Claimants succeed in HP/Autonomy fraud trial

31/01/22

In 2011, Hewlett-Packard announced the acquisition of Autonomy for US $11 billion. At the time, Autonomy – led by its founder and CEO, Dr Mike Lynch – was the largest British software company by market capitalisation. Its reported revenues had nearly doubled between 2008 and H1 2011. Just over a year after the acquisition was completed, however, HP announced a massive write-down of Autonomy’s value following an internal investigation.

In 2015, the HP group filed claims in the High Court against Dr Lynch and Autonomy’s chief financial officer, Sushovan Hussain. HP alleged that Dr Lynch and Mr Hussain had fraudulently inflated Autonomy’s true financial performance in its published results, as well as misrepresenting that performance to HP, and that HP had been induced by the fraud into significantly overpaying for the company.

The trial of HP’s claims ran from March 2019 to January 2020, making it one of the longest-running cases ever to be heard in England. Dr Lynch was cross-examined for 22 days. (Mr Hussain was by then in gaol in California following his conviction there on 16 counts of fraud committed during the sale of Autonomy; while represented at trial, he did not give evidence.)

After two years of deliberation, on 28 January 2022 Hildyard J took the unusual step of convening a public hearing to deliver a summary of his findings, in advance of providing his full judgment in draft to the parties’ representatives. He found that both Dr Lynch and Mr Hussain were liable in fraud under Schedule 10A of the Financial Services and Markets Act 2000, at common law, and under the Misrepresentation Act 1967. He upheld the Claimants’ case on each of the five principal categories of fraud alleged, namely (1) the artificial inflation of Autonomy’s ostensible software revenues by the reselling of “pure” hardware, usually at a loss; (2) the sale of software licences to “friendly” resellers (which incurred no real obligation to pay) to create the false appearance of revenue; (3) the use of reciprocal transactions without accounting for them on a net basis; (4) the ostensible sale of one-off software licences, which the purchaser did not need, in exchange for discounts on future periodic payments for hosting services, in order to accelerate revenue; and (5) the false presentation of certain revenue as representing royalty payments made by or through OEMs, which were considered in the market to generate a particularly dependable and valuable revenue stream.

The Judge concluded his summary by recording that “the legal representation and assistance provided to me in this case have been of the very highest standard. The longer my labours have continued the more I have understood and appreciated theirs and quite how much work has been put into these proceedings … I wish to express my profound and genuine appreciation to them all for the quality of their work, and in particular the enormous help they have provided to me in what has been for everyone involved an exceptionally onerous case.”

The judgment, which will be published in due course, concerns liability only. The Judge’s findings on quantum (which was also the subject of evidence and argument at trial) will be addressed in a subsequent judgment.

The published summary of the judgment is here.