May 19, 2022

High & Low Finance: A Clash of Auditors in H.P. Deal and Loss

But the eternal question asked whenever a fraud surfaces — “Where were the auditors?” — does have an answer in this case.

They were everywhere.

They were consulting. They were advising, according to one account, on strategies for “optimizing” revenue. They were investigating whether books were cooked, and they were signing off on audits approving the books that are now alleged to have been cooked. They were offering advice on executive pay. There are four major accounting firms, and each has some involvement.

Herewith a brief summary of the Autonomy dispute:

Hewlett-Packard, a computer maker that in recent years has gone from one stumble to another, bought Autonomy last year. The British company’s accounting had long been the subject of harsh criticism from some short-sellers, but H.P. evidently did not care. The $11 billion deal closed in October 2011.

Last week, H.P. said Autonomy had been cooking its books in a variety of ways. Mike Lynch, who founded Autonomy and was fired by H.P. this year, says the company’s books were fine. If the company has lost value, he says, it is because of H.P.’s mismanagement.

Autonomy was audited by the British arm of Deloitte. H.P., which is audited by Ernst Young, hired KPMG to perform due diligence in connection with the acquisition — due diligence that presumably found no big problems with the books.

That covered three of the four big firms, so it should be no surprise that the final one, PricewaterhouseCoopers, was brought in to conduct a forensic investigation after an unnamed whistle-blower told H.P. that the books were not kosher. H.P. says the PWC investigation found “serious accounting improprieties, misrepresentation and disclosure failures.”

That would seem to make the Big Four tally two for Autonomy and two for H.P., or at least it would when Ernst approves H.P.’s annual report including the write-down.

But KPMG wants it known that it “was not engaged by H.P. to perform any audit work on this matter. The firm’s only role was to provide a limited set of non-audit-related services.” KPMG won’t say what those services were, but states, “We can say with confidence that we acted responsibly and with integrity.’

Deloitte did much more for Autonomy than audit its books, perhaps taking advantage of British rules, which are more relaxed about potential conflicts of interest than are American regulations enacted a decade ago in the Sarbanes-Oxley law. In 2010, states the company’s annual report, 44 percent of the money paid to Deloitte by Autonomy was for nonaudit services. Some of the money went for “advice in relation to remuneration,” which presumably means consultations on how much executives should be paid.

The consulting arms of the Big Four also have relationships that can be complicated. At an auditing conference this week at New York University, Francine McKenna of noted that Deloitte was officially a platinum-level “strategic alliance technology implementation partner” of H.P. and said she had learned of “at least two large client engagements where Autonomy and Deloitte Consulting worked together before the acquisition.” A Deloitte spokeswoman did not comment on that report.

To an outsider, making sense of this brouhaha is not easy. In a normal accounting scandal, if there is such a thing, the company restates its earnings and details how revenue was inflated or costs hidden. That has not happened here, and it may never happen. There is not even an accusation of how much Autonomy inflated its profits, but if there were, it would be a very small fraction of the $8.8 billion write-off that H.P. took. Autonomy never reported earning $1 billion in a year.

That $8.8 billion represents a write-off of much of the good will that H.P. booked when it made the deal, based on the conclusion that Autonomy was not worth nearly as much as it had paid. It says more than $5 billion of that relates to the accounting irregularities, with the rest reflecting H.P.’s low stock price and “headwinds against anticipated synergies and marketplace performance,” whatever that might mean.

Some of the accounting accusations relate to how Autonomy booked expenses. The H.P. version is that the British company made sales of hardware — personal computers it bought and resold — look like sales of valuable software. It hid some costs as marketing expenses when they should have been reported as costs of goods sold.

All that, if true, would inflate operating profit margins and growth rates for the most important part of the business. But it would not change net earnings.

Floyd Norris comments on finance and the economy at

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U.S. Said to Be Ready to Sue Banks Over Mortgages

The Federal Housing Finance Agency suits, which are expected to be filed in the coming days in federal court, are aimed at Bank of America, JPMorgan Chase, Goldman Sachs and Deutsche Bank, among others, according to three individuals briefed on the matter.

