‘Anaemic at best’: The inside story of how the Macquarie-backed Nuix float went sour

It was Saturday and the prisoner in protective custody had a familiar visitor.

Dr Anthony Dante Castagna, a former finance professor, was one year into his four-year sentence for tax fraud and money laundering. In four days’ time, his crucial appeal against his conviction would be heard.

But on that Saturday, March 30, 2019, an old friend wanted to catch up. Macquarie Group executive Dan Phillips was about to fly to London for a board meeting of Nuix, the secretive forensic data analytics firm into which the investment bank had tipped more than $100 million.

Macquarie had plans to reap big returns from its investment through a float or sale to a new owner. Codenamed internally as “Project Truth”, the process would make Macquarie millions. But before he jetted off, Phillips wanted to talk to the person who knew more about the inner workings of the business than almost anyone else: Castagna.

Tony Castagna arrives at Nuix headquarters in Sydney late last month.Credit: Dominic Lorrimer

Fast forward two years and the 73-year-old Castagna is in clover. His conviction was quashed and an acquittal was entered. Last December an unusual options agreement resulted in him turning a $3000 investment into an $80 million windfall when Nuix listed on the Australian Securities Exchange.

Meanwhile, after orchestrating what is widely believed to be Macquarie’s most successful investment ever, Phillips has been lauded as one of the stars of Australia’s biggest investment bank.

At the time of the float, Nuix was heralded as Australia’s next great technology company. It makes software platforms that international regulators, tax officials and law enforcement agencies, such as the US Department of Justice and Britain’s Serious Fraud Office, use to run sensitive probes into malfeasance and misconduct. But a joint investigation by The Sydney Morning Herald, The Age and The Australian Financial Review paints a different picture.

The investigation, based on interviews with current and former staff and investors, who asked to remain anonymous, as well as confidential internal documents, raises questions about Nuix’s governance and financial accounts years before it floated. The internal concerns even led to an attempted coup of Nuix chief executive Rod Vawdrey which was ultimately thwarted by Phillips and the board.

Nuix chief executive Rod Vawdrey at the company’s ASX listing in December.Credit: Ben Rushton

Since the heavily hyped float that made Castagna and Macquarie millions, Nuix shares have fallen from a peak of almost $12 to close at just $3.47 last week.

The coming of Castagna

Castagna has a background in finance and appears to have focused on technology after working in Silicon Valley in the 1980s, advising on tech start-ups before the dotcom boom.

On his return to Australia, Phillips signed him up as a full-time consultant to Macquarie Bank in April 1998. About seven years later he was asked to turn around what was then a struggling technology business called Nuix. The business seemed to do well and by 2011 Macquarie was a significant shareholder. At the same time, Castagna’s friends from Macquarie, Phillips and David Standen, were appointed to the board.

About a decade into his involvement with Macquarie and Nuix, Castagna’s office at the bank was raided as part of a major federal tax probe. Macquarie executives were concerned and made a voluntary statement to the Australian Taxation Office (ATO). But they were not concerned enough to cut ties with the venture capitalist.

Castagna had come to the attention of Project Wickenby investigators via his Vanuatu-based cousin Robert Agius, who was suspected of running multiple tax-avoidance schemes. Agius’s phone calls – which were intercepted by the ATO – led them to Castagna.

The Crown case against Castagna and his cousin revolved around how Macquarie Bank had been paying Castagna’s consultancy agreements for the decade since Phillips signed him on in 1998. In April 2018, a Supreme Court jury found Castagna and his cousin guilty of money laundering and tax evasion. Castagna was profoundly shocked when he received a seven-year sentence, four of it non-parole. “He always thought he was smarter than everyone else and that he would win,” said one of those close to him who spoke on the condition of anonymity because they were describing private conversations.

Castagna leaves a Sydney court in April 2018 where a jury found him guilty of money laundering and tax evasion. He served time in jail before he was acquitted and his conviction quashed.Credit: Janie Barrett

While he no longer had a choice about staying on as a director of Nuix because he was in prison, he still had a key shareholding in the company and the ongoing support of Phillips, Standen and the rest of the board.

