What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing in today's video we've got yet another epic corporate scandal that resulted in losses of billions of dollars for the victims. This time the perpetrator was the biggest software company. In england, a company called autonomy. Corporation autonomy corporation was engaged in producing enterprise software for processing large amounts of data.

Their products included everything you might expect from a high-tech data analytics company. All sorts of companies use their software to do pattern, recognition and enterprise search, allowing companies to leverage unstructured data sources such as emails and audio transcripts. Despite their high profile success as england's crown jewel in the software space, the company was founded by the sec to have engaged in a massive accounting fraud spanning multiple years leading up to hewlett-packard's disastrous acquisition of the company. This fraud caused hp to overpay for the company by billions of dollars, taking an 8.8 billion loss on the acquisition.

Almost immediately in this video we'll go over what actually happened and how much money this company, scammed out of hp shareholders autonomy was founded in cambridge england. In the 1990s from the start, they were focused on high-tech software development, in particular things like pattern, recognition and digital search. They were originally spun off from another firm called cambridge neurodynamics, which focused on automated fingerprint recognition. They had connections to the world-class research institution, cambridge university, which gave them both credibility and the intellectual resources to produce cutting-edge technology.

In addition, they adopted a brutal corporate culture where they would fire the bottom 20 percent of their workforce every single year on the opposite side of their spectrum, their star employees were given huge bonuses and treated well. This reflected management's view that employees were nothing more than assets to the company whose worth were solely in their productivity for the company. These factors allowed the company to beat its competition and flourish throughout the 2000s. The company acquired many smaller companies by 2010 just 12 years.

After its founding, it become the largest and most successful software business in the uk. Meanwhile, in the early 2010s hewlett packard was struggling in the us. Their main business of personal computers was suffering due to the rise of smartphones and, to a lesser extent, tablets in early 2012, hp laid off 27 000 employees following a disastrous quarter. Financially hp was also suffering from a series of failed acquisitions, including its acquisition in 2010.

Of mobile phone maker paul for 1.2 billion dollars, paul made a series of smartphones that experience a short period of popularity before the rise of the iphone hp bought palm when palm is at its business peak. But hp was unable to successfully incorporate it with hp's other acquisitions to build an hp ecosystem in the following two years: hp fired and hired multiple ceos and stock dropped precipitously. It fired ceo mark hurd in 2010 and transferred cfo kathy lestjak. As interim ceo, leo apotheker was named permanent ceo a few months later, but was soon the target of controversy for things he did in his previous role at company sap less than a year later.

He was also fired and replaced by meg whitman around the same time. In a desperate attempt to stay relevant as a tech, company hp announced that it had offered a staggering 10.2 billion dollars for an 87.3 stake in autonomy corporation. At the time, autonomy's stock was trading at around a 7 billion market cap, meaning that hp was paying close to an 80 premium over the market. Value of the company, the board of directors at autonomy immediately approved the deal unanimously, and only one and a half months later in october of 2011, the deal closed less than a year after the acquisition founder and ceo mike lynch left the company.

By this point, he was already a billionaire from the sale of his company to hp and he probably wanted to cash out after a successful career in tech entrepreneurship. However, as it would soon be revealed, there may have been other reasons why he felt the need to jump ship half a year after mike lynch left his role as ceo of autonomy under hp hp announced the shareholders that was forced to take an 8.8 billion dollar Write down on the autonomy acquisition a more than 85 loss on the 10 plus billion acquisition. The reason was the discovery of quote a whole host of very concerning accounting, improprieties, unquote. Hp said that autonomy had engaged in a deliberate effort to mislead hp, leading up to hp's offer to acquire autonomy by inflating the value of autonomy.

The ceo of hp said that autonomy's business was much smaller and less profitable than they were led to believe in the due diligence process of the acquisition. For example, certain hardware sales were reported as software sales. Software sales are generally considered to be much more desirable than hardware, because profit margins on software can be nearly 100 percent. Additionally, one of the biggest, if not the biggest, reason, that hp wanted to acquire autonomous in the first place, was because it wanted to transition away from selling hardware such as pcs to a more software oriented business.