The suits stem from subpoenas the finance agency issued to banks a year ago. If the case is not filed Friday, they said, it will come Tuesday, shortly before a deadline expires for the housing agency to file claims.

The suits will argue the banks, which assembled the mortgages and marketed them as securities to investors, failed to perform the due diligence required under securities law and missed evidence that borrowers’ incomes were inflated or falsified. When many borrowers were unable to pay their mortgages, the securities backed by the mortgages quickly lost value.

Fannie and Freddie lost more than $30 billion, in part as a result of the deals, losses that were borne mostly by taxpayers.

In July, the agency filed suit against UBS, another major mortgage securitizer, seeking to recover at least $900 million, and the individuals with knowledge of the case said the new litigation would be similar in scope.

Private holders of mortgage securities are already trying to force the big banks to buy back tens of billions in soured mortgage-backed bonds, but this federal effort is a new chapter in a huge legal fight that has alarmed investors in bank shares. In this case, rather than demanding that the banks buy back the original loans, the finance agency is seeking reimbursement for losses on the securities held by Fannie and Freddie.

The impending litigation underscores how almost exactly three years after the collapse of Lehman Brothers and the beginning of a financial crisis caused in large part by subprime lending, the legal fallout is mounting.

Besides the angry investors, 50 state attorneys general are in the final stages of negotiating a settlement to address abuses by the largest mortgage servicers, including Bank of America, JPMorgan and Citigroup. The attorneys general, as well as federal officials, are pressing the banks to pay at least $20 billion in that case, with much of the money earmarked to reduce mortgages of homeowners facing foreclosure.

And last month, the insurance giant American International Group filed a $10 billion suit against Bank of America, accusing the bank and its Countrywide Financial and Merrill Lynch units of misrepresenting the quality of mortgages that backed the securities A.I.G. bought.

Bank of America, Goldman Sachs and JPMorgan all declined to comment. Frank Kelly, a spokesman for Deutsche Bank, said, “We can’t comment on a suit that we haven’t seen and hasn’t been filed yet.”

But privately, financial service industry executives argue that the losses on the mortgage-backed securities were caused by a broader downturn in the economy and the housing market, not by how the mortgages were originated or packaged into securities. In addition, they contend that investors like A.I.G. as well as Fannie and Freddie were sophisticated and knew the securities were not without risk.

Investors fear that if banks are forced to pay out billions of dollars for mortgages that later defaulted, it could sap earnings for years and contribute to further losses across the financial services industry, which has only recently regained its footing.

Bank officials also counter that further legal attacks on them will only delay the recovery in the housing market, which remains moribund, hurting the broader economy. Other experts warned that a series of adverse settlements costing the banks billions raises other risks, even if suits have legal merit.

The housing finance agency was created in 2008 and assigned to oversee the hemorrhaging government-backed mortgage companies, a process known as conservatorship.

“While I believe that F.H.F.A. is acting responsibly in its role as conservator, I am afraid that we risk pushing these guys off of a cliff and we’re going to have to bail out the banks again,” said Tim Rood, who worked at Fannie Mae until 2006 and is now a partner at the Collingwood Group, which advises banks and servicers on housing-related issues.

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DealBook: Liberty Buys a Stake in Barnes & Noble for $204 Million

Leonard Riggio, the chairman and largest shareholder of Barnes  Noble.Jin Lee/Bloomberg NewsLeonard Riggio, the chairman and largest shareholder of Barnes Noble.

8:28 p.m. | Updated

Liberty Media, the media conglomerate controlled by John C. Malone, agreed on Thursday to buy a stake in Barnes Noble for $204 million, but declined to buy the bookseller outright.

The deal would disappoint investors who had hoped that Liberty, whose investments include Starz Entertainment, the home shopping channel QVC and the Atlanta Braves baseball team, would acquire a majority stake. Liberty had offered in May to buy 70 percent of Barnes Noble for $17 a share if the retailer’s powerful chairman, Leonard S. Riggio, who controls nearly 30 percent of the company, assented.

