Particulars of Claim HP Vs Lynch et al.
Complaint by HP against former executives of Autonomy. High Court of London, U.K....
IN THE HIGH COURT OF JUSTICE CHANCERY DIVISION
Claim No. HC-2015-001324
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
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.
The First Claimant, Autonomy Corporation Limited ("Autonomy"), was incorporated under the laws of England and Wales on 21 March 1996. The registered office of Autonomy is situated at Amen Corner, Cain Road, Bracknell, Berkshire, United Kingdom RG12 1HN.
At all material times, Autonomy acted as the holding company of a group of companies which, according to the Business Overview section in its 2009 Annual Report and Accounts (p6), was: "a global leader in infrastructure software for the enterprise that helps organizations to derive meaning and value from their business information whether unstructured, semi-structured or structured, as well as mitigate the risks associated with those same assets."
Autonomy became a public company on 16 July 1998. In November 2000 its shares were admitted to trading on the main market of the London Stock Exchange. From 8 November 2006 until its shares ceased to be traded on the main market on 14 November 2011, Autonomy was, for the purposes of section 90A of the Financial Services and Markets Act 2000 ("FSMA"), an "issuer of securities". As such, it was potentially liable to pay compensation to a person who acquired its securities in reliance on its "published information" ("published information") and suffered loss in respect of those securities as a result of any untrue or misleading statements in that published information or the omission from it of any matter required to be included in it. (For the avoidance of doubt, references to published information herein include publications to which section 90A of FSMA applied prior to 1 October 2010).
The Second Claimant, Hewlett-Packard Vision BV ("Bidco"), was incorporated in the Netherlands on 15 August 2011. The registered office of Bidco is situated at Startbaan 16, 1187 XR Amstelveen, the Netherlands.
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.
Pursuant to a recommended offer that was announced on 18 August 2011 and became unconditional on 3 October 2011, Bidco (the corporate vehicle used by HP to effect the acquisition) acquired all of the outstanding shares and convertible loan notes in Autonomy for a total price of approximately £7.15 billion (equivalent to approximately US$11.1 billion) ("the Autonomy Acquisition"). On 10 January 2012, following the Autonomy Acquisition, Autonomy was re-registered as a private company.
The Third Claimant, Autonomy Systems Limited ("ASL"), was incorporated in England on 31 May 1995. The registered office of ASL is at Amen Corner, Cain Road, Bracknell, Berkshire, United Kingdom, RG12 1HN.
At all material times, ASL was an indirect wholly-owned subsidiary of Autonomy. It carried on the business of software development and distribution, and operated as licensor of Autonomy software to other entities in the Autonomy group.
Pursuant to transfer pricing arrangements with some other Autonomy group companies including Autonomy Inc, amounts equal to, typically, 100% of the 4
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.
The Fourth Claimant, Autonomy, Inc ("Autonomy Inc"), was incorporated under the laws of New Jersey, USA, on 21 March 1996. Autonomy Inc's principal place of business is at 1140 Enterprise Way, Building G, Sunnyvale, California 94089.
Autonomy Inc was at all material times an indirect wholly-owned subsidiary of Autonomy. It carried on the business of software development and distribution and was the Autonomy group's main operating company in the USA.
ZANTAZ Inc ("ZANTAZ") was incorporated under the laws of California, USA. Its principal business address was at 5758 Las Positas Blvd, Pleasanton, CA 94588 and thereafter at 5671 Gibraltar Drive, Pleasanton, CA 94588.
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.
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.
Autonomy Inc therefore pursues its claims in these proceedings both on behalf of itself and as assignee of rights assigned to it by ZANTAZ.
The Defendants Lynch 16.
The First Defendant, Michael Lynch ("Lynch"), was a director of Autonomy at all times from its incorporation in 1996 until 30 November 2011.
Lynch was employed by Autonomy as its Managing Director and Chief Executive Officer under the terms of an agreement set out in a letter dated 9 July 1998 ("Lynch's Employment Contract"). Lynch's Employment Contract was terminated by letter dated 23 May 2012, with effect from 23 November 2012.
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.
Upon his resignation as a director of Autonomy, Lynch provided a letter dated November 2011, under which he agreed to indemnify Autonomy against any claims, demands or liabilities that had occurred or might occur in future in connection with his role as a director of the company ("the Lynch Indemnity").
Prior to the Autonomy Acquisition, Lynch was a substantial shareholder in Autonomy. He held 20,288,320 shares and share options as at 22 August 2011. Lynch sold all of his shares in Autonomy to Bidco for approximately £517 million. Lynch continued to hold office as Chief Executive Officer of Autonomy after completion of the Autonomy Acquisition until 23 May 2012.
Hussain is a qualified chartered accountant. He was the Autonomy group's Chief Financial Officer from June 2001 until 30 November 2011. He was a director of Autonomy from 1 June 2003 until 30 November 2011 and at all relevant times a director of each of ASL, Autonomy Inc and ZANTAZ.
Hussain was employed by ASL under the terms of an agreement dated 27 June 2001 ("Hussain's Employment Contract"), pursuant to which he was appointed as Finance Director (Europe). After 30 November 2011, when he ceased to hold office as Chief Financial Officer of the Autonomy group, he
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.
Prior to the Autonomy Acquisition, Hussain was a shareholder in Autonomy. He held 399,274 shares and share options as at 22 August 2011. Hussain sold all of his shares in Autonomy to Bidco for approximately £10 million.
"Managerial responsibilities" within Autonomy
At all material times, by virtue of their status as directors of Autonomy, each of Lynch and Hussain was a "person discharging managerial responsibilities" within Autonomy for the purposes of paragraphs 3(2) and 3(3) of Schedule 10A of FSMA (and for the purposes of the predecessor provisions of section 90A of FSMA which applied at all relevant times prior to 1 October 2010) (collectively, "Sch 10A FSMA").
SUMMARY OF THE CLAIMS
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.
Lynch and Hussain caused Autonomy to issue published information that, by virtue of the said improper transactions and accounting practices, included many statements which they knew were untrue and/or misleading (or they were reckless as to the same) or which omitted matters that were required to be included in it, in circumstances where they knew the omissions to involve the dishonest concealment of material facts.
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.
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
by a desire to achieve a sale of their own shareholdings in Autonomy at a price in excess of their true value. 30.
The improper transactions and accounting practices can broadly be divided into the following three categories: 30.1. Undisclosed, loss-making hardware sales: Autonomy presented itself as a company that derived its revenues from licensing its Intelligent Data Operating Layer ("IDOL") software and related services. However, from Q2 2009 Autonomy Inc engaged in substantial sales of third-party computer hardware, without modification and unaccompanied by any Autonomy software ("pure hardware sales"). These pure hardware sales generated revenue of approximately US$200 million over the Relevant Period and comprised approximately 11% of Autonomy's total reported revenue during the period Q3 2009 to Q2 2011. Autonomy disclosed neither the existence nor the amount of such sales in its published information (or anywhere else). This nondisclosure contributed significantly to the false appearance of a rapidly growing software business. The fact that these substantial pure hardware sales were consistently made at a significant loss was also concealed in Autonomy's published information. COGS was artificially reduced, thereby inflating Autonomy's reported gross margins. 30.2. Improper revenue recognition: A number of forms of contrived transactions were deployed by Lynch and Hussain in order to recognise revenues which were either improperly accelerated or fabricated: 30.2.1. VAR transactions:
126.96.36.199. Ordinarily, value-added resellers ("VARs") purchase another business's product, add value to (or provide services with) that product, and then resell the resulting product to an end-user. However, in Autonomy's case, certain VARs were used to fabricate or accelerate what was then held out by Autonomy to be revenue and profits. 188.8.131.52. For example, where an Autonomy group company had attempted to license an Autonomy product to a prospective end-user, but had been unable to finalise a transaction by the end of a financial quarter, Lynch and Hussain caused the sale to a VAR of a licence to use that (or another) product, ostensibly for onward licensing to the end-user, even though the VAR had had no prior involvement in the prospective transaction with the end-user. 184.108.40.206. In fact, the VAR did not bear commercial risk in relation to its ostensible liability to pay for the software licence, because it had been agreed and/ or was understood between the Autonomy group company and the VAR that the VAR would not be required to pay for the software licence from its own resources. In the event the Autonomy group company either forgave this supposed liability or ensured that the VAR was put in funds to enable it to effect payment. 220.127.116.11. The arrangement with the VAR was purely a pretext for the recognition of revenue. In some instances, the 11
arrangement accelerated revenue recognition because the Autonomy group company (not the VAR) continued to negotiate with the end-user after entering into the arrangement with the VAR, and was eventually able to effect a transaction with that enduser. In other instances, no revenue should ever have been recognised or reported at any time, because neither the VAR nor the Autonomy group company ever sold a licence to the end-user. In these latter situations the VAR was, by one means or another, put in funds or relieved by the Autonomy group company of its purported obligation to pay for the software licence. 18.104.22.168. In many cases, the Autonomy group company made a payment, described as, amongst other things, a "marketing assistance fee", to reward the VAR for participating in the arrangement even though the VAR had provided no actual marketing assistance to the Autonomy group company, and had had no contact with the end-user in relation to the proposed transaction. 30.2.2. Reciprocal transactions: 22.214.171.124. Lynch and Hussain fabricated revenue by causing Autonomy group companies to enter into improper reciprocal transactions under which an Autonomy group company (i) granted a software licence to a counterparty at one price and (ii) purchased products (including software), rights and/or services from that 12
counterparty at a greater price. In almost all cases, the products, rights and/or services purchased were of no discernible value to the Autonomy group (or the Autonomy group company overpaid for them). The purpose of the purchase from the counterparty was to provide the counterparty with both the incentive and the funds to acquire a licence to Autonomy software that the counterparty would not otherwise have acquired. These contrived transactions meant that the Autonomy group was funding the purchase by counterparties of its own software in order to allow Autonomy inappropriately to report revenue and profits. 30.2.3. Acceleration of hosting revenue: 126.96.36.199. One aspect of the Autonomy group's business was the hosting of customer data on hardware owned or controlled by Autonomy group companies (principally ZANTAZ) using Autonomy (and other) software and managed by Autonomy personnel. Hosting services were typically provided over a period of years. They resulted in a stream of revenue which, historically, Autonomy and ZANTAZ (prior to its acquisition by Autonomy) had recognised (correctly) over the entire period during which the data hosting service was provided. This aspect of the group's business was represented in Autonomy's published information to be a growing source of recurring revenue.
188.8.131.52. For the improper purpose of accelerating the recognition of revenues into the then-current period, Lynch and Hussain caused Autonomy group companies to structure new hosting arrangements, and to restructure existing hosting arrangements, by charging a substantial upfront fee ostensibly for a licence to use Autonomy's Digital Safe or eDiscovery software and a greatly reduced fee for data hosting services over the term of the hosting relationship. 184.108.40.206. The licence to use Digital Safe software was of no, or no substantial, independent value to the customer. The incentive to the customer was the reduction in the aggregate fees payable over the term of the arrangement. In relation to hosting arrangements utilising Autonomy's eDiscovery software, whilst this was capable, in principle, of operating independently of the hosting service provided by Autonomy group companies, no reliable fair value could be attributed to the individual value of the eDiscovery software. 220.127.116.11. For Autonomy, such arrangements created the appearance of rapid revenue growth in the short term, but damaged the future profitability of Autonomy's data hosting business by significantly reducing the future recurring revenue to be derived from individual customer relationships and the data hosting business as a whole. It also rendered current revenue unrepresentative of future recurring revenue and made the description of the data hosting business
in Autonomy's published information untrue and/or misleading. 30.3. Misrepresented IDOL OEM revenue: 30.3.1. Autonomy's published information stated that an important type of revenue for Autonomy was "IDOL OEM", "OEM derived revenues" or "IDOL OEM derived revenues" (together, "IDOL OEM Revenue"). IDOL was described in each of Autonomy's 2009 and 2010 Annual Reports and Accounts as Autonomy's "core technology". IDOL OEM Revenue meant revenue obtained from businesses known as Original Equipment Manufacturers ("OEMs"). In theory, OEMs were software companies that embedded Autonomy software in their own products, and then licensed those products to their own customers. Autonomy's published information represented that transactions with OEMs (and the associated IDOL OEM Revenue) reflected the wide acceptance and use of Autonomy's software in the software industry and resulted in a growing and recurring stream of royalties paid by the OEMs to Autonomy. 30.3.2. Lynch and Hussain knowingly included within Autonomy's reported IDOL OEM Revenue revenue derived from sales to non-software companies (i.e. companies which could not embed Autonomy software in their own software products), revenue derived from licences that required the licensee to use the Autonomy software for internal purposes only, and revenue derived from sales of hardware and revenue arising from contrived VAR, reciprocal and hosting transactions. Many of the remaining OEM transactions generated only a 15
single upfront payment and no other material royalty payment. Autonomy's published information over the Relevant Period overstated IDOL OEM Revenue by at least 390% and portrayed this aspect of its business as growing rapidly when, in fact, it was shrinking. 31.
In causing Autonomy group companies to engage in these improper transactions and accounting practices: 31.1. Lynch and Hussain breached fiduciary duties that they owed under the Act as directors of Autonomy; 31.2. Lynch breached fiduciary duties owed as a de facto director of ZANTAZ; 31.3. Lynch breached fiduciary duties owed as a de facto or shadow director or assumed as a fiduciary of ASL and as an officer of Autonomy Inc; 31.4. Lynch further breached his contractual duties as an employee of Autonomy; 31.5. Lynch is liable to indemnify Autonomy under the Lynch Indemnity; and 31.6. Hussain breached fiduciary duties owed under the Act as a director of ASL and breached the fiduciary and contractual duties that he owed as an employee of ASL and fiduciary duties owed as a director and officer of Autonomy Inc and ZANTAZ.
When proceeding with the Autonomy Acquisition, HP and thus Bidco reasonably relied upon Autonomy's published information, which, by reason 16
of the improper transactions and false accounting perpetrated by Lynch and Hussain, and as each of them knew (or were reckless as to the same), contained untrue and/ or misleading statements and/ or dishonestly concealed material facts which were wrongly omitted from such published information. HP and thus Bidco, relying on Autonomy's published information, believed that Bidco was acquiring a rapidly growing software company that was gaining market share. In fact, Bidco acquired a company that was not growing nearly as quickly as it appeared, with its sales comprising both software and loss-making hardware, and which was losing market share. As a result, Bidco overpaid for the Autonomy Acquisition by at least £3.2 billion (equivalent to at least approximately US$5 billion)1. 33.
