ASIC emails reveal Nuix prospectus warnings were dismissed

Internal emails reveal ASIC waved through a crucial section of the disastrous Nuix prospectus, which was at least partly assessed by a graduate.

Nuix CEO Rod Vawdrey at the ASX listing ceremony last December. Picture: Bianca De Marchi

The corporate regulator took just 12 days to give the Nuix float its seal of approval, waving through the prospectus for an IPO that has since delivered hundreds of million of dollars in shareholder losses, despite repeated warnings from a high-level Nuix insider that the prospectus was riddled with dangers for investors.

Internal Australian Securities and Investments Commission emails and letters released to The Australian under Freedom of Information laws reveal that one of ASIC’s highest ranking executive leaders branded a crucial section of the disastrous Nuix prospectus around internal financial risks control as “not controversial”.

The documents have emerged as the troubled investigative software company Nuix issued its third earnings downgrade since February, junking revenue guidance only given to the market six weeks ago.

The announcement sent its share price tumbling nearly 18 per cent on Monday, confirming Nuix as one of the worst-performing blockbuster floats of the last year.

ASIC was warned in November 2020, two weeks before the Nuix float, that the high-profile tech stock could find it difficult to hit its prospectus forecasts for revenue in fiscal 2021 because of a mass selldown in shares by senior Nuix staff.

There were also ominous warnings that the backers of Nuix’s $1.8bn float, including its directors and joint lead managers, could cash in their options and walk away without any recourse from shareholders if fraud was detected.

“For example – an extreme event such as fraud could occur, yet those responsible for the prospectus, having cashed in a major part of their financial interest in Nuix, will be able to walk away with no adverse impact to them on that receipt,” ASIC was warned in November 2020.

ASIC’s key investigative and compliance staff were bracing for complaints concerning the float. Complaints arrived in late November from a lawyer acting on behalf of an anonymous client, believed to be a former Nuix executive.

However, ASIC investigators and legal officers hoped to give the lengthy and detailed complaint about the Nuix prospectus a cursory view and then move on.

“As predicted, a complaint in relation to Nuix. Let’s digest quickly and see if there is any substance,” read one email between senior ASIC legal staff and ASIC senior executive leader, corporations, Claire LaBouchardiere.

Meanwhile, much of the grunt work around vetting and clearing the Nuix prospectus involved a graduate at ASIC who was assigned to work on the Nuix case with the jovial salutation “welcome aboard”.

Despite the warnings, detailed insider knowledge from a former Nuix executive and growing concerns over Nuix’s management of financial risks, the prospectus was not stopped by the corporate regulator. Nuix floated later in 2020, becoming the biggest IPO of the year.

Since then Nuix has been plagued by corporate governance scandals, three profit warnings and extreme share price volatility as investors questioned its ability to forecast even short-term sales and earnings. The controversy has seen the share price collapse by almost 80 per cent, destroying more than $2bn in investor wealth.

But the ASIC documents show the November correspondence raised major concerns. Aperion Law director Mark Allen first contacted the corporate regulator on November 23 and followed up on November 25 with correspondence to the ASX, ASIC, and individual ASIC commissioners on their personal emails, making a number of serious allegations around the $1.8bn Nuix prospectus.

Mr Allen said he had been instructed by his client, who wished to remain anonymous, to bring to the regulator’s attention matters relating to the disclosures made by the promoters in the Nuix prospectus, which included its directors, members of the Nuix due diligence committee and the joint lead managers for the float.

“The prospectus, at over 320 pages long, is hardly a concise document. In our client’s view, notwithstanding its length, it does not contain all of the information that investors and their professional advisers should have available to make an informed assessment about the company’s offer,” Mr Allen’s letter to ASIC on November 23 read.

“Our client is concerned that, given the length of the document, there is a danger that insufficient scrutiny can be given to these matters in the exposure period, particularly in light of the size and nature of the offer and given the identity of the parties involved.”

Mr Allen wrote to ASIC asking it to “examine these matters and consider requiring additional disclosure to be made by Nuix in respect of the matters set out in this letter.”

Mr Allen said the matters raised by his client fell into two parts: the consequence to investors of the Nuix’s attempt to transfer certain financial risks from the promoters to the investors themselves; and the impact of the significant selldown by key members of the senior leadership team on the Nuix’s ability to achieve its fiscal 2021 revenue forecast.

“It is submitted that the matters, when taken collectively, result in the prospectus not containing all of the information that investors and their professional advisers reasonably require to make an informed assessment about the Nuix’s offer,” he wrote.

The anonymous complaint drew ASIC’s attention to the risks around financial and operational controls and its impact on preparing financial reports. There were also concerns raised about the massive selldown of Nuix shareholders in the float, such as Macquarie Group which cashed in $575m in shares — which helped boost the investment bank’s own profitability for the period — and escrow periods for other Nuix shareholders.

However, despite the string of serious financial and corporate governance allegations painstakingly detailed to key ASIC executives and staff by December 4 — only 12 days later — the complaint was dismissed.

In her letter to Mr Allen, Ms LaBouchardiere said that ASIC did agree the disclosure in the Nuix prospectus warning of the dangers of incorrect tax calculations, the under or overstatement of key financial metrics was “uncommon”.

“However, the disclosure that precedes it in paragraph 5.1.21, describing internal control risks and management of growth, is not controversial. It is clearly appropriate that the restatements to the accounts in recent financial years have been disclosed. It follows, in our view, that it is prudent and conservative to include related risk disclosure in the prospectus.”

Mr Allen was then thanked for his inquiry.

“We thank you for taking the time to write to us. We value all reports of misconduct we receive. Please be assured that your correspondence has been carefully considered by my team.”

Three profit warnings later, issues around corporate governance and the involvement of former Nuix chairman and shareholder Tony Castagna — who Nuix cut ties with this week after reports of an Australian Federal Police investigation in to potential breaches of the Corporations Act — and Nuix shares have slumped almost 80 per cent.