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Tech startup CEO charged with allegedly cooking books to pump up ‘unicorn’ valuation

MarketWatch logo MarketWatch 8/26/2021 Lukas I. Alpert
a man flying through the air on a cloudy day © karl-josef hildenbrand/Agence France-Presse/Getty Images
FINANCIAL CRIME

This unicorn was missing a few zeroes.

The co-founder of a venture-backed Silicon Valley startup has been charged with significantly inflating the company’s revenue to convince investors to value the business at over $1 billion, prosecutors and the SEC said.

Manish Lachwani, 45, who was the chief executive of Headspin, Inc. until May 2020, allegedly quadrupled the company’s actual overall revenue as the firm sought to close a series C funding round that valued it at $1.1 billion.

After the accounting fraud was discovered, the company’s investors reevaluated the business and dropped its valuation to $300 million, federal prosecutors in northern California and investigators with the Securities and Exchange Commission said.

Lachwani was arrested Wednesday and has been charged in U.S. District Court in northern California with wire and securities fraud. He faces up to 20 years in prison and a $5.25 million fine, prosecutors said. He was also hit with a separate civil suit by 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.”

It wasn’t immediately clear if Lachwani had retained counsel and he couldn’t be immediately reached for comment.

Lachwani co-founded the SaaS (software as a service) business in 2015 as a subscription service for customers to remotely test their mobile applications across different communications networks around the world. The company raised around $55 million in various funding rounds.

As the business approached its series C funding round, prosecutors say Lachwani began instructing employees to include revenue from potential customers that had inquired about doing business with Headspin but hadn’t signed on, as well as revenue from past customers who had left the service. 

In all, prosecutors say Lachwani overstated annual recurring revenue by as much as $55 million, allowing him to raise an additional $60 million from investors at a valuation of over $1 billion. The SEC alleges Lachwani personally made $2.5 million in the transaction.

In May 2020, prosecutors say, the company’s books were reviewed by an outside auditor who discovered that the company’s cumulative revenue since it started business had only been $26.3 million, not the $95.3 million Lachwani had claimed. The auditor also found that Headpsin had lost $15.9 million since it was founded, rather than the $3.7 million profit Lachwani had said.

The company itself wasn’t charged and in a statement said it had cooperated fully with the investigation and had “returned a substantial portion of funds to its investors.”

“We are grateful to our customers who have supported us through the journey and continue to stay focused on delivering value to them,” the company said.

Lachwani had previously been a principal architect in developing the first operating system for Amazon’s Kindle and had founded Appurify, a startup that was later acquired by Alphabet Inc.’s Google.

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