Exclusive Hewlett Packard Enterprise settled its potential lawsuit against Autonomy auditors Deloitte for $45m in 2016, The Register can reveal – shedding new light on how the $5bn lawsuit against former Autonomy CEO Mike Lynch and ex-CFO Sushovan Hussain came about.
The amount of the settlement is less than 1 per cent of the $5bn for which HPE is pursuing Lynch and Hussain.
Although HPE and Deloitte signed a confidentiality agreement over the $45m, its main details were hiding in plain sight inside the last ever accounts filed by Autonomy Corporation Ltd (ACL) before it was merged away into HPE's corporate structure, becoming known as ACL Netherlands BV.
A letter previously sent by HPE's lawyers to Deloitte in 2014 alleged "there is evidence that Deloitte was complicit in aspects of the misstatements in Autonomy's published information". That allegation would never be tested in court, though Britain's accounting regulator eventually found it proven.
Public knowledge of the settlement sum also sheds light on why Deloitte was never a co-defendant with Lynch and Hussain in the High Court, despite the auditor being an obvious target for HPE following allegations of false accounting at Autonomy.
In 2012, HP wrote down Autonomy's value by $8.8bn and announced it would be pursuing Autonomy's former management and Deloitte, the auditors who signed off Autonomy's accounts. While its legal case against Lynch and Hussain was filed in 2015, the potential for adding Deloitte to that case wasn't withdrawn until 2016. Various news outlets reported rumours of settlement talks in 2015 but those didn't crystallise for another year, as we can now reveal.
ACL's last ever annual accounts revealed how the Deloitte settlement came about. HP had, legally speaking, threatened to sue wholly owned subsidiary ACL for $4.55bn. The accounts explained that ACL (naturally) accepted liability, leading to the next steps:
HP Vision BV recognised that the company [ACL] does not have the means to discharge its estimated liability to HP Vision BV and requested that the company take steps (including litigation) to recover its losses from the parties responsible for the publication of the information described above.
That information was Autonomy's pre-buyout accounts, which HPE claimed contain deliberate inaccuracies.
Accordingly, on 30 September 2014 the Company sent a pre-action letter to its former auditors, Deloitte LLP, in respect of losses suffered by the Company (including its liability to HP Vision BV under [the Financial Services and Markets Act]). On 27 April 2016 the Company reached a satisfactory settlement with Deloitte LLP, including a payment by Deloitte LLP of $45,000,000 (£31,245,660). Following the settlement with Deloitte, the Company reimbursed HPE for legal costs of $8,741,549 (£6,069,677) previously funded by HPE. Also, on 31 August 2016, the Company made a partial settlement of the claim from HP Vision BV, in the amount of $35,293,502 (£26,576,432).
We have asked Lynch for comment. Deloitte and HPE both declined to comment.
Deloitte's former principals on Autonomy's accounts have all signed cooperation agreements with the US Department of Justice. As we previously reported, these men are former lead auditors Richard Knights and Nigel Mercer, along with Lee Welham and Tom Murray.
During cross-examination in the High Court in 2019, Lynch's barrister Robert Miles QC asked Welham: "Do you recall that during 2015 the American DoJ were looking for cooperation from Deloitte?" to which the auditor replied "Yes".
"And," continued Miles, "Deloitte had some concerns about agreeing to testify while the civil claim was still out there; do you recall that?"
Welham said he didn't know for sure. Miles went on to show him a copy of the cooperation agreement, which was signed in 2016 as detailed in ACL's accounts.
The Register has obtained a copy of that agreement from the High Court proceedings. Deloitte agreed to make a dozen auditors available for interview by HPE's lawyers and, "so far as it is in Deloitte's power to do so to procure that each Deloitte Interviewee" should provide:
... such assistance and co-operation in those interviews as if they were being interviewed by Deloitte, including providing testimony as to their recollection of events and comments upon (a) whether particular facts were or were not known to them; (b) whether particular documents were or were not shown to them during the course of their audit work, and (c) where such facts or documents were not known or shown to them (whilst not expressing an expert opinion, consistent with their status as witnesses of fact) whether such facts or documents were in their opinion relevant to their work and the potential impact of such facts or documents on their work...
The 2016 agreement also expressly said that Deloitte did not admit any wrongdoing or liability. It also said Deloitte would hand over "complete access" to all of Deloitte's Autonomy audit papers and internal emails about them.
While the knowledge of the settlement has broadly been known about since 2015-16, when rumours of talks were first reported, neither the amount of the settlement nor its key terms has been revealed until now.
Public knowledge of why Deloitte wasn't a co-defendant alongside Lynch may answer questions about why that came to be, as well as showing precisely how HPE secured the audit firm's cooperation with its case against Lynch and Hussain.
Had Deloitte not cooperated with HPE and instead stood alongside Lynch and Hussain in the High Court, it seems likely (in light of the Financial Reporting Review Panel's report) that the reputational and professional consequences of an adverse judgment could have had a large impact upon the firm.
The High Court is awaiting Mr Justice Hildyard's judgment, which is expected to be handed down at some point between April and May. ®