Plaintiffs ‘substantially succeed’ in largest civil fraud trial ever recorded in English

The High Court released a summary of its findings on long-term liability 5 billion US dollars civil action for fraud brought by Hewlett-Packard group in connection with its acquisition of UK software company Limited Autonomy Society (“Autonomy”) in 2012. Plaintiffs were “substantially successful” in their claims against two former Autonomy executives: ACL Netherlands BVHewlett-Packard The Hague BV and others against Lynch and Shushovan [HC-2015-001324].

Sir Judge Hildyard to the Chancery Division presented its findings in a detailed report Summary of Findings, before its full judgment which is currently under embargo. Successful claims have been made under the Financial Services and Markets Act 2000 (FSMA), Common Law Misrepresentation and Deceit and Misrepresentation Act 1967, as well as breach of duty claims management of defendants.

The submissions are limited to the issue of liability, with a separate judgment on the amount of damages to be awarded at a later date. However, the judge indicated that he anticipated that “although substantial, it will be considerably less than is claimed”.

The court observed that the litigation had been “an exceptionally onerous case” for everyone involved. The “exceptionally complex” trial lasted 93 days, including the cross-examination of the first defendant, Dr Lynchfor 20 days (Mr Hussain did not participate because he is incarcerated in the United States). There was a database of “several million” documents, whittled down to a trial bundle of over 28,000 documents. In addition, there were hundreds of pages of hearsay evidence, largely consisting of transcripts from previous civil and criminal proceedings in the United States. The complete judgment (on liability only) should be at least 1500 pages.

The revendications

The procedure relates to the acquisition, for approximately US$11.1 billion in cash, of all of the issued share capital of Autonomy by a securitization vehicle (“Bidco”) created for this purpose by Hewlett-Packard Company (“HP“).

Dr Lynch was a former director of Autonomy and was, throughout the relevant period, “the driving force and figurehead of Autonomy”. Mr. Hussain was a former chief financial officer and director of Autonomy.

The key grievance with the acquisition was that HP was induced to complete the transaction by dishonest statements and omissions in information published by Autonomy, and other statements made personally by the two defendants. Specifically, these allegations related to:

(a) the supposedly dishonest description of Autonomy as being a “pure software company” when in fact it was engaged and accustomed to inflating what appeared to be its software business revenue by making substantial hardware sales; and

(b) the allegedly dishonest presentation of its financial performance, which concealed inappropriate practices, including inflating and artificially accelerating revenues; underestimating costs of goods sold by misrepresenting these costs in order to protect gross margins; misrepresentation of the nature and quality of income; and exaggerated profits.

The plaintiffs argued that this resulted in Autonomy actually being a considerably less valuable company than it appeared based on its published information.

Complaints of fraud regarding the acquisition have been filed (by different entities within the HP group) under the following legal headings:

  • FSMA complaint
    By far the largest of the claims was an FSMA Schedule 10A claim – essentially alleging liability of the issuer (Autonomy) for statements or omissions in its published information about which the investor relied to make an investment decision. The alleged basis for the issuer’s liability was that at least one of the defendants, as “persons discharging managerial responsibilities within the issuer” (“PDMR”), knew that these statements or omissions were false or misleading, or amounted to dishonest concealment of material facts. The defendants have not disputed that they are PDRMs for the purposes of Schedule 10A.
    The FSMA’s claim was presented under what Hildyard J described as a “dog leg” structure. A Schedule 10A action against the issuer (autonomy) would not help HP in this case given that he now owns Autonomy. So:
    • HP/Bidco notified its request for autonomy;
    • Controlled by HP, Autonomy acknowledged its liability to Bidco; and
    • Autonomy (through its successor) then brought this action against the two defendants, as PDMR, to answer for this liability.

  • Deception / fraudulent misrepresentation / s2(1) Misrepresentation Act 1967
    These claims were based on the personal liability of the defendants (rather than the issuer) for the portion of the loss attributable to the shares that the defendants themselves held and each sold in connection with the transaction (pleaded at 420 million US dollars). The statements relied on included restatements of the relevant statements in the published information. Any sum recovered under this head of debt will be recovered on a subsidiary basis to the claim of the FSMA, in order to avoid double recovery.

In addition, the action included claims regarding the conduct of the defendants’ management. Approximately $76.1 million was claimed for direct losses suffered by HP entitles them to onerous transactions that they claim the defendants caused them to enter into, in violation of the defendants’ fiduciary duties or employment contracts (the “claims for breach of duty“).

Results

In the Acquisition Claims, the factual allegations related to six areas of Autonomy’s business and accounting. On all but one of these six areas, Hildyard J found that the plaintiffs had established (to the extent they were alleged with respect to this area) (i) both parts of the FSMA’s claim and (ii) the common law / misrepresentation Act claims.

With respect to breach of duty claims for transaction losses, the plaintiffs were successful for a portion of the disputed transactions.

Hildyard J noted, as a matter of general interest, that no contributory negligence defense is available as a defense against the FSMA or direct fraud claims. He confirmed that he had not drawn any conclusion that HPthe due diligence of was deficient but that, even if he had found that HP one might have expected to uncover and probe the relevant issues, that would not be a defense (unless he found that HP was in fact aware of the issues before the acquisition, which would defeat the necessary element of trust, but this was not the case).

Quantum

The lawsuit included a full quantum argument, including “dense and voluminous” evidence. However, Hildyard J felt it was inappropriate to delay judgment on liability while he proceeds with the quantum review, which he will now do.

He did, however, record in the summary of findings that he had tentatively determined that, even adjusted for established fraud, HP would have always considered Autonomy a suitable acquisition. He noted that “I would expect the quantum to be significantly lower than claimed”.

It therefore seems likely that the quantum will be assessed by reference to what HP would have paid for the company if it had known the true position, rather than on a “failed trade” basis (looking at what position it would be in had it not proceeded). However, this will not be clear until the quantum judgment is rendered.

at Mr Lynch representatives reportedly said he intended to seek leave to appeal.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

Mrs Jan O’NeillHerbert Smith’s Freehills
exchange house
Primrose Street
London
EC2A 2HS
UK

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