Read the "You Be the Judge" on p. 444 of the text. It is the case ofIn re HP Securities Litigation.

Review the facts, and the arguments of each party in the case.

The issue in the case is:did HP violate Section 10(b) of the Securities Exchange Act of 1934, i.e. did it have scienter when Meg Whitman reported on Autonomy's current situation and future prospects?Take a look at the Liability section under the Securities Exchange Act of 1934 in Ch. 23. What is scienter and does it apply to HP's actions in this case? Why or why not?

As the judge, decide for one party or the other. State your reasoning. Try to go beyond reiterating the argument given in the text. Also, don't rely on your instinct. Apply the law.

This is the "You Be the Judge" on p. 444:

In re HP Secs. Litig

Facts: Here is the time-line of events:

1. October: HP purchased Autonomy Corporation. Over the next few months, HP learned that Autonomy's financials were inaccurate.

2. May 23: a. HP CEO Meg Whitman hired Pricewater-houseCoopers to investigate reports of serious accounting improprieties at Autonomy. b. On a call with analysts, Whitman said, "In my view, Autonomy is a terrific product."

3. June 5: During a press interview, Whitman stated about Autonomy's difficulties: In my view, this is the classic case of scaling a business from startup to grownup. You can't run the organization at $1.5 billion the same way you did at $500 million. You just can't. I know exactly how this world works. I have every confidence that Autonomy will be a very big and very profitable business.

4. August 22: On a conference call, Whitman said, "Autonomy still requires a great deal of attention and we've been aggressively working on that business."

5. September 10: HP's Form 10-Q reported that: "At the time of the Autonomy acquisition in October 2011, the fair value of Autonomy approximated the carrying value."

6. Fifteen months later, on November 20: HP announced that, because of the report it had just received from PricewaterhouseCoopers, it was writing down the Autonomy investment by $8.8 billion. Shareholders filed suit alleging that Whitman and HP had committed fraud under 10(b).

You Be the Judge: Did the defendants have scienter? Did they act either intentionally or with deliberate recklessness?

Argument for the Shareholders: Long after it knew of problems with the Autonomy purchase, HP executives made filings with the SEC and statements to investors that gave no hint of trouble. Whitman even made up a whole story about how Autonomy was just going through growing pains. She stated that "Autonomy is a terrific product"an odd description for a fraudulent deal. HP said in a filing that, at the time of the Autonomy acquisition in October, its fair value approximated the carrying value. The senior executives could not possibly have believed that statement to be true. In short, they deliberately duped and defrauded investors.

Argument for the Company and Its Executives: Yes, there were rumors and allegations about Autonomy, but not until November 20, when the Pricewaterhouse investigation finished, did the defendants know for sure that the deal had been a fraud. As soon as the company knew, it made the public announcement. Taking time to investigate a situation before making disclosures to the investing public is not fraudulent; it is prudent and reasonable. Besides, Whitman's statements were nothing but sales talk and, therefore, create no liability. The Autonomy purchase was a mistake, but no one intentionally engaged in wrongdoing. HP was the one who was duped.