Professional Documents
Culture Documents
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.
B.
C.
D.
E.
PARTIES
3
The Claimants
3
The Defendants
6
SUMMARY OF THE CLAIMS
9
DUTIES OWED BY LYNCH AND HUSSAIN TO AUTONOMY, ASL,
AUTONOMY INC AND ZANTAZ
19
Fiduciary duties
19
Duties as employees
20
FALSE ACCOUNTING AND IMPROPER TRANSACTIONS
24
Autonomy's published information
24
Overview
25
Loss-making hardware transactions
26
Improper revenue recognition
37
IDOL OEM Revenue
67
Cumulative effect of the false accounting
71
INVOLVEMENT OF LYNCH AND HUSSAIN AND THEIR BREACHES OF
DUTY
76
Involvement of Lynch and Hussain in the transactions themselves
76
Knowledge and involvement of Lynch and Hussain in false accounting
84
Breaches of duty
100
1
105
THE AUTONOMY ACQUISITION
NEGOTIATIONS WITH HP MISREPRESENTATIONS BY LYNCH AND
HUSSAIN
107
107
The January Slides
109
The 3 February 2011 video-conference
112
The 4 March 2011 meeting
116
The Valuation Model
117
The 29 June 2011 meeting
118
The 29 July 2011 meeting
119
The 1 August 2011 due diligence call
122
The 2 August 2011 due diligence call
124
The 4 August 2011 due diligence call
125
Knowledge or recklessness of Lynch and Hussain
125
Reliance by HP/Bidco upon misrepresentations
AUTONOMY'S, AUTONOMY INC'S AND ASL'S CLAIMS AGAINST
H.
128
LYNCH AND HUSSAIN
128
Liability of Autonomy to Bidco under Sch 10A FSMA
129
Transaction-based losses
131
I.
BIDCO'S CLAIMS AGAINST LYNCH AND HUSSAIN
Bidco's claims against Lynch and Hussain
131
132
J.
INTEREST
133
K.
PRAYER
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
F.
G.
A. PARTIES
The Claimants
Autonomy
1.
2.
3.
Bidco
4.
5.
Bidco has at all material times since its incorporation been an indirect whollyowned subsidiary of Hewlett-Packard Company ("HP"), an American
corporation which, through its operating subsidiaries, is a leading provider of
computing and imaging products, technologies, software and services
throughout the world.
6.
ASL
7.
8.
9.
costs incurred by those other group companies and 96.5% of their revenues
were transferred from those other group companies to ASL.
Autonomy Inc
10.
11.
ZANTAZ
12.
13.
At all material times after July 2007, ZANTAZ was an indirect wholly-owned
subsidiary of Autonomy. It carried on the business of supplying consolidated
archive management technology and services, including the hosting of
customers' data. ZANTAZ had (in addition to the routine transfer pricing
arrangements referred to in paragraph 9 above) a profit share arrangement
with ASL whereby a percentage of the amounts initially transferred to ASL
were transferred back from ASL to ZANTAZ.
14.
With effect from 1 November 2014, ZANTAZ merged with and into HP on the
basis that HP assumed all the liabilities and obligations of ZANTAZ and was
the surviving corporation. Prior to the merger, on 31 October 2014, ZANTAZ
assigned to Autonomy Inc all of its rights, title to and interest in, amongst
5
other matters, any claims, rights and causes of action that ZANTAZ had
against any third parties. Notice of such assignment was given to the
Defendants on 27 March 2015.
15.
The Defendants
Lynch
16.
17.
18.
Lynch was at all material times the chief decision-maker within the Autonomy
group and the Claimants rely upon the facts and matters set out in Section E
in support of the contention that:
18.1. Lynch acted as if he were a director of ASL, Autonomy Inc and
ZANTAZ;
18.2. The formally appointed directors of ASL, namely the Second
Defendant, Sushovan Hussain ("Hussain"), and Andrew Kanter
("Kanter"), were accustomed to act in accordance with directions or
instructions given by Lynch such that Lynch was a shadow director of
ASL within the meaning of section 251 of the Companies Act 2006 ("the
Act"); and/or
6
18.3. Lynch acted for and on behalf of ASL in relation to transactions which
had a financial impact on ASL in circumstances which gave rise to a
relationship of trust and confidence such that Lynch assumed the
obligations of a fiduciary towards ASL.
19.
Further, Lynch was the President of Autonomy Inc and, as pleaded in Section
C below, owed that company fiduciary duties.
20.
21.
Hussain
22.
23.
acted as President of ASL with responsibility for all of the Autonomy group's
sales activities. Hussain ceased to be an employee of ASL on 31 May 2012.
24.
25.
B.
26.
Over the period from (at least) the first quarter of 2009 until the second
quarter of 2011 ("the Relevant Period") (Autonomy's financial quarters
corresponded to calendar quarters and are referred to herein as Q1, Q2, Q3
and Q4 as appropriate), Lynch and Hussain caused Autonomy group
companies to engage in improper transactions and accounting practices that
artificially inflated and accelerated Autonomy's reported revenues,
understated its costs of goods sold ("COGS") (thereby artificially inflating its
gross margins), misrepresented its rate of organic growth and the nature and
quality of its revenues, and overstated its gross and net profits.
27.
28.
This conduct by Lynch and Hussain was systematic and was sustained over
the Relevant Period. Its purpose was to ensure that the Autonomy group's
financial performance, as reported in Autonomy's published information,
appeared to be that of a rapidly growing pure software company whose
performance was consistently in line with market expectations. The reality
was that the group was experiencing little or no growth, it was losing market
share, and its true financial performance consistently fell far short of market
expectations.
29.
Furthermore, from no later than January 2011 when Lynch and Hussain began
taking steps with a view to the sale of Autonomy, the falsification of
Autonomy's financial performance was (it is to be inferred) further motivated
10
13
14
32.
34.
I In these Particulars of Claim, the figures for loss and damage arising from Bidco's acquisition of Autonomy are
based on an exchange rate of US$1.56 : 1 as at 3 October 2011, being the date that Bidco's offer became
unconditional.
17
loss suffered by Autonomy that was caused by the wrongful conduct of Lynch
and Hussain.
35.
Accordingly, Autonomy in turn claims against Lynch and Hussain for this
damage, which was caused to it by their breaches of fiduciary duties as
directors of Autonomy and, in the case of Lynch, under Lynch's Employment
Contract. Autonomy also seeks to recover from Lynch under the Lynch
Indemnity.
36.
18
38.
39.
40.
Duties as employees
41.
Further, at all material times Lynch owed Autonomy the following duties,
amongst others, pursuant to Lynch's Employment Contract ("the Lynch
Employment Duties"):
41.1. The duty under 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 ZANTAZ) well and faithfully;
41.2. The duty under clause 2.3.1 not to do anything which in the reasonable
opinion of the board of directors of Autonomy would be or would be
likely to be damaging or prejudicial to the business and/or commercial
interests of Autonomy or "the Group"; and
20
41.3. Based on his senior position and role, an implied duty to disclose
misconduct by himself and other executives involved in the business of
Autonomy and its group.
42.
Further, at all material times Hussain owed ASL, amongst others, the
following duties as an employee which were implied into Hussain's
Employment Contract ("the Hussain Employment 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
misconduct by himself and other executives involved in the business of
ASL.
43.
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45.
46.
47.
Overview
48.
49.
As a result, the Annual Reports and the Quarterly Reports contained untrue
and/or misleading statements and/ or omitted matters required to be
included in those Reports.
50.
Lynch and Hussain knew such statements to be untrue or misleading (or were
reckless as to the same) and knew the omissions to involve the dishonest
concealment of material facts.
25
51.
52.
26
27
Schedule 1 contains a table setting out the amount of pure hardware sales
identified by the Claimants 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 Relevant
Period amounted to approximately US$200 million and constituted 11% of the
total reported revenues during the period between Q3 2009 and Q2 2011, and
a very significant proportion of reported revenue growth in 2009 as compared
to 2008 and in 2010 as compared to 2009.
