Long Read: advice is no defence

In this month’s first Long Read, Contributing Editor Allan Foad considers a classic case of irresistible force meeting immovable object: Hewlett Packard v Lynch and Hussain.

Allan Foad writes: Up until now, I think all the frauds that I have written about have been adjudicated in the criminal courts, but that is not always the case. Many are heard in the civil courts, and the fraud I am about to write about was contested in both, with conflicting results.

The case in question centres on the acquisition of Autonomy, a FTSE 100 company based in Cambridge, by Hewlett Packard in 2011. After the takeover HP realised that it had been provided with falsified information that misrepresented the business it bought and it sought redress.

Autonomy was founded in 1996 with Dr Michael Lynch as its Chief Executive. It focused on devising ways to search unstructured sources such as phone calls, emails and videos for information that can be used to other peoples’ advantage. It sounds very sinister but it must have been a legitimate activity. Autonomy grew exponentially in value and raced up the FTSE index. It was the jewel in Neurodynamics’ crown and Lynch was being heralded as Britain’s answer to Bill Gates in Silicon Fen. 

For many years HP had been struggling to keep its footing in the technology market and it was looking for a business that would lift its fortunes. In 2011 it made an approach to Autonomy and a deal was agreed. The sale completed in October for $11 billion and it is thought that Lynch pocketed $800 million.

The following year, HP realised it had bought a dud identifying “serious accounting improprieties, disclosure failures and outright misrepresentations”. It was forced to write down the value of its investment by $8.8 billion and it fired its chief executive, Leo Apotheker. Lynch and his finance director, Sushovan Hussain vigorously denied HP’s accusations.

HP pursued its complaints through the English legal system and they were taken up by the Serious Fraud Office which, after a prolonged investigation, decided in 2015 there was insufficient evidence to support HP’s claims. It ceded the investigation to the authorities in the US, specifically the FBI, who clearly dug deeper and in 2018 Lynch and Hussain, together with Stephen Chamberlain, who worked as a finance officer under Hussain, were indicted to stand trial in the US. Lynch and Chamberlain resisted extradition but, for reasons I have been unable to discover, Hussain opted to stand trial.

Hussain was charged with sixteen counts covering conspiracy, wire fraud, and serious fraud and accused of using sophisticated accounting methods to falsely inflate Autonomy’s revenues and profits. He produced a picture of a company growing much faster than it actually was, and brought forward future income even though it was not invoiced or contracted. He concealed the fact that Autonomy’s hardware company was loss-making. Instead, he made it appear profitable.

Hussain was found guilty and sentenced to five years in prison. He was also fined $4 million and had assets to the value of $6 million forfeited. He went to jail in 2019.

Back in the UK, HP took out a civil action against Lynch and Hussain, suing them for damages of $5 billion under the Financial Services and Markets Act 2000. The case came to court in 2021 and the judge found in favour of HP.

The judge ruled that whilst HP was remiss in not undertaking meaningful due diligence it was still entitled to rely on information supplied to it by Lynch and Hussain. He also ruled that it was not a defence for the defendants to claim they were acting on the advice of other professionals.

In 2022, after a hearing of 93 days, the judge said that damages would be awarded to HP but for a much lower figure than it was claiming. Meanwhile, as the civil action was taking place, Lynch was fighting extradition. Appeals failed, and in 2023 Lynch and Chamberlain were flown to the US where they were kept under house arrest.

The case went to court in March 2024 and Lynch and Chamberlain were charged with the same offences as Hussain. Lynch’s defence was that at the time of the sale to HP he focused on the technological aspects and left the financial ones to the finance team. The trial lasted for eleven weeks and, to the surprise of many, the jury returned not guilty verdicts for both Lynch and Chamberlain. 

Both men returned jubilant to the UK in June and then both men met with tragic ends within a few days of each other. On 17 August Chamberlain was out jogging on a road near his home outside of Cambridge when he was hit by a car, dying in hospital three days later. Two days after that, Lynch was on his super-yacht moored off the coast of Sicily when it was hit by a freak weather event and overturned. He had been celebrating his acquittal with his defence team. 

Both deaths appear to be the result of freakish accidents but I suspect conspiracy theorists will make more of them in the years to come. 

It all goes to demonstrate the importance of undertaking full due diligence when making acquisitions and the likelihood that accounting falsifications will be found out if properly investigated. 

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