HeadSpin’s investors must have been dizzy when the company’s value was decreased from $1.1 billion to $300 million with just a few keystrokes. Recently, Manish Lachwani, HeadSpin’s CEO, was charged with investment fraud. He tricked investors out of $80 million from 2018 to 2020. When Lachwani’s investment scheme was discovered, the board of directors forced him out and immediately revalued the company. As for 45-year-old Lachwani, his future is dimming.  SEC News Release

Companies in real estate, oil and gas, technology, and digital currency still turn heads of many financial investors. HeadSpin occupied the technology space. The company provided a platform for other companies to test their mobile apps. You can imagine how many details are involved in making sure mobile apps work on all phones and all platforms. Having a tool that does all that tedious work for you could be attractive.

Size Matters when you’re Talking Deals

Lachwani’s control over sales and financials at HeadSpin created the perfect opportunity for him to commit investor fraud. He recognized that to attract investors, HeadSpin’s ARR (annual recurring revenue) must grow quickly. Lachwani did grow the ARR, but much of the growth was through fake invoices or lying about the size of the deals. In one instance, Lachwani inflated the size of a deal by over $500,000. Lachwani did close a deal with another customer for $720,000, but he represented that the sale was a multi-year deal worth $1.44 million per year. SEC Complaint

With a laundry list of similar fraudulent representations, Lachwani led three successful investor financing rounds. Just the Series B offering raised $20 million from 26 investors. SEC Complaint.

A Series B offering is when a business has launched it initial product and then pursue funding for expansion.

Name Dropping—Always a Winner

In the Pitch Deck for the Series B offering, Lachwani claimed that HeadSpin never lost a customer and had triple-digit growth. In fact, Headspin had lost customers. The sales materials included logos of well-known companies who all were purportedly customers. Not so fast. Several of the listed companies were actually not active customers. SEC Complaint

Covering Tracks

When a 2019 investor questioned the substantial amount of unbilled revenue on the financials, Lachwani said they allowed customers to try their products and services for several months before they were required to pay an invoice. Lachwani recognized that lie would not withstand scrutiny, so he created more fake documentation. He altered invoices by adding several hundred thousand dollars. Then he gave the inflated invoices to the bookkeeper to reduce unbilled revenue. Lachwani sent the actual invoices to customers. SEC Complaint

It’s not unusual for small companies and start-ups to forgo the usual checks and balances designed to reduce investment fraud. Many of these schemes involve multiple parties within a company. As far as we can tell, Lachwani acted alone. However, this case does highlight the importance of the board of directors paying more attention to the operations and financials. And, HeadSpin was running its financial operations with a bookkeeper reporting to Lachwani. Would things have been different if HeadSpin employed a more experienced accountant and/or used an external CPA to review the books on a quarterly basis? What about if the accountant reported to someone other than Lachwani? Certainly, an annual financial review or audit would have caught the financial irregularities.

When you uncover triple-digit growth, a laundry list of who’s who in customers, and a company that is not audited by an outside firm, maybe you should stop and get more information before investing.

If you’re thinking you would never fall for such an investment scam, did you notice that the average investment was just shy of $1 million in the second offering? It’s easy to believe financials.

Stay vigilant. Do your research. Exercise caution. Seek the advice of financial professionals.

We hope all your real estate, technology, digital currency, and oil and gas investments are safe and profitable. But if you find yourself searching for an experienced oil and gas litigation attorney or a commercial litigation lawyer, we at Mark A. Alexander, P.C. are here to help.