Travers Smith LLP acted for the Claimants in these proceedings.

"Fraud on a grand scale; or relentless witch-hunt?": these were the first eight words of Mr Justice Hildyard's mammoth (almost 1,700 page) judgment in the high profile fraud claim brought by various Hewlett-Packard group companies (the "Claimants") against Dr Michael Lynch (the founder and former CEO of Autonomy Corporation Plc ("Autonomy")) and Mr Sushovan Hussain (the former CFO of Autonomy) following a 93 day trial which Hildyard J said "may rank amongst the longest and most complex in English legal history".

On 28 January 2022, just over two years after the end of the trial, Hildyard J, in an (in his words) "unorthodox" move, announced the result in open court prior to circulating his draft judgment to the parties and their legal teams. Handing down his "Summary of conclusions" judgment (the "Conclusions Judgment"), Hildyard J revealed that the answer to the above question was the former, i.e. "fraud on a grand scale", the Claimants having "substantially succeeded in their claims". He also stated that quantum would be dealt with in a separate judgment, to be published in due course. The detailed liability judgment was published on 17 May 2022 (the "Liability Judgment").

In this briefing, we focus on the claim brought pursuant to Schedule 10A (and its predecessor, section 90A) of the Financial Services and Markets Act 2000 ("FSMA"). Unless stated otherwise, references to paragraph numbers are to the paragraph numbers of the Liability Judgment.

FSMA securities claims

FSMA provides two mechanisms for disgruntled investors to seek compensation from the issuer of securities in respect of loss suffered as a result of reliance on misinformation disseminated to the market: section 90, which provides redress for misleading statements or omissions in listing particulars or prospectuses; and Schedule 10A, which imposes liability on issuers for untrue or misleading statements, or omissions of matters required to be included, in "published information", such as quarterly and annual reports and trading updates. Recent high-profile examples of claims brought under these provisions are:

  • a multi-million-pound claim brought by institutional and retail investors against The Royal Bank of Scotland. The claim was brought pursuant to section 90 of FSMA in respect of allegedly false and misleading information contained in a prospectus published by RBS in April 2008 in connection with its £12 billion rights issue shortly before the bank collapsed a few months later (the "RBS Rights Issue Litigation"). The case settled in 2017 shortly before trial; and
  • a multi-million-pound claim brought by institutional shareholders against Tesco Plc, pursuant to section 90A and Schedule 10A of FSMA, following a public announcement in 2014 that Tesco's profits had been overstated in its accounts to the tune of £250 million (the "Tesco Litigation"). The case was dropped by "mutual agreement" in September 2020, again, shortly before the trial was due to begin.

In contrast to the facts which gave rise to the RBS Rights Issue Litigation and the Tesco Litigation, the claim in the Autonomy case arose out of the acquisition by Hewlett-Packard ("HP") of the entire issued share capital of Autonomy in 2011. In other words, unlike the RBS and Tesco cases, there was just one acquiror – HP – who had purchased shares in the issuer in reliance on the issuer's allegedly misleading published information; and at the time of the claim the issuer in question – Autonomy – was 100% owned by HP. We discuss below the practical difficulty to which this gave rise, and the way in which the Claimants overcame it.

1. Background – from Acquisition to Judgment

On 18 August 2011, HP announced that it was to acquire Autonomy, a FTSE 100 software company headquartered in Cambridge, for US$11.1 billion. However, just over a year later, HP announced to the market that a substantial (US$8.8 billion) write-down of Autonomy's value was required due in large part to the discovery of "accounting irregularities" and "disclosure failures". In 2015, the Claimants issued a claim in the High Court, advancing three discrete (but related) causes of action:

  1. a circa US$4.5 billion claim against two of Autonomy's former directors, Dr Lynch and Mr Hussain, under section 90A and Schedule 10A (known as the "FSMA claim");  
  2. a circa US$400 million claim against Dr Lynch and Mr Hussain, attributable to the shares and share options each sold to HP in the deal, in the tort of deceit and/or under the Misrepresentation Act 1967, in respect of allegedly fraudulent misrepresentations made by Dr Lynch and Mr Hussain to HP during the acquisition process; and  
  3. a smaller (circa US$76 million) claim against Dr Lynch and Mr Hussain for causing various Autonomy group companies to whom they owed fiduciary duties to enter into improper transactions, thereby causing those subsidiaries loss.

