Startup founder charged with fraud by the U.S. Department of Justice and the SEC
Manish Lachwani, the cofounder of a mobile app testing company Headspin and who had been leading the 6-year-old company as CEO until May last year, had falsely claimed during the Series C funding round pitch that the company had “achieved strong and consistent growth in acquiring customers and generating revenue” and had defrauded the investors out of $80 million. Lachwani has been arrested by the DOJ with one count of wire fraud and one count of securities fraud, both of which carry hefty sentences if found guilty. And the SEC (Securities and Exchange Commission),has said he violated antifraud provisions and they are looking to order a permanent injunction, a conduct-based injunction and to bar him from acting as a corporate exec or board member.
According to the SEC, the lies based around the growth were conjured up to help secure the round at a ‘unicorn valuation’ -startups that are worth more than a billion. Which did work, as Headspin attracted coverage in Forbes in February last year after Tiger Global, Iconiq Capital and Dell Technologies Capital put forward $60 million in Series C funding at a $1.16 billion valuation. Reported by Forbes, the valuation was double what investors assigned Headspin when it closed the Series B round in October of 2018. Apparently Lachwani was looking to enrich himself, supposedly by “by selling $2.5 million of his HeadSpin shares in a fundraising round during which he made misrepresentations to an existing HeadSpininvestor.” It is unknown if the SEC is referring to the Series C or a previous round. The SEC is still investigating the situation.
Leading up to the DOJ’s charges, the FBI had found many examples of Lachwani instructing employees to include revenue from potential customers that inquired but didn’t carry out business with Headspin, past customers that no longer had dealings with them, and from customers who did have business with Headspin but the business was far less that the revenue reported. The federal complaint from the DOJ says that Lachwani had been falsely representing the company’s success since around November 2019 and possibly before this, when Headspin was fundraising. In presentations and materials presented to potential investors, Lachwani had reported false revenue, and overstated key financial metrics of the company. He controlled all parts such as operation, record keeping and sales, including invoices, and had many chances to dictate what was read in these. The investigation began after the company’s board of directors oversaw an internal investigation to revise the company’s valuation, which wentdown from just over a billion, to $300 million. The DOJ noted in their announcement that “a complaint merely alleges that crimes have been committed, and all defendants are presumedinnocent until proven guilty beyond a reasonable doubt.”
Rajeev Butani who joined Headspin as their chief sales officer early last year has replaced Lachwani as the executive. Nikesh Arora helped to lead the internal review as a then-director on the board of Headspin, and who is a former SoftBank president and the current CEO and chairman of Palo Alto Networks. Headspin has been cooperating with the government’s investigation and has so far not been charged.
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