Autonomy founder Mike Lynch called ‘driving force’ of ‘massive fraud’ in US trial

British tech entrepreneur finally faces US jury after years of legal wrangling

US prosecutors on Monday sought to portray British tech entrepreneur Mike Lynch as “a controlling, dominating, intimidating boss” and “the driving force behind [a] massive fraud”, as the trial over events that transfixed Silicon Valley more than a decade ago got under way in San Francisco.

Mr Lynch, the former chief executive of UK software company Autonomy, pulled off “an elaborate, multilayered, multiyear fraud” that involved overstating his company’s revenues by tens of millions of dollars and leading Hewlett-Packard (HP) to overpay in a $11.5 billion (€10.6 billion) acquisition, lead prosecutor Adam Reeves said.

The Autonomy deal, which the prosecution claims involved the biggest fraud in Silicon Valley history, was central to HP’s efforts to turn itself round and reinvent itself as a tech company with a heavy reliance on software. As its strategy foundered, it laid off more than 100,000 workers and was eventually split up.

Mr Lynch – who has spent years masterminding his defence through a series of proceedings, including a civil fraud case and extradition hearings in the UK – sat impassively at his lawyers’ table in a dark suit and tie and a white shirt during opening arguments. He has pleaded not guilty.

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The trial comes 10 months after he was extradited to the US, forcing him to live under house arrest and 24-hour surveillance in San Francisco.

Mr Lynch (58) is standing trial alongside Stephen Chamberlain, Autonomy’s former vice-president of finance, on 15 charges of wire fraud and conspiracy that carry potentially lengthy prison sentences. Mr Lynch also faces a charge of securities fraud. Autonomy’s chief financial officer (CFO), Sushovan Hussain, was convicted on similar charges and sentenced to five years’ imprisonment in 2019.

In an opening statement, Mr Reeves told jurors that the trial, which is expected to last three months, would revolve around complex accounting methods that Autonomy used to artificially inflate its revenue.

“There’s a lot of jargon around these deals,” Mr Reeves said. “Don’t worry about that. Keep your eyes on the dollars.”

The company had backdated sales, engaged in round-trip transactions with customers to compensate them for buying its software, and falsely dressed up loss-making hardware transactions as software deals, he said.

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Reid Weingarten, a lawyer for Mr Lynch, said the defence’s evidence would show the transactions at the heart of the case reflected the complexity of normal business life. “Where [the prosecution] claimed fire, you’ll see only smoke,” he told the jury.

“You’re going to conclude that a lot of what you heard today about accounting fraud was nothing other than normal business done by Mike Lynch.”

He also cautioned jurors not to be distracted by prosecution attempts to make Lynch seem “unlikeable”. The former Autonomy boss was “a hard charger and demanding”, he said, but added that these characteristics were part of his effort to do his best for the company.

Reeves, for the prosecution, suggested there would be little documentary evidence directly implicating Lynch in the transactions and accounting entries at the centre of the fraud claims. Instead, he said the company’s former CFO had been central in carrying out the fraud.

The jury would be able to draw “a reasonable inference that Hussain’s centrality was exactly how Mike Lynch wanted it”, enabling him to exercise control “without creating a paper trail back to him”, he said.

Pointing to the CFO’s close involvement in the disputed transactions, Lynch’s lawyer said Hussain “essentially taught Mike the bulk of what Mike knows about accounting”. “Mike never, never had a reason not to trust” Hussain, he said.

In advance of the trial the judge, Charles Breyer, ruled Lynch’s defence could not argue in court that he had been made a scapegoat by HP to cover up its mismanagement of Autonomy after the acquisition. However, his lawyer told the jury that HP was “in dire straits” at the time of the deal and tried, unsuccessfully, to use the transaction to distract attention from its own problems. – Copyright the Financial Times Limited 2024