British technology company Autonomy entered into millions of dollars worth of “contracts” to pay customers to buy its software, a jury heard in the fraud trial of its co-founder Mike Lynch.
Lynch, who co-founded and ran Autonomy, pleaded not guilty to 16 counts of wire fraud, securities fraud and conspiracy. He was accused of orchestrating a major fraud before Hewlett-Packard’s grand takeover of the company in 2011.
Since his criminal trial began Monday in San Francisco, federal prosecutors have alleged that Autonomy used “various accounting tricks” to inflate its revenue growth. This involved so-called “kickback” deals, they claim, where customers were paid money so they could actually pay back Autonomy, in seemingly unrelated deals.
During opening statements at the trial, Assistant US Attorney Adam Reeves used a hypothetical example of a company paying a customer $110, with the expectation that the company would get $100 back in the form of a purchase. “Add a few zeros,” he said, “and that’s what Autonomy was doing.”
On Thursday, the government subpoenaed John Baiocco, CEO of Capax Global, a New Jersey-based company that worked with Autonomy. He described how, beginning in 2009, Autonomy offered to “finance” Capax’s purchase of its software.
“A software seller pays a software buyer?” Reeves asked. “Yes,” replied Baiocco, who said it was part of a “handshake deal.” In total, there were about 10 such deals, he testified, worth millions of dollars.
Capax would charge Autonomy for offering “services” related to the software it bought, Baiocco said. Asked if Capax had indeed performed such services “at any time,” Baiocco replied, “No.”
When Capax received the money from Autonomy, Baiocco said the company would return the funds and pay the British software company “pretty much the next day.”
Federal prosecutors alleged that Autonomy used such schemes to boost its revenue and boost its growth — impressing investors and, ultimately, HP.
Chris Morvillo, Lynch’s attorney, noted that Baiocco did not mention Lynch during questioning by prosecutors. Baiocco said he met him “maybe once or twice.”
Capax also sold Autonomy software to other companies. Baiocco testified under Morvillo’s questioning that, in the event that one company failed to make the purchase, Autonomy agreed by agreement to help Capax sell the software to the other.
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Asked if his “legal relationship” with Autonomy still required Capax to pay for the software if the acquisition by another company failed, Baiocco said that was correct. When one such deal, with McAfee, fell through, Baiocco said Capax paid for the software “with our own money.”
One former Autonomy executive the government mentioned during Baiocco’s cross-examination—and spoke to directly—was Steve Chamberlain, Lynch’s co-defendant. Chamberlain, who was vice president of finance at Autonomy, pleaded not guilty to 15 counts of fraud and conspiracy.
Chamberlain’s lawyers showed emails their client sent to Baiocca in October, November and December 2009, checking the status of Capax’s debts to Autonomy. They also showed a message Baiocco sent to another Autonomy executive, complaining that Chamberlain was “harassing” him.
Baiocco was the third witness to testify at the trial. The first two, Ganesh Vaidyanathan and Reena Prasad, worked in Autonomy’s finance department in the US. Prasad told the court how she and one of her managers were fired after raising questions about accounting irregularities.
The trial continues on Monday.