SEC Charges Former Tech CEO In Alleged $80M Fraud Scheme

Former HeadSpin CEO Manish Lachwani allegedly swindled investors by falsely claiming the Palo Alto, Calif.-based company had achieved strong growth in customer acquisition and revenue generation. Its investors included Dell Technologies Capital.

The U.S. Securities and Exchange Commission has charged the former CEO of HeadSpin, a Palo Alto, Calif.-based technology company, with allegedly defrauding investors to the tune of $80 million.

The SEC today said Manish Lachwani allegedly defrauded investors by falsely claiming that HeadSpin had achieved strong growth in customer acquisition and revenue generation.

The SEC alleges that from at least 2018 through 2020, Lachwani fraudulently schemed to boost the valuation of HeadSpin to more than $1 billion by falsely inflating the technology startup’s key financial metrics and doctoring internal sales records, according to an SEC complaint filed in the U.S. District Court for the Northern District of California.

Lachwani could not be reached immediately for comment. He was arrested today on charges of securities fraud and wire fraud perpetrated to raise money from investors, according to the U.S. Attorney’s Office for the Northern District of California. HeadSpin, a digital experience AI platform company that claims Amazon Web Services, Google Cloud and IBM among others as its partners, continues to operate under a new CEO.

Lachwani controlled HeadSpin’s business functions and operations from its formation in about 2015 through his tenure as CEO that ended in 2020. HeadSpin made virtually all of its revenue by charging customers fees to use its hardware and software products, according to the SEC court complaint.

“To create the illusion of strong and consistent growth, Lachwani, who controlled all important aspects of HeadSpin’s financials and sales operations, falsely inflated the values of numerous customer deals that, in reality, were much smaller,” the complaint stated. “He also fraudulently treated uncommitted deal amounts that he had discussed with customers as if they were guaranteed future payments.”

Lachwani allegedly concealed the inflated claims by creating fake invoices and altering real invoices to falsely make it appear that customers were billed higher amounts. He also allegedly enriched himself by selling $2.5 million of his personal HeadSpin shares in a fundraising round during which he made misrepresentations to an existing HeadSpin investor, the SEC said.

“Lachwani’s fraudulent actions increased HeadSpin’s revenue-related financial measures, which, in turn, fueled the company’s valuation upward,” the SEC’s complaint states. “In fall of 2018, ahead of its Series B fundraising round, HeadSpin was valued at approximately half a billion dollars. When Lachwani sold his personal stock in around May 2019, that valuation had climbed about 50 percent to approximately $750 million. Less than six months later, in fall of 2019, HeadSpin’s valuation for its Series C fund raise had jumped to approximately $1.1 billion and entered so-called ‘unicorn status.’”

Investors invested millions of dollars in HeadSpin based on Lachwani’s alleged misrepresentations, according to the SEC.

“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 C. Winkler, associate regional director of the SEC’s San Francisco office. “Companies and their executives must tell the truth when speaking about financial metrics that are material to the value of the business.”

Lachwani’s alleged fraudulent activity unraveled in the spring of 2020 after an internal investigation by the company’s board found significant issues with HeadSpin’s reporting of customer deals. The board had been alerted to concern about the accuracy of the financial and customer information provided to investors.

“As Lachwani admitted in a December 2017 email, he intended to ‘super micro manage’ the company’s financials and finance function, and he rebuffed repeated requests from late 2017 into 2020 from HeadSpin’s board to hire a chief financial officer to manage HeadSpin’s day-to-day finances,” the SEC court complaint states.

Lachwani was forced to resign as HeadSpin CEO in May 2020, and he returned approximately $2 million to an unnamed investor who had purchased some of his personal HeadSpin stock in May 2019.

Gaurav Mathur, HeadSpin’s current chief operating officer, said in a statement that “when Manish Lachwani’s conduct initially came to light in early 2020, the board took immediate action to investigate and address the issue, and Manish stepped down as CEO of the company. At the end of last year, HeadSpin completed a recapitalization, which returned a substantial portion of funds to its investors.”

He added that “Headspin has cooperated fully and will continue to do so with the government’s investigation. We are grateful to our customers who have supported us through the journey and continue to stay focused on delivering value to them.”

HeadSpin subsequently revised its valuation to $300 million from $1.1 billion, according to the SEC complaint. HeadSpin, at the time, also acknowledged that its annual recurring revenue was closer to $10 million rather than the $80 million figure that Lachwani had given to investors.

Twenty-nine unnamed investors had purchased HeadSpin stock at prices based on its inflated $1.1 billion valuation. HeadSpin returned approximately 70 percent of principal to investors in its Series B and C funding rounds, and it further offered to return the remaining funds in the form of promissory notes with 1 percent interest. Approximately 31 investors retained their shares in in the company.

HeadSpin investors included Dell Technologies Capital, ICONIQ Capital, Tiger Global Management, Kearny Jackson and Alpha Square Group, according to a company press release.

Lachwani declined to produce any documents concerning the SEC investigation on the basis of his Fifth Amendment privilege against self-incrimination, according to the SEC.

He has been charged with violating antifraud provisions of the federal securities laws. The SEC has asked the court to order Lachwani to pay civil monetary penalties, bar him from issuing, purchasing or selling securities for any company he owns or controls, and prohibit him from serving as an officer or director of any publicly traded company.

The SEC said its investigation into Lachwani is ongoing.

Lachwani, now 45, and living in Los Altos, Calif., co-founded HeadSpin in 2015 to provide hardware and software tools that allow customers to test their mobile software applications and ensure they work on different operating systems as well as various internet and cellular data networks, according to the SEC. Prior to HeadSpin, he co-founded another tech start-up -- Appurify, a maker of a mobile app testing service -- that was sold to Google in 2014 and in which Google Ventures (now GV) already held a stake.

Lachwani previously was chief technology officer for Zynga and a principal architect for Amazon Kindle, according to a company press release.