Former CEO of Palo Alto-based startup charged with securities fraud
SAN FRANCISCO - The co-founder and former CEO of Palo Alto-based startup Headspin is facing federal charges of securities fraud and wire fraud.
Manish Lachwani, 45, co-founder and former CEO of the technology company, allegedly inflated the value of his company's earnings and valuation to investors, federal prosecutors say.
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.
In the complaint unsealed Wednesday, Lachwani is alleged to have overstated Headspin's annual recurring revenue by $51-55 million.
The complaint alleges Lachwani stated revenue for the first half of 2020 totaled $95.3 million. But auditors found that Headspin's revenue was actually $26.3 million.
The same auditing firm calculated the cumulative net loss from Headspin’s inception through the first half of 2020, totaled approximately $15.9 million, instead of the $3.7 million net income originally reported by the company.
According to the complaint, 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 million 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. After the company discovered the overstated revenue and recapitalized the company’s investors, the valuation of the company dropped to approximately $300 million.
Lachwani is set make an initial appearance in federal court to face the charges in the complaint on date and time to be set by the court.
He is charged with one count of wire fraud in violation of 18 U.S.C. § 1343 and one count of securities fraud in violation of 15 U.S.C. §§ 78j(b) and 78ff and Title 17 C.F.R. § 240.10b-5.
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, Lachwani 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.