Allan J. Nicolow, et al. v. Hewlett-Packard Company, et al. 12-CV-05980-Consolidated Complaint

148 Pages·2013·7.55 MB·English

by  Allan J. Nicolow

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1 KESSLER TOPAZ MELTZER
& CHECK, LLP
2 RAMZI ABADOU (Bar No. 222567)
ELI R. GREENSTEIN (Bar No. 217945)
3 STACEY M. KAPLAN (Bar No. 241989)
PAUL A. BREUCOP (Bar No. 278807)
4 IOANA A. BROOKS (Bar No. 253123)
One Sansome Street, Suite 1850
(cid:9)
5 San Francisco, CA 94104
Tel: [phone]
(cid:9)
6 Fax: [phone]
[email protected]
(cid:9)
7 [email protected]
[email protected]
8 [email protected]
[email protected]
9
Counsel for Lead Plaintiff PGGM Vermogensbeheer B .V.
and Lead Counsel for the Class
10
11
UNITED STATES DISTRICT COURT
(cid:9)
12
NORTHERN DISTRICT OF CALIFORNIA
(cid:9)
13 SAN FRANCISCO DIVISION
14
IN RE HP SECURITIES LITIGATION, (cid:9) Master File No. C-12-5980 CRB

15
CLASS ACTION
(cid:9)
16 This Document Relates To: All Actions
CONSOLIDATED COMPLAINT FOR
(cid:9)
17 VIOLATION OF THE FEDERAL
SECURITIES LAWS
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DEMAND FOR JURY TRIAL
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TABLE OF CONTENTS
1
INTRODUCTION............................................................................................................... 1
2 I.
SUBSTANTIVE ALLEGATIONS AND DEFENDANTS’ MOTIVES ............................ 3
3 II.
A. (cid:9) Background to the Class Period .............................................................................. 5
4
1. A Brief History of HP’s High-Level Corporate Leaks ................................ 5
5
2. Red Flags Are Raised About Autonomy Before the Class
6
Period...........................................................................................................7

7
3. HP Hires a New CEO Desperate to Transform HP Into a
SoftwareCompany .................................................................................... 12
8
4. Apotheker and Lynch Agree to a Deal-In-Principle .................................. 15
9
5. HP Conducts Cursory Due Diligence on a Polluted and
10
Vastly Overvalued Asset ........................................................................... 18

11
B. (cid:9) The Class Period Starts with Apotheker’s Announcement of HP’s
Offer to Purchase Autonomy ................................................................................. 21
12
1. More Suspicions Emerge About Autonomy’s Improper
13
Course of Business Conduct ...................................................................... 23

14
2. Apotheker Responds to Investors’ Unease About HP’s
Offerfor Autonomy ................................................................................... 29
15
3. The Briody Matter ..................................................................................... 31
16
C. (cid:9) Unbeknownst to HP’s Shareowners, HP Sought to Withdraw the
17
AutonomyOffer .................................................................................................... 33

18
D. (cid:9) HP Begins to Unwind Autonomy’s Improper Accounting Practices .................... 36

19
E. (cid:9) A Fourth Whistleblower Alerts HP About Autonomy .......................................... 38

20
F. (cid:9) The Relevant Truth Is Mostly Revealed, Thereby Ending the Class
Period.....................................................................................................................40
21
G. (cid:9) Relevant Post Class Period Developments ............................................................ 43
22
1. HP/Autonomy Defends Autonomy’s Accounting Practices
23
inNew Hampshire ..................................................................................... 46

24
2. Lynch and Apotheker Respond to HP’s Accusations ................................ 48

25
JURISDICTION AND VENUE ........................................................................................ 51
III.
26
THEPARTIES .................................................................................................................. 51
IV.
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A. (cid:9) Lead Plaintiff ......................................................................................................... 51

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1 B. Corporate “Person” ................................................................................................ 52

2 C. Insider Defendants ................................................................................................. 52

3 V DEFENDANTS’ VIOLATIONS OF THE EXCHANGE ACT ....................................... 57

4 A. (cid:9) HP’s Quantitative Financial Statements Were Materially Misstated
in Violation of GAAP and SEC Regulations ........................................................ 57

