Autonomy Trial Mike Lynch's Autonomy Corporation pumped up its value by paying its own customers to buy its products so Autonomy could inflate its accounts, London's High Court was told this morning.
Laurence Rabinowitz QC, counsel for HPE, told Mr Justice Hildyard that under Lynch and former CFO Sushovan Hussain, Autonomy "engaged in a programme of widespread and systematic fraudulent accounting".
In the runup to its 2011 buyout by HP (as was), Autonomy's CEO and CFO engaged in "the practice of buying and selling hardware at a loss with a view to revenue pumping, to reflect revenue which in fact is obtained by selling hardware at a loss which wasn’t disclosed".
The same applied to deals Autonomy struck with resellers, said the barrister, the faintest South African twang breaking through his dense legalese.
In many of those [transactions], in order to persuade the VAR [value-added reseller] to become involved in those transactions, Autonomy paid those a very substantial markup, usually around 10 per cent. If we're right that those transactions were all for an improper purpose, then we say Dr Lynch and Mr Hussain, by inducing Autonomy to enter into that sort of transaction from [pause] the only benefit for which could come to Autonomy. To show revenue, accelerate [a] revenue counting exercise. If we're right about that then again, Mr Hussain and Dr Lynch have caused loss to ASL [Autonomy Systems Ltd].
Rabinowitz showed the court a graph of Autonomy's finances prepared by HPE, showing what the American megacorp claims is the extent to which Autonomy falsely exaggerated its accounts through hardware sales.
Autonomy's revenues as summarised by HPE. Red is allegedly "improperly recognised revenues" while yellow covers "hardware sales". Click to enlarge
Referring to the above graph of Autonomy's revenues, Rabinowitz told the court: "We've superimposed on that, a blue line with the market expectations for that month. You have a market consensus and then these devices, improper hardware sales are used to enable – this is all reflected in the emails your lordship will see in due course – are all used to aid Autonomy to hit those market consensuses." [sic]
In other words, HPE alleged that Autonomy was faking revenues in order to meet financial analysts' public revenue targets. Had Autonomy not met those analyst targets, its share price could have dropped because investors believed the company's performance was getting worse, lowering the value of the firm.
Mr Justice Hildyard, the judge, asked what the yellow parts of the graph meant. "Your case is that – your definition of pure hardware effectively means hardware with no Autonomy DNA in it?"
"No software loaded," nodded Rabinowitz.
Lynch and Hussain's legal teams will respond to these allegations in their own opening remarks, which come after HPE has set out its case. This is expected to take the next couple of days. The two deny all wrongdoing.
Lynch himself, in a neat blue suit, sat on the far right hand corner of the courtroom, cocooned from the world's press by an army of PR advisors.
The civil case, heard by a judge alone without a jury, is scheduled to continue until December this year. ®