Updated Judgment Day draws ever closer for ex-Autonomy CEO Mike Lynch. As the promised “end of Q1”* date for judgment in the years-long case draws closer, The Register has collated a handy cut-out-n-keep guide to what the case is all about.
All the way back in 2011, the year when Adele’s single "Someone Like You" was top of the charts and John Paul II was beatified, Hewlett Packard and Autonomy Corporation Ltd were finalising top-secret commercial negotiations over the former's "Project Tesla".
That was a codename for the American company buying Autonomy from its founder Mike Lynch, who was delighted to be offered a fat cheque and a continuing job with the Cambridge-based business he had started and built up into a global tech company. Autonomy had presented itself to the world as a “pure play” software company forging ahead in the big data analysis market.
HP paid £25.50 ($42.11) a share for Autonomy, about $11bn in total, back in 2011. HP chief exec Leo Apotheker was so focused on other details that he didn’t bother reading the draft due diligence report on Autonomy prepared by KPMG before the buyout was made public, as he admitted in court.**
By November 2012, HP had written down Autonomy’s value by $8.8bn and cried foul, starting a furious lobbying operation that targeted the UK prime minister and Chancellor of the Exchequer among others. HP went on to allege that Lynch and his chief financial officer Sushovan Hussain had deliberately pulled the wool over its eyes.
To London’s High Court
In 2015 Hewlett Packard fired its opening legal shot, filing a case against Lynch in the High Court. This alleged:
- Lynch and Hussain had breached their fiduciary duties as directors (sections 171 and 172, Companies Act 2006) of Autonomy.
- They did this by publishing false accounts that artificially inflated Autonomy’s revenues.
- Those falsehoods breached part 2 of schedule 10A of the Financial Services and Markets Act 2000, which makes it unlawful to publish “untrue or misleading statements” to shareholders who suffer losses as a result.
- The directors also breached section 2(1) of the Misrepresentation Act 1967, which also makes it unlawful to tell porky pies in order to get somebody to sign a contract.
That is the heart of the Hewlett Packard Enterprise*** claim against Lynch and Hussain.
Not to be outdone, Lynch hit back with a counterclaim of his own. He said public statements made by HP in 2012 when it announced the Autonomy writedown were untrue, and that HP had breached a duty of care it owed to him as Autonomy’s ex-CEO.
Those statements, he alleged, cost him $900m in potential investments in his post-Autonomy business, venture fund Invoke Capital. Two investors, Warburg Pincus and the Ontario Teachers’ Pension Plan, both pulled out of funding deals as a direct result of HP’s statements, Lynch told the court.
HP alleged that under Lynch and Hussain, Autonomy had gone to great lengths to artificially manipulate its accounts. It claimed:
- Autonomy had a carousel relationship with some of its customers and resellers, where money moved from Autonomy only to be paid straight back, to generate the false appearance of real revenues.
- Those false revenues were recorded in Autonomy’s published accounts, misleading HP.
- Autonomy sold hundreds of millions of dollars of enterprise IT hardware, both pure hardware and appliances pre-loaded with Autonomy software.
- Revenue from those hardware sales was (wrongly) never broken out in the accounts.
- Recurring revenue (from long-term support contracts lasting years and payable in instalments) was recognised as an upfront lump sum in Autonomy’s accounts.
- Some sales of Autonomy’s IDOL product were recorded as being made to companies which could never have used it as intended.
Lynch and Hussain deny all wrongdoing.
In our defence…
Most of the High Court case has seen Lynch’s legal team squaring up to HP, with Hussain sending a not-quite-token legal presence; he chose to concentrate on clearing his name in the US legal system, which resulted in his criminal conviction for fraud under US law and five years in prison.
The duo’s defence is that everything they did was legal and permitted under the laws and British accounting regulations of the time. They also say they had belt-and-braces protection from auditor Deloitte, which signed off Autonomy’s accounts for 2009 and 2010 as A-OK.
Lynch said in court filings that HP was in “real difficulties” at the time of the Autonomy buyout, culminating in its share price crashing by 20 percentage points after it announced the multi-billion dollar writedown. In summary, he alleges:
- Autonomy was a profitable software business that also sold hardware and appliances.
