Mike Lynch, once one of Britain's most successful tech entrepreneurs, will go on trial in San Francisco on Monday, 13 years after what US prosecutors called Silicon Valley's “biggest fraud in history”.
Lynch, who sold his software company Autonomy to Hewlett-Packard for $11.7 billion in 2011, faces charges that he falsified Autonomy's accounts two years before the deal. He was extradited from Britain last year after a five-year battle.
Lynch will be tried along with Stephen Chamberlain, Autonomy's former vice president of finance, on 16 counts of wire and securities fraud, which carry a maximum penalty of 20 years in prison. The charges are similar to those for which Sushovan Hussain, Autonomy's former chief financial officer, was sentenced to five years in prison.
One setback for Lynch is that some of the defense evidence he had hoped to rely on was watered down in preliminary hearings in recent weeks. Judge Charles Breyer, who will oversee the three-month jury trial, suppressed some of the key evidence his attorneys planned to present.
The acquisition of Autonomy, whose data analytics software played a central role in turning around one of Silicon Valley's founding companies, Hewlett-Packard, was trying to rebuild itself around software.
But a year after the deal, HP Chief Executive Meg Whitman accused former Autonomy management of falsifying the books, resulting in a $5 billion write-off. She later gave up on trying to reinvent HP and dissolved the company.
Lynch's attempt to deflect the accusations onto Whitman, claiming she was made a scapegoat for his own mismanagement of the Autonomy business, has thrust the reputations of some of Silicon Valley's top figures into the spotlight.
In addition to Whitman, the former CEO of eBay and current U.S. ambassador to Kenya, they include Frank Quattrone, a top Silicon Valley investment banker during the dot-com bubble of the 1990s, who after acquiring Autonomy to other companies including Oracle and Cisco, Responsible for the sale of Autonomy.
Quattrone and Léo Apotheker, HP's chief executive at the time of the deal, have been named as potential witnesses by prosecutors. Lynch also may take the stand, his attorneys told the judge, though his attorneys said his case to go directly to the jury was hampered by the limited evidence he could use.
The US has sought to paint the former Autonomy boss as a micromanager who had tight control over the company's finances, including personally approving any payments over $30,000.
Lynch's lawyers successfully persuaded Judge Breyer to throw out evidence prosecutors sought to present that Lynch liked to compare himself to James Bond villains and that he kept a tank of piranhas in the Autonomy's reception area.
However, the judge rejected the defense's attempt to suppress two witness statements in which Lynch compared his company to the Mafia, saying that even if he was joking, it could be seen as related to the extent of his control over the company.
In the biggest blow to the defense, the judge excluded almost all evidence related to the period after HP acquired Autonomy, making it difficult for Lynch to shift the focus to Whitman and other HP employees.
The judge also questioned the relevance of accounting evidence seeking to show that Autonomy's financial statements complied with UK rules, and that the fraud allegations were merely a dispute over different accounting practices.
The former Autonomy boss has long claimed that HP's $5 billion write-off due to alleged fraud was exaggerated to cover his own business failures. During Hussein's trial, HP estimated that alleged accounting misstatements caused it to overpay the company by $1.7 billion to $2.7 billion.
A British judge ruled two years ago that HP had “substantially succeeded” in proving Lynch's civil fraud case, while also saying any damages would be significantly less than the $5 billion it claimed.
The 17th U.S. indictment against Lynch and Chamberlain, accusing them of conspiring to conceal fraud, would open the door to more evidence about post-deal events. However, Judge Breyer separated that count from the other charges and said it would not be heard in the trial, which begins Monday.
Commenting on Lynch's claim that HP made him a scapegoat for its own mismanagement, Judge Breyer said: “I have no opinion on whether that's correct. But I do have an opinion on whether that applies, and it's not the case.”
He added: “There is no such thing as fraud after the fact. As of the date it is alleged to have occurred, the event either occurred or it did not occur. If it had not occurred, it would make no difference to anything he did thereafter.”
The ruling complicates Lynch's plans to testify in his own defense. His lawyers say much of his case will hinge on first-hand accounts of how he ended up at HP after the deal — something they say he would not have done if he had participated in the fraud. They still hope to present some post-acquisition evidence, although Judge Breyer said that would be allowed only on a very limited basis and only after he had a chance to review Lynch's answers to specific questions.
According to the U.S. charges, Lynch and Chamberlain artificially inflated Autonomy's revenue by backdating sales and engaging in round-trip transactions in which customers were compensated for false purchases of Autonomy 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 actually was.
The prosecution's case is likely to rely heavily on a number of witnesses who were closely associated with Autonomy at the time. Among them is Christopher Egan, the former head of the company's U.S. operations, who reached a deferred prosecution agreement with prosecutors and agreed to testify if charged.
Prosecutors plan to call former Autonomy general counsel Joel Scott to testify about Lynch's involvement in the firing of a whistleblower who tried to expose alleged fraud.
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