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Autonomy founder plans appeal as Hewlett Packard wins fraud case against him
28 January 2022, 16:34
Mike Lynch is also facing extradition to the US over allegations related to the sale.
A British entrepreneur facing extradition to the United States over fraud allegations has signalled he intends to appeal against a High Court judge’s decision in a civil case brought by Hewlett Packard (HP).
Dr Mike Lynch, founder of British software company Autonomy, is accused of deliberately overstating the value of his business before it was acquired by the American technology giant more than a decade ago.
HP, now Hewlett Packard Enterprise (HPE), sued Dr Lynch and Autonomy’s former chief financial officer, Sushovan Hussain, for around five billion US dollars (£3.7 billion), following its purchase of the Cambridge-based firm for 11.1 billion US dollars (£8.3 billion) in 2011.
Announcing his decision on the case at the High Court in London on Friday, Mr Justice Hildyard said HP had “substantially succeeded” in its various claims against the two men – but is likely to receive “substantially less” than the amount claimed in damages.
The announcement comes on the same day Home Secretary Priti Patel will have to reach a decision as to whether Dr Lynch should be extradited to the US.
Kelwin Nicholls, of law firm Clifford Chance, representing Dr Lynch, said in a statement after the decision: “Today’s outcome is disappointing and Dr Lynch intends to appeal.
“We will study the full judgment over the coming weeks. We note the judge’s concerns over the reliability of some of HP’s witnesses.
“We also note the judge’s expectation that any loss suffered by HP will be substantially less than the five billion dollars (£3.8 billion) claimed.”
Mr Justice Hildyard delivered a summary of his conclusions in the case on Friday, more than two years after the start of what was believed to be the UK’s biggest civil fraud trial – which was heard over nine months in 2019.
He said Dr Lynch and Mr Hussain gave a “misleading picture” of the business, including by “reselling” hardware in order to enable Autonomy to cover shortfalls in software revenue.
The judge said: “The purpose of the hardware selling strategy was to meet market expectations of revenue maintenance and growth, by misleading the market as to the true market position of Autonomy.
“These loss-making transactions were not commercially justified on any basis.
“The justifications advanced by the defendants were no more than pretexts to increase stated revenue in the accounts.
“The strategy was not for the purpose of raising software revenue sales. That justification was a pretence, fashioned principally for the audit committee and Deloitte, who would not have approved the accounting treatment without the pretence.
“Both concealment of the hardware sales and their true cost in Autonomy’s accounts and other published information were necessary because revelation of the Autonomy’s use of hardware sales, and the erosion of gross margin, would have nullified their true purpose.
“This would have exposed that Autonomy’s software business was not generating the accelerating revenue and profits which the market thought it was, and which heavily influenced its price.”
The judge said Autonomy was founded in 1996 out of a company called Cambridge Neurodynamics, an early venture into using “machine learning” to develop software techniques which Dr Lynch had explored in his PhD thesis at Cambridge University.
His full judgment in the case is expected to be published at a later date but remains embargoed until then.
US authorities claim Dr Lynch, who denies all charges against him, deliberately overstated the value of his business, which specialised in software to sort through large data sets.
On Wednesday, Ms Patel was given until midnight on Friday to decide on his extradition after a High Court judge ruled against Dr Lynch’s legal challenge over a previously set deadline.
Ms Patel had wanted to consider Mr Justice Hildyard’s ruling on the High Court civil claim before making an extradition decision.
During the civil trial in 2019, HP said the write-down of Autonomy’s value was because it had found “serious accounting improprieties”.
Laurence Rabinowitz QC, representing HP, said Dr Lynch and Mr Hussain had knowingly caused Autonomy to “engage in a programme of widespread and systematic fraudulent” accounting practices ahead of the sale.
He said Autonomy had been “meeting its revenue and revenue growth targets by simply buying and selling third-party hardware, without any connection to Autonomy software”.
Mr Rabinowitz added the firm also used “a variety of other fraudulent devices” to either accelerate revenue or to invent revenue that never existed in the first place.
The two men denied the claims and Dr Lynch launched a counter-claim for at least 125 million US dollars (£95 million) in damages against HP for “a series of false, misleading and unfair public statements” about his alleged responsibility for supposed accounting irregularities and misrepresentations at Autonomy.
He accused HP of “making a series of far-fetched allegations of fraud and scapegoating”, arguing it had “destroyed one of the most successful and promising software companies of its time due to management incompetence, politics and infighting”.
Dr Lynch, from Suffolk, argued the technology giant was trying to make him “a scapegoat for their failures”.
Mr Hussain was convicted in April 2018 in the US of wire fraud and other crimes related to Autonomy’s sale and was sentenced to five years in prison.
In the separate criminal proceedings in the US, Dr Lynch faces charges of securities fraud, wire fraud and conspiracy in a federal court over the sale of Autonomy.
Mr Justice Hildyard said the amount of damages, or quantum, to be paid to HP and the other claimants will be dealt with at a later date, but is expected to be “substantially less” than the 5 billion US dollars (£3.7 billion) claimed by HP.
He said: “I considered it inappropriate to delay my judgment on liability when it could have an effect on other proceedings, in particular the extradition proceedings, to allow completion of the quantum section.”
A spokesperson for HPE said: “Dr Lynch and Mr Hussain defrauded and deliberately misled the market and Hewlett Packard.
“HPE is pleased that the judge has held them accountable.”