As summarised in the Conclusions Judgment, the nub of the first two (and main) claims was that HP was induced into acquiring Autonomy by dishonest statements and omissions in Autonomy's published information, and related representations made personally by the Defendants during due diligence / the negotiations. The underlying fraud alleged by the Claimants consisted of the publication of information to the market which was known by the Defendants to be false and / or misleading. As described in the Conclusions Judgment, this was based on "(a) the allegedly dishonest description of Autonomy as being a "pure software company" when in fact it undertook and had become accustomed to inflating what appeared to be the revenues of its software business by undertaking substantial hardware sales and (b) the allegedly dishonest presentation of its financial performance, which did not disclose (and instead disguised) improper practices which Autonomy adopted to boost and accelerate revenue."

As above, Hildyard J found that HP had substantially succeeded in its various fraud and breach of fiduciary duty claims. As a result of the fraud, "Autonomy was a smaller company with a materially less attractive revenue mix, with lower growth and less success in the market and (overall) lower profit margins than it was represented and appeared from its published information to be" [para 4055]. As the Judge said in his concluding section of the Liability Judgment, the Claimants "have established… that the Defendants dishonestly misrepresented the financial position and performance of Autonomy during the Relevant Period [Q1 2009 to Q2 2011]..… One of the tragedies of the case is clear: an innovative and ground-breaking product, its architect and the company will probably always be associated with fraud" [paras 4127-8].

Whilst this case was not heard as a split trial, a separate quantum judgment will, as noted above, be published at a later date. In the Conclusions Judgment, Hildyard J stated that he anticipated that the damages to be awarded to HP would be "substantial", albeit he thought they would be less than the amount claimed ($5 billion).

Section 90A/Schedule 10A of FSMA – Liability of issuers in connection with published information

Schedule 10A came into force on 1 October 2010 and applies to published information issued after that date, although section 90A (which was very similar to Schedule 10A) continues to apply to information published before that date (but after 8 November 2006). In this briefing note, we focus on the provisions of Schedule 10A.

In summary, paragraph 3 of Schedule 10A, which applies to securities that are admitted to trading on a securities market in the UK, or where the UK is the home State of the issuer of the securities, makes provision for issuers of securities to pay compensation to persons who have suffered loss as a result of an untrue or misleading statement, or the omission of a matter required to be included, in "published information" relating to the securities, provided that:

  • a "person discharging managerial responsibilities" ("PDMR") of the issuer knew that, or was reckless as to whether, the statement in question was untrue or misleading (or knew that the omission involved the dishonest concealment of a material fact); and  
  • the person acquiring the securities relied on that published information in circumstances in which such reliance was objectively reasonable.

As the Court noted [paras 438 & 439], these provisions provide a framework for a claim that would otherwise be very difficult to bring at common law. For example, it would not be possible to make a claim of this type under the tort of deceit unless the maker of the statement in question (i.e. the issuer) intended the recipient of the statement to rely on that statement (Schedule 10A does not require the issuer to intend the recipient of the statement in question to rely on it). The Court noted that such an intention would be very difficult to establish in respect of annual or quarterly reports, given that (unlike prospectuses) such documents are not intended to encourage prospective purchasers of securities to invest: the purpose of those documents is primarily to report to the shareholders on the directors' stewardship of the company and to enable shareholders to exercise their governance rights.

The "dog leg" nature of the claim

Before turning to the Court's analysis of Schedule 10A, it should be noted that HP acquired Autonomy via a special purpose vehicle (SPV), Hewlett Packard Vision B.V. (otherwise known as "Bidco"), a company incorporated in the Netherlands in mid-August 2011 just a few days before, and for the sole purpose of, the acquisition.

