Britain | Lynch mob

Britain’s biggest fraud trial pits Mike Lynch against Hewlett Packard

The trial is going well for “Britain’s Bill Gates”, but extradition to America looms

LONDON’S LEGAL district, dotted with purveyors of horsehair wigs and pubs once frequented by Charles Dickens, seems an unlikely setting for an entrepreneur at the cutting edge of technology. Mike Lynch, sometimes called Britain’s Bill Gates, backed Darktrace, an artificial-intelligence-powered cyber-security firm that has become one of the country’s most highly valued startups. But Mr Lynch will not be celebrating. Instead he is spending summer in court fighting Hewlett-Packard (HP), an American IT giant, over alleged fraud at Autonomy, another firm he founded and which HP bought in 2011.

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It is Britain’s biggest-ever fraud case. HP’s claim of $5.1bn against Mr Lynch is massive chiefly because the American firm overpaid for Autonomy. A decade ago, after a series of boardroom crises, HP was keen to add high-margin software to its lacklustre hardware business. It paid $10.3bn for Autonomy, which reported revenues of $870m in 2010, representing a whopping 64% premium to its market value.

HP’s shares fell by a fifth after news of the deal and other changes. Léo Apotheker, its boss and the deal’s architect, was sacked. In 2012 HP’s next boss, Meg Whitman, wrote off $8.8bn of Autonomy’s value and said HP had been duped. HP accuses Mr Lynch, and Autonomy’s former chief financial officer, Sushovan Hussain, of padding revenues and profits pre-acquisition. Mr Lynch has been indicted by America’s Department of Justice (DoJ). He says HP’s charges are baseless and that it destroyed Autonomy with bad management.

That Autonomy’s revenue accounting was questionable is not in doubt. Before the HP deal Mr Lynch was accused of bullying bank analysts whose research pointed to aggressive practices. But Autonomy’s auditor, Deloitte, signed off the accounts. Neither did HP’s own pre-deal due-diligence process, conducted by KPMG, another big audit firm, raise problems. And a 2012 report by Ernst & Young, yet another auditor, concluded that the alleged incorrect accounting would not have had a material impact on HP’s valuation of Autonomy. Mr Lynch says in testimony that differences between international and American accounting standards help explain the gap, and that he knew nothing about the allegedly fraudulent transactions.

So far the trial is going well for the tech entrepreneur, a commanding presence in the witness box who has taken to treating the court to short explainers on the software industry’s workings. A boost came from HP’s star witness, Chris Egan, a former head of Autonomy’s American business. He had admitted to some of the practices used to flatter revenues (such as backdating deals and doing “round-trip” transactions) and been fined. He struck a plea bargain with the DoJ. But in May he admitted he had no evidence that Mr Lynch directed any fraudulent accounting.

Whatever the outcome in the British courts—the trial will conclude in December—Mr Lynch is threatened with extradition to America. The DoJ filed charges against him in November and added a new indictment in March. If extradited and convicted, as was Mr Hussain, he faces prison.

An extradition demand would kick up a storm, especially since Britain’s arrangements with America, which date from soon after 9/11, are considered by many to be overly generous to US prosecutors. The last big case concerned Gary McKinnon, a British hacker with Asperger’s syndrome, who in 2012 won the right to stay put. His victory has made American prosecutors more determined, which may not help Mr Lynch. But at least the process has become less political. Courts, not the home secretary, now have the final say. If, post-Brexit, Britain goes all out for a trade deal with America, that should mean Mr Lynch is less likely to find himself used as a bargaining chip.

Vacancy: The Economist is looking to hire a staff writer to cover British economics. Journalistic experience is not necessary; the ability to write clearly and entertainingly is. For details of how to apply, visit economist.com/britainjob2019. The deadline is August 4th.

This article appeared in the Britain section of the print edition under the headline "Lynch mob"

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