Mobile Monitor Technologies, LLC (MMT), a privately owned Massachusetts-based technology company, filed suit on April 3, 2014 in California against PricewaterhouseCoopers and Hewlett-Packard for what it says were the two firms “combined market dominance, anti-competitive pricing, client-sharing arrangements, misappropriation of trade secrets, and fraudulent and deceptive advertising [that have] irrevocably blunted MMT’s prominence in the portable monitor market and resulted in a persistent and ongoing decline in its revenues.” MMT seeks damages in excess of $100 million.
MMT designs and manufactures portable laptop displays. Accounting firms are its largest customers. The firm was founded in 2009 by two entrepreneurs, Frederic A. Macdonald and Lawrence M. Pensack, and their
accountant and business partner, Jeffrey J. Simmons, to create a laptop companion monitor for auditors in the field.
According to Mark O’Connor, CEO of consulting industry analyst firm, Monadnock Research, “The MMT complaint reads like a chapter out of a ‘How to Steal Trade Secrets for Dummies’ text. But most importantly, if MMT’s allegations against PwC and HP are accurate, the complaint shows how easy it would be for HP to offer a quid pro quo in exchange for PwC’s HP-friendly Autonomy forensic investigation report. The mere appearance that so many nested conflicts exist for a Big Four firm should be an embarrassment to PwC, the public accounting profession, and to US and UK regulators. But I’m afraid that it may simply be viewed by HP and PwC as a creative and highly profitable supplier relationship management arrangement.”
MMT says the company conceptualized and designed the world’s first full-sized portable computer monitor in November 2009. It introduced its portable monitor to the market and claims it coined the term “mobile monitor” to define its “first of a kind solution” in early 2011. PwC was first in line and began piloting the mobile monitors. As other accounting firms took notice and the press picked up on it, MMT was pressured to meet greater production demands. To prepare for a global rollout, MMT approached HP in mid-April 2011 and proposed a joint venture. At the same time MMT worked exclusively with PwC on a pilot of the monitors.
Unbeknownst to MMT, PwC had become, according to the complaint, HP’s “Agility Alliance” partner, a “synergistic relationship with minimal overlap or competing offerings across HP business units [that] can leverage each other’s trusted relationships and brand equity with CIOs and CFOs, respectively, to communicate the differentiated value of [their] joint solutions.”
MMT claims that HP and PwC colluded to steal MMT’s knowledge, strategies, and trade secrets, under the guise of partnership “negotiations,” which allowed HP to develop its own identically sized portable monitor. After PwC selected MMT’s mobile monitor to fill a $40 million order for distribution to its accounting professionals, the complaint alleges PwC contacted HP “to solicit a financially more advantageous below-cost pricing option and/or bundled discounts and/or other anti-competitive incentives—all before offering HP’s new product to the public.”
PwC reversed its decision to purchase the monitors from MMT, even though MMT says it had beaten other models, such as Toshiba and Lenovo which were already on the market, in a PwC procurement-led competition. PwC transferred its global order to HP, which had not yet offered its version of the product to the public. From the complaint:
[MMT CEO] Macdonald requested an immediate in-person meeting with PwC executives following the loss of the promised $40 million mobile monitor order. PwC’s Global Vice Chairman Mike Burwell, who acknowledged that PwC had mishandled the situation, said that he and Mr. Schott would meet with Mr. Macdonald at PwC’s New York City headquarters. Mr. Macdonald noted that an in-person discussion would permit PwC to reassess its decision to award its entire global portable monitor order to HP. Mr. Schott responded that the decision had already been made.
As a result, Mr. Macdonald then requested an immediate telephone conference with Messrs. Schott and Burwell. In the course of the conversation, and after many apologies, Mr. Burwell agreed to ‘make things right’ by purchasing MMT’s new accounting product, the Track10 keypad accessory. PwC assured MMT that it would place an immediate order for the device in unit quantities equal to MMT’s lost monitor business, without trials or pilot programs, if it demonstrated basic functionality (plugs in, keys function). MMT memorialized the verbal contract in December 11, 2012 letters sent via FedEx to both Mr. Burwell and Mr. Schott.
MMT expedited development for PwC’s Track10 keypad, sending PwC regular progress reports, CAD designs and video. On May 14, 2013, MMT sent the first working prototype to PwC. PwC never meaningfully responded to Mr. Macdonald’s inquiries about using the prototype and ultimately stopped replying to MMT’s emails and phone calls altogether.
