Autonomy founder Lynch was scapegoat for HP's incompetence, court told

By Georgina Prodhan and Paul Sandle

LONDON (Reuters) - Hewlett-Packard botched its $11.1 billion (8.41 billion pounds) acquisition of Autonomy and then tried to cover up its own mismanagement by accusing the British software company's founder Mike Lynch of fraud, a London court was told on Wednesday.

HP is suing Lynch, once hailed as Britain's answer to Bill Gates, along with his former finance chief Sushovan Hussain for more than $5 billion after the 2011 Autonomy deal went disastrously wrong for the Silicon Valley group.

Lynch denies any wrongdoing and says HP's mismanagement was responsible for the failure of the acquisition. Hussain also denies any wrongdoing.

HP wrote down the value of Autonomy by $8.8 billion, saying it had uncovered serious accounting improprieties. HP is suing Lynch and Hussain for $5 billion of that amount making the case Britain's biggest-ever fraud trial.

HP's lawyers told the court when the case opened this week that Autonomy had inflated its true value through a series of fraudulent transactions, such as selling hardware at a loss and so-called round-trip deals - a type of barter with no real commercial rationale - masterminded by Lynch.

In his opening argument for Lynch's defence, Robert Miles QC said HP had only discovered a small number of historical deals which were said to have some or other wrongful feature, despite spending several years and huge sums of money on its search.

"All the deals now attacked were real commercial deals with real counterparties. The suggestion that Dr Lynch was in the business of conning HP is unreal," he told London's High Court.

"HP, on the other hand, was a vast but floundering company."

Lynch also faces criminal fraud charges in the United States, which carry a maximum term of 20 years. Hussain has been convicted of fraud in a U.S. case related to the deal.

STRATEGY REVERSAL

A year after acquiring Autonomy, HP threw out Chief Executive Leo Apotheker, the architect of the deal which was supposed to transform the computer and printer maker, one of Silicon Valley's original companies, into a more profitable group centred on business software and services.

Apotheker was replaced by Meg Whitman, who planned to refocus the company on its core hardware strengths after an outcry from shareholders over the new strategy and a steep decline in HP's share price.

"Autonomy was left as HP's unwanted stepchild," said Miles.

Both Apotheker and Whitman are expected to appear as witnesses in the London trial.

As the case opened on Monday, HP's lawyer Laurence Rabinowitz QC said the U.S. company had been led to believe it was buying a fast-growing, pure software company.

He told the court that Lynch and Hussain had knowingly been involved in "widespread and systematic false accounting" to create a materially false picture of Autonomy's finances.

Autonomy had engaged in "revenue-pumping" by encouraging customers to buy its products in exchange for buying goods from them that it did not need, restructuring deals to produce upfront licence fees, and covertly selling pure hardware not even programmed with its software at a loss, Rabinowitz said.

Lynch's lawyer told the court that it was absurd to think the 53-year-old was making detailed, day-to-day accounting decisions. Rather he relied on a finance department overseen by an audit committee and the company's auditors, Miles said.

Miles also said it was impossible to understand why Lynch would have taken an executive position at HP after the deal if he really had committed a huge fraud with the U.S. company as its victim.

"The case that we're now hearing being advanced entails that Dr Lynch must have been monumentally dim and, as you'll see, there's no chance that he is," Miles said.

Lynch attended the court session but is not expected to be questioned until around July.

Miles also told the court that the $5 billion figure for which Lynch and Hussain are being sued was not based on HP's own commissioned audits, which had not found a basis for writing down Autonomy in the months after the acquisition.

Hewlett Packard Company in 2015 split into two separate publicly traded companies - HP Inc. and Hewlett Packard Enterprise.

The case is expected to last until the end of the year.

(Editing by Jane Merriman)