56.
Substantially all of the pure hardware sales were carried out at a significant
loss. In Q3 2009, for example, Autonomy purchased hardware from EMC (and
its reseller, Associated Computer 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 and Q1 and Q2 2011, Dell identified customers that
wished to purchase Dell hardware. Autonomy was then introduced to the
transaction. It purchased Dell hardware at one price, sold the same hardware
to Dell's customer at a lower price, and then recognised the revenue
associated with 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 Autonomy 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 provided in Table 12A of Schedule 12. In
addition, a further loss of US$250,000 was suffered by ZANTAZ and ASL
(under the transfer pricing and profit share arrangements referred to in
paragraphs 9 and 13 above) as a result of the improper bonuses referred to in
paragraph 135.6 below and in the Summary in Schedule 12.
Revenue
59.
61.
The revenues derived from pure hardware 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 customers for each product or service, or
each group of similar products and services, to be disclosed. Pure hardware
was not similar to the other products and services sold by Autonomy and
ought therefore to have been separately disclosed. In this regard, the
Claimants rely upon the following facts and matters:
30
31
In short, the statements in the Annual Reports and in the Quarterly Reports
from Q4 2010 to Q2 2011 (inclusive) to the effect that Autonomy was a "pure
software" company were untrue and/or misleading and/or omitted a material
fact (namely that Autonomy was engaged in the business of selling significant
amounts 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 Autonomy's published
information that Autonomy was a business whose revenues derived from the
sales of software and associated services. Insofar as Autonomy made sales of
hardware, HP (and thus Bidco) understood that these were high margin
appliance sales that were not material to Autonomy's financial statements (as
if they had been material, 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 Autonomy sold material amounts of
pure hardware.
32
The costs of purchasing the pure hardware were included in the financial
statements the Annual Reports and in each of the Quarterly Reports from Q2
2009 to Q2 2011 (inclusive) but were divided between COGS and sales and
marketing expenses.
65.
In the Financial Review section of the 2009 Annual Report (pH), COGS 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 revenues, together with a shift in the mix of
revenues at the beginning of 2009 as a result of [the acquisition of a
company named Interwoven] and the IDOL SPE [software] Quick Start
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 wrongly allocated to sales and marketing expenses, 77%
of the reported increase in COGS 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), COGS were
said to have increased by US$23.8 million from 2009 to 2010. The increase was
attributed to "increased revenues and a change in the sale mix discussed throughout
this report." The 2010 Annual Report omitted the material fact that, even
though (as explained below) a large portion of the costs of pure hardware had
been wrongly allocated to sales and marketing expenses, the entire increase in
reported COGS during the financial year was attributable to the costs of pure
hardware, which was not mentioned anywhere in the Report. Further, the
statement about the increase in COGS was untrue and/ or misleading in that
the costs of all other revenues had actually decreased.
33
67.
The Financial Review section in the 2009 Annual Report (p11) stated that the
increase in sales and marketing expenses in 2009 had been caused "primarily"
by "increased advertising, additional headcount and an increase in sales commissions
due to an increase in sales and a change in the geographic and size-of-transaction
mix". This was untrue and/or misleading because the increase in sales and
marketing expenses was entirely attributable to the improper allocation in
2009 of the majority of the costs of purchasing pure hardware to sales and
marketing expenses (a material fact omitted from the 2009 Annual Report). In
2009, US$35.8 million of the costs of purchasing pure hardware was treated as
sales and marketing 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.
68.2. In accordance with IAS 2, paragraphs 10 and 38, COGS should have
included all costs of purchase of any hardware 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 marketing expenses would have been
permissible under IFRS 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 marketing
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 Autonomy Inc for that hardware.
69.
70.
Accordingly, 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 COGS, gross profits, gross margin and sales
and marketing expenses as they were in fact reported in the Annual Reports
and in the Quarterly Reports compared to the true figures as they should have
been reported if the correct accounting treatment of the costs of purchasing
pure hardware had been adopted (but without correcting for the other matters
of which complaint is made in these proceedings).
74.
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74.3. The purported sale of the licence to the VAR was not, however, a
genuine arm's length commercial transaction. Instead, the VAR and the
Autonomy group company (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 Autonomy from its own resources, and would
not otherwise bear any commercial risk in relation to the arrangement.
Such is to be inferred from the following:
74.3.1. There had been no communication between the Autonomy
group company and the VAR in relation to the transaction in
question until immediately prior to the end of the relevant
quarter.
74.3.2. The VAR had made 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 VAR did not have the means to pay the
Autonomy group company in the absence of an onward sale of
the relevant licence to the identified end-user.
74.3.5. The notion that a software company like Autonomy, in the
process of seeking to conclude an agreement on a significant
sales opportunity involving complex software products and
solutions, would, on the last day of the quarter, abandon those
sales negotiations and instead sell the software products and
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Most of the contrived VAR 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 same individual, David Truitt, was the Chief Executive Officer of
both DiscoverTech and Microlink. He was the brother of an Autonomy
group employee.
76.2. Another brother in the same family, Stephen Truitt, was the Chief
Operating Officer of MicroTech.
76.3. The President of FileTek, Gary Szukalski, was a former Autonomy
group employee.
77.10. The next day, 30 June 2011, (i) Autonomy Inc paid Capax Global US$2
million under the NearPoint agreement (notwithstanding the 60 day
period for payment), and (ii) Capax Discovery paid Autonomy Inc the
amount of US$1.5 million that was outstanding under the Capax
Discovery/ FSA purchase order.
77.11. On 7 September 2011, shortly after Bidco's offer to purchase the
outstanding shares of Autonomy was announced, Autonomy Inc
informed Capax Discovery that it was cancelling Capax Discovery's
liability for the entire outstanding balance of US$3 million in respect of
the Capax Discovery/FSA purchase order.
77.12. In aggregate, Autonomy 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 Autonomy Inc had paid US$2m to Capax
Global under the NearPoint agreement for costs and expenses most of
which were 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, Autonomy Inc entered into a software licence and support
purchase order with MicroTech which identified the Vatican Library as the
end-user ("the March 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 maintenance and customer support. These fees
were said to be payable within 90 days. Autonomy recognised licence revenue
of US$11 million as revenue in Q12010 and recognised the support and
maintenance of US$550,000 on a quarterly basis over the one year period of
the maintenance and support agreement. In reality, the March 2010 purchase
46
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 2010 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 prestige project within the Autonomy group, and both
Lynch and Hussain were involved in reviewing and dictating the
commercial terms which the Autonomy 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 email dated 29 March 2010 Hussain stated:
"It is a big project and having an Italian partner would be very
useful to us. However, the partner that we would use would have to
be sufficiently strong for us to be able to recognize the revenue and
only if the [Purchase Order] and contract is signed this quarter.
The partner you mentioned last night I think is too small for
revenue recognition purposes."
78.4. Within 48 hours of that email, on 31 March 2010, Autonomy Inc and
MicroTech entered into the March 2010 purchase order. MicroTech was
not an Italian company, but was based in Virginia, 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 Vatican Library prior to
31 March 2010.
47
78.5. Moreover, after concluding the March 2010 purchase order under
which it ostensibly assumed a liability to pay Autonomy Inc $11.55
million within 90 days, MicroTech did not attempt to sell a licence to
the Vatican Library and was not subsequently involved in or even
consulted in relation to Autonomy's continuing efforts to conclude a
transaction with the Vatican Library. Those efforts were conducted
solely by representatives of the Autonomy group, including Lynch and
Hussain.
