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.
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.