Under pressure from some large shareholders, Barnes Noble had put itself up for sale last August, but until Liberty showed up, no real bidder had emerged.

While Liberty had begun conducting due diligence on Barnes Noble earlier in the summer, the company grew concerned about both the cost of financing a full takeover and the volatility of the stock markets, people briefed on the matter said.

Liberty’s $17-a-share offer in May, then worth a 20 percent premium to where Barnes Noble’s shares were trading, had raised some eyebrows. Mr. Malone later explained that he was interested in Barnes Noble’s e-reader, the Nook, which is now second only to Amazon’s Kindle in popularity.

He added that a deal for the retailer would be a “flier” for his media conglomerate.

Under the terms of the investment, Liberty would receive preferred shares that can be converted at $17 each into common shares worth 16.6 percent of Barnes Noble. The preferred shares will pay a 7.75 percent annual dividend. Liberty would also get two new seats on Barnes Noble’s board. It has nominated Gregory B. Maffei, its chief executive, and Mark D. Carleton, a senior vice president.

Barnes Noble will use the investment to continue its e-reader strategy, which is built upon the Nook device.

“This investment provides Barnes Noble with capital to grow its business on terms that are attractive for both parties and allows us to play a meaningful role in shaping their success to generate returns for our shareholders and theirs,” Mr. Maffei said in a statement.

Mr. Riggio, who had previously hinted that he was interested in working with Liberty, said in a statement: “We could not have found a better strategic investor than Liberty Media. Their investment is a strong endorsement of our overall business, and the additional capital will further fuel the explosive growth of our digital strategy.”

Earlier on Thursday, shares of Barnes Noble fell nearly 7 percent, to $12.09, after investors grew increasingly worried that Liberty would not try to buy all of the company.

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DealBook: Postcrisis, New Investment Tactics to Lure the Ultra Wealthy

Girish Reddy, a founder of Prisma Capital Partners, seeks to avoid specialty overlap in the hedge funds he invests in.Hiroko Masuike/The New York TimesGirish Reddy, a founder of Prisma Capital Partners, seeks to avoid specialty overlap in the hedge funds he invests in.

Funds of hedge funds are changing their ways.

For decades, the money managers, which invest across a number of hedge funds, lured big institutions with the promise of diversification. They justified the extra fees by saying their extensive due diligence would help protect investors from major blowups.

Then the financial crisis struck, and the strategy failed. Weighed down by the added expenses, the baskets of funds lost on average more than individual portfolios.

Some failed to detect fraud in their underlying holdings. Fairfield Greenwich Advisors and Tremont Group Holdings lost billions of dollars when Bernard L. Madoff’s fund turned out to be a huge Ponzi scheme.

Since then, the investments have been a tough sell. Assets in funds of funds stand at $667 billion, some $130 billion below their 2007 peak. By contrast, the overall hedge fund industry just reached new record highs, with more than $2 trillion, according to Hedge Fund Research. Increasingly, institutional investors are opting to pay consultants to advise them on allocations, or are investing directly into hedge funds themselves. Ultrawealthy individuals, once major investors in funds of funds, have yet to return full force since 2008.

Amid the wreckage, some funds of funds are adapting their strategies and enhancing their services. They’re also looking to new lines of business, as investors seek out lower fees and greater protection in the aftermath of the crisis.

“The needs of the client have changed and the demands have increased,” said Henry P. Davis, managing director at Arden Asset Management, a fund of funds that manages about $8 billion, down from $12 billion at its peak. “It’s been a pressure that has been constructive, in terms of strengthening and broadening the scope of what you have to offer.”

Arden, for example, is now helping clients vet other potential alternative investments. Investors have access to more than 40,000 reports on external hedge funds that the firm has written over its 18-year history. Arden executives also provide consulting services, joining clients for onsite visits at money managers they’re considering.

In the current market, investors are also seeking established firms with heft. Behemoths like the Blackstone Group, which manages some $37 billion in its fund of funds business, have had little trouble raising money.

