In the biggest UK civil fraud trial to date (for more than $5bn), two former directors of Autonomy have been found liable for publishing misleading information about the company’s performance before Hewlett Packard (HP) bought the entire issued share capital of Autonomy. How did they come to be liable for this misleading information?
The full judgment on liability is not yet available and will only be handed down after it has been checked and corrected, and the section on the amount of damages payable is still to be completed. The judge however, conscious that the liability judgment could have an effect on other proceedings (one director is facing extradition for US criminal proceedings in relation to the same facts as this dispute), has unusually published a Summary of Conclusions of Mr Justice Hildyard – 28th January 2022 showing the key findings on liability.
What was the misleading information?
HP alleged that the directors (former Autonomy CEO Mike Lynch, and ex-CFO Sushovan Hussain as a shadow director) dishonestly claimed that Autonomy was a pure software company and that it was more profitable than it was, concealing its substantial hardware sales and carrying out improper accounting practices to boost and accelerate revenue. All this resulted in Autonomy being a considerably less valuable enterprise than it appeared to the market.
Section 90A/Schedule 10A Financial Services and Markets Act 2000 (FSMA) claims
The judge found that Autonomy was liable to HP for the misleading information in the accounts under Section 90A (and Schedule 10A) of FSMA. This makes issuers of securities liable to pay compensation to those who have suffered loss as a result of a misleading statement in certain published information relating to those securities, or an omission of something required to be so published, or a dishonest delay in publishing such information. This is information published on a recognised information service, so communicated to the market at large.
The issuer is liable:
- for an untrue or misleading statement - if a person discharging managerial responsibilities within the issuer (PDMR) knew the statement was untrue or misleading, or was reckless as to whether this was the case
- for an omission - if a PDMR knew the omission to be a dishonest concealment of a material fact
- for a delay in publishing information – if the PDMR acted dishonestly in delaying the publication.
A PDMR is, in general terms, any director or senior manager of the issuer (or person occupying such a position), and dishonesty means conduct regarded as dishonest by persons who regularly trade on the securities market in question, where the PDMR was aware (or must be taken to have been aware) that it was so regarded.
As HP had bought the shares in Autonomy, it was effectively suing its own company. However an issuer can seek to lay off its own liability by suing the PMDRs if they knew about the wrongful statements and omissions. Although Autonomy had already admitted HP’s FSMA claim, this admission did not bind the court, so HP had to prove Autonomy’s liability before proving the personal liability of the former Autonomy CEO Mike Lynch and ex-CFO Sushovan Hussain as PDMRs.
Fraudulent misrepresentation – tort of deceit and section 2(1) Misrepresentation Act 1967
The judge also found that the directors were liable to HP both in the common law and the statutory claim for fraudulent misrepresentation in relation to the same facts. Such claims are direct claims against the directors (based on their personal liability rather than the liability of the issuer). The directors had made false representations in the published accounts, knowingly, recklessly or without reasonable belief in the truth of them, which induced HP to purchase shares in Autonomy.
The damages recoverable for these claims would be less than for the FSMA claim because HP would only be able to recover loss attributable to the shares and share options which Dr Lynch and Mr Hussain themselves each held and sold to the investor. In any event there would be no double recovery for the same loss to the extent that loss was recovered under the FSMA claim.
What if HP had other ways of discovering the truth about the accounts?
It is no defence to a FSMA claim or a fraud claim that the claimants had the means of discovering the truth, and no defence of contributory negligence is available. As the judge said, even if HP’s due diligence on Autonomy had been rushed and deficient, or if HP might have been expected to unearth and probe further into the matters it was complaining about, that would not be a defence. So long as HP’s reliance on the accounts was reasonable (so HP had no actual knowledge that they were misleading) its claim under FSMA could stand.
Why weren’t the accountants liable?
HP did originally claim against Autonomy’s accountants in respect of the accounts as well as Autonomy directors, but this claim was settled in 2016. HP will have to give credit for the settlement sum in the amount it recovers from the directors.
Breach of fiduciary duty and/or breach of employment contract
Separately to the above claims, the judge also found that the directors were liable for entering into various loss-making transactions in breach of their fiduciary duties as directors and their employment contracts. These claims did not arise out of the acquisition, but out of the defendants’ management conduct.
What can we learn from this case?
The judge reached clear conclusions on the evidence on the civil liability of Dr Lynch and Mr Hussain for fraud under FSMA, common law, and the Misrepresentation Act 1967. The bar in proving fraud is set quite high. The claimant must show on a balance of probabilities that the defendant knew the representation was false or was reckless as to whether it was true or false, and intended reliance on it. If a buyer of listed securities can successfully prove fraud, bringing a claim, particularly under FSMA, is a very valuable weapon in recovering compensation and making good its losses.
Laura Beagrie
Kathryn Saunders