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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

A.

B.
C.

D.

E.

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
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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.

2.

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."

3.

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).

Bidco
4.

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.

5.

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.

6.

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.

ASL
7.

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.

8.

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.

9.

Pursuant to transfer pricing arrangements with some other Autonomy group


companies including Autonomy Inc, amounts equal to, typically, 100% of the
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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.

11.

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
12.

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.

13.

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.

14.

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
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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.

17.

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.

18.

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
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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.

20.

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").

21.

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
22.

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.

23.

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

25.

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").

B.

SUMMARY OF THE CLAIMS

26.

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.

27.

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.

28.

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.

29.

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:

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30.2.1.1. 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.
30.2.1.2. 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.
30.2.1.3. 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.
30.2.1.4. The arrangement with the VAR was purely a pretext
for the recognition of revenue. In some instances, the
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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.
30.2.1.5. 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:
30.2.2.1. 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
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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:
30.2.3.1. 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.

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30.2.3.2. 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.
30.2.3.3. 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.
30.2.3.4. 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

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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
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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.

32.

When proceeding with the Autonomy Acquisition, HP and thus Bidco


reasonably relied upon Autonomy's published information, which, by reason
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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).

34.

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.

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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.

36.

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.

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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.

38.

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.
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39.

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.

40.

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

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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.

43.

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:
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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;

22

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.

45.

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".

46.

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.

47.

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

Overview
48.

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.

49.

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.

50.

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

51.

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.

52.

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";

26

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

27

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.

56.

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.

28

57.

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".

Revenue
59.

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.

61.

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:

30

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.

31

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.

63.

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.

65.

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.

66.

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.

33

67.

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.

68.

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.

70.

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

72.

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.

74.

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.

37

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

38

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:
74.4.3.1. 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
74.4.3.2. 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
74.4.3.3. 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.

47

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.

51

80.

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.

81.

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).

(2)

Reciprocal transactions

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.

84.

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

88.

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.

91.

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.

58

94.

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.

95.

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.

96.

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.

97.

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.

99.

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)

Hosting arrangements

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.
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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
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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.

63

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.

64

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

(4)

Other Transactions

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
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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:
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"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

69

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;
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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;

71

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
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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.

75

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
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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
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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
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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.

79

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
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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.
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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:
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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
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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

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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:

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"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
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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.
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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
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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.
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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
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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;
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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.

93

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
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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
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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.

97

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.

98

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

100

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.

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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
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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.

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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.

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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
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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.

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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,
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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:

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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.

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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.

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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.
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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.

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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.

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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'
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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

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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.

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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.
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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
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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

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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).

123

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
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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

126

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.

127

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.

130

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).

131

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.

132

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

133

COY

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.

134