Darktrace hires EY to review finances after short-seller attack

Darktrace has hired EY to conduct an independent review of its finances as it tries to defend itself against a hedge fund that alleges questionable marketing, sales and accounting practices at the cybersecurity company.

The FTSE 250 company said the accountancy firm EY would provide “additional independent third-party review of its key financial processes and controls”, in a statement to the stock market on Monday.

A New York-based hedge fund, Quintessential Capital Management (QCM), has bet against Darktrace, taking a short position on shares. It accused Darktrace last month of a series of questionable and aggressive marketing, sales and accounting practices in a 69-page report. “After a careful analysis, we are deeply sceptical about the validity of Darktrace’s financial statements and fear that sales, margins and growth rates may be overstated and close to a sharp correction,” QCM alleged.

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Darktrace strenuously denied the allegations. Poppy Gustafsson, its chief executive and co-founder, published a lengthy response saying that the company was run with “the greatest integrity” and had “world class” technology.

Gordon Hurst, the chair of the Darktrace board, said: “The board believes fully in the robustness of Darktrace’s financial processes and controls. As a sign of that confidence, we have commissioned this independent third-party review by EY. We look forward to the outcome of this review.”

Darktrace said it would report EY’s findings but these would not be ready in time for half-year results on 8 March. Grant Thornton is the company’s auditor.

Quintessential’s managing partner, Gabriel Grego, said: “We welcome Darktrace’s decision to initiate an independent review of its finances. We hope that such review will be of sufficient granularity, scepticism and impartiality to provide insights about the dubious transactions we flagged in our report.”

The company had been struggling before Quintessential’s report. Analysts and other hedge funds had raised concerns about Darktrace’s business model and its technology.

The company also has to contend with the difficulties around Mick Lynch, the co-founder of Darktrace and one of its largest shareholders. Lynch is fighting extradition to the US, where he is accused of fraudulently inflating the value of his previous technology company, Autonomy, before its £8.4bn sale to Hewlett-Packard in 2011. Lynch denies the allegations.

Darktrace shares dropped by 17% to 210p in the two days after the Quintessential report. Since then they have recovered to 266p, valuing the company at £1.9bn. However, that is still far below their high of more than £10 a share in autumn 2021, and just above the 250p price at which its shares floated on the London Stock Exchange in April 2021.

Its shares gained 3% on Monday after the appointment of EY.

Lynch and his wife, Angela Bacares, have in recent months reduced the size of their Darktrace stakes to a combined 12% of the company, worth more than £210m at the end of last week.

Quintessential’s position did not appear in the latest daily short-selling data published by the Financial Conduct Authority, the regulator, suggesting that the hedge fund’s activity is below the 0.5% of issued share capital mark at which it is required to disclose it. Previous disclosures showed that its short position climbed to 1.3%, before dropping gradually to 0.38% by 16 February.

The UK-based Marshall Wace, one of the world’s biggest hedge funds, also held a 1.07% short position on Friday. Marshall Wace disclosed its short position in October 2022.