Particulars of Claim HP Vs Lynch et al

8/9/2019 Particulars of Claim HP Vs Lynch et al.

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IN THE HIGH COURT OF JUSTICE laim No. HC-2015-001324

CHANCERY DIVISION

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.

PARTIES

The C laimants

The D efendants

B.

SUMMARY OF THE CLAIMS

C. DUTIES OWED BY LYNCH AND HUSSAIN TO AUTONOM Y, ASL,

AUTONOMY INC AND ZANTAZ 9

Fiduciary duties

9

Duties as employees

0

D. FALSE ACCOUNTING AND IMPROPER TRANSACTIONS 4

Autonom y s published inform ation

4

Overview 5

Loss-making hardware transactions 6

Imprope r revenue recognition 7

IDOL OEM Revenue

7

Cum ulative effect of the false accounting 1

E. INVOLVEMENT OF LYNCH AN D HUSSAIN AND THEIR BREACHES OF

DUTY

6

Involvement of Lynch and Hussain in the transactions themselves

76

Knowledge and involvement of Lynch and Hussain in false accounting 4

Breaches of duty

00

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F.

THE AUTONOMY ACQUISITION

05

G.

NEGOTIATIONS WITH HP — MISREPRESENTATIONS BY LYNCH AND

HUSSAIN

07

The January S lides

107

The 3 February 2011 video-conference

09

The 4 Marc h 2011 meeting

12

The Valuation Model

16

The 29 June 2011 meeting

17

The 29 July 2011 meeting

18

The 1 August 2011 due diligence call

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124

Know ledge or recklessness of Lynch and Hussain

25

Reliance by HP/Bidco upon misrepresentations

25

H.

AUTONOMY'S, AUTONOMY INC'S AND ASL'S CLAIMS AGAINST

LYNCH AND HUSSAIN

28

Liabili ty of Autonom y to Bidco under Sch 10A FS MA

28

Transaction-based losses

29

I. BIDCO'S CLAIMS AGAINST LYNCH AND HUSSAIN

31

Bidco s claims against Lynch and H ussain

31

J. INTEREST

32

K. PRAYER

33

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

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A PARTIES

The Claimants

Autonomy

1

The First Claimant, Autonomy C orporation Lim ited

( Autonomy ),

was

incorporated under the laws of England and W ales on 21 M arch 1996. The

registered office of A utonomy is situated at Amen Corner, Cain Road,

Bracknell, Berkshire, United Kingdom RG 12 1HN .

2

At all material times, Autonom y acted as the holding company of a group of

comp anies which, according to the B usiness Overview section in its 2009

Annual Report and Accounts p6), was:

a globa l leader in infrastructure sof tware for the enterprise that helps

organizations to derive mea ning and va lue from their business information

wh ether unstructured, semi-structured or structured, as w ell as mit igate

the risks associated with those same a ssets.

3

Autonom y became a public company on 16 July 1998. In Novem ber 2000 its

shares were adm itted to trading on the main mark et of the London Stock

Exchange. From 8 Novem ber 2006 until its shares ceased to be traded on the

main market on 14 N ovemb er 2011, Autonomy w as, for the purposes of

section 90A of the Financial Services and Markets Act 2000

( FSMA ) ,

an

issuer of securit ies .

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 secu rities as a

result of any untrue or m isleading statements in that published information or

the omission from it of any matter required to be included in it. For the

avoidance of dou bt, references to published information herein include

publications to which section 90A of FSM A app lied prior to 1 October 2010).

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Bidco

4

The Second Claimant, Hew lett-Packard Vision BV ( Bidc o ), was

incorporated in the Netherlands on 1 5 Au gust 2011. The registered office of

Bidc o is situated at Startbaan 16, 1187 XR Am stelveen, the Netherlands.

5

Bid co has at all material times since its incorpo ration been an indirect who lly-

owned subsidiary of Hewlett-Packard Company

( HP ), an Am erican

corporation which, through its operating subsidiaries, is a leading provider of

com puting and im aging products, technologies, software and services

throughout the world

6

Pursuant to a recom mend ed offer that was announced on 18 A ugust 2011 and

became unc onditional on 3 October 2011, Bidco (the corporate vehicle used by

HP to effect the acquisition) acquired all of the outstanding sh ares and

conve rtible loan notes in Autono my for a total price of approxim ately £7.15

billion (equivalent to approxim ately US$11 .1 billion)

( the Autonomy

Acquisition ).

On 10 January 2012, following the Autonomy Acquisition,

Autonom y was re-registered as a private com pany.

ASL

7 The Third Claimant, Autonom y Systems Limited

( ASL ),

was incorporated

in England on 31 M ay 1995. The registered office of ASL is at Am en Corner,

Cain Road, B racknell , Berkshire, United K ingdom, RG 12 1HN .

8

At all material t imes, ASL was an indirect wholly-owned subsidiary of

Autonom y. It carried on the business of software developm ent and

distribution, and operated as licensor of A utonom y software to other entities

in the Autonomy group

9

Pursuant to transfer pricing arrangements with some other Autonomy group

com panies including A utonomy Inc, amounts equal to, typically, 100% of the

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costs incurred by those other group com panies and 96.5% of their revenues

were transferred from those other group comp anies to ASL.

Autonomy Inc

10.

The Fourth Claimant, Autonom y, Inc ( Autonom y Inc ), was incorporated

under the laws of New Jersey, USA, on 21 M arch 1996. Autonomy Inc's

principal place of business is at 1140 E nterprise Way, Building G , Sunnyvale,

California 94 089.

11.

Autonom y Inc was at all material times an indirect wholly-owned subsidiary

of Autonom y. It carried on the business of software development and

distribution and was the Autonomy group s main operating company in the

USA.

ZANTAZ

12.

ZA NT AZ Inc ( ZA NT AZ ) was incorporated under the laws of California,

US A. 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, ZA NTA Z was an indirect wholly-owned

subsidiary of Autonom y. It carried on the business of supplying consolidated

archive managem ent technology and services, including the hosting of

customers' data. ZAN TA Z had (in addition to the routine transfer pricing

arrangem ents referred to in paragraph 9 ab ove) a profit share arrangement

with AS L w hereby a percentage of the amoun ts initially transferred to A SL

were transferred back from ASL to ZA NTA Z.

14.

W ith effect from 1 N ovember 2014, ZA NTA Z m erged with and into HP on the

basis that HP assumed all the liabilities and obligations of ZA NTA Z and was

the surviving corporation. Prior to the merger, on 31 October 2014, Z AN TAZ

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 ZAN TA Z had

against any third parties. Notice of such assignment w as given to the

Defendants on 27 M arch 2015.

