This week saw the kick-off of what has been dubbed “tech’s trial of the century”.  UK’s biggest ever fraud trial began in London on 25 March 2019 and is expected to last a gruelling nine months.

US technology giant Hewlett-Packard is suing Mike Lynch, the former head of the software company Autonomy.  In 2011, Hewlett-Packard purchased Autonomy for $11.1bn.  A year later, it stated it had been “duped” into overpaying contributing to an $8.8 billion write-down and a huge quarterly loss.

As well as the UK civil case, Mr Lynch is facing criminal charges in the United States.

How it all began

Autonomy was launched in 1996.  It developed software that was able to extract data from phones, emails, video, and other ‘unstructured’ sources.  In practice, this means the software can suggest answers to call centre operators and make sense of TV and radio channels by looking for specific words and phrases.

When Mike Lynch sold his company, Autonomy, to Hewlett-Packard, he was proclaimed as the next Bill Gates.  Autonomy boasted “nearly $1 billion of 2010 revenues and possessing “a consistent track record of double-digit revenue growth, with 87 percent gross margins and 43 percent operating margins.”

However, in 2012, Hewlett-Packard issued a statement stating an internal investigation had revealed “serious accounting improprieties” and “outright misrepresentations” in connection with the UK software company.

Former Chief Executive Meg Whitman told the Wall Street Journal:

“There appears to have been a wilful sustained effort to inflate Autonomy’s revenue and profitability. This was designed to be hidden.”

Jack T. Ciesielski wrote an investigative piece for Fortune magazine regarding the transaction in 2016.  He pointed out:

“One fact really stands out: in each of the 10 quarters preceding the acquisition, Autonomy’s revenues were within 4% of analyst expectations. That’s a level of precision that should arouse suspicion. In hindsight, achieving revenue targets like clockwork looks awfully strange.”

Mr Ciesielski then went on to explain how this was achieved; the company allegedly used various methods such as backdating purchase order transactions, maintaining control of deals with end users without the aid of its resellers, and round-trip reseller transactions.  The Wall Street Journal reported that at least a year prior to the acquisition, an executive approached the U.S. Securities and Exchange Commission (SEC) and others with concerns about Autonomy’s accounting practices.  However, because the company did not trade on the stock exchange prior to Hewlett-Packard’s purchase, the regulatory authorities approached may not have had jurisdiction.

The civil trial

In the UK civil trial, Hewlett-Packard alleges that Autonomy founder Mike Lynch and chief financial officer Sushovan Hussain inflated the value of Autonomy before the 2011 sale and are, as a result, suing for $5.1bn (£3.9 bn).  Both Mr Lynch and Mr Hussain deny any wrongdoing.  A spokesperson told the BBC:

“The real story is that HP, after a history of failed acquisitions, botched the purchase of Autonomy and destroyed the company, seeking to blame others. Mike will not be a scapegoat for their failures.”

The criminal prosecution

Mr Lynch is also facing criminal prosecution after an inditement was filed in a San Francisco court in mid-March.  The 17 charges include conspiracy and wire fraud.  It is also alleged Mr Lynch and Stephen Chamberlain, a former Autonomy executive, conspired to cover up fraud, including by destroying documents, “paying hush money” to former Autonomy employees and laundering the proceeds of the deal with HP.  The US Justice Department is seeking to confiscate $804m (£608m) from Mr Lynch, alleging it was fraudulently obtained.  Mr Lynch could face 25 years in prison if found guilty.

False accounting in UK law

Under section 17(1) of the Theft Act 1974, a person commits an offence if they dishonestly, benefit themselves or someone else, or with intent to cause loss to another:

• Destroys, defaces, conceals, or falsifies any account, or any record or document made or required for any accounting purpose.
• In furnishing information for any purpose, produces or makes use of any account, record, or document that to his knowledge is (or maybe) misleading, false or deceptive in a material particular.

The test for dishonesty (the mental element of the offence) was set out by the Supreme Court in Ivey v Genting Casinos (UK) Ltd t/a Crockford and is as follows:

“Irrespective of the defendant’s belief about the facts, whether his conduct was honest or dishonest by the objective standards of ordinary decent people.”

Defending a claim or prosecution involving false accounting

Defending a claim of false accountancy requires a sharp strategy.  Often the prosecution or claimant inflate the scale of the accounts, making the alleged fraud look much worse than it is.  To obtain an accurate picture of the accounts, expert evidence from a forensic accountant is likely to be commissioned.  In addition, just because there are errors on the accounts, it does not automatically follow that the defendant is guilty; the prosecution or claimant must show evidence of dishonesty.  If the errors were the result of a mistake, it is your defence team’s job to show the judge or jury the circumstances of that mistake so they can understand the reason for it.