78.6. Although Autonomy immediately recognised US$11 million of revenue
in Q12010, MicroTech failed to pay such amount by the due date of 29
June 2010. Whilst it made a small payment (US$0.5 million) in October
2010, MicroTech was not pursued at any stage by Autonomy Inc for
payment 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 what was described as MicroTech's "Advanced
Technology Innovation Center" ("ATIC") which was essentially to be a
display facility in a room and in a vehicle. In fact, the ATIC licence was
a contrived arrangement intended to put MicroTech in funds so as to
enable it to pay at least a portion of the outstanding amount ostensibly
due under the March 2010 purchase order:
78.7.1. The proposal to create an ATIC stated that the ATIC would
enable Autonomy to demonstrate its products to the United
States Government and others;
78.7.2. The ATIC did not exist at the time that the proposal was
accepted;
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group company did not need (and which had no discernible value to
it).
79.2. Autonomy retained managerial involvement in the ongoing sales
discussions with the end-user to the degree usually associated with
ownership or effective control over the licence that was to be sold.
Autonomy group personnel continued, without any reference to the
VAR, to negotiate the terms of the licences, including deciding upon
the services and products to be supplied, the fees that would be paid,
the schedule of payments the customer would be required to make and
all other contractual terms. Autonomy group personnel were not
guided or directed by a VAR on any aspect of the licensing transaction
with the end-user.
79.3. At the time revenue was recognised by Autonomy, it was not probable
that the Autonomy group company would receive the economic
benefits associated with the contrived VAR transaction. In many
instances, the VAR did not have the resources to pay its accumulated
purported obligations to the Autonomy group company. Under the
arrangements described above, payment in respect of a particular
transaction would only occur if and when the sale of a licence was
concluded with the end-user, and even then only if the end-user was
willing to contract with the VAR, or pay the VAR so as to put it in
funds to meet its ostensible liability to Autonomy. But the VAR was
involved precisely because of Autonomy's inability to conclude a
transaction with the end-user by the end of the relevant quarter, and
the VAR had had no prior involvement with, and was not intended to
have any subsequent involvement with, the end-user. Accordingly, it
was inherently unknown, and in many cases unlikely, that the end-user
would ultimately agree to contract with, or pay money to, the VAR.
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80.
81.
(2)
Reciprocal transactions
During the Relevant Period, Lynch and Hussain caused Autonomy group
companies to purchase products (including software), rights and/or services
from a counterparty in order to induce that counterparty to acquire a licence
for Autonomy software, and to provide the counterparty with the funds to
pay for that software. In these transactions:
82.1. The amount paid by the Autonomy group company for the
counterparty's products, rights and/or services exceeded the price paid
by the counterparty for the licence of Autonomy software; and/or
82.2. The amount paid by the Autonomy group company for the
counterparty's products, rights and/or services was in excess of the fair
value for such products, rights and/or services; and/or
82.3. The Autonomy group company had no independent need for the
products, rights and/or services that it purchased or licensed from the
52
These transactions were not genuinely in the furtherance of, or pursuant to,
Autonomy's business. Instead, they were conducted for the improper purpose
of creating the appearance of revenue. Particulars of the transactions relied
upon by the Claimants ("the reciprocal transactions") are set out in Schedule
5.
84.
Inc acquired a limited licence to use and display VMS data from Video
Monitoring Services of America, LP ("VMS LP") for US$13 million ("the first
VMS reciprocal transaction"). Autonomy recognised a total of US$8.5 million
in revenue on 30 June 2009. The transaction had the following characteristics:
85.1. On 30 June 2009 and 3 July 2009 respectively, Stouffer Egan ("Egan"),
the Chief Executive Officer of Autonomy Inc, and Hussain each created
a "business plan" which they falsely backdated to 21 March 2009 (i.e.
before the transaction had been closed) in order to give the false and
misleading impression that the business case for the transaction was
genuine and had been considered in advance.
85.2. Lynch and Hussain approved the purchase element of the transaction
and approved the immediate payment by Autonomy Inc of US$13
million on 29 July 2009 to VMS LP. The following day, VMS Inc paid
Autonomy Inc US$9 million.
85.3. Hussain and Stephen Chamberlain ("Chamberlain"), who held the
position of Vice President, Finance, and reported to Hussain, informed
Deloitte, that the "VMS software" would generate additional revenue of
US$23.4 million over three years. In fact, VMS did not provide software
to Autonomy. It merely provided a data feed that essentially republished a newsfeed service that Autonomy Inc had previously been
receiving free of charge from a company called Moreover Technologies,
Inc. The VMS data feed was not accessed by Autonomy Inc for several
months and did not become operational until February 2010 or later.
86.
and VMS LP purchased licences from Autonomy Inc for US$5 million. At the
same time, VMS Inc purchased US$6 million of pure hardware from
Autonomy Inc. Autonomy recognised a total of US$11 million in revenue on
31 December 2010. The transaction had the following characteristics:
86.1. In the negotiations leading up to this transaction, the principal issue
was what Egan referred to as the "delta" between the amount that
Autonomy Inc would pay to VMS LP for rights relating to VMS's data
and the lesser amount that VMS LP would pay to license Autonomy
Inc's software.
86.2. Shortly after the transaction was completed, Hussain told Lynch that
Egan had explained that VMS "looked upon it [the transaction] as a
financial transaction only".
86.3. Hussain told Autonomy's Audit Committee of Autonomy Inc's sale of
a licence to VMS LP, but did not tell the Audit Committee that in the
same transaction Autonomy had purchased rights from VMS LP or that
the purchase price for those rights significantly exceeded the price paid
by VMS LP for Autonomy Inc's licences.
86.4. Although Autonomy recognised revenue with respect to Autonomy
Inc's sale of hardware to VMS Inc, VMS Inc did not pay Autonomy Inc
for the hardware.
Examples of reciprocal transactions - FileTek (Schedule 5, Transaction 3)
87.
88.
89. Notwithstanding these matters, in March 2010, Autonomy Inc agreed with
FileTek that it would purchase a further licence to use FileTek's StorHouse
software for an additional US$11.5 million in Q2 2010, on the condition that
FileTek would purchase further licences from Autonomy in Q12010 for US$9
million ("the second FileTek reciprocal transaction"). The sale to FileTek was
concluded on 31 March 2010 (the last day of Q12010). The purchase by
Autonomy Inc occurred on 11 May 2010. FileTek's invoice relating to that
purchase was sent on 11 May 2010. It was paid in full by Autonomy Inc on 13
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May 2010. On the same day, FileTek paid Autonomy Inc an instalment of
US$4.5 million towards the monies owed in respect of its 31 March 2010
purchase. The final instalment of US$4.5 million was paid by FileTek on 28
June 2010.
90.
91.
In aggregate, Autonomy Inc, and hence ASL through the transfer pricing
arrangements referred to in paragraph 9 above, paid FileTek a total of
approximately US$33.6 million for software which was of no value to the
Autonomy group but which enabled Autonomy improperly to recognise
US$28 million of revenues in respect of software licences and related services
ostensibly sold by Autonomy Inc to FileTek.
In the Annual Reports and in each of the Quarterly Reports from (at least) Q1
2009 to Q2 2011 (inclusive), revenue was overstated as the licence revenue in
respect of the reciprocal transactions was inappropriately recognised in full by
Autonomy. The costs of the counterparty's product or service were usually
capitalised and amortised over the purported useful life of the counterparty's
product or service.
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94.
95.
In the case of the reciprocal transactions, IAS 18, paragraph 12 required that:
95.1. When goods or services were sold in exchange for dissimilar goods or
services, the revenue should have been measured at the fair value of
the goods or services received (the value of the counterparty's
product), adjusted by the amount of any cash transferred (the cash
increment paid by Autonomy to the counterparty).
95.2. Where the fair value of the goods or services received from the
counterparty could not be measured reliably, the revenue should have
been measured at the fair value of the goods or services given up,
adjusted by any amount of cash transferred.
96.
97.