In addition, prior to the Autonomy Acquisition, Lynch and Hussain also made a series of misrepresentations to HP (including reaffirming the false statements in Autonomy's published information) on which (as Lynch and Hussain intended) Bidco relied. Bidco claims damages against Lynch and Hussain under section 2(1) of the Misrepresentation Act 1967 and/or in the tort of deceit for the loss incurred as a result of the inflated amount paid by Bidco to Lynch and Hussain for their own shares in Autonomy, which loss is in the aggregate sum of approximately £269 million (equivalent to approximately USS420 million).
As regards the balance of Bidco's loss, in the sum of approximately £2.93 billion (equivalent to approximately US$4.58 billion), Autonomy accepts that it is liable to Bidco for this loss under Sch 10A FSMA by reason of the facts and matters summarised in paragraph 30 above and as described in more detail below. Autonomy's liability to Bidco under Sch 10A FSMA comprises a
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.
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.
In addition, ASL, alternatively Autonomy Inc and/or ZANTAZ, have suffered losses attributable to the improper transactions that Lynch and Hussain wrongfully caused to be entered into. ASL and Autonomy Inc bring claims to recover these losses from Lynch and Hussain on grounds of their breaches of duties as directors and/or employees and/or as fiduciaries of Autonomy Inc, ASL and/or ZANTAZ as pleaded at paragraph 203 below. Particulars of such transaction-based losses appear in Schedule 12. Based on the information set out in Schedule 12, the Claimants estimate that such losses are in excess of £62.5 million (approximately US$100 million)2.
Based on an exchange rate of US$1.6 : £1.
C DUTIES OWED BY LYNCH AND HUSSAIN TO AUTONOMY, ASL, AUTONOMY INC AND ZANTAZ Fiduciary duties 37.
At all material times Lynch and Hussain, as directors of Autonomy, each owed Autonomy the following duties under the Act: 37.1. The duty under section 171 of the Act to act in accordance with the company's constitution and to exercise his powers as a director only for the purposes for which they were conferred; 37.2. The duty under section 172 of the Act to act in the way he considered in good faith would be most likely to promote the success of the company for the benefit of its members as a whole; and 37.3. The duty under section 175 of the Act not to place himself in a situation in which he had, or could have, a direct or indirect interest (or duty) that conflicted or possibly might conflict with the interests of the company.
At all material times, Hussain as a director, and Lynch as a de facto director, of ASL each owed ASL the duties set out in paragraphs 37.1 to 37.3 above. Further or in the alternative in respect of Lynch, he undertook to act for and on behalf of ASL in relation to transactions which had a financial impact on ASL pursuant to the transfer pricing and profit sharing arrangements referred to in paragraphs 9 and 13 above in circumstances which gave rise to a relationship of trust and confidence such that Lynch assumed the obligations of a fiduciary towards ASL and thereby assumed fiduciary duties equivalent to the statutory duties set out in paragraphs 37.1 to 37.3 above. In the further alternative in respect of Lynch, he acted as a shadow director of ASL within the meaning of section 251 of the Act and, in that capacity, owed ASL the duties set out in paragraphs 37.1 to 37.3 above. 19
At all material times, Lynch, as an officer, and Hussain, as a director and officer, of Autonomy Inc each owed Autonomy Inc the following fiduciary duties (as a matter of the law of New Jersey): 39.1. A duty to act with utmost fidelity in their dealings with the company; and 39.2. A duty of loyalty, i.e. to act in the best interests of the company, rather than for their own benefit.
At all material times, Lynch as a de facto director, and Hussain as a director and officer of ZANTAZ each owed ZANTAZ a fiduciary duty of loyalty (as a matter of the law of California), which required each of them to place the interests of ZANTAZ and its shareholders over any personal interest.
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
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.
Further, at all material times Lynch and Hussain, as directors of Autonomy, each owed the following statutory duties in relation to the preparation of accounts (Autonomy was required to prepare its consolidated accounts for the Autonomy group ("group accounts") in accordance with the International Financial Reporting Standards ("IFRS") and had elected to prepare its standalone accounts ("individual accounts") under IFRS): 43.1. The duty, under section 394 of the Act, to prepare individual accounts for Autonomy for each of its financial years; 43.2. The duty, under section 399 of the Act, to prepare group accounts for each of Autonomy's financial years; 43.3. The duty, under section 393 of the Act, not to approve accounts prepared for the purposes of Part 15, Chapter 4 of the Act unless satisfied that they gave a true and fair view of the assets, liabilities, financial position and profit or loss: 21
43.3.1. In the case of the individual accounts of Autonomy, of Autonomy; and 43.3.2. In the case of Autonomy's group accounts, of the undertakings included in the consolidation as a whole, so far as concerned members of Autonomy. In relation to the duty under section 393 of the Act, International Accounting Standard ("IAS") 1 required each of the directors to: 43.3.3. Properly select and apply accounting policies; 43.3.4. Present information, including accounting policies, in a manner that provided relevant reliable, comparable and understandable information; and 43.3.5. Provide additional disclosures where compliance with the specific requirements in IFRS was insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance. 43.4. The duty, under section 415 of the Act, to prepare a group directors' report for each of Autonomy's financial years relating to the undertakings included in the consolidation and including the following: 43.4.1. Pursuant to section 416 of the Act, a statement of the principal activities of the undertakings included in the consolidation in the course of the year;
43.4.2. Pursuant to section 417 of the Act, a business review containing a fair review of Autonomy's business (being a balanced and comprehensive analysis of the development and performance of Autonomy's business during the financial year and the position of its business at the end of that year) and a description of the principal risks and uncertainties facing Autonomy; and 43.4.3. Pursuant to section 418 of the Act, a statement to the effect that so far as each of them as directors of Autonomy was aware, there was no relevant audit information of which Autonomy's auditor was unaware, and that he had taken all the steps that he ought to have taken as a director in order to make himself aware of any relevant audit information and to establish that Autonomy's auditor was aware of that information.
D. FALSE ACCOUNTING AND IMPROPER TRANSACTIONS Autonomy's published information 44.
Autonomy's individual and consolidated group accounts were published in an annual report in respect of each financial year. The Annual Reports and Accounts for the years ended 31 December 2009 and 31 December 2010, which are referred to hereinafter together as "the Annual Reports", included, amongst other things, an Executive Summary containing the Chairman's and Chief Executive's Statement, a Business Overview, and a Performance section (containing a Financial Review), giving a description of the performance of the business over the financial period.
In addition, Autonomy published interim financial results and information on a quarterly basis in the form of quarterly reports which included, amongst other things, a statement of financial highlights, a description of the performance of the business over the period and a condensed set of consolidated financial statements. The quarterly reports that were published by Autonomy over the course of the Relevant Period (from Q12009 to Q2 2011) are referred to herein collectively as "the Quarterly Reports".
The Quarterly Reports in respect of Q2 2009, Q2 2010 and Q2 2011 also fulfilled the requirements in respect of half-yearly results that Autonomy, as an issuer whose shares were admitted to trading on a regulated market in the United Kingdom, was obliged to produce under Chapter 4 of the Disclosure and Transparency Rules.
In addition, transcripts of earnings calls with analysts in respect of the Quarterly Reports published after 1 October 2010 ("earnings calls") constituted information which was published by recognised means or the availability of which was announced by Autonomy by recognised means within the meaning of paragraph 2(1) of Sch 10A FSMA and hence constituted published information for the purposes of Sch 10A FSMA. 24
Over the course of the Relevant Period, the financial performance of Autonomy (which in this context means the Autonomy group) as reported in the Annual Reports and in the Quarterly Reports was falsified as a result of a combination of the following: 48.1. The inclusion in Autonomy's reported results of figures derived from transactions that were not entered into genuinely in the furtherance of, or pursuant to Autonomy's business, but rather for the improper purpose of artificially inflating or accelerating revenue; 48.2. The improper allocation of costs so as to enhance reported gross profits; 48.3. The accounting for transactions (including the said transactions entered into for the improper purpose of artificially inflating or accelerating revenue) in a manner that was not in accordance with IFRS and was designed to present artificially inflated figures for revenue, gross profits, gross margin and net profits; 48.4. The incorrect and incomplete description of Autonomy's business, and the rate of organic growth of the components of its business and of the business as a whole.
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.
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
The categories of improper transactions and methods of false accounting that were carried out by or at the behest of Lynch and Hussain, as summarised in paragraph 30 above, are described in more detail below.
The falsification of Autonomy's financial performance was orchestrated by Lynch and Hussain acting in concert during the Relevant Period as part of a campaign to create the appearance of a company whose revenues and profits were growing rapidly, were sustainable, and were consistent with market expectations. Without such false accounting, Autonomy's reported financial performance in each financial quarter during the Relevant Period would have fallen short of market expectations and Autonomy would have been shown to be losing market share and enjoying little or no actual growth in software revenues.
Loss-making hardware transactions Nature and extent of the transactions 53.
Autonomy was presented to the market as a company whose revenues were derived from the sale of its IDOL software and related services. In particular: 53.1. In the 2009 Annual Report: 53.1.1. The Business Overview section (p9) stated that the Autonomy group's business model was "the development and licensing of world-leading technology for the automated processing of all forms of unstructured information," and that its financial model was "one of the very rare examples of a pure software model"; 53.1.2. The Chairman's Statement (p2) explained that "Autonomy operates in the realm of pure software";
53.1.3. The "Revenue recognition" section within the "Significant Accounting Policies" (p41) stated that "The nature of the transactions that the group has entered into during 2009 is the same as in 2008 in all respects." In 2008 the Autonomy group had not sold any material amount of hardware that was unaccompanied by any Autonomy software. 53.2. In the 2010 Annual Report: 53.2.1. The Financial Review section (p16) explained that "Autonomy operates a rare 'pure software' model"; 53.2.2. The Chief Executive's Review (p6) stated that it was Autonomy's strategy to "retain a pure high margin software business model"; 53.2.3. The Business Overview section (pp12-13) again stated that the Autonomy group's "business is the development and licensing of world-leading technology for the automated processing of all forms of unstructured information" and explained that: "Autonomy operates a rare pure software model. Many software companies have a large percentage of revenues that stem from professional services, because they have to do a lot of customisation work on the product for every single implementation. In contrast, Autonomy ships a standard product that requires little tailoring, with the necessary implementation work carried out by approved partners such as IBM Global Services, Accenture and others."; from which the reader would reasonably infer that: (i) if the fees from any professional services were not large, fees from sales of other goods and services aside from pure software
would be even smaller; and (ii) the "standard product" shipped by Autonomy was Autonomy software. 54.
However, beginning in Q2 2009, Lynch and Hussain caused Autonomy Inc to purchase substantial amounts of computer hardware (including laptop and desktop computers and accessories, servers and server equipment, and electronic storage and associated equipment) from vendors such as Dell Inc ("Dell"), EMC Corporation ("EMC") and Hitachi Data Systems ("Hitachi").
Autonomy Inc then resold this hardware without modification and unaccompanied by any Autonomy software. 55.
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.
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.
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.
False accounting for loss-making hardware transactions 58.
As set out below, Autonomy omitted to disclose in its published information (as it was required to do) the material fact that it was engaging in significant amounts of pure hardware sales; nor did it disclose that a substantial amount of the costs of those sales was not being accounted for as COGS. As a result, Autonomy's published information contained: 58.1. Statements about its revenues that were untrue and/or misleading, because they gave the impression of "organic growth" in what was stated to be Autonomy's "pure" software business; 58.2. Statements about its costs that were untrue and/or misleading, because they gave the impression of high and steady gross margins, which were then held out in the Annual Reports to be a "key performance measure" and an "[i]ndicator of success of the company's business model".
Pure hardware sales are to be distinguished from sales of hardware on which Autonomy software had been pre-installed ("appliance sales"). Appliance sales were specifically referred to and explained in Autonomy's published information. They were described in the Business Overview section of the 29
2010 Annual Report as being a "small part of Autonomy's business" conducted at margins that were not dissimilar to those of Autonomy's software licensing business (p12). 60.
By contrast, the Annual Reports, the Quarterly Reports from Q2 2009 to Q2 2011 (inclusive) and transcripts of earnings calls omitted the material fact that Autonomy Inc was carrying out a much larger volume of pure hardware sales at margins that were very different from those of Autonomy's software licensing business. The revenues from pure hardware sales were included without disclosure or differentiation in the aggregate revenues reported in Autonomy's financial statements and elsewhere in the Annual Reports and Quarterly Reports (and in information provided during earnings calls) even though: 60.1. The undisclosed revenues derived from pure hardware sales were significantly greater than the revenues from the disclosed appliance sales; and 60.2. The economic characteristics of the pure hardware sales (namely, that they were inherently loss-making) were very different from high margin software and appliance sales.
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:
61.1. According to Autonomy Inc's general ledger, revenues from pure hardware sales amounted to approximately 7.3% of total reported revenue for the Autonomy group in 2009, 12.1% in 2010 and 8.6% in the first half of 2011. Such revenues constituted a significantly larger percentage of total reported revenues in particular individual quarters as appears from the table in Schedule 1. 61.2. Pure hardware sales were a new product offering for Autonomy in 2009 and a clear departure from its publicised "pure software model". Thus the statement pleaded at paragraph 53.1.3 above (that the nature of Autonomy's transactions was the same in 2009 as for 2008) was untrue and/or misleading. 61.3. The pure hardware sales were carried out at an overall loss, and thus at margins that were very different from those achieved by Autonomy on sales of software. 61.4. Autonomy reported high levels of what was said to be "organic growth" (increases in revenue excluding the effect of acquisitions and foreign exchange) and "organic IDOL growth" (increases in revenue excluding the effect of acquisitions, foreign exchange, services revenues and deferred revenue release). Despite characterising "organic IDOL growth" in the Financial Review section of the 2010 Annual Report (p16) as the "most meaningful organic performance metric for understanding the momentum within the business", Autonomy did not disclose that a significant part of that supposed growth was the result of selling thirdparty hardware, containing no Autonomy software (and thus not "IDOL" at all), at a loss. The level of pure hardware sales was managed on a quarter-by-quarter basis to create the desired appearance of growth.
