Ms. Whitman. (Photo: Max Morse)

The nuts and bolts of HP's $11.1 billion acquisition of Autonomy are pretty wonky. But we know a good scandal when we see one, and this $8.8 billion loss and the whole "fraud" debacle are shaking up to be one for the record books.

After losing all that money, HP pointed the finger at its subsidiary, alleging that cooked books had made Autonomy appear more valuable than it really was. If the HP thought the former Autonomy team would go quietly into that good night, the Silicon Valley giant was sadley mistaken. Former Autonomy CEO Mike Lynch has loudly maintained his innocence, and now Business Insider reports that he's started a blog to defend against the allegations.

The description:

This website is maintained by Dr Mike Lynch on behalf of the former management team of Autonomy. The site provides relevant information pertaining to the accusations made by Hewlett Packard (HP) on 20 November 2012 of financial impropriety at Autonomy. The former management team of Autonomy strongly rejects the accusations made by HP.

Thus far the blog is mostly placeholder, with an open letter to HP board dated November 27, an Autonomy timeline and the lengthiest legal notice we've ever seen outside of an iTunes terms of service agreement. But we're adding it to our RSS feed and waiting for the other shoe to drop.

It's tough to say who to believe here, but one thing is for sure: This is just the latest chapter in the sad, sorry history of corporate scandals at Hewlett-Packard, a company's had its dirty laundry aired over and over again in the most public of possible arenas. The company has had, count 'em, seven CEOs since 1999. CEO Meg Whitman was supposed to be a clean break with a past involving rampant leaks to the press, sexual harassment and gross infighting on the company's board of directors.

Guess that's not working out so well.

Hackers never look this cool.

Romanians Iulian Dolan and Cezar Iulian Butu have confessed in the U.S. District Court in New Hampshire to multiple counts related to credit card fraud via hacking.

Under the leadership of another Romanian, Adrian-Tiberiu Opera, the men trawled the Internet for vulnerable point-of-sale programs, which apparently included applications linked to credit card payments at 150 Subway restaurants. The scam lasted two years and vacuumed up more than $10 million in profits. Citing court documents, Ars Technica reports on how the hacks worked:

Dolan admitted he helped alleged ring leader Adrian-Tiberiu Opera scan the Internet for point-of-sale systems. "These were typically password-protected, so Dolan would attempt to crack the passwords, where necessary," Monday's plea agreement, which was signed by the defendant, stated. "Next, once he cracked the password and gained administrative access, Dolan remotely installed software programs called 'keystroke loggers' (or 'sniffers') onto the POS systems. These programs would record, and then store, all of the data that was keyed into or swiped through the merchants' POS systems, including customers' payment card data."

The hackers didn't confine their efforts to Subway. Mr. Dolan admitted he wormed his way into "several hundred" American payment systems, downloading financial information for 6,000 people. He has received a seven-year prison sentence for his trouble. His countryman Mr. Butu will spend nearly two years in prison.

Adrian-Tiberiu Opera is awaiting trial.

And from now on we are paying cash at Subways.

Wait...they're using computer too?

One of the reason that Bernie Madoff was able to stay undetected for so long was that he could alternately charm and intimidate the young SEC staffers sent to investigate his firm. In the wake of that scandal, reports The Wall Street Journal, the SEC has developed a computer system that analyzes performance from thousands of hedge funds and looks for  unusually good performance year-over-year that, like Mr. Madoff, seems too good to be true. 

So far the data crunching effort has led to four indictments, a positive sign that has the SEC thinking about expanding the scope of their computerized scrutiny to include up to 20,000 mutual funds and private equity firms.

Wall Street's reaction has been to suggest that this kind of scrutiny will have a chilling effect on managers who perform well. "There are people out there who have been committing fraud, and we want to get them and get them out of the system," Robert Leonard, a partner at law firm Bingham McCutchen LLP who represents hedge funds told The Wall Street Journal. "I'm concerned there probably will be some chilling effect for managers who are knocking the cover off the ball."

Right. Money managers with nothing to hide are going to begin tanking their own returns, rather than risk a SEC investigation? The financial sector has been relying on the world's best mathematical minds and most powerful computers for decades to gain an edge. The fact that the SEC is just now beginning to use these methods to detect fraud is a shocking, if welcome sign that they realize they have a lot of catching up to do if they are going to keep pace with the bad actors in these markets. This will help them do a better job detecting those hard-to-identify bogus firms, the ones with zero name recognition and no website who list their address as a non-existent street in New Jersey.

Mr. Arrington flashes his "first amendment" gang sign.