As will be apparent from the above, under Schedule 10A (and indeed section 90A), it is only the issuer of the securities that is liable to pay compensation to investors in respect of untrue or misleading statements or dishonest omissions. In this case, this would have involved HP (or rather its proxy, Bidco) issuing proceedings against Autonomy (the issuer), in circumstances where Autonomy was now a wholly owned subsidiary of Bidco. That would plainly have been a fruitless, not to say bizarre, endeavour.

To get around this issue, Autonomy, at the direction of HP, voluntarily accepted full liability to Bidco, and that acceptance was used as a stepping stone for Autonomy to pursue, pursuant to paragraph 7(2) of Schedule 10A, two of its former directors, who were the PDMRs for the purposes of the FSMA claim and who it was alleged were liable for various breaches of duty owed to Autonomy. The Court confirmed that there was no conceptual impediment to the "dog-leg" structure (as it became known) of the FSMA claim [para 434].

Autonomy's admission of liability was not, of course, binding on the Court or the Defendants. The Claimants first had to prove that Autonomy was right to accept liability to Bidco under Schedule 10A, before it (Autonomy) could pursue the former directors. Thus, the Claimants had to prove that Autonomy had in fact (to the knowledge of one or more of its directors) carried on fraudulent accounting practices leading to its published information being untrue or misleading, or concealing material information. In other words, they had to prove that on the balance of probabilities:

  1. Autonomy was in fact liable to Bidco; and  
  2. Dr Lynch and Mr Hussain were liable to Autonomy.


2. The Court's analysis of the constituent elements of Schedule 10A

Person Discharging Managerial Responsibilities

Schedule 10A defines a PDMR as including a director of the issuer (or a person occupying that position). Given that Dr Lynch and Mr Hussain were directors of Autonomy, it was common ground that they were PDMRs.

Published Information to which Schedule 10A FSMA applies

Paragraph 2 of Schedule 10A uses the label "published information" to refer to information published by the issuer by "recognised means", which include a "recognised information service" such as the RNS service. It was common ground that Autonomy's annual and quarterly reports were "published information" under Schedule 10A (as well as being "publications" for the purposes of section 90A).

It was also common ground that earnings calls occurring before 1 October 2010 and the transcripts of those earnings calls were not "publications" to which section 90A applied. There was, however, a debate as to whether the information broadcast on earnings calls after 1 October 2010 and the transcripts of those calls constituted "published information" for the purposes of paragraph 2(1)(b) of Schedule 10A. The Claimants argued that they did, because Autonomy's quarterly reports (which were published by recognised means) provided details of the time, date and website for the forthcoming earnings calls. They argued that this meant that the information transmitted on those calls (and the transcripts produced subsequently) were published by recognised means.

The Defendants, in contrast, argued that it did not follow from the fact that Autonomy provided information in respect of how to join the earnings calls, that the information then communicated on those calls was 'published' for the purposes of Schedule 10A. They argued the same in respect of the transcripts recording this information.

The Court favoured the Defendants' argument: it held that all that was announced by recognised means was the details enabling a person to join the earnings call and, importantly, there was no announcement in relation to the production, or existence, of the transcripts of the earnings calls. Therefore, the earnings calls (and the transcripts thereof) were not published information for the purposes of FSMA.

Crucially for the Claimants, whilst not independently actionable under FSMA, allegedly untrue or misleading statements made by the Defendants on the earnings calls were admissible and relevant to certain of the fraud claims [para 459].

Subjective and objective elements

As the Court noted, paragraph 3 of Schedule 10A (summarised above) contains objective and subjective elements:

  1. the objective element: the relevant statement in the published information must be 'untrue or misleading' (or the omission must be 'required to be included' in the published information); and  
  2. the subjective element (described by Hildyard J as "guilty knowledge"): the PDMR must know or be reckless as to whether the statement in question was untrue or misleading (or know the omission to be the dishonest concealment of a material fact).

