Judge details Lynch's $700k signoff via iPhone text in full Autonomy judgement
Still no damages number, likely to be way less than $5 billion
When an accounts assistant asked Autonomy founder Mike Lynch to approve a $700,000 purchase order in December 2010, the British exec "wrote 'ok' from his iPhone."
"He asked no questions at all," wrote the High Court judge who found Lynch liable for fraud in the case brought against him by HPE.
The detail was included in Mr Justice Hildyard's substantial (1,600+ pages) judgement yesterday, which expanded on his earlier civil fraud claim ruling.
The ruling clears the way for the British software exec's extradition proceeedings to the US to face criminal charges. Lynch faces trial on 17 charges of wire fraud and conspiracy regarding Hewlett Packard's acquisiton of his software company back in 2011.
The High Court trial also relates to HPE's (then HP's) $11bn acquisition of Autonomy back in 2011.
The iPhone text detail, wrote the judge, "fortified" his conclusion that Lynch "likely" understood a value added reseller transaction between Autonomy Inc and Capex Discovery, one of several "impugned VAR transactions with 'friendly' VARs" before the acquisition took place was "a pretence."
HP - as it was known when the Autonomy purchase was made - had alleged that under Lynch and Autonomy chief financial officer Sushovan Hussain, Autonomy had artificially manipulated its accounts to inflate the purchase price.
In the full judgement, the judge wrote that Lynch had "denied in cross-examination that either Mr Egan [former US Autonomy sales chief Christopher] or Mr Kanter [former Autonomy COO Andrew] told him about this arrangement to cover Capax Discovery's shortfall."
He added: "Dr Lynch's position was that, as far as he was concerned, the payments were for services which Autonomy needed to sub-contract; nothing suggested to him that the payments were for fictitious services."
The judgement states Autonomy used sales to value-added resellers (VARs) to recognize income before any sale to an end user, enabling it to make good on any shortfalls in its software revenues relative to market forecasts.
In the summary, the judge wrote that "the impugned VAR transactions had no commercial substance. They were a means by which Autonomy could maintain the appearance of meeting revenue targets at the end of a quarter."
There was a clear pattern to the impugned VAR transactions, according to the findings. They were all large, and entered into at the very end of the quarter, with no investigation by the VAR of the liability they were legally undertaking.
In fact, the VAR would often not have the ability to meet the payments, but there was never any expectation from either Autonomy or the VAR that the contractual terms would ever be enforced.
In his defence, Dr Lynch had claimed that he knew of but was not involved in the negotiation of this reseller deal, nor in the accounting for it. He also denied being involved in later VAR arrangements.
Mr Justice Hildyard made it clear that the VAR strategy was directed by Hussain and encouraged and presided over by Lynch.
"Both knew that the VAR transactions were not being accounted for according to their true substance. Both knew that the recognition of revenue on the sale to the VAR was improper, and that the accounts were thus false," he said.
The judgement also says that "the hardware reselling programme was conceived, expanded and implemented in order to enable Autonomy to cover shortfalls in software revenue by selling hardware and including the revenue without differentiation in revenue shown in the accounts as generated by Autonomy’s software business."
Lynch has confirmed he intends to appeal against the ruling and denies all wrongdoing over the Autonomy buyout, having previously told the court he acted on the advice of auditors from Deloitte who cleared Autonomy's accounting practices.
This does not alter the judgment announced back in January, which already indicated that HPE had been broadly successful in its claims under the Financial Services and Markets Act 2000, but also that Lynch and former Autonomy CFO Hussain had breached their fiduciary duties as directors, along with other claims.
These claims relate to Autonomy inflating what appeared to be the revenues of its software business by undertaking substantial hardware sales to customers, along with other improper practices through which Autonomy sought to make its revenue appear greater in the run up to the acquisition by HP.
Hildyard said that he will determine damages in a later judgment, but that it was inappropriate to delay the liability judgment as this might have an effect on other proceedings, such as the extradition proceedings for Lynch to face charges in the US.
The judge also reiterated his earlier warnings that any award is likely to be substantially less than that claimed.
A detailed account of the entire HPE v Lynch case history is available here.
Appeal and counterclaim
In a statement, Lynch's lawyer Kelwin Nicholls of Clifford Chance said that Lynch will be seeking permission to appeal against this judgment and he will continue to contest the extradition proceedings against him.
HPE started proceedings back in March 2015, alleging that HP had paid over the odds for Autonomy to the tune of about $5 billion as a result of these deceptions.
The pleaded quantum of loss for claims under FSMA is at least $4.55 billion, this being the amount for which Autonomy accepted it is liable for. The claims for fraudulent misrepresentation under the Misrepresentation Act 1967 are direct claims against Lynch and Hussain, for which the pleaded quantum of loss is approximately $420 million.
HPE also claims for transactional losses on breaches of fiduciary and employee duties relating to losses suffered by Autonomy and subsidiaries in respect of the impugned transactions, where the pleaded quantum of loss is in excess of $76.1 million.
On the hardware sales case, the summary found that the purpose of the hardware selling strategy was to meet market expectations of revenue maintenance and growth, misleading the market as to the true market standing of Autonomy.
- HPE has 'substantially succeeded' in its £3.3bn fraud trial against Autonomy's Mike Lynch – judge
- Mike Lynch loses US extradition delay bid: Flight across the Atlantic looks closer than ever
- Everything you need to know about the HPE v Mike Lynch High Court case
- HPE building its 4th global 'supercomputer factory'
The summary states that Deloitte, which signed off Autonomy’s accounts for 2009 and 2010 while acting as auditors, either did not comprehend the full picture or "preferred to accept reassurance that negated the true purpose of the VAR transactions." Neither the approval of Deloitte nor that of the audit committee was thus fully and properly informed.
Deloitte itself was fined £15m for its part in the Autonomy case, while its two senior auditors on the Autonomy account were both found to have committed professional misconduct.
Lynch also made a counterclaim against HPE that statements made by the then HP when it announced an $8.8 billion writedown of the value of Autonomy had caused investors to pull out of intended investments in his new venture, Invoke Capital.
Mr Justice Hildyard effectively dismissed this claim, stating "I need say nothing about this. My findings in the main claim undermine his counterclaim. I have not therefore addressed it in my draft judgment. If there remains anything of substance, I am sure I will be told of it."
In fact, he stated that he has determined that HPE has succeeded in substantially all their claims, except one impugned VAR transaction and in claims relating to "Other Transactions."
"I consider that HP bought a smaller and less successful company than it was represented to be and that HP was led to and did believe that it was acquiring," he added.
The judge also raised questions about the original nature of HP’s allegations of fraud and writedowns, stating: "There are grounds for supposing that HP had hurried to inform the market before it had completed the necessary investigations because it urgently needed to revalue the component parts of its business following a reduction in its market capitalisation in 2012 and to satisfy the requirement of US accounting rules that the sum of the parts of a business plus 30 percent control premium could not exceed its market capitalisation. The huge write-off neatly resolved this problem."
Summarising, Mr Justice Hildyard noted that this trial has been an unusually complex one, 93 days long, and involving a database of many millions of documents from which a trial bundle containing more than 28,000 documents was extracted.
These documents have been the most reliable source of evidence, he said, but there were also hundreds of pages of hearsay evidence, largely comprised of transcripts from previous proceedings in the United States. ®