SEC Files a Financial Fraud Action

Financial fraud has long been a focus of the Commission’s enforcement program. While over the years a series of significant actions have been initiated, in recent periods, there have been difficulties in identifying and initiating actions.

This week the Commission filed what is a classic financial fraud case – a CEO who inflated revenues to make the company appear more prosperous than possible. After two rounds of financings, an internal investigation uncovered the wrongful conduct. The action was filed:

SEC v. Lachwani, Civil Action No. 5:21-cv-06554 (N.D. Ca. Filed August 25, 2021).

Named as defendant is Manish Lachwani, CEO of HeadSpin, Inc., a Silcon Valley start-up that focuses on software applications. Over a period of two years, Defendant falsely inflated the revenues of the company in an effort to make its capitalization exceed $1 billion.

Mr. Lachwani achieved this by falsely inflating the value of numerous company deals in advance of two rounds of financing. In the fall of 2018, before its Series B fundraisings, HeadSpin was valued at about half a billion dollars. When Defendant sold his personal stock in May 2018 the valuation was up 50% to about $750,000. Less six months later at the time of the Series C fund raise, the valuation had increased to about $1.1 billion.

The company entered so-called “unicorn” status. A number of false statements were made by Mr. Lachwani to facilitate the scheme. That scheme unraveled following an internal investigation. Defendant was forced to resign. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. The U.S. Attorney’s Office for the Northern District of California announced criminal charges against Mr. Lachwani. See also Lit. Rel. No. 25182 (August 25, 2021).

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