5
1. (cid:9) Applicable Accounting and Disclosure Rules ........................................... 57

6
2. (cid:9) Summary of HP’s Accounting Violations ................................................. 60

7
a. HP’s 4Q11 and FY 2011 Financial Statements
8 ViolatedGAAP ............................................................................. 64

9 b. HP’s 1Q12 Financial Statements Violated GAAP ........................ 67

10 c. HP’s 2Q12 Financial Statements Violated GAAP ........................ 68

11 d. HP’s 3Q12 Financial Statements Violated GAAP ........................ 69

12 3.(cid:9) HP/Autonomy’s Financial Misrepresentations Were
Material......................................................................................................70

13
B. (cid:9) Defendants’ Qualitatively Materially False and Misleading Class
14 Period Statements and Omissions ......................................................................... 72

15 1. (cid:9) August 18 & 22, 2011 ............................................................................... 72

16 2. (cid:9) September 13 & 22, 2011 .......................................................................... 76

17 3.(cid:9) Fourth Quarter 2011 and FY 2011 ............................................................ 79

18 4. (cid:9) First Quarter 2012 ...................................................................................... 81

19 a. HP’s 2/22/12 Press Release was Materially False
andMisleading .............................................................................. 81

20
b. HP Announces Its 1Q12 Results ................................................... 82

21
5.(cid:9) Second Quarter 2012 ................................................................................. 83

22
a. HP’s 5/23/12 Press Release was Materially False
23 andMisleading .............................................................................. 83

24 b. HP Announces Its 2Q12 Results ................................................... 85

25 6.(cid:9) Third Quarter 2012 .................................................................................... 86

26 a. HP’s 8/22/12 Press Release was Materially False
andMisleading .............................................................................. 86

27
b. HP Announces Its 3Q12 Results ................................................... 88

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(cid:9)
1 C. (cid:9) Loss Causation/Economic Loss ............................................................................. 90

(cid:9)
2 1. (cid:9) HP’s August 22, 2012 Partial Disclosure .................................................. 91

(cid:9)
3 2. (cid:9) HP’s November 20, 2012 Class Period Ending Disclosures.....................92

(cid:9)
4 3.(cid:9) Relevant Post-Class Period Admissions .................................................... 93

5 VI. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON-
THE-MARKET DOCTRINE ............................................................................................ 95

6
VII. APPLICABILITY OF THE AFFILIATED UTE PRESUMPTION OF
(cid:9)
7 RELIANCE.......................................................................................................................96

(cid:9)
8 VIII. (cid:9) NO SAFE HARBOR ......................................................................................................... 96

(cid:9)
9 IX. (cid:9) CLASS ACTION ALLEGATIONS .................................................................................. 97

(cid:9)
10 X. (cid:9) CLAIMS FOR RELIEF ..................................................................................................... 98

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1 “If those revenues are not what Autonomy says they are,
then HP is getting the shaft.”
2 – eDiscovery Journal, Aug. 31, 2011 1
3 (cid:9) I. INTRODUCTION