In the case of the reciprocal transactions, in almost all cases either the goods or
services received from the counterparty were of no discernible value to
Autonomy or the goods or services were purchased at sums in excess of their
fair value. In most instances, the relevant Autonomy group company paid
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In the event that the approach set out above resulted in revenue potentially
being derived from the reciprocal transactions, all the criteria for revenue
recognition in IAS 18, paragraph 14, would still need to have been met in
order for revenue to be recognised. In the case of the reciprocal transactions,
not all of these criteria were met.
99.
In the premises, the revenue, and gross and net profit figures in the Annual
Reports and the Quarterly Reports from at least Q12009 to Q2 2011 (inclusive)
were untrue and/or misleading and/ or omitted the material fact that the
revenue in question derived from reciprocal transactions that were entered
into by Autonomy group companies for the purpose of creating the
appearance of increased revenue and corresponding profits.
100. The impact of the inappropriate recognition of revenue derived from the
reciprocal transactions on Autonomy's reported revenue and profits from
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Hosting arrangements
104. This practice allowed Lynch and Hussain to create the untrue and/or
misleading impression that IDOL Cloud was a rapidly growing source of
recurring revenue that turned "one-off sales into multi-year committed annuity
streams" (Chief Executive's Review in the 2010 Annual Report, p4). In fact, the
opposite was true: future continuing revenue and profits associated with
Autonomy's hosting business were sacrificed in order to generate upfront
licence fees and to record inappropriately current revenue and profits.
Transactions which in fact resulted in reduced revenue and reduced gross and
net profits in respect of individual customer relationships and of the hosting
business as a whole were falsely and misleadingly represented as increasing
revenues, gross and net profits. Revenues that were held out, in Autonomy's
published information, to be recurring were, in fact, non-recurring. Revenues
that were supposedly representative of future hosting revenues were actually
generated by sacrificing future hosting revenues. Those losses were largely
incurred in the first instance by ZANTAZ and, ultimately, in part, by ASL by
reason of the transfer pricing and profit sharing arrangements referred to in
paragraphs 9 and 13 above.
105. The specific arrangements of this kind that the Claimants contend were
entered into for this improper purpose ("the hosting arrangements") are set
out in Schedule 6.
106. Total upfront licence fees relating to hosting arrangements involving Digital
Safe software of US$115 million were recognised during the Relevant Period.
Table 12D in Schedule 12 sets out five examples of such transactions,
representing 29% of such Digital Safe hosting licence fees. Reduced revenues,
and resulting lost profits, in the range of 59% to 142% of the upfront licence
fees were incurred on those five transactions over the term of the restructured
hosting arrangements, giving rise to a total aggregate loss of profits on the
five transactions alone of US$29.3 million. On the assumption that the range
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of loss on these five transactions was also suffered on the remaining Digital
Safe hosting arrangements, Autonomy Inc (for itself and as assignee of
ZANTAZ's causes of action) suffered total transaction-based losses of
between US$77.7 million and US$145.7 million in respect of the hosting
arrangements.
False accounting for hosting arrangements
107. Throughout the Relevant Period, Autonomy recognised the purported licence
fees in respect of each of the hosting arrangements at the commencement of
the arrangement or restructuring. The materially reduced fees and charges for
the hosting and related services were then recognised over the multi-year
period during which the services were actually provided. This practice had
the effect of leaving a significantly reduced hosting revenue stream with
which to cover the costs of providing the hosting service. This reduction in
continuing revenues would have been of particular concern to anyone who
acquired Autonomy after the commencement of the arrangement or
restructuring because the costs of providing the hosting service would
continue without substantial reduction and the resulting profitability of the
ongoing hosting business would be greatly reduced.
108. The licence fee revenue was also largely allocated to IDOL Cloud revenue in
the breakdowns contained in the Financial Review section of the 2010 Annual
Report and in the Quarterly Reports from Q1 2010 to Q2 2011 (inclusive). This
contributed to the untrue and/ or misleading impression given by those
reports that IDOL Cloud revenue was increasing rapidly and was a source of
recurring revenue at the level suggested by then-current reported IDOL
Cloud revenue. In fact, the aforementioned practice destroyed the utility of
current hosting revenues and profits as a predictor of recurring future hosting
revenues and profits.
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109. Each of the hosting arrangements was, in substance, a transaction for the
provision of services over the period during which the Autonomy group
company hosted the customer's data. Customers wanted the Autonomy
group company to host their data and often required various other support
services. They did not want to host the data themselves. Under IAS 8,
paragraph 10, and IAS 18, paragraphs 13, 20 and 25, the hosting arrangements
should therefore have been accounted for as services, with revenue recognised
over the periods in which the services were provided. The payments received
and attributed to the relevant licence fees should have been treated as
prepayments for hosting and related services and recognised as revenue over
the subsequent periods during which those services were actually provided.
110. Further, in relation to the relevant hosting arrangements that were based
upon the Digital Safe software, and in particular where the data was hosted
by Autonomy at locations controlled by Autonomy, the purported software
licence had no independent value to the hosting customer and/or was not
used by it independently of Autonomy and the hosting service provided by
the Autonomy group. Whilst Digital Safe could be configured for use on a
customer's own premises, such an arrangement required proprietary
knowledge and resources and Digital Safe could only be customised,
configured and implemented for customer use on the customer's own
premises by Autonomy itself. Accordingly, a licence of Digital Safe software
did not have any independent value to a customer of hosting services in the
absence of such additional support from Autonomy, which additional support
did not form part of the licensing or hosting arrangements provided to the
customer. Digital Safe software licences were therefore not separately
identifiable components of hosting arrangements. The requirements under
IAS 18, paragraph 13, for the recognition of revenue from licence fees
separately from the hosting and related services, were therefore not met.
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111. In relation to the hosting arrangements that were based upon Autonomy's
eDiscovery software, although this software was capable, in principle, of
operating independently of the hosting service provided by Autonomy, no
reliable fair value was, or could be, attributed to all of the individual
components of the eDiscovery contracts. The eDiscovery package
encompassed the provision of a variety of possible services over time and the
costs of those services depended upon which combination of services was
provided over the duration of the contract, a factor that was not known at the
outset of the arrangement and could not subsequently be determined because
the costs of performing different services were not tracked. The revenue on a
sale of a licence for eDiscovery software could not therefore be measured
reliably. Therefore the requirements under IAS 18, paragraph 14, for the
recognition of revenue on the sale of the licence, were not met.
112. Accordingly, in addition to consideration of the substance of the transactions,
Digital Safe and eDiscovery software licences did not meet the requirements
under IAS 18 for the recognition of revenue for the further reasons set out in
paragraphs 110 and 111 above. As described at paragraph 109 above, the
payments received and attributed to the relevant licence fees should have
been treated as prepayments for hosting and related services and recognised
as revenue over the subsequent periods during which the hosting services
were provided.
113. In the premises, the revenue and gross and net profit figures in the Annual
Reports and the Quarterly Reports were untrue and/or misleading as a result
of the inappropriate recognition of revenue attributed to the licence fees
charged in connection with hosting arrangements.
114. The impact of this practice on Autonomy's reported revenue and profits is set
out on a quarter-by-quarter basis in the table at Schedule 4 and in further
detail in Schedule 6 (see also the table at Schedule 10).
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(4)
Other Transactions
115.2. In other instances, Autonomy entered into contracts for the delivery of
licences and related support and professional services to customers,
which were in practice the delivery of a customer-specific tailored,
customised version of the relevant software and its implementation.