61.5. The Quarterly Reports from Q3 2009 to Q2 2011 (inclusive) included a separate disclosure of total reported revenues broken down into the following categories: IDOL Product; IDOL OEM; Services; and Deferred Revenue Release; and (in the case of the Financial Review section of the 2010 Annual Report (pp15-16) and the Quarterly Reports from Q1 2010 onwards) IDOL Cloud. Revenue from pure hardware sales was greater than revenue from Services, one of these categories, but was not separately disclosed, thereby rendering the breakdown of revenue misleading (by omission). In addition, the revenues derived from pure hardware sales were included within one or more of the identified categories of revenue, thereby causing the revenue in those categories to be overstated (and thus untrue and/or misleading). In fact, revenues from pure hardware sales did not properly fall within any of the five identified categories. 62.
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.
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
Costs and Expenses 64.
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.
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.
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.
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.
Accounting for a significant portion of the costs of purchasing pure hardware as sales and marketing expenses rather than COGS was not in accordance with the required accounting standards and so rendered the information in the Annual Reports and Quarterly Reports from Q3 2009 to Q2 2011 untrue and/or misleading, because: 68.1. No part of the costs of purchasing pure hardware was in fact attributable to sales and marketing activities. Autonomy Inc purchased computer equipment from EMC, Hitachi and Dell, and nothing else. EMC, Hitachi and Dell had no obligation to provide marketing services for the Autonomy group's benefit. It was therefore wholly inappropriate to account for the purchase transactions as anything other than the purchase of goods. It was irrelevant to the accounting treatment for the purchase transactions whether Autonomy Inc decided to sell those goods at a profit or a loss. Those sales were separate economic events from the purchase of the hardware, and therefore could not affect the proper accounting treatment of the costs of purchase. 34
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.
Even if (which is denied) an element of the costs of the pure hardware purchases could properly have been accounted for as sales and marketing expenses, the Annual Reports were untrue and/or misleading and/or omitted material facts because they made no reference to the fact that the costs of purchasing the pure hardware were allocated between COGS and sales and marketing expenses and because the reasons given for the increases in COGS and sales and marketing expenses were incorrect.
Gross margin is an important measure of the success of a software company and was recognised as such in the Annual Reports (see, for example, paragraph 58.2 above). The improper allocation of a significant portion of the 35
costs of purchasing pure hardware to sales and marketing expenses materially increased the gross profits and gross margin stated in the Annual Reports and the Quarterly Reports from Q3 2009 to Q2 2011 and stated during earnings calls. The allocation of a portion of the costs of pure hardware to sales and marketing expenses reduced the impact of the pure hardware sales on gross margin and thereby assisted in concealing both the fact that the pure hardware sales were being made and the variation in the amount of those sales from quarter to quarter. For example: 70.1. The gross profits in the financial statements in the 2009 Annual Report included US$20,585,268 in respect of pure hardware sales. Had the full costs of purchasing hardware been accounted for as COGS (as they should have been) rather than allocating a large portion of those costs to sales and marketing expenses, a gross loss of US$15,215,329 on pure hardware transactions would have been recorded. The reported "adjusted" gross margin for 2009 of 88.1%would have been reduced to 83.3% (without correcting for the other matters of which complaint is made in these proceedings). 70.2. The gross profits in the financial statements in the 2010 Annual Report included US$23,900,424 in respect of pure hardware sales. Had the full costs of purchasing hardware been properly accounted for as COGS, a gross loss of US$7,310,594 on pure hardware sales would have been recorded and the reported "adjusted" gross margin of 87.2% would have been reduced to 83.6% (without correcting for the other matters of which complaint is made in these proceedings). 71.
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. 36
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).
Improper revenue recognition (1)
Contrived VAR Transactions
Nature of the transactions 73.
From at least Q2 2009 Lynch and Hussain caused Autonomy group companies to engage in the practice of entering into transactions with VARs that were not genuinely in the furtherance of Autonomy's business, but were, rather, for the improper purpose of providing a pretext for the inappropriate or premature recognition of revenue. Particulars of the specific transactions with VARs that the Claimants contend were entered into for this improper purpose ("the contrived VAR transactions") are set out in Schedule 3.
The transactions typically had the following characteristics: 74.1. An Autonomy group company had attempted to sell a licence to use Autonomy software to a particular end-user, but was unable to conclude such a sale before the end of the relevant quarter. 74.2. Having failed to conclude a deal with the end-user, Autonomy purported to sell a licence for the software in question to a VAR on the last day of the quarter, ostensibly for onward licensing to the particular end-user.
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
services to a VAR which would then take responsibility for concluding the transaction, makes no commercial sense. 74.3.6. It also makes no commercial sense for a VAR that had no knowledge of, or relationship with, the end-user, no knowledge of the end-user's requirements and no insight as to the likelihood of concluding a transaction, to have taken on the risk of concluding such a transaction, which, if unsuccessful, would result in a significant loss to (and in some cases the potential insolvency of) the VAR. 74.4. The fact that these arrangements were not genuine is further to be inferred from the actions of the Autonomy group company and the VAR once the "sale" between them had been ostensibly concluded: 74.4.1. The VAR did not thereafter make any effort to sell a licence for the relevant software to the end-user. Instead, the Autonomy group company continued its own efforts to achieve a sale of the licence directly with the end-user (and without consultation with the VAR). 74.4.2. In certain cases, the Autonomy group company succeeded in selling a licence to the end-user in a later accounting period; in others, no such transaction was ever concluded. 74.4.3. The VAR in question was subsequently relieved of its ostensible liability to pay the price for the Autonomy software licence that it had "purchased" by one of the following means: 18.104.22.168. The purported sale agreement between the Autonomy group company and the VAR was 39
cancelled or a credit note was issued to the VAR which discharged its ostensible liability to pay the price; or 22.214.171.124. Where the relevant Autonomy group company subsequently achieved a direct licensing transaction with the end-user, the Autonomy group company arranged for the end-user to pay the VAR so that the VAR could then pay the relevant Autonomy group company; or 126.96.36.199. An Autonomy group company was caused to make a payment to the VAR to purchase rights, goods or services that the Autonomy group company did not need (and which had no discernible value to it), but which had the purpose and effect of putting the VAR in funds which it then used to pay some or all of the purchase price for the Autonomy software licence ("reciprocal VAR transactions"). In these situations, the sum paid to the VAR for its product, right or service usually exceeded the amount owed by the VAR in respect of the failed transaction. 75.
In many instances, the VAR was paid a fee, described variously as a "marketing assistance fee", a "referral partner commission" or a "sales commission fee" (together, a "MAF"). The VAR did not in fact provide any genuine assistance to the Autonomy group company in identifying the end-user as a proposed customer for the relevant Autonomy software or provide any genuine assistance in concluding a transaction with that end-user. Instead, the MAF was a payment to the VAR to reward it for engaging in a transaction that would not otherwise have benefited the VAR, but which allowed 40
Autonomy (improperly) to recognise revenue in respect of a transaction that the Autonomy group company it was unable to complete with its actual intended end-user. The losses incurred by Autonomy group companies as a result of the said MAF payments were in the sum of approximately US$7.7 million, of which US$0.2 million was suffered by ZANTAZ, and the remainder resulted in a corresponding loss to ASL by virtue of the transfer pricing and profit sharing arrangements referred to in paragraphs 9 and 13 above. Details of such losses are particularised in Table 12C of Schedule 12. 76.
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.
Example of a contrived VAR transaction - Capax Discovery/the FSA (Schedule 3, Transaction 10) 77.
On 31 March 2010, Capax Discovery submitted a purchase order to Autonomy Inc ("the Capax Discovery/FSA purchase order"). The end-user was identified as the Financial Services Authority ("the FSA"). The amount due from Capax Discovery was US$4.5 million, consisting of US$4.3 million for a software licence and US$200,000 for one year of support and maintenance. 41
The amount was ostensibly payable by Capax Discovery in four instalments: US$450,000 by 30 April 2010, US$1.05 million by 31 March 2011 and US$1.5 million by each of 31 March 2012 and 31 March 2013. Autonomy recognised licence revenue of US$4.3 million as revenue in Q1 2010 and support and maintenance of US$200,000 on a quarterly basis over the following year. In reality, the Capax Discovery/FSA purchase order was a contrived transaction entered into for the purpose of enabling the premature recognition of revenue by Autonomy and on the basis of an agreement or understanding (as set out in paragraph 74.3 above) that Capax Discovery would not in fact be required to satisfy any liability to Autonomy Inc from its own resources and would not otherwise bear any commercial risk in relation to the arrangement: 77.1. This was the fourth occasion on which Capax Discovery, purporting to act as a VAR, had submitted a purchase order to Autonomy Inc on the last date of a quarter in relation to an end-user with which an Autonomy group company had been conducting negotiations. On each of the three prior occasions (i) Capax Discovery had not been involved in the negotiations with the end-user, (ii) revenue was recognised immediately by Autonomy in the relevant quarter, (iii) Capax Discovery did not subsequently become involved in negotiations with the end-user, (iv) Autonomy Inc subsequently entered into a direct agreement with the end-user, (v) Autonomy Inc then either caused the relevant end-user to pay Capax Discovery so that it could in turn pay Autonomy Inc or simply relieved Capax Discovery of its payment obligations, and (vi) Autonomy Inc either procured that the relevant end-user paid Capax Discovery a sum in excess of the amount to be paid to Autonomy Inc or simply paid a MAF to Capax Discovery so as to reward Capax Discovery for participating in the arrangement: 77.1.1. In Q2 and Q3 2009 Capax Discovery entered into two purchase orders with Autonomy Inc, in respect of which the end-user 42
was stated to be TXU Energy ("TXU"). The aggregate amount of the purchase orders was US$1.4 million. Capax Discovery did not pay the sums due under those purchase orders when they fell due. Autonomy Inc entered into a direct agreement with TXU Energy Retail Company LLC ("TXU Energy Retail") in a total amount of US$1.7 million. On 30 September 2009, the same day that Capax Discovery entered into the second purchase order with Autonomy Inc, Autonomy Inc directed TXU Energy Retail to pay Capax Discovery the US$1.7 million due under the direct agreement. Capax Discovery subsequently made payments totalling US$1.3 million to Autonomy Inc in relation to the two purchase orders and retained the balance of approximately US$370,000 (see Schedule 3, Transaction 2). 77.1.2. In Q3 2009, Capax Discovery entered into a purchase order in the amount of US$4.2 million with Autonomy Inc for end-user Kraft Foods Global, Inc ("Kraft"). On 22 December 2009, Autonomy Inc entered into a direct transaction with Kraft for US$4.2 million. A week later, on 29 December 2009, Autonomy Inc issued a credit note to Capax Discovery in the amount of US$4.2 million and paid Capax Discovery a "one time fee" (i.e., a MAF) of US$400,000 in respect of the Kraft transaction (see Schedule 3, Transaction 3). 77.1.3. On 31 December 2009, Capax Discovery entered into a purchase order with Autonomy Inc for end-user Eli Lilly and Company ("Eli Lilly") for US$6.3 million. Capax Discovery did not make payment when it fell due on 31 March 2010. Autonomy Inc thereafter (i) entered into a direct transaction with Eli Lilly, (ii) caused Eli Lilly to make payment to Capax 43
Discovery so that Capax Discovery could pay Autonomy, and (iii) paid Capax Discovery a MAF in the amount of US$629,000 (see Schedule 3, Transaction 4). 77.2. As relates to the intended transaction with the FSA, Hussain and others acting at his direction attempted to persuade the FSA to enter into a licence and data hosting transaction with an Autonomy group company throughout Q12010. Capax Discovery did not participate in those efforts. 77.3. It became clear in late March 2010 that a transaction with the FSA could not be completed before the end of the quarter. Late in the day on 31 March 2010, Autonomy Inc asked Capax Discovery to enter into a VAR transaction pursuant to which Capax Discovery would acquire a licence for the same software as Autonomy Inc was proposing to license to the FSA directly. There had been no prior contact between Capax Discovery and the FSA, nor had there been any prior contact between an Autonomy group company and Capax Discovery regarding the FSA. There was no price negotiation between Capax Discovery and Autonomy Inc. Instead, Autonomy Inc merely prepared a purchase order for Capax Discovery in the total sum of US .5 million, and Capax Discovery executed that purchase order as requested. Autonomy then recognised licence revenue of US$4.3 million as revenue immediately in Q12010 and recognised support and maintenance of US$200,000 on a quarterly basis over the following year. 77.4. After 31 March 2010, Hussain, and others acting at his direction, continued sales efforts directed at the FSA. Capax Discovery did not participate in those efforts and did not otherwise communicate with the FSA. 44
77.5. Capax Discovery's first payment under the Capax Discovery/FSA purchase order (in the amount of US$450,000) ostensibly became due to Autonomy Inc by 30 April 2010. Payment was not made. 77.6. On 25 August 2010, ASL entered into a direct licence and hosting agreement with the FSA in the amount of US$6.7 million. 77.7. On 7 October 2010, even though Capax Discovery was then more than five months in arrears on its payment obligation under the Capax Discovery/FSA purchase order and had had no contact with the FSA, Autonomy Inc paid Capax Discovery a MAF in the amount of US 50,000 for "Capax's contribution to the FSA transaction." Hussain approved the payment. 77.8. Capax Discovery's second payment under the Capax Discover/FSA purchase order (in the amount of US$1.05 million) was ostensibly due to Autonomy Inc by 31 March 2011. Again, payment was not made. At that date, Capax Discovery owed Autonomy Inc a total of US$1.5 million, of which US$450,000 was 11 months overdue. Nevertheless, Autonomy Inc made no request for payment. 77.9. Instead, on 29 June 2011, Autonomy Inc and Capax Discovery (and other Capax group companies including Capax Global LLC ("Capax Global")) entered into an agreement pursuant to which Capax Discovery was to provide maintenance and support services to customers of a product that Autonomy proposed to phase out called NearPoint. The contract provided that Autonomy Inc would pay Capax Discovery US$2 million (described as the "NearPoint Ramp-up Fee") within 60 days for "significant, up-front costs and expenses." "Significant, up-front costs and expenses" were not, in fact, required. 45
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.