4 1. (cid:9) This is a class action for violations of the federal securities laws. PGGM
(cid:9)
5 Vermogensbeheer B.V. (“Lead Plaintiff” or “PGGM”) alleges the following based upon personal
(cid:9)
6 knowledge with respect to itself and, with respect to all other matters, the investigation of Kessler
(cid:9)
7 Topaz Meltzer & Check, LLP (“Lead Counsel”). Lead Plaintiff believes that substantial
(cid:9)
8 evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for
(cid:9)
9 discovery.
(cid:9)
10 2. (cid:9) Lead Counsel’s investigation included, inter alia, a review and analysis of:
(cid:9)
11 (i) Hewlett-Packard Company’s (“HP” or the “Company”) filings with the United States
(cid:9)
12 Securities and Exchange Commission (“SEC”); (ii) Autonomy Corporation plc’s (“Autonomy”)
(cid:9)
13 filings with the London Stock Exchange (“LSE”); (iii) the offering documents filed by HP and
14 Autonomy pursuant to the United Kingdom City Code on Takeovers and Mergers (the “City
(cid:9)
15 Code”) for HP’s acquisition of Autonomy on October 3, 2011; (iv) foreign and domestic press
(cid:9)
16 releases and other HP and Autonomy public statements, securities analyst reports and media
(cid:9)
17 reports, as well as information developed from former HP and Autonomy employees;
(cid:9)
18 (v) interviews with industry experts and analysts, including Alan Pelz-Sharpe (“Pelz-Sharpe”),
(cid:9)
19 who referred Autonomy to the United Kingdom’s Serious Fraud Office for “alleged suspicious
(cid:9)
20 practices” before the Autonomy acquisition closed on October 3, 2011 (hereinafter, the
(cid:9)
21 “Autonomy Acquisition”), and Paul Morland (“Morland”), who alerted HP’s Investor Relations
(cid:9)
22 Department about Autonomy’s manipulative accounting practices prior to the Autonomy
(cid:9)
23 Acquisition; and (vi) internal Autonomy e-mails and other documents filed in Briody v.
24 Autonomy NA Holdings Inc ., No. 42552 (Dep’t of Labor 2011) (the “Briody Matter”) and
(cid:9)
25 Autonomy NA Holdings Inc . v. Briody, No. 218-2012-CV-1056 (N.H. Super. Ct. 2012).2
26
(cid:9) (cid:9)
1 All emphasis is added unless otherwise noted.
27
(cid:9)
2 A list of acronyms referenced in this Consolidated Complaint for Violation of Federal
(cid:9)
28 Securities Laws (“Complaint”) is attached hereto as Appendix A.
COMPLAINT (cid:9) -1-
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(cid:9)
1 3.(cid:9) Lead Plaintiff brings this action on behalf of all persons who purchased or
(cid:9)
2 otherwise acquired HP’s common stock between August 19, 2011 and November 20, 2012,
(cid:9)
3 inclusive (the “Class Period”), and who were damaged thereby. The Defendants are: (i) HP;
(cid:9)
4 (ii) current HP Chief Executive Officer (“CEO”) Margaret C. Whitman (“Whitman”); (iii) former
(cid:9)
5 HP CEO Léo Apotheker (“Apotheker”), who was terminated by HP effective September 22,
(cid:9)
6 2011, for spearheading the Autonomy Acquisition; (iv) Autonomy’s founder and HP’s former
(cid:9)
7 Executive Vice President of Information Management Michael R. Lynch (“Lynch”), who
(cid:9)
8 Whitman terminated in April 2012 in connection with the Autonomy Acquisition; (v) former HP
(cid:9)
9 Executive Vice President and Chief Strategy and Technology Officer Shane V. Robison
(cid:9)
10 (“Robison”), who was also terminated for his role in supporting the Autonomy Acquisition;
(cid:9)
11 (vi) current HP Executive Vice President and Chief Financial Officer (“CFO”) Catherine A.
(cid:9)
12 Lesjak (“Lesjak”); (vii) HP’s former Executive Chairman of the Board of Directors (the “HP
(cid:9)
13 Board”), Raymond J. Lane (“Lane”), who was forced to step down as Executive Chairman for
(cid:9)
14 overseeing the Autonomy Acquisition; and (viii) HP’s former Senior Vice President, Controller
(cid:9)
15 and Principal Accounting Officer, James T. Murrin (“Murrin”), (the individuals above are
(cid:9)
16 referred to herein as the “Insider Defendants”).
(cid:9)
17 4. (cid:9) Lead Plaintiff’s claims arise out of Defendants’ deliberately reckless and/or
(cid:9)
