Autonomy founder Mike Lynch 'revenue-pumped' company to secure HP deal, court hears

Hewlett-Packard has accused former executives at Autonomy of “artificially inflating” the software company’s value prior to its sale to HP for $11.1 billion in 2011.

Mike Lynch, Autonomy's founder and former chief executive, and Sushovan Hussain, former chief financial officer, “set out to deceive the market” about its true value by “revenue-pumping” its account between 2009 and 2011, lawyers for HP told the High Court in London on the first day of a civil trial.

They both deny the allegations. A spokesman for Lynch today said he wouldn’t be a “scapegoat” for HP’s “failures.”

Laurence Rabinowitz, representing HP, said that Lynch and Hussein “deliberately” and “dishonestly” inflated its revenue figures to the wider market.

Autonomy bought and sold “pure hardware” to make it appear as if it was meeting its financial targets, Rabinowitz said. “The purpose of these [purchases] was simply a revenue-pumping exercise, in order to bump up the figures. Lynch and Hussein suggest this is part of a marketing exercise.”

During the indictment period of 2009 and 2011, hardware sales represented 11 percent of the company's total reported revenue of approximately $200 million.

Autonomy’s “deception only came to an end in October 2011,” when the company was acquired by HP. “That’s when … the true position of Autonomy started to emerge,” added Rabinowitz.

— Sold at a loss —

Judge Robert Hildyard asked Rabinowitz: “Your case … and your definition of pure hardware means hardware with no Autonomy DNA in it?”

“Absolutely” answered Rabinowitz. “What Autonomy is effectively doing is buying hardware and selling it at a loss simply to generate revenue. They are then hiding the costs.” He clarified that “there is nothing fraudulent in the transaction to sell hardware … this is not a matter for the counterparties.”

In response to the “serious accounting improprieties,” HP was forced to make “a massive write-down” of Autonomy’s value, he said.

Rabinowitz said that Lynch sought "to take cover" behind his lawyers during Autonomy's hardware transactions. “The first person who was misled in relation to what was going on, was indeed their lawyer.”

He explained that “unless these defendants could persuade their lawyers that what they were doing was okay,” it would not have been allowed to continue. This was “well understood” by Lynch and Hussein, said Rabinowitz.

Court documents submitted by HP state that Lynch, in attempting to distance himself from the allegations, is “keen to emphasize that he is a member of the establishment, citing a string of credentials such as being a Fellow of the Royal Society, a former director of the BBC, and (until recently) advisor to the Prime Minister.”

— Criminal action —

The UK’s Serious Fraud Office began a probe into Autonomy’s accounting practices in 2013, but closed its investigation two years later citing “insufficient evidence” to secure a conviction.

The US Department of Justice also took action against the company’s former management in 2012, which is ongoing. In November, the DOJ filed criminal charges against Lynch for conspiracy and fraud. It also seeks to confiscate $815 million generated by the alleged fraud.

Last week, prosecutors in San Francisco said they had secured fresh criminal charges against Lynch and former Autonomy executive Stephen Chamberlain for conspiracy to commit fraud, money laundering and obstruction of justice by destroying key documents.

— 'Scapegoat' —

A spokesperson for Lynch said in a statement today that “Mike Lynch is pleased to finally have the opportunity to respond in court to HP’s accusations. There was no fraud at Autonomy.”

“Rather, this is a case that distils down to a dispute over differences between UK and US accounting systems and will focus on the appropriate exercise of business judgments made in a particular context and time with the full knowledge and approval of numerous financial and technical experts and advisers.”

“The real story is that HP, after a history of failed acquisitions, botched the purchase of Autonomy and destroyed the company, seeking to blame others. Mike will not be a scapegoat for their failures.”

The case continues, and is expected to last nine months.