A prominent UK cybersecurity stock is under attack from short sellers. Here's what you need to know

Cybersecurity institution Darktrace, 1 of the U.K.'s astir salient tech names, has recovered itself nether onslaught from abbreviated sellers.

The company, whose tools let firms to combat cyberthreats with artificial intelligence, was past week targeted successful a study by New York-based plus manager Quintessential Capital Management.

QCM, whose stated purpose is "exposing fraud and transgression behaviour successful nationalist companies astir the world," claims it has had a 100% occurrence complaint successful its activistic campaigns.

The institution told Reuters it holds a abbreviated presumption of 1.3% successful Darktrace shares.

London-based hedge money Marshall Wace besides shorted Darktrace, according to information tract Breakout Point.

Short selling is simply a strategy successful which investors stake connected the terms of a banal going down successful value. A trader borrows the banal and past sells it connected the presumption that it volition fall, earlier buying it backmost astatine a discounted terms and pocketing the spread.

Darktrace, 1 of the U.K.'s largest cybersecurity companies, was founded successful 2013 by a radical of erstwhile quality experts and mathematicians.

The Cambridge-headquartered institution says its exertion uses AI to observe and respond to cyberthreats successful a business' IT systems.

The institution floated connected the London Stock Exchange successful 2021, and its debut was seen arsenic a cardinal triumph successful the U.K.'s bid to lure much high-growth tech startups to the London marketplace aft its withdrawal from the European Union.

The stock's show pursuing the listing has been underwhelming. After initially rising to an all-time precocious of £9.45 ($11.58) successful October 2021, Darktrace shares person since plunged dramatically successful tandem with a broader slump successful planetary tech stocks.

As of Monday afternoon, Darktrace shares were trading astatine a terms of £2.32, down 37% successful the past 12 months.

Darktrace stock terms show successful the past 12 months.

On Tuesday, U.S. hedge money QCM said it had taken a abbreviated presumption retired against Darktrace and published a lengthy report detailing alleged flaws successful Darktrace's accounting.

QCM said that, pursuing an probe into Darktrace's concern exemplary and selling practices, it was "deeply skeptical astir the validity of Darktrace's fiscal statements" and believed income and maturation rates whitethorn person been overstated.

"We would similar to springiness our strongest imaginable informing to investors and judge that DT's equity is overvalued and liable to a large correction, oregon worse," QCM said successful the report.

Darktrace was accused by QCM of engaging successful "channel stuffing" and "round-tripping" — activities that artificially inflate a company's reported income — involving individuals with ties to organized crime, wealth laundering and fraud.

Darktrace didn't straight code those allegations. On Wednesday, the firm's CEO Poppy Gustafsson issued a connection defending the institution from what she called "unfounded inferences" made by QCM.

Separately, QCM suggested Darktrace whitethorn person inflated its revenues by booking unearned revenues arsenic existent sales.

The institution occasionally books gross from payments for contracts it receives earlier delivering its work to clients arsenic deferred revenue, according to the report.

This is not uncommon among subscription-based bundle companies. However, QCM noted deferred gross arsenic a percent of Darktrace's income had dropped betwixt 2018 and 2022, suggesting the steadfast "may person progressively been booking unearned gross arsenic existent sales."

In response, Darktrace said: "Rarely, customers volition wage afloat declaration values successful beforehand but due to the fact that this is infrequent, non-current deferred gross balances volition diminution arsenic these contracts tally down unless determination is different unusual, large, in-advance payment."

QCM alleged Darktrace whitethorn person tried to capable gaps successful its receivables near by clients dropping retired of income negotiations done selling sponsorships with indebted resellers and utilizing ammunition companies to airs arsenic phantom clients.

"Organisations that transact with the transmission volition typically co-host selling events with their partners. Partner selling events are a mean people of concern for astir each bundle businesses and Darktrace is nary different," Darktrace said Wednesday.

"This has been, and remains, a precise tiny portion of Darktrace's selling and the costs of them implicit the past 5 years has consistently been substantially beneath 0.5% of Darktrace's revenue," Darktrace added.

Darktrace was not instantly disposable for remark erstwhile contacted by CNBC.

Separately Wednesday, Darktrace said it would embark connected a stock buyback worthy up to £75 cardinal ($92 million) to beryllium completed nary aboriginal than Oct. 31, 2023.

It's worthy noting that, adjacent earlier the QCM report, determination were clouds hanging implicit Darktrace's business. Analysts person criticized the institution implicit an allegedly assertive income culture and doubts implicit the worth of its technology.

Darktrace is besides backed by Mike Lynch, the British tech tycoon.

Lynch founded the endeavor bundle steadfast Autonomy, whose merchantability to Hewlett-Packard was mired successful ungraded implicit accusations that Lynch plotted to inflate the worth of Autonomy earlier it was bought by HP for astir $11 cardinal successful 2011.

In 2022, a British justice ruled in favour of HP successful a civilian fraud lawsuit against Lynch. Lynch, an influential fig successful the U.K.'s tech scene, faces a imaginable transgression proceedings successful the U.S. aft the U.K. authorities approved his extradition past year.

He has repeatedly denied the allegations.

Several executives astatine Darktrace, including Gustafsson and Chief Strategy Officer Nicole Eagan, antecedently worked for Autonomy.

The QCM study besides raised concerns implicit the connections betwixt Darktrace and Autonomy.

"Darktrace has been led oregon powerfully influenced by galore of the precise aforesaid individuals that participated successful the Autonomy debacle," QCM said successful its report.

"If our allegations are confirmed, we expect Darktrace to travel the aforesaid tragic destiny of its predecessor, Autonomy," QCM said.

Lynch is reportedly nary longer progressive with Darktrace's management, but remains a important shareholder.

Lynch is no longer progressive with Darktrace's management, but remains its sixth-largest shareholder, according to Refinitiv Eikon data.

Meanwhile, Darktrace is besides suffering from uncertainty related to the wider macroeconomic environment. The institution lowered its forecast for yearly recurring gross maturation for the twelvemonth ending June 2023 to betwixt 29% and 31.5%, down from an earlier forecast of 31% to 34%, citing weaker lawsuit growth.