Finally, on September 6, 2013, nearly 4 months after receiving the prototype, and a full ten months after rejecting MMT’s monitor and engaging with MMT on the development of this new product, Mr. Schott emailed Mr. Macdonald: “I have had our technical group evaluate the Track 10 and PwC has decided not to pursue its use.” Plaintiff had to then seek legal assistance to compel the return of the prototype.
[Bonus feature: Here is a video where PwC Chief Procurement Officer Schott describes how important his suppliers are to him and PwC. He is a former VP of Purchasing for Chrysler where he spent 26 years.]
The complaint says high level executives from PwC and HP produced an April 2013 commercial video (video has been removed from this site per a takedown notice from HP attorneys Arnold & Porter) in which HP describes its “first of a kind solutions” and HP claims credit for developing the world’s first “mobile monitor” for PwC. The video was originally posted to YouTube but, once it was mentioned to the defendants in conjunction with a potential lawsuit, PwC had it pulled. MMT CEO Fred Macdonald told me, “We’re using the video as evidence to prove that PwC’s last minute decision to buy HP’s monitors came from the top.”
The MMT complaint makes a throwaway reference to PwC’s role in HP’s mess with Autonomy, the acquisition that resulted in fraud accusations against Autonomy founder Mike Lynch and a $5 billion write down by HP:
The executives perceived yet another opportunity to exploit PwC’s symbiotic relationship with its Agility Alliance partner by asking HP, dominant in the broader computer monitor market, to enter the niche portable monitor market. In high-level discussions between HP and PwC, HP agreed to manufacture and deploy its own portable monitor and offer the brand new product to PwC at anticompetitive prices—through below-cost pricing and/or global bundling and/or by offering other Agility Alliance opportunities to PwC, equally dominant in its own accounting market.
With these promises in place, PwC overrode its internal dual monitor task force and awarded MMT’s $40 million contract to its Alliance partner. HP hastily implemented production of its monitor and strategically introduced it to the press and public after it was already in the hands of PwC employees. HP’s monitor was identical in size, configuration, resolution, and build quality to the existing Toshiba product, the same product PwC’s Ray Garcia and his dual monitor task force had already rejected. At or around this same time, HP engaged PwC to audit the Autonomy debacle. Six months later, HP further thanked its Agility Alliance partner for its new business with its prestigious Growth Award at HP’s largest industry event, “HP Discover 2013.”
HP filed revised accounts in February 2014 in the UK. Economia, the magazine of the Institute of Chartered Accountants of England and Wales (ICAEW), gives us the latest on the Autonomy “debacle” on March 20, 2014:
The accounts allege Autonomy inflated its revenue and profit by as much as 81%. It reported profit after tax of £105.7m in 2010, but newly restated accounts have revised the figure down to £19.6m. HP also restated Autonomy’s revenue for 2010 from £175.6m to £81.3m.
In January [former Autonomy CEO Mike] Lynch said the allegations of fraud against him and his team of directors were based on HP confusion over the difference between US GAAP and IFRS accounting rules, claims which HP branded “patently ridiculous”.
The HP/Autonomy deal directly or indirectly involved all of the Big Four, with KPMG brought in to conduct due diligence on Autonomy after Deloitte signed off its audit of the UK company in 2010. Later PwC was brought in to carry out the report into the takeover, while EY are the auditors of HP, and signed off the restated turnover.
Economia also reminds us HP is currently being sued by shareholders and the deal and its parties are currently under investigation by regulators and watch dogs on both sides of the Atlantic, including the UK Serious Fraud Office and the US Securities and Exchange Commission. The US Department of Justice and the UK’s Financial Reporting Council are also investigating HP’s acquisition.
HP is certainly not fighting for its honor on the Autonomy deal from a position of moral authority. The Guardian reports on April 9:
Hewlett-Packard (HP) is to pay US regulators $108m to settle a corruption scandal involving employees at subsidiaries in three countries, who were charged with bribing government officials to win and retain lucrative public contracts.
Corruption was unearthed in relation to contracts worth $40m to install IT equipment at the national police headquarters in Poland, €35m of work for government prosecutors in Russia, and a deal to supply Mexico’s state-owned petroleum company.
