SAN FRANCISCO (CN) – Two former Autonomy Corporation executives were indicted in San Francisco on Thursday for allegedly defrauding company shareholders, after an $11 billion acquisition by computer hardware firm HP vaporized billions of dollars in shareholder value amid revelations of accounting irregularities by Autonomy.
A federal grand jury returned a 14-count indictment against Autonomy's former chief executive Michael Lynch and its former Vice President for Finance Stephen Chamberlain on charges they inflated the British software company's financial position in part to make it "more attractive to a potential purchaser like HP."
According to the indictment, Lynch, 53, Chamberlain, 46, and others met in 2011 with executives from HP to discuss a potential acquisition of Autonomy. Shortly after, the group gave HP false and misleading financial statements and made false and misleading statements directly to HP about Autonomy’s financial condition during the negotiations leading up to the August 2011 acquisition announcement.
A press release by HP announcing the deal called Autonomy's recent operating and financial performance "strong," according to the indictment. In the press release, HP also touted Autonomy's "consistent track record of double-digit revenue growth, with 87 percent gross margins and 43 percent operating margins in calendar year 2010," reflecting the success of Lynch's and Chamberlain's allegedly fraudulent accounting practices.
These practices included backdating agreements to record revenue in prior periods, making false and misleading statements to Autonomy’s independent auditor and regulators about the company's revenue transactions and financial statements, and intimidating and paying off employees who complained about its accounting practices, the indictment alleges.
Within a year of the $11 billion acquisition, HP was forced to write down $8.8 billion of Autonomy's value after discovering accounting irregularities by the company's executives. HP's shareholders lost billions of dollars in value, torpedoing the Palo Alto, California-based firm's attempted move into software, The Guardian reported.
In an emailed statement, Lynch's attorneys Chris Morvillo and Reid Weingarten likened the claims to "a business dispute over the application of U.K. accounting standards" and accused HP of "scapegoating" Lynch for the failed deal.
"There was no conspiracy at Autonomy and no fraud against HP for the [Department of Justice] to take up," they said. "HP has a long history of failed acquisitions. Autonomy was merely the latest successful company it destroyed. HP has sought to blame Autonomy for its own crippling errors, and has falsely accused Mike Lynch to cover its own tracks."
Morvillo practices with Clifford Chance in New York, and Weingarten with Steptoe & Johnson in New York and Washington.
If convicted, Lynch and Chamberlain face up to 20 years in prison and a $250,000 fine, plus restitution, for each of 13 counts of wire fraud and one count of conspiracy.
"The indictment filed today merely alleges that crimes have been committed, and the defendants are presumed innocent until proven guilty beyond a reasonable doubt," the Justice Department said in a press release announcing the charges Thursday.
A Justice Department spokesman did not immediately reply to an email seeking comment Thursday evening. HP also had no immediate comment.
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