15

Autonom y Inc therefore pursues its claims in these proceedings both on

behalf of itself and as assignee of rights assigned to it by ZA NT AZ.

The Defendants

Lynch

16

The First Defendant, Michael Lynch

( Lynch ),

was a director of Autonom y at

all times from its incorporation in 1996 until 30 N ovem ber 2011 .

17

Lynch was em ployed by Autonomy as its M anaging Director and Chief

Executive Officer under the terms of an agreement set out in a letter dated 9

July 1998

( Ly nch's Em ploym ent Contract ) . Lynch s Em ployment Contract

was terminated by letter dated 23 M ay 201 2, with effect from 23 November

2012.

18 Lynch w as at all material times the chief decision-maker within the Autonomy

group and the C laimants rely upon the facts and m atters set out in Section E

in support of the contention that:

18.1. Ly nch acted as if he were a director of ASL, Autono my Inc and

ZANTAZ;

18.2. The formally appointed directors of AS L, nam ely the Second

Defendant, Sushovan Hussain

( Hussain ),

and Andrew Kanter

( Kanter ),

were accustom ed to act in accordance w ith directions or

instructions given by Lynch such that Lyn ch 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 imp act on ASL in circumstances which gave rise to a

relationship of trust and confidence such that Lynch assum ed the

obligations of a fiduciary towards ASL.

19

Further, Lynch was the P resident of Autonom y Inc and, as pleaded in Section

C below, owed that comp any fiduciary duties.

20

Upon his resignation as a director of Autonom y, Lynch p rovided a letter

dated N ovember 2011, u nder which he agreed to indemnify Autonomy

against any claims, dem ands or liabilities that had occurred or m ight occur in

future in connection with his role as a director of the comp any

( the Lynch

Indemnity ).

21

Prior to the Autonom y Acquisition, Lynch w as a substantial shareholder in

Autonom y. He held 20,288,320 shares and share options as at 22 Augu st 2011.

Lynch sold all of his shares in Autonom y to Bidco for approxim ately £517

million. Lynch continued to hold office as Chief E xecutive O fficer of

Autonomy after comp letion of the Autonom y Acquisition until 23 May 2012.

Hussain

22

Hu ssain is a qualified chartered accountant. He w as the Autonom y group s

Chief Financial Officer from June 2001 until 30 Novem ber 2011. He was a

director of Autonom y from 1 June 2003 un til 30 November 2011 and at all

relevant times a director of each of ASL, Autonomy Inc and ZA NTA Z.

23

Hussain was em ployed by ASL under the terms of an agreement dated 27

June 2001

( Hussain's Em ployment Contract ),

pursuant to which he was

appointed as Finance Director (Europe). After 30 Novem ber 2011, when he

ceased to hold office as Chief Financial Officer of the Autonom y group , he

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acted as President of ASL with responsibility for all of the Autonom y group's

sales activities. Hussain ceased to be an em ployee of ASL on 31 M ay 2012 .

24

Prior to the Autonom y Acquisition, Hussain was a shareholder in Autonom y.

He held 399,274 shares and share options as at 22 A ugust 2011. H ussain sold

all of his shares in Autonom y to B idco for approximately £10 m illion.

Managerial responsibilities

within Autonomy

25

At all material times, by v irtue of their status as directors of Autono my , each

of Lynch and Hussain was a

person d ischarging m anag erial responsibi li ties

within Autonom y 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 o f FSM A w hich applied at all relevant times prior to 1 O ctober 2010)

(collectively, Sch

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B . SUMM RY OF THE CL IMS

26.

Over the p eriod from (at least) the first quarter of 2009 until the second

quarter of 2011

( the Relevan t Period )

(Autonom y s financial quarters

corresponded to calendar quarters and are referred to herein as Q1, Q2 , Q3

and Q4 as appropriate), Lynch and H ussain caused A utonomy group

comp anies to engage in im proper transactions and accou nting practices that

artificially inflated and accelerated Autonom y s reported revenues,

understated its costs of goods sold

( CO G S ) (thereby artificially inflating its

gross m argins), misrepresented its rate of organic growth and the nature and

quality of its revenues, and overstated its gross and net profits.

27.

Lynch and H ussain caused Autonom y to issue published information that, by

virtue of the said im proper transactions and accoun ting practices, included

many statements which they knew were untrue and/or misleading or they

were reckless as to the same) or which om itted m atters that were required to

be included in it, in circumstances where they knew the om issions to involve

the dishonest concealment of material facts.

28.

This conduct by Lynch and H ussain was systematic and was sustained over

the Relevant Period. Its purpose w as to ensure that the Autonom y group s

financial performan ce, as reported in Autonom y s published information,

ppe red to be th t of r pidly growing pure softw re comp ny whose

performance w as consistently in line with m arket expectations. The reality

was that the group w as experiencing little or no growth, it was losing m arket

share, and its true financial performance consistently fell far short of market

expectations.

29.

Furthermore, from no later than January 2011 w hen Lynch and Hu ssain began

taking steps with a view to the sale of Autonom y, the falsification of

Autonom y s financial performance was (it is to be inferred) further motivated

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by a desire to achieve a sale of their own shareholdings in Autonomy at a

price in excess of their true value.

30.

he improper transactions and accounting practices can broadly be divided

into the following three catego ries:

30.1. Undisclosed, loss-making hardware sales: Autonomy presented itself

as a company that derived its revenues from licensing its Intelligent

Data Op erating Layer

( IDOL ) software and related services.

How ever, from Q 2 20 09 Autonomy Inc engaged in substantial sales of

third-party computer hardware, without modification and

unaccompanied by any A utonomy software

( pure hardware sales ).

These pure hardw are sales generated revenue of approximately

US 200 million over the Relevant Period and comprised approximately

11% of A utonomy's total reported revenue during the period Q3 20 09

to Q2 2011. A utonomy disclosed neither the existence nor the amount

of such sales in its published information (or anywhere else). This non-

disclosure contributed significantly to the false appearance of a rapidly

growing so ftware business. The fact that these substantial pure

hardware sales were consistently made at a significant loss was also

concealed in Autonom y's published information. CO GS 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 an d Hussain in order to

recognise revenues which w ere 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. Howev er, in

Autonomy's case, certain VAR s were used to

fabricate or accelerate what was then held out by

Autonom y to be revenue and profits.

