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Mike Lynch-backed Darktrace accused of misrepresenting accounts by short seller

Darktrace
Darktrace

Darktrace, the cybersecurity company, has lost a quarter of a billion pounds from its valuation after an aggressive US short-seller claimed the company engages in fraudulent accounting.

Quintessential Capital Management (QCM), a New York-based asset management firm, alleged that Darktrace engages in “channel stuffing” and other fraudulent practices designed to artificially inflate its sales figures.

So-called “channel stuffing” is when a company strikes fake sales contracts with commercial partners immediately before a deadline such as the end of the financial year. After the deadline passes, goods “sold” under the fake contract are quietly returned.

In a 70-page report published on Tuesday, QCM’s founder Gabriel Grego claimed that Darktrace was “shifting tomorrow’s revenues into today’s books”.

He said: “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.”

A Darktrace spokesman denied the QCM allegations and said the company was confident in its accounting.

QCM has previously published similar allegations against companies in which it has taken a short position, meaning it bets on the share price falling. One such company, US-based Cassava Sciences, sued QCM in the US last year alleging it was the target of a “disinformation” campaign.

Darktrace’s shares have plunged nearly a fifth from Monday’s opening price after QCM disclosed a short position in the company, before Tuesday’s report was made public.

Sources said Mr Grego’s position amounted to 0.86pc of the company, which has lost around £250m from its market valuation since Monday. The business was valued at £1.7bn before its 17.8pc price drop.

Mr Grego, who confirmed that he had not contacted Darktrace before publishing his report, told The Telegraph that he had visited some of the company’s resellers – businesses that sell its products on a commission basis – and found that some did not appear to be resident at addresses given in official records.

He said: “They change the Facebook page, they change the Twitter handle from one company to another from one identity to another. But it seems to always be the same people.”

Darktrace was co founded by controversial tech tycoon Mike Lynch. He is currently being extradited to the US to stand trial on 15 criminal charges of fraud and false accounting linked to allegations about business practices at his former Cambridge-based software business  Autonomy.

Mr Lynch is no longer involved with Darktrace's management but together with his wife remains a substantial shareholder in the company. The High Court ruled last year that he and Autonomy's finance chief committed fraud by falsely inflating its accounts when they sold Autonomy in 2011. Mr Lynch intends to appeal.

A Darktrace spokesman said: “We have never been contacted by the authors of this report for information. As a UK listed business, our management team and Board take our fiduciary responsibilities very seriously and have full confidence in our accounting practices and the integrity of our independently audited financial statements.

“We're proud of the business we have built, which today helps to protect over 8,100 customers around the world from cyber disruption.”