Mike Lynch is on trial in the US for Silicon Valley’s “largest fraud”

Mike Lynch, one of the UK’s most successful entrepreneurs in the tech sector, will be on trial on Monday in San Francisco, 13 years after the “largest fraud in Silicon Valley’s history”, as described by US prosecutors.

Lynch, who sold Autonomy software to Hewlett-Packard in 2011 for $11.7bn, faces charges of falsifying Autonomy’s accounting two years prior to the deal. After a five-year struggle, he was extradited last year from the UK.

Lynch, along with Stephen Chamberlain (Autonomy’s ex-vice president of finance), will be charged on 16 counts of securities and wire fraud. These charges carry a maximum sentence of 20 years. These charges are very similar to those that resulted in the five year jail sentence of former Autonomy Chief Financial Officer Sushovan Hussain.

In a blow to Lynch’s defence, some of his evidence was eroded during recent pre-trial proceedings. Judge Charles Breyer who will preside over the three-month trial by jury has barred some evidence his lawyers planned to use.

The acquisition of Autonomy’s data analysis software was a key factor in the efforts to transform HP, one Silicon Valley’s founding companies that at the time, was trying to reinvent itself around software.

A year after the Autonomy deal, Meg Whitman was HP’s CEO and accused Autonomy of falsifying their accounts. This led to a $5bn write off. She eventually gave up trying to reinvent HP and split the company.

Lynch tried to turn Whitman’s accusations around by claiming he was made the scapegoat of her own alleged mismanagement Autonomy’s Business, putting some of Silicon Valley’s biggest names in the spotlight.

Frank Quattrone was the top investment banker in Silicon Valley during the dotcom boom of the 1990s. He handled the Autonomy deal after having also sold it to Oracle and Cisco.

Quattrone, as well as Leo Apotheker who was the HP CEO at the time, has been named by the prosecution. Lynch will also appear, according to his lawyers, who told the judge. However, the evidence that he is allowed to use to support the case that he intends to present directly to the jury may be limited.

The US has attempted to portray the former Autonomy boss, as a micromanager with tight control over its finances. This included personally approving payments above $30,000.

Lynch’s attorneys were able to convince Judge Breyer that the evidence that was brought by the prosecution to show that Lynch enjoyed comparing himself with James Bond villains and that he had a tank full of piranhas at Autonomy’s lobby area would be disallowed.

The judge, however, rejected the defence’s attempts to exclude two witness statements in which Lynch compared his company with the mafia. He said that even if Lynch was joking about it, this could still be relevant to how much control he had over the company.

The judge has excluded almost all evidence relating to the period following HP’s purchase of Autonomy. This makes it difficult for Lynch to focus on Whitman and the other HP staff.

The judge questioned also the relevance of the accounting evidence which sought to show Autonomy’s Financial Statements were in accordance with UK rules, and that the claims of fraud were just a dispute over different accounting conventions.

Former Autonomy boss, John McDonnell, has claimed for years that HP’s $5bn write off for the alleged fraud is inflated in order to compensate for HP’s own business failures. HP claimed that during Hussain’s trial it overpaid for the company between $1.7bn and $2.75bn due to the alleged accounting errors.

Two years ago, a UK judge ruled that HP “substantially” succeeded in proving its civil fraud case against Lynch. He also said that any damages awarded would be much less than the $5bn that it claimed.

The 17th charge, which the US filed against Lynch and Chamberlain alleging conspiracy to conceal fraud, could have led to additional evidence regarding events that occurred after the deal. The judge separated this count from the others and said that it would not be heard at the trial beginning on Monday.

Breyer’s comments on Lynch’s assertion that HP used him as a scapegoat to cover up its own mismanagement were: “I don’t have an opinion whether this is correct.” I have an opinion about whether it is coming into this case or not, and it is not.

He said: “There is no such thing as hindsight fraud.” It happened or it didn’t happen as of the dates alleged. “If it didn’t happen, then what he did afterwards makes no difference.”

Lynch’s plan to testify in his defence has been complicated by the ruling. His lawyers claimed that much of the case hinged on his account of what he did after the deal, which they said would have been impossible if he had committed fraud. The lawyers still want to introduce some post-acquisition proof, but Judge Breyer has said that it will only be permitted on a limited basis and after he has had the chance to review Lynch’s responses to specific questions.

According to US charges, Lynch and Chamberlain artificially inflated Autonomy’s revenues by engaging in round-trip agreements in which customers are compensated for fake software purchases. According to the US charges, Lynch and Chamberlain artificially inflated Autonomy’s revenues by backdating sales and engaging in round-trip deals where customers were compensated for fake purchases of Autonomy software.

It is likely that the prosecution’s case will be heavily reliant on witnesses who were involved in Autonomy at that time. Christopher Egan was the former US head of Autonomy. He reached a deferred prosecutor agreement with prosecutors, and agreed to testify.

The US Prosecutor’s Office plans to call Joel Scott to testify regarding Lynch’s involvement with the firing of a whistleblower that tried to expose the alleged fraud.