SEC Charges Executive With Fraud in HP Acquisition
The SEC filed an action against the CEO of a U.S. subsidiary of a U.K firm who implemented a financial fraud at the behest of his superiors. The firm was eventually sold to a U.S. public company at an inflated price based on the false financial statements. In the Matter of Christopher Egan, Adm. Proc. File No. 3-17678 (Nov. 15, 2016).
Respondent was the Head of Sales and CEO of Autonomy, Inc., a subsidiary of Autonomy Corporation, Plc, a U.K. firm. Autonomy is a software company based in Cambridge, England and San Francisco, California. It shares were traded on the London Stock Exchange until October 2011.
Autonomy provided enterprise software design and managed unstructured data such as emails, video and voice messages that are outside data bases. The firm promoted itself to investors and potential acquirers through its quarterly earnings releases. There it appeared to be a high-growth, high-margin, company with almost $1billion in revenue in 2010. Its executive sales team focused on meeting quarterly analyst consensus numbers.
Beginning in 2009, and continuing until late 2011 when the firm was acquired by Hewlett-Packard Company, senior executives at Autonomy’s headquarters crafted an executed a scheme to inflate the firm’s revenue, using over 30 transactions totaling almost $200 million.
The scheme centered on five U.S. value-added resellers of Autonomy software. Typically the sales involved took place when Autonomy was in the process of negotiating a sale to an end user but had not closed the deal by the end of the quarter. At that point Mr. Egan, acting on directions from the firm’s senior most finance executives, would approach the reseller and negotiate a deal under which the reseller purchased the software for 10% of the reseller’s purchase order to Autonomy. The reseller then supposedly could complete the deal with the identified end user. The revenue was booked.
The proposed transactions continued to be controlled by Autonomy. Thus Mr. Egan, acting on instructions from his superiors, told the resellers to avoid becoming involved in the transactions. Under these circumstances the resellers had no real risk.
Autonomy called these transactions “acceleration deals.” About 15% of the firm’s revenue came from them. Prematurely recording the revenue was not in accord with IFRS, the accounting principles applied by the firm. Mr. Egan’s actions contributed to the wrongful scheme, although he was acting on orders from his superiors, according to the Order.
Autonomy engaged in other wrongful accounting practices to bolster its revenue. For example, in at least five instances transactions were backdated to facilitate making revenue targets. In other instances the firm used round-trip transactions to funnel cash to resellers where a transaction had been unsuccessful and yielded no profit for the reseller but had been booked by Autonomy.
On August 18, 2011 HP acquired Autonomy. Throughout the process HP was encouraged to rely on the financial statement of Autonomy. The purchase prices was $11.1 billion, a 64% premium over Autonomy’s stock price at the time. By November 20, 2012 HP announced a non-cash impairment charge of $8.8 billion. Most of the charge was do to what the firm called the “serious accounting improprieties, misrepresentations and disclosure failures” of Autonomy. The Order alleges violations of Securities Act Section 17(a)(2).
To resolve the proceeding Mr. Egan consented to the entry of a cease and desist order based on the Section cited in the Order. He will also pay disgorgement of $800,669 (the value received in the merger for his firm shares) and prejudgment interest. A penalty was not imposed based on his cooperation in a Commission investigation and/or related enforcement action.
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