Mike Lynch, once one of the UK’s most successful tech entrepreneurs, is set to go on trial in San Francisco on Monday, 13 years after what US prosecutors have called “the largest fraud in the history” of Silicon Valley.
Lynch, who sold his software company Autonomy to Hewlett-Packard for $11.7bn in 2011, faces charges that he falsified Autonomy’s accounts in the two years before the deal. He was extradited from the UK last year after a five-year battle.
Alongside Stephen Chamberlain, Autonomy’s former vice-president of finance, Lynch will be tried on 16 counts of wire and securities fraud, which carry sentences of up to 20 years. The charges are similar to ones that have already resulted in a five-year jail sentence for former Autonomy chief financial officer Sushovan Hussain.
In a setback for Lynch, some of the defence evidence he had hoped to rely on was chipped away during pre-trial hearings in recent weeks. Judge Charles Breyer, who will oversee the three-month jury trial, barred some of the main evidence that his lawyers had planned to present.
The acquisition of Autonomy’s data analysis software played a central role in efforts to turn around HP, one of Silicon Valley’s founding companies, which at the time was trying to rebuild itself around software.
But a year after the deal, Meg Whitman, HP’s chief executive, accused Autonomy’s former management of falsifying its accounts, leading to a $5bn write-off. She later gave up on trying to remake HP and broke up the company.
Lynch sought to turn the accusations back on Whitman by claiming that he was being made a scapegoat for her own alleged mismanagement of Autonomy’s business, putting the reputations of some of Silicon Valley’s top names in the spotlight.
Besides Whitman, a former eBay chief executive who is now the US ambassador to Kenya, they include Frank Quattrone, Silicon Valley’s top investment banker during the 1990s dotcom boom, who handled the Autonomy sale after also shopping it to other companies including Oracle and Cisco.
Quattrone has been listed as a potential witness by the prosecution, along with Léo Apotheker, the HP chief executive at the time of the deal. Lynch is also likely to appear, his lawyers have told the judge, though the case he wants to put directly to the jury has been hampered by the limitations on evidence he can use, his lawyers said.
The US has sought to portray the former Autonomy boss as a micromanager who had close control over its finances, including personally approving any payment above $30,000.
Lynch’s lawyers succeeded in persuading Judge Breyer to disallow evidence the prosecution had sought to bring showing that he delighted in comparing himself to James Bond villains, and that he kept a tank of piranhas in Autonomy’s reception area.
However, the judge rejected the defence’s attempt to bar two witness statements that Lynch had compared his company to the mafia, saying that, even if he was joking, it could be seen as relevant to the amount of control he exerted over the company.
In the biggest blow to the defence, the judge has ruled out almost all evidence that relates to the period after HP bought Autonomy, making it hard for Lynch to redirect the spotlight on to Whitman and other HP staff.
The judge also questioned the relevance of accounting evidence that sought to show that Autonomy’s financial statements were in line with UK rules and that the fraud claims were just a dispute about different accounting conventions.
The former Autonomy boss has always claimed that HP’s $5bn write-off for the alleged fraud was inflated to make up for its own business failures. During Hussain’s trial, HP estimated that the alleged accounting misstatements led it to overpay for the company by $1.7bn-2.7bn.
A judge in the UK ruled two years ago that HP had “substantially succeeded” in proving a civil fraud case against Lynch, while also saying that any damages award would be significantly less than the $5bn it claimed.
A 17th charge that the US has lodged against Lynch and Chamberlain, alleging conspiracy to conceal the fraud, would have opened the door to more evidence about events after the deal. However, Judge Breyer separated that count from the other charges and said it would not be heard in the trial that begins on Monday.
Commenting on Lynch’s claim that HP made him a scapegoat for its own mismanagement, Judge Breyer said: “I have no opinion about whether that’s correct. But I do have an opinion as to whether or not it’s coming in in this case, and it’s not.”
He added: “There’s no such thing as a hindsight fraud. It either occurred or didn’t occur as of the dates that it’s alleged to have occurred. If it didn’t occur, whatever he did afterward makes no difference.”
The ruling complicates Lynch’s plans to appear as a witness in his own defence. His lawyers said much of his case would turn on his first-hand account of how he took a position at HP after the deal — something they said he would not have done had he been involved in fraud. They still hope to bring in some post-acquisition evidence, though Judge Breyer said it would only be allowed on a very limited basis, and only after he had a chance to vet Lynch’s answers to particular questions.
According to the US charges, Lynch and Chamberlain artificially inflated Autonomy’s revenues by backdating sales and engaging in round-trip deals in which customers were compensated for fake purchases of Autonomy’s software. The alleged fraud also involved misrepresenting low-margin hardware sales as software deals, giving the false impression that Autonomy’s software was growing much faster than it was.
The prosecution’s case is likely to rest heavily on a number of witnesses who were closely involved with Autonomy at the time. They include Christopher Egan, the former head of the company’s US business, who struck a deferred prosecution agreement with prosecutors and agreed to testify after also being charged.
Prosecutors plan to call Joel Scott, the former Autonomy general counsel in the US, whom they said would testify about Lynch’s involvement in the sacking of a whistleblower who tried to reveal the alleged fraud.