Autonomy accounted for each element of these contracts separately,
recognising revenue relating to the licence element upfront. IFRS
required that for contracts involving the licensing of software that
required significant customisation, software licence revenue should not
have been recognised until that customisation (including tailoring,
delivery, set up and the subsequent testing and acceptance of the
software by the customer) was complete. In at least the instances
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with US$593.0 million in 2009. This increase in revenue from software and
related services included the effect of acquisitions of entire business units
from other companies during 2009 and 2010. Actual growth in software
revenue and related services, including the effect of acquisitions, was only
6.2%. If the effect of acquisitions made during 2009 and 2010 are excluded,
organic revenue from software and related services actually decreased by
6.0%. In the circumstances, the statement by Lynch in the "Financial
Highlights" section of the Chief Executive's Review in the 2010 Annual Report
that Autonomy had achieved "Full year organic growth in core business of 17%"
was untrue and/ or misleading.
128. Autonomy's reported organic growth and organic IDOL growth figures were
highlighted in the Annual Reports and Quarterly Reports and were held out
to be a key indicator of the true strength of Autonomy's core software
business on the basis that they excluded the effect of acquisitions. However,
these figures were untrue and/or misleading. If revenue derived from pure
hardware sales and inappropriately recognised revenue had not been
included, the effect on the reported organic growth figures would have been
dramatic. As shown in the second table in Schedule 10 (headed "Organic
Growth"), instead of the reported organic growth of 15% for Q3 2009, 18% for
Q4 2009, 17% for Q12010, and 13% for Q2 2010, the true figures would have
been -5% for Q3 2009, -20% for Q4 2009, 1% for Q12010, and -10% for Q2 2010.
It would therefore have been readily apparent that Autonomy was not a
growing business at all.
129. Moreover, on the true figures, it would also have been apparent that
Autonomy had failed to meet market expectations (i.e. the consensus
estimates of future revenues by market analysts) by a wide margin in every
quarter from Q12009 to Q2 2011. As shown in the table in Schedule 11,
instead of the reported figures showing that Autonomy either exceeded, or
failed to meet, market expectations by a percentage point or two, the true
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figures would have revealed that Autonomy had failed to meet market
expectations by as much as 20% to 30% each quarter.
130. Autonomy was able to appear to meet market expectations only by virtue of
changing combinations of the improper transactions and false accounting
practices described above. For example:
130.1. In Q3 2009, Autonomy met market expectations largely by purchasing
US$47 million of pure hardware and selling it for US$38 million.
130.2. In Q4 2009, Autonomy's principal supplier of hardware, EMC,
discontinued sales to Autonomy. Autonomy filled the void by
engaging in six separate VAR transactions of the kind described above
that generated the appearance of US$25.3 million of revenue and two
reciprocal transactions that generated the appearance of a further
US$10.5 million of revenue. All of these transactions took place in the
last two days of the quarter. In addition, a number of hosting
arrangements were entered into which resulted in the inappropriate
recognition of US$20.2 million of licence revenue.
130.3. In Q12010, Autonomy overcame its shortfall in revenue and profits by
entering into five VAR transactions that generated US$25 million in
purported revenue, and one reciprocal transaction that resulted in a
further US$8.5 million in revenue at the end of the quarter. A number
of hosting arrangements were also entered into which resulted in the
inappropriate recognition of a further US$11.5 million of licence
revenue.
130.4. In Q2 2010, Brent Hogenson, the Chief Financial Officer of the
Autonomy group in the Americas ("Hogenson"), raised concerns about
whether Autonomy's use of VAR transactions and at least one
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136.2. Lynch was privy to, and consulted about, and, with Hussain, managed
contrived VAR transactions (generally by directing the actions of other
employees and determining which VAR would be used on a given
transaction) in order that revenue might be recognised (albeit
improperly) with respect to those transactions.
136.3. Lynch and Hussain authorised payments of MAFs in order to reward
VARs for participating in contrived VAR transactions.
136.4. Lynch and Hussain approved purchases of products, rights and/or
services from VARs that Autonomy did not need or use (including the
ATIC and StorHouse transactions described above), which transferred
funds to individual VARs so that they could and would pay Autonomy
for prior transactions where there had been no sale to an end-user.
136.5. In Q3 2011, following the announcement of the Autonomy Acquisition,
but before its completion, the following steps were taken in an attempt
to conceal or unwind prior contrived VAR transactions, in
circumstances where it is inconceivable that such significant decisions
could have been taken without the knowledge and authorisation or
permission of Lynch and Hussain:
136.5.1. New transactions with the relevant VARs were substantially
discontinued.
136.5.2. Autonomy group companies purchased licences from VARs,
and made payments to VARs for products, software and
services, totalling US$29.3 million. The associated payments to
VARs were then used by the VARs to discharge their
obligations to Autonomy group companies with respect to
prior contrived VAR transactions. The software and services
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Capax Discovery with the funds to pay Autonomy for licences for
Autonomy's Introspect EDD software. Hussain asserted in an email
dated 8 July 2010 that "Our relationship with Capax as a trusted partner is
good so we will sub contract to them when necessary (e-discovery] overflow
services." In fact, no back-up support services were needed by
Autonomy, and none were provided by Capax Discovery.
137.3. Lynch and Hussain approved the first FileTek reciprocal transaction,
(see paragraphs 87 to 88 above and Schedule 5, Transaction 3) and the
second FileTek reciprocal transaction (see paragraph 89 above and
Schedule 5, Transaction 3).
137.4. By an email dated 10 May 2010 to Joel Scott, Chief Operating Officer of
Autonomy Inc ("Scott"), and Lynch, Hussain provided a purported
explanation, which was confirmed by Lynch, for approving the second
FileTek reciprocal transaction, namely that the first FileTek reciprocal
transaction had been a success. In fact, as was known by both Lynch
and Hussain, the FileTek software had not been integrated with
Autonomy software and there was then (and thereafter) no clear
understanding within Autonomy as to whether or how the FileTek
software could be used by Autonomy.
137.5. Lynch and Hussain each approved the first VMS reciprocal transaction
in Q2 2009 (see paragraph 85 above and Schedule 5, Transaction 2) and
the second VMS reciprocal transaction in Q4 2010 (see paragraph 86
above and Schedule 5, Transaction 2). Hussain created and falsely
backdated a business plan to support the first VMS reciprocal
transaction. He personally managed the negotiation with VMS of the
price difference between the sum Autonomy would pay VMS and the
lesser amount that VMS would pay Autonomy in the second VMS
reciprocal transaction.
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139.1. Hussain directed the exercise that led to the recognition of US$7 million
based on the sale of a licence in the amount of US$1.5 million to Iron
Mountain Information Management, Inc. On 15 July 2011, Chamberlain
sent an email to Hussain requesting a summary of comparable
transactions "so that we can justify the fair value adjustment." Hussain
responded with "an extract of the large OEMs over the past 3 to 4 years".
As Hussain must have known, this approach was improper because
Autonomy applied a value-based pricing model under which the price
charged for licences of the same software varied from customer to
customer based on the perceived value of the software to the particular
customer in the circumstances applicable to an individual transaction.
139.2. Lynch and Hussain either negotiated or directed the negotiation of
contracts that involved the licensing of software that was to be
customised to meet the customer's unique requirements (and required
related support and professional services). Hussain and Lynch were
either personally involved in, or directed the negotiation of, each of
these transactions. Hussain was aware of the nature of these
arrangements, but nevertheless approved the recognition of the entire
amount of revenue associated with the transactions before the
customisation began, before the required services were provided, and
long before customer acceptance. Given the size of the transactions
(which would affect the results for the relevant quarter) Hussain kept
Lynch apprised of their status.
Knowledge and involvement of Lynch and Hussain in false accounting
140.
Lynch and Hussain also knew of and deliberately instigated and managed the
false accounting pleaded above and knew that, by reason of that false
accounting, information contained in the Annual Reports and the Quarterly
Reports (and information provided during earnings calls) was untrue and/or
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142.10. Lynch and Hussain each knew that (or were reckless as to whether) the
information contained in the Annual Reports and the Quarterly Reports
from Q3 2009 to Q2 2011 (inclusive) was untrue and/or misleading
and/or that they omitted matters that should have been included (such
that their omission constituted the dishonest concealment of material
facts) in the following further respects:
142.10.1. In omitting any reference to the pure hardware sales, to the
material fact that a large part of Autonomy's reported
revenue growth was attributable to those sales, and to the
fact that revenue derived from those sales was so significant
that by the end of 2010 Lynch and Hussain considered the
level of the Autonomy group's hardware sales to be
equivalent to those of an independent hardware reseller.
