HP accused of ignoring evidence on ‘vastly overvalued’ acquisition while Autonomy founder denies financial impropriety

Hewlett-Packard tried to pull out of its $11bn (£7bn) takeover of British software firm Autonomy before the deal closed, according to claims in a $1bn shareholder lawsuit brought against the US computer maker.

HP’s chief executive Meg Whitman, her predecessor Léo Apotheker, the company’s former chairman Ray Lane and Autonomy founder Mike Lynch are among eight defendants named in the class action suit, filed at California’s San Francisco district court, which accuses those who oversaw the botched deal of conducting “cursory due diligence on a polluted and vastly overvalued asset”.

Whitman and Lane – who resigned as chairman in April after a shareholder revolt – are accused of ignoring damaging evidence from whistleblowers and hiding their full concerns about the Autonomy deal. They allegedly employed “devices, schemes and artifices to defraud” shareholders into buying the stock, before eventually admitting HP had overpaid in November 2012.

The revelation of an $8.8bn writedown of HP’s book value, related to the Autonomy purchase, which came over a year after the acquisition was completed, wiped more than $3bn from the US company’s market value in a single day. In a devastating overview, 101 pages of court documents seen by the Guardian tell the story of an HP board of directors too tired from infighting to effectively oversee the acquisition of Autonomy.

The claim is that Apotheker was egged on by “self-interested auditors, Wall Street bankers and other investment advisers who facilitated HP’s severely reckless pursuit of Autonomy in exchange for nearly $100m in fees”. The lawsuit claims that Lynch, having exaggerated his company’s performance to investors, was “hoping to cash out of Autonomy before it collapsed under the weight of its own fraud”.

Lynch strongly rejects any financial impropriety, and says Autonomy received unqualified audit reports during his leadership.

“Unbeknownst to investors,” court filings claim, “HP was actively seeking to withdraw its offer to purchase Autonomy” before the 3 October 2011 deadline. By this time Whitman, who had been a member of the board that approved the purchase, had replaced Apotheker as chief executive. The suit claims she was aware of Autonomy’s supposedly questionable practices from analyst and press reports.

Lane is alleged to have asked HP’s financial advisers, Barclays and Perella Weinberg, to check whether his company could back out of the deal. Because the board had been aware of accusations that Autonomy’s management were exaggerating their company’s performance before the offer was made, the UK Takeover Panel would reject any plea by HP to walk away, Lane was reportedly told. This part of the suit is based on a report in the Wall Street Journal.

“Rather than engage in embarrassing failed foreign litigation with Autonomy,” the filings say, Lane, Whitman and HP’s finance director “resolved to try to quietly clean up the HP/Autonomy debacle internally.”

They were only forced into a full disclosure in May 2012, when a senior Autonomy executive blew the whistle on serious accounting improprieties with HP’s top lawyer John Schultz, the claim alleges. Whitman responded by asking accountants PricewaterhouseCoopers to investigate, but these developments were “concealed” from investors until November.

The claimants identify four whistleblowers, three of whom came forward before the deal was completed. They are UK financial analyst Paul Morland, who wrote to HP’s investor relations department in September 2011 to “tell them they were making a big mistake”; a former Autonomy finance executive who told the British company’s auditor Deloitte of “improper accounting”; and the author of a widely circulated email which questioned Autonomy’s claims about the popularity of its flagship software.

Despite these red flags, HP’s due diligence checks on Autonomy lasted just three weeks. The British company “refused” to hand over copies of financial documents supporting its audits, limiting HP’s review to only publicly reported financial statements and about 25 sales contracts, the filings claim.

The case is brought on behalf of all investors who bought HP shares between 19 August 2011 – the day after the takeover was announced – and 20 November 2012, when HP came clean about the full extent of its concerns.

The suit, filed on Friday, is led by the Dutch pension fund PGGM Vermogensbeheer, which last year was part of a group of investors that sued Bank of America for $2.4bn over its purchase of Merrill Lynch, and believes it lost $35m on its HP investments. A hearing may follow later this year and depending on how many other shareholders join the action, it is understood damages could exceed $1bn.

“As we have continually said, HP relied on the audited financial statements and the representations of Autonomy’s management and its auditors regarding Autonomy’s business and revenue,” HP said in a statement.

“Those facts and figures appear to have been willfully manipulated by certain Autonomy employees prior to the company’s acquisition, to mislead investors and potential buyers.”