Kara Brockmeyer, of the SEC enforcement division, said: “Hewlett-Packard lacked the internal controls to stop a pattern of illegal payments to win business in Mexico and Eastern Europe. The company’s books and records reflected the payments as legitimate commissions and expenses.
“Companies have a fundamental obligation to ensure that their internal controls are both reasonably designed and appropriately implemented across their entire business operations, and they should take a hard look at the agents conducting business on their behalf.”
HP-Autonomy acquisition due diligence service provider KPMG is facing difficult scrutiny in the UK over its role as auditor of failed Irish Nationwide Building Society and now liquidator of Irish Bank Resolution Corporation, a merger of the Irish Nationwide Building Society and failed Allied Irish Bank. (KPMG was poised to decide if it should sue itself for negligence in the audit.) KPMG may finally lose its audit of scandal and loss-ridden Co-operative Bank. A review is ongoing by the Financial Reporting Council (FRC) which regulates these matters in the UK – into the Co-operative Bank’s financial reporting and the audits of the reports by KPMG.
I reported that last year HP paid its auditor Ernst & Young $2 million in “Other” fees to testify on its behalf before Senator Carl Levin on tax avoidance and tax evasion. That’s a very big violation, in my opinion, of auditor independence rules that prohibit advocacy services, especially related to tax issues, by auditors on behalf of their audit clients. Ernst & Young is also being investigated by the SEC for independence violations related to tax lobbying on behalf of audit clients, according to Reuters.
Deloitte is in court all over the world for its alleged poor audits and apparently incomplete, incompetent, and conflicted consulting. It recently settled malpractice claims over its role as auditor in financial crisis mortgage fraud Taylor Bean & Whitaker and is facing serious allegations in Spain over its audit of Bankia.
Deloitte and Ernst & Young were the ostensible due diligence service providers to PwC audit client Caterpillar when it overpaid and claimed fraud on a recent China acquisition. PwC, as Caterpillar auditor, recently had to testify on behalf of Caterpillar before Senator Levin’s panel on a tax avoidance scheme it developed for its client that Levin criticized. (I wonder what PwC will charge Caterpillar for that performance?) From Fortune Magazine on April 1:
Accountants at PwC advising Caterpillar seemed to be aware that this change was a risky strategy that might get the company in trouble. One particularly damning email exchange took place between two PwC transfer pricing experts, Steven Williams and Thomas Quinn, when they were reviewing the Caterpillar tax strategy in 2009 in response to proposed regulatory changes from the IRS. The emails discussed whether or not Caterpillar could justify allocating so much profit to its Swiss subsidiary when much of the economic activity that generated those profits occurred in the U.S. Steven Williams concluded:
“What the heck. We’ll all be retired when this audit comes up … [PwC colleagues] Bodnam and Dunn will have to solve it. Baby boomers have their fun and leave the kids to pay for it.”
PwC faces litigation over its role in the failure of MF Global, SemGroup, and Colonial Bank. Its new audit client Herbalife, inherited from KPMG who had to resign because of its senior partner’s inside trading in the stock, is reportedly facing civil and criminal investigations.
MMT’s suit against PwC and HP raises the ugly question: Did PwC find the accounting adjustments to support HPs fraud claim against Autonomy and $5 billion goodwill write downs in exchange for a deal that resulted in thousands of monitors delivered to PwC below cost? Was it an advisory/hardware quid pro quo?
This could be an excellent example of what Monadnock’s Mark O’Connor referred to in the recent post here: Advisory work that auditors perform can present an untenable conflict in performing their primary role, and public duty to the capital markets, as auditors. Auditor independence is not just about deterring audit partners from trading on inside information or even about identifying auditors that provide prohibited services to audit clients in violation of Sarbanes-Oxley or the new EU rules. Those are easy, slam-dunk violations to spot. The tough auditor independence violations, the ones the SEC and PCAOB have been ignoring, result from with the firms’ business alliance relationships.
MMT CEO Fred Macdonald commented, “It’s very unfortunate that two global leaders worked together to crush a startup that brought them a win-win opportunity. After we identified the market and mapped it out, HP and PwC took it for themselves. To make matters worse, they then advertised that they had invented it on their own – a full three years after we introduced it.”
Michael Thacker, Director, Media Relations for HP Global Communications, replied to my request for comment: “We are reviewing the complaint at this time and have no further comment.”
PwC has not yet replied to my request for comment.
Main page art is Andy Warhol’s Dollar Sign courtesy of The Independent.