As to the objective element, Hildyard J held that the Court must determine the objective meaning of the statement in question; that being the meaning that would be ascribed to that statement by the intended readership, having regard to the circumstances at that time. Furthermore, the claimant must prove that it understood the meaning of the statement in the sense ascribed to it by the Court [paras 460 to 466].

The Court then analysed the subjective element. In particular, the Court held that, in respect of the meaning of 'knowledge' under these provisions, a PDMR must (in respect of statements) have actual knowledge of the untruthful nature of the statement at the time the statement was made, and (in respect of omissions) have applied his mind to the omission at the time the information was published and appreciated that a material fact was being concealed, i.e. that it was required to be included but was deliberately left out [paras 468-469].

Further, the Court noted that "recklessness" in the context of the FSMA claims bears the same meaning as in the context of deceit claims, i.e. not caring about the truth of the statement, such as to lack an honest belief in its truth: if the PDMR were honestly to believe in the truth of a statement then the PDMR would not be "reckless" for these purposes, no matter how unreasonable the belief, "though of course the more unreasonable the belief asserted the less likely the finder of fact is to accept that it was genuinely held" [para 470].

In the case of both allegedly untrue / misleading statements and omissions, the Court held that advice given by professionals (e.g. auditors) to the company or its directors will be relevant to the question of dishonesty. Thus, if an auditor advises that disclosure of a particular fact is not required under the accounting standards/rules, then the requirement for dishonesty is unlikely to be satisfied, even if the Court takes the view that disclosure of the fact in question was in fact required.

That said, the Court cautioned against directors' reliance on advice given by auditors in the context of the narrative "front end" of companies' quarterly and annual reports, which reflect the directors' own views of the business rather than the auditors': "on matters within the directors' proper province, the view of the company's auditors cannot be regarded as a litmus test nor a 'safe harbour': auditors may prompt but they cannot keep the directors' conscience." [paras 475 to 476]

Furthermore, the Court noted that whilst ordinarily the presumption will be that if information is not required to be disclosed by the accounting standards then even if "reasonably useful" it need not be disclosed, there may be circumstances where disclosure is nevertheless required: "In my judgment, information may just as much be "required" to be disclosed for the purposes of s. 90A(3)(b) and (when it came into force in October 2010) Schedule 10A paragraph 3(1) of FSMA to give, overall, a true and fair view of a company's position and performance as when specific accounting principles or statements of practice expressly require it." [paras 1731-2]

Reliance / inducement

In the absence of detailed guidance in FSMA on this point, the Court discussed extensively the meaning of 'reliance' under Schedule 10A and included an informative analysis of cases on misrepresentation and deceit [paras 478 to 573]. The Court considered four questions in particular: (i) "reliance by whom?"; (ii) "reliance on what?"; (iii) "what degree of reliance?"; and (iv) "when is reliance reasonable?". In summary, the Court held as follows:

Reliance by whom?

It is (to state the obvious) the person that acquired the securities in question that must have relied on the impugned published information - which, in this case, meant Bidco.

In their closing submissions, the Defendants raised what became known as the "Bidco point", arguing that Bidco (the SPV) could not in any real sense have 'relied' on the allegedly fraudulent statements / dishonest omissions in Autonomy's published information, given that (i) it did not exist until 15 August 2011, two weeks after HP's due diligence process had commenced (and just three days before the acquisition was announced) and therefore would not have considered or even have been aware of the alleged misstatements in the published information and (ii) there was no evidence from either of the two Bidco directors as to what they did or thought in their capacity as Bidco directors. The Defendants submitted that the only person who could be said to have relied on those statements / omissions was HP, which was not a party to the proceedings. As the Court noted: "The Defendants' forthright conclusion was that HP chose to buy Autonomy through Bidco for its own commercial reasons: if the benefits of doing so came at the cost of depriving HP of a claim under FSMA, that is the consequence of HP's choice, and that reliance by HP cannot be equated to reliance by Bidco" [para 494]. The Court dismissed this argument, concluding that just because HP undertook the due diligence process did not mean that Bidco could not have 'relied' on those statements / omissions. The Court held that "HP can be treated as the controlling mind of Bidco, and HP's reliance is to be treated as Bidco's reliance". On that basis, "[t]here is no such separation… between the person who relies on the information and the person who suffers the loss, nor between the acquirer and the decision-maker… Such a conclusion is consistent with the intent of the statutory provisions and avoids what to my mind would be the counter-intuitive conclusion, that the use of an SPV which had no purpose or business nor any real part in the process except as a pocket in HP's trousers, should invalidate the claim" [paras 500(1) to (3)].

