SEC Charges Former HeadSpin CEO With $80M Fraud

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 the former CEO of HeadSpin Inc., a private technology company, defrauded investors and enriched himself by falsely asserting that the company had grown substantially through customer development and revenue generation.

According to the complaint, Silicon Valley-based HeadSpin “provides customers with hardware and software tools to test their mobile software applications across the world.” Lachwani reportedly co-founded the company and headed it since its establishment in 2015.

From roughly 2018 to 2020, the SEC alleged, Lachwani created the false impression that HeadSpin was flourishing, propelling its value to over $1 billion. As the person primarily in control of the company’s finances and sales, Lachwani reportedly had access to and tampered with financial records including a key metric called “annual recurring revenue” (ARR).

Specifically, Lachwani was alleged to have inflated the value of customer deals and fraudulently treated potential deal income as though it was already banked. The accused man allegedly covered his tracks by creating fake invoices and doctoring real invoices to make it seem as though customers paid more than they actually did for HeadSpin’s services.

The complaint further alleged that Lachwani sold $2.5 million of his shares during a fundraising round. In 2020, the SEC contended, the illicit scheme fell apart after HeadSpin’s board of directors undertook an investigation that revealed customer deal reporting problems. The revelations caused the company’s valuation to drop to $300 million from $1.1 billion and the return of approximately 70% of principal to investors in the Series B and C funding rounds. 

The SEC argued that “by virtue of his control over the company, Lachwani knew, or was reckless in not knowing, that HeadSpin’s ARR and other financial numbers were false and inflated.” The commission supports this argument by pointing to a 2017 email from Lachwani stating that he sought to involve himself in the tedium of the company’s financials and the alleged fact that for more than two years, he refused requests from the company’s board to hire a CFO.

For the alleged securities fraud, the SEC seeks declaratory and injunctive relief, an officer director bar, and an order requiring that Lachwani pay civil penalties.