On September 8, 2023, Wolf Popper filed an Amended Complaint on behalf of the court-appointed lead plaintiff in
In re Arqit Quantum Inc. Securities Litigation, a securities class action pending in the U.S. District Court for the Eastern District of New York. The Amended Complaint alleges that Arqit Quantum Inc. and the other defendants made materially false and misleading statements in violation of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 and Sections 10(b), 14(a), and 20(a) of the Securities Exchange Act of 1934 and SEC Rules 10b-5 and 14d-9 promulgated thereunder.
As alleged in the Amended Complaint, Arqit Quantum claimed to have created technology and a protocol to make communications “quantum safe,” or safe from attack by a quantum computer. Arqit Quantum’s technology and protocol involved two pieces—software and satellites. As Arqit acknowledged, there is a known “‘key distribution’ problem” in the cybersecurity industry because while “computationally secure” symmetric keys can be created, “to date there has been no secure way to create and distribute those keys electronically.” Arqit claimed to solve “all known problems” with its flagship software program, QuantumCloud, and its patented encryption algorithm and quantum protocol ARQ19, through which Arqit would deliver random numbers to users, who would use QuantumCloud software to create identical encryption keys at separate locations using separate devices, allowing them to communicate and transfer data securely through Arqit’s QuantumCloud platform. While Arqit started by transmitting the random numbers terrestrially, Arqit touted that its soon to be launched quantum satellites would beam the random numbers to users on Earth, which would be more secure than the terrestrial transmission of random numbers.
The Amended Complaint alleges that in connection with the merger transaction and throughout the September 7, 2021 through December 13, 2022 Class Period, the defendants informed the public and investors that, among other things: (a) Arqit had “pioneered a unique quantum encryption technology which makes the communications links of any networked device secure against current and future forms of cyber-attack – even an attack from a quantum computer;” (b) Arqit’s technology and software “has been launched live to customers” and is “being sold to and used by customers today;” (c) QuantumCloud, as designed to include the use of satellites, would create encryption keys “that are low cost,” “in infinite volumes at minimal cost,” and was “easily scalable,” including that Arqit itself was “capable of hyper scaling” its operations; (d) QuantumCloud “solves all previously known problems of quantum key distribution;” and (e) Arqit Quantum had a “backlog of $130 million of binding revenue contracts…where the revenues will definitely be delivered.”
The Amended Complaint alleges that the truth concerning the defendants materially false and misleading statements was revealed through two disclosures. First, on April 18, 2022, The Wall Street Journal published a story entitled “
British Encryption Startup Overstates Its Prospects, Former Staff and Others Say.” According to The Wall Street Journal, among other things, (a) Arqit had “given investors an overly optimistic view of its future revenue and the readiness and workability of its signature encryption system;” (b) Arqit’s chief revenue officer had resigned in April 2021 “after raising concerns with [Arqit’s CEO] that [the CEO] was overstating contracts and giving unrealistic revenue projections to potential investors;” (c) “British cybersecurity officials questioned the viability of Arqit’s proposed approach to encryption technology in a high-level evaluation they privately shared with the company in the summer of 2020;” (d) when Arqit Quantum stock started trading in September 2021, “its signature product was an early-stage prototype unable to encrypt anything in practical use,” “[n]o commercial customer was using Arqit [Quantum]’s encryption system with live data,” “the system couldn’t meaningfully use any of the common internet protocols required to do nearly anything online,” and “its revenue consisted of a handful of government grants and small research contracts;” (e) “[s]everal clients the company lists—including a number of British government agencies—are simply giving Arqit research grants, nonbinding memorandums of understanding or research agreements that come with no funding, not contracts for its encryption product;” and (f) “The encryption technology the company hinges on—a system to protect against next-generation quantum computers—might never apply beyond niche uses, numerous people inside and outside the company warned, unless there were a major overhaul of internet protocols” and “[t]he encryption system—with or without its satellite components—depends on the broad adoption of new protocols and standards for telecommunications, cloud computing and internet services that currently aren’t widely supported.”
Then, on Monday August 18, 2022, Arqit Quantum ordinary shares fell $2.57 per share, or 17%, and Arqit Quantum warrants fell $1.4479 per warrant, or 37.6%.
On December 14, 2022, Arqit Quantum disclosed that it was cooperating with an SEC investigation into the merger between Arqit Quantum and Centricus, and that Arqit Quantum had significantly altered its technology strategy and core product, QuantumCloud, to abandon quantum satellite technology completely. On December 14, 2022, Arqit Quantum ordinary shares fell $1.10 per share, or 17.6%, and Arqit Quantum warrants fell $0.418 per warrant, or 34.8%.