Final words

The outcome of the Hewlett-Packard case will be closely watched by the media and legal fraternity alike.  As more information comes out in the trial, I will keep you up to date.

Tanveer Qureshi is a Legal 500 barrister, specialising in ASA compliance, business to business fraud, health and safety, food standards, civil litigation, and corporate crime.  If you require legal representation, please contact directly on 020 3870 3187.

We all love our kids and want to provide them with the best start in life. With this in mind, how far would you go to secure a place for your child in a top university? For some parents in America, including Hollywood stars Lori Loughlin and Felicity Huffman, the lengths gone to get their children into a good school may have included fraud and bribery.

What is the college admissions cheating scandal?

Federal prosecutors in the United States say that at least 50 people were involved in a scheme which saw parents arranging for their children to cheat on SAT or ACT or bribing college coaches and school officials to accept students as college athletes — even if the student had never played that sport.

The FBI investigation was dubbed “Operation Varsity Blues” and it has led to the largest college admissions fraud and bribery scandal ever to be prosecuted by the Department of Justice.

Who instigated the scam?

To get into college, American students must either sit the SAT or ACT test (similar to British students sitting A levels). Since 2011 the scam in question has been operated by William Rick Singer, CEO of a college admissions prep company called Key Worldwide Financial (KWF).  Mr Singer has admitted to the charges against him and stated that everything the Prosecutor accused him of is accurate.

According to Vanity Fair, Mr Singer, a college counsellor, told parents “We will get your child into college.”

“These were upper-class parents, the kind who had spent the previous 15 or so years fretting over the butterfly effect of every educational decision they made concerning their child: Did we put them in the right nursery school? Did the private school we chose correctly correlate with our child’s unique style of learning? Does their résumé feature the correct ratio of athletics to community service? In Singer, they found a man who vowed to somehow make sure all of those decisions had been correct.”

The article went on to say:

“Moments after his [sales] spiel ended, Singer found himself in conversation with one concerned mother whose daughter struggled with standardized tests, her scores still not at the level they needed to be. Did Singer have any suggestions for her? According to this mother, who asked not to be identified by name, Singer said within five minutes of beginning the conversation, “We could have her take the test with one of my proctors, and we could jump her score up three or four points so it wouldn’t be that obvious. It will cost you $15,000.”

How did the fraud work?

Regarding the SAT and ACT tests, parents would pay between $15,000 and $75,000 for Mr Singer to arrange a third-party to either take the test secretly in place of their child or swap the test scores with that of the third-party. Test administrators were bribed to turn a blind eye. Students would fake learning disabilities so they could take the tests at a place where administrators had received bribes.

It is alleged that Desperate Housewives and Transamerica star Felicity Huffman paid $15,000 to cheat on her oldest daughter’s SATs.

The fake athletes’ credentials scheme worked by bribing coaches and athletic officials to make recommendations regarding which college applicants should be accepted. According to the Guardian court documents show:

“a parent paid Singer $1.2m to get a student into Yale in 2017. The women’s soccer coach at Yale allegedly received a $400,000 bribe from Singer to designate the girl as a recruited athlete – even though she did not play competitive soccer, and the coach knew it. The student got in”.

Lori Loughlin and her husband are accused of paying bribes of $500,000 in exchange for having their two daughters designated as recruits to the USC crew team – even though they did not row.

Why has the scandal garnered so much media attention?

Given the current backlash against those in positions of power engineering society to their advantage, so their positions of privilege can be maintained, it is no wonder a lot of people are furious. And the class-action lawsuits have started to erupt; several students are suing Yale, Georgetown, Stanford and other schools involved in the scam, saying they and others were denied a fair shot at admission. We can expect many more suits to be brought over the coming months.

Furthermore, the IRS has launched an investigation regarding tax fraud. KWF was set up as a charity, allowing those who made six-figure bribes to write these off against their taxes. The IRS is looking to claw back these deductions.

The issue with this type of fraud is often innocent parties become caught up. Felicity Huffman’s husband, the actor William H. Macy was not charged, and it is suspected he did not play a part in the alleged offence. However, it is unclear whether any of the children who received the benefit of college admission knew of the fraud and they may yet face prosecution.

Jane Buckingham, the founder of brand strategy firm Trendera, is accused of making a $50,000 donation to KWF which prosecutors say was a cover for bribes. Her son Jack has made a statement to The Hollywood Reporter saying:

“I am upset that I was unknowingly involved in a large scheme that helps give kids who may not work as hard as others an advantage over those who truly deserve those spots.”

