Mike Lynch verdict a milestone in British civil fraud
It took Mr Justice Hildyard over two years to come to a ruling on Hewlett Packard’s civil fraud claim against Autonomy’s founder and CEO Mike Lynch, yet when it came last week it could hardly have been more unequivocal. In brutal detail, he spells out how Lynch and his finance director comprehensively misled the stock market, the company’s auditors, and HP itself prior to the bid by the US company.
Observers of the decade-long fight were hardly surprised to learn the next day of Lynch’s intention to appeal, but the detail and the number of instances which were found against him make success in overturning the ruling a very distant prospect. On the same day the Home Secretary ruled that he could be extradited to the US to face criminal charges relating to the takeover in 2011. He is appealing that decision, too.
There is no doubt that the $11bn cash takeover was a disaster for HP shareholders, and this remains the central puzzle of the case. The price was at an 80 per cent premium to Autonomy’s then market price, and HP shares slumped by a quarter on the day. The deal was described by Paul Morland, an analyst at brokers Peel Hunt, as “a truly golden offer.” In effect, he indicated that Autonomy shareholders should hardly believe their luck. Along with Daud Kahn at JP Morgan, Morland had been relentless in attacking Autonomy’s accounting, and the curious acquisition of part of Iron Mountain, “a business in decline that is not currently profitable.” Autonomy was the most shorted stock in the FTSE100 when the bid came.
Two serious analysts trying to make sense of a business that few outsiders could really claim to understand? Two flapping red flags, which was surely sufficient on its own to discourage paying $11bn for a business valued in the market at $6bn. Autonomy shareholders stampeded to accept, and things started to fall apart almost immediately. HP’s CEO was out within months, and the company now wants $5bn of the purchase price back from Lynch.
It may have quite a wait, and the judge made it clear that $5bn is a fantasy number. Given his reputation for tenacity, it is understandable that Lynch is still fighting hard. His team runs a website which details his side of the case at almost the length of James Joyce’s Ulysses, and is about as comprehensible. It is of little help to those of us who are still struggling to define exactly what it is that Autonomy does, or did.
It reflects great credit on Sir Robert Hildyard that his ruling has turned this mass of lawyer-speak into prose which normal mortals can understand, while the case itself is truly a milestone in British civil fraud. It took 93 days, 58 witnesses, 11m documents, 30 lawyers and cost over £40m. Thanks to his proceeds of HP’s golden bid, Lynch can afford to fuel the legal gravy-train for years yet, even if he keeps on losing. Endless courtroom battles was hardly his career choice, but paying damages followed by extradition to a US gaol is a good deal worse.
Nearly free money at Lloyds
If you are quick, and have plenty of equity in your house, you can remortgage with Lloyds Bank at an interest rate of 1.66 per cent, fixed for 10 years. In the week when the Bank of England’s sluggish Monetary Policy Committee cranked another few basis points onto Bank Rate, the contrast between the cost of domestic mortgages and that in the world outside this bubble could hardly have been more acute.
Had Lloyds just decided to put the money into a “risk-free” 10-year UK government stock, it could make a guaranteed 1.35 per cent a year over the next decade. Had it found a better use for the money during that time, the trade could be effortlessly unwound, while the mortgage is illiquid and of unknown duration.
There are surely many better ways for the UK’s biggest domestic bank to deploy its assets, and of course there are. Many businesses are desperate for money as they struggle to recover from the financial disaster of Covid. Lloyds is always telling us how it is helping some of them, but the price is far removed from 1.66 per cent for 10 years.
This is not entirely the fault of nervous bankers trying to price for commercial risks they don’t understand. The rules oblige them to set aside far more capital against business loans than against domestic mortgages, so what looks like price gouging to the hapless commercial borrower may end up as only marginally profitable for the bank.
Mortgages, by contrast, are treated as if they are risk-free, and thanks to the British belief that house prices only ever go one way (up 10 per cent in the last year on the Halifax index) the banks all want to provide loans. Well, maybe they are right, and house prices can go on indefinitely separating the property haves from the have-nots. One day a serious rise in interest rates could bring this escalator to a halt, or even put it into reverse. In the meantime, if you qualify for the Lloyds mortgage, get it while you can.
It’s a hapless case
Once upon a time, when we were all even more naive, we were told of the munificent benefits that a new rail line from London to the north would bring. Look how much time you would save, travelling from Birmingham to London on HS2! Then it was pointed out that the saving might be 15 minutes on a good day, and had nobody heard of the mobile internet?
Ah, no, we really need HS2 because the existing lines are full. It will free up much-needed capacity for other trains using bits of the existing route, so on the project went, at almost unimaginable cost (over £100bn and counting) and causing widespread misery along the route.
That was then, this is now. Suddenly Great British Rail has so much capacity following the pandemic that rail services are being slashed to try and stem the losses of traffic and revenue. In between trying to cull those patronising announcements, transport secretary Grant (“Hapless”) Shapps explains that the taxpayer is now paying too much of the cost, so there must be cuts. On the ball as ever, he has also noticed that there are 75 different types of train in operation on the network. Something must be done. After all, if HS2 ever gets into operation, that would make 76.