Government questioned MicroTech about its role in HP fraud allegations

Mike Fuentes/Bloomberg - MicroTechnologies LLC is among two companies and six executives who are said to have taken part in the efforts to boost the revenues of software maker Autonomy before its sale to HP, according to documents.

A fast-growing government contractor based in Tysons Corner has been linked to investigations into alleged efforts to inflate the revenues of a software company ahead of its acquisition by Hewlett Packard in 2011, according to government documents obtained by The Washington Post. Hewlett Packard claimed the following year that the alleged fraud cost it $8.8 billion.

MicroTechnologies LLC is among two companies and six executives who are said to have taken part in the efforts to boost the revenues of software maker Autonomy before its sale to HP, according to documents prepared by the Air Force deputy general counsel’s office that raised the possibility of barring all the parties from receiving federal contracts.

Video

A Washington Post investigation shows how MicroTech navigated complex rules to become a contracting force. In a video, the Post’s Lee Powell documents the rise of the firm.

A Washington Post investigation shows how MicroTech navigated complex rules to become a contracting force. In a video, the Post’s Lee Powell documents the rise of the firm.

Graphic

MicroTech's complex ties.
Click Here to View Full Graphic Story

MicroTech's complex ties.

More on this Story

View all Items in this Story

In 2012, Hewlett Packard claimed in financial filings that Autonomy had worked for years to deceive it and the public about its true value, triggering sweeping fraud investigations by authorities here and in Britain.

The Air Force documents include a letter and memo sent to MicroTech on Sept. 6 that provide details about MicroTech’s alleged role in the HP matter. HP has alleged “pre-acquisition accounting improprieties, disclosure failures, and misrepresentations by former Autonomy senior management,” the Air Force memo said. MicroTech had allegedly engaged in “accounting improprieties” with Autonomy — allegations that are “sufficient to support your proposed debarment,” the letter said.

Contracting and Air Force documents show that MicroTech worked with Autonomy to resell the larger company’s software to the government and to other private-sector customers. The Air Force is one of HP’s largest government customers. The Air Force letter said that in some cases MicroTech and Autonomy claimed to close out millions in software deals “when no transaction closed at all.”

It is not clear from the Air Force documents what MicroTech received for its work with Autonomy.

MicroTech declined to address details about the Air Force letter, a “show cause” notice asking the firm to explain why it should not be debarred.

“MicroTech has responded fully and completely to the Air Force’s show cause notice,” said Kristopher Parker, MicroTech’s attorney. “We have followed all applicable laws and regulations, and look forward to continuing to provide quality support to the Air Force.”

The Justice Department, the Securities and Exchange Commission and Britain’s Serious Fraud Office have launched investigations of the HP allegations. The Serious Fraud Office has described its work as a criminal probe. The Air Force examination, based on internal documents provided by HP, is a civil regulatory effort aimed at protecting the government from future harm.

Among those named in the Air Force documents is Autonomy founder and former chief executive Michael R. Lynch, a legendary British entrepreneur who was fired in May 2012, the Air Force documents said. Lynch has repeatedly denied any wrongdoing.

“The former management of Autonomy strongly rejects HP’s allegations,” said Vanessa Colomar, a spokeswoman for Lynch. “The few examples seen to date show that HP appears to have had a fundamental misunderstanding of [International Finance Reporting Standards] accounting practices, and we vehemently deny anything improper. A year on, despite repeated requests we have still not received detailed allegations or the supporting evidence for them. Rather what we see is unsupported accusations, leaks and PR spin rather than a direct conversation based on the facts.”

MicroTech was suspended from receiving federal deals by the Small Business Administration on Dec. 20 on allegations unrelated to the earlier Air Force letter. The SBA said it took action because it had information that MicroTech, one of the government’s top small-business contractors, had provided the agency with “false and misleading statements” about its ownership and operations.

MicroTech has 30 days to respond to the SBA action. In the meantime, it cannot receive any new contracts.

The SBA action followed articles in The Post that examined MicroTech’s rapid rise and claims by competitors that the company had grown too large to continue to receive contracts set aside for small firms owned by disadvantaged entrepreneurs and service-disabled veterans. The Post found inconsistencies between MicroTech’s statements to the government and documents and interviews with former employees. The company said it followed all government rules.

The Air Force action is focused on the HP claims about Autonomy’s accounting and sales practices.

“Autonomy used you to accelerate revenue recognition or, in some cases, to recognize revenue that Autonomy subsequently refunded in one fashion or another to you,” the Air Force letter said.

