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HP Fraud

November 22, 2012 by  

HP Fraud, It is not often that one sees buyer’s remorse blamed on the fraudulent accounting policies of an acquired company. And there is good reason for that. If in fact there was fraud involved in the sale of Autonomy to H-P (and Autonomy’s former CEO has vigorously denied H-P’s allegations), there is still a lot of potential downside to H-P from making the claims. Essentially, to avoid further problems or costs, H-P will have to establish three main points.

The most important one is that Autonomy committed what H-P called “serious accounting improprieties” and that, in the words of H-P CEO Meg Whitman, they were “designed to be hidden.” Or, in short, Autonomy committed fraud.

Fraud is generally not easy to prove. And because this deal was with a U.K.-listed company, the acquisition was done in accordance with U.K. practices and the Offer agreement is a simple 11-page letter agreement.

The paperwork didn’t include specific representations and warranties found in U.S.-style documents, representations and warranties that H-P might otherwise could have used as a basis for saying it was misled. Rather, to win a civil fraud case, H-P would have to prove that management of Autonomy intentionally misrepresented material facts to it.

It likely wouldn’t be enough to show that it wasn’t given every possible document; H-P would need to show that it asked the specific questions calling for the information H-P claims was hidden from it. And that the answers it got were at least misleading.

To recover on allegations, H-P would probably need to litigate the issue in the U.K. courts. And the U.K. generally follows a “loser pays” rule for litigation expenses. So if H-P fails to establish the fraud and its right to recover damages, H-P could face steep legal bills and spend even more H-P shareholders’ money.

Second, H-P has the responsibility for its own financial statements, which include Autonomy since the acquisition. H-P could be subject to an inquiry from regulators or even litigation from its shareholders on the issue of whether, if there was accounting fraud at Autonomy, that fraud infected H-P’s financial statements. In other words, if transactions were being improperly recorded prior to the closing, did the improper accounting entries stop effective with the closing? Or at least was there no material impact of them on H-P’s financial statements?

H-P’s general counsel said in an interview that the acquisition has caused no problems with H-P financial statements since the deal closed and that there is no material weakness in its control processes in connection with its accounting for Autonomy.

Still, the fraud allegations could raise questions. For example, if Autonomy’s alleged fraud caused revenue to be improperly accelerated, did H-P book that revenue at the proper time when it owned Autonomy?

And those kinds of questions lead to a third major one: if there was such a massive fraud that diluted the value of Autonomy by almost one half, how come it took so long for H-P to figure this mess out?

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