Darktrace and Autonomy: tracking down all the money and CEOs

As a data scientist and a cybersecurity geek, I have a natural interest in learning about companies that apply machine learning techniques to solve cybersecurity challenges. I also love mysteries and crime dramas — I’m a big fan of the BBC Sherlock Holmes series.

I recently stumbled on something that feeds both of my passions.

I have been reading a lot about a UK-based AI Cybersecurity unicorn called Darktrace. Last year, KKR invested in the firm and they reported a valuation of $1.65 billion after another investment round this year.

My web searches about Darktrace’s investors

I uncovered a related story about Mike Lynch of Invoke Capital Partners, the founder and its first investor. For those of you who have never heard of this name before, let me clarify. Michael Richard Lynch is a British entrepreneur and a PhD graduate from the University of Cambridge. He studied advanced physics, biology, biochemistry, and mathematics, among other things.

It wasn’t long before all this knowledge was put to good use. Lynch founded company after company. Of course, it wasn’t all roses. The man did face challenges down the road and some of them are still lingering around, threatening to steal his peace of mind and his freedom, for that matter.

The title of the Financial Times article that particularly grabbed my attention suggested that Mike’s defense was cracking under US charges. That definitely needed more clarification, so I dug deeper.

Suddenly, my technology research took an interesting turn into a darker world of white-collar crime. What I found on the web about Mike Lynch, Invoke Capital Partners, Darktrace, and a company I hadn’t heard of, called Autonomy, was very surprising and entertaining … in an oddly dark way.

The start-up

Ever since its inception in 1996, the main objective and specialty of Autonomy were to dig into piles of unstructured data in search of certain patterns. It analyzed anything from web surfing to online video, and emails. The techniques incorporated in the complex mechanism were based on a combination of traditional methods and Bayesian inference.

It appears that the company had a promising future. Here is what happened next.

The buyout

When you are doing great things that can change the world, sooner or later somebody shows up offering to buy your product and even make it more powerful. All good intentions here. This is probably what fate had stored for the UK firm. And it didn’t take much time for the right opportunity to present itself, or so it seemed.

In August 2011, Hewlett-Packard announced its intent to take over Autonomy for the staggering $11 billion, and shares in the latter rose. At the time of the announcement, the Financial Times reported that Mike Lynch had an 8 percent stake in Autonomy worth more than $800 million at the takeover price, not including stock options.

It appeared that good times were coming for the software start-up whose co-founder was about to get insanely rich. It’s not like he hadn’t already been so, but still…

HP came into possession of Autonomy in October 2011.

And the world thought the case was over. Except it was just the beginning. The following May 2012, Hewlett made it public that a restructuring plan had sent Lynch packing after a transition period. To help the performance, the company decided to replace the current director with Bill Veghte who was executive vice president of HP Software at the time. (source: Slashgear.com)

The US company assured both the public and its partners that the competitive positioning of Autonomy was good, especially in terms of its cloud-based products. Veghte would work to create the right processes and fulfil the initial promise of the project despite having to say farewell to the founder. He was described as a well-versed software leader that would manage the blow that Lynch’s departure would deal to the firm.

Invoke Capital

In the meantime, Crunchbase listed the Cambridge University graduate one of Invoke Capital’s founders, along with a group of technology experts, as well as people of Autonomy’s senior management team. According to the data, they had access to $1 billion in capital. Now, the company is centered on identifying and investing in powerful high-class technology that is created across Europe. It was established in 2012 and has its headquarters in London, UK.

Last year, an article in the Financial Times looked into the question of why Dr. Lynch was not using his $1 billion technology fund. It was then that I learned Invoke was based in the British Virgin Islands where, unlike a great deal of UK-based venture funds, filings were really of no use. And from this Wikipedia page I found out the British Virgin Islands do not have capital gains, corporate taxes and profit, as they are included on the most acknowledged lists of tax havens.

If you were thinking about abandoning this article, don’t!

Internal investigation

In November 2012, things got heated up when HP admitted it had been running its own inspection, the results of which were intimidating. In short, it revealed “outright misrepresentations” and accounting misconduct on the part of the ex-management.

Source: The Wall Street Journal

What went wrong?

First off, in the latest quarter of 2011, the US computer maker faced a loss of $6.9 million, a number that could not go unnoticed. A small part of it was attributed to existing problems of different nature; however, the biggest culprit, as claimed by HP’s executives, was the acquisition of Autonomy.

