This startup founder was just indicted by the SEC and DOJ for fraud. He lied to Tiger and other investors.
Today, the U.S. Department of Justice and Securities and Exchange Commission both charged Manish Lachwani with fraud. He was cofounder of Headspin, a mobile app testing firm. According to the SEC, Manish Lachwani violated antifraud laws. The civil penalties it seeks include a permanent and conduct-based injunctions, as well as an injunction that prohibits him from serving on a corporate board or executive committee.
Lachwani was arrested earlier by the DOJ. He is charged with one count each of wire fraud and securities fraud. The penalties for his conviction are harsher, including a maximum sentence in prison of 20 years and a fine up to $250,000. He faces a maximum sentence in prison of 20 years and a $5,000,000. fine if he is found guilty of securities fraud.
The SEC and DOJ both claim that Lachwani, who was CEO for six years, defrauded investors of $80 millions by falsely claiming Headspin had experienced strong growth in acquiring customers, and generating revenue, when he pitched its Series C round to potential backers.
According to the SECs, his lies were meant to secure the round at a valuation of $1.16 billion. This apparent plan also worked with Palo Alto-based Headspin receiving coverage in Forbes in February last year. The company received $60 million in Series C funding from Dell Technologies Capital, Iconiq Capital, and Tiger Global at a valuation of $1.16 billion. Forbes reported that HeadSpin's valuation was twice what investors had given it when it closed its Series A round in October 2018.
The SEC claims that Lachwani was also looking to gain personal wealth. It says that he sold $2.5 million of HeadSpin shares during a fundraising round in which he misrepresented to an existing HeadSpin investor.
According to the DOJ's federal complaint, Lachwanis is accused of plotting back to November 2019, when the company was raising money. Lachwani knowingly misrepresented the success of Palo Alto-based Headspin, which aids apps and devices in different environments around world, to investors.
The complaint claims that Lachwani lied about revenue and exaggerated key financial metrics in presentations and materials to potential investors. . . He was responsible for all aspects of operations, sales and record-keeping. Invoicing was his final responsibility.
The FBI found multiple instances of Lachwani telling employees to include revenue from potential customers, past customers, and existing customers. This led to the DOJs charging.
These collective calculations were how far off? According to the complaint, Lachwani ultimately provided false information to investors that exaggerated Headspins annual revenue recurring revenue. . . Between $51 and $55 Million
The complaint claims that Lachwanis fraud was exposed after the company's board of directors carried out an internal investigation. They also revised HeadSpins valuation from $1.1 billion down to $300 million. The Information reported in August last year that the company planned to reduce the Series C stock's value by almost 80%.
According to the outlet, Lachwani was already replaced by another executive. LinkedIn says Rajeev Butani is the person who replaced Lachwani as Headspin's chief sales officer at the time of its Series C round announcement in February last year.
Former SoftBank president Nikesh Arora is the current CEO and Chairman of Palo Alto Networks. He also served as the director on the Board of Headspin at the time of the internal review, according to The Information.
According to the SEC, its investigation is ongoing. The DOJ announced that the complaint only alleges crimes were committed. All defendants are presumed innocent unless proven guilty beyond reasonable doubt.
Whatever the case, Lachwani's prospects are not very bright right now. Forbes reports that he sold a mobile cloud company to Google previously and co-founded Headspin after Jerry Yang, Yahoo cofounder, introduced him to Brien Colwell. Colwell was a Quora and Palantir engineer who was at the time working on a different startup.
Colwell is still Headspin's CTO. He was not named in the DOJs or SEC complaints about Headspin.
The company, which claims it was cooperating with the government's investigation, was not also charged.
Above, from left to right, Headspin founders Lachwani & Colwell.