142.10.2. In falsely describing Autonomy as a "pure software"
company.
142.10.3. In including revenue from pure hardware sales in the
breakdowns of revenue (which breakdowns were prepared
by Hussain personally).
142.10.4. In taking revenue derived from such sales into account when
determining and reporting "organic growth", "organic growth
in core business" and "organic IDOL growth".
142.10.5. In allocating to sales and marketing expenses, rather than
COGS, a significant proportion of the costs of purchasing
and thereafter selling pure hardware (thus causing the
amounts stated for COGS, gross profit, gross margin and
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143.1.3. In many cases, as Lynch and Hussain knew, when an enduser did not complete a transaction involving Autonomy
software, sales were reversed, purported debts were written
off or reciprocal deals were arranged to put the VAR in funds
that it then used to pay its purported debt to Autonomy.
144. Hussain misled the Audit Committee regarding a number of the contrived
VAR transactions complained of:
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145. As regards the false accounting for reciprocal transactions, Lynch and
Hussain each knew that the reciprocal transactions were not genuine arm's
length commercial transactions but were a pretext for the inappropriate
recognition of revenue by Autonomy and that, as a result, the revenue and
gross and net profit reported in respect of such transactions in the Annual
Reports and the Quarterly Reports were untrue and/ or misleading.
146. Hussain misled the Audit Committee with respect to reciprocal transactions.
For example:
146.1. His memorandum to the Audit Committee in respect of Q4 2009 stated
that Autonomy's purchase from and sale to FileTek were entirely
separate transactions, that the licensing of software from FileTek in the
first FileTek reciprocal transaction was the result of a lengthy and
detailed evaluation process, and that Autonomy had integrated
FileTek's StorHouse software into Autonomy's software and that it was
available for commercial sale by mid-January 2010 (two weeks after it
was licensed). None of those statements were true. Furthermore,
Hussain subsequently failed to inform the Audit Committee that the
second FileTek reciprocal transaction occurred without Autonomy first
determining that FileTek's StorHouse software could be integrated
successfully with Autonomy's software.
146.2. He informed the Audit Committee in the management section of the
Audit Committee Report for Q2 2009 that the purchase of a licence
from VMS LP and the sale of a licence to VMS Inc in the first VMS
reciprocal transaction were entirely separate transactions. He did not
tell the Audit Committee that the VMS newsfeed for which Autonomy
Inc was paying US$13 million was substantially the same as a similar
service that Autonomy Inc had previously obtained from another
vendor free of charge. As to the second VMS reciprocal transaction, in
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stating that there had been no serious review of the matters he had
raised or even a discussion with him. On 28 July 2010, he was
summarily dismissed by Scott acting at the direction of Lynch.
148. As regards the false accounting for the hosting arrangements:
148.1. Lynch and Hussain each knew that each of the relevant hosting
arrangements was, in substance, a transaction for the provision of
services over the lifetime of the arrangement, that the relevant licences
of Digital Safe software had no independent value to the hosting
service customers if divorced from the hosting services themselves, and
that no reliable fair value could be attributed to all of the individual
components of the eDiscovery contracts.
148.2. In relation to those of the hosting arrangements that resulted from the
restructuring of pre-existing hosting arrangements, Lynch and Hussain
each knew that, prior to its acquisition by Autonomy, ZANTAZ had
treated the hosting arrangements as a service and had recognised all
related revenue over the period during which the services were
provided.
148.3. In the premises, Lynch and Hussain each knew that (or were reckless as
to whether) Autonomy's published information contained untrue
and/or misleading statements in relation to the amount and rate of
growth of hosting revenue. They presented hosting as a stream of
recurring revenue when they knew that it included a significant
proportion of non-recurring revenue which had been generated by
reducing future recurring revenue and aggregate revenue from
individual, pre-existing hosting arrangements.
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149. In at least his memoranda to the Audit Committee in respect of Q4 2009 and
Q2 2011, Hussain misled the Audit Committee by reporting sales of licences to
Autonomy without disclosing that:
149.1. The reported licences were part of a hosting service arrangement;
and/or
149.2. The reported licences actually replaced pre-existing hosting
agreements; and/or
149.3. The reported licences were obtained in exchange for a reduction in
Autonomy's future data hosting service fees that was so large that the
transactions resulted in materially reduced aggregate revenue to
Autonomy.
150. As regards the false reporting of IDOL OEM Revenue:
150.1. Hussain prepared (or oversaw the preparation of) the revenue
spreadsheets in which particular transactions were misallocated to and
therefore misclassified as IDOL OEM Revenue.
150.2. In the course of the audit of Autonomy's individual and group
accounts for the year ended 31 December 2009, Lynch confirmed to
Deloitte that he monitored and managed the Autonomy group's
business through the use of the revenue spreadsheets.
150.3. The nature and materiality of the incorrect classifications summarised
above were such that it would have been obvious both to Lynch and to
Hussain that the classifications made on the revenue spreadsheets were
untrue and/or misleading.
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154. Lynch and Hussain, as directors of Autonomy, each breached the duties that
he owed to Autonomy under section 171 and/or section 172 of the Act, and
Lynch breached the Lynch Employment Duties as aforesaid, in circumstances
where they thereby exposed Autonomy to liability under Sch 10A FSMA to
persons who purchased Autonomy securities, by reason of the following:
154.1. Omitting from the Annual Reports and the Quarterly Reports any
reference to:
154.1.1. The fact that Autonomy group companies were carrying out
large volumes of pure hardware sales, such that by the end of
2010 Lynch and Hussain considered the level of the Autonomy
group's hardware sales to be equivalent to those of an
independent hardware reseller;
154.1.2. The fact that Autonomy group companies were carrying out
transactions which were not entered into genuinely in the
furtherance of, or pursuant to, the Autonomy group's business,
but rather for the improper purpose of artificially inflating or
accelerating revenues and profits;
in circumstances where they knew that the said omissions involved the
dishonest concealment of material facts. In the premises, those Reports
contained untrue and/or misleading information and/or omitted
matters required to be contained in them.
154.2. Signing the Responsibility Statements in the Annual Reports and in the
Quarterly Reports for Q2 2009, Q2 2010 and Q2 2011 in the knowledge
that information contained in those Reports was untrue and/or
misleading and/or omitted matters required to be contained in them
(in the knowledge that such omissions involved the dishonest
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991 of the Act. Those rights were exercised by about 5 December 2011 and
Bidco became the holder of the entire issued share capital of Autonomy on 5
January 2012.
162. As part of the Autonomy Acquisition:
162.1. Lynch sold his 20,288,320 shares in Autonomy to Bidco for
approximately 517 million.
162.2. Hussain sold his 399,274 shares in Autonomy to Bidco for
approximately 10 million.
163. HP and Bidco proceeded with the Autonomy Acquisition in the belief that
Autonomy was (i) a pure software company (ii) that was growing rapidly,
and (iii) whose prospects for recurring revenue from existing revenue streams
were good, because that was the way in which Autonomy was consistently
portrayed in its published information. It was also the way in which Lynch
and Hussain portrayed Autonomy in their presentations to and discussions
with HP.
164. Bidco acquired the share capital of Autonomy, including the shares held by
Lynch and Hussain, in reliance on (i) the information contained in the Annual
Reports and the Quarterly Reports (and as repeated and explained during
earnings calls) and (ii) the misrepresentations made by Lynch and Hussain
directly to HP (and thus to Bidco) as set out below.