18 knowing course of business conduct whereby they caused HP to issue materially false and
(cid:9)
19 misleading statements related to the Company’s $11 billion Autonomy Acquisition and
(cid:9)
20 integration. Defendants’ public misrepresentations and omissions of material adverse facts about
(cid:9)
21 the Autonomy Acquisition and subsequent integration into HP caused the market price of HP
(cid:9)
22 securities to be artificially inflated during the Class Period. Each of the Defendants either knew, or
(cid:9)
23 recklessly disregarded, that: (i) the statements and omissions alleged herein were false and
(cid:9)
24 misleading when made; (ii) such statements would adversely affect the integrity of the market for
(cid:9)
25 HP securities; and (iii) would deceive investors into purchasing HP securities at artificially inflated
(cid:9)
26 prices.
(cid:9)
27 5.(cid:9) On November 20, 2012, during HP’s 4Q12 earnings conference call (“11/20/12
(cid:9)
28 Conference Call”), and only about a year after the Autonomy Acquisition closed, Defendants
(cid:9)
COMPLAINT -2-
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(cid:9)
1 announced an 85% write-down of the value of Autonomy ( i.e., an $8.8 billion write-down for an
(cid:9)
2 $11 billion acquisition price).3 The same day, Defendant Whitman and HP General Counsel
(cid:9)
3 John Schultz (“GC Schultz”) blamed $5+ billion of the write-down on a purportedly vast
(cid:9)
4 accounting fraud perpetrated by “Autonomy’s management.” In Whitman’s words, Autonomy’s
(cid:9)
5 management engaged in “serious accounting improprieties, disclosure failures and outright
(cid:9)
6 misrepresentations.” HP specifically attributed the remaining $3 billion of the total write-down
(cid:9)
7 amount “to the recent trading value of HP stock.” In response to these disclosures, the price of
(cid:9)
8 HP’s common stock fell nearly 12% on unusually heavy trading volume of 154,734,832 shares
(cid:9)
9 traded on November 20, 2012, eliminating more than $3.1 billion from the Company’s market
(cid:9)
10 capitalization in a single trading day.
11 II. SUBSTANTIVE ALLEGATIONS AND DEFENDANTS’ MOTIVES
(cid:9)
12 6.(cid:9) This Complaint tells the story of: (i) a beleaguered HP Board who were, in their
(cid:9)
13 own words, “just too exhausted from all the infighting” to effectively oversee HP’s executive
(cid:9)
14 management in the months leading up to the Autonomy Acquisition; (ii) a German software
(cid:9)
15 executive (Apotheker) whom a majority of the HP Board had never met prior to hiring him as
(cid:9)
16 CEO in September 2010; (iii) a British software executive (Lynch) hoping to cash out of
(cid:9)
17 Autonomy before it collapsed under the weight of its own fraud; (iv) an HP Board member
(cid:9)
18 (Whitman) who voted for the Autonomy Acquisition but later replaced Apotheker as HP’s CEO
(cid:9)
19 on September 22, 2011 – a week before the Autonomy Acquisition Apotheker spearheaded even
(cid:9)
20 closed; (v) current HP CFO (Lesjak), and longtime HP stalwart, who opposed the Autonomy
(cid:9)
21 Acquisition in front of the full HP Board in late July 2011; (vi) former HP Board Executive
(cid:9)
22 Chairman (Lane) who, since he was elected as an HP Director in 2010, has overseen HP’s 50%
(cid:9)
23 share price decline; and (vii) the self-interested auditors, Wall Street bankers and other
24
25
3 (cid:9) “1Q09” refers to the first quarter of 2009; “3Q09” refers to the third quarter of 2009;
(cid:9)
26 “1Q10” refers to the first quarter of 2010; “2Q10” refers to the second quarter of 2010; “3Q10”
refers to the third quarter of 2010; “1Q11” refers to the first quarter of 2011; “2Q11” refers to the
(cid:9)
27 second quarter of 2011; “3Q11” refers to the third quarter of 2011; “4Q11” refers to the fourth
quarter of 2011; “1Q12” refers to the first quarter of 2012; “2Q12” refers to the second quarter of
(cid:9)
28 2012; “3Q12” refers to the third quarter of 2012; and “4Q12” refers to the fourth quarter of 2012.
(cid:9)
COMPLAINT -3-
