Autonomy Trial Mike Lynch, former CEO of Autonomy, today told a court, “I was not involved in the vast majority of transactions,” that HP claims added up to a $5bn fraud it uncovered after buying the company from Lynch and then-CFO Sushovan Hussain.
Right at the very end of Wednesday's opening of Lynch's cross-examination in London’s High Court, Laurence Rabinowitz QC, for HPE, metaphorically went for the executive's jugular.
“So concerned were you that Autonomy should not fall short [of its public revenue targets] that you encouraged Mr Hussain and, indeed, others, to do what needed to be done in order to ensure that did not happen, that revenue targets were not missed, correct?” asked the barrister.
The British executive and tech investor, who was wearing a white shirt, navy suit and dark blue tie with a tight white horizontal stripe pattern, replied: “To do what they should do, yes.”
“Fraudulent devices that enabled Autonomy to misrepresent its finances to the market!” scoffed the speedily-spoken Rabinowitz, sneering at Lynch for being scared of Autonomy “falling by the wayside” if it missed its targets.
“No,” replied Lynch, “that is not correct.”
Scenting blood, Rabinowitz went on to accuse Lynch of having misled “auditors, audit committee, analysts, investors, the market in general,” to which Autonomy’s founding chief exec said: “It’s important to get a perspective on this. It [the company] had a billion dollars in cash. $360m cash in a year. That number was growing at 27 per cent, it was one of the most successful companies England has ever produced. To consider that as ‘falling by the wayside’ is an illogical perspective.”
Today’s opening saw Rabinowitz dive straight into heavy financial detail, taking Lynch through a succession of public Autonomy financial and earnings statements, and asking how much involvement he had in their preparation.
And the carefully considered written version
Lynch has entered the witness box for what is expected to be five weeks of cross-examination by barristers for HPE, which alleges Lynch and co-defendant Hussain committed fraud by cooking Autonomy’s books ahead of its purchase by HP (as the company was then called, pre-split).
“As the CEO of a multinational FTSE 100 company,” Lynch told the High Court in his written witness statement, “I was not aware of every transaction going on around the world in all of Autonomy's various subsidiaries. Where I was aware of them, my knowledge of them was generally limited.”
He added: “I cannot be certain that every one of the transactions that HP impugns is defensible with the benefit of hindsight. No CEO of any public company could do so.” On top of that, he said: “It was the members of the finance department in Cambridge who had access to the books and records of the entire company.”
HPE apparently believed that, along with Sushovan Hussain, Lynch was “‘determined’ to find a third-party buyer for Autonomy in late 2010 or early 2011 because we were worried about the prospects for the IDOL platform in the US,” according to Lynch’s 360 pages of witness statements. He responded to that point by writing: “I was not looking to sell the company in 2011. In fact, the opposite was true.”
Hardware schmardware, that was legit business
Addressing one of HPE’s key claims, that it didn’t really know Autonomy was selling hardware, contrary to the belief it was a software-only business, and that it was unaware Autonomy had padded out its bottom line with hardware sales, Lynch said: “Selling hardware actually made it more difficult to hit this target each quarter, due to the costs associated with hardware sales. Autonomy's hardware sales thus made the company look less profitable to the market, not more.”
Dealing with another key HPE claim, that Autonomy contrived with its resellers to put together round-robin deals to inflate each side’s revenues, Lynch said:
Prior to the acquisition, HP knew that Autonomy recognised revenue on sales to resellers on a ‘sell-in’, not ‘sell-through’, basis. This is a matter of accounting judgment and policy under the relevant accounting rules.
As he understood it, Lynch said, if the resellers were left holding the risk in the goods or software, Autonomy was allowed to account for that as upfront revenue on the basis that the reseller was the customer.
Under further cross-examination by Rabinowitz, Lynch clashed a few times with the barrister to the point where trial judge Mr Justice Hildyard had to intervene and warn Lynch to wait for questions before answering them instead of jumping ahead and making statements.
A transatlantic warning shot
Reflecting the close attention US prosecutors have paid to the UK civil case brought by HPE, Mr Justice Hildyard issued a thinly disguised warning this afternoon in court, immediately before Lynch swore the standard witness oath to give evidence that is “the truth, the whole truth, and nothing but the truth.”
“While the witness is giving evidence in a matter such as this,” Mr Justice Hildyard told Rabinowitz and Lynch’s brief Robert Miles QC, “were there to be matters which intervened and upset all of you, then from the purely English point of view – and an important point of view! – a mammoth, very important trial, I should be extremely sorry.”
This was a clear reference to the timing of American government prosecutors’ announcements about their criminal case against Lynch. Back in March, on the eve of the England trial, Uncle Sam declared it had filed a fresh set of criminal charges against Lynch. When sentencing proceedings were ongoing in the US against Hussain, for criminal fraud, the US described the CFO in public statements as “a James Bond villain or a Mafioso.”
Whether or not American district judge Charles Breyer will give due respect to an ongoing trial in another country remains to be seen. A US hearing about the criminal indictment of Lynch has been listed for July 9, the High Court was told this afternoon.
The Autonomy trial continues. Lynch is expected to be in the witness box until the end of July. ®