Betabeat published a story yesterday about the ways in which tech investors who write about private companies on public blogs might run afoul of SEC regulations. It focused, naturally, on Mike Arrington, who saw the post around 2 a.m. this morning and responded with this tweet:

"Screw that. Let me introduce you to the first fucking amendment to our constitution."

Mr. Arrington failed to provide any links to the first amendment, but luckily, Betabeat had spent yesterday afternoon conversing with Prof. John Coffee of Columbia University, one of the foremost experts on securities law in the nation.

"I do agree with Ralph Ferrara that the rules established by the Securities and Exchange Act of 1934 apply to public discussion of private companies in the same way it does to public companies," said Prof. Coffee.

Prof. Coffee also agreed with Mr. Arrington that the first amendment offers some protections to bloggers writing about private companies in which they are investors with inside knowledge. "It's not just about the sin of omission. Otherwise it would be impossible for anyone to write about companies with attaching a full prospectus to every post."

The argument, should a case go to court, says Prof. Coffee, would be about proving deception. "Can you prove that this blogger wrote something which wasn't their honest opinion, or show that they intended to deceive others?"

The portion of the Securities and Exchange Act of 1934 on which all this hinges is section 10 b-5: Employment of Manipulative and Deceptive Practices:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

1. To employ any device, scheme, or artifice to defraud,
2. To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
3. To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,

in connection with the purchase or sale of any security.

So the answer is, yes and no. Investors like Reid Hoffman, who wrote a post on TechCrunch about why Greylock invested in Groupon, are not guilty of fraud simply because they neglected to mention, let's say, the $400 million a year Groupon was losing.

But by blogging publicly about the investment, and knowingly omitting a material fact about the company's finances, Mr. Hoffman opened himself up to an investigation by the SEC or charges of fraud from investors who believe they suffered a financial loss as a result of his post (see Rochez Bros. vs Rhoades).

In Mr. Hoffman's case, charges of market manipulation might center around the long expected IPO or the robust secondary market for trading equity in Groupon. And as Prof. Coffee points out, the fact that the secondary markets are much smaller and far less transparent than the public markets, means that manipulation is a much more serious issue.

"Especially in the very thin, private secondary markets, where there is little liquidity and share prices are more subject to manipulation, investors who blog publicly and don't disclose contrary interest, are in violation of 10 b-5."

P.S.--"The winner from this group receives the Disrupt Cup and $50,000, taking over possession from Disrupt New York winner Getaround. Without further ado, the runners-up is Prism Skylabs. And the winner is…Shaker! Disclosure: TechCrunch founder Michael Arrington is an investor in Prism Skylabs and is a pending investor in Shaker."

Image via BacktoGeek

Has Blogging Become the New Insider Trading?

“People think there is a distinction between how an major investor can talk about a public company versus a private company,” said Ralph Ferrara, former General Counsel for the SEC. “But if you read the law carefully, you see that everything that you can do wrong when combining a public company with the media applies to investments in private companies as well.”

Michael Arrington wanted to have it all. The editor-in-chief of TechCrunch, the nation’s most powerful tech blog, had, except for a brief hiatus, invested his own money in the companies he covered. The move always prompted a bit of grumbling in the blogosphere, but nothing he couldn't handle.

Then Mr. Arrington decided to go bigger. He tapped Silicon Valley’s royalty to raise a $10 million pool he dubbed CrunchFund.

According to sources familiar with the fund, it was only after these commitments were made that Mr. Arrington approached his corporate overlords at AOL to inform them of his plans. Initially upper management was nervous about the potential conflict of interest. Mr. Arrington was, after all, running the crown jewel of AOL’s new journalistic empire. “He explained to them that this was nothing unusual, and pointed out that Om Malik works for True Ventures and runs GigaOm,” the source said.

The answer seemed to satisfy AOL, which gave Mr. Arrington its blessing...and an additional $10 million in corporate cash to invest. When CrunchFund became public just before Labor Day, however, the result was a media firestorm. Mr. Arrington was fired (twice) and quit (once), before eventually parting ways with TechCrunch on an amicable note. It all made for great theater—but it also signaled that something significant was happening. The increasingly incestuous relationship between investors in private technology companies and the new media publishers who cover them had become to big to ignore.

Anyone watching the industry closely could see this conflict coming. TechCrunch, GigaOm, Business Insider and yes, Betabeat, are all backed to some extent by venture funds or individuals who also invest in the companies the blogs cover (BetaBeat is owned in part by Josh Kushner of Thrive Capital). All maintain rules about disclosure when writing about companies their own backers fund, but no marriage of media and money is ever completely cut-and- dry.