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1 investment advisers who facilitated HP’s severely reckless pursuit of Autonomy in exchange for
2 nearly $100 million in fees.
3 7. Throughout the Class Period, Defendants either knowingly, or with deliberate
4 recklessness, made materially false and misleading statements and/or failed to disclose that: (i) at
5 the time the Company acquired Autonomy for $11 billion on October 3, 2011, Autonomy’s
6 reported operating results and growth were the product of “serious accounting improprieties;”
7 (ii) in the period between HP’s announcement of its offer to acquire Autonomy on August 18,
8 2011 and closing on October 3, 3011, Whitman and Lane sought to rescind HP’s offer to acquire
9 Autonomy; (iii) the Company engaged in deliberately reckless due diligence, causing HP’s
4
10 shareholders to materially overpay for Autonomy; (iv) HP’s reported goodwill and acquired
11 intangible assets were materially overstated, and its impairments were materially understated,
12 throughout the Class Period; and (v) in May 2012, a senior HP/Autonomy executive alerted GC
13 Schultz, who immediately told CEO Whitman, that Autonomy was engaging in fraud. 5
14 8. On November 20, 2012, the last day of the Class Period, Defendant Whitman and
15 GC Schultz effectively accused former Autonomy CEO Lynch, who was HP’s Executive Vice
16 President of Information Management from November 2011 to April 2012, of engaging in
17 improper accounting practices, revealing that “[t]he majority of [the Autonomy] impairment
18 charge, more than $5 billion, is linked to serious accounting improprieties, misrepresentation[s]
19 and disclosure failures” committed by “former members of Autonomy’s management team.”
20 This misconduct, which Defendants were either aware of or recklessly disregarded, caused
21 material overstatements to HP’s publicly reported goodwill in its 2011 Annual Report on Form 10-K
22 filed with the SEC on December 14, 2011, and in the three Quarterly Reports (for 1Q12-3Q12) on
23 Forms 10-Q that HP filed with the SEC as alleged in ¶¶134-162, infra.
24
25
4 (cid:9) Goodwill is “[a]n asset representing the future economic benefits arising from other assets
26
acquired in a business combination...that are not individually identified and separately
recognized.” Financial Accounting Standards Codification (“FASC”) 350-20-20.
27
5 (cid:9) See Ben Worthen, H-P Says It Was Duped, Takes $8.8 Billion Charge , Wall St. J., Nov.
28 20, 2012.
(cid:9)
COMPLAINT -4-
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1 (cid:9) A.(cid:9) Background to the Class Period
(cid:9)
2 1. (cid:9) A Brief History of HP’s High-Level Corporate Leaks
(cid:9)
3 9.(cid:9) HP was founded by Stanford University graduates William Redington Hewlett
(cid:9)
4 and David Packard in a single-car garage in Palo Alto in 1939 with an initial investment of about
(cid:9)
5 $530.6 According to its filings with the SEC, HP provides products, technologies, software,
(cid:9)
6 solutions and services to individual consumers, small-sized and medium-sized businesses, and
(cid:9)
7 large enterprises, including customers in the government, health and education sectors. The
(cid:9)
8 Company’s products and services include: personal computing devices; imaging and printing-
(cid:9)
9 related products and services; enterprise information technology services; and multi-vendor
(cid:9)
10 customer services, including infrastructure technology and business process outsourcing and
(cid:9)
11 technology support and maintenance.
(cid:9)
12 10. (cid:9) In a section of HP’s “Standards of Business Conduct” on its corporate website
(cid:9)
13 called “Uncompromising integrity,” the Company assures its shareowners that HP “protect[s]
(cid:9)
14 sensitive information.” In truth, HP’s weak disclosure controls have caused the Company’s
(cid:9)
15 sensitive corporate information to leak publicly for years. The Company’s disclosure control
(cid:9)
16 failures go back at least to early 2005. In January 2005, an HP insider leaked confidential Board
(cid:9)