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; 48
78.7.3. There was no written contract detailing the respective rights of the parties in relation to the construction and operation of the ATIC; 78.7.4. The price that Autonomy agreed to pay for the non-exclusive right to use the ATIC also included the advance payment of the full salaries of five MicroTech employees who were to staff the ATIC for three years after construction was completed; 78.7.5. The entire contract sum was paid in full in advance, before the ATIC was constructed and therefore months before the need for the MicroTech employees to begin their work could have arisen; 78.7.6. During the period up to the departure of Lynch and Hussain from Autonomy and thereafter, the Autonomy group made no use of the ATIC and the five MicroTech employees never performed any material services for the Autonomy group. 78.8. On 31 December 2010, the day after Autonomy agreed to pay for the three year non-exclusive licence to use the then non-existent ATIC (and the salaries of five employees), ASL paid MicroTech the entire amount of US$9.6 million in respect of that licence. Later that day, MicroTech paid Autonomy Inc US$6.3 million, of which US$4.3 million was allocated to the March 2010 purchase order (with the remainder allocated to monies due under other generally similar Autonomy/MicroTech arrangements). 78.9. During Q2 and Q3 2011, MicroTech paid a further US$4.4 million to Autonomy Inc in respect of the March 2010 purchase order. 49
78.10. The remaining balance of US$2.3 million ostensibly owed by MicroTech under the March 2010 purchase order was never paid by MicroTech. Instead, on 11 October 2011, after Bidco's offer to purchase the issued share capital of Autonomy became unconditional, Autonomy Inc decided to write off this balance. No attempt to collect this sum was made. 78.11. Despite continuing efforts by Autonomy group representatives over several years after the March 2010 purchase order, no transaction was ever concluded with the Vatican Library. False accounting for contrived VAR transactions 79. In the Annual Reports and in each of the Quarterly Reports from Q2 2009 to Q2 2011 (inclusive) revenue was misstated as a result of the inappropriate recognition of revenue by Autonomy in relation to the contrived VAR transactions. In the circumstances set out above, the recognition of revenue was contrary to the requirements of IFRS, specifically IAS 18, paragraph 14, because: 79.1. In reality, the relevant Autonomy group company did not transfer to the VAR the significant risks and rewards of ownership. Instead, it was agreed and/or understood between Autonomy and the VAR that the VAR would not be required to pay for the software licence from its own resources. In many instances, the relevant Autonomy group company extinguished the ostensible liability of the VAR by issuing a credit note in respect of the amount payable. In some instances (and when a sale was actually made by Autonomy to the end-user), the relevant Autonomy group company arranged for the end-user to pay the VAR. In other instances, the Autonomy group company made a payment to the VAR for rights, goods or services that the Autonomy 50
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.
The contrived VAR transactions rendered information in the Annual Reports and in the Quarterly Reports from Q2 2009 to Q2 2011 (inclusive) untrue and/or misleading. In particular, they caused revenue, gross profits, net profits and supposed "organic growth" to be significantly overstated. Because no material costs were associated with the sale of a licence, the profits associated from such a sale were substantially equal to the revenue recognised in respect of that sale.
The impact of the inappropriate recognition of revenue derived from the contrived VAR transactions on Autonomy's reported revenue and operating profits is set out on a quarter-by-quarter basis in the table at Schedule 4 (see also the table at Schedule 10).
Nature of the transactions 82.
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
counterparty (and which had no discernible value to the Autonomy group company). The Autonomy group's analysis of the need for, or utility to the Autonomy group of, the counterparty's product or services took place on the day before (or sometimes after) its agreement to make that purchase (even though the transactions often involved millions of dollars) and, it is to be inferred, took place for the benefit of Autonomy's auditors, Deloitte LLP ("Deloitte"). Furthermore, in many instances, the Autonomy group company did not even attempt to obtain or utilise the product or service that it had purchased for a period of months after its nominal purchase. 83.
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.
The transaction-based losses incurred by the Autonomy group companies as a result of (i) the reciprocal transactions and (ii) the reciprocal VAR transactions, either through purchasing products (including software), rights and/ or services that they did not need, or for which they paid an excessive price, were in the sum of approximately US$16 million, which resulted in a corresponding loss to ASL by virtue of the transfer pricing arrangements referred to in paragraph 9 above. Details of such losses are particularised in Table 12B of Schedule 12.
Examples of reciprocal transactions -VMS (Schedule 5, Transaction 2) 85.
On 30 June 2009, Autonomy Inc sold to Video Monitoring Services of America, Inc ("VMS Inc") software licences in respect of a range of Autonomy software for US$9 million (US$8.5 million for the software licence fee and US$500,000 for one year's support and maintenance) and Autonomy 53
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.
On 31 December 2010, Autonomy Inc entered into a second transaction with VMS ("the second VMS reciprocal transaction"). The transaction was negotiated by Egan acting at the direction of Hussain. Autonomy Inc purchased additional rights to a newsfeed from VMS LP for US$8.4 million 54
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.
On 31 December 2009, following an initial discussion between Egan and FileTek fewer than three days earlier, Autonomy Inc purchased for US$10.4 million a limited licence to use FileTek's "StorHouse" software (and related services) and sold to FileTek a software licence (and related services) for US$8.5 million ("the first FileTek reciprocal transaction"). 55
The first FileTek reciprocal transaction had the following characteristics: 88.1. Egan informed FileTek during the discussions leading up to the transaction that Autonomy Inc would purchase a licence for StorHouse if FileTek were to purchase a licence to use Autonomy software (for a lesser price). 88.2. Autonomy Inc spent US$10.4 million to purchase a limited licence to use StorHouse after a cursory and inconclusive evaluation of FileTek's website, without any direct assessment of the FileTek software and without any evaluation of the feasibility of integrating StorHouse into Autonomy's existing software. 88.3. The purchase element of the transaction was expressly approved by Lynch and Hussain. 88.4. Autonomy Inc did not even download the StorHouse software until April 2010. It was never incorporated successfully into, or integrated with, any Autonomy product, used by an Autonomy group company to provide services to a third party, or used in any way for the Autonomy group's benefit.
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 56
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.
The engineering work needed to determine the feasibility of integrating StorHouse into Autonomy's existing software did not begin until about 5 April 2010. By 13 May 2010, it had not been possible to achieve such integration or confirm that such integration was feasible. The US$11.5 million payment to FileTek was nevertheless approved by Lynch and Hussain. In fact, by 4 June 2010, Autonomy Inc's engineers had concluded that integration was unlikely ever to be achieved.
On 30 September 2010, Autonomy Inc entered into a VAR transaction with FileTek where the end-user was stated to be the United States Department of Veterans Affairs ("the USDVA") (see Schedule 3, Transaction 18). The licence fee was US$10 million, which was recognised as revenue in Q3 2010, and US$500,000 for support and maintenance, which was deferred, to be recognised over the following year. Payment in the amount of US$500,000 was made by FileTek on 30 September 2010. A payment in the amount of US$2,500,000 was made by FileTek on 31 March 2011. Payment in the remaining amount of US$7,500,000 was due by 29 June 2011. The following points should be noted in relation to the transaction: 91.1. Apart from this transaction, FileTek was not in the business of acting as a reseller of another company's software (or other products). 91.2. At the time when FileTek entered into this arrangement, the USDVA had not even issued a Request for Proposal. FileTek had not communicated with the USDVA before it entered into this VAR arrangement. FileTek did not attempt to sell a licence to, and did not 57
otherwise communicate with, the USDVA after it purported to agree to incur a US$10.5 million obligation to Autonomy Inc. 91.3. Neither FileTek nor any Autonomy group company ever sold a licence to the USDVA. 91.4. In order to channel funds to FileTek to allow it to discharge its ostensible liability to Autonomy Inc of US$10.5 million, Autonomy Inc purchased a series of licences to use StorHouse for particular purposes in Q1, Q2 and Q3 2011. The fees paid by Autonomy Inc for these licences totalled US$11,673,397, thus yielding a "profit" to FileTek of US$1,173,397. The Autonomy group did not need any of the StorHouse licences that it purchased. The rights that it obtained were not used to increase its revenues, satisfy any actual customer needs or enhance any Autonomy product or service. 92.
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.
False accounting for reciprocal transactions 93.
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.
The combined effect of recognising revenue from the licensing of Autonomy software and capitalising the costs of the counterparty's product or service was to recognise revenue and profits in the then-current quarter but to defer the recognition of the related costs, and usually to spread them over a period of years thereafter. As a result, transactions that were actually conducted at a significant loss were used to create the illusion of increased revenue, gross profits and net profits in the financial period in which the transaction occurred.
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.
Furthermore, IAS 8, paragraph 10 and IAS 18, paragraph 13 required that transactions be reported in accordance with their economic substance. In the case of transactions without economic substance, no revenue should have been recognised.
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 59
substantial net amounts to the counterparty as part of the arrangements, or committed to do so. It follows that either: 97.1. Where the goods or services received from the counterparty were of no discernible value to the Autonomy group company, and the relevant Autonomy group company paid cash to the counterparty, no revenue should have been recognised. Both the sale and the purchase transactions lacked economic substance; or 97.2. Where the goods or services were purchased at sums in excess of their fair values, the sale value recorded was in respect of a sale transaction that lacked substantial economic substance. Both the sale revenue and the purchase cost should have been reduced to reflect the difference between the purported purchase price and the fair value (if any) of the goods or services that were purchased. 98.
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.
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 60
operations is set out on a quarter-by-quarter basis in the table at Schedule 4 (see also the table at Schedule 10). (3)
Nature and extent of the arrangements 101. The Autonomy group provided data hosting services to customers that enabled those customers to preserve and access unstructured digital information in an environment that was hosted and managed by the Autonomy group. This hosting business (sometimes called "Idol Cloud") was carried on by certain Autonomy group companies, principally ZANTAZ. 102. Prior to and during the Relevant Period, Autonomy group companies that were involved in the hosting business structured new data hosting arrangements, or restructured existing hosting arrangements, so that: 102.1. A substantial upfront fee was charged, purportedly in respect of the grant of a licence. In fact, the customer's only interest in the grant of the licence (and thus the only reason for it agreeing to pay the upfront fee) was that it would in return pay a substantially reduced fee for actual hosting services. 102.2. In the case of existing hosting arrangements which were restructured, the aggregate amount that the customer was required to pay under the restructured arrangement was materially less than had been due under its then-existing arrangement. 103. The structuring, or restructuring, of these arrangements in this way was not genuinely in the furtherance of Autonomy's business, but instead was for the improper purpose of providing a pretext for accelerating the recognition of revenue and profits so that the same were recognised at the commencement, or at the time of the restructuring, of the arrangement. 61
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 62
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.
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.
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). 65
Nature and extent of the arrangements 115. Autonomy engaged in other types of arrangements that had the effect of improperly recognising or accelerating the recognition of revenue. Details of these other transactions are provided in Schedule 7. In particular:
115.1. In Q2 2011, Autonomy Inc sold a licence to use Autonomy software to Iron Mountain Information Management Inc for US$1.5 million, but recognised US$7 million in respect of that transaction. Hussain sought to justify this on the basis that the fair value of the relevant software was US$7 million. As Hussain must have appreciated, there was no justification for increasing the revenue recognised with respect to this transaction over the amount agreed upon by the parties to the transaction. The relevant software had no standard price and no established fair value. It was sold to different customers at very different prices based upon the individual customer's perception of the value of the software to that customer in the customer's particular environment.
