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”.
The problem for Darktrace here is that it is somewhat believable. For the accusations – they are just that for any lawyers reading – about Autonomy are that such accounting went on. And if Mike Lynch is involved then do such habits repeat?
Note what is being said here. Absolutely not that the two firms will share practices. Nor even that Autonomy did channel stuff. Only that folk out here might believe the Autonomy claim and then go on to believe the Darktrace one.
So it’s an easy short to make.
As an aside, I wrote a little stock market piece elsewhere saying that Darktrace lumbered under something of a cloud. That there was a certain belief that perhaps they shined up their revenues a bit too much. Not that they did, just that some might believe they did, this therefore explaining their low – for the reported revenue growth numbers – P/E ratio.
I got an email from a financial PR type insisting that this was absolutely not so etc. Which, as I pointed out to him, isn’t exactly a refutation of the claim that Darktrace thinks a lot about beliefs about its numbers. Because a PR email about a squib of a piece with a few hundred readers doesn’t, in fact, refute the idea that Darktrace worries about financial PR now, does it?