SEC, DOJ accuse former Headspin CEO of mismanaging finances

SEC, DOJ accuse former Headspin CEO of mismanaging finances

Manish Lachwani, the former CEO of tech start-up Headspin, was arrested on Wednesday for allegedly defrauding investors, according to the US Department of Justice. The Securities and Exchange Commission also announced a lawsuit accusing Lachwani of defrauding investors of $ 80 million.

According to the DOJ complaint, which was filed in California District Court on August 20 and closed on Wednesday, Lachwani overestimated the company’s key financial metrics, including revenue, in a bid to increase the company value. He was charged with electronic fraud and security fraud.

The complaint alleges several instances in which Lachwani asked employees “to include income from potential customers who inquired about Headspin but did not include Headspin, previous customers who no longer did business with Headspin.” and existing customers whose business was well below reported revenue, ”the DOJ said.

Lachwani allegedly increased Headspin’s annual recurring revenue from $ 51 million to $ 55 million, according to the complaint.

A lawyer representing Lachwani said in a statement emailed to CNBC: “The government’s complaint makes no reference to extensive evidence showing that Mr. Lachhwani acted in good faith throughout his time at Headspin. Work done. “” We look forward to presenting a complete and accurate factual picture in court and showing that the government’s claims are false. “

Headspin said in an emailed statement to CNBC: “When Manish Lachwani’s conduct came to light in early 2020, the board took immediate action to investigate and resolve the issue, and Manish took action. management of the company. ” I’m quitting. “” At the end of last year, Headspin completed a recapitalization that returned a substantial portion of the funds to its investors. Headspin has fully cooperated and will continue to do so with the government’s investigation.

Headspin, a digital platform that enables mobile testing for application developers, was founded in 2015 by Lachvani and Brian Colwell. According to PitchBook, the company has raised $ 91 million from investors including Alphabet’s GV, Dell Technologies Capital and various venture capital firms and individual investors and has at least 168 employees.

An audit firm reviewed Headspin’s unaudited financial statements in May 2020, according to the complaint. Auditors found that revenue between 2018 and the first half of 2020 was $ 26.3 million, compared to $ 95.3 million initially reported. The company recorded a net loss of $ 15.9 million during this period, compared to initially reported net income of $ 3.7 million.

Following the discovery, Headspin’s valuation was revised down from $ 1.1 billion to nearly $ 300 million, and Lachwani resigned from the company.

If convicted of wire fraud, Lachwani faces up to 20 years in prison and a fine of $ 250,000. If convicted of securities fraud, he faces up to 20 years in prison and a fine of $ 5 million.

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