Following his jailing, a string of Nuix and Macquarie executives, including Phillips and Standen, beat a regular path to see the former chairman as he languished in jail cells in Parklea, Kariong and Long Bay, according to multiple Nuix and Corrective Services sources.

On June 5, 2019, the Court of Criminal Appeal quashed his conviction and he was acquitted. The Crown case was that he had avoided tax by channelling his consultancy fees from Macquarie to Vanuatu via a New Zealand bank account operated by a UK company called Billbury. But the Court of Appeal found that the contractual arrangement between Macquarie and his private company Billbury was genuine, therefore the assessable income derived by Dr Castagna was the money he received from Billbury, not the money received by Billbury from Macquarie.

“Unless it could be said that the agreement was a sham ... it follows that the income was derived by Billbury,” the judgment said.

Even if it was assumed the Crown case was strong, said the appeal court judges, a fresh trial was not appropriate in part because of Castagna’s age, he was then 72, and he’d already been in jail for more than a year.

Macquarie’s long-term ambition was for Nuix to become a public company listed on the ASX. On December 4, 2020, that ambition was realised when Nuix listed in what was described as the hottest float in years.

It listed at $5.31, soaring 50 per cent on the first day, valuing the business at $2.5 billion. In the lead up to the float, Phillips and Standen were the subject of a positive write-up in the Financial Review, which featured a photo of Phillips posing with Chinese orphans. “The float looms as one of the biggest moments of their careers,” said the article.

Macquarie Group executive Dan Phillips. He has been involved in a charity looking after Chinese orphans.Credit:

The float scored a billion-dollar payday for Macquarie, with handsome bonuses for the executives involved. It also made Castagna seriously wealthy as he cashed in his options for the $80 million windfall.

But few retail investors in the business would have even known of his involvement in the forensic data company. On the same day the float prospectus was launched, Castagna quietly exited the company’s board. The prospectus, which provides potential investors with details of the business, didn’t include Castagna’s role as a founder.

Two footnotes in the 320-page prospectus detailing Castagna’s company’s shareholding were the only record of his role in the company.

Trouble brewing

When Phillips visited Castagna in jail on March 30, 2019, trouble was brewing at Nuix. Macquarie was itching to start the sale process, but much of the golden payday it was seeking would depend on the company’s then incarcerated rainmaker: Castagna.

Just days later in London, six senior executives told Phillips and Standen at an offsite meeting the company had lost its way. The six executives demanded that Rod Vawdrey, the CEO, be sacked, along with his confidant, human resources manager Megan Farrell.

Castagna described Vawdrey, above at the ASX listing, as his “bulldog”.Credit: Ben Rushton

In a presentation titled “Nuix 2.0”, they said, “Nuix has lost focus, lost customer-centricity and stopped innovating” and cited key issues as a “toxic, no-trust culture where acting in the interests of the ‘greater good’ of Nuix has been lost” and “accountability [was] always shifting”.

With budget forecasts missed, high levels of staff turnover and staff surveys outlining morale problems, the senior executives proposed a new management structure and a blueprint aimed at turning the company around. They had even prepared a press release, sighted by the joint investigation, to announce Vawdrey’s departure.

Nuix’s future was in the balance. Vawdrey was seen as Castagna’s loyal lieutenant. As Castagna once told an executive, “Rod’s a bulldog, but he’s my bulldog.”

Yet by July, the coup was repelled. During the fortnight of tennis at Wimbledon, Nuix directors convened at Macquarie’s London offices for an early morning board meeting that went for almost eight hours. Despite having no official role, Castagna, a month out of jail, was on the line from Sydney, according to board minutes as a “guest”.

Board minutes show that within weeks he was back on the board dealing with the failed coup attempt, missed budgets and a crisis of confidence among staff. Macquarie’s investment in Nuix delivered considerable power to Castagna. Despite controlling three-quarters of the company, Macquarie had two board seats, the same as Castagna even though his stake had shrunk to just 6 per cent.

