SEC rewards technology company’s remediation efforts with penalty-free settlement

On January 28 2022, the US securities and Exchange Commission announced that it had settled fraud charges with HeadSpin, Inc., a mobile application developer headquartered in California, without imposing any penalty on the company.

The SEC’s complaint, filed in the US District Court for the Northern District of California simultaneously with the announcement that no penalty would be imposed on the company, alleges that from 2018 to 2020, HeadSpin, through the actions of its then-chief executive officer, Manish Lachwani, engaged in a fraudulent scheme to inflate its reported value by artificially increasing the company’s annual recurring revenue.  According to the complaint, Lachwani controlled the company’s sales operations and financials; acting for the company, he misrepresented the quantity and value of HeadSpin’s software and hardware licensing contracts, creating fake and doctored invoices and promoting the appearance of high value and success.  As a result of the scheme, investors put $80 million into the company.

An internal investigation instigated by HeadSpin’s board brought about the forced resignation of Lachwani in May 2020, and a downward valuation by the company.  HeadSpin returned to investors approximately 70% of the principal invested in two major funding rounds, and offered to return the other 30% in the form of promissory notes.  In addition to these measures, the company engaged new senior management, expanded its board, and implemented new procedures to ensure that future transactions would be reported accurately and transparently.

The SEC found that HeadSpin’s conduct had violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder, but requested only that the court enjoin the company from directly or indirectly violating those provisions of the federal securities laws.

In its press release, the SEC noted HeadSpin’s “significant remedial efforts,” adding that the case offers an excellent example “for companies wondering what types of remedial actions and cooperation might be credited by the Commission after a company uncovers fraud,” particularly as “HeadSpin’s remediation and cooperation included not just its internal investigation and revised valuation, but also repaying harmed investors and improving its governance—all of which were factors that counseled against the imposition of a penalty in this case."
 
Separately, the SEC filed an action against the former CEO, Lachwani, on August 25, 2021. 

SEC press release | Complaint 

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