Another startup founder will go to prison for exaggerating his company's performance to investors.
Manish Lachwani, who last year pleaded guilty to three counts of defrauding investors in his new software company, HeadSpin, was sentenced Friday to a year and a half in prison. He will also pay a fine of one million dollars.
Government prosecutors said Lachwani, 48, deceived investors by inflating HeadSpin's revenue nearly four times, making false claims about his clients and creating false invoices to cover it up. His misrepresentations allowed him to raise $117 million in financing from major investment firms, valuing his startup at $1.1 billion.
When HeadSpin board members learned of the behavior in 2020, they pressured Lachwani to resign and cut the company's valuation by two-thirds.
Lachwani is at least the fourth startup founder in recent years to face serious consequences after taking Silicon Valley's hype culture too far. Other founders currently in prison for fraud include Sam Bankman-Fried of cryptocurrency exchange FTX and Elizabeth Holmes and Ramesh Balwani of blood testing startup Theranos.
Trevor Milton, founder of electric vehicle company Nikola, was sentenced to prison in December for fraud. Michael Rothenberg, a venture capitalist who was recently convicted of 12 counts of fraud and money laundering, will be sentenced in June. And Changpeng Zhao, who founded the Binance cryptocurrency exchange and pleaded guilty to money laundering last year, is scheduled to be sentenced later this month.
Carlos Watson, founder of digital media outlet Ozy Media, and Charlie Javice, founder of financial aid startup Frank, have pleaded not guilty to fraud charges and will face trials later this year.
Past generations of startup founders rarely faced lasting consequences for their hype. But low interest rates over the past decade have led to increasing sums being invested in technology startups. Some founders used that environment to expand the truth about what their technology could do or how their business performed.
The government has intensified its investigations into these types of situations. The Department of Justice saying last month that its fraud division tried more than 100 white-collar crime cases in the past two years, which was a record. He also announced plans to strengthen his program pay whistleblowers.
At Lachwani's sentencing on Friday, his attorney, John Hemann, argued for a lower sentence because, unlike other startup frauds, the HeadSpin business was a success and investors did not lose money.
“He wasn't inventing a product,” Hemann said of Lachwani. “I wasn't selling snake oil.”
Judge Charles Breyer of the Northern District of California court said success was not a panacea for fraud. Silicon Valley tech founders and executives need to know that overreacting to investors will result in imprisonment, no matter how successful they are, he said.
“If you win, there are no serious consequences; that simply cannot be the law,” he said.
Addressing the judge, Mr. Lachwani burst into tears several times. He apologized to the investors he misled and spoke of HeadSpin's success. “HeadSpin got very big, very fast,” he said.
Other government agencies are also investigating the founders. On Wednesday, the Consumer Financial Protection Bureau accused Austin Allred, founder of BloomTech, a coding school that allowed students to pay tuition by pledging a portion of their future income, of violating the law by making false claims to clients.
In a statement, Allred said a “cohort” of BloomTech students had a 100 percent job placement rate, but the “cohort” consisted of one student, the agency said. The CFPB fined BloomTech $164,000 and prohibited it from making loans.