Reliance on what?

It is not enough for there merely to be fraudulent statements in, say, an annual report: the person acquiring the securities must have considered and applied their mind to the statements in question. In this case, HP referred to alleged misstatements and omissions in a number of documents (including, as discussed above, transcripts of earnings calls, and quarterly reports – produced some time before the acquisition) which were not reviewed by or on behalf of any of the Claimants. The Court held that these could not found a claim, "though they may be relevant evidence of intention". However, it went on to say: "….. statements (or omissions) may in combination create an impression which no single one imparts. In my view, if the overall impression thus created is false it may found a claim" [paras 501 to 506].

What degree of reliance?

The Court held that it is enough that a fraudulent representation had an "impact on the mind" or an "influence on the judgement" of the claimant; "the fact that other considerations may have been predominant does not negate the deception if it did have some impact or influence" [para 515(1)].

The Court ultimately concluded that the so-called "presumption of inducement" that applies in the context of deceit claims should also be read into the FSMA test: "once it has been established that a representor fraudulently intended his words to be taken in a certain sense and that the representee understood them in that sense and entered into the contract, it is natural to suppose, unless the presumption is rebutted on the facts, that the representee was induced to make his investment decision on the faith of the representor’s statement ….It remains a question of fact to be determined on the balance of probabilities whether having regard to all the circumstances it did in fact have “an impact on the mind” or an “influence on the judgment” …. of the representee in making that investment decision. But the presumption is difficult to shift….. the claimant must show that the representation had a sufficient impact on its mind or influence on its judgment for it to have been reasonable in all the circumstances for the claimant to have relied on it". The statement in question only gives rise to the presumption of inducement if it was in fact read, heard or understood by the representee in its deceptive sense. In other words, it should not be presumed that the person acquiring the securities relied on every fraudulent statement / dishonest omission in published information merely because those statements were fraudulent (or the omissions were dishonest) [para 515(2)-(8)].

When is reliance reasonable?

The Court held, citing an 1881 case (Redgrave v Hurd), that reliance on false representations is reasonable even if (which was held not to be the case in this case) due diligence would have revealed to the representee the falsity of the representations: "… it is no defence to a FSMA or fraud claim that the claimants had the means of discovering the truth; and no defence of contributory negligence or "caveat emptor" is available. The test of reasonableness relates to the form and timing of the misrepresentation and what it is reasonable for the representee to make of what he is told: it is not addressed to hypothetical matters such as what else the representee might have done to assess the reliability of the statement." [paras 518-519]. This is entirely consistent with Hildyard J's statement at paragraph 47 of the Conclusions Judgment that "…. it is no defence to a FSMA or a fraud claim that the claimants had the means of discovering the truth. No defence of contributory negligence is available…. It would be beguiling but wrong to think that the answer would be "caveat emptor"." Hildyard J did, however, make plain in the Conclusions Judgment that if he had found (which he did not) that HP had in fact been aware of the fraud prior to the acquisition, then the result would have been very different, "for in those circumstances [HP] could not say that it had reasonably relied on what it saw and read".