After giving Mr. Lynch the boot, they sent a team of finance experts straight to England to look into the firm’s books. The accuracy of the numbers was difficult to believe. HP claimed Autonomy had misrepresented its own sales prior to the buyout, a deed which misled investors to believe the firm was more than thriving. According to them, the issues remained uncovered during the due diligence that preceded the purchase and which involved around 300 people.

In the end, Hewlett admitted the UK software giant was worth around 80% less than what had been paid for. That, coupled with the $6.9 million loss, is what led the computer maker to write down the price by $8.8 billion.

Until now, if you had asked anyone that knows corporate matters inside out, they would have told you the worst corporate decision ever made was to merge Time Warner with AOL Inc. back in 2000. The deal quickly proved poisonous, turning into the biggest disaster that took place on the business scene. Careers were destroyed and lessons were learned.

Well, it is fair to say we are not sure about the latter anymore.

A number of investors, analysts, and rivals have come to the conclusion that HP’s “marriage” to Autonomy might as well be the most unpleasant and serious thing to have hit the corporate world in recent years, or ever.

Darktrace

But moving down the history timeline, the following June 2013, was the day that Darktrace Ltd. came into being. It was incorporated in the United Kingdom with a single shareholder, Invoke Capital Partners. It focuses on cyber defense and counts on self-learning AI to detect threats in real time and fight back. The system protects corporate networks, SaaS, industrial systems, IoT, and the cloud itself from a range of vulnerabilities and attacks.

Since its establishment, the company has had a few CEOs. In September 2013, Nicole Eagan, former Autonomy CMO, got the chance to call the shots. Then in February 2015, Mike Lynch and ex-Autonomy CFO Sushovan Hussain were appointed its directors.

One month later, both men were in the news again when the BBC reported that Hewlett-Packard was suing them for approximately $5.1 billion.

Sushovan Hussain & Dr Michael Lynch

Reactions

If you are wondering how Mike Lynch responded to the accusations, here is more on the matter. In October 2016, The Register reported that the Englishman was countersuing HP for at least $150 million. He claimed his reputation was highly damaged by the assertion he had something to do with inflating the price of the bargain.

His lawyers commented the indictment was a mere travesty for being brought to a US court when it involved a British company that operated under British laws. Additionally, they said HP has a number of failed acquisitions under its belt and that Mike is nothing but a “scapegoat” in this scenario.

On November 1, 2016, Sushovan Hussain resigned as a director of Darktrace. Ten days later, he was indicted on 16 counts of securities, conspiracy, and wire fraud. Most of these lied on the presumption that he helped Lynch cook the books to up the overall price of Autonomy at the time of the purchase.

Aren’t you glad you kept reading? But wait, there’s more.

Needless to say, Hussain pled innocent on Jan. 12, 2017. Unfortunately, that didn’t go well for him. On April 30, 2018, he was found guilty of conducting an accounting fraud that aimed to reach a higher buying price of the HP-Autonomy deal.

Sentencing for Mr. Hussain has been delayed. On November 14, 2018, the U.S. District Court issued a subpoena requiring Invoke Capital to produce several documents. It included those related to correspondence, financial transactions, share valuations, and sales involving Sushovan Hussain, Dr. Michael Lynch, Invoke Capital, and Darktrace.

Accommodating the court’s demand may be made easier by the fact that Invoke Capital Partners and Darktrace are situated in the same offices in Cambridge and London, England.

On November 19, 2018, Bloomberg published an article that suggested Hussain’s ties to Michael Lynch might mean hush money was handed over under the table. It appeared that the Cambridge University graduate was paying a ridiculously high price for some of Sushovan’s shares. The prosecutors admitted this act raised questions about the actual motive and objective of the transactions.

They wanted Hussain to peddle information about all financial dealings he had had with Mr. Lynch. That included his stake with the other companies he was involved with — Darktrace and Invoke. The fact that Autonomy’s ex-co-founder assembled the same circle of participants at the new companies was what alarmed the authorities. The government argued that the act is not illegal per se. However, it may have established financial relationships which keep some of the members from becoming witnesses.

And what has happened to Mike Lynch?

On November 29, 2018, the same Bloomberg reporter wrote an article which states that prosecutors have had their eyes on the Cambridge University graduate for a while, identifying him as a co-conspirator with Sushovan Hussain. Not good.

On November 30, 2018, Lynch left both his roles as a director of Darktrace and adviser to Theresa May, UK’s Prime Minister, after being indicted for fraud in the US.

All I can say is “Wow! I wonder what will happen next?!”

Maybe Glenn Jordan, Adam McKay or JC Chandor will make a movie about this.