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109
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172.4. The same slide also contained a pie chart describing Autonomy's
"Attractive Revenue Mix" which falsely represented the categories of
revenue for 2010 described in paragraph 169.4 above. In particular, it:
172.4.1. Falsely represented that IDOL OEM Revenue for 2010 was
US$132 million, whereas actual IDOL OEM Revenue was no
more than US$23 million.
172.4.2. Gave the same false impression about Autonomy's revenue
categories as pleaded at paragraph 169.4 above.
172.5. A bar chart on the same slide headed "Organic IDOL Revenue Growth
Y/Y" falsely represented the level of quarterly organic revenue growth
(which it described as excluding "any contribution from acquisitions and
services") in that this figure was calculated using improperly recognised
revenue and undisclosed loss-making pure hardware sales.
172.6. The slide headed "IDOL Software Business Model" made false
representations about the character of Autonomy's IDOL OEM
Revenue, in that:
172.6.1. It falsely represented that IDOL OEM Revenue was "Royaltybased 3%" when, in fact, few, if any, actual IDOL OEM
transactions generated, or could reasonably be expected to
generate, a recurring royalty stream in the order of 3% of
licence sales.
172.6.2. It falsely represented that IDOL OEM Revenue had grown by
32% between 2009 and 2010, whereas IDOL OEM Revenue
actually declined by approximately 35% between 2009 and
2010.
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112
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175.4. The slide headed "IDOL OEM" contained the further misrepresentation
that IDOL OEM was "growing at >30%". In addition:
175.4.1. The slide only identified software companies as being OEM
customers of the Autonomy group. This impliedly represented
that Autonomy's publicly reported IDOL OEM Revenue was
exclusively derived from transactions with software companies.
This was false because much of the reported IDOL OEM
Revenue was based on revenue from transactions with entities
that were not software companies and could not embed
Autonomy software in any software product.
175.4.2. The slide falsely represented that then-current IDOL OEM
Revenue "relate[d] to deals signed two years ago", whereas thencurrent revenues were based largely on then-current
transactions, transactions that accelerated future revenues into
the then-current period, and transactions that were not IDOL
OEM transactions as defined in Autonomy's published
information.
175.5. The slide headed "Cumulative Revenue Effect" repeated the
misrepresentation that IDOL OEM Revenue constituted 15% of total
reported revenues in 2010. It also stated that the IDOL OEM "Quarterly
royalty run rate implies end user sales of IDOL powered software >$1bn",
thus representing that Autonomy's IDOL software had been widely
adopted by software companies and impliedly representing that
Autonomy stood to earn substantial ongoing IDOL OEM Revenue from
royalties paid on sales of the OEMs' products. This was false because
most of reported IDOL OEM Revenue was not IDOL OEM Revenue at
all, and much of the actual IDOL OEM Revenue was derived from
upfront payments rather than from royalties based upon licensees'
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175.6. The slide entitled "Historical Revenue & Profit" contained bar charts that
represented the same false revenue, revenue growth, and operating
profits and operating profits growth figures for 2009 and 2010.
175.7. The slide headed "2011 Outlook - Q4' 10 as baseline for 2011?" , set out
reported 2010 revenues by product category and contained the
following misrepresentations:
175.7.1. It was stated that IDOL OEM Revenue had been US$132
million in 2010 and that this "implied" IDOL OEM Revenue of
US$167 million in 2011, whereas actual IDOL OEM Revenue for
2010 was no more than approximately US$23 million and there
were thus no honest or reasonable grounds for "implying" that
IDOL OEM Revenue would increase by more than 600% in
2011.
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his team to the q2 press release and presentation. I'll go through those." This was a
reference to the Q2 2011 Quarterly Report and an investor presentation, in
Power Point format, relating to the July 2011 earnings call (see paragraph
118.6 above).
186. On 1 August 2011, a call took place between (among others) Sarin, Johnson
and Rob Binns of HP, KPMG (who were advising HP in relation to aspects of
the Autonomy Acquisition) and Hussain and Chamberlain of Autonomy.
Hussain made the following representations, each of which was false:
186.1. Autonomy had a gross margin range of between 87% and 90%.
186.2. Autonomy's revenue recognition policy was closely aligned to US
GAAP. This was false because Autonomy's revenue recognition did not
meet the requirements of IFRS, let alone the more prescriptive
requirements of US GAAP.
186.3. Autonomy's COGS included support costs, managed service data
centre hosting costs and very little third-party royalty costs. This was
false by omission because no mention was made of the costs of
purchasing the pure hardware which, even after large costs allocations
to sales and marketing expenses, constituted 37.7% of reported COGS
in 2009, 73.2% of reported COGS in 2010, and 69.0% of reported COGS
during the 6 months ended 30 June 2011.
186.4. The market consensus was that Autonomy's revenue for 2011 would be
US$1.05 billion. Hussain thereby impliedly represented that there were
reasonable grounds for the market consensus, which was false because
the consensus projection was based on Autonomy's untrue and/or
misleading published information as to its historical and then-current
revenue.
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187. In the course of the call, Hussain presented Autonomy's recently published
results for Q2 and half-year 2011. In so doing, Hussain impliedly represented
that the Q2 2011 Quarterly Report was complete, accurate and not misleading,
and could be relied upon by HP (and any acquisition vehicle that it used,
including Bidco). In fact, information contained in the report was untrue
and/or misleading and/or omitted material facts in that, amongst other
matters:
187.1. Q2 2011 reported revenue of US$256.3 million included US$20.9 million
of loss-making pure hardware sales which were not disclosed.
187.2. Q2 2011 reported revenue included a significant proportion of
improperly recognised revenue (approximately US$42.0 million)
derived from contrived VAR transactions, reciprocal transactions,
hosting arrangements and other transactions.
187.3. Half-year reported revenue was untrue and/or misleading for similar
reasons.
187.4. Q2 2011 and half-year 2011 gross margins were stated to be 87% and
88%, respectively. These margins were overstated and the allocation of
hardware costs to sales and marketing expenses was not disclosed.
187.5. Q2 2011 organic IDOL growth was reported as 15% and half-year
organic IDOL growth was stated to be 17% when, in fact, these figures
were distorted by the effects of undisclosed revenue from the pure
hardware sales as well as improperly recognised revenue from
contrived VAR transactions, reciprocal transactions, hosting
arrangements and other transactions of the types described in Section
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D above. Actual organic growth was 6.0% in Q2 2011 and no more than
2.7% in the half-year.
187.6. The breakdown of revenues for Q2 2011 by category was false and/or
misleading for the reasons pleaded at paragraph 169.4 above.
187.7. Autonomy reported 2011 half-year IDOL OEM Revenue of US$84
million, which was said to represent a 25% increase over reported halfyear IDOL OEM Revenue of US$67 million in the first half of 2010. Both
of these IDOL OEM Revenue amounts were false. Actual IDOL OEM
Revenue for the first half of 2010 was no more than approximately
US$14.5 million and approximately US$5.5 million for the first half of
2011, representing a decline of 62%.
187.8. Autonomy reported Q2 2011 IDOL OEM Revenue of US$47.2 million,
as compared to Q2 2010 IDOL OEM Revenue of US$38 million, a 24%
increase. These statements were false. At least 96% of reported IDOL
OEM Revenue in Q2 2011 (i.e. approximately US$45.3 million out of
US$47.2 million) was not in fact IDOL OEM Revenue. On the basis of
the transactions analysed, IDOL OEM Revenue actually declined by
approximately 82% compared to Q2 2010.
187.9. The Report represented that "Autonomy operates a rare 'pure software'
model", which was false for the reasons pleaded above.
The 2 August 2011 due diligence call
188. On 2 August 2011, a further call took place between (among others) Sarin on
behalf of HP and Hussain on behalf of Autonomy. A list of questions had
been provided by HP to Autonomy in advance of the call. Hussain considered
these questions and made notes of his intended responses before speaking to
HP.
