When H-P announced
on November 20, 2012 that it was taking an $8.8 billion charge after it
discovered "accounting improprieties, misrepresentations and disclosure
failures" at its Autonomy unit (which H-P acquired in October 2011 for $11.1
billion), there was a great
deal of speculation that litigation would quickly follow. The intervening
Thanksgiving weekend may have slowed down the filing of the first of the
lawsuits, but only a little bit. The first of what will likely be many related
lawsuits has now arrived.
On Monday November 26, 2012, plaintiffs' lawyers filed a
securities class action lawsuit in the Northern District of California against
H-P and certain of its directors and officers. A copy of the plaintiff's
complaint can be found here. The
plaintiffs' lawyers' November 26, 2012 press release can be found here.
The complaint names as defendants the company itself; Leo
Apotheker, who was H-P's CEO until September 2011 and who was CEO at the time
the Autonomy deal was agreed upon; Meg Whitman, who became CEO in September
2011, but who had also served on H-P's board at the time the Autonomy deal was
agreed to; H-P's CFO, Catherine Lesjak; and the company's Chief Accounting
Officer, James T. Murrin. The complaint was filed by an individual H-P
shareholder on behalf of a class of investors who purchased H-P stock between
August 19, 2011 (the date the Autonomy deal was announced) and November 20,
2012 (the date H-P announced the alleged improprieties at Autonomy).
The complaint alleges that the defendants violated the
liability provisions of the Securities Exchange Act of 1934. Significantly, and
as noted below, the complaint relates not just to the accounting improprieties
at Autonomy, but also to the earlier $8 billion goodwill charge associated with
H-P's Enterprise Services business, as noted below.
According to the plaintiff's lawyers' press release, the
complaint alleges that the defendants "concealed that the Company had gained
control of Autonomy in 2011 based on financial statements that could not be
relied upon because of serious accounting manipulation and improprieties." The
"true facts," according to the complaint, "which were known by the defendants
but concealed from the investing public," were that
(a) at the time Hewlett-Packard acquired Autonomy, the
business's operating results and historic growth were the product of accounting
improprieties, including the mischaracterization of sales 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; (b) at the time Hewlett-Packard had agreed in principle to acquire
Autonomy, defendants were looking to unwind the deal in light of the accounting
irregularities that plagued Autonomy's financial statements; and (c)
Enterprise Services' operating margin had collapsed from 10% in 2010 to
approximately 6% as of April 30, 2011, 4% as of October 31, 2011, and 3% as of
April 30, 2012, due to various reasons, including unfavorable revenue mix and
The reference to the Enterprise Services division relates
to the H-P unit that incorporated the business formerly known as Electronic
Data Systems Corporation ("EDS"), which Hewlett-Packard had acquired in August
2008 for $13.0 billion. On August 22, 2012, H-P took an $8 billion impairment
charge on the goodwill associated with the EDS acquisition. The sequence of
disclosures that the complaint cites is arranged to portray a pattern of
misrepresentations regarding H-P's Enterprise Services division, of which
Autonomy was a part following H-P's acquisition of the company.
It is interesting to note that the complaint names as
defendants only the four current and former H-P officers. It does not name any
of the other members of the H-P board, nor does it name any of the outside
firms that advised H-P in connection with the Autonomy transaction and that
presumably assisted with the due diligence review of the target company. It
also seems noteworthy that the complaint does not name any of the former
Autonomy directors or officers, even though at least some were also officials
at H-P following the acquisition. (The absence of any Autonomy defendants may
be due to the fact that Autonomy's shares were not traded on U.S. exchanges
immediately prior to the acquisition, and so, under the Supreme Court's Morrison
decision, the alleged pre-acquisition misrepresentations are beyond the ambit
of the U.S. securities laws.)
This is of course the first complaint to be filed; there
likely will be others, as this event seems likely to keep many lawyers busy for
many years. Subsequent complaints may name others as defendants.
There is of course some irony that H-P and its senior
management are targets of this litigation, as --at least from their perspective
and according to the account -- the company is itself the victim of the fraud.
Indeed, in its press release regarding the Autonomy revelations, the company
disclosed that it has contacted the U.K. Serious Fraud Office and the SEC. The
company will clearly argue that it could not have knowingly or recklessly
misled its investors in violation of the securities laws, as it was itself
The complaint does not allege any specific grounds for
the assertions that the defendants knew but concealed from the investing public
during the class period that Autonomy had misrepresented its operating performance
and financial condition.The complaint does not provide any explanation of what
the defendants' motivation would have been to make these misrepresentations.
Perhaps in recognition of these potential issues, the complaint refers not only
to H-P's revelations about the accounting improprieties at Autonomy, but also
references H-P's earlier goodwill impairment charge in connection with the EDS
transaction. It seems as if the plaintiffs hope to contend that both the EDS
and Autonomy deals were part of failed strategy for the company's Enterprise
Services business, which the company sought to try to conceal until the
problems could no longer be hidden from shareholders - although if this is the
plaintiff's theory, it is at this point only implied in the complaint, not
As I said, there will likely be other lawsuits to come.
The other suits and the likely amended complaints may further elaborate the
plaintiffs' theory of this case.
The ABA Blawg 100: I
am delighted to report that The D&O Diary has once again been named
to the American Bar Association's Blawg 100, the bar organization's list of the
top blogs about lawyers and the law. The ABA's Sixth Annual Blawg 100 list can
be found here.
We are delighted to be included again in this year's list, if for no other
reason than the blogs we follow and respect the most are all on the list as
As it has done in past years, the ABA is once again
inviting readers to choose the top blogs in each of 14 different categories.
Voting begins today and ends at close of business Friday, December 21, 2012
Winners will be announced by January 3, 2013. You can vote for your
favorite blog here
(registration, which is free, is required to vote). You can also vote by
clicking on the "Vote for this Blog" box in the right hand column. Everyone
here at The D&O Diary would be very grateful to any readers who
might consider casting a vote for this site.
The Deadline for the Towers Watson D&O
Survey is Approaching: As I have previously noted on this site,
Towers Watson is once again conducting its annual D&O insurance
survey. Everyone in our industry benefits from the survey results, so we
all have a stake in making sure that the survey responses are as representative
as possible of the industry as a whole. The deadline for this year's survey is
this Friday, November 30, 2012. Please take a moment and think about whether
you have a client that could help with this year's survey. The survey form
itself is relatively short and only takes a few minutes to complete. The survey
form can be found here.
Please take a moment and forward this link to any prospective survey
respondents you can think of.
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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