Technology

Former HeadSpin CEO Manish Lachwani Charged With Fraud by DOJ for Allegedly Misstating Financials

Andrew Kelly | Reuters
  • Manish Lachwani, the former CEO and co-founder of tech start-up HeadSpin, was arrested for allegedly defrauding investors to raise money, the U.S. Department of Justice said.
  • Separately, the Securities and Exchange Commission sued Lachwani for defrauding investors out of $80 million while running HeadSpin, a digital platform that allows app developers to test their products.
  • Lachwani allegedly overstated the company's key financial metrics, including revenue, in an attempt to inflate the company's value.

Manish Lachwani, the former CEO and co-founder of tech start-up HeadSpin, was arrested Wednesday for allegedly defrauding investors to raise money, the U.S. Department of Justice said.

Separately, the Securities and Exchange Commission sued Lachwani for defrauding investors out of $80 million while running HeadSpin, a digital platform that allows app developers to test their products.

Lachwani is accused of overstating the privately held company's key financial metrics including revenue in an attempt to inflate the company's value

He is charged with wire fraud and securities fraud in a criminal complaint in U.S. District Court in San Francisco.

That complaint alleges several instances in which Lachwani told 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," the DOJ said.

Lachwani also allegedly overstated HeadSpin's annual recurring revenue by about $51 million to $55 million, according to the complaint.

His lawyer John Hemann in an emailed statement to CNBC disputed the allegations.

"We look forward to presenting a complete and accurate factual picture in court, and to showing that the government's allegations are wrong," Hemann said. "The government's complaint makes no reference to the extensive evidence showing that Mr. Lachwani acted in good faith throughout his time at HeadSpin."

HeadSpin, in an emailed statement to CNBC, said, "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," the company said. "HeadSpin has cooperated fully and will continue to do so with the government's investigation."

HeadSpin was founded in 2015 by Lachwani and Brien Colwell. The company has raised $91 million from investors including Alphabet's GV, Dell Technologies Capital and a variety of venture firms and individual investors and has at least 168 employees, according to Pitchbook.

The criminal complaint says that an accounting firm reviewed HeadSpin's unaudited financial statements in May 2020. That firm found that HeadSpin's actual revenues between 2018 and the first half of 2020 were $26.3 million, instead of the $95.3 million in revenues that were originally reported.

The company also had actually suffered a net loss of $15.9 million during that period, and not the $3.7 million net income initially reported when Lachwani ran HeadSpin.

After the accounting firm's review was completed in May 2020, HeadSpin's valuation was revised from $1.1 billion to about $300 million and Lachwani resigned from the company.

Lachwani faces a maximum possible prison sentence of 20 years in prison and fines in excess of $5 million.

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