Accounts whistleblower blackmailed Autonomy for a payoff, Mike Lynch tells High Court
And yet his pre-HP buyout allegations got UK finance watchdogs sniffing
Autonomy Trial Former Autonomy CEO Mike Lynch has accused the financial director who brought an internal accounting scandal to his attention of trying to blackmail the software company – and denied suggestions he tried to find a pretext for sacking the beancounter.
In courtroom exchanges with barrister Laurence Rabinowitz QC, Lynch described Brent Hogenson as "trying to hold the company to blackmail" over his internal whistleblowing about Autonomy's accounting practices.
Lynch also accused Hogenson of having carried out a "payroll fraud" by giving "half a million dollars to obscure organisations without any justification or following procedures" as he was questioned in London's High Court about his response to the US CFO's communications with him in July 2010.
As reported earlier this week, Hogenson was the man who initially reported to Lynch and then to auditors Deloitte that something seemed wrong in Autonomy's accounting, a year before the company's disastrous purchase for $11.8bn by Hewlett Packard, as was.
Alleging Lynch had tried to silence Hogenson and shut down his whistleblowing attempts, Rabinowitz, who is barrister for HPE in its $5bn lawsuit against Lynch, asked the ex-CEO: "You were beginning to see that you could not get Mr Hogenson to back down and you decided you were going to have to get him thrown out of the company, correct?"
"Not at all," replied Lynch, explaining that Hogenson had been "wiping his computers" during "a criminal investigation" and going on to accuse him in court earlier this week of insider trading. He also confirmed that private investigation firm Kroll was brought in by Autonomy to investigate Hogenson. Kroll "didn't identify any evidence" of Hogenson being involved in payroll fraud and neither did a second firm brought in by Autonomy.
After being summarily demoted to serve under Autonomy finance veep Joel Scott and his office moved 50 miles from San Jose to San Francisco, Hogenson was sacked in July 2010. Lynch claimed in court that Hogenson had only blown the whistle as a smokescreen for finance irregularities that happened on his watch, with a view to extracting "a suitable payout" from Autonomy.
Hogenson eventually won a $750,000 settlement – but his letters to auditors and regulators eventually triggered the interest of the UK's Financial Results Reporting Panel (FRRP), an accounting watchdog.
Financial watchdog bites
Rabinowitz accused Lynch of having authorised Autonomy to lie to the FRRP in early 2011 over a previous deal with pharma megacorp Eli Lilly. Once the FRRP told Lynch's firm it was considering whether to stick a probe into Autonomy's books, the company wrote back to address the FRRP's concerns.
"Let me ask you this," Rabinowitz said to Lynch.
If you really believed that there was nothing wrong about an arrangement whereby [Autonomy reseller] Capax Discovery submitted a purchase order [to Autonomy] but then had nothing to do with negotiations with the end user, which were carried on exclusively by Autonomy, why didn't you simply set out the truth of it in this letter?
Lynch replied: "We didn't believe it to be a requirement in the accounting. I assume the fact that Deloitte were happy to approve this without checking that [I] didn't think that they believed it to be a requirement in the accounting."
HPE's case is that Capax Discovery was only a profitable company because Autonomy secretly funnelled it cash to repay its debts to Autonomy. Rabinowitz previously told the court that Capax Discovery's parent company, Capax, had suggested it would not guarantee Capax Discovery if the latter ran into financial trouble. HPE argues that Capax Discovery was part of a revenue-generating carousel run for the benefit of both Autonomy and its own parent company. Lynch denies that this was the case.
Gone but not gone away
Continuing his theme that Autonomy was misleading the FRRP, Rabinowitz later suggested the reason for Autonomy stalling over precise details of the Eli Lilly deal "was because you could not tell the regulator the truth because you knew it would mean that the false accounting on which Autonomy had been engaged would be discovered".
The FRRP still has open investigations into Sushovan Hussain, Lynch's CFO during his time at Autonomy and a co-defendant in the trial; Stephen Chamberlain, former Autonomy finance veep; Deloitte LLP; and its auditors Richard Knights and Nigel Mercer.
The investigations are on ice while the High Court's Autonomy trial continues. The case is now formally acknowledged to be overrunning into January 2020, as El Reg predicted a little while ago, at a cost of £4m per month. ®