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Hewlett Packard Enterprise (HPE) corporate headquarters located in Silicon Valley | AccountingWEB |Autonomy saga twist as co-founder cleared in landmark tech trial
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Autonomy saga twist as Mike Lynch cleared in landmark fraud trial

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One of the most complex accounting cases in legal history took another turn with the stunning acquittal of Autonomy co-founder Mike Lynch by a US jury.

10th Jun 2024
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Autonomy co-founder Mike Lynch has been acquitted of all fraud charges by a US jury, following a 13-year fight over the sale of his software business to Hewlett-Packard (HP) in 2011 for $11.7bn (£8.5bn).

The lengthy legal battle was one of the biggest ever fraud cases on either side of the Atlantic, and also resulted in the jailing of Autonomy’s chief financial officer (CFO) for five years for falsely inflating sales figures.

“I am elated with [the] verdict and grateful to the jury for their attention to the facts over the last 10 weeks,” Lynch said on Thursday, June 6, following the decision. “I am looking forward to returning to the UK and getting back to what I love most: my family and innovating in my field.”

Lynch took the stand as the final witness in the trial, which began in March, and often spoke directly to the jury to explain why his role as chief executive did not require knowledge of the business’s accounting practices.

Having co-founded the software business in 1996, he claimed he had minimal knowledge of its day-to-day dealings, or, crucially, its accounting processes.

During the trial he maintained his innocence and blamed other executives or employees for the accounting fraud which underpinned HP’s claims.

M&A disaster and legal fallout

Shortly after the deal closed, HP wrote down the value of the acquisition by $8.8bn, claiming they were duped by false accounting, dishonest statements, and omissions in Autonomy’s published information.

A litany of lawsuits followed.

First, shareholders sued HP and accountants KPMG and Deloitte for carrying out “cursory due diligence on a polluted and vastly overvalued asset”, HP sued Lynch and Hussein for fraud, whilst Lynch counter-sued HP for unfounded claims that demonstrated “a fundamental misunderstanding of [international] accounting practices”.

The UK’s Serious Fraud Office also opened a probe, only to park it when US prosecutors picked up the case in 2015.

In the UK, an epic civil case brought by HP concluded in 2022 with Mr Justice Hildyard handing down an enormous 1,680-page judgment that detailed how Lynch and CFO Sushovan Hussain manipulated the accounts with bogus deals to inflate the company’s market price.

Lynch and Hussain argued that HP “manufactured” the claim to justify poor management decisions, and to use the pair as scapegoats “for what in reality is buyer’s remorse”.

HP sued for approximately $4bn and is still awaiting a court decision on the extent of the damages.

The Judge recorded that he believed it to be “amongst the longest and most complex in English legal history”.

A Financial Reporting Council (FRC) investigation into the audit led to a £15m fine with £5.6m costs in 2020, which is the largest-ever audit regulation sanction in the UK.

The FRC said Richard Knights, the former Deloitte partner in charge of auditing Autonomy, “consciously lost his objectivity” throughout a five-year relationship with the tech firm, and was “reckless” and “seriously misleading” in reports to regulators.

CFO carries the can

US prosecutors indicted Hussain in 2016, and in 2019 he was jailed for five years after a jury found him guilty of 16 counts of fraud.

Hussain was also fined $4m and ordered to forfeit $6.1m by a US judge.

A San Francisco court heard how for more than two years prior to Autonomy’s sale, Hussain used “sophisticated accounting methods” to falsely inflate revenues and make it appear the business was growing.

Prosecutors claimed that Hussain used backdated contracts, round trips, channel stuffing, and other forms of accounting fraud to fraudulently inflate publicly-reported revenues by as much as 14.6% in 2009, 17.9% in 2010, 21.5% in the first quarter of 2011, and 12.4% in the second quarter of 2011. 

In addition, Hussain fraudulently hid from investors and market analysts the scale of Autonomy’s hardware sales, which were used to boost the company’s reported revenue, the court heard.

In 2020, Hussein's appeal against the 14 charges failed. He has since been released from prison.

