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San Francisco Court House | accountingweb | Autonomy founder extradited to USA
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Autonomy founder extradited to USA

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Mike Lynch, former Autonomy CEO, is under “home confinement” in California after inflating the value of the software business before selling it to HP.

17th May 2023
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Former Autonomy CEO Mike Lynch is now under house arrest in California after losing his fight against extradition to the USA on corporate fraud charges.

For the past four years, the Autonomy founder resisted extradition arising from charges laid by federal prosecutors alleging that with the connivance of senior accountants, Lynch inflated the value of the software business before selling it to HP for $11bn in 2011. He lost his appeal against extradition before the UK High Court at the end of April. 

Lynch was flown to the US and appeared before district judge Charles R Breyer in San Francisco at the end of last week. He was released to “home confinement” after posting a $100m bond. 

The prosecution is pursuing 17 charges alleging Lynch and his co-defendant, former Autonomy vice president of finance Stephen Chamberlain, camouflaged Autonomy’s value with false and misleading financial statements, both to the US Securities and Exchange Commission and directly to HP during the pre-acquisition due diligence period. A year after the deal was concluded, HP had to write down 75% of the company’s value as a result of irregularities that had artificially inflated Autonomy’s reported revenues and profits, triggering an avalanche of regulatory investigations and legal claims against the UK business intelligence software company.

The criminal charges Lynch now faces in California include:

  • backdating written agreements to record revenue in prior periods; booking revenue from contracts subject to side letters and other conditions that affected revenue recognition; and improperly booking revenue for “roundtrip” transactions
  • making false and misleading statements to the company auditor, Deloitte, about the suspicious transactions and other elements of the accounts
  • misleading market analysts about Autonomy’s true performance and the nature of its products, revenues and expenses
  • misleading regulators investigating Autonomy’s financial statements
  • claiming Autonomy was a “pure software” company while carrying out hidden, loss-making hardware resales 
  • making false statements about alleged sales of original manufactured equipment (OEM) licenses; and 
  • obstructing the US investigation in various ways such as “tampering with witnesses; engaging in money laundering; and falsifying, destroying, and stealing business records of HP”. 

Chamberlain pleaded not guilty to all counts in February 2019.

Long-running saga

The criminal case in what US Attorneys call “one of the largest corporate frauds ever prosecuted” has been held up by Lynch’s extradition battle. His appeal turned on whether as a UK-listed subject to IFRS accounting standards, the case should be heard by a UK court. Those arguments failed to convince High Court judges, who issued a lengthy decision in April backing the arguments of US prosecutors and the district judge. Given the greater loss and harm experienced by victims of the fraud in the US, it was right for the trial to be heard in that country, they ruled.

In the meantime, former Autonomy chief financial officer Sushovan Hussain was found guilty by a jury in 2019 on 16 counts of accounting fraud at the San Francisco federal court. Judge Breyer sentenced Hussain to five years in prison, fined him $4m (£3.1m) and ordered him to forfeit $6.1m (£4.73m).

Lynch and Hussain also lost a civil court case last year that brought forward details of a sequence of side deals and accounting feints they used to hoodwink the company’s audit committee and auditor, Deloitte. The full amount of the resulting damages still hasn’t been revealed.

Record £15m FRC fine

Deloitte didn’t escape the fallout from Autonomy either. In 2020 it received a £15m fine from the Financial Reporting Council (FRC), plus costs of £5.6m resulting from evidentiary and independence breaches by the firm itself and the audit engagement partners. 

Earlier this year, Lynch’s name was linked to the controversy surrounding the accounts of Darktrace, an artificial intelligence software company he founded after Autonomy and where he remains a shareholder. 

A report published by New York-based short-seller Quintessential Capital Management suggested that Darktrace was employing similar tactics to Autonomy, for example by engaging in bogus sales of equipment that may have remained on its balance sheet. Darktrace responded by commissioning EY to carry out an independent review of Darktrace’s accounts.

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By Rgab1947
18th May 2023 10:32

So he may get a 10 year sentence after which he goes back to his £100 billion less some change.

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By hyper10
18th May 2023 11:17

The Daily Telegraph had an article and most posters were doing the usual bit about the Yanks etc. The point I made is, the High Court made it clear about his behaviour and although it's a lower bar, the High Court Judges are generally switched on.
He morphed a Mercedes Sprinter van into a recurring income asset worth £750K, all fun and games and banter until you realise that HP shareholders were basically ripped off. I think the HP board need a kick up their behinds but they were stupid not criminal.
On the face of it, he's in the camp of Madoff because at least at a civil level, it's been found he acted fraudulently and people wouldn't so forgiving if it were their money or pension.

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