17 plans to redistribute the duties of then CEO Carly Fiorina to other executives. In response,
(cid:9)
18 Fiorina authorized an investigation to determine who had leaked the plans, which later revealed
(cid:9)
19 that an HP Board member had leaked the reorganization to the press. The following month, in
(cid:9)
20 February 2005, Fiorina was ousted as HP’s CEO.
(cid:9)
21 11. (cid:9) In early 2006, former HP Board Chairwoman, Patricia C. Dunn, took
(cid:9)
22 controversial measures to try to stem the leaks at HP. After an HP Director appeared to have
(cid:9)
23 leaked HP’s long-term business strategy to CNET News , Dunn secretly authorized a team of
(cid:9)
24 independent electronic security experts to identify the source of the leak. The team thereafter
(cid:9)
25 unlawfully monitored ten HP Directors’ communications by obtaining records of calls from their
(cid:9)
26 homes and private cell phones. HP’s investigators obtained this information using a method
27
(cid:9)
6 The name HP was decided by a coin flip between Messrs. Hewlett and Packard that Mr.
(cid:9)
28 Hewlett won.
COMPLAINT (cid:9) -5-
Master File No. C-12-5980 CRB
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(cid:9)
1 called “pretexting,” i.e., employing false pretenses to obtain a person’s private information. The
(cid:9)
2 investigation ultimately revealed that long-time HP Director member George A. Keyworth II had
(cid:9)
3 leaked the information. After HP’s investigatory methods came to light, California’s Attorney
(cid:9)
4 General filed criminal charges against Dunn and four others involved. Thomas J. Perkins, HP
(cid:9)
5 Director at the time, abruptly left the Board in protest of Dunn’s investigation.
(cid:9)
6 12. (cid:9) In 2008, the HP Board accused then CEO Mark V. Hurd of leaking HP’s secret
(cid:9)
7 plan to acquire Electronic Data Systems Corporation (“EDS”). Hurd later resigned as HP's CEO
(cid:9)
8 in August 2010 and was succeeded by Defendant Apotheker, effective November 1, 2010. The
(cid:9)
9 leaks at HP continued under Apotheker. Only six months after becoming HP’s CEO, on May 4,
(cid:9)
10 2011, Apotheker circulated a sensitive internal memo to HP’s top executives reportedly stating,
(cid:9)
11 among other things, that “Q3 is going to be another tough quarter.” Two weeks later,
(cid:9)
12 Apotheker’s e-mail appeared in a Bloomberg news report dated May 16, 2011, headlined
(cid:9)
13 “Hewlett-Packard CEO Expects ‘Tough Third Quarter,’ Memo Says.” The leak forced HP to
(cid:9)
14 accelerate the filing of its 2Q11 earnings report to officially disclose the Company’s lower
(cid:9)
15 internal revenue projections. During the Company’s May 17, 2011 hastily-scheduled 2Q11
(cid:9)
16 earnings conference call (“5/17/11 Conference Call”), HP’s then Vice President of Investor
(cid:9)
17 Relations, Steve Fieler, explained:
(cid:9)
18 Before we get started, I wanted to explain the decision to accelerate the timing of
our Q2 earnings announcement. Yesterday afternoon, we became aware of a
(cid:9)
19 published media report quoting from an internal HP communication.... We
therefore determined that the most prudent course of action under these
(cid:9)
20 circumstances was to accelerate our second-quarter earnings announcement.
(cid:9)
21 13. (cid:9) During the same call, Defendant Apotheker apologized for the leak, conveying
(cid:9)
22 that he “felt announcing early was the right thing to do given the circumstances.” Apotheker was
(cid:9)
23 profoundly humiliated by the leak and thereafter resolved to maintain a small circle of only his
(cid:9)
24 most loyal lieutenants at HP, including former SAP AG (“SAP”) employees Apotheker brought
(cid:9)
25 with him to HP. After only 11 months as HP’s CEO, Apotheker was terminated in September
(cid:9)
26 2011 for spearheading the Autonomy Acquisition. Ironically, Apotheker learned of his ouster via
(cid:9)
27 a September 21, 2011 leak to Fortune in an article called “HP Board May Oust Apotheker for
28
(cid:9)
COMPLAINT -6-
Master File No. C-12-5980 CRB