Statistics released by KPMG in March 2022 showed that fraud cases are on the rise, with the number of fraud cases heard by British courts rising by 65% in 2021, compared to 2020.

Our recent update - tackling economic crime in the UK post Covid- explained proposed criminal law updates to address the rise of fraud across the UK.

Criminal investigations and prosecutions often run in parallel to civil litigation in which the victims of fraud seek (1) interim orders to protect lost assets (2) recovery of sums paid and (3) damages for losses caused by fraudulent conduct.

In this update, we explain a recent commercial case in which a party sought damages in the High Court alleging that it had been the victim of fraud.

Hewlett Packard v Lynch

The case of Hewlett Packard v Lynch has been one of the most expensive and high profile fraud trials of recent history. We take a look at the key points from the judge's summary of conclusions below.

Background

Autonomy was a profitable software company founded in 1996 and floated on the FTSE100 in 2008. Autonomy generated annual revenue of about $900 million ad had blue-chip customers in every sector. In 2011, based on market capitalisation, it was the largest British software company.

In 2011 Hewlett Packard (HP) purchased Autonomy for $11 billion. A year later HP wrote down the value of Autonomy by $8.8 billion. The fallout from that deal triggered civil proceedings in the UK and criminal proceedings in the US.

In the UK, HP, the claimant, has been substantially successful in arguing that it had been dishonestly induced to purchase Autonomy as a result of a fraud perpetrated by Autonomy's founder and owner, Dr Lynch, and its Chief Financial Officer, Mr Hussain (the Defendants).

The claims

HP's complaint was that they were induced into buying Autonomy by dishonest statements and omissions in Autonomy’s published information, and other representations made personally by the Defendants.

HP alleged:

  • fraud under the Financial Services and Markets Act 2000 in respect of statements and omissions in Autonomy's published information, on the basis of which HP relied in making an investment decision;
  • that “persons discharging managerial responsibilities within the issuers” (PDMRs) knew those statements or omissions to be untrue or misleading, or to amount to the dishonest concealment of a material facts;
  • that the defendants made false representations knowingly and/or recklessly and/or without reasonable belief in the truth, which induced the purchase of shares in Autonomy; and
  • various other claims for direct losses suffered by HP in loss-making transactions as a result of the Defendant's misconduct in breach of their fiduciary duties or employment contracts.

Damages were claimed under the Misrepresentation Act 1967 and the tort of deceit.

Liability

The court found in favour of HP, finding that:

  • the description of Autonomy as being a “pure software company” was dishonest, as Autonomy had inflated the apparent revenues of its software business by undertaking substantial hardware sales;
  • the presentation of Autonomy's financial performance was dishonest, as it disguised improper practices adopted to boost and accelerate revenue; and
  • improper practices included artificially inflating and accelerating Autonomy’s revenues; understating Autonomy’s costs of goods sold by characterizing such costs as sales and marketing expenses so as to protect gross margins; misrepresenting Autonomy’s rate of organic growth; and misrepresenting the nature and quality of Autonomy’s revenues as well as overstating its gross and net profits.

In sum, the court agreed that the above resulted in Autonomy being in fact a considerably less valuable enterprise than it appeared on the basis of its published information.

Caveat emptor - no defence

In his summary of conclusions, the judge noted that it is no defence to a Financial Services Market Act a fraud claim that the claimants had the means of discovering the truth and that there is no defence of contributory negligence: "even if … HP’s due diligence were considered to be rushed and deficient, and HP might have been expected to unearth and probe further into matters about which complaint is now made, that would not be a defence. It would be beguiling but wrong to think that the answer could be “caveat emptor”".

This case rested on the premise that documents and information were dishonestly contrived by the defendants to give a false impression of the performance of Autonomy’s business. Although the defendants had taken sophisticated measures to justify false transactions, the court found that this justification was a "pretence, fashioned principally for the audit committee and Deloitte, who would not have approved the accounting treatment without the pretence".

Quantum

Mindful of the impact his judgment might have on other proceedings, including extradition proceedings, the judge considered it inappropriate to delay his judgment on liability. However, he declined to consider quantum beyond making a provisional determination that, even if adjusted to take account of the fraud, HP would still have considered Autonomy a suitable acquisition. It is expected that the amount to be awarded to HP will be significant although "substantially less than is claimed".

The case highlights how a party may seek to issue a range of claims in the commercial court to recover losses caused by fraud. In addition to the civil remedies available, parties may often seek criminal redress, including reporting the matter to a specialist enforcement agency in the UK or abroad.

Contributor

Paul Marshall

Partner