30.2.1.2. For example, where an Autonomy group com pany

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 onw ard

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 com mercial 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 w ould not be

required to pay for the software licence from its own

resources. In the event the Autonom y group

com pany either forgave this supposed liability or

ensured that the VAR was pu t in funds to enable it to

effect payment.

30.2.1.4. The arrangement w ith the VA R w as purely a pretext

for the recognition of revenue. In som e instances, the

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arrangement accelerated revenue recognition because

the Autonom y group company not the VA R)

continued to negotiate w ith the end-user after

entering into the arrangem ent with the VA R, and w as

eventually able to effect a transaction with that end-

user. In other instances, no revenue sho uld ever have

been recog nised or reported at any time , because

neither the VA R nor the Autonomy group com pany

ever sold a licence to the end -user. In these latter

situations the V AR was, by one means or another, put

in funds or relieved by the A utonomy group

com pany of its purported obligation to pay for the

software licence.

30.2.1.5. In many cases, the Autonomy g roup compan y mad e

a paym ent, described as, amo ngst other things, a

marketing assis tance fee ,

to reward the VAR for

participating in the arrangement even though the

VA R had provided no actual marketing assistance to

the Autonomy group com pany, and had had no

contact with the end -user in relation to the propo sed

transaction.

30.2.2. Reciprocal transactions:

30.2.2.1. Lynch and Hussain fabricated revenue by causing

Autonom y group com panies 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 produc ts

including softw are), 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 Autonom y group (or the

Autonomy group com pany overpaid for them). The

purpose of the purchase from the cou nterparty was to

provide the counterparty with both the incentive and

the funds to acquire a licence to Autonom y 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 A utonomy group s business was

the hosting of customer data on hardware owned or

controlled by Autonomy group companies

(principally ZANT AZ) using Autonom y (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, Autonom y and ZA NTA Z (prior

to its acquisition by Autonom y) had recognised

(correctly) over the entire period during w hich 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

com panies to structure new h osting arrangem ents,

and to restructure existing hosting arrangem ents, by

charging a substantial upfront fee ostensibly for a

licence to use Autonom y 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 D igital Safe software was of no, or

no substantial, independent value to the customer.

The incentive to the customer w as the reduction in

the aggregate fees payable over the term of the

arrangement. In relation to ho sting arrangem ents

utilising Au tonomy s eD iscovery software, whilst this

was cap able, in principle, of operating indepen dently

of the hosting service provided by Autonom y group

compan ies, no reliable fair value could be attributed

to the individual value of the eDiscovery software.

30.2.3.4. For Autonom y, such arrangements created the

ppe r nce of r pid revenue growth in the short

term, but damaged the future profitability of

Autonom y s data hosting business by significantly

reducing the future recurring revenue to be derived

from individu l customer rel tionships nd the d t

hosting business as a w hole. It also rendered cu rrent

revenue unrepresent tive of future recurring revenue

nd m de the description of the d t 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 Autonom y was

IDOL OEM , OEM

derived revenues or IDOL OEM derived reve nues (together,

IDO L OEM Revenue ). IDOL w as described in each of

Autonomy's 2009 and 201 0 Annual Reports and Accounts as

Autonomy s core technology . IDOL OE M R evenue meant

revenue obtained from bu sinesses known as Original

Equipm ent M anufacturers ( OE M s ). In theory, OE M s were

software companies that embedded Autonomy software in

their own produ cts, and then licensed those products to their

own customers. Autonomy s published information

represented that transactions w ith O EM s (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 an d recurring stream of royalties paid by the O EM s

to Autonomy.

30.3.2. Lynch and Hussain knowingly included within Autonomy s

reported IDO L OE M Revenue revenue derived from sales to

non-software com panies (i.e. comp anies which could not

emb ed Autono my software in their own software products),

revenue derived from licences that required the licensee to use

the Autonom y software for internal purposes only, and

revenue derived from sales of hardware and revenue arising

from contrived VAR, reciprocal and hosting transactions.

M any of the remaining OEM transactions generated only a

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single upfront payment and no other material royalty payment.

Autonom y's published information over the R elevant Period

overstated IDOL OE M Revenue by at least 390 and portrayed

this aspect of its business as growing rapidly w hen, in fact, it

was shrinking.

31

In causing Autonomy group com panies to engage in these improper

transactions and accounting p ractices:

31 1 Lynch and Hussain breached fiduciary duties that they owed under the

Act as directors of Autonom y;

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 AS L and as an officer of Autonom y 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 ow ed as

an employee of ASL and fiduciary duties owed as a director and officer

of Autonomy Inc and ZAN TAZ.

32

W hen proceeding with the Autonomy A cquisition, HP and thus Bidco

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

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loss suffered by Autonom y that was caused by the wrongful conduct of Lynch

and Hussain

35

Accordingly, Autonom y in turn claims against Lynch and H ussain for this

damage, w hich was caused to it by their breaches of fiduciary duties as

directors of Autonom y and, in the case of Lynch, under Lynch's Em ployment

Contract. Autonomy also seeks to recover from L ynch under the Lynch

Indemnity

36

In addition, ASL , alternatively Autonom y Inc and/or ZAN TAZ , have

suffered losses attributable to the imp roper transactions that L ynch and

Hussain wrongfully caused to be entered into. ASL and Autonom y Inc bring

claims to recover these losses from Lynch and Hussain on g rounds of their

breaches of duties as directors and/or employees and/or as fiduciaries of

Autonom y Inc, ASL and/or ZANT AZ 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 OW ED BY LYNCH AND HUSSAIN TO AUTONO MY ASL

AUTONOMY INC AND ZANTAZ

Fiduciary duties

37

At all material times L ynch and H ussain, as directors of A utonomy, each

owed A utonom y 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 con ferred;

37.2. The duty under section 172 of the A ct to act in the way he con sidered in

good faith would be m ost likely to promote the success of the company

for the benefit of its mem bers as a whole; and

37.3. The du ty under section 175 of the Act not to place him self in a situation

in which h e had, or cou ld have, a direct or indirect interest (or duty)

that conflicted or possibly m ight 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 A SL the duties set out in paragraphs 37.1 to 37.3 above.

Further or in the alternative in respect of Lyn ch, he undertook to act for and

on behalf of ASL in relation to transactions which had a financial impact on

AS L 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 assum ed the obligations

of a fiduciary towards A SL and thereby assum ed fiduciary duties equivalent

to the statutory duties set out in paragraphs 37.1 to 37.3 above . In the further

alternative in respect of L ynch, he acted as a shadow director of AS L within

the meaning of section 251 of the Act and, in that capacity, owed A SL 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 H ussain, as a director and

officer, of Autonom y Inc each ow ed Au tonomy Inc the following fiduciary

duties (as a matter of the law of N ew Jersey):

39 1 A duty to act with utmost fidelity in their dealings with the company;

and

39.2. A du ty of loyalty, i.e. to act in the best interests of the com pany, rather

than for their own benefit.

