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Illustration: Aïda Amer/Axios

Just days before jury selection starts in the criminal fraud trial of Theranos' Elizabeth Holmes, federal prosecutors filed fraud charges against another VC-backed founder: Manish Lachwani, former CEO of mobile app testing company HeadSpin.

Why it matters: The Lachwani case is a reminder that startup execs can be held liable for what they tell VCs, and also that investors are often blind to the veracity of those statements.

What happened: Lachwani is accused of cooking the books to both help his company secure capital and to enrich himself.

  • Palo Alto-based HeadSpin raised over $100 million from such veteran firms as Tiger Global, Google Ventures, EQT Ventures and Battery Ventures.
  • This included a $60 million Series C round in early 2020, led by Dell Technologies Ventures and ICONIQ Capital, at around a $1.1 billion valuation. Plus a Series B round during which Lachwani sold around $2.5 million of personal shares.
  • The SEC alleges that the 45-year-old Lachwani began to inflate company financials in 2018, including by creating false invoices and altering real ones.

Per the complaint:

"Lachwani was able to carry out his fraudulent scheme for years because he controlled and managed all the key aspects of HeadSpin’s financials and sales operations, and he kept HeadSpin employees in those different departments isolated from each other. For instance, virtually all the information provided to HeadSpin’s bookkeeper, including the supporting documentation for claimed revenue amounts, flowed through Lachwani."By virtue of his control over the company, Lachwani knew, or was reckless in not knowing, that HeadSpin’s ARR and other financial numbers were false and inflated."

Shortly after the Series C financing, HeadSpin's board "was alerted" to the possibility of forged financials. It launched an internal investigation that found the company's annual recurring revenue at the end of 2019 was closer to $10 million than the $80 million that they'd been told.

  • That led to a DOJ investigation and a recap that cut HeadSpin's valuation from $1.16 billion to around $300 million.
  • Lachwani was fired and now faces serious prison time.
  • Neither HeadSpin nor other company executives were named in the SEC's complaint, which charges Lachwani with both wire fraud and securities fraud.

The bottom line: Venture capital has always been a trust business at its core, and fraud remains unusual. But don't be surprised to see more malfeasance in today's environment of hyper-competitive deals and truncated due diligence.

Go deeper

Felix Salmon, author of Capital
Sep 9, 2021 - Economy & Business

Why corporate fraud remains unchecked

Illustration: Eniola Odetunde/Axios

As the first Theranos trial begins, there have never been fewer incentives to uncover or prosecute corporate fraud.

Why it matters: There was a brief crackdown on white-collar crime at the end of last year, as Republican prosecutors negotiated deals before a new administration was sworn in. Now, however, there's no such urgency.

Felix Salmon, author of Capital
2 hours ago - Technology

Facebook's scandals have been great for shareholders

Expand chart
Data: YCharts; Chart: Axios

Facebook has been embroiled in scandal for the past five years, and while the specific allegations change over time, a central theme is constant. Given the choice between commercial and moral imperatives, Facebook always seems to choose the option that is best for the share price.

Why it matters: Facebook's stock chart supports that narrative. Since the 2016 scandals alleging that the social network was infiltrated by foreign actors trying to influence the outcome of democratic elections, Facebook's revenues — and its stock — have been soaring.

Biden to tap telecom trio for NTIA, FCC posts

Jessica Rosenworcel. Photo: Bill Clark/CQ Roll Call

President Joe Biden on Tuesday is expected to name Alan Davidson as head of the telecom arm of the Commerce Department, Jessica Rosenworcel as chairwoman of the Federal Communications Commission and Gigi Sohn as a commissioner at the FCC, according to a person familiar with the process.

Why it matters: Internet availability and affordability has been a key policy priority for the White House, but the administration lagged in tapping people for the agency posts that oversee the issues.