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 66
identified in Schedule 7, the software to be customised was either never accepted by the customer, or was only accepted following further contract negotiations long after the licence revenue had already been recognised. IDOL OEM Revenue The nature of IDOL OEM Revenue 116. Beginning in Q3 2009, the Quarterly Reports included a range of "supplemental metrics" which identified, amongst other things, the amount of revenue derived by Autonomy from particular revenue streams, including "IDOL OEM", "IDOL OEM derived revenues" or "OEM derived revenues", i.e. IDOL OEM Revenue. IDOL OEM Revenue was also identified in the breakdown of revenue contained in Autonomy's 2010 Annual Report and was referred to during earnings calls. 117. IDOL OEM Revenue was consistently represented to be revenue derived from two sources: the payment to Autonomy by software companies of an upfront fee for the right to embed Autonomy's IDOL software in the other software companies' own products and the subsequent payment of royalties on licensing by the other software companies of the resulting combined product. Autonomy's published information asserted that a great many, and an ever increasing number of, other software companies had incorporated and/or were incorporating Autonomy's IDOL software as a key element of their own products. The Annual Reports (at pp9 and 12 respectively) and other published information indicated that Autonomy was being paid royalties of approximately 3% of the OEMs' revenues on products that included Autonomy's software. 118. IDOL OEM Revenue was repeatedly presented to the market as a key measure of Autonomy's current success and future prospects, because it was said to be indicative of a wide acceptance and use of Autonomy software 67
throughout the entire software industry, and a key driver of Autonomy's sustainable, recurring revenue which would grow over time as other software companies licensed their own software containing Autonomy's IDOL software: 118.1. The Q2 2010 Quarterly Report included Lynch's comments that: "The OEM business continues to be our fastest growing revenue stream, and we see a powerful networking effect underway as IDOL further penetrates the entire spectrum of enterprise software applications."; and (in a comment repeated by Lynch in the Q3 2010 Quarterly Report) that: "The continued strong growth of our IDOL OEM revenues is both a further endorsement of the unique capabilities of IDOL and reflects a growing network effect as more software companies choose to design their products with Autonomy inside." 118.2. In the Q3 2010 Quarterly Report, the "Financial Highlights" were stated to include "IDOL OEM revenue growth rate of 30% year on year". 118.3. In the Chief Executive's Review in the 2010 Annual Report (p4), Lynch stated that IDOL OEM was "highly attractive" because it "turn[ed] one-off sales into multi-year committed annuity streams". He went on to state (p7): "Last year I reported that we saw our strongest growth in the new models of the software industry such as OEM and cloud computing. During the course of 2010, we saw the balance of our business shift towards IDOL Cloud and IDOL OEM being the key drivers of our business." 118.4. In the Financial Review section in the 2010 Annual Report (p15), Hussain stated: 68
"IDOL is now embedded in most major software companies' products addressing most software vertical markets. This is a particularly important revenue stream as it generates ongoing business across the broadest product set possible, in addition to upfront development licences." 118.5. Similarly, in the Quarterly Reports for each of Q1 and Q2 2011 it was said that IDOL OEM was "a particularly important revenue stream as it generates ongoing business across the broadest product set possible". 118.6. During the earnings call on 27 July 2011, Lynch said that Autonomy's "cloud model" (the data hosting business) and IDOL OEM Revenue accounted for 62% of IDOL software sales. He also represented that the "OEM business was experiencing organic growth of 27%" in Q2 2011 demonstrating "very strong customer sign-up". Similarly, Hussain stated that IDOL OEM grew at 26% and that the growth was "all organic". The false and misleading reporting of IDOL OEM Revenue 119. A large proportion of the transactions said by Autonomy to be IDOL OEM transactions were incorrectly so described. Schedule 8 identifies transactions in excess of US$1 million (and certain others) that were incorrectly characterised as giving rise to IDOL OEM Revenue during the Relevant Period. 120. The characterisation of those transactions as IDOL OEM transactions in Autonomy's published information was untrue and/or misleading because: 120.1. The revenue was derived from the licensing of Autonomy's software to a customer that was not a software company and, accordingly, that had neither the intention nor the ability to embed Autonomy's software within its own software products; and/or
120.2. The revenue was derived from licensing Autonomy's software to a customer pursuant to an agreement that required the customer to use Autonomy software for internal purposes only, and which thus prohibited the customer from embedding IDOL software into a customer's product that was offered for sale or licence to third parties; and/ or 120.3. The revenue in question was derived from a hosting arrangement, a contrived VAR transaction, a reciprocal transaction, or the sale of pure hardware. 121. In addition, in many instances where IDOL was licensed to a third party software company, the relationship did not result in an ongoing revenue stream either because the relevant licensing agreement required only a onetime payment to Autonomy and did not require the payment of a royalty based on future sales of the licensee's product or because the licensee's purported prepayment of royalties effectively eliminated future royalty payments. In other instances, the software licensed by Autonomy was not IDOL and the associated revenue should not have been characterised as IDOL OEM Revenue. 122. While the market (and HP and Bidco in particular) understood Autonomy's IDOL OEM Revenue to be a "particularly important" and growing revenue stream, this was untrue. Examples of transactions which were treated incorrectly as IDOL OEM include: 122.1. Licence sales to Lockheed (a defence company) and Pfizer (a pharmaceutical company) for use internally for litigation purposes; 122.2. A resale to Bloomberg of EMC hardware, software, maintenance and services; 70
122.3. Hosting services provided to Bank of America, Metropolitan Life and JP Morgan Chase; and
122.4. The sale of a licence to Tottenham Hotspur Football Club in connection with the development of its website. 123. From Q3 2009 until Q2 2011 (inclusive) more than 85% of reported IDOL OEM Revenue (90% of analysed transactions) had one or more of the characteristics set out in paragraph 120 above and was thus incorrectly classified or reported as IDOL OEM Revenue. As a result, the statements about IDOL OEM Revenue in the Quarterly Reports from Q3 2009 to Q2 2011 (inclusive), in the 2010 Annual Report and during the earnings calls were untrue and/or misleading. In addition, as described in paragraph 121 above, a large proportion of the relatively few transactions that were properly classified as IDOL OEM transactions did not in fact result in the payment by the licensee of a running royalty. The statement in the 2009 Annual Report and the indication in the 2010 Annual Report that IDOL OEM generated 3% royalties were untrue and/or misleading. The assertion that Autonomy's software was being widely used in other companies' software products, or used to the degree implied by reported IDOL OEM Revenue, was also untrue and/or misleading. The extent to which revenue was incorrectly classified as IDOL OEM Revenue is set out on a quarter-by-quarter basis in the table at Schedule 9. Cumulative effect of the false accounting 124. The cumulative effect of the improper transactions and false accounting described above made it appear that: 124.1. Autonomy was growing consistently and rapidly;
124.2. A substantial portion of its revenue was recurring; 124.3. Its software and services were being adopted widely; and 124.4. Its financial performance was in line with market expectations. 125. In fact, the revenue and organic growth figures that were reported in the Annual Reports and Quarterly Reports and during earnings calls were untrue and/or misleading because they included a substantial amount of (i) revenue derived from (undisclosed) pure hardware sales made at a loss and (ii) inappropriately recognised revenue derived from contrived VAR transactions, reciprocal transactions and upfront licence fees introduced into hosting arrangements. Furthermore, future recurring revenue streams reported or implied with respect to Autonomy's hosting and IDOL OEM business were significantly overstated. Long-term hosting revenue was sacrificed in order to enable Lynch and Hussain to inflate Autonomy's current hosting revenue and current earnings. IDOL OEM Revenue was very significantly overstated. 126. The first table in Schedule 10 (headed "Improperly recognised revenues 2009 to H1 2011") sets out Autonomy's consolidated reported revenues, its improperly recognised revenues, its correctly stated revenues and correctly stated revenues excluding revenues derived from pure hardware sales throughout the Relevant Period. In 2009, reported revenue exceeded actual revenue from software and related services by 24.7%. In 2010, the difference was 38.2%. In the first half of 2011, the difference was 35.9%. 127. As a result of the practices described above, Autonomy's total reported revenues for 2010 (US$870.4 million) gave the appearance of 17.7% growth in revenue from software and related services as compared to the previous year (US$739.7 million). This was false and/or misleading because actual revenue from software and related services in 2010 was US$629.6 million compared 72
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 73
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 74
reciprocal transaction were leading to the material misstatement of revenue in Autonomy's published information. Thereafter, Lynch and Hussain sought to achieve their aim of meeting market expectations in Q2 2010 by expanding their reliance on pure hardware sales and the grant of licences in respect of hosting arrangements. Pure hardware sales increased from US$12.2 million in Q12010 to US$31.1 million, and US$32.7 million of hosting service revenue was accelerated. 131. At HP's request during due diligence leading up to the Autonomy Acquisition, Lynch and Hussain identified what they asserted were Autonomy's 40 largest transactions. Of those transactions: 131.1. Six were sales of licences to VARs in respect of which revenue was recognised where no sale was ever made to the end-user by either the VAR or Autonomy; 131.2. Nine more were transactions where the sale to a VAR was used to accelerate revenue improperly; 131.3. Seven were hosting transactions in respect of which licence revenue was improperly recognised and aggregate revenue to Autonomy actually reduced; 131.4. Three were one part of a reciprocal transaction; and 131.5. Five were transactions in respect of which revenue was improperly recognised for other reasons.
E INVOLVEMENT OF LYNCH AND HUSSAIN AND THEIR BREACHES OF DUTY 132. Lynch and Hussain knew of and deliberately instigated and managed the aforementioned improper transactions and false accounting in order to maintain the false appearance that Autonomy was a successful, rapidly growing, pure software business whose financial performance was in line with or ahead of market expectations. Involvement of Lynch and Hussain in the transactions themselves 133. The involvement of Lynch and Hussain in, and their knowledge of, the transactions complained of is apparent from the following facts and matters: 133.1. Lynch was the founder and Chief Executive Officer of Autonomy and a substantial shareholder. He was the chief decision-maker for the Autonomy group. All significant transactions and decisions took place at his direction or with his knowledge, consent and involvement. He was viewed by Deloitte in a document dated 23 January 2011 as exercising "a very unusual level of control for a FTSE 100 CEO". 133.2. As a matter of general practice, Lynch's approval was required or obtained for all purchases made by Autonomy group companies that exceeded US$30,000. 133.3. Lynch and Hussain personally led Autonomy's sales processes. They conducted regular, lengthy meetings (usually by telephone) with Autonomy's sales personnel regarding the status of sales efforts directed at individual customers. 133.4. Lynch set or approved Autonomy's revenue targets. Hussain, with Lynch, was ultimately responsible for revenue recognition for all Autonomy transactions. Hussain managed the reporting of gross 76
margin so as to cause Autonomy to give the appearance of a successful pure software company. 133.5. Hussain and Lynch sat at adjacent desks in the same room. They had a close working relationship, such that it is to be inferred that neither of them took any significant decisions affecting the business or prospects of the Autonomy group without consulting, and securing the consent or acquiescence of, the other. 134. Further, in relation to each type of improper transaction, the Claimants rely, in particular, on the additional facts and matters pleaded in paragraphs 135 to 138 below to establish the knowledge and involvement of Lynch and Hussain. 135. As regards the loss-making pure hardware sales: 135.1. In Q3 2009, Lynch approved the practice of selling pure hardware at a loss. 135.2. Hussain discussed with Lynch, and (it is to be inferred) agreed with him, the amount of pure hardware sales that would be needed to meet Autonomy's revenue targets for then-current financial periods. Thus, in an email to Lynch dated 19 April 2010, Hussain referred to "consensus $222m", meaning that the consensus in the market was that Autonomy's revenue for Q2 2010 would be US$222 million. Hussain went on to state, "To hit $215m will need JPM, BAV, $20m hardware" and "Or could go for $220m ... will need either 5m more h/w and lower cost or more s/w. The question is more of how much h/w to talce." 135.3. Hussain, with Lynch's approval, set hardware sales goals and then also pressed the executive who (as set out below) was primarily responsible for hardware sales, namely Michael Sullivan ("Sullivan"), (including in 77
emails dated 15 March 2010, 24 March 2010, 8 October 2010, 30 December 2010 and 25 March 2011) and other Autonomy employees, especially towards the end of each quarter, to reach those goals so that Autonomy could meet its revenue targets. By an email dated 25 March 2011 (headed "low margin" and which related to pure hardware sales) Hussain instructed the same executive to "aggressively pursue SHI, JPMC etc. Really need to hit $25m." 135.4. On occasion, Lynch and Hussain also discussed and (it is to be inferred) agreed to defer recognising revenue from pure hardware sales from one quarter to the next, and to reduce the level of pure hardware sales that could otherwise have been achieved (and thus to postpone or avoid recognising the associated costs of hardware) where they anticipated that they could meet market expectations with a lower level of hardware sales than had been, or could be, achieved. Thus, for example, in an email to Lynch on 28 April 2010 entitled "strategic lower margin deals", Hussain wrote, "Deferred was $15 m. New so far is $15.5m. Expect 10m more minimum. I am slowing it down ok?" 135.5. During the course of a management away-day in Q3 2009, Lynch and Hussain asked Sullivan, a senior Autonomy executive, whether he could resell US$10 million worth of pure hardware that quarter. Lynch told Sullivan that if he achieved this goal Lynch would buy him a Porsche. 135.6. In Q3 2009, Lynch and Hussain agreed that Sullivan would have principal responsibility for the pure hardware transactions and should be rewarded for generating specific amounts of recognisable revenue from the sale of pure hardware and for procuring evidence that would appear to support the allocation to sales and marketing expenses of a significant part of the costs of purchasing that hardware. On 15 78
September 2009, Hussain sent an email to Sullivan on the subject of "special compensation on the EMC deals this quarter." In that email, Hussain stated that he and Lynch had agreed that Sullivan should receive a "special $200,000 bonus for delivering $30m of recognisable revenue by September 30th", i.e. in the remaining 15 days of Q3 2009. The email went on to say that the special bonus would increase to US$300,000 if Sullivan were to achieve US$50 million of recognisable revenue. In addition, a special bonus of US$50,000 would be paid provided that Sullivan was "able to extract an email that allows us [to] allocate the associated costs appropriately in my opinion". On 11 November 2009, Hussain sought and obtained Lynch's approval for a communication to Sullivan confirming his bonus for Q3 2009 and offering further incentives for the sale of hardware in Q4 2009. 135.7. Hussain also personally participated in efforts to conclude pure hardware sales, and, with the consent and/or acquiescence of Lynch, approved significant discounts to that end. So, for example, on 31 December 2009 Hussain wrote to Morgan Stanley urging it to accept a proposal which involved selling pure hardware at a loss on the ground that "at the last moments of the [quarter] this is a key deal for us". 136. As regards the contrived VAR transactions: 136.1. Lynch and Hussain managed Autonomy's sales and, on occasion, were personally involved in attempts to conclude proposed sales to endusers of Autonomy software licences (including the proposed transaction with the Vatican Library described in paragraph 78 above) which, when unsuccessful, were followed by the contrived VAR transactions.
