LONDON (Reuters) - Hewlett-Packard Co was made aware of practices at Autonomy, including hardware sales and growth rates boosted by different accounting rules, before it bought the firm for $11 billion in an ill-fated deal, according to founder Mike Lynch.
HP is suing Lynch, and former Autonomy finance director Sushovan Hussain, in London for damages of about $5.1 billion for their management of Autonomy, alleging they engaged in fraudulent activities to boost the value of the company.
Lynch said on Friday that contentious issues, such as the sale of hardware and the recognition of revenues in deals with resellers, were raised in a due diligence report by KPMG.
The report, made public after U.S shareholders pursued action in the United States against HP, also shows KPMG told HP the difference between European and U.S. accounting standards could impact historical growth rates for the company.
"The KPMG report directly contradicts the statements HP made about Autonomy on which its whole case is based," Lynch told Reuters. "HP said it did not know things that it plainly did."
HP repeated its allegation that for more than two years prior to HP's acquisition of Autonomy, Lynch and Hussain had conducted "a systematic and sustained scheme to make Autonomy look like a rapidly growing, pure software company whose performance was consistently in line with market expectations.
"It was a lie," a HP spokeswoman said.
"HP had no knowledge of Lynch and Hussain's contrived sales to value added resellers and other improper transactions and accounting practices, all of which artificially inflated Autonomy's reported revenues, misrepresented its rate of organic growth and overstated its gross and net profits."
Documents made public in the court case in Northern California also indicate that Chairman Ray Lane was worried about going ahead with the deal right to the last minute.
He emailed HP's independent directors requesting a last-minute meeting before the acquisition was announced, saying he had "received new news this morning that I'm still trying to digest," according to the documents.
A report by legal firm Proskauer Rose LLP prepared for HP said the minutes for this meeting were unavailable.
Days after the deal was announced, Lane said in an email to Chief Executive Leo Apotheker that he was "still haunted by Autonomy itself."
He asked Apotheker and the company's advisers if there was any way to get out of the deal.
Apotheker, who was replaced by Meg Whitman weeks later, responded in an email that he was 99 percent sure that the Autonomy deal was irreversible.
(Reporting by Paul Sandle; Editing Bernard Orr)