I may have read Autonomy whistleblower emails about 'inflated' sales, founder Mike Lynch admits in court
A year before THAT ill-fated buyout
Autonomy Trial A senior finance department worker at Autonomy blew the whistle a year before it was purchased in 2011 by HP, saying the Brit software house was recognising revenue on deals before contracts were even signed.
In an explosive July 2010 email to Autonomy's US CFO that was shown to London's High Court on Monday, Percy Tejeda – the company's "director of revenue" – said that he "started to have concerns" about certain specific accounting duties he was asked to carry out.
Tejeda said Autonomy was fiddling its risk estimates for ongoing contracts in order to inflate its quarterly financial estimates and also that it was faking purchase orders with suppliers as part of a revenue inflation carousel scheme. He sent his concerns to Autonomy's US CFO, Brent Hogenson – who was fired soon after raising them, first with Lynch and then with Autonomy's audit committee and company auditors Deloitte.
One of Tejeda's concerns was a draft contract between Autonomy and pharma biz Eli Lilly, where he thought some clauses would "affect the revenue recognition of the transaction". In his email to Hogenson he said:
I sent the draft contract and my revenue recognition concerns - i.e. extended warranty and product acceptance - to Steve Chamberlain [a senior Autonomy finance worker] for his input and guidance, as this was one of the first transactions that I was reviewing for non-Interwoven business [Tejeda came on board after Autonomy acquired Interwoven in 2009].
Steve responded back to me that I needed a bit of background on this deal and followed up with a phone call, telling me that the license revenue associated with the Eli Lilly license transaction had already been recognised in Q4 2009 (in the amount of $6.0m in license revenue), and that he would send me the contract from Q4 2009 (between Autonomy and Capax)- which he did.
Capax Discovery was an Autonomy reseller. Tejeda said that in June 2010 he was told by Chamberlain to create a "proforma invoice… that would not be subject to acceptance and send such proforma invoice to Capax," with the intention that Capax would in turn invoice Eli Lilly and then pay Autonomy's invoices for its Q4 2009 licence transaction.
Although the revenue had been recognised in Autonomy's accounts the actual payment wasn't being made until months afterwards, Tejeda alleged, saying: "I responded back to Steve that I was not comfortable with doing that."
Tejeda also alleged, among other things, that he was instructed to add $500k of revenue to an accounting spreadsheet under the heading "EDD services" (EDD standing for Electronic Data Discovery, an Autonomy search product for law firms.) When he queried what that related to, he said associate general counsel Jim Crumbacher told him: "Not sure. I'd just include it as one of the 'EDD Services' and move on. Not sure if it was catch up for something or not."
HPE claims, in its lawsuit against then Autonomy CEO Mike Lynch and ex-CFO Sushovan Hussain, that some of the EDD payments being made to and from Capax Discovery were bogus and intended purely to generate the appearance of real revenue. It claims each company would buy a similar value of goods and services from each other at the same time.
You were told about that, weren't you, Mr CEO?
Earlier this week Mike Lynch, Autonomy CEO at the time, was questioned in the High Court about Tejeda's email. It was forwarded to him by Hogenson, who copied him in again when sending it to Deloitte and Autonomy's internal audit committee. Hogenson had invoked "the Whistle Blower Policy I received from Andy Kanter" [Autonomy COO] and asked for "guidance as to how I should respond".
Responding to questions about Hogenson's emails, Lynch said: "No, his allegation was that the auditors didn't know that we had made EDD payments… and actually, the auditors did know about the EDD payments and then they went away and did an investigation. They didn't find anything improper."
"Are you seriously saying you didn't look at it?" asked Laurence Rabinowitz QC, HPE's barrister.
"I may well have looked at it," conceded Lynch. Rabinowitz, parrying Lynch's suggestion that he was just "trying to be very precise here," followed up: "You're not suggesting, are you, that you did not read this particular email that we’re looking at now?"
"I may well have read it, I don't know," said Lynch. Rabinowitz pressed on: "On the assumption that you did read it, you would have seen… that you had been approving purchase orders in respect of a situation where there wasn't even a contract underlying that transaction, wouldn't you?"
Lynch agreed, saying: "Yes, I would have seen that if I’d read this," going on to suggest that because Hogenson had copied in Deloitte, it was the auditors' problem and not his.
In email replies shown to the court, Sushovan Hussain, Autonomy's CFO, dismissed Tejeda and Hogenson's concerns by saying "there's nothing new nor material in these assertions," adding that all was well because internal auditors knew what was going on.
Yesterday in court Rabinowitz put to Lynch:
The true position is that you authorised Autonomy to pay millions of dollars to Capax for fictitious EDD services and supplemental EAS support in order to put Capax in funds to buy EDD licences from Autonomy on which Autonomy could purport to recognise revenue, but you well understood that it was improper for Autonomy to recognise revenue in circumstances where in effect Autonomy had bought these revenues by putting Capax in funds?
"I disagree," replied the ex-CEO. Lynch previously said that he didn't know Capax Discovery was incapable, at the time, of delivering its contracted customer support for EDD, blaming disgraced former US sales chief Christopher "Stouffer" Egan for inking deals behind his back to pad out revenues. Lynch said he only discovered the subterfuge when Egan was charged, tried and found guilty of fraud charges in the US.
The British executive denied Rabinowitz's courtroom assertion that he himself had lied when he said he had no reason to believe "that there were any material issues with the accounting".
The Autonomy trial continues. ®