Hewlett-Packard must defend against a lawsuit accusing former management at the world's largest personal computer maker of defrauding shareholders by abandoning a business model it had long touted, causing more than $16 billion of market value to be wiped out.
US District Judge Andrew Guilford in Santa Ana, California said shareholders had raised a "strong inference" that officials including former chief executive Leo Apotheker in June and July 2011 misled them about HP's commitment to the WebOS operating system and related products, including the TouchPad tablet PC.
"It is far from implausible that a corporate executive who had spent months building excitement and momentum around important, new technology products might recklessly misrepresent the inability to deliver on those promises," the judge wrote in a decision dated May 8 and made public the next day.
The lawsuit was filed after Apotheker shocked investors on August 18, 2011 by announcing plans to refocus the company on business services and products.
He also announced plans to scrap WebOS, whose rights HP had obtained when it bought Palm in 2010; pay $11.1 billion for British software company Autonomy; and possibly spin off HP's personal computer business. The company also halted sales of the TouchPad, after just seven weeks on the market.
The news sparked a two-day sell-off in which HP's share price fell 24.8%, causing the company's market value to drop by about $16.2 billion. Apotheker was fired the next month. The shares still trade below where they had fallen to at the time.
Michael Thacker, an HP spokesman, said the Palo Alto, California-based company does not discuss pending litigation.
Guilford dismissed part of the lawsuit, including claims related to statements that HP had made in early 2011.
Other challenged statements that remain in the case were made by Todd Bradley, executive vice president of HP's printing and personal systems group, its largest business unit.
"We're extremely satisfied and happy with the court's decision, and will be moving the case into discovery," Jonathan Gardner, a partner at Labaton Sucharow representing the plaintiffs, said in a phone interview.
Lawyers for Apotheker and Bradley did not immediately respond to requests for comment.
The lead plaintiffs include the Arkansas Teacher Retirement System; the Labourers' Pension Fund of Central and Eastern Canada in Oakville, Ontario; the Liuna National Pension Fund and Liuna Staff & Affiliates Pension Fund in Washington, DC; and Union Asset Management Holding AG in Frankfurt, Germany.
Guilford had last August dismissed the entire lawsuit, but given the plaintiffs a chance to amend their complaint.
Now run by Meg Whitman, HP is cutting costs and expanding in areas such as enterprise computing services as part of a multi-year plan to stimulate growth.
The company revamped its board, kept its PC business, and in November announced an $8.8 billion charge for Autonomy, accusing officials there including former chief executive Mike Lynch of accounting fraud. Lynch has denied the allegations.
In February, HP reentered the consumer tablet market with a $169 tablet powered by the Android operating system.
The case is Gammel et al v Hewlett-Packard Co et al, US District Court, Central District of California, No. 11-01404.