US charges HeadSpin ex-CEO over fake $1bn valuation scheme
The US Securities and Exchange Commission (SEC) has charged the former CEO of HeadSpin for allegedly defrauding investors.
Founded in 2015 and based in Silicon Valley, HeadSpin markets itself as an AI testing, dev-ops, and mobile testing platform. The co-founder and former chief executive, Manish Lachwani, led the company until May 2020.
According to the SEC and the US Department of Justice (DoJ), the 45-year-old allegedly defrauded investors out of $80 million “by falsely claiming that the company had achieved strong and consistent growth in acquiring customers and generating revenue.”
For approximately two years, the executive allegedly pushed for a valuation beyond $1 billion by inflating key financial metrics, doctoring internal sales records, and falsely increasing deal values currently under discussion with potential clients, making out that they were secure and guaranteed revenue streams.
The SEC says that through these methods, as well as the creation of fake, inflated customer invoices, Lachwani also “enriched himself” by selling $2.5 million of his own HeadSpin shares during a funding round.
Monique Winkler, Associate Regional Director of the SEC’s San Francisco Regional Office, said these activities misled investors into believing the startup had achieved “unicorn” status, the term used for a privately-held startup that passes the $1 billion valuation threshold.
However, his alleged actions did not go unnoticed, and an internal investigation by the firm’s board found issues with HeadSpin’s financial reporting.
According to the US agencies, the probe resulted in the startup’s valuation being slashed from $1 billion to $300 million. The former CEO was then required to resign.
Lachwani was arrested on Wednesday by US law enforcement.
HeadSpin has not been charged and says it is cooperating with the US agencies.
The SEC’s complaint, filed in the Northern District of California, charges Lachwani with violating US antitrust laws. The regulator is pursuing penalties, an injunction, and a court order to prevent the former CEO from acting as an officer or director in the future.
Separately, the DoJ has filed one count of wire fraud and one count of securities fraud against the former executive. If convicted, Lachwani faces a maximum sentence of 20 years in prison for each charge, as well as fines of up to $250,000 and $5 million, respectively.
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