Ultimately, the question of when reliance is reasonable is fact sensitive [para 522]. In this case, Hildyard J found that "[i]t was entirely reasonable for HP/Bidco to rely, as it did, on the accuracy and completeness of the figures and description thus given, unless and to the extent that through persons acting on its behalf, and having responsibility to pass on to HP/Bidco what they had found out, HP/Bidco actually became aware (whether in the context of due diligence or otherwise) of some particular inaccuracy or material qualification… HP/Bidco did not, prior to the Acquisition, and whether in the course of due diligence or otherwise, actually become aware of anything in the course of due diligence to warn it of some inaccuracy or material qualification such as to invalidate or cause it not reasonably to be entitled to place reliance on Autonomy’s figures and representations in its published information." [paras 522(2)-(3)]

Conditions of liability of the Defendants / knowledge of the Defendants

The Court analysed the legal issues arising in relation to the Defendants' individual liability to Autonomy for the loss Autonomy caused Bidco at paragraphs 540-544, concluding that a director would not be liable save in respect of losses caused by his own breach of duty: he could only be liable for the consequences of the particular wrongful statements or omissions in respect of which he had the requisite guilty knowledge, not for the consequences of any other wrongful statements there may have been of which he was unaware, even if those statements gave rise to a liability on the part of Autonomy to Bidco (e.g. because another PDMR had the requisite guilty knowledge in relation to those other statements).

3. Conclusion

The Liability Judgment provides useful commentary on the background to, and the application of, Schedule 10A and will be of general interest to shareholders looking for a remedy in circumstances where they have acquired shares in a listed company on the basis of information in interim and annual reports that turns out to be untrue or misleading or where important information that would have been relevant to the investment decision was omitted.

Perhaps of even more interest is the Court's determination that the dog-leg nature of the claim against the defendant directors was a legally permissible construct. Had the Court not accepted the viability of the construct, then this would have had the perverse consequence of putting an investor who had acquired 100% of a listed company's issued share capital in a worse position than an investor who had acquired 0.1% of the company's shares on the basis that the only claim the former would have had would have been against an entity within its own group. Furthermore, the Court's finding in HP's favour in relation to the "Bidco point" is crucial where the acquiring entity is, as is often the case, an SPV: corporates that acquire other corporates via a specially created vehicle can, in principle, use the framework provided by section 90A and Schedule 10A to take action against fraudulent directors.

It should be borne in mind at all times, however, that it is not enough that the report or trading update in question contains untrue or misleading information, or omits important matters – one or more of the directors must have what Hildyard J described as "guilty knowledge" of the deficiency in question; in other words their dishonesty must be proven. However, as Hildyard J observed at paragraph 473, "the courts recognise that it is generally unlikely that people engage in [fraudulent] conduct". Furthermore, fraud is not something to be bandied about lightly; there are, of course, strict rules about pleading it.

Whilst the Liability Judgment will be of great assistance to future claimants who, like HP, have acquired the entire share capital of the issuer company, it does not resolve some of the legal and practical difficulties facing claimants in shareholder class actions. All of Autonomy's documents were under HP's control and therefore available to HP for the purpose of establishing whether it had sufficient grounds for pleading dishonesty/fraud, a luxury which will not be available to shareholder class action claimants, where those documents will usually be in the hands of the defendant company, at least until disclosure. Furthermore, the Liability Judgment gives only limited guidance on reliance and causation in the shareholder class action context. HP had reviewed Autonomy's recent published information before making its offer for Autonomy, and used it for valuation purposes and to determine the bid price. The Liability Judgment does not, therefore, address the markedly different reliance and causation issues which arise where the investor may not even have read the accounts, and relied on them only in the sense that the market price of the shares is based at least in part on the company's published information.

Finally, and importantly, the Court, having recognised the need to protect existing and long-term investors who may "indirectly bear the brunt of any award" made in favour of a claimant shareholder, made clear that the courts "should not interpret and apply [sections 90A/Schedule 10A] in a way which exposes public companies and their shareholders to unreasonably wide liability" [para 445]. It remains to be seen whether this will temper the effect of this decision on claims brought under Schedule 10A (or section 90A) in the future.

The full judgment is available here: Autonomy & Ors v Lynch & Anr [2022] EWHC 1178 (Ch)