Executives at the British software company Autonomy mischaracterised revenues from clients including Tottenham Hotspur, the Serious Fraud Office and the BBC to inflate software sales figures ahead of a disastrous £8 billion (€9.4 billion) acquisition by the US firm Hewlett-Packard, London's high court has heard.
HP is suing the former Autonomy founder Mike Lynch and former chief financial officer Sushovan Hussain, accusing them of a $5 billion (€4.4 billion) fraud ahead of the 2011 takeover. HP subsequently wrote down $8.8 billion in relation to the deal.
Successor companies to HP and Autonomy accuse Dr Lynch and Mr Hussain of deliberately inflating the value of the company in a number of ways, including by bringing forward revenues, entering into improper transactions to boost revenues and engaging in false accounting.
The claimants allege that one of the “fraudulent mechanisms” included wrongly characterising revenues related to Autonomy’s main product, IDOL (Intelligent Data Operating Layer) – software used to sort through clients’ complex unstructured data.
The court heard on Tuesday that Autonomy wrongly included 67 transactions together worth tens of millions of pounds in figures for sales to original equipment manufacturers (OEMs) who would then use Autonomy software in their own products.
However, Laurence Rabinowitz QC, representing the claimants, told the court that the Autonomy figures included wrongly classified revenues from organisations who did not intend to sell on products that included Autonomy technology, including the UK Ministry of Defence, the UK Serious Fraud Office, Bank of America, the BBC and Tottenham Hotspur, the London football club whose shirts Autonomy and HP sponsored.
The claimants said that Autonomy selectively revealed IDOL OEM customers – many of whom were well known technology companies – while ignoring larger deals which could arouse suspicion about the revenues in its public statements.
In the first quarter of 2011 Autonomy publicly referred to deals with Symantec and HP, while ignoring larger deals worth $6.4 million and $1.6 million respectively with Spurs and the BBC.
The listed uses for the software sold to Spurs were all internal, the claimants said in their opening submission to the court.
The submission said: “While the purchase order contained a clause […]allowing Tottenham to assign or share licence rights, Dr Lynch has not identified any reason to think that Tottenham was likely to become a software licensor within the footballing industry.”
Dr Lynch’s lawyers will argue that the use of “OEM” was used broadly and was not intended to be limited to software makers, according to their opening submission.
The documents also cover the relationship between Spurs and Autonomy, which became the club’s shirt sponsor in July 2010 in a £63 million deal covering five seasons.
Spurs bought services worth millions of pounds from Autonomy, while sponsorship fees would fall by £3 million if the club did not generate £4 million in revenues for Autonomy through introductions to third parties, the claimants’ submission said. The football club was then entitled to 30 per cent of those revenues.
The claimants alleged that another transaction with Spurs was used to accelerate the recognition of Autonomy’s revenues. Autonomy backdated a £3.9 million plus VAT fee for providing Tottenham with software licences and a production server to June 2010 so that it fell before the quarter end, the claimants alleged.
Dr Lynch's lawyers argued that Autonomy's auditors, Deloitte, signed off on the transactions, according to their opening submission. However, the claimants alleged that Autonomy concealed the nature of the transactions from Deloitte.
Spurs “had no comprehension as to what they had purchased”, with an agenda for a meeting in July 2010 between Autonomy and the club including “a look at/understanding of what we have purchased”, the claimants’ submission said. No design of the products sold to the club had been completed by late April 2011, the submission said.
Dr Lynch and Mr Hussain have denied all of the allegations made by the claimants. It is thought that Dr Lynch, who was present in the high court on Tuesday, will give evidence in the trial, which is expected to continue for around nine months. The opening submission from Dr Lynch’s defence was due to start on Wednesday.
Dr Lynch also faces separate criminal charges in the US. The 17 charges from the US Department of Justice include conspiracy and wire fraud, with a maximum prison sentence of 25 years.
A spokesperson for Dr Lynch last week said he “vigorously” denied the charges.
Mr Hussain was convicted on similar charges on April 2018, and is currently awaiting sentencing in the San Francisco area. He is expected to appeal against the conviction. – Guardian service