- Quintessential Capital Management and Marshall Wace take short positions
- US hedge fund questions validity of financial statements and warns of correction
- Darktrace says it has full confidence in accounting practices
New York’s Quintessential Capital Management (QCM) has taken a short position in Darktrace (DARK) and published a report questioning the validity of the firm’s financial statements in a damaging bear raid on the AI-driven cyber security firm.
Shares in the company, which have been highly volatile since listing at 250p in April 2021, are down 4.7% to 209.6p in early afternoon trading. This represented a recovery from earlier lows as the company published a response hitting back at its detractor.
Bear raids effectively involve an individual or institution betting a share price will fall. They force the price down by publishing negative information and reports about the company.
QCM has taken a 0.86% short position in Darktrace shares (its UK counterpart Marshall Wace has itself taken a 0.9% position) and has alleged transactions detected in the run up to its IPO involved ‘simulated or anticipated sales to phantom end-users’ through a network of resellers.
It is worth noting the QCM claims come almost exactly a year after reports of a bear raid by hedge fund ShadowFall which caused a similar drop in the share price.
A DAMAGING REPORT
QCM asserts Darktrace repeatedly used marketing activities to channel funds back to partners as payment for apparently fictitious purchases and that some of these activities may have even involved shell companies manned by people with links to organised crime, money laundering and fraud.
It noted that some of the firm’s past recurring software sales may instead be one-off sales of hardware appliances, cited issues with revenue recognition and argued a portion of legitimate sales had only been achieved due to extremely aggressive (and expensive) marketing.
It argued: ‘After 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.’
Darktrace was backed by Invoke Capital, the technology investment company set up by tech entrepreneur Mike Lynch. He founded UK firm Autonomy and was found to have defrauded HP (HP:NYSE) into overpaying when it bought Autonomy for $11 billion in 2011 and faces extradition to the US.
LYNCH LINKS HAVE CAST A CLOUD
The case cast a cloud over Darktrace which it has struggled to escape and QCM argues the links with Lynch and its concerns about the company are not coincidental.
Giving the ‘strongest possible warning’ to investors, the hedge fund concluded that the shares are ‘overvalued and liable to a major correction or worse’.
For its part Darktrace commented: ‘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 have rigorous controls in place across our business to ensure we comply fully with IFRS accounting standards. We're proud of the business we have built, which today helps to protect over 8,100 customers around the world from cyber disruption.’
