In re HP Securities Litigation
3:12-cv-05980
N.D. Cal.Nov 26, 2013Background
- HP acquired UK software company Autonomy in August–October 2011 for ~ $11 billion; shortly after announcement HP stock fell ~20% and litigation followed.
- After integration problems surfaced, HP hired PwC to investigate; on November 20, 2012 HP disclosed that hundreds of millions of pre-acquisition Autonomy revenues were improper and wrote down ~85% (~$8.8B) of the purchase price.
- Lead Plaintiff PGGM sued in a consolidated securities class action covering Aug 19, 2011–Nov 20, 2012, alleging HP and seven individual defendants made materially false statements/omissions and acted with scienter under §10(b) and §20(a).
- Plaintiff alleged defendants knew or should have known of red flags (auditor/media concerns, limited due diligence, whistleblower allegations) and therefore misstated Autonomy’s value and performance.
- Defendants moved to dismiss for failure to plead falsity and a strong inference of scienter; they also sought judicial notice of documents. The court granted judicial notice of unopposed items.
- The court dismissed all §10(b)/§20(a) claims concerning statements made before May 23, 2012 for failure to plead a strong inference of scienter, but denied dismissal as to HP and Whitman for certain statements/omissions beginning May 23, 2012 (and denied dismissal as to one September 2012 10-Q statement about fair value).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether complaint pleads falsity of public statements | HP’s public statements about Autonomy’s financials, integration, and valuation were false or misleading when made | Statements reflected Autonomy-provided information, reasonable views, or were non-actionable puffery; some later statements accurately warned of impairment risk | Pre-May 23, 2012 statements: dismissed for lack of falsity/scienter; Post-May 23, 2012: some statements by HP/Whitman survive; specific 10-Q/8-K disclosures mostly upheld or dismissed depending on context |
| Whether complaint pleads a strong inference of scienter (intent or deliberate recklessness) | Red flags, limited due diligence, whistleblowers, executive departures, and large write-down support an inference defendants knew of fraud | Allegations show at most negligence or poor judgment; alternative nonculpable inferences (investigation, integration issues) are more compelling | Strong inference not pleaded for most defendants/statements pre-May 23, 2012; limited inference plausible as to Whitman/HP beginning May 23, 2012 due to Whistleblower No.4 and PwC investigation timing |
| Adequacy of specific omissions/statements (May 23 and June 5, 2012 remarks) | Whitman omitted that she knew of potential accounting fraud and an initiated PwC probe, rendering optimistic explanations misleading | Whitman’s remarks were permissible commentary and investigatory delay was lawful; she could have declined to speculate | Court: Whitman’s affirmative explanations (attributing weakness to scaling) while failing to disclose the plausible fraud allegation were actionable omissions beginning May 23, 2012; denial of dismissal as to those statements |
| Secondary liability under §20(a) (control person) | Individual defendants exercised control and therefore §20(a) liability should attach | §20(a) requires a primary §10(b) violation; absent primary liability, control claims fail | §20(a) claims dismissed for all defendants except HP and Whitman because §10(b) primary violations were not sufficiently pleaded for others |
Key Cases Cited
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (requirement that scienter inference be cogent and at least as compelling as any nonculpable inference)
- Merck & Co. v. Reynolds, 559 U.S. 633 (definition of scienter in securities fraud context)
- Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981 (Ninth Circuit standard for deliberate recklessness and §20(a) principles)
- Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (elements of a §10(b) claim)
- Ashcroft v. Iqbal, 556 U.S. 662 (plausibility standard for pleading)
- Swartz v. KPMG LLP, 476 F.3d 756 (Rule 9(b) particularity requirements for fraud pleading)
- Balistreri v. Pacifica Police Dep’t, 901 F.2d 696 (12(b)(6) dismissal grounds)