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Advice for Darktrace: don’t complain, just explain

Advice for cybersecurity firm Darktrace as it finds itself under attack from short-sellers: don’t rely on airy “nothing to see here” statements. If you want to shore up investors’ confidence when a New York hedge fund is questioning your accounting in a lengthy report, you usually have to get into the gritty business of point-by-point rebuttal.

Darktrace’s response on Tuesday to an outfit called Quintessential Capital Management fell into the boilerplate category. The company said it had “full confidence” in its accounting practices and financial statements, and that its board and management take their fiduciary responsibilities “very seriously”. All standard stuff, in other words.

More detail must follow. The reality of stock market life is that it is pointless to complain that you weren’t contacted by the report’s authors, which was another line offered by Darktrace. The market only wants to know what you have to say about the specific allegations.

The stakes are high at Darktrace because of the shared corporate roots with Mike Lynch and Autonomy, the London-listed software firm that was sold to Hewlett-Packard in 2011 for $11bn in a deal that led to a six-year civil fraud case in the UK. Lynch, who with his wife is also a big shareholder in Darktrace, is fighting extradition to the US to answer criminal fraud charges; he denies the accusations.


But the shadow of Autonomy only emphasises the need for a detailed response to Quintessential Capital by Darktrace. The hedge fund may be talking nonsense but the onus falls on the company to demonstrate as much – presumably with the assistance of its auditors, Grant Thornton. Chief executive Poppy Gustafsson should consider the upside of a successful and transparent defence. She might silence the persistent City whispering around the cyber firm’s very high sales and marketing expenditure, which was one focus of the hedge fund’s report.

One hopes senior figures on Darktrace’s board – chair Gordon Hurst, ex-Capita; Sir Peter Bonfield, former chief executive of BT; David Willetts, former Conservative education minister – take the grown-up approach. Short-sellers aren’t a minor irritant that can easily be swatted away or ignored – or not always. They have to be taken seriously.

Quintessential Capital itself may have a low profile but others in the short-selling game were more prominent around corporate blow-ups such as former FTSE 100 firm NMC Health and, famously, German payments giant Wirecard. Shorters are also legitimate players in a well-functioning stock market: the place needs a few sceptics to counter the default setting of ra-ra bullishness.

None of which, to repeat, is to suggest that Quintessential Capital is on the right track at Darktrace. Its “deep investigation” may be deeply flawed. The hedge fund may have misunderstood or have piled assumption upon assumption. Short-sellers also miss their intended target sometimes.

Yet the Quintessential Capital report is out there for the world to read and Darktrace’s shares were already sliding. At 210p, they are down a fifth since new year, are below the 2021 float price of 250p and are miles away from the all-time high of almost £10. There is an imperative to try to change the narrative. As stockbroker Davy’s analysts argued, Darktrace “operates in the cybersecurity arena and trust is everything”.

The best way to respond to a report titled “The dark side of Darktrace” is to turn the lights on. Opt for full exposure and elaborate explanation.