SEC and DOJ charge former Headspin CEO with misstating financials


Signage is seen at the United States Department of Justice headquarters in Washington, D.C., August 29, 2020.

Andrew Kelly | Reuters

Manish Lachwani, the former CEO of tech start-up Headspin, was arrested Wednesday for allegedly defrauding investors to raise money, according to the U.S. Department of Justice. The Securities and Exchange Commission also announced a lawsuit accusing Lachwani of defrauding investors out of $80 million.

According to the DOJ complaint, which was filed in a California district court Aug. 20 and unsealed Wednesday, Lachwani overstated the company’s key financial metrics including revenue in an attempt to inflate the company’s value. He is charged with wire fraud and securities fraud.

The complaint alleges several instances in which Lachwani told 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,” the DOJ said.

Lachwani also allegedly overstated Headspin’s annual recurring revenue by about $51 million to $55 million, according to the complaint.

“The government’s complaint makes no reference to the extensive evidence showing that Mr. Lachwani acted in good faith throughout his time at Headspin,” a lawyer representing Lachwani said in an emailed statement to CNBC. “We look forward to presenting a complete and accurate factual picture in court, and to showing that the government’s allegations are wrong.”

“When Manish Lachwani’s conduct initially came to light in early 2020, the Board took immediate action to investigate and address the issue, and Manish stepped down as CEO of the company,” Headspin said in an emailed statement to CNBC. “At the end of last year, Headspin completed a recapitalization, which returned a substantial portion of funds to its investors. Headspin has cooperated fully and will continue to do so with the government’s investigation.”

Headspin, a digital platform that allows mobile testing for app developers, was founded in 2015 by Lachwani and Brien Colwell. The company has raised $91 million from investors including Alphabet‘s GV, Dell Technologies Capital and a variety of venture firms and individual investors and has at least 168 employees, according to Pitchbook.

An auditing firm reviewed Headspin’s unaudited financial statements in May 2020, the complaint says. The auditors found that revenues between 2018 and the first half of 2020 were $26.3 million, rather than the $95.3 million originally reported. The company suffered a net loss of $15.9 million during that period, compared with the $3.7 million net income initially reported.

Following the discovery, Headspin’s valuation was revised from $1.1 billion to about $300 million and Lachwani resigned from the company.

If convicted of wire fraud, Lachwani 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 million.