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189. The responses to HP's questions provided by Hussain during this call were
false in at least the following respects:
189.1. In relation to IDOL OEM Revenue, Hussain represented that it took an
OEM approximately two years to embed Autonomy's IDOL software
in its own product and bring that product to market. He said that once
sales of that OEM product began, the OEM generally paid the
Autonomy group a royalty calculated as a percentage of the OEM's
revenue from the licensing of its product. Hussain said that this aspect
of Autonomy's business generated revenues that were in the nature of
an annuity because it produced a stream of revenues from the sale of
the OEM's product that lasted for years thereafter. This was false
because (as pleaded in paragraphs 119 to 123 above) many of the
transactions that Autonomy had classified as IDOL OEM were in fact
one-off sales of licences, many required the licensee to use Autonomy
software for internal purposes only, many were transactions with
companies that did not license their own software, and the contractual
terms of others were such that they did not (and would not) generate
any ongoing royalty income.
189.2. In response to a request to describe Autonomy's sales model "by
product or vertical", including "the standard elements in each arrangement
by sales model and how revenue is recognized", Hussain described licence
and other revenue categories, but omitted any reference to the pure
hardware sales. This omission gave the false impression that
Autonomy's revenue and revenue growth were derived solely from
software and related services (together with a small amount of
appliance sales).
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information in the Quarterly Reports and the Annual Reports was true
and not misleading and did not omit material facts.
Knowledge or recklessness of Lynch and Hussain
191. The subject matter of each of the aforementioned misrepresentations made by
Lynch and Hussain related to the improper transactions and/ or false
accounting (and the resulting false and misleading statements in Autonomy's
published information) pleaded in Section D above. Bidco therefore relies
upon the facts and matters set out in paragraphs 132 to 150 above in support
of its contention that Lynch and Hussain each knew that those representations
were false or, alternatively, each was reckless with respect to the truth of those
representations. In the premises, the misrepresentations were made
fraudulently by each of Lynch and Hussain.
Reliance by HP/Bidco upon misrepresentations
192. Lynch and Hussain repeatedly informed HP (and thereby Bidco) in the course
of the due diligence process that information provided to HP would be
limited to publicly available financial information, oral representations made
by Autonomy management based on specific questions provided by HP in
advance, and the review of a limited number of policies, redacted client
contracts, and other (often redacted) documents.
193. As justification for these strictures, Autonomy cited the Takeover Code,
including its view that Rule 20.2 would require Autonomy to share all of the
information Autonomy might provide to HP with any other company that
expressed an interest in acquiring Autonomy. Lynch and Hussain stated that
they were concerned that a competitor might express interest in an acquisition
as a means of obtaining commercially sensitive information about Autonomy.
For its part, HP was concerned about the prospect of an Autonomy
competitor obtaining access to Autonomy's confidential and/or commercially
sensitive information in the event that HP were to acquire Autonomy.
125
194. In the circumstances, the Annual and Quarterly Reports and transcripts of
earnings calls, as reiterated and endorsed by Lynch and Hussain during their
presentations to and discussions with, HP, and the representations made by
Lynch and Hussain, were the primary sources of information concerning
Autonomy upon which HP (and thus Bidco) relied when deciding whether
Bidco would proceed with the Autonomy Acquisition and determining the
price that Bidco would be prepared to pay for Autonomy.
195. Autonomy's published information was also relied upon by the investment
bankers that HP retained to advise it in connection with the Autonomy
Acquisition. In particular:
195.1. Barclays Capital ("BarCap") issued an opinion dated 18 August 2011 to
HP's Board with respect to the fairness to HP, from a financial point of
view, of the consideration (25.50 per Autonomy share) to be paid for
the Autonomy Acquisition. This opinion stated that, in arriving at its
conclusion, BarCap had reviewed and analysed, amongst other things:
"such other publicly available financial statements and other
business and financial information relating to the Target that we
considered relevant to our analysis, including the Target's audited
annual accounts for the two financial years ended December 31st
2009 and 2010 and the Target's unaudited accounts for the first
two quarters of financial year 2011."
BarCap went on to say:
"In arriving at our opinion, we have assumed and relied upon the
accuracy and completeness of the financial and other information
used by us without any independent verification of such
information (and have not assumed responsibility or liability for
any independent verification of such information) and have further
relied upon the assurances of the management of [HP] that they are
126
127
held by Lynch and Hussain, in the sum of at least US$4.55 billion (equivalent
to at least approximately 2.9 billion) and Autonomy has correctly accepted
that it is liable to Bidco in that amount ("the FSMA Loss").
201. As set out in paragraph 154 above, each of Lynch and Hussain caused
Autonomy to be liable to Bidco for the FSMA Loss. The said liability arises by
reason of their knowledge (or recklessness) that statements in Autonomy's
published information (including in the Annual Reports and the Quarterly
Reports) were untrue and/or misleading and that omissions from such
information involved the dishonest concealment of material facts.
202. In the premises, each of Lynch and Hussain is liable to compensate Autonomy
in the amount of the FSMA Loss:
202.1. In the case of Lynch, by reason of:
202.1.1. His breaches of the duties that he owed Autonomy as a
director; and/or
202.1.2. His breaches of the Lynch Employment Duties; and/or
202.1.3. The terms of the Lynch Indemnity.
202.2. In the case of Hussain, by reason of his breaches of the duties that he
owed Autonomy as a director.
202.3. In the case of both of them, under section 463 of the Act.
Transaction-based losses
203. Further, or in the alternative, each of Lynch and Hussain is liable to
compensate ASL and/or Autonomy Inc for the losses that each of those
129
130
131
INTEREST
L
208. The Claimants claim interest pursuant to section 35A of the Senior Courts Act
1981 at such rate and for such period as the Court deems fit, alternatively
compound or simple interest at common law.
209. Further, or in the alternative, the First and Third Claimants seek interest in
equity in respect of all sums due to them at such rates and compounded at
such intervals as the Court shall consider just.
132
K. PRAYER
AND THE CLAIMANTS CLAIM:
(1) Equitable compensation and/or damages to be assessed;
(2) In the case of the First Claimant, payment of sums due under the Lynch
Indemnity;
(3) Interest as pleaded in Section J;
(4) Further or other relief; and
(5) Costs.
LAURENCE RABINOWITZ QC
RICHARD SNOWDEN QC
JAMES POTTS QC
EDWARD DAVIES
THOMAS PLEWMAN
CONALL PATTON
Statement of Truth
The First Claimant believes that the facts stated in these Particulars of Claim are true.
I am duly authorised to sign these Particulars of Claim on the First Claimant's behalf:
Signature:
r.
Name: Ta
Position: XCC4fiv-C, V4(e pyatatit (itlick,t( CoarSCI 0-rd
133
COY
The Second Claimant believes that the facts stated in these Particulars of Claim are
true.
I am duly authorised to sign these Particulars of Claim on the Second Claimant's
behalf:
Signature:
Name:
7a h vi r Sa("~( (2
Position: Exa
vicc Prcs tdtrrt , C-artzu CkuriSLI 041d 62411ye 1-( SCOetari
The Third Claimant believes that the facts stated in these Particulars of Claim are
true.
I am duly authorised to sign these Particulars of Claim on the Third Claimant's
behalf:
Signature:
Tct4.t...t..
Sc-4,-j f7
Name:
Position: I .X(CuttmC, \ACr, N.Sidarr, (.410c0 Ci UJaild Cola)/ aff_. Cc* crtraktj
The Fourth Claimant believes that the facts stated in these Particulars of Claim are
true.
I am duly authorised to sign these Particulars of Claim on the Fourth Claimant's
behalf:
Signature:
Name:
7CL Li F. sc.11_,-((2._
Position: Dautitic, victoodoit
Served this;day of April 2015 by Travers Smith LLP, 10 Snow Hill, London EC1A
2AL, solicitors for the Claimants.
134