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Judge Boots Case Over HP’s Botched Deal

SAN FRANCISCO (CN) - Without leave to amend, a federal judge dismissed an employees' class action over Hewlett-Packard's botched $11.1 billion acquisition of English software company Autonomy Plc.

U.S. District Judge Charles Breyer rejected employees' claims that "new information" from two Financial Times reports and the U.S. Supreme Court ruling in Fifth Third Bancorp v. Dudenhoeffer justified reviving the case, which he first dismissed in April 2014.

Hewlett-Packard wrote off $8.8 billion in losses after the widely reported merger fiasco.

"This is already the second amended complaint, and the court sees no compelling representation that changed facts or circumstances warrant another amendment," Breyer wrote in dismissing the case Tuesday. "Rather, it is clear by this point in the extensive life of this case that the SAC's shortcomings are inherent legal ones, not curable omissions of facts or inartful pleading that could be saved by amendment."

Lead plaintiff Mike Laffen, representing a class of HP 401k plan participants, sued HP in December 2012 under the Employee Retirement Income Security Act. He claimed investment managers and HP executives breached their fiduciary duties by failing to disclose information about the Autonomy acquisition.

The first amended complaint of June 2013 claimed that those entrusted with investing money from the Employee Stock Ownership Plan (ESOP) should have suspended investment in HP in light of the company's troubles and its freefalling share price.

Breyer dismissed the first amended complaint on April 2, 2014, saying HP had an obligation to keep investing the funds, citing the Moench presumption of prudence. In Moench v. Robertson, the Third Circuit addressed "to what extent" fiduciaries are liable for ESOPs under ERISA.

"The court concluded that only 'in limited circumstances' ESOP fiduciaries can be liable under ERISA for continuing to invest in employer stock according to the plan's direction," Breyer wrote. "Thus, when an employee benefit plan requires or encourages investment in employer's stock, plan fiduciaries are entitled to a strong presumption that they satisfied ERISA's prudence mandate by permitting plan participants to invest in their employer's stock."

On Tuesday, Breyer dismissed the case for good.

"The 'new facts' from the FT articles show nothing more than that HP knew around the time of the acquisition that Autonomy sold hardware and used value-added resellers - not that Autonomy engaged in fraud in its accounting or use of these practices," Breyer wrote. "At most, the FT articles insinuate that there was no Autonomy fraud at all - rather, that HP was mistaken in its valuation of Autonomy and botched the integration, and in hindsight seeks to shift the blame for its own incompetence."

He continued: "Ultimately, the SAC fails to state a claim that HP was imprudent under 'circumstances prevailing at the time' [that] HP acted."

The second amended complaint also argued that the ruling in Fifth Third made the Moench presumption of prudence short-lived because the Supreme Court ruling, made shortly after Breyer's dismissal of the first amended complaint, makes ESOP fiduciaries subject to the same duty of prudence that applies under ERISA.

But Breyer said that even under ERISA, HP had the right and the "duty" to investigate before making any moves affecting employee 401k plans.

"HP conducted three investigations in the process of integrating Autonomy and the commissioned the PwC [Pricewaterhouse Coopers] investigation of the fraud allegations after Whistleblower No. 4 came forward," he said. "HP should have, and was entitled to, investigate and none of the allegations in the SAC plausibly plead otherwise. Because the content of the duty of prudence turns on 'the circumstances ... prevailing' at the time the fiduciary acts, the appropriate inquiry will necessarily be context specific."

Breyer said a third amended complaint would be of no avail.

"Plaintiffs' 'repeated failure to cure deficiencies by amendments previously allowed' is a symptom of the SAC's deeper malaise - that the actions it sets forth are simply not actionable under Fifth Third and ERISA," Breyer wrote. "Any further amendment would be futile, and the court hereby dismisses without leave to amend."

Breyer noted that HP stock made an energetic recovery only days after the Nov. 19, 2012 disclosure that it would make the $8.8 billion write-down for the Autonomy purchase.

"Specifically, HP's stock price fell from $13.30 to $11.71, only to bounce back within nine trading days and not close below that level since - indeed, HP's stock price has nearly tripled since Nov. 19, 2012."

Calls to HP and plaintiffs' attorneys were not immediately returned.

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