Not a numbers guy

Lynch fought the extradition attempts of US officials but eventually lost an appeal in the UK High Court in May 2023 and was placed in home confinement in California after posting a $100m bond.

Prosecutors alleged Lynch was a major part of the deception, leading Hussain and others to inflate Autonomy’s sales by up to $20.85m in the months leading up to the HP deal.

Despite the US Attorney’s Office for the Northern District of California attempting to label the entrepreneur as the “driving force” of the fraud, the jury disagreed and unanimously cleared the former CEO.

More than 30 witnesses were called, and dismissed by Lynch as “a parade … I’ve never met”.

Many could not recall details of complex matters in conversations occurring nearly 15 years ago, whilst the defence painted Lynch as a man more taken with new ideas that numbers.

“He wasn’t particularly interested in the finance side,” said Jonathan Bloomer, former chairman of Autonomy’s audit committee. “Mike was mostly interested in the strategy, new products, new areas to look at. He didn’t come to the audit committee.”

On the stand, Lynch said HP had moved too quickly, did not understand what it was buying and had not carried out sufficient due diligence.

Defence lawyers said HP’s senior management team, led at the time by CEO Meg Whitman, had incorrectly blamed Lynch for their mismanagement of the acquisition and the subsequent integration.

Prosecutors didn’t call Whitman to testify, which some experts said may have swayed the jury.

“In a battle between a rich founder executive and a sophisticated larger company, where the larger company bought the founder’s company, people will assume that the larger company is responsible for doing its due diligence,” said Attorney Joe Ahmad, co-founder of US law firm Ahmad, Zavitsanos & Mensing.

“They will likely assume the company executives should know better than to rely purely on representations of the other side’s management,” Ahmad said.

The lack of testimony may have raised suspicions, Ahmad said, allowing Lynch to play “guide and teacher to the jury about British phrases”, which is likely to have endeared him.

Never skip the due diligence

During the 2019 civil suit, HP’s CFO dropped a bombshell in court by admitting she had not read any of the due diligence documentation on Autonomy prior to the sale.

Opinion of Lynch and how he operated is split, but the negligence on HP’s part is a near unanimous refrain from commentators.

Corporate law specialist Lindsay Healy, of Aria Grace Law CIC, said the case had some parallels with the Post Office saga, in which a bad deal was made worse because the buyer went after the seller in court.

“Lynch at trial …threw everyone else under the bus. May as well; the CFO had already been imprisoned, and witnesses, a la Post Office, couldn’t remember anything that happened 15 years ago. Moral of the story - caveat emptor - due diligence is a fundamental part of every piece of M&A. It’s the first bit of advice we give and the first (material) action we do. Do it properly.”

Executive leader Adrien Bray, former managing director of 360 Logic recruiters, said conviction of Sushovan Hussain “warrants re-examination” in light of the outcome.

He noted HP’s history of poor deal-making, and said that the business had failed in its duty of care on more than one occasion.

“Businesses overpay for acquisitions, executives can mismanage, and trying to get a realistic read on a sales pipeline is always fun. But this battle by US authorities might now be seen as a gross overreaction,” he said.

He said the realm of mergers and acquisitions is “fraught with complexities, and it is common for one party to later express dissatisfaction with aspects of the deal”.

“This underscores the importance of a meticulous and experienced due diligence process,” he said.

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By Justin Bryant
10th Jun 2024 12:45

Yes, don't we see this all the time? Big ego bosses overpaying for (so-called trophy) acquisitions? The best defence here is offence. There are numerous examples. Fred The Shred and that Dutch bank (ABN Amro) for instance (although there you cannot blame 10,000s of shareholder sellers of course).

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By FactChecker
10th Jun 2024 20:36

Guess it goes to show that some CFOs really earn those big packets ... even if sometimes, like here, they appear not to have realised that the F stood for Fall-guy (not Finance)!

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By moneymanager
13th Jun 2024 13:18

"Mr Justice Hikdtard, would you care to comment?'

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