Lawyers for Mike Lynch tried to highlight differences between UK and US accounting standards as they defended the British businessman against allegations he orchestrated a “massive” years-long fraud.
Lynch, who founded and led Autonomy, a UK software firm, is fighting to avoid prison after federal prosecutors in the US charged him with 16 counts of wire fraud, securities fraud and conspiracy. His criminal trial started in San Francisco on Monday.
Autonomy was bought by Hewlett-Packard in an $11.1bn (£8.72bn) takeover in 2011, which quickly unraveled after HP wrote down the value of its purchase by $8.8bn and alleged “serious accounting improprieties” and misrepresentations at Autonomy.
Lynch, who was indicted by a federal grand jury in November 2018 and extradited to the US in May 2023, has pleaded not guilty.
As the US government started building its case against Lynch this week, it summoned Ganesh Vaidyanathan, a former accounting director at Autonomy in the US, as its first witness.
Questioned by prosecutors, Vaidyanathan testified about potential accounting issues he first raised inside the company in 2010. He said he had seen a disconnect between what Autonomy told investors about its business, and the reality.
During cross-examination, Brian Heberlig, an attorney for Lynch, noted that Interwoven, where Vaidyanathan had previously worked, was a San Jose, California-based company which – in line with the US norm – had used financial reporting standards known as generally accepted accounting principles, or GAAP.
In 2009, Interwoven, a US company, was acquired by Autonomy, a UK firm listed on the London stock market. Vaidyanathan stayed on to work at Autonomy, which used different accounting standards known as international financial reporting standards, or IFRS.
Heberlig, Lynch’s attorney, suggested that Vaidyanathan – who had raised concerns about issues he identified within Autonomy – was not as familiar with IFRS, the financial reporting framework it used, as he was with GAAP.
The government has claimed that Autonomy used so-called “round trip” arrangements with customers, whereby it paid them money effectively so they could pay it money back, to inflate its revenues. Using a hypothetical example of a firm paying a customer $110 so that it paid $100 back, on Monday the assistant US attorney Adam Reeves said: “Add a few zeroes, and that is what Autonomy was doing.”
Heberlig questioned Vaidyanathan about the specific IFRS principles that determined whether two deals between companies were sufficiently linked. “You yourself are not familiar with what those standards are,” said Heberlig. “No,” replied Vaidyanathan.
The government later called another witness, the former Autonomy finance worker Reena Prasad. Questioning of Vaidyanathan is due to resume on Wednesday.
