Software Encryption Firm Misled SEC, Investors, Says Fraud Class Action

The risk factors section in Arqit’s 2021 registration statement with the SEC failed to discuss the risks of adoption of the company’s quantum encryption-as-a-service technology, alleges a Friday fraud class action (docket 1:23-cv-02806) in U.S. District Court for Eastern New York in Brooklyn.

Plaintiff Chris Weeks received an assignment of claim from his wife, Judy Smith, who bought Arqit shares pursuable or traceable to the company’s registration statement and was economically damaged as a result, said the complaint. On March 31, U.S. Magistrate Judge Marcia Henry issued a memorandum and order appointing Weeks as lead plaintiff in Glick v. Arqit (docket 1:22-cv-02604), and as a related action to Glick, and to toll the statute of limitations for claims under the Securities Act in anticipation of filing a motion to consolidate the action with Glick and a consolidated or amended complaint, it said.

Arquit's QuantumCloud encryption technology purported to make the communications links of any networked device “secure against current and future forms of cyber-attack -- even an attack from a quantum computer,” said the complaint, citing the registration statement. “The software has universal application to every edge device and cloud machine in the world,” it said, and “solves all previously known problems of quantum key distribution.”

The registration statement also said Arqit was preparing to launch its first live service during second-half 2021 and had already signed “major, long-term contracts for its services with large companies and government institutes.” A transcript of a presentation filed with the SEC in August 2021 quoted executives saying QuantumCloud was “live for service” and the company had $130 million in signed commitments. Customers included the U.K. government, the European Space Agency, BT and Sumitomo, it said.

Statements were “untrue” in fact or omission because they misrepresented and failed to disclose that 1) the proposed encryption technology would require “widespread adoption of new protocols and standards for telecommunications that had not yet been adopted," 2) British cybersecurity officials questioned the viability of the encryption technology in 2020; 3) the British government was providing grants to Arqit; 4) the company had little more than an “early-stage prototype” at the time of its merger announcement with Centricus in May 2021; 5) no commercial customer was using the system with live data; and 6) most Arqit revenue wasn’t from selling products, said the complaint.

On April 18, 2022, Arqit shares fell 17% to $12.49, the complaint said; they fell 17% on Dec. 14 to $5.15, it said. As of Friday, when the complaint was filed, shares closed at $1.24 per share, it said. As a result of defendants’ “wrongful acts and omissions,” class members have suffered “significant losses and damages,” the complaint said.

Plaintiffs claim violations of section 11 of the Securities Act against all defendants and violations of Section 12(a)(2) of the Securities Act against Arqit and founder David Williams. Plaintiffs seek damages, reasonable costs and expenses and further relief deemed proper by the court.