The fact that autonomous reported hardware sales as software both artificially inflated the revenue of the company and gave the illusion of being more profitable than it actually was hp. Ceo said that autonomous had advertised profit margins in the very high 40 to 45 percent range, whereas hp had since discovered them to be closer to the 20 to 28 range. However, autonomy founder mike lynch denied the allegations. He said that hp should have been responsible for doing all their necessary research into the company before buying autonomy.

He further accused hp of trying to use autonomy as a cover-up to distract from hp's own poor financial results. After all, the decision to purchase autonomy was part of a long-term plan to move away from the pc and hardware business, because that business was not doing well on the news that hp was taking. This write-down of a loss on autonomy, resulting in a more than 6 billion corporate loss on the quarter hp stock, tanked 12 in a single day that destroyed billions of dollars of shareholder value, almost immediately on hp's accusations of autonomy having fraudulently fabricated sales and profitability numbers. The fcc and fbi both took notice additionally uk's regulator.

Sirius fraud office also opened an investigation into autonomy. After years of fighting between the regulators and autonomy's current and former management, the serious fraud office closed its investigation. However, the american regulators kept investigating eventually, in 2016, the sec concluded that autonomy had indeed engaged in financial fraud. They issued a cease and desist order against one of the high up executives at autonomy, christopher egan who is responsible for the fabrication of autonomy sales when hp was considering making an offer.

Eagan was the head of sales and chief executive officer of autonomy's us-based subsidiary, the largest subsidiary, according to the sec, the scheme that ian perpetrated at the direction of other high ups in the company involved inflating and back dating sales using what are referred to as value-added Resellers in the scheme, autonomy would find potential customers of its software and begin the negotiation process for the sales. In the meantime, while the negotiations were going on autonomous would estimate the amount of revenue that they would eventually receive from the deals and sell the software to third-party resellers. These resellers were not interested in the product at all and were simply paid by autonomy just to purchase the software on paper. Eventually, if the deal with the real customer went through, they would receive the product from the third party company, and the third party company would be paid back by the real customer.

In this way, autonomy would be able to record the revenue from the deal months before the deal actually was signed. Sometimes the deals would fall through and autonomy would have to pay back to third-party companies recording a loss. However, in those cases the revenue recorded would still remain. Autonomy would frequently use this accounting scheme to make sure that they always hit analyst estimates when reporting earnings, as well as to accelerate revenue forward from when the deals were actually signed.

Sometimes, however, this was not enough and in those cases, autonomy sometimes blatantly reported sales in a financial quarter that were actually made after the quarter ended. This is obviously not allowed under securities law and allowed autonomy to build a multi-year track record of always hitting analyst estimates through other accounting. Improprieties autonomy was also able to bill certain hardware sales as high margin software sales further perpetrating the fraud. As a result, christopher eagan was ordered to cease and desist all fraudulent activities within the company and also pay a nearly 1 million fine to the united states.

Christopher egan admitted to the conviction and paid the penalty. The u.s department of justice came to a similar conclusion. As the sec, however founder mike lynch was never charged. Instead, the regulators only had enough evidence to criminally charge.

Cfo sushivan hussein. As of the time of recording this video, he is currently awaiting trial after a successful appeal of his conviction and faces extradition to the uk. Hp shareholders have never received any compensation for the losses they incurred in the acquisition. Hp shares have only recently retaken their levels from before the disastrous acquisition of autonomy.

Alright, guys that wraps it up for this video. If you enjoyed the content, make sure to leave a thumbs up and subscribe, so you don't miss. Other videos also leave a comment saying what you think about the uk's once biggest software company in the meantime. Thank you so much for watching and we'll see you in the next video wall street millennial, signing out.