'Unicorn' startup CEO faked sales figures, deals to trick investors, prosecutors claim

Co-founder of mobile dev biz HeadSpin Manish Lachwani charged with fraud

The US Department of Justice and the SEC on Wednesday charged the former CEO and co-founder of mobile development testing biz HeadSpin with defrauding investors.

The government's complaint [PDF], filed in a federal district court in San Jose, California, contends that Manish Lachwani, who helped found HeadSpin in nearby Palo Alto in 2015 and served as its CEO until May 2020, raised money by overstating the company's financial performance.

"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," said Monique Winkler, Associate Regional Director of the SEC's San Francisco Regional Office, in a statement. "Companies and their executives must tell the truth when speaking about financial metrics that are material to the value of the business."

A unicorn valuation, in the context of a privately held company, is one that reaches a billion dollars or more. Examples include Reddit, Discord, and Graphcore.

The complaint says that from 2018 through 2020, Lachwani fraudulently boosted HeadSpin's valuation above $1bn "by falsely inflating the company’s key financial metrics and doctoring its internal sales records." It further asserts Lachwani used the inflated figures to get investors to pour about $80m into the company during that period, enabling him to collect $2.5m by selling his own stock in the business.

According to an FBI affidavit [PDF] supporting the criminal complaint, Lachwani controlled virtually all of the sales and financial records of the company and used his access to manipulate them.

"Lachwani was able to conceal the scheme to defraud by creating fake invoices and altering real invoices which he then provided to a HeadSpin employee who did accounting and financial record keeping for the company," the affidavit says.

The court filing describes how an employee of the company in March 2020 alerted the board to apparent inconsistencies and an audit of the company books two months later found that the cumulative amount of revenue HeadSpin earned through the first half of 2020 came to about $26.3m, compared to the $95.3m figure reported by the company. Its net loss during that period turned out to be $15.9m instead of the reported $3.7m profit.

It's further alleged that presentations to investors made revenue projections citing false revenue figures.

In a statement emailed to The Register, Lachwani's attorney John Hemann, from Cooley LLP, challenged the charges. "The government’s complaint makes no reference to the extensive evidence showing that Mr Lachwani acted in good faith throughout his time at HeadSpin. We look forward to presenting a complete and accurate factual picture in court, and to showing that the government’s allegations are wrong."

HeadSpin did not immediately respond to a request for comment.

Lachwani is charged with one count of wire fraud and one count of securities fraud, each of which, if he is convicted, carries a maximum penalty of 20 years in prison and potential fines of up to $250K and $5m respectively.

The bigger problem

From 2016 through 2020, according to the US Sentencing Commission [PDF], 86.6 per cent of those convicted of securities fraud were sentenced to prison terms with an average length of 46 months. That's down from 88 per cent and a 57 month average sentence from 2013 through 2015 [PDF].

The US Justice Department's Fiscal Year 2020 Annual Statistical Report [PDF] identifies 94 securities fraud cases filed during that period and 66 people sentenced by verdict or plea out of a total of 133 defendants – some of which may have been the result of cases originating in prior years.

In 2011, the most recent year when the DoJ broke out white collar crime stats separately [PDF], the agency said it had a 91 per cent conviction rate for white collar crimes, with 64 per cent of convicted defendants sentenced to prison.

White collar crime prosecutions have decreased by about 53.3 per cent since 2011, according to the Transactional Records Access Clearinghouse (TRAC) at Syracuse University. But so far this year, such cases are up 11 per cent, which TRAC attributes to the temporary suppression of white collar crime prosecution in 2020 as a result of the COVID-19 pandemic. ®

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