40

At all material times, Lyn ch as a d e facto director, and H ussain as a director

and officer of ZAN TA Z each ow ed ZAN TA Z a fiduciary duty of loyalty (as a

matter of the law of California), which required each of them to place the

interests of ZA NT AZ and its shareholders over any personal interest.

Duties as employees

41

Further, at all material times L ynch ow ed Au tonom y the following duties,

amongst others, pursuant to L ynch s Employm ent Contract

( the Lync h

Em ployment Duties ):

41.1. The duty und er 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 ZANTA Z)

well and faithfully;

41.2. The duty under c lause 2.3.1 not to do anything w hich in the reasonab le

opinion of the board of directors of Autonomy w ould be or would be

likely to be damagin g or prejudicial to the business and/or com mercial

interests of Autonom y or

the Gro up ;

and

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41.3. Based on h is senior position and role, an imp lied duty to disclose

misconduct by himself and other executives involved in the business of

Autonomy and its group.

42.

Further, at all material times H ussain owed A SL, amongst others, the

following duties as an emp loyee which w ere implied into Hussain s

Employment Contract

( the Hussain Em ployment 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

miscondu ct by himself and other execu tives involved in the business of

ASL.

43. Further, at all material times Lynch and H ussain, as directors of A utonomy,

each ow ed the following statutory duties in relation to the preparation of

accounts (Autonom y w as required to prepare its consolidated accounts for the

Autonomy group

( group accounts )

in accordance w ith the International

Financial Reporting Standards

( IFRS ) and had elected to prepare its stand-

alone accounts ( individual accou nts ) under IFRS):

43.1. The duty, under section 394 of the Act, to prepare individual accounts

for Autonom y for each o f its financial years;

43.2. The duty, under section 399 of the Act, to prepare group accounts for

each of Autonom y 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 Autonom y, 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 acco unting policies;

43.3.4. Present information, including accounting policies, in a m anner

that provided relevant reliable, comparable and

understandable information; and

43.3.5. Provide additional disclosures where compliance with the

specific requirements in IFRS w as insufficient to enable users to

understand the impact of particular transactions, other events

and cond itions 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 A utonomy'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 un dertakings included in the co nsolidation in

the course of the year;

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43.4.2. Pursuant to section 417 of the Act, a business review containing

a fair review of Autonom y s business (being a balanced and

comp rehensive analysis of the development and performance

of Autonom y 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 Autonom y was aw are,

there was no relevant audit information of which Au tonom y s

auditor was unaware, and that he had taken all the steps that

he ought to have taken as a d irector in order to make him self

aware of any relevant audit information and to establish that

Autonomy s auditor was aware of that information.


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D. FALSE ACCOUNTING AND IMPRO PER 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 A nnual Reports and

Accounts for the years ended 31 D ecember 2009 and 31 Decem ber 2010, which

are referred to hereinafter together as the Annua l Reports , included,

amo ngst other things, an Executive Summ ary containing the Chairm an s and

Chief Executive s Statement, a Business Overview, and a Performance section

(containing a F inancial Review), giving a description of the performan ce of

the business over the financial period.

45. In addition, Au tonom y published interim financial results and information on

a quarterly basis in the form of quarterly reports wh ich included, amon gst

other things, a statement of financial highlights, a description of the

performance of the business over the period and a cond ensed set of

consolidated financial statem ents. The quarterly reports that were pu blished

by Autonom y over the course of the Relevant Period (from Q1 2009 to Q 2

2011)

are referred to herein collectively as the Q uarterly Reports .

46.

The Quarterly Reports in respect of Q2 2009, Q 2 2010 and Q2 2011 also

fulfilled the requirements in respect of half-yearly results that A utonom y, 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 O ctober 2010

( earnings calls )

constituted inform ation which was pub lished by recognised m eans or the

availability of which w as announced by A utonomy by recognised means

within the meaning of paragraph 2(1) of Sch 10A FSM A and hence constituted

published information for the purposes of Sch 10A FSM A.

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verview

48. Over the course of the R elevant Period, the financial performance of

Autonom y which in this context means the Autonomy group) as reported in

the Annu al Reports and in the Q uarterly Repo rts 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 w ere not entered into genu inely 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 im proper allocation of costs so as to enhan ce 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 revenu e, gross

profits, gross margin and n et profits;

48.4. The incorrect and incomplete description of Autonomy s business, and

the rate of organic growth o f the compo nents of its business and of the

business as a wh ole.

49. As a result, the Annu al Reports and the Quarterly Reports contained untrue

and/or misleading statements and/ or omitted matters required to be

included in those Repo rts.

50.

Lynch and Hussain knew such statem ents to be untrue or m isleading or were

reckless as to the same) and knew the o missions to involve the d ishonest

concealment of material facts.

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51.

The categories of improper transactions and m ethods of false accounting that

were carried out by or at the behest of Lynch and H ussain, as summarised in

paragraph 30 abov e, are described in m ore detail below.

52.

The falsification of A utonomy 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 com pany wh ose revenues and profits

were grow ing rapidly, were sustainable, and we re consistent with m arket

expectations. Without such false accounting, Autonomy s reported financial

performance in each financial quarter during the Relevant Period wou ld have

fallen short of market expectations and A utonomy w ould have been show n to

be losing market share and enjoying little or no actual growth in software

revenues.

Loss making hardw are transactions

Nature and extent of the transactions

53.

Autonomy w as 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 B usiness Overview section (p9) stated that the Autonom y

group s business model was

the development and l icensing of

world-leading technology for the automated processing of all forms of

unstructured informa tion, and that its financial model was

one

of the very rare examples of a pure software m odel ;

53.1.2. The Chairman s Statement (p2) explained that

Autonomy

operates in the realm of pure software ;

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53.1.3. The

Revenue recogn ition

section within the

Significant

Accounting Policies

(p41) stated that

The nature o f 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 hardw are that was

unaccom panied by any Autonomy software.

53.2. In the 2010 Annual Report:

53.2.1. The Financial Review section (p16) explained that

A utonom y

operates a rare 'pure software' mod el ;

53.2.2. The C hief 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

wo rld-leading technology for the autom ated processing of all forms of

unstructured information

and explained that:

Autonomy operates a rare pure software mod el. Many

software comp anies have a large percentage of revenues that

stem from professional services, because they have to do a lot

of customisation work on the p roduct for every single

implementation. In contrast, Autonomy ships a standard

product that requires little tailoring, with the nec essary

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

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would be even smaller; and (ii) the

standard product

shipped

by Autonomy was A utonomy software.

