A judge has ruled that Hewlett-Packard and its CEO, Meg Whitman, must mount a defence against a shareholder class action lawsuit claiming that Whitman and HP made misleading statements about the acquisition of Autonomy.
HP spent more than $10 billion (€7.35 billion) to acquire Autonomy in October 2011, but subsequently wrote off $8.8 billion (€6.47 billion) of the purchase as the result of what it termed to be serious accounting irregularities by Autonomy prior to the deal, leading to an investigation by UK authorities.
The class action, filed in November 2012 by lead plaintiff PGGM Vermogensbeheer B.V., alleged that HP and other named defendants “knew or should have known” that “corporate governance firms, auditors, media and analysts had questioned Autonomy’s market value due to concerns about its accounting practices, and whether its reported growth rates and margins had been artificially inflated.”
US District Court Judge Charles Breyer ordered the case to proceed in a ruling filed Tuesday in US District Court for the Northern District of California.
But the judge’s ruling was not entirely in favour of the plaintiffs.
“First, the complaint fails to establish any coherent motive as to why Defendants would knowingly purchase a company for several times its actual value or that they knew Autonomy’s accounting was problematic,” Breyer wrote. “It is implausible that had Defendants known about the fraud being perpetrated on them before the deal closed that they would have gone ahead with the deal.”
Breyer also ruled that the case could only centre on statements made by the defendants about Autonomy following 23 May, 2012. A member of Autonomy’s senior staff came forward as a whistleblower following the dismissal of Autonomy CEO Mike Lynch on that date, according to the complaint.
“This suggests that the earliest possible date Whitman could have learned of Whistleblower No. 4’s allegations would have been 23 May,” he wrote.
But in talking about Autonomy’s financial performance during a subsequent conference call, Whitman “omitted material information which the complaint alleges she possessed at the time, namely that she was considering accounting fraud at Autonomy as the explanation for its weak performance,” Breyer wrote.
“Whitman knew that if Whistleblower No. 4’s allegations were true, the fraud would explain Autonomy’s under performance rather than ‘classic entrepreneurial [c]ompany scaling challenges,'” he added. “Whitman’s decision to put forward entrepreneurial challenges as an explanation while choosing not even to mention the alternative possibility of accounting fraud, which she knew to be plausible, constitutes a material omission.”
Breyer also dismissed claims made against former HP CEO Leo Apotheker, Lynch and three others named in the suit.
An HP spokesman declined to comment on the ruling.
Analysts have, since the deal, not only questioned the allegations of fraud in the deal, but also the value of the technology at the heart of the Autonomy acquisition. All allegations of fraud have been strenuously denied by Mike Lynch, Autonomy CEO at the time of the deal.
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