HPE has 'substantially succeeded' in its £3.3bn fraud trial against Autonomy's Mike Lynch – judge

All eyes turn to Priti Patel as midnight extradition deadline looms

Updated Hewlett Packard Enterprise "substantially succeeded" in its multi-billion pound lawsuit against Autonomy founder Mike Lynch for fraud over that startup's accounts.

Giving a summary of his full judgment this morning, High Court trial judge Mr Justice Hildyard said HPE "substantially succeeded" in its case in England against the British businessman. The full financial damages are yet to be announced.

The finding is a massive victory for HPE, which saw its corporate reputation dragged through the mud during the trial as queues of ex-execs testified they didn't read due diligence documents before agreeing to Hewlett Packard's $11bn acquisition of Autonomy in 2011.

Today's ruling makes it more likely that Lynch will not be able to avoid extradition from the UK to the US, where he faces trial on 17 charges of wire fraud and conspiracy regarding Hewlett Packard's disastrous takeover of his British tech firm.

UK Home Secretary Priti Patel must make a decision about his fate before midnight tonight, following a 48-hour deadline imposed by Mr Justice Swift earlier this week.

The full judgment is delayed, as has been reported ad nauseam over the last two years. Yet, amid mounting criticism from other judges, Justice Hildyard delivered today's public summary of his 1,500-page judgment – which is still not finalised.

Updated to add at 1230 UTC

The judge is delivering a very lengthy "summary" of the case's procedural history, much in the way that judges in centuries past would read out each and every word of their decisions.

Yet this is not his full judgment, as he warned the court.

Despite lengthy legal submissions from Lynch's lawyers, and the popular belief that HPE rushed headlong into a too-good-to-be-true deal without carefully checking first, this wasn't a point that had any weight in law, said Justice Hildyard. "It would be beguiling but wrong to think the answer might be caveat emptor," said the judge, addressing the point that HPE failed to carry out proper due diligence before committing to the Autonomy purchase.

Mike Lynch and Autonomy's then-CFO Sushovan Hussain also misled not only auditors Deloitte but also their own company's audit committee, said the judge, while giving his decision on Autonomy's reseller transactions.

HPE had alleged there was a carousel of cash flowing back and forth to generate a fake impression of real sales and real revenues. "Deloitte did not see the full picture or accept reassurance of the true purpose of the [value-added reseller] transactions," said Mr Justice Hildyard, adding: "I am satisfied in each case Autonomy bought from the VAR products for which it had little or no identified need or use.

"Purchase by Autonomy was a means of getting the VAR off the hook of the legal obligation to pay, which it was never expected or intended to pay or to meet out of its own resources. No revenue should have been recognised."

Updated to add at 1310 UTC: Hardware sales 'not commercially justified'

Autonomy, which told the market it was a "pure play" software company, accounted for its substantial hardware sales by burying them inside its sales and marketing revenue instead of breaking them out separately. Mr Justice Hildyard did not mince his words about this practice.

"These loss-making transactions were not commercially justified on any basis," ruled the judge. "The justifications advanced by the Defendants were no more than pretexts to increase stated revenue in the accounts.

Even the justification that hardware was sold to bulk out software sales was a "pretence," he said, adding that if Autonomy's audit committee and Deloitte had known the truth, they "would not have approved the accounting treatment."

Had Autonomy properly accounted for the hardware sales it would have led to "erosion of gross margin" in the overall accounts, making the company more likely to miss analysts' predictions of growth.

Reseller cash sales had 'no commercial substance'

Everything about Autonomy's accounting was done to keep up with the financial market's expectations, found the judge.

"Dr Lynch and Mr Hussain kept a very careful watch over revenues, especially towards the end of a quarter when Autonomy would have to post its results," said Mr Justice Hildyard.

"If such a shortfall became apparent, a VAR sale would be arranged, usually on the same day, to cover it, with no questions asked."

Those sales "had no commercial substance" and were purely "a means by which Autonomy could maintain the appearance of meeting revenue targets at the end of a quarter."

HPE also prevailed on its case about sales to some Autonomy OEMs being contrived to artificially pump up revenues, including sales to purported OEMs who could never have used its IDOL data-analysis product as intended.

Lynch and Hussain lost multiple claims against them of fraud under the Financial Services and Markets Act and the Misrepresentation Act 1967.

Lynch's counterclaim was dismissed, with the judge refusing even to address its substance.

In a statement outside the courtroom, an HPE spokesman said: "Dr Lynch and Mr Hussain defrauded and deliberately misled the market and HP. HPE is pleased that the judge has held them accountable."

The Home Office is due to make a formal decision on Lynch's extradition later today.

Kelwin Nicholls of Clifford Chance, Lynch's lawyer, said of the trial judgement: "Today's outcome is disappointing and Dr Lynch intends to appeal. We will study the full judgment over the coming weeks. We note the judge's concerns over the reliability of some of HP's witnesses. We also note the judge's expectation that any loss suffered by HP will be substantially less than the $5bn claimed."

The full summary can be found here. ®

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