54.

How ever, beginning in Q2 200 9, Lynch and Hussain caused Autonomy Inc to

purchase substantial amounts of computer hardware including laptop and

desktop com puters and accessories, servers and server equipm ent, and

electronic storage and associated equipment) from vendors such as D ell Inc

( Dell ),

EMC Corporation ( EMC )

and Hitachi Data Systems ( Hitachi ).

Autono my Inc then resold this hardwa re without modification and

unaccompanied by any Autonomy software.

55.

Schedule 1 contains a table setting out the amount of pure hardw are sales

identified by the C laimants 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 R elevant

Period amounted to approximately US 200 m illion and constituted 11% of the

total reported revenues during the period between Q3 20 09 and Q 2 2011, and

a very significant proportion of reported revenue growth in 2009 as compared

to 2008 and in 2010 as com pared to 2009.

56.

Substantially all of the pure hardw are sales were carried out at a significant

loss. In Q3 200 9, for example, Autonomy purchased hardware from EM C (and

its reseller, Associated Com puter 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 an d Q1 and Q 2 2011 , Dell identified customers that

wished to purchase Dell hardware. Autonomy was then introduced to the

transaction. It purchased Dell hardw are at one price, sold the same hardw are

to Dell's customer at a low er price, and then recognised the revenue

associated w ith its sale.

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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 A utonomy 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 p rovided in Table 12A of Schedule 12. In

addition, a further loss of US 250,000 was suffered by ZAN TAZ and A SL

(under the transfer pricing and profit share arrangements referred to in

paragraphs 9 and 1 3 abov e) as a result of the improper bonuses referred to in

paragraph 135.6 below and in the Summ ary in Schedule 12.

False accounting for loss-making hardware transactions

58. As set out b elow, Autonom y o mitted to disclose in its published information

(as it was required to do) the material fact that it was engaging in significant

amo unts of pure h ardware sales; nor did it disclose that a substantial amo unt

of the costs of those sales was not being accou nted 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 im pression 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 m argins, which

were then held out in the Annual Repo rts to be a

key performance

measure and an

[i]ndicator of success of the company's business model .

Revenue

59.

Pure hardw are sales are to be distinguished from sales of hardware o n wh ich

Autonom y software had been pre-installed

( appliance sales ).

Appliance

sales were specifically referred to and explained in Autonom y's published

information. They were described in the B usiness Overview section of the

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2010 A nnual Report as being a small part of Autonom y's business

conducted at

margins that we re not dissimilar to those of A utonom y s software licensing

business (p12).

60

By contrast, the Annual R eports, the Quarterly Reports from Q2 200 9 to Q2

2011 (inclusive) and transcripts of earnings calls omitted the material fact that

Autonom y Inc was carrying out a mu ch larger volume of pure hardware sales

at margins that were very different from tho se of Auton omy s software

licensing business. The revenues from pure hardw are sales were included

without disclosure or differentiation in the aggreg ate revenu es reported in

Autonom y s financial statements and elsewhere in the Annu al 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 app liance

sales; and

60.2. The e conom ic characteristics of the pure hardware sales (nam ely, that

they were inherently loss-making) w ere very different from high

margin software and appliance sales.

61

The revenu es derived from pure hardw are 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 custome rs for each product or service, or

each group o f similar products and services, to be disclosed. Pure hardw are

was not similar to the other products and services sold by A utonomy and

ough t therefore to have b een sep arately disclosed. In this regard, the

Claiman ts rely upon the following facts and ma tters:

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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 reven ues constituted a significantly larger

percentage o f total reported revenues in particular individual quarters

as appears from the table in Sch edule 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 abov e (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 A utonomy 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 revenu e excluding

the effect of acquisitions, foreign exchan ge, services revenues and

deferred revenue release). Despite characterising

organic IDOL growth

in the Financial Review section of the 2010 A nnual Report (p16) as the

most meaningful organic performance metric for understanding the

momentum within the business ,

A utonomy did not disclose that a

significant part of that supposed grow th was the result of selling third-

party hardware, containing no Autonomy software (and thus not

I D O L

at all), at a loss. The level of pure hardw are sales was m anaged

on a quarter-by-quarter basis to create the desired appearance of

growth.

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61.5. The Quarterly Reports from Q3 20 09 to Q2 20 11 (inclusive) included a

separate disclosure of total reported revenues broken down into the

following categories: IDOL Product; IDO L O EM ; Services; and

Deferred Revenue Release; and (in the case of the Financial Review

section of the 2010 Annu al Report (pp15-16) and the Quarterly Reports

from Q1 2010 onwards) IDO L C loud. Revenue from pure hardware

sales was greater than revenue from Services, one of these categories,

but was no t separately disclosed, thereby rendering the breakdown of

revenue m isleading (by om ission). In addition, the revenues derived

from pure hardw are 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 hardw are sales did not properly fall within

any of the five identified categories.

62.

In short, the statements in the An nual Reports and in the Q uarterly Reports

from Q4 2010 to Q 2 2011 (inclusive) to the effect that Autonomy w as a pure

software company were untrue and/or misleading and/or omitted a material

fact (namely that Autono my w as engag ed in the business of selling significant

amo unts 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 A utonom y s published

information that Autonomy was a business whose revenues derived from the

sales of software and associated services. Insofar as Autonom y m ade sales of

hardware, HP (and thus Bidco) understood that these were high margin

appliance sales that were not m aterial to A utonom y s financial statements (as

if they had been m aterial, 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 Au tonom y sold material amounts of

pure hardware.

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Costs and Expenses

64

The costs of purchasing the pure h ardware w ere included in the financial

statements the Annual Reports and in each of the Q uarterly Reports from Q 2

2009 to Q2 20 11 (inclusive) but were divided between CO GS an d sales and

marketing expenses.

65

In the Financial Review section of the 2009 Annual Rep ort (pH), COG S 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 reve nues, together with a shift in the mix of

revenues at the beginning of 200 9 as a resul t of [ the acquisit ion o f a

company nam ed In terwoven] and the IDOL SPE [so ftware] Quick Star t

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 w rongly allocated to sales and marketing expenses, 77%

of the reported increase in CO GS 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), CO GS were

said to have increased by US 23.8 million from 2009 to 2010. The increase was

attributed to

increased revenues and a cha nge in the sale mix discussed throughout

this report.

