Another start-up founder will go to prison for overstating his company's performance in the eyes of investors.
Manish Lachwani, who last year pleaded guilty to three counts of defrauding investors in his software start-up, HeadSpin, was sentenced Friday to a year and a half in prison. He will also pay a fine of $1 million.
Prosecutors said Mr. Lachwani, 48, deceived investors by inflating HeadSpin's revenue by nearly fourfold, making false claims about his customers and creating false invoices to cover it all up. His misrepresentations allowed him to raise $117 million in funding from major investment firms, valuing his start-up at $1.1 billion.
When HeadSpin board members discovered the behavior in 2020, they pushed Mr. Lachwani to resign and cut the company's valuation by two-thirds.
Lachwani is at least the fourth start-up 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 company Nikola, was sentenced to prison in December for fraud. Michael Rothenberg, a venture capital investor recently convicted of 12 counts of fraud and money laundering, will be sentenced in June. And Changpeng Zhao, who founded cryptocurrency exchange Binance and pleaded guilty to money laundering last year, is expected to be sentenced later this month.
Carlos Watson, the founder of digital media channel Ozy Media, and Charlie Javice, founder of financial aid start-up Frank, have pleaded not guilty to fraud charges and will face trial later this year.
Past generations of start-up founders have rarely faced lasting consequences for their exaggerations. But low interest rates over the last decade have led to increasing sums being poured into tech startups. Some founders used that environment to reveal the truth about what their technology could do or how their business ran.
The government has intensified investigations into such situations. The Justice Department said last month that its fraud division has prosecuted more than 100 white-collar crime cases in the past two years, a record. It also announced plans to strengthen its program to pay whistleblowers.
At Mr. Lachwani's sentencing on Friday, his lawyer, John Hemann, asked for a lower sentence because, unlike other startup-related frauds, HeadSpin's business was a success and investors did not lose money.
“He wasn't inventing a product,” Mr. Hemann said of Mr. Lachwani. “He Didn't Sell Snake Oil.”
Judge Charles Breyer of the Northern District Court of California said success is no panacea for fraud. Silicon Valley founders and tech executives need to know that overreaching investors will lead to incarceration, no matter how successful they are, he said.
“If you win, there are no serious consequences — it just can't be the law,” he said.
Addressing the judge, Mr Lachwani burst into tears several times. He apologized to the investors he deceived and talked about the success of HeadSpin. “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 allows students to pay tuition by promising a portion of their future income, of violating the law by making false claims to customers.
In one statement, Mr. Allred said a “group” of BloomTech students had a 100% job placement rate, but the “group” consisted of one student, the agency said. The CFPB fined BloomTech $164,000 and barred it from making loans.