HP Readies $5 Billion Trial Against Autonomy Founder Mike Lynch

Jonathan Browning (Bloomberg) -- Faced with a U.S. indictment, British tech supremo Mike Lynch had a simple choice: Focus on the criminal trial—with a possible sentence of 20 years in prison—or fight a civil lawsuit first.

The former Autonomy Corp. chief executive officer chose the latter, surprising many including those at Hewlett Packard Enterprise Co., which brought the $5.1 billion suit and believed he’d fight the American charges first. “We’d rather get on with it,” Lynch said in January.

The nine-month trial between HP and Lynch is set to start Monday in London’s High Court, with at least three ex-CEOs expected to testify. The computer giant has accused Lynch of being the architect of a massive accounting fraud at Autonomy, once the U.K.’s second-biggest software company. Lynch counters by saying that HP, which under Meg Whitman pulled a U-turn on its software ambitions, simply ran his firm into the ground.

Autonomy was HP’s “unwanted stepchild,” Whitman is alleged to have told her senior management.

The case centers on HP’s 2011 purchase of Autonomy for $10.3 billion, a 60 percent premium to its share price. Lynch himself made $815 million from the deal and his reputation prospered, with appointments to advise the government and a new career as startup investor soon following.

All that fell apart when HP took an $8.8 billion writedown of the business just a year later. Whitman, the newly appointed boss at HP, accused Lynch of misstating Autonomy’s financial performance. The Palo Alto, California-based company has pursued the executive ever since, culminating in the current lawsuit that has already encompassed more than 100 million pages of documents.

The Key Players

US Charges

For Lynch, the decision to fight the British lawsuit first was taken against the backdrop of the swift conviction of his longtime Chief Financial Officer Sushovan Hussain in April. The U.S. has filed similar charges against Lynch, saying he used false and misleading statements from 2009, 2010 and early 2011 “to make Autonomy more attractive to a potential purchaser like HP,” according to the indictment.

But staying in Britain means that Lynch could be served with an American extradition request in the middle of the civil trial, something his legal team is already preparing for. Lynch has repeatedly sought to maintain that the dispute is solely about a British company operating under U.K. law and doesn’t belong in the U.S.

The case will focus on HP’s allegations that Lynch and Hussain, who is also a defendant, oversaw accounting practices that artificially inflated Autonomy’s sales. The software firm sold around $200 million in loss-making hardware, something that HP’s lawyers have argued should have been fully disclosed. The way in which Autonomy packaged its services with other resellers and then booked revenue is also likely to come under scrutiny – with HP calling them “contrived.”

Lynch isn’t an accountant and had “little involvement in the day-to-day detail,” his lawyers said in their most recent filing.

Lynch has countersued HP for $160 million, saying that he suffered significant reputational damage that led to private equity funds dropping proposed investments in his new fund Invoke Capital, he said.

With the Autonomy deal, the storied computer maker’s then-CEO, Leo Apotheker, sought to transform itself into a higher-margin software firm to rival Oracle Corp. Lynch’s argument is that HP under Whitman reversed course and failed to integrate Autonomy correctly, causing the wipeout in value.

HP was beset by political infighting following the Autonomy deal, Lynch said. In one email to Whitman in February 2012, he asked if she would appoint a “craziness Czar” to deal with all HP’s processes. “Someone needs to start shutting them down.”

HP’s legal case, he said, is a “culmination of a campaign” by the company to deflect and shift blame onto him and his associates for a deal it shouldn’t have done.