The founder of another startup is going to prison for overstating his company's performance to investors.
Manish Lakhwani was sentenced Friday to 18 months in prison after pleading guilty last year to three counts of defrauding investors in his software startup Headspin. He will also pay a $1 million fine.
Government prosecutors say Lakhwani, 48, nearly quadrupled Headspin's profits, defrauded investors by making false claims about customers and creating fake invoices to hide them. said. His false statements allowed him to raise $117 million in funding from a top investment firm, valuing his startup at $1.1 billion.
When members of Headspin's board learned of this behavior in 2020, they forced Ratchwani to resign and cut the company's valuation by two-thirds.
Ratchwani is at least the fourth startup founder in recent years to face serious consequences for taking Silicon Valley's hype culture too far. Other founders currently in jail on fraud charges include Sam Bankman Fried of cryptocurrency exchange FTX and Elizabeth Holmes and Ramesh Balwani of blood testing startup Theranos.
Trevor Milton, the founder of electric car company Nikola, was sentenced to prison in December for fraud. Venture capital investor Michael Rotenberg, who was recently convicted on 12 counts of fraud and money laundering, is scheduled to be sentenced in June. And Changpeng Zhao, who founded the cryptocurrency exchange Binance and pleaded guilty to money laundering last year, is scheduled to be sentenced later this month.
Carlos Watson, founder of digital media outlet Ozzie Media, and Charlie Jarvis, founder of financial aid startup Frank, have pleaded not guilty to fraud charges and are scheduled to go on trial later this year.
Past generations of startup founders rarely faced lasting consequences for their exaggerations. But the past decade's low interest rates have increased the amount of money poured into tech startups. Some founders took advantage of that environment to exaggerate the truth about what their technology could do or how their business would work.
The government is intensifying its investigation into these situations. The Justice Department announced last month that its fraud division had tried more than 100 white-collar crime cases in the past two years, a record number. It also announced plans to strengthen its program to reward whistleblowers.
At Lakhwani's sentencing on Friday, lawyer John Heman argued for a reduced sentence because, unlike other startup scams, Headspin's business was a success and investors did not lose money.
“He didn't fabricate the product,” Heman said of Lakhwani. “He wasn't selling snake oil.”
Judge Charles Breyer of the Northern District of California said success is not a panacea for fraud. Silicon Valley tech founders and executives need to know that exaggerating to investors can land them in jail, no matter how successful they are, he said.
“There are no serious consequences if you win. That can't happen in law,” he said.
Ratchwani broke down in tears several times as he addressed the judge. He apologized to investors for the misunderstanding and talked about Headspin's success. “HeadSpin has gotten really big and really fast,” he said.
Other government agencies are also investigating the founders. The Consumer Financial Protection Bureau on Wednesday accused Austin Allred, founder of Bloomtech, a coding school that made students pay tuition by promising them a portion of their future earnings, for falsely charging customers. accused of violating the law.
In one claim, Allred said the employment rate for a “cluster” of BloomTech students was 100 percent, but the agency said that “cluster” consisted of one student. The CFPB fined Bloomtech $164,000 and prohibited it from making loans.