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 80
that Autonomy purchased from those VARs were not used to generate revenue, to reduce costs or otherwise to benefit Autonomy. In at least one case, a payment in advance to MicroTech in the amount of US$8.2 million for the development of a "US Government Federal Cloud Platform for Autonomy Solution", the relevant platform was never delivered to Autonomy, and Autonomy never demanded, or even requested, delivery (see Schedule 3, Transaction 37). 136.5.3. Credit notes were issued to Capax Discovery, MicroTech and DiscoverTech amounting to US$47.2 million so as to eliminate their obligations to Autonomy group companies in respect of prior contrived VAR transactions that had been used to create the false appearance of revenue. 136.5.4. Bad debt write offs or provisions were recorded amounting to a total of US$45.5 million, including the remaining balance of US$2.3 million owed to Autonomy by MicroTech under the MicroTech/ Vatican Library transaction, as described in paragraph 78.10 above. 137. As regards the reciprocal transactions: 137.1. Hussain managed (by setting pricing) and Lynch approved all, or substantially all, of the reciprocal transactions. 137.2. In relation to a reciprocal transaction pursuant to which Autonomy Inc had granted Introspect EDD software licences to Capax Discovery for licence fees totalling US$11.5 million (see Schedule 5, Transaction 1), Hussain subsequently sought to justify to Deloitte the payments that had been made by Autonomy to Capax Discovery which provided 81
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. 82
137.6. Hussain approved two reciprocal transactions with Vidient Systems, Inc ("Vidient"), one in Q4 2009 and one in Q3 2010 (see Schedule 5, Transaction 4). In those transactions, Autonomy Inc paid Vidient an aggregate of US$5.5 million for a licence and other rights that Autonomy did not need or use in order to induce Vidient to purchase licences from Autonomy Inc for a total of US$4.7 million, which Autonomy recognised as revenue in Q4 2009 and Q3 2010. 137.7. Following the announcement of the Autonomy Acquisition, and apart from purchases from VARs that put them in funds to pay pre-existing obligations, the improper reciprocal transactions ceased. 138. As regards the hosting arrangements: 138.1. Hussain was privy to communications and consulted about Autonomy's efforts to structure, or restructure hosting arrangements. 138.2. Hussain was aware of, and approved, the pricing for substantially all of the hosting arrangements in respect of which a licence for Digital Safe software was introduced or modified. Lynch personally negotiated such a transaction with JP Morgan Chase, and executed another with Bank of America. 138.3. Hussain, with the consent and/or acquiescence of Lynch, encouraged members of Autonomy's management to identify existing hosting arrangements that could be restructured so as to allow the introduction of, or increase in the amount of, a purported licence fee. 139. As regards the other transactions referred to in paragraph 115 above and Schedule 7: 83
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 84
misleading (alternatively Lynch and Hussain were reckless as to the same) and/or omitted matters that were required to be included in those Reports such as to involve the dishonest concealment of material facts. 141. In addition to the facts and matters pleaded at paragraphs 133 to 139 above, the Claimants rely on the fact that Hussain was a qualified chartered accountant who had acted as the Autonomy group's Chief Financial Officer since July 2001. He was well aware of, and understood, the applicable financial accounting standards. As evidenced by the exchanges with Hogenson referred to in paragraph 147 below, Lynch was similarly aware of, and understood the applicable financial accounting requirements. Further, the Claimants rely on the additional facts and matters pleaded at paragraphs 142 to 150 below. 142. As regards the false accounting for the loss-making pure hardware transactions: 142.1. Lynch and Hussain knew that Autonomy Inc was carrying out pure hardware sales at a loss and knew that Autonomy's reported revenue included the significant amounts of revenue generated by those sales. They understood that financial analysts place considerable weight on a software company's ability to demonstrate revenue growth and to meet or exceed consensus growth projections, and that there would have been a significant adverse reaction if, for example, Autonomy had disclosed in Q3 2009 that it had achieved almost 20% of its expected revenues by selling pure hardware at a substantial loss. They omitted the disclosure of pure hardware sales from the Annual Reports and the Quarterly Reports from Q2 2009 to Q2 2011 in circumstances where they must have known that this involved the dishonest concealment of material facts, not least because of Deloitte's admonitions that the
existence of the pure hardware sales should be disclosed in Autonomy's published information. 142.2. The Financial Review section of the 2009 Annual Report (p11) purported to explain the increase in Autonomy's revenue as follows: "The increase in revenues in the year is a combination of strong organic growth and the successful integration of Interwoven. These results reflect our ongoing strategy focussed on licensing of our core IDOL software and pre-configured applications." Lynch and Hussain must have known that this statement was untrue and/or misleading (by omission) because (as they knew) pure hardware sales resulted in US$53.7 million of apparent revenue growth between 2008 and 2009 and did not involve the licensing of IDOL software or pre-configured applications. 142.3. Similarly, the Financial Review section of the 2010 Annual Report (p15) ascribed Autonomy's reported revenue growth between 2009 and 2010 entirely to the deployment by customers of Autonomy software, when Lynch and Hussain knew that approximately 40% of that reported revenue growth (before consideration of acquisitions) resulted from pure hardware sales that included no Autonomy software of any kind. 142.4. In the course of the earnings call that took place on 21 April 2010 in respect of the Q12010 results, a number of questions were raised by analysts concerning an increase in Autonomy's inventory of hardware. Both Lynch and Hussain attributed that increase to forthcoming appliance sales and stressed that the software component of the resultant revenue was far higher than the hardware component. Lynch also stated:
"We have very little interest in just selling hardware, and consequently the revenue that that goes for is not related to the hardware cost. It's solely a component of that sale. So what we are not doing here is acting as a generic company that resells hardware, like a Morse or something like that. Obviously those people do that business and we have no interest in it." As Lynch knew, that statement was untrue and/or misleading. Further, or in the alternative, Lynch knew that the omission of any reference to the loss-making pure hardware transactions involved the dishonest concealment of a material fact. 142.5. Hussain misled the Audit Committee regarding the disclosure of pure hardware sales. In his memorandum to the Audit Committee relating to Autonomy's Q4 2010 financial performance, he assured the Audit Committee that Autonomy's "strategic sales" (i.e. pure hardware sales) had been "flagged in previous quarters results presentations so the market is aware of them." Similar assurances were provided by Hussain in his memoranda to the Audit Committee with respect to Q2 and Q3 2010. In fact, during the earnings call in respect of the Q12010 results referred to in paragraph 142.4 above, Lynch and Hussain had only disclosed to the "market" the fact that appliance sales in relatively small quantities were to be made in Q2 and Q3 2010 and Lynch had denied that Autonomy was acting as a reseller of pure hardware. 142.6. From Q3 2009 onwards, Hussain, with the consent and/or acquiescence of Lynch, determined the amount of the costs associated with the purchase of pure hardware that was to be accounted for as COGS and the amount that was to be allocated to sales and marketing expenses. The allocation was determined, not by reference to the applicable accounting standards pleaded above, but by reference to the gross margin that Lynch and Hussain wanted Autonomy to report in its published information. For example, in an email from Hussain to 87
Chamberlain dated 11 October 2009, Hussain told Chamberlain to "see if you can allocate $4m from cogs to opex" because "need GM [gross margin] to be at the minimum 86%." Further, Lynch and Hussain must have known the importance of maintaining a gross margin close to that reported in previous quarters and that they would have been unable to explain a significant variation in gross margin to the financial markets without disclosing Autonomy's new practice of making significant loss-making sales of pure hardware in amounts that varied from quarter to quarter. 142.7. Lynch and Hussain disregarded Deloitte's advice, provided to the Audit Committee in respect of the Q12010 review, that all of the costs of the pure hardware sales in that quarter should be treated as COGS. They similarly disregarded Deloitte's advice to the Audit Committee in respect of the 2010 year-end audit that Autonomy should not record a gross profit on hardware sales made at a loss. 142.8. Hussain misled the Audit Committee regarding hardware costs: 142.8.1. In a memorandum to the Audit Committee in respect of Q3 2009, Hussain represented that Autonomy and EMC were engaged in a "highly targeted joint marketing program" and that Autonomy had "spent US$20 million on shared marketing costs with EMC". There was no such marketing program and no such expenditure. 142.8.2. In memoranda to the Audit Committee in respect of Q2, Q3 and Q4 2010, Hussain told the Audit Committee that Autonomy had agreed with its suppliers that 50% of the costs of hardware would be used for marketing purposes. There were no such agreements. 88
142.8.3. In memoranda to the Audit Committee in respect of Q2 and Q3 2010, Hussain represented that the costs of hardware had been charged to COGS, when, in fact, a portion of hardware costs had been charged to sales and marketing expenses. 142.8.4. In memoranda to the Audit Committee in respect of Q2, Q3 and Q4 2010 and Q1 and Q2 2011, Hussain told the Audit Committee that sales of pure hardware were the cause of profit-making software sales, although there was no (or no adequate) evidence to support that assertion. He did not inform the Audit Committee that pure hardware sales were being managed in order to meet revenue targets. 142.9. Hussain, with the consent and/or acquiescence of Lynch, advanced varying purported justifications to Deloitte to support the allocation of a significant portion of the costs of purchasing pure hardware to sales and marketing expenses instead of COGS. Those purported justifications were known by Lynch and Hussain to be untrue and/or misleading. In particular: 142.9.1. In a memorandum entitled "Strategic deals memorandum" dated 14 October 2009 that Hussain provided to Deloitte, it was stated that Autonomy was in a "strategic partnership" with EMC, that EMC was providing marketing assistance to Autonomy and was "spending monies developing an appliance with Autonomy software preloaded and immediately operational on its hardware." Lynch made substantially the same representation to Deloitte in October 2009. However, as Lynch and Hussain both knew, there was no "strategic partnership" between Autonomy and EMC, no marketing assistance being 89
provided by EMC to Autonomy, and no commitment by EMC to expend money to develop an appliance comprising EMC hardware with Autonomy software. 142.9.2. In about January 2010, Hussain, with the consent or acquiescence of Lynch, informed Deloitte that Autonomy was developing a strategic relationship with Dell, with the intention that Autonomy and Dell would develop and sell a Dell/ Autonomy appliance. However, as Lynch and Hussain knew, there was no such strategic partnership between Autonomy and Dell, and no development by Dell of an appliance consisting of Dell hardware and Autonomy software. 142.9.3. In or around Q2 2010, Hussain provided Deloitte with another, different, purported rationale for the pure hardware transactions. With the consent or acquiescence of Lynch, Hussain asserted that the pure hardware transactions were loss-leaders intended to promote future profit-making software licensing to, and data hosting relationships with, strategic enduser customers. However, as Lynch and Hussain knew, lossmaking pure hardware sales were designed to inflate reported revenue. Dell identified customers for Dell hardware. It then offered Autonomy the "opportunity" to purchase that hardware at one price and resell it to Dell's customer at a lower price. These sales were not intended to, and did not, lead to subsequent profit-making software licences or data hosting relationships. Indeed, many of the purchasers of the pure hardware sold by Autonomy Inc were hardware resellers and other entities with which Autonomy did not transact any, or any substantial, amount of software or hosting business. 90
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 91
sales and marketing expenses to be untrue and/or misleading) in circumstances where Lynch and Hussain must have appreciated that there was no proper justification for those costs to be treated in that way. 142.10.6. In describing the reason for the reported increase in COGS and sales and marketing expenses that resulted from those transactions, without any reference to the material fact that the increase in COGS in 2009 and 2010 and in sales and marketing expenses in 2009 was actually due to the costs of purchasing pure hardware. 143. As regards the false accounting for contrived VAR transactions: 143.1. Lynch and Hussain each knew that the contrived VAR transactions were not genuine arm's length commercial transactions but were a pretext for the inappropriate recognition of revenue by Autonomy, and, accordingly, that the revenue and gross and net profit reported in respect of such transactions in the Annual Reports and the Quarterly Reports from Q2 2009 to Q2 2011 (inclusive) were untrue and/or misleading: 143.1.1. Lynch and Hussain knew in the case of almost all of the contrived VAR transactions that Autonomy group companies alone were to continue with the sales processes to secure deals with the end-users; 143.1.2. Lynch and Hussain could have had no confidence, at the time that revenue from the contrived VAR transactions was recognised, that the end-users would be willing to contract with the VARs; 92
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.
143.2. In the premises, it is to be inferred that Lynch and Hussain intended, at the time revenue from the contrived VAR transactions was recognised, that the VARs would not be required to meet their ostensible obligations when a transaction with an end-user was not completed or an end-user contracted directly with Autonomy.
144. Hussain misled the Audit Committee regarding a number of the contrived VAR transactions complained of:
144.1. His quarterly memoranda to the Audit Committee repeatedly stated that licences had been sold to an identified end-user when, in fact, an Autonomy group company had been unable to complete a transaction with that end-user and had, instead, sold a corresponding licence to a VAR.
144.2. In the management section of the Audit Committee Reports, he misled the Audit Committee as to the collectability of accounts receivables due from individual VARs in the absence of a transaction with an Autonomy group company that would provide funds to the VAR with which the VAR could pay the Autonomy group company. He stated in the Audit Committee Reports that collection efforts were ongoing with respect to identified VARs, when, in fact, they were not.
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 94
the management section of the Audit Committee Report in respect of Q4 2010, Hussain disclosed to the Audit Committee that Autonomy Inc had sold a licence to VMS LP for US$5 million but did not disclose, there or elsewhere, that the sale was induced by Autonomy Inc's purchase of an US$8.4 million licence from VMS LP. 147. Lynch's knowledge of the false accounting for the contrived VAR transactions and the reciprocal transactions is further to be inferred from the manner in which he directed attempts to suppress concerns raised by Hogenson in June 2010 over such matters: 147.1. As indicated above, Hogenson was the Chief Financial Officer of the Autonomy group in the Americas. The Americas accounted for approximately 70% of Autonomy group revenues. 147.2. By a series of emails to Lynch commencing on 22 June 2010, Hogenson raised concerns that Autonomy had engaged in transactions with VARs which suggested that Autonomy "may have materially misstated revenue and income within our reported financial statements", and that that there had been "barter" (i.e., reciprocal) transactions where "the economic benefit on both sides of the transaction appear to be materially overstated." The transactions referred to by Hogenson included a number of those referred to above or detailed in Schedule 3. Hogenson asked that he be given the opportunity to meet the Audit Committee "prior to the release of Autonomy's Q2 2010 financial statements to review these matters and to ensure that material misstatements, if any, are corrected prior to releasing future financial statements". 147.3. Lynch responded to Hogenson, asking him not to involve the finance team headed by Hussain, advancing an extended defence of Autonomy's practices (citing IFRS revenue criteria in detail), and 95
seeking (among other things) to suggest that Hogenson was mistaken and lacked all the relevant information. For example, in a document attached to an email to Hogenson dated 24 June 2010, expressed to be from Lynch and Kanter, it was asserted that Hogenson's concerns about the first and second FileTek reciprocal transactions were misplaced on the ground that FileTek would have been able to pay Autonomy Inc, even if Autonomy Inc had not paid for the licences it had bought from FileTek. This was untrue. In fact, FileTek's US$8.5 million purchase from Autonomy (i.e. the purchase element of the first FileTek reciprocal transaction) substantially exceeded the aggregate revenue of FileTek's entire business for the first nine months of 2009. 147.4. Hogenson was not satisfied with Lynch's responses and, on 26 June 2010, he contacted Deloitte and specifically asked that the questions he had raised be shared with Autonomy's Audit Committee. 147.5. Rather than facilitating communications between Hogenson, the Audit Committee and Deloitte or otherwise seeking to promote a thorough investigation, Lynch responded to him by email on 27 June 2010. In his email, Lynch criticised Hogenson for contacting Deloitte directly, told him that the matters that he had raised were ultimately for the directors and the Audit Committee to consider rather than him, and sought to dissuade him from pursuing the concerns that he had raised. Lynch suggested that Hogenson should concentrate on an employee payroll fraud that had been discovered in Autonomy's San Francisco office and should leave Deloitte to consider his concerns. 147.6. On 22 July 2010, Autonomy released its results for H12010 without Hogenson either having been contacted by Deloitte or told of the results of their consideration of his concerns. Thereafter, on 26 July 2010, Hogenson sent an email to the FSA, detailing his concerns and 96
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.
