The share price of cyber security group Darktrace has dropped by about a fifth since the start of this week after a short seller alleged potential accounting errors at one of the UK’s biggest tech companies.
Quintessential Capital Management published a detailed report on Tuesday making claims about potential irregularities in contracts with resellers and customers, predominantly dating from before Darktrace’s public listing in 2021.
The New York-based hedge fund pointed towards connections between Darktrace and Autonomy, the UK software company with which Darktrace shares many ties. Autonomy was accused of irregular accounting practices relating to its $11.7bn sale to Hewlett-Packard in 2011.
The company’s share price fell 12 per cent when Quintessential first disclosed its short position on Monday. The shares then fell a further 8 per cent on Tuesday after the report was published, down to 200p.
Darktrace said in a public statement that it had never been contacted by the authors of the Quintessential report.
It said the company had “full confidence” in its accounting practices and the “integrity of our independently audited financial statements”. “We have rigorous controls in place across our business to ensure we comply fully with IFRS accounting standards,” it added.
“Neither Darktrace nor any of its acting executives has ever been the target of these litigation proceedings,” Darktrace told the Financial Times.
The cyber security group’s share price had already fallen more than 14 per cent this month after it cut its full-year revenue forecast, warning that challenging macroeconomic conditions were having an impact on customer growth.
The allegations presented by Quintessential add to the scepticism that has surrounded Darktrace for close to a decade, in large part because of its links to Autonomy.
Autonomy was alleged to have used false accounting practices to overinflate the value of the business ahead of its 2011 sale to Hewlett-Packard, which the US tech giant said was the reason behind its $8.8bn writedown of Autonomy in November 2012.
Former Autonomy executives have served in roles or been linked to Darktrace, including Sushovan Hussain, the former chief financial officer now serving a prison term in the US after being found guilty of fraud relating to the sale of Autonomy to HP, and Nicole Eagan, chief strategy officer at Darktrace who was Autonomy’s chief marketing officer.
Eagan helped set up Darktrace with the current chief executive Poppy Gustafsson, previously Autonomy’s corporate controller, using funds in part from former Autonomy chief Mike Lynch.
Lynch is battling against extradition to the US to face fraud charges after the High Court found in 2022 that he and his finance director defrauded HP by manipulating Autonomy’s accounts to inflate the value of the company. He has denied the accusation.
Shareholders in Darktrace have long complained that the company has been unfairly linked with Autonomy.
Last year, Thoma Bravo, a US-based technology private equity group, flirted with acquiring Darktrace to add to its growing portfolio of cyber security investments, but changed its mind in early September.
The hedge fund Shadowfall also has a public short position on the company, claiming Darktrace overestimates its potential customer base and underspends on research and development compared with its peers.