Lawyers for Mike Lynch sought to highlight the differences between British and American accounting standards as they defended him against allegations of orchestrating a “massive” fraud over many years.
Mr Lynch, who founded and led British software company Autonomy, is fighting to avoid prison after US federal prosecutors indicted him on 16 counts of wire fraud, securities fraud and conspiracy. His criminal trial began Monday in San Francisco.
Autonomy was acquired by Hewlett-Packard in 2011 for $11.1 billion (approximately £8.72 billion), but HP reduced the purchase price by $8.8 billion and falsely accused Autonomy of “serious accounting irregularities.” It soon became clear that they had insisted on displaying the information.
Lynch was indicted by a federal grand jury in November 2018 and extradited to the United States in May 2023, where he has pleaded not guilty.
The U.S. government began developing its case against Lynch this week, subpoenaing Ganesh Vaidyanathan, the former accounting director of U.S. Autonomy, as its first witness.
Under questioning from prosecutors, Vaidyanathan testified about potential accounting issues that he first raised internally in 2010. He said he felt there was a disconnect between what Autonomy told investors about the business and reality.
During cross-examination, Lynch’s attorney Brian Heberlig said that Interwoven, where Vaidyanathan previously worked, is a San Jose, Calif.-based company that complies with U.S. standards and generally accepted financial reporting. It was pointed out that the standard was used. Accounting Principles, or GAAP.
In 2009, the American company Interwoven was acquired by the British company Autonomy, which is listed on the London Stock Exchange. Vaidyanathan remained with Autonomy, which uses a different accounting standard known as International Financial Reporting Standards (IFRS).
Mr. Lynch’s lawyer, Mr. Heberlig, said that Mr. Vaidyanathan, who had expressed concerns about the issues he had raised within Autonomy, was not as familiar with IFRS (the financial reporting framework used by the company) as he was with accounting standards (GAAP). He suggested that it might be.
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The government alleges that Autonomy used so-called “round trip” arrangements with customers to inflate its profits by effectively paying customers to refund their money. Citing a hypothetical example in which a company paid a customer $110 and was refunded $100, Assistant U.S. Attorney Adam Reeves said Monday: “Add some zeros. That’s what Autonomy does. “It’s true.”
Mr Heberlig asked Mr Vaidyanathan about the specific IFRS principles that determine whether two transactions between entities are sufficiently related. “You yourself don’t really know what those standards are,” Heverlig said. “No,” Vaidyanathan replied.
The government later summoned another witness, former municipal finance official Leena Prasad. The interrogation of Mr Vaidyanathan is scheduled to resume on Wednesday.
