Since the beginning of the week, the stock price of cyber security firm Darktrace has dropped by about a fifth due to a short seller’s allegations of possible accounting errors at one of the UK’s largest tech companies.
Tuesday saw the release of a lengthy report by Quintessential Capital Management that made allegations of possible irregularities in contracts with resellers and customers, most of which predated Darktrace’s public listing in 2021.
The New York-based hedge fund referenced Darktrace’s ties to Autonomy, a software company based in the United Kingdom. When Autonomy sold to Hewlett-Packard in 2011 for $11.7 billion, the company was accused of engaging in questionable accounting practises.
Following Monday’s disclosure of Quintessential’s short position, the company’s share price dropped by 12%. Following the report’s release on Tuesday, the stock price dropped another 8%, to a low of 200p.
In a public statement
Darktrace claimed that it had never been contacted by the researchers who wrote the Quintessential report.
There was an expression of trust in the “integrity of our independently audited financial statements” and “reasonableness” of the company’s accounting procedures. It went on to say, “We have rigorous controls in place across our business to ensure we comply fully with IFRS accounting standards.”
According to a statement provided to the Financial Times by Darktrace, “neither Darktrace nor any of its acting executives has ever been the target of these litigation proceedings.”
After cutting its full-year revenue forecast and warning that difficult macroeconomic conditions were having an impact on customer growth, the cyber security company’s share price fell more than 14% this month.
Due in large part to its ties to Autonomy, Darktrace has been met with scepticism for close to a decade, and the allegations presented by Quintessential only serve to add to this.
In November 2012, Hewlett-Packard took a $8.8 billion writedown on its acquisition of Autonomy due to allegations that the company had engaged in fraudulent accounting practises in order to artificially inflate the value of the business prior to its sale in 2011.
Sushovan Hussain, formerly Autonomy’s CFO and currently serving time in a US prison for fraud related to the sale of Autonomy to HP, and Nicole Eagan, formerly Autonomy’s CMO and chief strategy officer, have both served in roles or been linked to Darktrace.
Darktrace was founded by Eagan and current CEO Poppy Gustafsson, who was formerly the corporate controller at Autonomy, with seed money from Lynch, who had previously led Autonomy.
After the High Court ruled in 2022 that Lynch and his finance director had defrauded HP by inflating Autonomy’s accounts to increase the company’s value, Lynch has been fighting extradition to the United States to face fraud charges. He has refuted the charge against him.
Darktrace investors have griped for a long time about the company’s unfair association with Autonomy.
Before changing its mind in early September, US-based technology private equity firm Thoma Bravo had been considering a purchase of Darktrace to add to its growing portfolio of cyber security investments made over the course of the previous year.
Shadowfall, a hedge fund, has a public short position on Darktrace because, among other things, it believes the company overestimates the size of its potential customer base and underspends on R&D in comparison to its competitors.