In one instance, the letter alleged, MicroTech claimed to sign off on a deal on March 30, 2010, to resell $11 million in Autonomy software licenses to an organization described as “Entity A.” The Air Force concluded, however, that the “Entity A transaction never consummated,” the memo said.

After an outside auditor questioned the deal, Autonomy wired MicroTech $9.6 million to pay for putative services and “MicroTech subsequently wired $9.6 million back to Autonomy” to pay for “outstanding MicroTech receivables,” the Air Force said.

“Your alleged conduct raises serious concerns regarding your business integrity and overall responsibility because you are a U.S. Government contractor,” the Sept. 6 letter to MicroTech said. “I consider these allegations sufficient to support your proposed debarment from Government contracting.”

Debarment blocks companies or individuals from receiving government contracts. Debarment is not considered punishment for a crime.

MicroTech was asked “to address the allegations and to provide me with any additional information that may assist in my decision-making,” said the letter, which was signed by an Air Force deputy general counsel, Rodney A. Grandon.

MicroTech canceled a scheduled meeting with The Post and provided a brief statement from Parker, the company’s attorney. The company also declined to provide The Post with the response it has given the Air Force.

An Air Force official who spoke on background because the debarment process is ongoing said that all the parties named in the memo have received similar notices and all have provided responses. Those responses are still under review because the alleged improprieties involve “very complicated accounting issues,” the official said.

The 2011 sale of Autonomy was acclaimed as the biggest ever of a British software maker, with a value of more than $11 billion.

But one year later, in November 2012, HP announced $8.8 billion in losses in filings. After an internal investigation, it alleged that Autonomy worked with other companies to inflate its apparent value through questionable deals and improper accounting, according to SEC filings. It referred the allegations to the SEC and other authorities.

The Air Force documents allege that the Autonomy executives used MicroTech and another firm, Capax Global, in transactions for software licenses to boost sales receipts of Autonomy in the final days of fiscal quarters from 2007 to 2011. Capax is based in Morristown, N.J. Capax declined to comment Thursday.

“The information available to this office establishes that former principals of Autonomy leveraged [MicroTech] to engage in numerous accounting and sales practices designed to deceive analysts, investors, and potential purchasers into believing that Autonomy could, and would continue to, generate margins and revenues that it could not ultimately sustain,” the Air Force letter to MicroTech said.

The Air Force memo said the former Autonomy executives had misled the public about the nature of its business. They called Autonomy a “pure software company” at a time when it was reporting “substantial revenues” from lower-margin sales of hardware products.

The memo said that Autonomy sold the hardware at a loss to customers to “fill-in end of quarter revenue gaps,” boosting the firm’s apparent quarterly performance.

Up to 19 percent of the company’s revenues per quarter in 2009 to 2011 came from hardware sales, but the company “never disclosed these pure hardware resale activities in public filings, press releases, or earnings calls.”

In financial filings, Autonomy treated “certain costs as sale/marketing expenses rather than costs of goods sold. Such treatment allowed Autonomy to inflate artificially its reported gross margins.”

Lynch and the five other former Autonomy executives named by the Air Force also “were responsible for falsifying software license transactions” with MicroTech and Capax to “accelerate Autonomy’s revenue recognition,” another way of inflating its end-of-quarter reports, the documents said.

Last month, the Air Force asked the SBA to become the government’s lead agency on the assessment of MicroTech’s behavior as a federal contractor after Post articles that examined MicroTech’s extraordinary growth as a small-business contractor. The Air Force and SBA concluded that the SBA could move more quickly on a proposed debarment of MicroTech based on the SBA allegations, the Air Force official said. But the Air Force examination of the HP allegations remains a “live wire,” the official said.

Since its formation in 2004, MicroTech has received $1.4 billion in federal contracts, becoming the government’s top contractor for disadvantaged small businesses, records show. About a third of its contracts for technology goods and services have been reserved for small firms owned by disadvantaged entrepreneurs or service-disabled veterans.

MicroTech owner Anthony R. Jimenez, a retired Army lieutenant colonel and contracting specialist, has attended small-business meetings at the White House and has been called on to testify in Congress as an expert in small, disadvantaged and veteran contracting programs.

In its debarment proposal, the SBA has said that MicroTech and Jimenez provided “false and misleading statements,” starting when Jimenez sought certification as a small disadvantaged firm. The agency said the alleged false statements included a “complete fabrication” to hide the extensive role of two investors who worked with Jimenez to launch, bankroll and operate MicroTech, the letter said.

David S. Fallis and Sari Horwitz contributed to this report.

 
Read what others are saying