The 201 0 A nnual Report omitted the material fact that, even

though (as explained below) a large portion of the costs of pure hardware h ad

been wrongly allocated to sales and marketing expenses, the entire increase in

reported COG S du ring the financial year was attributable to the costs of pure

hardware, wh ich was not men tioned anywhere in the Report. Further, the

statemen t about the increase in CO GS was un true and/ or misleading in that

the costs of all other revenues had actually decreased.

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67.

The Financial Review section in the 2009 A nnual Report (p11) stated that the

increase in sales and marketing expenses in 2009 had been c aused

primarily

by

increased advertising, additional headco unt and an increase in sales commissions

due to an increase in sales and a chang e in the ge ographic and size-of-transaction

mix .

This was untrue and/or misleading because the increase in sales and

marketing exp enses was entirely attributable to the im proper allocation in

2009 of the m ajority of the costs of purchasing pure hardw are to sales and

marketing expenses (a m aterial fact omitted from the 2009 A nnual Repo rt). In

2009, US 35.8 million of the costs of purchasing pure hardware was treated as

sales and ma rketing 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.

Accou nting for a significant portion of the costs of purchasing pure hardw are

as sales and marketing expenses rather than COG S w as not in accordance

with the required accounting standards and so rendered the information in

the Annual Rep orts and Quarterly Reports from Q3 2009 to Q2 2 011 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. Autonom y Inc purchased

com puter equipment from EM C, Hitachi and Dell, and nothing else.

EM C, Hitachi and Dell had no obligation to provide marketing services

for the Autono my grou p's benefit. It was therefore who lly

inappropriate to account for the purchase transactions as anything

other than the purch ase of goods. It was irrelevant to the accou nting

treatment for the purchase transactions whether A utonom y Inc

decided to sell those goods at a profit or a loss. Those sales w ere

separate econom ic events from the pu rchase of the hardware, and

therefore could not affect the proper acco unting treatment of the co sts

of purchase.

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68.2. In accordance with IAS 2, paragraphs 10 and 38, COG S should have

included all costs of purchase of an y hardw are 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 m arketing expenses would have been

permissible under IFR S 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 m arketing

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 Autonom y Inc for that hardware.

69.

Even if which is denied) an element of the costs of the pure hardware

purchases could properly have been a ccounted for as sales and marketing

expenses the Annual Reports were untrue and/or misleading and/or omitted

material facts because they m ade no reference to the fact that the costs of

purchasing the pure hardware were allocated between C OG S and sales and

marketing expenses and because the reasons given for the increases in CO GS

and sales and m arketing expenses w ere incorrect.

70. Gross m argin is an important measure of the success of a software com pany

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

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costs of purchasing pure hardware to sales and marketing expenses materially

increased the gross profits and gross m argin stated in the An nual Reports and

the Quarterly Reports from Q3 2009 to Q 2 201 1 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 an d thereby assisted in concealing both the fact that the pure

hardware sales were being m ade and the variation in the am ount of those

sales from quarter to quarter. For exam ple:

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 C OG S (as they

should have b een) rather than allocating a large portion of those costs

to sales and marketing expenses, a gross loss of US 15,215,32 9 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 COG S, 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. ccordingly, 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

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72.

Schedule 2 sets out the figures for COG S, gross profits, gross margin and sales

and m arketing expenses as they were in fact reported in the Annual Rep orts

and in the Quarterly Reports com pared to the true figures as they should have

been reported if the correct accounting treatment of the co sts of purchasing

pure hardware had been adopted but without correcting for the other matters

of which com plaint is made in these proceedings).

Improper revenue recognition

(1) ontrived VAR Transactions

ature of the transactions

73.

From at least Q2 2009 Ly nch and Hussain caused Autonom y group

comp anies to engage in the practice of entering into transactions with V ARs

that were not genu inely in the furtherance of Autono my s business, but were,

rather, for the improp er purpose of providing a pretext for the inappropriate

or prem ature recognition of revenu e. Particulars of the specific transactions

with VA Rs that the Claiman ts contend were entered into for this improp er

purpose

( the contrived VA R 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

Autono my softw are to a particular end-user, but was unable to

conclude su ch 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 VA R on the

last day of the qu arter, ostensibly for onw ard licensing to the p articular

end-user.

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74.3. The purported sale of the licence to the V AR was not, howev er, a

genuine arm s length comm ercial transaction. Instead, the V AR and the

Autonom y group com pany (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 Au tonomy from its ow n resources, and would

not otherwise bear any comm ercial risk in relation to the arrangem ent.

Such is to be inferred from the follow ing:

74.3.1. There had been no communication between the Autonomy

group com pany and the VAR in relation to the transaction in

question until immediately prior to the end of the relevant

quarter.

74.3.2. The V AR had m ade 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 VA R did not have the m eans to pay the

Autonom y group comp any in the absence of an onward sale of

the relevant licence to the iden tified end-user.

74.3.5. The notion that a software com pany like Autonom y, in the

process of seeking to conclude an agreement on a significant

sales opportunity involving complex software products and

solutions, wo uld, on the last day of the quarter, abandon those

sales negotiations and instead sell the software produc ts and

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services to a V AR which w ould then take responsibility for

concluding the transaction, makes no com mercial sense.

74.3.6. It also mak es no com mercial sense for a VA R that had no

know ledge of, or relationship w ith, the end-user, no

know ledge 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,

wou ld result in a significant loss to (and in som e 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 Autonom y group com pany and the

VA R once the sale between them had been ostensibly concluded:

74.4.1. The V AR did not thereafter make any effort to sell a licence for

the relevant software to the end-user. Instead, the Autonom y

group com pany con tinued its own efforts to achieve a sale of

the licence directly with the end -user (and withou t

consultation with the V AR ).

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 w as ever concluded.

74.4.3. The V AR in question was subseque ntly relieved of its

ostensible liability to pay the p rice for the Au tonom y software

licence that it had purchased by one of the following mean s:

74.4.3.1. The p urported sale agreement betw een the

Autonomy group company and the VAR w as

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cancelled or a credit note was issued to the VA R

wh ich 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 V AR so that the

VA R could then pay the relevant Autonomy group

company; or

74.4.3.3. An Autonom y group company was caused to make a

paym ent to the VA R to purchase rights, goods or

services that the utonomy group company did not

need and which had no discernible value to it), but

which had the pu rpose and effect of putting the VAR

in funds which it then used to p ay some or all of the

purchase price for the Autono my software licence

( reciprocal VA R transactions ) .

