Manish Lachwani was accused of violating anti-fraud provisions of federal securities laws according to a Northern District of California complaint filed on Wednesday. The SEC claimed that HeadSpin Inc.’s former CEO, a private tech company, had defrauded investors. He also claimed that revenue generation and customer development were the main drivers of the company’s growth.
Silicon Valley Fraud
The complaint states that HeadSpin, a Silicon Valley-based company that provides customers hardware and software tools for testing their mobile software applications around the world. Lachwani is said to have co-founded and led the company since 2015.
The SEC claimed that HeadSpin’s value rose to more than $1 billion between 2018 and 2020 due to the false impression created by Lachwani. Lachwani was allegedly the primary controller of sales and finances at the company. He reportedly had access and tampered over financial records, including an important metric called “Annual recurring revenue”.
Lachwani is accused of inflating the value customer deals and treating potential deal income fraudulently as though it were already banked. He allegedly created fake invoices and altered real invoices to cover his tracks, making it appear that customers paid more for HeadSpin’s services than they did. One person familiar with the matter mentioned that fraud is very dishonest.
Lachwani Causes Heads to Spin and SEC Takes Notice
Further, the complaint claimed that Lachwani had sold $2.5 million of his shares in a fundraising round. The SEC claimed that the illegal scheme collapsed in 2020 after HeadSpin’s board conducted an investigation into customer reporting issues. These revelations led to a drop in company valuation from $1.1 billion to $300 million and the return of about 70% of principal to investors during the Series B/C funding rounds.
The SEC claimed that Lachwani, through his control over the company knew or was reckless in failing to know that HeadSpin’s ARR (and other financial numbers) were false and inflate. The SEC also cites a 2017 email Lachwani sent stating that he wanted to be involved in the financial tedium and that he had refused requests by the board for a CFO to be hired for more than two consecutive years.
The SEC is seeking declaratory and injunctive relief for the alleged securities fraud. It also seeks an officer director bar and an order that Lachwani must pay civil penalties.