Indian American start-up founder pleads guilty to securities fraud
Representative image
Former HeadSpin CEO Manish Lachwani presented false financial information while raising more than $100 million
Indian American Silicon Valley start-up founder Manish Lachwani has pleaded guilty to wire fraud and securities fraud charges in connection with his scheme to dupe potential investors into supporting the technology start-up he founded and led,
The guilty pleas were accepted by US District Judge Charles R. Breyer in federal court in San Francisco on April 27, US Attorney’s Office for Northern District of California stated in a press release.
Read: Two former Indian American executives convicted in $1 billion scam (April 12, 2023)
Lachwani is currently released on bond.
Breyer scheduled Lachwani’s sentencing hearing for Sep 27. The maximum statutory penalty for each count of wire fraud is 20 years in prison and a fine of $250,000.
The maximum statutory penalty for securities fraud is 20 years in prison and a fine of $5 million, plus restitution if appropriate.
In addition, as part of the sentence Lachwani may be ordered to pay additional fines and to serve an additional term of supervised release after any prison sentence.
Lachwani, 47, of Los Altos, California founded Silicon Valley-based HeadSpin, a company that provided clients with software tools and access to devices to test mobile applications, according to the press release.
Lachwani founded the company in 2015 and served as its CEO until May 2020. Between April 2017 and April 2020, HeadSpin raised more than $100 million from investors over multiple rounds of fundraising, leading to a valuation of approximately $1.1 billion.
According to his plea agreement, Lachwani admitted that he disseminated false and overstated revenue metrics to potential investors to lure investments into his company.
The plea agreement provides several details of the fraud. Lachwani acknowledged that while HeadSpin was raising money, he provided to prospective investors information about the company’s business, customers, revenue, and finances.
Read: Indian American FTX executive pleads guilty in billion-dollar fraud (March 2, 2023)
Further, because HeadSpin was a software-as-a-service company, Lachwani knew that annual recurring revenue, known as “ARR,” was significant to investors and their decisions whether to invest in HeadSpin.
According to the plea agreement, Lachwani admitted that he provided prospective investors with inflated ARR numbers and overstated revenue numbers.
With respect to these metrics, Lachwani included amounts from potential customers that had not agreed to pay subscription fees to HeadSpin, amounts that were more than real customers had agreed to pay, and amounts from customers that had stopped using and paying for HeadSpin’s services.
Lachwani maintained and controlled an ARR spreadsheet that contained this false information and which he shared with potential investors.
In 2018, in connection with a round of fundraising, Lachwani sent a slide deck to investors that stated HeadSpin’s ARR was more than $33 million as of the second quarter of 2018, though Lachwani knew the company’s ARR was far less.
In 2019, during another round of fundraising, Lachwani again provided information to investors that overstated ARR, this time stating that HeadSpin’s ARR was $54 million when, in fact, it was far less.
Similarly, with respect to revenues, Lachwani sent invoices to HeadSpin’s accountant that Lachwani knew were altered to show amounts not actually invoiced to clients.
Read: Indian-American tech start-up founder pleads guilty to securities fraud (April 29, 2023)
HeadSpin investors received financial statements that were impacted by the altered invoices.
On Aug 4, 2022, a federal grand jury handed down a superseding indictment that charged Lachwani with 11 counts of wire fraud, one count of money laundering and four counts of securities fraud.
Pursuant to the plea agreement, Lachwani pleaded guilty to two counts of wire fraud and one count of securities fraud. If Lachwani complies with the plea agreement, the remaining counts will be dismissed at sentencing.