However, Prosecutors may find it hard to believe those close to the scam were not part of the fraud.

I will keep you updated as this matter develops.

Tanveer Qureshi is a Legal 500 barrister, specialising in ASA compliance, business to business fraud, health and safety, food standards, civil litigation, and corporate crime. If you require legal representation, please contact directly on 020 3870 3187.

A media report that your business has been prosecuted for a health and safety offence can be highly damaging, both in terms of financial penalties and the loss of consumer and investor confidence in your business.  In addition, companies looking for joint-venture partners examine the health and safety record of prospects carefully.  Disclosure of any health and safety breaches are also often required on tender applications.

It is crucial to note that just because a health and safety incident has occurred does not necessarily mean the employer was in breach of any rules or regulations.  Health and safety compliance is complex because it must run side-by-side with commercial reality.  There are very few entities who do not take health and safety seriously; however, it can be difficult for SMEs to remain on top of rapidly shifting compliance requirements.  To-do lists get longer, and days seem to accelerate.  But by understanding how health and safety prosecutions are brought, the importance of compliance can be shown.  Because to have a credible defence it is imperative to show that your business has the policies and procedures in place from the outset.

To illustrate the seriousness of this article, take a moment to consider the below statistics from 2016/17.

• The Health and Safety Executive (HSE) made 593 prosecutions with at least one conviction achieved in 554 cases (a conviction rate of 93%); and
• Prosecution led to fines totalling £69.9 million with an average penalty of £126,000 per case.

Convictions against individuals are also increasing.  Prosecutions of this type used to be few and far between.  Not any longer.  The HSE will frequently examine individual involvement in workplace accidents and incidents of industrial disease.  Prison sentences for individuals were introduced by the Health and Safety Offences Act 2008.  And even if a custodial sentence is not handed down, the consequence of having a criminal conviction can severely blight a person’s future.

These high rates of prosecutions and fines added to the potential for a custodial sentence illustrate the seriousness of an alleged breach and the importance of seeking expert legal advice immediately.

Who prosecutes health and safety offences?

Health and safety offences can be prosecuted by the HSE, a local authority, and any other body authorised by primary or secondary legislation to enforce health and safety law.

What does a health and safety investigation involve?

An investigation by the HSE or other regulatory body is likely to occur following an incident or a complaint regarding health and safety standards.  An inspector will visit your premises to gather evidence and prepare a report.  The inspector is not the person who will decide on whether a prosecution is brought, this will be done by an approval officer following an evaluation of the report.

For a prosecution to be brought, all aspects of the Code for Crown Prosecutors (January 2013) must be followed, and this includes a two-stage test:

Evidence stage – the prosecuting authority must be satisfied that there is “sufficient evidence to provide a realistic prospect of conviction against each suspect on each charge”.  This must take into account the strength of the evidence collated, and the assessment should be done on an objective basis.  Just because there is enough evidence to prosecute does not mean that there is enough for a conviction.

Public interest stage – if the evidence stage is satisfied, then a decision must be made whether it is in the public interest to prosecute. The more serious the offence, the less weight that public interest factors will have.

In addition to the Code for Crown Prosecutors (January 2013), the HSE has a formal Enforcement Policy Statement (EPS), and an Enforcement Guide .

The EPS states that the purpose of HSE enforcement is to:

• Encourage compliance.
• Ensure unsafe practices are made safe.
• Promote rapid action to eliminate serious risks.

It also sets out the public interest factors to be considered which include (but are not limited to):

• Whether the breach resulted in death
• What was the gravity of the offence and the level of actual or potential harm?
• Has there been a breach of health and safety compliance in the past?
• Was work carried out with sufficient compliance or licence (if applicable)
• Has the organisation failed to comply with an improvement or prohibition notice in the past?

Can I mitigate the chances of being prosecuted?

As a business owner, you can have considerable influence over whether you are prosecuted for an alleged health and safety breach.  The most important action you can take is to co-operate fully with the investigator and take prompt remedial action to fix any fault.  The other way to reduce your risk of being prosecuted is to organise an emergency response in the form of a legal professional who can conduct an internal investigation.  Evidence can then be presented to the authority explaining why prosecution is not necessary and/or justified.

Final words

Being prosecuted for a health and safety offence should be taken extremely seriously.   Getting the right advice from the outset can mitigate the risk of a disastrous outcome which could affect your professional and personal life for years to come.

Tanveer Qureshi is a Legal 500 barrister, specialising in ASA compliance, business to business fraud, health and safety, food standards, civil litigation, and corporate crime.  If you require legal representation, please contact directly on 020 3870 3187.