In these situations,

the sum paid to the V AR for its product, right or

service usually exceeded the amount owed by the

VA R in respect of the failed transaction.

75.

n man y instances, the VA R w as paid a fee, described variously as a

marketing assistance fee ,

a

referral partner commission

or a

sales comm ission

fee

together, a

MAF ) .

The V AR did not in fact provide any genuine

assistance to the Au tonomy group com pany in identifying the end-user as a

proposed customer for the relevant Autonomy software or provide any

genuine assistance in co ncluding a transaction w ith that end-user. Instead, the

MA F w as a payment to the VA R to reward it for engaging in a transaction

that would not otherwise have benefited the VA R, but which allowed

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Autonom y (improperly) to recognise revenue in respect of a transaction that

the Autonomy group com pany it was unable to comp lete with its actual

intended end-user. The losses incurred by Autonom y group com panies as a

result of the said MAF paym ents were in the sum of approximately US 7.7

million, of which US 0.2 million was suffered by ZAN TAZ , and the

remainder resulted in a corresponding loss to A SL by virtue of the transfer

pricing and profit sharing arrangemen ts referred to in paragraphs 9 an d 13

above . Details of such losses are particularised in Table 12C of Schedule 12 .

76

M ost of the contrived VA R 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 sam e individual, D avid Truitt, was the Chief Ex ecutive O fficer of

both DiscoverTech and M icrolink. He was the brother of an Autonomy

group employee

76.2. Ano ther brother in the sam e family, Stephen Truitt, was the Chief

Operating Officer of M icroTech.

76.3. The President of FileTek, Gary Szuk alski, was a form er Autonom y

group employee

Example of a contrived VAR transaction - Capax Discovery/the FSA Schedule 3,

Transaction 10

77

On 31 M arch 2010, Capax D iscovery submitted a purchase order to Autonomy

Inc

( the Cap ax 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.

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The am ount was ostensibly payable by Capax D iscovery 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 M arch 2012 and 31 M arch 2013. Autonom y recognised

licence revenue of U S 4.3 million as revenue in Q1 2 010 and support and

maintenance of U S 20 0,00 0 on a quarterly basis over the following year. In

reality, the Capax D iscovery/FSA purchase order was a con trived transaction

entered into for the purpose of enabling the p remature recognition of revenue

by A utonom y and on the basis of an agreem ent or understanding (as set out

in paragraph 74.3 above) that Capax D iscovery would not in fact be required

to satisfy any liability to Autonom y Inc from its ow n resources and w ould not

otherwise bear any com mercial risk in relation to the arrangem ent:

77.1. This was the fourth occasion on which Capax Discovery, purporting to

act as a VA R, had subm itted a purchase order to Autonom y Inc on the

last date of a quarter in relation to an end-user w ith which an

A utonomy group com pany had been cond ucting negotiations. On each

of the three prior occasions (i) Capax D iscovery had not been involved

in the negotiations with the end-user, (ii) revenue w as recognised

imm ediately by A utonomy in the relevant quarter, (iii) Capax

Discovery did not subsequently becom e involved in negotiations with

the end-user, (iv) A utonom y Inc subsequently entered into a direct

agreem ent with the end-user, (v) A utonom y Inc then either caused the

relevant end-user to pay Capax D iscovery so that it could in turn pay

A utonomy Inc or simply relieved Capax D iscovery of its payment

obligations, and (vi) Autonom y Inc either procured that the relevant

end-user paid Capax D iscovery a sum in excess of the amount to be

paid to Autonom y Inc or simply paid a M A F to Capax Discovery so as

to reward Capax Discovery for participating in the arrangem ent:

77.1.1. In Q2 and Q3 200 9 Capax Discovery entered into two purchase

orders with A utonom y Inc, in respect of which the end-user

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was stated to be TX U Energy ( TX U ). The aggregate amou nt

of the purchase orders was US$1.4 m illion. Capax D iscovery

did not p y the sums due under those purch se orders when

they fell due. Autonomy Inc entered into a direct agreement

with TXU Energy Retail Company LLC ( TXU E nergy Retail )

in a total amount of U S$1.7 million. On 30 September 2 009, the

same day that Cap ax Discovery entered into the second

purchase order with Autonom y Inc, Autonomy Inc directed

TXU Energy Retail to pay Capax D iscovery the US $1.7 million

due under the direct agreem ent. Capax Discovery

subsequently made payments totalling US$1.3 million to

Autonom y Inc in relation to the two purchase orders and

retained the balance of approximately US $370,000 (see

Schedule 3, T ransaction 2).

77.1.2. In Q 3 20 09, C apax D iscovery entered into a purchase order in

the amoun t of US $4.2 million with Autonom y Inc for end-user

Kraft Foods Global, Inc ( Kraft ). On 22 Decem ber 2009,

Autonom y Inc entered into a direct transaction w ith Kraft for

US$4.2 m illion. A week later, on 29 Decem ber 2009, Autonomy

Inc issued a credit note to Capax D iscovery in the amount of

US$4 .2 million and paid Capax D iscovery 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 D ecember 2009, C apax Discovery entered into a

purchase order with Autonom y Inc for end-user Eli Lilly and

Com pany ( Eli Lilly ) for US$6.3 million. Capax Discovery did

not make paym ent when it fell due on 31 M arch 2010.

Autonom y Inc thereafter (i) entered into a direct transaction

with Eli Lilly, (ii) caused Eli Lilly to make p ayment to C apax

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Discovery so that Capax Discovery could pay Autonomy, and

(iii) paid Capax Discovery a MA F 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 FS A to enter into a

licence and data hosting transaction with an Autonom y group

comp any throughout Q12010 . Capax Discovery did not participate in

those efforts.

77.3. It became clear in late March 2 010 that a transaction with the FSA could

not be comp leted before the end of the quarter. Late in the day on 31

M arch 2010, Autonomy Inc asked Capax Discovery to enter into a VAR

transaction pursuant to which Capax Discovery wou ld acquire a

licence for the same software as Autonom y Inc was proposing to

license to the FSA directly. There had been no prior contact between

Capax D iscovery and the FSA , nor had there been any prior contact

between an Autonomy group com pany and Capax D iscovery

regarding the FSA. T here was no price negotiation between C apax

Discovery and Autonom y Inc. Instead, Autonomy Inc merely prepared

a purchase order for Capax Discovery in the total sum of US .5

million, and Capax Discovery execu ted that purchase order as

requested. Autonom y 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 M arch 2010, H ussain, and others acting at his direction,

continued sales efforts directed at the FS A. C apax D iscovery did not

participate in those efforts and did not otherwise comm unicate with

the FSA.