To help gain size, smaller firms are pairing with competitors, giving them new sources of capital and investors. In June, Arden announced an agreement to manage an additional $1.3 billion in assets for another money manager in the space.

Others are tailoring products to the needs of specific investors, rather than creating one-size-fits-all portfolios.

At Prisma Capital Partners, a fund of funds started by three former partners at Goldman Sachs, some 70 percent of assets are dedicated to customized portfolios that consider clients’ risk tolerance, their cash needs or the mix of their overall holdings.

Prisma is also more active than the typical fund of funds. The firm regularly analyzes its holdings and changes its lineup to take advantage of market opportunities and avoid overlap. For example, Prisma may opt to drop a manager who trades insurance products for one that specializes in mortgage-related investments.

“Our process tries to identify the specialists who have very defined areas of expertise in order to avoid overlap,” Girish Reddy, a founder and managing partner, said. “We don’t want five of our managers in the same position.”

The flexible strategy has appealed to investors. Prisma’s assets have swelled to nearly $7 billion, up from $5 billion before the crisis.

Niche funds of funds are also in vogue.

Dorset Management, a New York-based asset manager, is planning to start a commodities-focused fund of funds in the coming months, according to a person with knowledge of the matter. Some funds of funds are marketing so-called seeding platforms, which buy pieces of hedge funds in their infancy.

Liongate Capital Management, which runs about $3.2 billion, focuses on hedge funds with $500 million to $2 billion. It allows the firm to distinguish itself from larger rivals, whose asset loads make it difficult to invest in portfolios of that size. Liongate, which has had annualized returns of 9.45 percent since 2004, has pulled in about $2 billion since the financial crisis, reaching a new peak in assets.

“Fund of funds that are of a midsize like us have to differentiate themselves,” said Jeff Holland, a managing director at Liongate.

SkyBridge Capital, the firm run by Anthony Scaramucci, is trying to attract assets with a different type of vehicle that has a lower minimum. Clients pay only $50,000 to get access to a portfolio that invests in multibillion-dollar hedge funds like Third Point and SAC Capital.

Over all, SkyBridge manages about $8.5 billion across its funds.

While investors must still earn at least $200,000 a year or have a net worth in excess of $1 million, it is a far cry from the $10 million minimum investment required for many top hedge funds.

Mr. Scaramucci says he is trying to broaden the distribution channels for hedge funds, which have historically been reserved for the ultrawealthy and institutions. To do so, he is also charging a fraction atop the hefty hedge fund fees, roughly 1.5 percent of the assets. A typical fund of funds charges 1 percent of assets and takes 10 percent of profit.

“The fund of funds community is going out and identifying people that need services,” Mr. Scaramucci said.

The tactic seems to be working. Since June of last year, the business has grown to about $1.7 billion in assets under management from about $600 million.

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Trying to Game Google on ‘Mother’s Day Flowers’

Those words have been typed into search engines by countless Americans in the lead-up to Sunday. What few realize is that an online war over this endearing phrase is being waged by the country’s largest flower sellers, and some of them, apparently, are not fighting fair.

Internet marketing experts say Teleflora, FTD, and ProFlowers are trying to elevate their Web sites in search results with a strategy that violates Google’s guidelines.

The flower companies deny it. But all four have links on Web sites that are riddled with paid links, many of which include phrases like “mothers day flowers,” “mothers day arrangements” and “cheap mothers day flowers.” Anyone who clicks on those backlinks, as they are known, gets sent to the floral retailer who paid for them.

The real goal is to elevate the flower sellers’ sites in the eyes of Google. Or rather, Google’s algorithm, which uses links as a proxy for popularity — the more links attached to a Web site, the higher a site rises in Google searches.

“This is a pretty typical link-buying campaign,” says Byrne Hobart of Digital Due Diligence, a Manhattan Internet consulting firm. “These companies are paying for links to pages on their site that relate to seasonal terms, like ‘Mother’s Day Flowers’ or ‘Mother’s Day Gifts.’ It’s a high-risk strategy, but in some cases it pays off well for the link-buyer in the short term.”