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.
150.4. Lynch and Hussain, in their respective capacities as Chief Executive Officer and Chief Financial Officer, presented the IDOL OEM Revenue figures and opined upon their significance in the 2010 Annual Report, in the Quarterly Reports from Q3 2009 to Q2 2011 (inclusive) and during earnings calls. 150.5. Lynch and Hussain's knowledge as to the misclassification of revenue as IDOL OEM Revenue is to be inferred from the fact that the largest transactions used to generate the reported level of IDOL OEM Revenue were not cited as examples of OEM transactions in the Annual Reports and the Quarterly Reports, or in the presentation given by Lynch and Hussain to representatives of HP on 4 March 2011 (see paragraphs 173 to 175 below), despite the fact that, in each case, numerous counterparties involved in transactions of lesser value (but more plausibly capable of being classified as OEM transactions) were prominently identified as OEM counterparties. 150.6. The same inference is to be drawn from the fact that, in response to a request on 10 August 2011 from Manish Sarin ("Sarin") of HP for a list of the Autonomy group's "top 10 OEM customers by revenue for (financial year] 2010", Kanter (after consulting with Lynch and Hussain as to his response) provided a list to HP which did not include or refer to Bank of America, JP Morgan Chase, Amgen (a biotechnology company) or Metropolitan Life (an insurance company), even though those entities were among the top 10 customers that had been included in the actual calculation of IDOL OEM Revenue that was reported in Autonomy's published information. 151. Notwithstanding that Lynch and Hussain each knew, by reason of the facts and matters set out above, that information contained in the Annual Reports and in the Quarterly Reports was untrue and/or misleading and omitted 99
matters required to be included such as to involve the dishonest concealment of material facts, each of Lynch and Hussain signed statements of responsibility as follows ("the Responsibility Statements"):
151.1. In each of the Annual Reports:
"We confirm that to the best of our knowledge: • the financial statements, prepared in accordance with International Financial Reporting Standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; and • the management report, which is incorporated into the directors' report, includes a fair review of the development and performance of the business and the position of the company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face." 151.2. In the Quarterly Reports for Q2 2009, Q2 2010 and Q2 2011:
"We confirm that to the best of our knowledge: (a) the condensed set of financial statements has been prepared in accordance with IAS 34 "Interim Financial Reporting"; (b) the interim management report includes a fair review of the information required by DTR 4.2.7 (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year)...." Breaches of duty 152. By deliberately instigating, managing and permitting the practices whereby Autonomy group companies entered into the improper transactions and false accounting, as pleaded above, by failing to report such misconduct to, and actively misleading, the boards of those companies, and by acting with the knowledge that they were inflicting on Autonomy group companies
transaction-based losses that would be substantially transferred to ASL and/or ZANTAZ, Lynch and Hussain: 152.1. Caused Autonomy group companies to act in a manner that they knew was not genuinely in the furtherance of those companies' commercial interests, but was in fact contrary to those interests; and/or 152.2. Acted for the improper purpose of artificially inflating, or otherwise giving an untrue and/or misleading impression of, Autonomy's consolidated reported revenues, revenue growth, gross profit, net profit, and gross and net margins. 153. Accordingly: 153.1. Lynch and Hussain each breached the duties that he owed to Autonomy under section 171 and/or section 172 of the Act; 153.2. Hussain breached his duties to ASL and Lynch breached the same duties to ASL as a de facto or shadow director of ASL, or breached equivalent fiduciary duties owed to ASL; 153.3. Lynch and Hussain each breached his fiduciary duties owed to Autonomy Inc; 153.4. Lynch and Hussain each breached his fiduciary duties owed to ZANTAZ; and 153.5. Lynch breached the Lynch Employment Duties and Hussain breached the Hussain Employment Duties.
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 102
concealment of material facts) by virtue of the false accounting treatment of the transactions complained of herein. 154.3. Signing the Responsibility Statements in the 2010 Annual Report and in the Quarterly Reports for Q2 2010 and Q2 2011 in the knowledge that the information contained in them about IDOL OEM Revenue and revenue growth was untrue and/or misleading. 154.4. Deliberately instigating, managing and permitting the practice of incorrectly classifying revenue as IDOL OEM Revenue in order to give the untrue and/or misleading impression that Autonomy was experiencing rapid growth of what they identified as a key metric. 154.5. Failing to inform the boards of directors of Autonomy and ASL of their wrongdoing in relation to the transactions themselves and the accounting for such transactions, and actively misleading the Autonomy Audit Committee as alleged herein. 155. Lynch and Hussain each also breached the statutory duties that he owed under sections 393, 415, 416 and 417 of the Act in relation to the preparation of Autonomy's accounts and consolidated directors' reports (and thereby also breached the duties that they each owed to Autonomy as directors of Autonomy, specifically the duties under section 171 and/or section 172 of the Act), by reason of the following: 155.1. Omitting disclosure in the Annual Reports (knowing that such omission amounted to the dishonest concealment of a material fact) of the fact that a significant proportion of Autonomy's revenue and revenue growth was being generated by improper transactions and pure hardware sales.
155.2. Deliberately instigating, managing and permitting the practice whereby a significant proportion of the costs of pure hardware sales was accounted for as sales and marketing expenses instead of COGS, in the knowledge that this rendered Autonomy's published information untrue and/or misleading. 155.3. Signing the Responsibility Statements in the Annual Reports in the knowledge that information contained in those reports was untrue and/or misleading by virtue of the accounting treatment of the transactions complained of involving improper revenue recognition and the reported figures for IDOL OEM Revenue, as aforesaid. 156. Further, by reason of their conduct as aforesaid, from no later than January 2011 when they began taking steps with a view to the sale of the shares in Autonomy (including their own shareholdings), Lynch and Hussain each breached his duty to Autonomy and ASL under section 175 of the Act to avoid a situation in which he had an interest that conflicted with his duties to Autonomy, namely his personal interest in achieving a sale of his shareholding at an inflated price.
F. THE AUTONOMY ACQUISITION 157. On 10 December 2010, Hussain sent an email to Lynch informing him about the prospects for Autonomy's key product, IDOL, in the United States (its largest market). The email stated: "Really don't know what to do mike. As I guessed revenue fell away completely yet SMS report shows massive activity. But I speak with the vp's who are far more accurate. Also stouff, Joel and mike I think keep separate sheets and unless I am v wrong don't discuss the sheets hence plane crashes and they don't know. We've covered up with [Bank of America] and hopefully [Deutsche Bank] and [US Department of the Interior] but if latter 2 don't happen it's totally bad. There are swathes of reps with nothing to do maybe chase imaginary deals. So radical action is required, really radical, we can't wait any more. Everywhere I look at us [U.S.] idol it's bad." 158. Shortly thereafter, Lynch and Hussain determined to seek a third-party purchaser for the issued share capital of Autonomy. Those third parties included HP. 159. As set out in paragraphs 21 and 24 above, each of Lynch and Hussain was a shareholder in Autonomy. In seeking to achieve a sale of Autonomy, they were also negotiating the sale of their own shares, and they each had a personal interest in ensuring that the false and inflated perception of the value of Autonomy that they had engineered through the programme of improper transactions and false accounting described above was maintained. 160. On 18 August 2011, HP and Autonomy issued a joint press release announcing the terms of a recommended transaction under which Bidco would acquire all the outstanding shares of Autonomy in exchange for £25.50 per share in cash ("the Offer"). The Offer became unconditional on 3 October 2011. 161. On 14 October 2011, Bidco announced that it had satisfied the requirements enabling it to exercise the statutory squeeze-out rights under sections 974 to 105
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.
G. NEGOTIATIONS WITH HP - MISREPRESENTATIONS BY LYNCH AND HUSSAIN 165. From the outset of the negotiations with HP that ultimately led to the Autonomy Acquisition, Lynch and Hussain made or caused to be made misrepresentations regarding the financial position, performance and prospects of Autonomy. They also vouched for, and told HP representatives that HP (and thus Bidco) could rely on Autonomy's published information and, independently, they reiterated the statements in, and did not correct the omissions from, Autonomy's published information. 166. Lynch and Hussain knew that the said representations were false (or alternatively were made recklessly). They intended that the representations made to officers, agents or employees of HP and its group would be relied upon by HP, and thus by Bidco, and would induce HP and Bidco to proceed with the Autonomy Acquisition at an inflated price. 167. It is to be inferred from the facts and matters pleaded at paragraph 133 above that any representation made by either of Hussain or Lynch in relation to the Autonomy Acquisition was made with the knowledge, consent and approval of the other, and thus on behalf of them both. The January Slides 168. On 26 January 2011, Frank Quattrone ("Quattrone"), an investment banker at Qatalyst Partners ("Qatalyst"), sent a set of PowerPoint presentation slides ("the January Slides") to Raymond Lane, the then non-executive Chairman of HP. The January Slides purported to describe Autonomy's business. It is to be inferred, given the purpose for which the January Slides were prepared, namely to seek to persuade HP (and thus Bidco) to acquire Autonomy, and the fact that the January Slides were stated to be based on "information provided by or on behalf of [Autonomy]", that Lynch and Hussain were directly responsible for preparing and/ or approving the slides and/ or for providing, 107
or consenting to their content, such that the representations contained in the January Slides were made or caused to be made by each of them. 169. The "Autonomy Overview" section of the January Slides contained the following representations, derived from Autonomy's published information, which were false: 169.1. The Autonomy group's revenue for the year ended 31 December 2009 was stated to be US$740 million, whereas it was no more than US$646.7 million (an overstatement of 14.4%). Excluding the revenue derived from the undisclosed loss-making pure hardware sales of US$53.7 million, the 2009 revenue was no more than US$593.0 million, an overstatement of 24.7% of true software and related services revenue. 169.2. The Autonomy group's gross margin for 2009 was represented to be "over 90%" . In fact, it was no more than 83.3% (correcting only for the treatment of hardware costs and without adjusting for the other matters of which complaint is made in these proceedings). 169.3. The slide headed "IDOL Software Business Model" represented that IDOL OEM Revenue growth was "35% year-on-year", which, for the reasons set out in paragraphs 116 to 123 above, was false. IDOL OEM Revenue actually declined by approximately 35% between 2009 and 2010. 169.4. The slide headed "Key Financial Metrics" contained a pie chart showing the Autonomy group's revenue mix, listing its revenue categories as: IDOL Product, IDOL Cloud, OEM Ongoing, OEM Dev, Deferred Revenue and Services. This was false because:
169.4.1. The stated categories made up 100% of the "pie", whereas, in fact, the Autonomy group received substantial revenues from loss-making pure hardware transactions (which revenues exceeded the revenues attributed to at least one of the disclosed revenue categories). The implied representation that the identified revenue categories were the only material categories of revenue was false and/or misleading. 169.4.2. Loss-making pure hardware revenues were included within one or more of these categories, whereas those revenues did not properly fall within any of the categories. As a result, the revenue figures for one or more of the disclosed categories were overstated, and thus false. 169.4.3. The "OEM Ongoing" and "OEM Dev" revenue figures (i.e. IDOL OEM Revenue) were grossly overstated (and thus false) for the reasons set out in paragraphs 116 to 123 above. 169.4.4. The figures for IDOL Cloud revenues were false and/or misleading because they had been artificially inflated by converting service revenues into licence revenue as pleaded above. The 3 February 2011 video-conference 170. On 3 February 2011, Lynch and Quattrone participated in a video-conference with Andrew Johnson ("Johnson"), Shane Robison ("Robison") and Brian Humphries ("Humphries"), all of HP. The video-conference took place two days after Autonomy had announced its results for Q4 2010 and the 2010 financial year.
171. A presentation was given, primarily by Lynch, based upon certain PowerPoint slides ("the February Slides"). The February Slides were similar to the January Slides, but updated to take account of Autonomy's published 2010 results. The February Slides were subsequently sent by Quattrone to Robison, who forwarded them to Leo Apotheker ("Apotheker") (then Chief Executive Officer) and Cathie Lesjak (HP's Chief Financial Officer). 172. The February Slides contained the following representations, which were false: 172.1. The slide headed "Autonomy Overview" repeated the misrepresentations in the January Slides relating to Autonomy's 2009 revenue and falsely represented Autonomy's revenues for 2010 as US$870 million, whereas the true revenue figure for 2010 was no more than US$729.1 million (at least a 19.3% overstatement of the true revenue figure) and was no more than US$629.6 million if undisclosed pure hardware sales were excluded (with the result that reported revenues for 2010 overstated actual software and related services revenue by at least 38.2%). 172.2. This slide also falsely represented that Autonomy's gross margins were 88% for 2009 and 87% for 2010, whereas the true figures were 83.3% and 83.6%, respectively (correcting only for the treatment of hardware costs). 172.3. The slide headed "Key Financial Metrics" contained a bar chart headed "Historical Revenues". This bar chart contained the same false figures for Autonomy's 2009 and 2010 revenues. A graph on the same slide headed "Historical Margins" repeated the false figures for gross margin for 2009 and 2010.