When Castagna went to prison Macquarie judged that it now controlled Nuix, so it consolidated Nuix’s financial accounts into the parent company Macquarie Group, according to a PwC due diligence report prepared ahead of the Nuix float. Following his acquittal, Castagna was officially back on the Nuix board on August 7. Macquarie decided it no longer controlled Nuix and changed how it reported its investment.

By October 2019 Nuix was 14 months away from its stock exchange debut, but it still wasn’t meeting its revenue forecasts. In October 2019 Stephen Doyle, the head bean counter, revealed in an email to Vawdrey the December half sales were running 20 per cent below budget – a $US11 million shortfall. “I don’t see it worthwhile to spend time on a forecast call tomorrow discussing numbers that are that far from reality,” he said.

Furious cost-cutting between June 2019 and June 2020 resulted in the exit of key personnel. Internal documents show staff churn hit just over 35 per cent in the year to June 2020, a rate comparable with call centres. Nuix lost almost 30 per cent of its engineering staff, the heart and soul of the business, with savage turnover in the key product area. It would affect the quality of the business, but it kept costs down. As one trader would later say, it was a case of “dress the pig in the gown and sell it like it’s a princess”.

Amid all the pre-float hype, corporate watchdog ASIC received a tip-off urging it to vet Nuix’s prospectus. A director of Aperion Law wrote to the regulator on instructions from his client, who had asked to remain anonymous, to warn the prospectus wasn’t what it seemed and that it needed to investigate it. Information was missing, it warned, which meant investors couldn’t make an informed assessment about the investment on offer.

It alerted ASIC to the clause: “There is a risk that financial errors or mismanagement by Nuix, including but not limited to: errors in financial reporting practices or the accounting treatment of certain transactions; the incorrect interpretation of accounting standards or incorrect tax calculations.”

ASIC assigned the monitoring of the IPO and the letter of complaint to a graduate and his boss.

The pitch to prospective investors was that Nuix was on a strong growth curve. The pitch initially worked. Macquarie raised $565 million from selling shares in the float, and the stock initially soared on debut. Macquarie still owns a 30 per cent stake in Nuix worth $325 million. Castagna’s company still holds shares worth $45 million on top of the $80 million cash payout from his options. Vawdrey picked up $28 million from cashing in options.

Even though Castagna was no longer directly involved in Nuix, he wasn’t far from the action. On the day Nuix shares first traded, he was at the ASX. “Recognising and seizing a serendipitous opportunity is a phenomenon that no business plan can articulate or anticipate,” he told the crowd.

When Nuix lobbed its first-half results on February 26, the last day of reporting season, sales were down on 2020, not up, and investors panicked, carving 32 per cent from the share price. The stock kept sliding, then plunged again on April 20 when Nuix finally acknowledged it would not hit its 2021 forecasts, despite confirming them weeks earlier.

The downgrade came three days after the Herald, The Age and the Financial Review wrote to Nuix asking whether it continued to stand by its prospectus forecasts and whether it was planning a downgrade. None of the reasons given for the latest downgrade made the top 10 risks disclosed in the prospectus.

As one investor said, “they pitched this as a growth stock and the reality is the growth is anaemic at best”.

In response to detailed questions, Macquarie said: “[Your] questions relating to Nuix cover a range of matters, primarily in relation to an individual who was acquitted in 2019 of all charges relating to his tax affairs. Macquarie remains a 30 per cent shareholder in Nuix following last year’s IPO which was undertaken following thorough due diligence investigations by the company and its various advisers.”

In response to detailed questions, Nuix released a statement, saying it “does not propose to engage with questions raised in any specific sense for a range of reasons, including various obligations to the market, employees and shareholders”.

It said Nuix has “a strong corporate culture and a high-calibre leadership”.

Castagna, Doyle, Phillips and Standen did not respond to questions.

Castagna is still seen most days within the Nuix headquarters, where he has an office close to Vawdrey. He now has another private company, Haventec, that rents space from Nuix. Macquarie is a major shareholder.

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