The former CEO of HeadSpin, a Sunnyvale software testing company, Manish Lachwani, pleaded guilty in federal court in San Francisco on Thursday to wire fraud and securities fraud charges in connection with a scheme to dupe potential investors.
In a plea deal accepted by U.S. District Court Judge Charles Breyer, Lachwani admitted that he disseminated false and overstated revenue metrics to potential investors to lure investments into his company.
Lachwani, 47, of Los Altos, Calif., founded HeadSpin in Palo Alto in 2015, providing clients with software tools and access to devices to test mobile applications. Lachwani served as its Chief Executive Officer until May 2020. Between April 2017 and April 2020, HeadSpin raised more than $100 million from investors over multiple rounds of fundraising, leading to a valuation of approximately $1.1 billion.
The plea agreement provides several details of the fraud, said U.S. Attorney Ismail Ramsey. Lachwani acknowledged that while HeadSpin was raising money, he provided to prospective investors information about the company’s business, customers, revenue and finances.
According to the plea agreement, Lachwani admitted that he provided prospective investors with inflated data on annual recurring revenue, overstating revenue.
Prosecutors said Lachwani included amounts from potential customers that had not agreed to pay subscription fees to HeadSpin, amounts that were more than real customers had agreed to pay and amounts from customers that had stopped using and paying for HeadSpin’s services.
In 2018, in connection with a round of fundraising, Lachwani sent a slide deck to investors that stated HeadSpin’s annual recurring revenue was more than $33 million as of the second quarter of 2018, though Lachwani knew the company’s revenue was far less, said prosecutors.. In 2019, during another round of fundraising, Lachwani again provided information to investors that overstated revenue as $54 million when in fact it was far less.
Lachwani also sent invoices to HeadSpin’s accountant that Lachwani knew were altered to show amounts not actually invoiced to clients. HeadSpin investors received financial statements that were impacted by the altered invoices.
Pursuant to the plea agreement, Lachwani pleaded guilty to two counts of wire fraud and one count of securities fraud. If Lachwani complies with the plea agreement, nine remaining counts of wire fraud, three counts of securities fraud and one count of money laundering will be dismissed.
Lachwani, who was indicted by a federal grand jury in August 2022, is currently released on bond. Breyer scheduled Lachwani’s sentencing hearing for Sept. 27. The maximum statutory penalty for each count of wire fraud is 20 years in prison and a fine of $250,000. The maximum statutory penalty for securities fraud is 20 years in prison and a fine of $5 million, plus restitution if appropriate. In addition, as part of the sentence Lachwani may be ordered to pay additional fines and to serve an additional term of supervised release after any prison sentence.
The case is being prosecuted by the Corporate and Securities Fraud Section of the U.S. Attorney’s Office for the Northern District of California. The prosecution is the result of an investigation by the FBI, with assistance from the San Francisco Regional Office of the Securities and Exchange Commission.
