A conviction for fraud isn't a good look

There was always something remarkably odd about the company Autonomy. I had some very light indeed dealings with them at one point and I could never work out what was the “there” there. Others who actually know how to read accounts were also somewhat sceptical of what the company was reporting. At least one American court now believes that it has worked matters out:

The former chief financial officer of Autonomy was convicted of fraud in San Francisco on Monday, in the first courtroom test of claims by Hewlett-Packard that it was defrauded when it bought the British software company.

Sushovan Hussain was convicted on all 16 counts of wire and securities fraud after a trial that lasted two months. The federal case was brought after the UK’s Serious Fraud Office declined to pursue the allegations.

That the SFO declined to bring charges does show something or other. Maybe that they’re incompetent, perhaps that they didn’t think there was fraud. The American court disagrees. But then we’d expect a little home team bias, wouldn’t we? Both ways, the Brits not prosecuting, at the margin, if it’s Yanks ripped off, the Septics being a tad biased the other way.

Unsurprisingly, HP said it was “pleased” with the verdict.

“As we have consistently maintained, Mr Hussain engaged in outright fraud and deliberately misled the market about non-existent sales through a series of calculated sham transactions.

“Autonomy manipulated their revenue, and quarterly results, making an accurate valuation impossible. That Mr Hussain attempted to depict the fraud as nothing more than a misunderstanding of international accounting rules was, and still remains, patently ridiculous – and the jury has now held him accountable for his role in defrauding HP.”

Hmm, well, yes. It’s also true that the basic HP strategy of the time was a nonsense. Trying to turn a hardware manufacturer into a software services type of thing wasn’t likely to work out well. There really is a culture to a company and trying to change it is appallingly difficult. Often better to simply leave an organisation to its fate. It’s only a method of trying to get something done, after all, and if that thing no longer needs doing, or it others are better at it, then why not let the organisation die? Instead of attempts – usually very expensive attempts – to reinvent.

Hussain’s defense team portrayed him as a victim of HP’s incompetence, and said the the biz had been on a spending spree under the rein of then-CEO Leo Apotheker. Those purchases included Palm, which was hailed by King Leo as a crucial strategic move but later written off entirely. Hussain’s lawyers argued the same was true of Autonomy: it was poorly handled by HP.

As I actually remarked at the time of the writedown itself. The City always rather held its nose about Autonomy. Never quite understanding the business nor its accounts. That should have been a little warning to HP.

All of which is very interesting. But there’s a larger lesson here about international business. Something that ties in with Hayek’s point about all knowledge being local. In the English computer industry, and that part of the financial world that looks at computing, Autonomy was always rather an odd beast. Concerns about how it recognised revenue, when it booked it, even what they defined as a sale, had been going on for years. Ever since its first flotation in fact.

No one doubted that the product itself was great. But there was always just a slight whiff about the accounting. And if you worked in either English computing, or that part of the financial world that concerns itself with it, you would know all of this. Financial numbers from the company were, well, not to be distrusted…regarded as being just a little bit inventive perhaps?

And of course when you’re planning a grand strategic move from 6 thousand miles away that sort of local knowledge just isn’t going to be apparent. Any English company thinking of taking over Autonomy would have gone through the books with a fine toothed comb before handing over a penny. Even more so than they might have done with another company. HP, being based in California? Well, obviously, not so much.

That’s from 2012. It’s now 2018. Those mills of justice sure grind slow, no?

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1 COMMENT

  1. It is not “Often better to simply leave an organisation to its fate.” Notably when it is tanking and your investment will eventually be worthless. Which doesn’t mean that the solution is to buy a business overseas. As noted, HP has tended to buy businesses it doesn’t understand. It’s tough integrating employee bases; everyone knows who “came from the other side” and suspects that any success they enjoy owes to favoritism by management. It’s worse when a stuffed-shirt IBM buys a start-up where no one wears a tie.

    It’s not a problem telling employees writing code for a printer to start writing code for a server, or even to learn different languages to code in; more a problem that management doesn’t understand the new business. HP has had a series of impresarios (most famously, Carly Fiorina) whose “vision” mostly had to be inspiring rather than 20-20.

    Now, inducing a buyer to pay too much for something is not inherently fraud, but the accounting profession has created thousands of rules that one can inadvertently violate. I have “manipulated revenue”; for years, before Reagan, I deferred income rather than enter the 50% tax bracket. That would make valuation impossible. It’s not clear what here was fraud, other than, “We couldn’t make the merger work, and it’s your fault.” Presumably the SFO has a clearer picture. Presumably it is right down the hall from the Serious Murder Office and the Serious Rape Office.