Lying to Investors? Co-Founder of Startup 'HeadSpin' Gets 18-Month Prison Sentence for Fraud

The co-founder of Silicon Valley-based software testing startup HeadSpin was sentenced Friday to 18 months in prison and a $1 million fine, reports SFGate - for defrauding investors.Lachwani pleaded guilty to two counts of wire fraud and a count of securities fraud in April 2023, after federal prosecutors accused him of, for years, lying to investors about HeadSpin's finances to raise more money. HeadSpin, founded in 2015, grew to a $1.1 billion valuation by 2020 with over $115 million in funding from investors including Google Ventures and Iconiq Capital... He had personally altered invoices, lied to the company accountant and sent slide decks with fraudulent information to investors, [according to the government's 2021 criminal complaint]... Breyer, per the New York Times, rejected Lachwani's lawyer's argument that because HeadSpin investors didn't end up losing money, he should receive a light sentence. The judge, who often oversees tech industry cases, reportedly said: "If you win, there are no serious consequences - that simply can't be the law." Still, the sentencing was far lighter than it could have been. The government's prosecuting attorneys had asked for a five-year prison term. The New York Times reported in December that HeadSpin's financial statements had "often arrived months late, if at all, investors said in legal declarations," while the company's financial department "consisted of one external accountant who worked mostly from home using QuickBooks." And the comnpany also had no human resources department or organizational chart...After Manish Lachwani founded the Silicon Valley software start-up HeadSpin in 2015, he inflated the company's revenue numbers by nearly fourfold and falsely claimed that firms including Apple and American Express were customers. He showed a profit where there were losses. He used HeadSpin's cash to make risky trades on tech stocks. And he created fake invoices to cover it all up. What was especially breathtaking was how easily Mr. Lachwani, now 48, pulled all that off... [HeadSpin] had no chief financial officer, had no human resources department and was never audited. Mr. Lachwani used that lack of oversight to paint a rosier picture of HeadSpin's growth. Even though its main investors knew the start-up's financials were not accurate, according to Mr. Lachwani's lawyers, they chose to invest anyway, eventually propelling HeadSpin to a $1.1 billion valuation in 2020. When the investors pushed Mr. Lachwani to add a chief financial officer and share more details about the company's finances, he simply brushed them off. These details emerged this month in filings in U.S. District Court for the Northern District of California after Mr. Lachwani had pleaded guilty to three counts of fraud in April... The absence of controls at HeadSpin is part of an increasingly noticeable pattern at Silicon Valley start-ups that have run into trouble. Over the past decade, investors in tech start-ups were so eager to back hot companies that many often overlooked reckless behavior and gave up key controls like board seats, all in the service of fast growth and disruption. Then when founders took the ethos of "fake it till you make it" too far, their investors were often unaware or helpless... Now, amid a start-up shakeout, more frauds have started coming to light. The founder of the college aid company Frank has been charged, the internet connectivity start-up Cloudbrink has been sued, and the social media app IRL has been investigated and sued. Last month, Mike Rothenberg, a Silicon Valley investor, was found guilty on 21 counts of fraud and money laundering. On Monday, Trevor Milton, founder of the electric vehicle company Nikola, was sentenced to four years in prison for lying about Nikola's technological capabilities. The Times points out that similarly, FTX only had a three-person board "with barely any influence over the company, tracked its finances on QuickBooks and used a small, little-known accounting firm." And that Theranos had no financial audits for six years.

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