Autonomy trial Just how far has HPE come in proving its $5bn fraud allegations against former Autonomy CEO Mike Lynch and co-defendant CFO Sushovan Hussain? While the world basks in the summer sun, we had a close look at the last three months of court hearings to decide.
Regular readers know all too well about the Autonomy trial, which has been in full swing since March 2019. Mr Justice Hildyard, the presiding judge, has seen dozens of witnesses give evidence – including former HP CEOs Leo Apotheker and Meg Whitman.
And who could forget Mike Lynch's marathon month in the witness box, where he was subjected to close cross-examination by HPE's barrister, Laurence Rabinowitz QC?
Yet the point of any court proceeding is to establish which side has proven their case. While the theatrics of the Autonomy trial have doubtless sold thousands of bags of popcorn across the English-speaking tech world as everyone gawps at the revelations coming out of London's High Court, a close look is needed at what HPE alleges versus what the witnesses have said so far.
In his opening address to the court, Rabinowitz summarised the case against Lynch and Hussain:
The nub of the allegation against the defendants is that throughout the period running from 2009 through to mid-2011, Dr Lynch as chief executive officer and Mr Hussain as chief financial officer, knowingly caused the company of which they were directors, Autonomy Corporation, a FTSE100 company listed on the London Stock Exchange, to engage in a programme of widespread and systematic wrongful accounting and further knowingly caused or allowed Autonomy to make a number of false and misleading statements and dishonest concealments in the information Autonomy published to the market, in all cases intending thereby to create a materially false picture of Autonomy's reported revenues, revenue growth and gross margins.
HPE's detailed claims run to 894 pages in their written opening alone. While El Reg had a quick shufti at them at the start of the case back in March, we can now take a fresh look with the advantage of five months' witness testimony to shed more light.
On top of the lengthy passage above, HPE alleges that once it had showed an interest in buying Autonomy, the two then "repeated most if not all of those false and misleading statements directly to Bidco, Hewlett-Packard's acquisition vehicle, as a result of which Bidco, we say, paid very much more for Autonomy and for the defendants' shares in Autonomy than it otherwise would have – if it would have proceeded at all with the acquisition."
All of HPE's allegations of fraud and wrongdoing can be summarised as falling into five broad areas:
- Fiddling hardware revenues
- Misrepresenting Autonomy's SPE product to the market
- Dodgy reseller deals (known in the trial as "VAR" allegations)
- Dubious hosting arrangements
- IDOL OEM transactions
This article will focus on a couple of relevant things that were said about hardware, with later articles in this series looking at each of the other bullet-pointed areas in turn.
Who said August had to be a holiday anyway?
The devil's in the...
As everyone who's followed the broad thrust of HPE's allegations over the years knows, the US tech biz says Lynch and Hussain hid the scale of Autonomy's hardware sales from the market and from HP when it came sniffing around the British software company with chequebook in hand.
In a press release issued in 2012 blaming Lynch and Hussain for Autonomy's accounting mishaps, HPE (or HP as it was then) said that hardware sales comprised around "10-15 per cent of Autonomy's revenue", expressed in a way that, as Lynch's barrister Robert Miles QC said on the third day of the trial, made it seem as if this was "something HP had relatively recently discovered".
Lynch's legal team have argued that this was not the case, though HP has sought to say that in some instances, especially in transactions with EMC, Autonomy's hardware sales were in fact "loss making" – to which Lynch riposted in court: "Well, not when you take into account the marketing... Deloitte [Autonomy's auditor] knew exactly what the costs and the sales were."
Many of the key exchanges in the transcripts so far could be taken either way. Right towards the end of Lynch's time in the witness box, he was asked by HPE's barrister about a hardware offer Autonomy made to EMC. As Rabinowitz put it: "What Mr Hussain appears to be saying [in an email chain shown in court] in effect is that, if EMC buys software for $5m from Autonomy, Autonomy will spend another $5m on hardware from EMC, correct?"
Lynch denied this, with Miles later showing the court another email referring to an EMC requirement for "redundancy, failover and replication" hardware, trying to refute HP's line of questioning implying that the hardware sale was thrown in purely to bulk out Autonomy's revenues and to ensure the deal was effectively cost-neutral.
Deloitte knew – or did they?
Auditor Lee Welham was called as a witness back in June, and was cross-examined by Lynch's barrister on the topic of hardware revenues. Part of HPE's detailed allegations against Autonomy's accounting says that Autonomy described itself as a "pure-play software" company, which ex-HP CEO Apotheker testified was repeated to him in person by Lynch.
Pointing Welham to a series of documents outlining Autonomy's 2010 audit plan, something carried out together by Deloitte and the company's in-house audit committee, Miles read out a few sentences:
Revenues for 2010 are likely to include a more significant level of hardware sales than in prior year. Certain of these sales have been made at a loss for strategic reasons... Costs associated with hardware sales will be tested in detail to ensure they are appropriately classified in the financial statements and the allocation of costs in general will be tested to ensure it is appropriate and consistent with that established in Q2 and Q3 2010.
Look, Miles was saying to the court, Deloitte not only knew that Autonomy was selling hardware but was closely involved with the precise detail of how that was accounted for and showed up in the published financials.
Whatever the decision of Mr Justice Hildyard (who pointedly said, at the last sitting day back at the start of August, "This has been a huge exegesis and I'm many moons from making any even preliminary thoughts in my mind"), whether or not Autonomy's hardware accounting misled HP before the 2011 buyout will play a large part in the eventual judgment.
The Autonomy trial resumes at the start of September. It is expected to overrun into January 2020 with judgment due at some point before May that year. ®