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Start-up founder sentenced to 18 months in prison for fraud

Start-up founder sentenced to 18 months in prison for fraud

Another startup founder is going to prison for overestimating his company’s performance to investors.

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

Government prosecutors said Mr. Lachwani, 48, misled investors by quadrupling HeadSpin’s revenue, making false statements about his customers and creating fake invoices to cover up the affair. His false statements allowed him to raise $117 million from major investment firms, valuing his start-up at $1.1 billion.

When HeadSpin board members discovered this behavior in 2020, they pushed 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 startup Theranos.

Trevor Milton, founder of electric vehicle company Nikola, was sentenced to prison in December for fraud. Michael Rothenberg, a venture capitalist recently convicted of 12 counts of fraud and money laundering, is scheduled to 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, founder of digital media outlet Ozy Media, and Charlie Javice, founder of financial aid start-up Frank, have pleaded not guilty to fraud charges and will stand trial later this year.

Past generations of startup founders rarely faced lasting consequences for their exaggerations. But low interest rates over the past decade have led to increasing amounts of money being invested in tech start-ups. Some founders used this environment to extend the truth about what their technology could do or how their company was performing.

The government has stepped up its investigations into such situations. The Department of Justice said Last month, its fraud division tried more than 100 white-collar crime cases in the past two years, a record. He also announced his intention to strengthen his program to pay whistleblowers.

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

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

Judge Charles Breyer of the Northern District Court of California said success was not a panacea for fraud. Silicon Valley tech founders and executives need to know that overdoing it to investors will lead to incarceration, no matter how successful they are, he said.

“If you win, there won’t be any serious consequences – that just can’t be the law,” he said.

Addressing the judge, Mr. Lachwani broke down in tears several times. He apologized to the investors he had misled and discussed the success of HeadSpin. “HeadSpin got really big, really 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 for tuition by promising a portion of their future earnings, violated the law by making false statements to customers.

In a statement, 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 barred it from making loans.

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Mattie B. Jiménez

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