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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

Autonom y Inc by 30 April 2010. Paymen t was not made.

77.6. On 25 Au gust 2010, AS L entered into a direct licence and ho sting

agreement with the FSA in the amount of US 6.7 million.

77.7. On 7 October 2010, even though Capax Discovery w as then more than

five months in arrears on its paym ent obligation under the Capax

Discovery/FSA p urchase order and had had no contact with the FSA ,

Autonomy Inc paid Capax Discovery a MA F in the amount of

US 50,000 for

Capax's con tribution to the F SA 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 M arch 2011. Again, payment was not made. At

that date, Capax Discovery owed A utonom y Inc a total of US 1.5

million, of which US 450,000 was 11 mon ths overdue. Nevertheless,

Autonom y Inc made no request for payment.

77.9. Instead, on 29 June 2011 , Autonomy Inc and Capax D iscovery (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 Autonom y Inc wou ld 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 n ot, in fact, required.

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77.10. The next day, 30 June 2011, (i) Autonomy Inc paid Capax Global US 2

million u nder the N earPoint agreement (notwithstanding the 60 day

period for paym ent), and (ii) Capax D iscovery paid Au tonom y Inc the

am ount of US 1.5 million that was outstanding under the Capax

Discovery/ FSA purchase order.

77.11. O n 7 S eptemb er 2011, shortly after Bidco's offer to purchase the

outstanding shares of Autonom y was announced, Autonom y Inc

informed Capax Discovery that it was cancelling Capax Discovery's

liability for the entire outstanding balance of US 3 m illion in respect of

the Capax Discovery/FSA purchase order.

77.12. In aggregate, Autonom y 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 Autonom y Inc had paid US 2m to Capax

Global un der the NearPoint agreemen t for costs and exp enses mo st of

which w ere 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, Autonom y Inc en tered into a software licence and support

purchase order with M icroTech which identified the Vatican Library as the

end-user

( the M arch 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 maintenan ce and custom er suppo rt. These fees

were said to be payable within 90 days. Autonomy recognised licence revenue

of US 11 m illion as revenue in Q12010 and recognised the support and

maintenan ce of US 550,000 on a quarterly basis over the one year period of

the m aintenance and support agreement. In reality, the M arch 2010 purchase

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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 20 10 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 p restige project within the Autonom y group, and both

Lynch an d Hussain w ere involved in reviewing and d ictating the

com mercial terms wh ich the Autonom y 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 em ail dated 29 M arch 2010 Hussain stated:

It is a big project and having an Italian partner would b e very

useful to us. How ever, the partner that we wou ld use wo uld have to

be sufficiently strong for us to be able to recognize the revenue and

only if the [Pu rchase Order] and contract is signed this qu arter.

The partner you m entioned last night I think is too sm all for

revenue recognition purposes.

78.4. Within 48 hours of that email, on 31 M arch 2010, A utonomy Inc and

M icroTech entered into the M arch 2010 purchase order. M icroTech was

not an Italian com pany, but was based in V irginia, 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 V atican Library prior to

31 March 2010.

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78.5. Moreover, after concluding the March 2010 purchase order under

which it ostensibly assumed a liability to pay Autonom y Inc 11.55

million within 90 days, M icroTech did not attempt to sell a licence to

the Vatican Library and w as not subsequently involved in or even

consulted in relation to A utonomy's continuing efforts to conclude a

transaction with the Vatican Library. Those efforts were conducted

solely by representatives of the Autonom y group, including Lynch and

Hussain

78.6. Although Autonomy im mediately recognised US 11 million of revenue

in Q12010, MicroTech failed to pay such am ount by the due date of 29

June 2010. W hilst it made a small payment (US 0.5 million) in October

2010, MicroTech was not pursued at any stage by Autonom y Inc for

paym ent 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 w hat was described as MicroTech's

Advanced

Technolog y Innovation Center ( ATIC ) which w as essentially to be a

display facility in a room and in a vehicle. In fact, the A TIC licence was

a contrived arrangement intended to put MicroT ech in funds so as to

enable it to pay at least a portion of the outstanding am ount ostensibly

due under the March 2010 purchase order:

78.7.1. The proposal to create an ATIC stated that the ATIC would

enable Autonom y to dem onstrate its products to the United

States Government and others;

78.7.2. The AT IC did not exist at the tim e that the proposal was

accepted;

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78.7.3. Th ere 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 A utonomy agreed to pay for the non-exclusive

right to use the A TIC also included the advance payment of the

full salaries of five MicroTech employees w ho were to staff the

A TIC for three years after construction was completed;

78.7.5. The entire contract sum was paid in full in adva nce, before the

A TIC was constructed and therefore months before the need

for the MicroTech em ployees 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 A TIC and the five MicroTech employees never

performed any m aterial services for the A utonomy group.

78.8. On 31 December 2010, the day after A utonomy 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, M icroTech

paid A utonomy Inc US 6.3 million, of which US 4.3 million was

allocated to the M arch 2010 purchase order (with the remainder

allocated to monies due under other generally similar

Autonomy/MicroTech arrangements .

78.9. During Q2 and Q3 2011, M icroTech paid a further US 4.4 million to

A utonomy Inc in respect of the March 2010 purchase order.

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78.10. The remaining balance of US 2.3 million ostensibly ow ed by

M icroTech under the M arch 2010 purchase order was never paid by

MicroTech. Instead, on 11 October 201 1, after Bidco's offer to purchase

the issued share capital of Autonomy became unconditional,

Autonom y Inc decided to w rite off this balance. No attempt to collect

this sum w as made.

78.11. Despite continuing efforts by Autonomy group representatives over

several years after the M arch 2010 purcha se order, no transaction w as

ever concluded w ith the Va tican Library.

False accounting for contrived V R transactions

79. In the Annual Reports and in each of the Quarterly Reports from Q2 2009 to

Q2 2 011 (inclusive) revenue w as m isstated as a result of the inappropriate

recognition of revenue by Autonomy in relation to the contrived VAR

transactions. In the circums tances set out above, the recognition of revenue

was contrary to the requirements of IFR S, specifically IAS 18, paragraph 14,

because:

79.1. In reality the relevant Autonomy group company did not transfer to

the VA R the significant risks and rewards of ow nership. Instead, it was

agreed and/or understood between Autonomy and the VAR that the

VA R w ould not be required to pay for the software licence from its

own resources. In many instances, the relevant Autonom y group

com pany extinguished the ostensible liability of the VA R by issuing a

credit no

Documents

Particulars of Claim HP Vs Lynch et al