Unsupervised: Inside an initial boom-time fraud and its bust

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After Manish Lachwani founded Silicon Valley software startup HeadSpin in 2015, inflated the company's revenue figures nearly fourfold and falsely claimed that companies like Apple and American Express were clients. He showed profits where there were losses. He used HeadSpin cash to make risky trades in technology stocks. And he created fake invoices to cover it all up.

What was especially impressive was the ease with which Lachwani, now 48, accomplished all of this.

While HeadSpin had raised $117 million from top tech investors including GV, the venture capital arm of Google parent Alphabet; and Iconiq Capital, which helps manage Mark Zuckerberg's billions: had no chief financial officer, no human resources department, and was never audited.

Lachwani used that lack of oversight to paint a more optimistic picture of HeadSpin's growth. Although its major investors knew the startup's financials were inaccurate, according to Lachwani's lawyers, they decided to invest anyway, ultimately propelling HeadSpin to a valuation of $1.1 billion in 2020. When investors pressured Lachwani to add a CFO director and share more details about the company's finances, he simply ignored them.

These details emerged this month in filings in the United States District Court for the Northern District of California after Mr. Lachwani pleaded guilty to three counts of fraud in April. He is scheduled to be sentenced next month, with a maximum sentence of 20 years in prison on each count.

The lack of controls at HeadSpin is part of an increasingly notable pattern of troubled Silicon Valley startups. Over the last decade, investors in tech startups were So eager to support fashion companies. that many often overlooked reckless behavior and gave up key controls like board seats, all in the service of rapid growth and disruption. Then, when founders took the “fake it till you make it” ethos too far, their investors were often unaware or helpless.

FTX, the cryptocurrency exchange that collapsed last year, had a three-person board of directors with hardly any influence controlled the company, tracked its finances in QuickBooks, and used a small, little-known accounting firm. Theranos, the failed blood testing company, had without financial audits for six years. The founders of those companies have been convicted of fraud.

Now, in the middle of a initial shock, more frauds have begun to come to light. The founder of the university aid company. Frank has been loadedthe launch of Internet connectivity Cloud on the edge has been sued, and the social media app in real life has been investigated and defendant. Last month, Mike Rothenberg, a Silicon Valley investor, was found guilty for 21 counts of fraud and money laundering. On Monday, Trevor Milton, founder of electric vehicle company Nikola, was sentenced to four years in prison for lying about Nikola's technological capabilities.

“Governance got a little lax during the bubble,” said Healy Jones, vice president of financial strategy at Kruze Consulting, a provider of financial services for startups. Lately, Jones said, he's noticed that venture firms are doing more due diligence on potential investments, but “they probably shouldn't get a gold star for meeting their job description.”

Through a lawyer, Lachwani declined to comment.

Rajeev Butani, who took over as HeadSpin CEO in 2020, said in a statement that the company's board of directors took immediate action after Lachwani's conduct was discovered that year and cooperated with the government investigation.

“We are grateful to our customers who have supported us during this journey,” Butani added.

Lachwani founded HeadSpin in 2015 in Palo Alto, California, after selling his previous company, Appurify, to Google. Companies use HeadSpin technology to test and monitor their applications across geographies and devices. The new company quickly attracted money from investors such as SV Angel, Felicis and GV.

Soon there were warning signs. HeadSpin's financial statements often arrived months late, if at all, investors said in legal filings. The company's financial department consisted of an outside accountant who worked primarily from home using QuickBooks, a basic system designed for small businesses. HeadSpin had no human resources department or organizational chart and was not audited.

Around 2015, Lachwani saw an opportunity to profit from HeadSpin's cash reserves. “It's extremely sad to see money earning really low interest,” she wrote in an email that year to Karim Faris, a GV investor who was on HeadSpin's board of directors.

Faris advised Lachwani to keep cash in “very conservative and liquid instruments.” But over the next few years, Lachwani used HeadSpin's cash to buy shares and options in tech companies such as Snap, Roku and Tesla, according to bank statements filed as part of the case. At one point, he sent Faris a bank statement showing the money was in cash and cash equivalents, according to Faris' statement.

A GV spokeswoman declined to comment.

In 2017, Lachwani was overstating HeadSpin's revenue to investors by including revenue from client contracts that had not been finalized and one that had been canceled, he said in his plea agreement.

HeadSpin investors tried and failed to exert influence. Faris and Nikesh Arora, president of HeadSpin, each provided a list of candidates for the CFO to hire, they said in statements. Iconiq pressured Lachwani to add more controls, according to claims made in a filing included in a court filing.

Lachwani resisted Iconiq's demands, resulting in “a rift between them” that led the founder to want to return Iconiq's investment, according to the filing. Lachwani never hired a CFO.

Iconiq and Arora did not respond to requests for comment.

HeadSpin accountant Sana Okmyanskaya said in a statement that Lachwani had ordered her to add revenue from new contracts to the company's books. When she asked to see the contracts, he ignored her.

“He seemed very busy and often seemed to work late into the night,” she said in the statement.

Lachwani sometimes sent Okmyanskaya invoices that he had altered to include money that was never billed, his lawyers said in a filing. Okmyanskaya, who did not respond to a request for comment, said in his statement that he had also lied to her about details of the contracts to explain the inconsistencies.

In 2019, Lachwani cashed in $2.5 million of his own shares in HeadSpin and sold them to an investor.

Investors poured more money into HeadSpin in 2020, valuing it at $1.1 billion. By then, Stefanos Loukakos, a technology executive, had joined the company as a senior vice president and discovered Lachwani's pattern of misrepresentations.

That March, Loukakos shared his concerns with Arora in a 16-slide document. presentation, which was later presented to the court. Lachwani had claimed that HeadSpin had more than 20,000 devices on its network, for example, but Loukakos found that the actual number was closer to 2,000. When Loukakos asked an engineer about the discrepancy on Slack, the engineer responded, “Haha, ask Manish.”

Loukakos' presentation also included text messages showing Lachwani cursing at employees and abruptly firing them, including one worker who was in the middle of a video call with a client.

HeadSpin's board of directors launched an investigation. Lachwani resigned in May 2020 and agreed to return $1.9 million of the $2.5 million he had withdrawn. The company restructured its finances and returned money to investors who wanted out.

HeadSpin continues to work. In March, Announced new funding of an undisclosed amount from Atlassian Ventures. An outside accountant put the company's valuation at $302 million, more than 70 percent below its 2020 valuation.

Before his sentencing next month, Mr. Lachwani's lawyers argued for a lesser sentence. Despite Mr. Lachwani's misrepresentations, they said, none of HeadSpin's investors lost money.

“Mr. Lachwani did not need to say false or misleading things to create a successful company,” his lawyers wrote, “but he did.”



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