Manish Lachwani, co-founder and former CEO of technology company Headspin, was arrested today on charges of securities fraud and wire fraud when was raising money from investors, U.S. Justice Department officials announced.
The Securities and Exchange Commission also announced today the filing of a civil enforcement action against Lachwani in the Northern District of California.
According to the federal complaint unsealed today, Lachwani, 45, of Santa Clara County, is a co-founder of the Palo Alto-based technology company Headspin and acted as its CEO from its inception in 2015 until approximately May 2020.
Headspin provides a remote service that allows customers to access mobile devices around the world and remotely test their applications across different communications networks and in different locations. Headspin earns revenue by selling subscriptions to its services, according to the complaint, said Acting United States Attorney Stephanie M. Hinds and Federal Bureau of Investigation Special Agent in Charge Craig D. Fair.
The complaint alleges that from its 2015 inception until about March 2020, Headspin raised millions of dollars from investors during four major rounds of financing.
At its inception, Headspin raised approximately $11 million through the sale of Series A preferred shares. Later, in April 2017 to May 2018, Headspin raised approximately $24.7 million selling promissory notes convertible into future Series B preferred stock. During September to October 2018, Headspin raised approximately $20 million dollars in the sale of Series B preferred shares. The fourth round of fundraising occurred from November 2019 to early 2020, and Headspin raised approximately $60 million selling Series C preferred shares, according to the Justice Department complaint.
During the Series C fundraising round – starting no later than November 1, 2019, through at least January 30, 2020 – the federal complaint charges that Lachwani engaged in a scheme of securities fraud and wire fraud.
The complaint alleges that in materials and presentations to potential investors, Lachwani reported false revenue and overstated key financial metrics of the company. According to the complaint, Lachwani maintained control over operations, sales, and record-keeping, including invoicing, and he was the final decision maker on what revenue was booked and included in the company’s financial records.
Multiple examples are alleged in the complaint of Lachwani instructing 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.
Among other information, Lachwani provided investors false information that overstated Headspin’s annual recurring revenue – a key metric for evaluating the success of companies that provide “software as a service” – by approximately $51 to $55 million.
The company’s unaudited financial statements were reviewed by an auditing firm in May 2020. According to the complaint, the review concluded that Headspin’s cumulative revenues from inception through the first half of 2020 totaled only approximately $26.3 million, instead of the $95.3 million originally reported by the company.
The review also calculated the cumulative net loss from Headspin’s inception through the first half of 2020, totaling approximately $15.9 million, instead of the $3.7 million net income originally reported by the company.
The complaint alleges that in the fall of 2018, during Headspin’s Series B fundraising round, investors agreed to purchase shares at prices that valued the company at approximately $500 fmillion dollars. By late 2019, during the Series C fundraising round, investors agreed to purchase shares at prices that valued the company at approximately $1.1 billion.
According the allegations in the complaint, after the company discovered the overstated revenue and recapitalized the company’s investors, the valuation of the company dropped to approximately $300 million.
Lachwani will make an initial appearance in federal court to face the charges in the complaint at an undetermined future date, officials said.
Lachwani is charged in the complaint with one count of wire fraud in violation and one count of securities fraud. If convicted of wire fraud, he faces a maximum sentence of 20 years in prison and a fine of $250,000. If convicted of securities fraud, he faces a maximum sentence of 20 years in prison and a fine of $5,000,000. If convicted of either count, Lachwani is required to pay restitution.
A complaint merely alleges that crimes have been committed, and all defendants are presumed innocent until proven guilty beyond a reasonable doubt.
The case is being prosecuted by the Corporate and Securities Fraud Section of the U.S. Attorney’s Office for the Northern District of California. The prosecution is the result of an investigation by the FBI.