Brit analysts formed pact to crash Autonomy's market valuation, ex-CFO tells US court

Eye-catching claim in an eye-catching case


Autonomy's former chief financial officer has alleged the firm collapsed partly because two financial analysts agreed to badmouth it in the hope of making a profit from its demise.

Stephen Chamberlain, Autonomy founder Mike Lynch's co-defendant in US criminal proceedings over the company's collapse, made the extraordinary claims in filings to a San Francisco federal district court [PDF and PDF] earlier this month.

He accused former JP Morgan analyst Daud Khan and industry colleague Paul Morland, once of analyst firm Peel Hunt, of carrying out "concerted and improper efforts to depress Autonomy's share price for their and their short-selling clients' benefit" and being "vehemently antagonistic towards Autonomy and its management."

The two analysts are likely to be called by the US government as witnesses in the criminal trial of Lynch and Chamberlain, on charges that the two committed crimes against US law by deceiving Hewlett Packard about Autonomy's true value before HP (as was) bought it for $11bn in 2011.

What's he said, then?

In exhibits before the US Federal Court for the Northern District of California, Chamberlain's legal team claimed Morland had emailed Khan claiming the latter was carrying out "Autonomy bashing." The email chain in the full exhibit showed a third analyst saying Autonomy's marketing department was creating "massive bullshit on the way for the new product," and Morland describing a 2009 financial results table as "22 lines that tells us that 100-30+2=72."

One exhibit featured a Citigroup research note saying "we conclude that [Autonomy] has added value via acquisitions, is seeing the best growth in the software industry…" while adding: "However, we argue that [Autonomy] will have to increase disclosure if it want to end [sic] these ongoing discussions around accounting."

Chamberlain and Lynch have not formally accused Citigroup of being part of a conspiracy to falsely crash Autonomy's stock market valuation.

Another exhibit was the transcript of a Bloomberg terminal chat from 2010. In that, Khan told a Farringdon Capital analyst: "I can see an image of a hitler moment for Mike [Lynch], where his generals tell him the war is lost and that he has to step down." The context appears to be a chat between two industry colleagues; Khan believing Autonomy is overvalued and the other noncommittally chewing the fat about corporate valuations.

In another Bloomberg chat from 28 April 2009, a Citigroup analyst opens a chat with Khan to express shock at "Mike Lynch dissing you yesterday." Khan responded by saying Lynch "threatened his lawyers on me… phrased it the way a mafiosa would," to which the Citigroup analyst, Sherief Bakr, replied: "disrespecting him… sounds like marlon brando" [sic].

Brando played Vito Corleone, the Mafia kingpin in Francis Ford Coppola's The Godfather films.

"So why would a co. go to so much trouble to stop an analyst publishing unless im on to something," mused Khan, later writing, "so now I take pleasure in winding up Lynch."

We recorded you… uh, so does my boss

The exhibits also revealed that Andy Kanter, Autonomy's chief operating officer, approached Khan's employers, Cazenove, in 2008 to menace him into stopping criticism of Autonomy. Kanter told Cazenove he had obtained a tape of Khan expressing his views about Autonomy from a fund manager client.

Kanter, so Khan testified in the US criminal trial of one-time Autonomy CFO Sushovan Hussein, told Cazenove head of research David Knox that the tapes proved Khan's written opinion of Autonomy's financial performance was in breach of Financial Services Authority regulations. The COO threatened that Autonomy would make a formal complaint to the FSA about Cazenove unless Khan's latest research note was not published.

"David Knox and the compliance department at Cazenove had gone through all my audio recordings for the past month, concluded that there wasn't an issue, and David Knox informed me that they would publish the note as they felt this was a baseless claim," Khan told US District Judge Charles Breyer in 2018.

So why Chamberlain's focus on these two analysts?

Morland and Khan testified in the US criminal trial of Sushovan Hussain, which resulted in him being convicted and receiving a five-year prison sentence.

They also gave evidence to the UK's Financial Reporting Review Panel, which delivered a devastating ruling against Autonomy auditors Deloitte last year. The panel's verdict smashed a hole in Lynch's central High Court trial defence; namely, that Deloitte had signed off Autonomy's accounts and therefore they were all above board.

Deloitte later paid HP $45m in return for handing over all of its internal accounting reports about Autonomy – and has not being named as a defendant in the enterprise tech company's High Court case against Lynch.

Chamberlain, and former Autonomy CEO Lynch, want to claim in their defence that the analysts were presenting selective information to the various courts and tribunals: Chamberlain's motion before the US court is to force the two to hand over "additional evidence."

The case, which is currently at a pre-trial stage, continues.

And what about the London proceedings?

High Court judge Mr Justice Hildyard has still not handed down judgment in the long-running £3.3bn civil court case between Hewlett Packard Enterprise and Mike Lynch.

HPE claimed in London that Lynch and Hussein had lied about Autonomy's accounts and deliberately misled shareholders as a result. The former CEO and CFO deny all wrongdoing, saying Autonomy's accounts were signed off by Deloitte at the time. After the buyout HP wrote down Autonomy's value by $8.8bn; Lynch and Hussein say this was because HP was run by incompetents who nearly destroyed Autonomy, rather than proof of false accounting.

Judgment in the case is pending.

It appears that time and events have overtaken the High Court case to the point where it may become irrelevant to the HPE-Lynch dispute, in spite of the huge sums spent on it.

Lynch is waiting for UK Home Secretary Priti Patel to make a decision about extraditing him to the US to stand trial, which she must do by 29 November. The range of decisions open to her include deferring it for another few weeks.

If Patel makes a decision on 29 November, Lynch will immediately take it to the High Court (again) on appeal. The US government is expected to contest that appeal. ®


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