- It was not obliged to break out hardware sales in its accounts.
- HP, under CEO Leo Apotheker and chairman Ray Lane, was desperate to find a profitable buyout target to shore up the business.
- After buying it, HP severely mismanaged Autonomy and then used it as a scapegoat to blame for HP’s own failings.
- Those post-buyout failures were proof of HP's incompetence, not proof of false accounting at Autonomy.
- Independent auditors Deloitte were content with Autonomy’s accounting, showing that everything the British software company did was above board.
- All its transactions with its own customers and resellers were for sound commercial reasons
“Deloitte analysed the transaction and were content with the rationale and price” is a line that appears in Lynch’s defence filings. It summarises a significant part of his defence, both written and from his oral cross-examination in court.
Except Deloitte were naughty, as accounts regulator ruled
An Autonomy whistleblower, former US CFO Brent Hogenson, triggered an investigation by the UK’s Financial Results Reporting Panel, the FRRP. The accounting regulator looked into the conduct of Deloitte and its two senior auditors on the Autonomy account, Nigel Mercer and Richard Knights.
The resulting FRRP report into the three was devastating: Knights and Mercer were both found to have committed professional misconduct for signing off Autonomy’s accounts, while Deloitte itself was fined £15m. Sure enough, in February this year HPE formally applied to have the FRRP report admitted as evidence in the High Court trial.
Lynch’s lawyers argued that the judge should ignore it, describing the report as “someone else’s decision-making” rather than expert evidence in its own right.
A curious line in HP's particulars of claim filed with the High Court appeared to refer to a settlement between HP and some third party with an interest in Autonomy's accounts. It said:
In the ultimate quantification of the loss claimed by Autonomy FSMA Loss, credit will be given for a recovery made in settlement of a related claim in the sum of US$45 million (less the costs of such claim and any tax payable in respect of the settlement sum). The Claimants are prohibited by confidentiality obligations from providing any further particulars of the settlement at this stage but have given disclosure to the Defendants in respect of the settlement.
We have asked Lynch's PR representatives and HPE to comment on this.
And what about Autonomy’s accounts?
Both HPE and Lynch commissioned accounting experts**** to analyse all the evidence from both sides and produce reports to assist the judge, though in reality both were given assumptions to follow which meant their conclusions largely leaned towards whichever side instructed them.
Lynch’s expert, Gervase MacGregor, concluded that the majority of Autonomy’s deals were properly accounted for, casting aside HPE’s arguments that the beancounters were wrong.
In contrast, HPE’s beancounting maestro Peter Holgate found that the same transactions were indubitably dubious – unsurprising given that he was instructed to assume that Autonomy had secret side deals with all of its resellers that broke accounting rules.
The High Court judgment won’t be the end of it
Given the thousands of pages of evidence and eyewateringly high legal bills, publicly admitted to be £4m a month, it seems a certainty that whichever side loses the High Court case will immediately take it to the Court of Appeal. Neither will want to give up until there are no more legal avenues to pursue: HP/ HPE has pursued Lynch in and out of court for a decade, while for Lynch his liberty is at stake.
US criminal prosecutors are pursuing Lynch in that country, a case HPE enthusiastically supports, and are trying to have him extradited there to stand trial. That case itself will probably go to appeal when Westminster Magistrates’ Court makes its ruling, giving Lynch two separate court battles to fight on this side of the Atlantic. It is currently on hold until Mr Justice Hildyard hands down his High Court judgment.
Whatever the verdict, the result will be the latest instalment in a very long series of reports. The Register will continue to chronicle the case. ®
Updated at 11:54 UTC on 25 March 2021 to add
* The Reg understands that judgment has now been delayed "to April or May."
** The KPMG draft due dil report on Autonomy can be downloaded from El Reg’s servers as an 86-page full colour PDF.
*** HPE took over the Autonomy case from HP when the company began the great break up in 2015.
**** Holgate’s initial report can be downloaded here [PDF] and his supplemental report here [PDF]; MacGregor’s initial report is here [PDF] and his supplemental one is here [PDF]. The two produced a joint statement which is here [PDF].