Today, both the U.S. Department of Justice and the Securities and Exchange Commission charged Manish Lachwani, cofounder of a mobile app testing company Headspin, with fraud. The SEC says he violated antifraud provisions and the civil penalties it’s seeking include a permanent injunction, a conduct-based injunction, and an officer and director bar of Lachwani.
The DOJ, which arrested Lachwani earlier, has accused him of one count of wire fraud and one count of securities fraud, and the associated penalties if he’s found guilty are are more harsh, including, for wire fraud, a maximum sentence of 20 years in prison and a fine of $250,000. He faces maximum 20 years imprisonment and a $5,000,000. fine if he is found guilty of securities theft.
The DOJ and SEC both say that Lachwani, who was CEO of the company for six years, defrauded investors of $80million by falsely declaring Headspin had achieved “strong and consistent growth in the acquisition of customers and generation of revenue” while pitching the Series C round of funding to prospective backers.
According to the SEC, his lies were meant to secure the round at the so-called unicorn value. That apparent plan worked, too, with Palo Alto-based Headspin attracting coverage in Forbes in February of last year after Dell Technologies Capital, Iconiq Capital and Tiger Global provided the company with $60 million in Series C funding at a $1.16 billion valuation. Forbes stated at that time that HeadSpin’s valuation had been doubled by investors when the company closed its Series A round in October 2018.
According to the SEC, Lachwani also claimed that he was trying to make a profit. He sold $2.5m of HeadSpin shares during a round in which he misrepresented to an investor.
According to the DOJ, Lachwani was allegedly involved in scheming at least since November 2019 when the company was raising funds. Lachwani knowingly misrepresented the Palo Alto-based Headspin’s success in showcasing apps and devices that work in various environments all over the globe, according to the complaint.
The complaint claims that Lachwani allegedly reported falsified revenue in presentations and materials to investors and exaggerated key financial metrics. . . He was responsible for all aspects of operations and sales. Invoicing was also his responsibility.
The FBI found “multiple instances” that Lachwani instructed employees to include revenue revenue from customers, past customers, or existing customers, in the DOJ investigation.
These collective calculations were how far from reality? According to the complaint, Lachwani ultimately “provided false information to investors that exaggerated Headspin’s annual recurring revenues. . . Between $51 and $55 Million.
The complaint states that Lachwani was found guilty of fraud after an investigation by the board. They also revised HeadSpin’s value from $1.1billion to $300m. Indeed, in August of last year, The Information reported that the company was planning to lower the value of its Series C stock by nearly 80%.
According to the outlet, Lachwani was already replaced. LinkedIn says Rajeev Butani is the person who replaced Lachwani as Headspin’s chief sales officer at the announcement of its Series C round in February last year.
Former SoftBank President, Nikesh Arora is the current chairman and CEO of Palo Alto Networks. He also served as the director on the Board of Headspin.
According to the SEC, its investigation continues. The DOJ announced that a complaint does not allege that crime has been committed. All defendants are presumed innocent unless proven guilty beyond reasonable doubt.
The outlook for Lachwani is not very bright. According to Forbes, Lachwani sold a mobile cloud company to Google previously and co-founded Headspin when Jerry Yang, Yahoo’s cofounder, introduced him to Brien Colwell. Colwell was a Quora and Palantir engineer who was at that time working on another startup.
Colwell is still Headspin’s CTO. He was not named by the DOJ or the SEC in Headspin’s complaint.
The company, which claims it was cooperating in the investigation by the government, wasn’t charged either.
Left to right: Headspin founders Lachwani & Colwell.
Publited at Thu 26 August 2021, 00:53.32 +0000