Claimants "substantially succeed" in the largest ever English civil fraud trial

The High Court has published a summary of its findings on liability in the long-running USD$5 billion civil fraud action brought by the Hewlett Packard group in connection with its acquisition of the UK software company Autonomy Corporation Limited (“Autonomy”) in 2012.  The claimants have "substantially succeeded" in their claims against two former Autonomy executives: ACL Netherlands BV, Hewlett Packard The Hague BV and others v Lynch and Shushovan [HC-2015-001324].

Mr Justice Hildyard in the Chancery Division outlined his findings in a detailed Summary of Conclusions, in advance of his full judgment which is currently embargoed. The successful claims were brought under the Financial Services and Markets Act 2000 (FSMA), common law misrepresentation and deceit, and the Misrepresentation Act 1967, as well as claims for breach of the defendants' management duties.

The findings are limited to the issue of liability, with a separate judgment on the quantum of damages to be delivered at a later date. However, the judge did indicate that he anticipated that "although substantial, it will be considerably less than claimed".

The court observed that the litigation had been "an exceptionally onerous case" for everyone involved. The "unusually complex" trial lasted 93 days, including cross-examination of the first defendant, Dr Lynch, for 20 days (Mr Hussain did not attend as he is incarcerated in the US). There was a database of "many millions" of documents, reduced to a trial bundle of more than 28,000 documents. In addition, there were hundreds of pages of hearsay evidence, largely comprised of transcripts from previous civil and criminal proceedings in the US. The full judgment (on liability alone) is expected to run to at least 1500 pages.

The claims

The proceedings relate to the acquisition, for approximately USD$11.1 billion in cash, of the entire issued share capital of Autonomy by a special purpose vehicle ("Bidco") established for that purpose by Hewlett-Packard Company ("HP").

Dr Lynch was a former director of Autonomy and was throughout the relevant period "the driving force and leading figure within Autonomy".  Mr Hussain was a former Chief Financial Officer and director of Autonomy.

The essential complaint in respect of the acquisition was that HP was induced into entering the transaction by dishonest statements and omissions in Autonomy’s published information, and other representations made personally by the two defendants. Specifically, those claims centred on:

(a)   the allegedly dishonest description of Autonomy as being a “pure software company” when in fact it undertook and had become accustomed to inflating what appeared to be the revenues of its software business by undertaking substantial hardware sales; and

(b)   the allegedly dishonest presentation of its financial performance, which disguised improper practices including artificially inflating and accelerating revenues; understating costs of goods sold by mischaracterising such costs so as to protect gross margins; misrepresenting the nature and quality of revenues; and overstating profits.

The claimants contended that this resulted in Autonomy being in fact a considerably less valuable enterprise than it appeared on the basis of its published information.

The fraud claims in respect of the acquisition were brought (by different entities within the HP group) under the following legal heads:

• FSMA claim

By far the largest of the claims was a claim under Schedule 10A of FSMA  – in essence alleging liability on the part of the issuer (Autonomy) in respect of statements or omissions in its published information on which the investor relied in making an investment decision. The alleged basis for the issuer’s liability was that at least one of the defendants, as “persons discharging managerial responsibilities within the issuer” (“PDMRs”), knew those statements or omissions to be untrue or misleading, or to amount to the dishonest concealment of material facts. The defendants did not dispute that they were PDMRs for the purposes of Schedule 10A.

The FSMA claim was brought under what Hildyard J described as a “dog leg" structure. An action under Schedule 10A against the issuer (Autonomy) would not assist HP in this case given that it now owns Autonomy. Therefore:

1. 1. HP/Bidco notified its claim to Autonomy;
   2. Controlled by HP, Autonomy admitted liability to Bidco; and
   3. Autonomy (through its successor) then brought the present proceedings against the two defendants, as PDMRs, to meet that liability.

The amount of liability accepted by Autonomy to Bidco was USD $4.55 billion, which was therefore the principal sum claimed against the defendants under the FSMA claim.

No objection in principle was made by the defendants to the "dog-leg" nature of the claim, although every part of its substance was contested. The defendants’ case was that Autonomy had no liability to Bidco and should not have submitted to its claims.

The FSMA claim therefore required the claimant to satisfy two limbs in respect of each alleged wrongdoing:  first, that Autonomy was liable (as issuer) to Bidco, and second, that the defendants were liable to Autonomy as PDMRs.

• Deceit / fraudulent misrepresentation / s2(1) Misrepresentation Act 1967

These claims were based on the personal liability of the defendants (rather than the issuer) for the portion of the loss attributable to the shares that the defendants themselves each held and sold in the transaction (pleaded at USD$420 million). The representations relied upon included reaffirmations of the relevant statements within the published information.  Any sum recovered under this head of claim will be in the alternative to the FSMA claim, to avoid double recovery.

In addition, the action included claims concerning the defendants’ management conduct. Approximately $76.1 million was claimed for direct losses suffered by HP entitles in loss-making transactions which they claim the defendants caused them to enter into, in breach of the defendants' fiduciary duties or employment contracts (the "breach of duty claims").

Findings

In the claims regarding the acquisition, the factual allegations related to six areas within Autonomy’s business and accounting.  On all but one of those six areas, Hildyard J concluded that the claimants had made out (to the extent that they were alleged in respect of that area) (i) both limbs of the FSMA claim and (ii) the common law / Misrepresentation Act claims.

On the breach of duty claims for transactional losses, the claimants were successful in respect of a portion of the impugned transactions.

Hildyard J noted, as a point of general interest, that no defence of contributory negligence is available as a defence to the FSMA or direct fraud claims. He confirmed that he had made no finding to the effect that HP’s due diligence was deficient but that, even if he had found that HP might have been expected to unearth and probe further into the relevant matters, that would not be a defence (unless he found that HP was in fact aware of the matters before the acquisition, which would defeat the necessary element of reliance, but that was not the case).

Quantum

The trial included full argument on quantum, including "dense and voluminous" evidence. However, Hildyard J considered it inappropriate to delay his judgment on liability while he proceeded to consider quantum, which he will now do.

He did however record in the Summary of Conclusions that he had provisionally determined that, even if adjusted to take account of the established fraud, HP would still have considered Autonomy a suitable acquisition.  He noted that "I would expect the quantum to be substantially less than is claimed".

It therefore seems likely that quantum will be assessed by reference to what HP would have paid for the business if it had known the true position, rather than on a "failed transaction" basis (looking at what position it would be in if it had not proceeded). However, this will only be clear when the quantum judgment is delivered.

Mr Lynch's representatives have reportedly said that he intends to seek permission to appeal.