Former HeadSpin CEO Arrested in Alleged $80 Million Fraud

The co-founder and former CEO of Silicon Valley startup HeadSpin has been arrested for allegedly defrauding investors out of $80 million and faces civil charges filed by the Securities and Exchange Commission (SEC).

According to an unsealed federal complaint filed in the US District Court for the Northern District of California, Manish Lachwani, 45, allegedly reported false revenue and overstated key financial metrics of the company in materials and presentations to potential investors. Lachwani allegedly controlled operations, sales, and recordkeeping, including invoicing, and was the “final decisionmaker regarding when, how, and whether the company would record sales and revenue.”

HeadSpin provides a service that allows customers to access mobile devices and remotely test their applications across different communications networks and in different locations. It earns revenue by selling subscriptions to clients for its services.

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The complaint alleges that from HeadSpin’s inception in 2015 until about March 2020, the company raised millions of dollars from investors during four major rounds of financing. During a series C fundraising round in late 2019 and early 2020, Lachwani allegedly engaged in a scheme of securities fraud and wire fraud, according to the complaint. Lachwani is alleged to have instructed employees to include revenue from potential but not actual customers, as well as from former customers who stopped doing business with the firm. He also allegedly directed employees to report revenue from existing customers that was far more than it really was.

Lachwani also allegedly provided invoices that were later determined to be falsified and had not been issued by the purported customer, and overstated HeadSpin’s annual recurring revenue by as much as $55 million in financial documents sent to existing and potential investors.

According to the complaint, an auditor review determined that HeadSpin’s cumulative revenue from inception through the first half of 2020 was approximately $26.3 million, far less than the $95.3 million reported by the company. The review also estimated the cumulative net loss from HeadSpin’s inception through the first half of 2020 was approximately $15.9 million, not the $3.7 million of net income it had reported.

Lachwani, who is charged with one count of wire fraud and one count of securities fraud, faces a maximum sentence of 20 years in prison and a fine of $250,000 if convicted of wire fraud, and a maximum of 20 years in prison and a $5 million fine if convicted of securities fraud.

The SEC also filed a complaint against Lachwani in the Northern District of California that charges him with violating federal securities laws and seeks penalties, a permanent injunction, a conduct-based injunction, and an officer and director bar.

“We allege that Lachwani misled investors into believing that HeadSpin had achieved a ‘unicorn’ valuation by winning hundreds of lucrative deals, including many with Silicon Valley’s biggest and most high-profile companies,” Monique Winkler, associate regional director of the SEC’s San Francisco Regional Office, said in a statement. “Companies and their executives must tell the truth when speaking about financial metrics that are material to the value of the business.”

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Tags: HeadSpin, Manish Lachwani, Northern District of California, SEC, Securities and Exchange Commission, Securities Fraud, Wire Fraud

As the S&P 500 endured a third day of losses Wednesday (and maybe a fourth today), reminding investors besotted by the 2021 rally that stocks can go down, it’s time to think about a little protection.

That means turning to a “barbell strategy,” says Morgan Stanley’s chief equity strategist, Mike Wilson. The firm is expecting a 10% correction up ahead, given the end of government stimulus outlays and easy Federal Reserve monetary policy. Just how the market downturn will play out is not clear, he wrote in a research note.

Investors could face “fire or ice” scenarios, he mused: higher interest rates squelching stocks (fire) or plummeting consumer demand doing the same (ice).

“On one hand, we could see a continued strong economy and inflation drive the Fed to tighten policy, which would lead to higher interest rates and lower equity valuations. Here, you want to own cyclicals and avoid expensive long-duration growth stocks,” the note said. “In the other scenario, the payback in demand and weakening consumer confidence leads to a materially softer growth outcome than the consensus currently expects. Here, you want to own defensives.”

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In light of this uncertainty, Wilson called for a barbell approach, where investors are overweight with two distinct sets of stocks, whose fundamentals are at odds: cyclicals and defensives. Financials should be in both ends of those diametric opposites, he added.

The names to avoid are those that could get smacked under either scenario. Wilson warned investors to stay clear of high-growth tech stocks (vulnerable to rising interest rates) and consumer discretionary ones (they get whumped in an economic downturn).

“Bottom line, this fall we still expect our mid-cycle transition to end with a 10%+ S&P 500 correction, but a narrative of either fire or ice will determine the leadership,” he explained. “As such, our recommendation is a barbell of defensive quality with financials to participate and protect in either scenario, which appear equally likely to occur, in our view.”

Defensive shares typically include consumer staples and health care, which tend to do well in economic slumps. Cyclicals might be appliances and apparel, which would be fine if the problem is confined to higher interest rates without an economic slowdown. Figuring on Morgan’s “fresh money” buy list are health insurer Humana, credit card issuer MasterCard, and bank Synchrony Financial.

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Tags: barbell strategy, consumer confidence, consumer demand, cyclicals, defensives, Federal Reserve, Interest Rates, Mike Wilson, Morgan Stanley, tech stocks