In January, for example, Reid Hoffman of Greylock Parnters, which invested in Mr. Arrington’s new CrunchFund, took advantage of Mr. Arrington’s soap box with a long “guest post” for TechCrunch explaining why his firm had chosen to invest in the controversial daily deal giant Groupon.

“It takes a lot of conviction in the future of a business to pull out your checkbook when the pre-money valuation has this many zeroes,” intoned Mr. Hoffman, laying out his justification for TechCrunch readers, as well as, no doubt, the powerful limited partners who back Greylock.

Investors like Greylock typically have access to a company’s financials before committing to new funding. But there was little mention of accounting in this post. Instead Mr. Hoffman cited Groupon’s smart use of data and its sense of humor as the basis for his confidence that the company would emerge as the leader in capturing the $100 billion local advertising market. Less than five months after his post, Groupon filed for an IPO.

There was no mention in Mr. Hoffman’s item of the fact that Groupon was bleeding red ink—losing, depending on who’s accounting you prefer, anywhere between $100 and $400 million last year. He did note Groupon’s staggering growth, but neglected to touch on the corresponding explosion in hiring the company oversaw. Last week Groupon’s sales force filed a class action lawsuit alleging the company had failed to pay them millions in overtime. On the website Glass Door, a forum that allows workers to comment anonymously about their employers, members of the sales force described a boiler room atmosphere were employees were afraid to take bathroom breaks and cried at their desks.

What is Mr. Hoffman’s responsibility, if any, to investors who may decide to put money into Groupon based on his post? The conventional wisdom holds that rules governing how investors can use the media vary depending on whether a company is private or public. In the latter instance, the SEC has strict guidelines governing how the financial health of a company is represented to the public by insiders.

But the landscape is evolving rapidly. The emergence of robust secondary markets like SharePost and SecondMarket, which allow investors to purchase shares in private companies like Facebook, Twitter and Groupon, means thousands of smaller investors—with access to far less information than VC insiders—are getting in on the action. In theory, some may well have purchased shares in Groupon before their S-1 revealed their precarious financial situation—possibly after reading Mr. Hoffman’s endorsement.

“People think there is a distinction between how an major investor can talk about a public company versus a private company,” Ralph Ferrara, former General Counsel for the SEC, told Betabeat. “But if you read the law carefully, you see that everything that you can do wrong when combining a public company with the media applies to investments in private companies as well.”

Betabeat reached out several times to Greylock Partners for comment, but so far has received no reply.

According to Mr. Ferrara, there is a provision of the Securities and Exchange Act of 1934—often overlooked and typically unappreciated by investors and the lawyers who represent them—which that applies not only to public companies but to private securities as well: Section 10 b-5. Mr. Ferrara explained, "When an investor or insider is engaged in an omission which proves to be a deception, and the result of that was a financial loss to another investor, a case for fraud can be made.”

On Monday Mr. Arrington kicked off the TechCrunch Disrupt Conference, an extremely lucrative three-day orgy of back-slapping bonhomie between the TechCrunch editorial team and the companies they cover. Mr. Arrington began by announcing that he was stepping down, but he made no apologies for the conflict that caused his resignation. In fact he wore a T-shirt that read “unpaid blogger”—a middle finger to Arianna Huffington, and a play on the fact that while he had officially resigned, he has every intention of continuing to write about the companies he invests in.

For the first event of the conference, Mr. Arrington sat down for a friendly “fireside chat” with Greylock’s Reid Hoffman.

“I love the shirt,” said Mr. Hoffman.

“You can buy one on Zaarly, or not on Zaarly, dammit,” Mr. Arrington blustered, before adding jokingly, “I already said something I shouldn’t have about a company I invested in.”

Talk quickly turned to Mr. Arrington’s own drama. “I don’t have any doubts about TechCrunch, or your integrity,” Mr. Hoffman said seriously.

“But do you think all the drama around me hurts the companies?” said Mr. Arrington, the brazen provocateur suddenly concerned about media attention. “That worries me sometimes.”

Mr. Arrington began to needle Mr. Hoffman about what deals he was in. “As an investor, you really shouldn’t be talking about this stuff,” Mr. Hoffman warned, squirming a bit in his chair in front of a thousand journalists and industry insiders.

“All I want to say is, nicely done,” concluded Mr. Arrington. “You’ve got to get me in on some of these deals.”

“Likewise,” said Mr. Hoffman. And with that, it was back to business as usual.

Disclosure.