AFR piece,

Morgan Stanley was warned about ‘unusual’ Nuix targets in 2020

Morgan Stanley, the co-lead manager of the disastrous Nuix float in 2020, was warned about problems with the software company’s revenue forecasts, as well as “unusual” clauses that transferred risk to the company’s investors, just weeks before its listing.

Nuix remains under intense scrutiny after a four-week trial brought by the regulator wrapped up this week. The Australian Securities and Investment Commission alleges that Nuix, and four directors, were too slow to correct the announcements that assured investors it was on track to meet its revenue guidance even though it was not.

But documents obtained by The Australian Financial Review show a long-term Nuix contractor was concerned not only about how the forecasts were calculated but also about “unusual” risk disclosure requirements going into the IPO. The concerns were raised in a letter to Morgan Stanley, sent by James Olsen, a business development contractor who had worked with Nuix for two years before its IPO, in November 2020.

The letter shows Mr Olsen had warned that the prospectus sought to “transfer responsibility for both negligent and deliberate acts of omissions (in relation to accounting tax and related matters) from Nuix to investors”.

Mr Olsen also said this risk disclosure could amplify “potential harm” as there “appear to be very generous escrow conditions and the cashing out of options”.

Nuix options were the subject of a five-year, $183 million lawsuit brought by former chief executive Eddie Sheedy. Earlier this year, Mr Sheedy lost his claim that he was entitled to a stock split that would have allowed him to sell shares into the $1.3 billion listing.

Mr Olsen’s letter questions whether the Nuix prospectus – prepared by Macquarie and audited at least once by PwC – would meet financial regulators in other jurisdictions.

“[This] is considered by our client, and others in the finance sector to whom he has spoken, to be very unusual in an offer document because of its wide-reaching ambit and unlikely to meet the standards of financial regulators in the US and other comparable jurisdictions,” the letter reads.

Revenue calculations

Mr Olsen’s letter is addressed to Richard Wagner, Morgan Stanley’s co-head of investment banking, and others. Mr Wagner declined to comment.

Mr Olsen also raised concerns regarding the forecasts included in the prospectus, and questioned whether they were signed off by Nuix regional sales heads. He said they were not re-audited after a change in how revenue was calculated just before the float.

ASIC has previously dropped an investigation into whether Nuix’s primary backer, Macquarie, had overstated the company’s sales forecasts in the company prospectus before its $1.8 billion listing. The prospectus had forecast that Nuix would book $193 million in statutory revenue for FY21 and would grow at a conservative 10 per cent a year.

Mr Olsen also sent a letter to the corporate regulator in November 2020 expressing his concerns about the Nuix prospectus.

In closing submissions this week, ASIC alleged that Nuix and its board were aware they would miss these forecasts as early as January 2021, but reaffirmed guidance twice amid a sharp fall in the share price. The board published a corrective announcement in late April, conceding the forecast would be missed by as much as $13.5 million.

Nuix, and its directors, have defended their actions. They say they were reassured by the management that Nuix would make up for its “disappointing” first half in the second half. Macquarie, which remains a 30 per cent shareholder of Nuix, made $567 million from selling down part of its stake during the IPO.