Google wants Web sites to earn links because the sites are relevant; paying for links is against its rules. When caught in link-buying schemes, companies are often penalized by Google, which sends the sites plunging in its search results, sometimes for months.

On Wednesday, The New York Times sent Google representatives a list of roughly 6,000 links to the flower companies that were built in the last month. After Google’s spam team studied the list, a company spokesman, Jake Hubert, sent this statement:

“None of the links shared by The New York Times had a significant impact on our rankings, due to automated systems we have in place to assess the relevance of links. As always, we investigate spam reports and take corrective action where appropriate.”

In essence, Google said that these companies tried to game its algorithm, but for the most part, their efforts failed. So what we are talking about here is not Internet subterfuge — it is attempted Internet subterfuge.

Google is not saying whether it plans to demote any of the companies, but as of late Friday, it had not. A search of “mothers day flowers” had Proflowers at No. 1, 1800Flowers at No. 2, Teleflora at No. 3 and FTD at No. 4.

ProFlowers did not respond to requests for comment. A spokeswoman for said the company would not discuss the links. An FTD representative said that the vast majority of its links were on Web sites owned by FTD, adding, “If any of our practices appear to have moved outside of Google’s guidelines, we will certainly address them.”

Teleflora released a statement saying that its “corporate policy is to not pay for any links that would violate Google’s guidelines. After closely reviewing the Teleflora links you provided, we believe we are in compliance with Google.”

There are, however, Teleflora links on some ad-crammed Web sites. Several appear on, which until Friday featured a stock photo of a goateed man in a blue shirt — it is an image found all over the Internet — and a bunch of blandly written entries on topics like mortgages, car leasing and insurance, all of which contain links to corporate sponsors. An entry in March titled “Finding the Best Mothers Day Gifts Online” contained three links to Teleflora’s web site.

FTD’s campaign includes a lot of mom-related Web sites, some of which post links in exchange for money. The publisher of one Web site with an FTD link — who asked that neither she nor her site be named because she did not want to anger the company — said she received $30 a month to post a “mothers day flowers” link on her home page.

“I haven’t updated that site in a couple years,” she said. “There’s not a lot of traffic there.”

1800Flowers posted links on, and, which has a header that says the site is all about “Florida real estate — helping you find your dream home.”

A company buying links is risking a trip to the Internet’s answer to Siberia. That was demonstrated in February when Google demoted J. C. Penney in search results after concluding that the retailer had bought links for dozens of valuable terms during the holiday season.

Not every company gets caught, though, and because research shows that most shoppers click on the first two or three results, turning up at or near the top of a Google search presents a financial temptation.

The four flower sellers appear to have taken a calculated gamble: if they bought links and were demoted, they would suffer, but not as much as they would if they missed the chance to rank highly before Mother’s Day, when Americans are expected to spend $1.9 billion on flowers, according to the National Retail Federation.

The links put Google in an uncomfortable spot. Were the company to drag any of the country’s largest flower sellers into virtual oblivion right before Mother’s Day, users would be unable to find a retailer that they might well be looking for — and that rival search engines, like Bing, would feature.

It is impossible to double-check Google’s conclusion that few of the links of the florist companies helped in search results. The particulars of Google’s algorithm are shrouded in secrecy for the same reason that a bank does not publicize the route to its vault.

But Searchmetrics, a seller of search analytics software, found that Teleflora’s ranking had risen from No. 7 in Google searches for “mothers day flowers” to No. 4 not long after the company started its first major foray into link buying, in February of this year. Last year at this time, the company had an estimated 20,000 to 25,000 visitors per day, the company also found. This week, it has an estimated 35,000 visitors per day.

“There is a possible correlation between the backlinks and the increased visibility of the site,” said Horst Joepen, the chief executive of Searchmetrics. But without more research, he added, there is no way to be sure.

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DealBook: NYSE Euronext: A Fight About Cost Savings

The battle over NYSE Euronext may come down in part to a question of who can save more in a deal with the Big Board.

NYSE Euronext’s chief executive, Duncan Niederauer, told The Financial Times that his company had essentially understated the amount of cost savings in its proposed merger with Deutsche Börse by about 100 million euros. That puts the figure at “closer to” 400 million euros, or about $583 million.

