SEC and DOJ charge ex-CEO of Silicon Valley startup HeadSpin with $80m fraud

The Securities and Exchange Commission (SEC) charged the former CEO of HeadSpin Manish Lachwani with defrauding investors out of $80m by falsely claiming the company had achieved strong and consistent growth in acquiring customers and generating revenue.

The SEC’s complaint, filed in the US District Court for the Northern District of California, alleges from at least 2018 through 2020, Lachwani engaged in a fraudulent scheme to propel HeadSpin’s valuation to north of $1bn by puffing up HeadSpin’s key financial metrics and doctoring internal sales records. According to the complaint, Lachwani, who allegedly controlled all important aspects of HeadSpin’s financials and sales operations, significantly inflated the value of numerous customer deals and fraudulently treated potential deal amounts that he had discussed with customers as if they were guaranteed future payments.

In the investigation, 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,” the department specified.

The complaint further alleges Lachwani concealed this inflation by creating fake invoices and altering real invoices to make it appear as though customers had been billed higher amounts. Lachwani then allegedly enriched himself by selling $2.5m of his HeadSpin shares in a fundraising round during which he made misrepresentations to an existing HeadSpin investor.

According to the complaint, Lachwani’s fraud unravelled after the company’s board conducted an internal investigation that revealed significant issues with HeadSpin’s reporting of customer deals, and revised HeadSpin’s valuation down from $1.1bn to $300m.

Associate regional director of the SEC’s San Francisco Regional Office Monique C. Winkler said, “We allege that Lachwani misled investors into believing that HeadSpin had achieved a ‘unicorn’ valuation by winning hundreds of lucrative deals, including many with Silicon Valley’s biggest and most high profile companies. Companies and their executives must tell the truth when speaking about financial metrics that are material to the value of the business.”

The SEC’s complaint charges Lachwani with violating antifraud provisions of the federal securities laws and seeks penalties, a permanent injunction, a conduct-based injunction, and an officer and director bar.

The US Attorney’s Office for the Northern District of California announced criminal charges against Lachwani.

HeadSpin had announced a unicorn funding round last February and attracted investors including GV (formerly Google Ventures), Tiger Global Management, Dell Technologies Capital and Iconiq Capital. During the pursuance of that funding, HeadSpin forecast $100m in annual recurring revenue but was only bringing in $15m. That resulted in its private stock value shedding around 80% of its value.

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