Start-Up Founder Sentenced to 18 Months in Prison for Fraud

Start-Up Founder Sentenced to 18 Months in Prison for Fraud

Another start-up founder goes to prison for overstating his company’s performance to investors.

Manish Lachwani, who pleaded guilty last year to three counts of defrauding investors at his software start-up HeadSpin, was sentenced to a year and a half in prison on Friday. He will also pay a $1 million fine.

Prosecutors said Mr. Lachwani, 48, deceived investors by nearly quadrupling HeadSpin’s revenue, making false claims about his customers and creating fake invoices to cover it up. His misrepresentations allowed him to raise $117 million in funding from top investment firms, putting his startup’s value at $1.1 billion.

When HeadSpin board members learned of the behavior in 2020, they pressured Mr. Lachwani to resign and cut the company’s valuation by two-thirds.

Mr. 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 start-up Theranos.

Trevor Milton, founder of electric vehicle maker Nikola, was sentenced to prison in December for fraud. Michael Rothenberg, a venture capital investor who was recently convicted of 12 counts of fraud and money laundering, is scheduled to 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 company Ozy Media, and Charlie Javice, founder of financial aid start-up Frank, have pleaded not guilty to fraud charges and are due in court later this year.

Previous generations of start-up founders rarely had to face lasting consequences for their exaggerations. But low interest rates over the last decade led to more and more money flowing into tech start-ups. Some founders took advantage of this environment to uncover the truth about the power of their technology or the performance of their company.

The government has intensified its investigations into such situations. The Justice Department announced last month that its fraud unit had tried more than 100 white-collar crime cases in the past two years, a record. It also announced plans to strengthen its whistleblower pay program.

At Mr Lachwani’s sentencing on Friday, his lawyer John Hemann argued for a lower sentence because, unlike other start-up fraud cases, HeadSpin’s business was a success and investors did not lose money.

“He didn’t invent a product,” Mr. Hemann said of Mr. Lachwani. “He wasn’t selling snake oil.”

Judge Charles Breyer of the Northern District Court in California said success is not a panacea for fraud. Silicon Valley’s tech founders and executives need to be aware that overreaching to investors will lead to 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.

As he addressed the judge, Mr Lachwani burst into tears several times. He apologized to the investors he had misled and spoke of HeadSpin’s success. “HeadSpin just got really big, really fast,” he said.

Other government authorities are also investigating founders. On Wednesday, the Consumer Financial Protection Bureau accused Austin Allred, founder of BloomTech, a coding school that allowed students to pay tuition by promising them a portion of their future earnings, of violating the law by making false claims to customers asserted.

In one claim, Mr. 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 banned it from lending.

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2024-04-19 20:01:38