In his interview, Mr. Niederauer said that the savings would come in part from combining NYSE Euronext’s derivatives clearing platform with Deutsche Börse’s, allowing customers to pay just once.

Hinted at for some time, the revised numbers are meant to push back against the more than $700 million in cost savings estimated by the Nasdaq OMX Group and the IntercontinentalExchange in their proposed takeover of NYSE Euronext.

That’s in part because there’s more overlap in the Nasdaq-ICE proposal, especially in combining Nasdaq with NYSE Euronext’s stock-trading business, which would be a merger of the nation’s two biggest stock market operators.

Unsurprisingly, Nasdaq and ICE are skeptical about NYSE Euronext’s new numbers. In a statement on Monday, they question how, after more than two years of due diligence, NYSE Euronext was suddenly able to find an additional 100 million euros of cost savings. They also questioned where the additional savings come from, since the combined NYSE Euronext and Deutsche Börse plan to maintain two headquarters and two technology platforms.

In a separate presentation (below), Nasdaq and ICE highlighted what they said were flaws in NYSE Euronext’s own merger history, including missing both expense reduction and revenue combination targets in the original combination of the New York Stock Exchange and Euronext. They also pointed to a $1.6 billion write-down that NYSE Euronext took in late 2008 to reflect the lower value of the merger.

Nasdaq’s chief executive, Robert Greifeld, has said that his mooted cost savings would come in large part from combining data centers and backoffice systems. But NYSE Euronext has fought back by saying that its merger with Deutsche Börse would create minimal job cuts in the United States, whereas the Nasdaq offer’s cost savings are built on widespread pink slips.

That argument appears to have gotten the ear of Senator Charles E. Schumer, Democrat of New York. In a letter to the chief executives of Nasdaq and ICE, Mr. Schumer demanded more information about what their deal would mean for New York City jobs.

According to estimates prepared for him by NYSE Euronext, the Nasdaq-ICE proposal would lead to more than 1,000 job cuts in the United States — and 800 in New York City.

Here’s the full text of the letter that Mr. Schumer sent to Nasdaq and ICE:

Robert Greifeld
Chief Executive Officer President
The NASDAQ OMX Group, Inc
One Liberty Plaza
165 Broadway
New York, NY 10006

Jeffrey Sprecher
Chairman Chief Executive Officer
IntercontinentalExchange, Inc.
2100 RiverEdge Parkway
Suite 500
Atlanta, GA 30328

Dear Mr. Greifeld and Mr. Sprecher,

I write you today regarding an area of critical importance to me with respect to your ongoing efforts to acquire NYSE Euronext. As we previously discussed, I am concerned with the potential impact a NASDAQ/ICE takeover of NYSE Euronext would have on jobs in and around New York City. This would be a major consideration in judging any potential transaction.

I understand that the NYSE Euronext board of directors has once again reaffirmed its support for the Deutsche Börse transaction, but I also understand that NASDAQ and ICE may further revise their proposal or take it directly to NYSE Euronext’s stockholders. Accordingly, I wanted to follow up on our previous conversation, during which I requested your best estimates of expected job losses in the New York City area that would result from a NASDAQ/ICE takeover of NYSE Euronext. By your own account, the business rationale for a NASDAQ/ICE transaction appears predicated largely on over $700 million in so-called “cost synergies”. That almost certainly means significant job losses. At my request, NYSE Euronext estimated that the NASDAQ/ICE proposal, if effectuated, would result in the loss of 1,000-1,100 U.S. jobs, including approximately 800 in the New York City area.

Prior to taking additional steps in your acquisition efforts, please provide me with your best estimate of how many jobs would be lost in the New York City area in the event of a NASDAQ/NYSE combination, and an explanation for how the claimed cost synergies would be achieved in light of your estimated level of job losses.

Please let me know if you have any questions or would like to discuss this further.


Charles E. Schumer
United States Senator

Nasdaq and ICE presentation on NYSE Euronext deal cost savings

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