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 actually arrested Lachwani today, 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. If he’s found guilty of securities fraud, he faces a maximum sentence of 20 years in prison and a fine of $5,000,000.
Both the the SEC and the DOJ say Lachwani — who led the six-year-old company as CEO until May of last year — defrauded investors out of $80 million by falsely claiming that his company, Headspin, had “achieved strong and consistent growth in acquiring customers and generating revenue” when he was pitching its Series C round to potential backers.
By the SEC’s telling, his apparent bluster was largely an attempt to secure the round at a so-called unicorn valuation. 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 reported at the time that the valuation was double the valuation investors assigned HeadSpin when it closed its Series B round in October 2018.
The SEC also says that Lachwani was looking to enrich himself, saying he did so “by selling $2.5 million of his HeadSpin shares in a fundraising round during which he made misrepresentations to an existing HeadSpin investor.” (It isn’t clear from its complaint whether the SEC is referring to the Series C or an earlier round.)
The DOJ’s federal complaint suggests that Lachwani’s alleged scheme dates back to at least November 2019, when the company was fundraising. It’s then that the success of Headspin — a six-year-old, Palo Alto, Ca., startup that helps apps and devices work in different environments around the world – was being knowingly misrepresented to investors by Lachwani, according to the DOJ.
More specifically, the complaint alleges that “in materials and presentations to potential investors, Lachwani reported false revenue and overstated key financial metrics of the company. . . he maintained control over operations, sales, and record-keeping, including invoicing, and he was the final decision maker on what revenue was booked and included in the company’s financial records.”
It says that in its investigation, the FBI discovered “multiple examples” of Lachwani “instructing employees to include revenue from potential customers that inquired but did not engage Headspin, from past customers who no longer did business with Headspin, and from existing customers whose business was far less than the reported revenue.”
Among other materials, Lachwani “provided investors false information that overstated Headspin’s annual recurring revenue . . . by approximately $51 to $55 million,” says the DOJ.
According to the complaint, Lachwani’s fraud unraveled after the company’s board of directors conducted an internal investigation that revealed significant issues with HeadSpin’s reporting of customer deals and revised HeadSpin’s valuation down from $1.1 billion to $300 million.
Indeed, in August of last year, The Information reported that “after an internal review of financial irregularities forced [Headspin] to restate its financials,” the company planned to lower the value of its Series C stock by nearly 80%.
The outlet reported at the time that Lachwani had been replaced by another executive. That person, according to LinkedIn, is Rajeev Butani, who joined Headspin as its chief sales officer around the time its Series C round was being announced in February of last year.
Nikesh Arora, a former SoftBank president, the current CEO and chairman of Palo Alto Networks, and a now-former board member of Headspin, helped lead the internal review, said The Information.
The SEC’s investigation is continuing, it says. Meanwhile, the DOJ notes in its announcement that “a complaint merely alleges that crimes have been committed, and all defendants are presumed innocent until proven guilty beyond a reasonable doubt.”
Either way, the outlook doesn’t look very promising right now for Lachwani, who, according to Forbes, previously sold a mobile cloud business to Google and wound up co-founding Headspin after Yahoo cofounder Jerry Yang introduced him to Brien Colwell, a former Palantir and Quora engineer was working at the time on a different startup.
Colwell remains with Headspin as its CTO. He has not been named in either the SEC or the DOJ’s complaints relating to Headspin.
The company itself, which has reportedly been cooperating with the government’s investigation, was also not charged.
Pictured above, left to right, Headspin founders Lachwani and Colwell.