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. 111
172.7. Taken as a whole, the February Slides (and Lynch's presentation) represented to the reasonable reader and listener (and to HP/ Bidco) that the Autonomy group's software business was outperforming its competitors' products in the market and thus increasing its market share, that Autonomy had rapidly growing revenue, high gross and net profits, a high level of recurring revenue, and the prospect of continued rapid growth in revenue and profits. These representations were false by reason of the absence of any reference to the fact or extent of the loss-making pure hardware transactions or to the contrived VAR transactions, the reciprocal transactions, and the hosting arrangements and other transactions that are described above or their effect on reported revenue, apparent recurring revenue, and gross profits and net profits. The 4 March 2011 meeting 173. On 4 March 2011, a meeting took place at HP's Palo Alto office attended by, amongst others, Quattrone and Hussain for Autonomy and, for HP, Humphries, Johnson, Robison, Marge Breya ("Breya") and Jerome Levadoux ("Levadoux"). Lynch and Kanter participated via video-conference. 174. Lynch and Hussain gave a "Corporate Overview" presentation, attributed to "Dr Mike Lynch, CEO", which was based on, and included, a series of PowerPoint slides ("the March Slides"). In the days leading up to the meeting, Lynch and Hussain were personally involved in the preparation of these slides. The March Slides reflected data and commentary contained in Autonomy's earnings release for Q4 2010 and the 12 months ended 31 December 2010 and in the 2010 Annual Report (issued on 24 February 2011). Following the meeting, Quattrone emailed the March Slides to HP's Johnson, who forwarded them to numerous HP employees, including Apotheker.
175. The March Slides contained a number of representations by Lynch and Hussain which, for the reasons explained above, were false. In particular: 175.1. A table headed "Financial Highlights" and the slide headed "Financial Overview" repeated the misrepresentations pleaded at paragraphs 169.1 and 172.1 above about the Autonomy group's revenues. 175.2. The slide headed "Pure Software Model" represented that Autonomy had a "gross margin >90%" and "35% year-on-year [IDOL OEM] growth". For the reasons given in paragraph 172 above, these representations were false. 175.3. The slide headed "How do Customers Buy Idol?" contained a number of further misrepresentations: 175.3.1. IDOL OEM Revenue was falsely represented to constitute 15% of Autonomy's reported revenue in 2010, whereas in fact IDOL OEM Revenue comprised no more than 3.2% of the actual (as opposed to the higher reported) revenues in 2010. 175.3.2. IDOL OEM Revenue was falsely represented to have grown 3035% from 2009 to 2010, whereas in fact it had declined by approximately 35%. 175.3.3. The IDOL OEM "model" was falsely represented to involve the payment of annual royalties of approximately 4%, because few, if any, of Autonomy's OEM agreements generated, or could reasonably be expected to generate payment of royalties of approximately 4% per annum. Indeed, many provided for no ongoing royalty payment at all.
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' 114
sales of software that embedded IDOL and could be expected to recur in the future.
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.
175.7.2. The revenue represented for each product category, including IDOL OEM Revenue, was false for each of 2010 and Q4 2009 and Q4 2010 by reason of the false accounting alleged above.
175.7.3. By including revenue from the loss-making pure hardware sales in other revenue categories, the slide contained the same false representations as pleaded at paragraphs 169.4.1 and 169.4.2 above.
175.7.4. The slide represented that Autonomy had the "Advantage of growth in annuity streams" which was false because IDOL OEM Revenue was declining and IDOL Cloud revenues had been
artificially enhanced by the licensing arrangements described above, thereby making current revenue unrepresentative of future recurring revenue and current growth unrepresentative of future growth prospects. The Valuation Model 176. During June, July and August 2011, a team led by Sarin developed and incrementally refined a detailed acquisition valuation model for HP and Bidco ("the Valuation Model"). The Valuation Model, in very broad summary: 176.1. Collated Autonomy's published information for the period between 2008 and Q2 2011, as well as the revenue projections for the remainder of 2011 and for 2012 offered by market analysts. 176.2. Used the historical financial information and analysts' mean revenue projections (and in the case of maintenance revenues, formulae for the derivation of maintenance revenue from historical maintenance revenue and current licence revenue) to derive projections for revenue and gross profits for the remainder of 2011 and for 2012. 176.3. Applied growth estimates for 2013 to 2021 that were conservative (they were materially lower than the historical growth rates stated in Autonomy's published information) and that were based on Autonomy's published information (which had been vouched for and restated to HP by Lynch and Hussain), in order to project revenue and gross profits for those years. 176.4. Calculated a discounted cash flow net present value for Autonomy's business on a standalone basis, and separately valued synergistic benefits which might be achieved after the Autonomy Acquisition.
176.5. The model was critically reliant on information contained in Autonomy's published information. It relied on that published information: 176.5.1. To establish baseline revenues (when, in fact, Autonomy's reported revenues were significantly inflated); and 176.5.2. To project growth rates (when, in fact, Autonomy's historical growth rates were significantly inflated). The 29 Tune 2011 meeting 177. On 29 June 2011, Robison, Breya, Levadoux, Patrick Harr and Sarin of HP, met Lynch, Hussain, Kanter and Peter Menell ("Menell"), the Chief Technology Officer, of Autonomy at the Cavendish Hotel in London. The purpose of the meeting was to provide HP with a better understanding of Autonomy's business, long-term growth prospects and market trends. The format was question-and-answer, with Lynch personally answering most of HP's questions. 178. During the meeting, Lynch (or Hussain, with the acquiescence of Lynch) made the following false representations on behalf of them both: 178.1. Autonomy was a "pure software" company, a statement which was false for the reasons pleaded above. 178.2. Autonomy's software was prevalent in the software industry because many OEMs used elements of Autonomy's software, whereas in fact use of Autonomy's software by other software companies and Autonomy's actual IDOL OEM Revenue were much less than had been reported in Autonomy's published information, as pleaded in paragraphs 116 to 123 above. 117
178.3. Autonomy's OEM business was growing and generating royalties of 4% of OEM sales, whereas Autonomy's OEM business was actually shrinking, and few, if any, OEM sales generated or could reasonably be expected to generate a royalty of 4%. The 29 July 2011 meeting 179. On 29 July 2011, there was a second meeting in London, at the Berkeley Hotel, attended by Robison, Sarin, Breya and Levadoux, amongst others, for HP, and by Lynch, Hussain, Kanter and Menell for Autonomy. 180. In advance of the meeting, HP had circulated a list of due diligence questions regarding Autonomy's business and finances ("the Due Diligence Questions"). These included questions asking Autonomy to describe its OEM strategy, including the terms of typical OEM agreements and the identity of the top 20 OEM partners by revenue. HP also made enquiries with respect to revenue recognition policies by product. 181. At the meeting on 29 July 2011, the Due Diligence Questions were considered one by one. The HP representatives were told whether Autonomy would answer particular questions orally or provide responsive documents that would be lodged in an electronic data room ("the Data Room"). 182. The oral responses given at the meeting on 29 July 2011 by Hussain and in Lynch's presence were based on written responses prepared by Hussain in advance of the meeting. Hussain said that, in assessing Autonomy, HP should rely upon Autonomy's published information and analysts' reports (which were, in turn, based on that published information). This constituted an implied representation by Lynch and Hussain that Autonomy's published information was accurate and not misleading. In fact, as set out in Section D and in paragraphs 168 to 175 above, the published information contained 118
numerous untrue and/ or misleading statements and material omissions of matters required to be included in such published information. 183. As discussed at the 29 July 2011 meeting, Hussain, with the assistance of Kanter, subsequently prepared a table responsive to one of the Due Diligence Questions concerning sales pipeline by revenue type (i.e. Licence, Cloud, OEM, Maintenance and Service) and product category. This table, the source of which was stated to be "Autonomy quarterly earnings releases", was uploaded to the Data Room and thus it was impliedly represented that the information in the table was accurate and not misleading. In fact, the table: 183.1. Showed revenue by product category but omitted the material fact that significant revenues had been derived from pure hardware sales (thus rendering the breakdown by category false); and 183.2. Contained various revenue figures (including for IDOL OEM and IDOL Cloud) which were false for the reasons set out above. 184. During the 29 July 2011 meeting Sarin asked for Autonomy's three year financial projections. Hussain said that Autonomy did not have three year financial projections, but agreed instead to take part in a "walk through" of relevant parts of the Valuation Model in order to consider and comment on the reasonableness of HP's assumptions and projections. A call was arranged to take place on 4 August 2011 for that purpose. The 1 August 2011 due diligence call 185. On 27 July 2011, Quattrone forwarded to HP's Robison Autonomy's interim results for the 6 months ended 30 June 2011 (the Q2 2011 Quarterly Report), which had been released that day. In an email exchange with Qatalyst on 31 July 2011, Hussain told Qatalyst that Sarin wanted Hussain "to give an overview of the financials" and that Hussain had told Sarin that he "should point 119
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. 120
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
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. 122
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).
The 4 August 2011 due diligence call 190. On 4 August 2011, a call took place between Hussain and certain representatives of HP, including Johnson and Sarin, for the purposes of considering the financial projections contained in the Valuation Model. During the call, Hussain confirmed the reasonableness of the assumptions and projections used to derive the forecast revenues and gross profits in the Valuation Model (as it then was) and in addition made the following misrepresentations: 190.1. As to the projection contained in the Valuation Model for total revenue for 2011 (US$1.0634 billion), Hussain noted that the analysts' consensus number was approximately US$1.05 billion, but that he thought that the UBS projection (US$1.06 billion) was more accurate. 190.2. For 2012, Hussain said that the consensus forecast of US$1.25 billion was reasonable. The projection in the Valuation Model was U$1.259 billion. 190.3. Hussain confirmed that the projections in the Valuation Model for growth in Licence, Cloud and OEM revenue were "reasonable" and that the gross margins used in the model were correct. 190.4. In fact, Autonomy's published information, from which both the analysts' projections and HP's projections in the Valuation Model were derived, was untrue and/ or misleading and/or contained material omissions. As a result, both the baseline revenue and growth projections used in the Valuation Model were too high and were, and were known by Hussain to be, not reasonable. 190.5. Hussain again told HP that it could rely on Autonomy's publicly available financial information, thereby falsely representing that the 124
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
not aware of any facts or circumstances that would make such information inaccurate or misleading." The opinion concluded: "Based upon and subject to the foregoing, we are of the opinion as of the date hereof that, from a financial point of view, the Consideration to be paid by [HP] in the Proposed Transaction is fair to [HP]." 195.2. Perella Weinberg made a fairness presentation to the Board of Directors of HP and provided a written fairness opinion dated 18 August 2011. The fairness opinion stated that Perella Weinberg had relied upon the accuracy of the information provided to it, including:
"certain publicly available financial statements and other business and financial information with respect to [Autonomy] and [HP], including research analysts reports." The opinion concluded:
"Based upon and subject to the foregoing, including the various assumptions and limitations set forth herein, we are of the opinion that, on the date hereof, the Consideration to be paid by [HP] in the Offer is fair, from a financial point of view, to [HP]." 196. Furthermore, the key components of the Valuation Model used for the purposes of determining the price that Bidco would pay for the Autonomy Acquisition were baseline revenues and profits in 2011 and projected revenue, revenue growth and gross margins. The baseline revenues and the projected revenue, growth rates and gross margins were based upon the revenues, gross margins and historical growth rates as stated in Autonomy's published information. Hussain had confirmed the reasonableness of the baseline revenue and profit, growth rates and gross margins during the 4 August 2011 call concerning the Valuation Model.
H. AUTONOMY'S, AUTONOMY INC'S AND ASL'S CLAIMS AGAINST LYNCH AND HUSSAIN Liability of Autonomy to Bidco under Sch 10A FSMA 197. Autonomy's published information contained untrue and/or misleading statements and omitted matters required to be included in it, due to the false accounting, untrue and/ or misleading statements and non-disclosures described in Section D above. Bidco's reliance on Autonomy's published information, including the Annual Reports and the Quarterly Reports, in determining the amount of the Offer, was reasonable. 198. As set out in paragraph 25 above, each of Lynch and Hussain was at all material times a person discharging managerial responsibilities at Autonomy for the purposes of Sch 10A FSMA. Each was aware that the untrue and/or misleading statements in Autonomy's published information, were untrue and/or misleading, or, alternatively, each was reckless as to their truth and accuracy. As regards the omission from that published information of matters required to be included in it, each of Lynch and Hussain knew those omissions to be a dishonest concealment of material facts. 199. As a consequence, Bidco suffered loss in respect of its acquisition of the Autonomy shares ("the Loss"), being the difference between the price that Bidco actually paid for Autonomy (i.e. approximately US$11.1 billion) and the lower price that Bidco would have paid in order to acquire Autonomy, had it known the true position (this being a price which the selling shareholders in Autonomy would certainly have accepted or which they would have been likely to accept had they, too, known the true position). The quantification of the Loss will be a matter for expert evidence in due course, but it is estimated to be at least £3.2 billion (equivalent to approximately US$5 billion). 200. Bidco has asserted a claim against Autonomy in respect of that part of the Loss which relates to the acquisition of shares in Autonomy other than those 128
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
companies and ZANTAZ has suffered by reason of the transactions and payments procured by Lynch and Hussain in breach of their duties (as pleaded at paragraphs 38, 39, 40 and 42 above) to those companies. Autonomy Inc seeks compensation both for itself and in its capacity as assignee of ZANTAZ's claims. Based on the information set out in Schedule 12, the Claimants estimate such losses to exceed £62.5 million (approximately US$100 million). 204. Insofar as such compensation may reduce the FSMA Loss, appropriate credit will be given.
BIDCO'S CLAIMS AGAINST LYNCH AND HUSSAIN
Bidco's claims against Lynch and Hussain 205. By their fraudulent misrepresentations as pleaded above (which representations were material), Lynch and Hussain induced HP, and thus Bidco, to proceed with the Autonomy Acquisition at the price contained in the Offer. 206. Further, by accepting the Offer, each of Lynch and Hussain contracted with Bidco for the sale of their respective Autonomy shares in circumstances where Lynch and Hussain did not believe and/or had no reasonable grounds to believe up to the time of such contract that their representations as pleaded above were true. 207. In the circumstances, each of Lynch and Hussain is liable to pay damages to Bidco under section 2(1) of the Misrepresentation Act 1967 and/or in the tort of deceit in the respective amounts of the Loss that are attributable to the shares that they each sold to Bidco, in aggregate amounting to approximately £269 million (equivalent to approximately USS420 million).
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.
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
Cif( 'Cate lel
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
r.nctoLl aunSd avid (-019orck4e. 5(C-"Ct-ajj
Served this;day of April 2015 by Travers Smith LLP, 10 Snow Hill, London EC1A 2AL, solicitors for the Claimants.