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Today, the US Department of Justice and the Securities and Exchange Commission accused Manish Lachwani, co-founder of mobile app testing company Headspin, of fraud. The SEC says he violated anti-fraud provisions and that the civil penalties it seeks include a permanent injunction, a conduct-based injunction, and a ban on acting as a company officer or board member administration.
The DOJ, which arrested Lachwani earlier, charged him with one count of wire fraud and one count of securities fraud, and the associated penalties if found guilty are more severe, including, for electronic fraud, a maximum sentence of 20 years in prison and a fine of $ 250,000. If convicted of securities fraud, he faces a maximum sentence of 20 years in prison and a fine of $ 5,000,000.
The SEC and DOJ claim that Lachwani – who ran the company for six years as CEO until May of last year – defrauded investors of $ 80 million by falsely claiming that his company, Headspin, had “achieved strong and consistent growth in acquiring customers and generating income” when he introduced his Series C to potential funders.
According to the SEC, its fabrications were designed to help secure the ride to a so-called unicorn valuation. That apparent plan worked too, with Palo Alto-based Headspin attracting cover to Forbes in February last year after Dell Technologies Capital, Iconiq Capital and Tiger Global provided the company with $ 60 million Series C funding. dollars for a valuation of $ 1.16 billion. Forbes reported at the time that the valuation was double the valuation investors gave HeadSpin when it closed its Series B cycle in October 2018.
The SEC also said Lachwani was looking to get rich, saying he did so “by selling $ 2.5 million worth of his HeadSpin shares in a fundraiser in which he made money. misrepresentation to an existing HeadSpin investor “. (It’s not clear from its complaint whether the SEC is referring to Series C or an earlier cycle.)
The federal Justice Department complaint suggests that Lachwani’s alleged intrigues date back to at least November 2019, when the company raised funds. He says that’s when the success of Headspin – which helps apps and devices work in different environments across the world – was knowingly misrepresented to investors by Lachwani.
Specifically, the complaint alleges that “in documents and presentations to potential investors, Lachwani reported false income and overestimated the company’s key financial metrics. . . he maintained control of operations, sales and record keeping, including invoicing, and he was the final decision maker of revenues recognized and included in the company’s financial records.
In the investigation that led to the DOJ charges, the FBI uncovered “multiple examples” of Lachwani “ordering employees to include income from potential clients who requested but did not hire Headspin, former clients who were no longer doing business with Headspin and former clients whose activity was much lower than the declared turnover ”, specifies the department.
How far away were these collective calculations? The complaint says that in the end, Lachwani “provided investors with false information that overestimated Headspin’s annual recurring revenue. . . of about $ 51 million to $ 55 million.
According to complaint, Lachwani’s fraud came to light after the company’s board of directors conducted an internal investigation and revised HeadSpin’s valuation from $ 1.1 billion to $ 300 million. . Indeed, in August of last year, The Information reported that the company planned to lower the value of its Series C shares by nearly 80%.
The media reported at the time that Lachwani had already been replaced by another executive. That person, according to LinkedIn, is Rajeev Butani, who joined Headspin as sales manager early last year.
Nikesh Arora, former chairman of SoftBank and current CEO and chairman of Palo Alto Networks, helped lead the internal review as the then director on Headspin’s board, The Information said.
The SEC says its investigation is continuing. The DOJ also notes in its announcement that “a complaint simply alleges that crimes have been committed and that all defendants are presumed innocent until their guilt is proven beyond a reasonable doubt.”
Regardless, the outlook doesn’t look very bright right now for Lachwani, who according to Forbes previously sold a mobile cloud company to Google and ended up co-founding Headspin after Yahoo co-founder Jerry Yang , introduced it to Brien Colwell, a former Palantir and Quora Engineer who was working at another startup at the time.
Colwell remains with Headspin as CTO. He was not named in the SEC or DOJ complaints about Headspin.
The company itself, which says it cooperated with the government investigation, has also not been charged.
In the photo above, left to right, Headspin founders Lachwani and Colwell.
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