Autonomy co-founder Mike Lynch's fraud trial opens in San Francisco

Lynch accused of being the 'driving force' behind 'massive' fraud at Autonomy

The criminal trial of Autonomy co-founder Mike Lynch has started in San Francisco, California, with Lynch accused by prosecutors of being the “driving force” behind a “massive” fraud.

The prosecutors allege that Lynch - and Autonomy's former vice president of finance, Stephen Chamberlain - conspired to artificially inflate the company's revenues in a bid to make the company more attractive for potential acquisition, a scheme that culminated in the disastrous takeover of Autonomy by Hewlett-Packard for $11 billion (£8.6bn) in 2011.

Federal prosecutor Adam Reeves told the court that Lynch had "spun a fabulous tale" of the company's technology, which was reflected in supposedly accelerating software licence sales. "HP ate it up – they thought this kind of software company is exactly what they needed," said Reeves. He described it as a "multi-year, multi-layered fraud".

In reality, he said, much of Autonomy's revenue growth was underpinned by hardware resale and fraudulent accounting policies. These include:

• Hardware-only sales that were recognised as recurring software sales;
• ‘Channel stuffing', a deceptive business practice whereby distributors are shipped more units than they are able to sell, although the transactions are nevertheless booked;
• A number of transactions that were falsely accounted for as licence sales; and,
• "Improper" acquisition accounting in the 2009 purchase of MicroLink for $55 million.

Ironically, perhaps, one of the questionable deals involved a £4 million sale to the UK's Financial Services Authority at 11.39pm the night before the end of Autonomy's first quarter in March 2010.

Lynch, meanwhile, denied 16 counts of conspiracy and fraud, and faces up to 20 years in prison if found guilty. Since extradition to the US in May 2023 Lynch has lived in an apartment in San Francisco, wearing an electronic tag to prevent him from absconding as part of a $100 million bail agreement.

Lynch's lawyer, Reid Weingarten, has previously represented financier and convicted sex offender Jeffrey Epstein. Chamberlain is also standing trial alongside Lynch, pleading not guilty.

Weingarten told the court that HP had been "happy to pay" over the odds for Autonomy's software and had rushed the due diligence process in order to prevent rivals from making a counter-bid. Lynch, he added, was focused on technology, while the company's finances were left to Autonomy CFO Sushovan Hussain. "Mike had many sleepless nights worrying about Autonomy, but not about accounting," said Weingarten.

Lynch has claimed that HP executives didn't understand the technology they had bought, and were incompetent in the post-acquisition integration of Autonomy with HP.

Hussain agreed to be extradited to the US in 2016. He was found guilty of 16 counts of wire fraud, securities fraud and conspiracy in May 2019, and jailed for five years by US district judge Charles Breyer. He was also fined $4 million and ordered to forfeit $6.1 million. Prosecutors had sought a 12-year prison term. He was released from prison in January.

In January 2022, the High Court in London ruled "substantially" in favour of HP against Lynch and Hussain in a civil case brought by HP, in which it is seeking damages of $4 billion. Lynch has pledged to appeal the 2022 ruling after the level of damages is finally determined, and has asserted that his net worth stands at "just" $450 million.