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Fortune
Fortune
Leo Schwartz

Darktrace—the cybersecurity firm backed by doomed tech tycoon Mike Lynch—attracts renewed scrutiny after yacht disaster

Chart shows change in Darktrace stock since Jan 2023

Divers recovered the body of British tech entrepreneur Mike Lynch on Thursday, confirming the worst fears after his superyacht sank off the Italian coast on Monday. The tragic accident resurfaced Lynch’s controversial career, which saw the tycoon cleared of fraud charges in a U.S. federal court in June related to the sale of his software firm Autonomy to Hewlett-Packard.

Darktrace, a U.K. cybersecurity company that counted Lynch as one of its founding investors, has also faced renewed attention as it seeks to finalize its acquisition by U.S. private equity firm Thoma Bravo, a top software investor, for more than $5 billion. While Darktrace’s stock has soared in recent months, the company was the subject of a short-seller campaign in early 2023 that accused Darktrace of committing similar fraud and accounting wrongdoing that plagued Autonomy. No wrongdoing was ever proven, and at the time, Darktrace’s CEO issued a statement defending the company from “unfounded inferences.”

Now Lynch’s sudden death is putting his troubled business practices back into the spotlight—and just when the company is hoping to pull off an unlikely recovery.

Mike Lynch, controversial tech titan

While Lynch is one of the most celebrated figures in the U.K. tech scene, his career was peppered by myriad allegations, which he managed to shake again and again. Dubbed the “British Bill Gates,” Lynch founded Autonomy in 1996, selling the company to Hewlett-Packard in 2011 for $11 billion.

The deal quickly became surrounded by scandal, however, after the new owner wrote down its investment by $8.8 billion just a year later, alleging widespread accounting errors. Autonomy’s former CFO, Sushovan Hussain, was found guilty of fraud in 2018 by a U.S. jury, although Lynch was acquitted earlier this summer of all 17 charges pitted against him.

Despite the baggage around Autonomy, Lynch found continued success in tech through his venture firm, Invoke Capital, which he founded in 2012. One of its most profitable investments was Darktrace, a cybersecurity firm that shared deep connections with Autonomy, including, as of early 2020, half of Darktrace’s board and six of its eight top executives. Lynch and his wife held a combined stake of around 7% in Darktrace as of April 2024.

In part thanks to its ties to Autonomy, Darktrace soon became mired in scandals, including a Forbes investigation that alleged widespread sexual harassment. Despite the bad press, Darktrace went public in April 2021, with its price soaring from an initial valuation of $2.4 billion by 43% on its first day of trading.

The honeymoon didn’t last. In September 2022, discussions of an acquisition between Thoma Bravo and Darktrace fell through, sending share prices tumbling. And then in early 2023, the short-selling firm Quintessential Capital Management published a 70-page report accusing Darktrace of similar misconduct that had sunk Autonomy, including fudging sales numbers, misrepresenting revenue, and maintaining unsustainable marketing expenses. In particular, the report referenced practices called “channel stuffing” and “round-tripping,” which inflate revenue figures by exaggerating sales through resellers, as well as misrepresenting one-off hardware sales as recurring software sales.

“We are deeply skeptical about the validity of Darktrace’s financial statements,” the report read. Darktrace’s shares plunged as much as 17% after the report was published, though the company said at the time that the management team and board had “rigorous controls in place.” Quintessential Capital Management characterized Darktrace’s reaction as a “lame non-response” in a follow-up report, arguing that Darktrace had not denied any of its allegations.

Despite short positions by other firms—which would later include the U.K.-based Shadowfall and Qube Research & Technologies, along with the U.S.-based Cadian Capital Management—Darktrace managed to regain its share price. To shore up its reputation, the firm also hired Ernst & Young, whose accountants would find areas that “could be improved,” but didn’t find shortcomings material to Darktrace’s financial statements and controls. In response, Quintessential Capital Management called for the investigation to be published, but Darktrace declined, arguing that it contained “commercially sensitive information.”

A spokesperson for Darktrace pointed Fortune to the announcement the company made about the conclusion of the Ernst & Young review, and the RNS updates at the time of the short-seller attack, and added that Darktrace didn’t have any additional comment beyond what was said at the time.

After publication, a Darktrace spokesperson reiterated the company’s position that the allegations from the short-seller report were put to rest with the EY report and subsequent regulatory notifications, which included no changes to its previous financial statements.

Darktrace managed to recover from the episode, buoyed by the AI boom. Last January, the company shared a rosy outlook for its revenue and margins thanks to the demand for AI-powered products, projecting its revenue to grow around 24%. And in April 2024, Darktrace agreed to new sales talks with Thoma Bravo at a 20% premium to where its share prices had closed the previous day. Darktrace’s stock surged 16% on the news, its highest close since November 2021, likely wiping out any continued short positions. The deal demonstrates that the market has largely moved past the tremors.

While Lynch did not hold a formal position at Darktrace after stepping off its board in 2018 amid the Autonomy fraud trial, the widespread public attention around his death is resurfacing the roller coaster that was his career, including his involvement with Darktrace and the lingering accusations against the company. With the end of the acquisition talks in its sights, Darktrace faces a bumpy ride that may be far from over.

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