by Autonomy group representatives over
several years after the M arch 2010 purcha se order, no transaction w as
ever concluded w ith the Va tican Library.
False accounting for contrived V R transactions
79. In the Annual Reports and in each of the Quarterly Reports from Q2 2009 to
Q2 2 011 (inclusive) revenue w as m isstated as a result of the inappropriate
recognition of revenue by Autonomy in relation to the contrived VAR
transactions. In the circums tances set out above, the recognition of revenue
was contrary to the requirements of IFR S, specifically IAS 18, paragraph 14,
because:
79.1. In reality the relevant Autonomy group company did not transfer to
the VA R the significant risks and rewards of ow nership. Instead, it was
agreed and/or understood between Autonomy and the VAR that the
VA R w ould not be required to pay for the software licence from its
own resources. In many instances, the relevant Autonom y group
com pany extinguished the ostensible liability of the VA R by issuing a
credit no