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

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

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

Government prosecutors said Mr. Lachwani, 48, deceived investors by inflating HeadSpin’s revenue nearly fourfold, making false claims about its customers and creating fake invoices to cover it up. His misrepresentations allowed him to raise $117 million in funding from top investment firms, valuing his start-up at $1.1 billion.

When HeadSpin’s board members found out about the behavior in 2020, they pushed Mr. Lachwani to resign and slashed the company’s valuation by two-thirds.

Mr. Lachwani is at least the fourth start-up founder in recent years to face serious consequences after taking Silicon Valley’s culture of hype too far. Other founders currently in prison for fraud include Sam Bankman-Fried of the cryptocurrency exchange FTX and Elizabeth Holmes and Ramesh Balwani of the blood testing start-up Theranos.

Trevor Milton, a founder of the electric vehicle company 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 set 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, the founder of the digital media outlet Ozy Media, and Charlie Javice, founder of the financial aid start-up Frank, have pleaded not guilty to fraud charges and face trials later this year.

Past generations of start-up founders rarely faced lasting consequences for their exaggerations. But the last decade’s low interest rates led to growing sums being poured into tech start-ups. Some founders used that environment to stretch the truth about what their technology could do or how their business performed.

The government has stepped up its investigations into such situations. The Justice Department said last month that its fraud division tried more than 100 white-collar crime cases over the last two years, which was a record. It also announced plans to beef up its program to pay whistle-blowers.

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

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

Judge Charles Breyer of California’s Northern District court said success was not a panacea for fraud. Silicon Valley’s tech founders and executives need to know that exaggerating to investors will result in incarceration, no matter how successful they are, he said.

“If you win, there are no serious consequences — that simply can’t be the law,” he said.

Addressing the judge, Mr. Lachwani broke down in tears several times. He apologized to the investors he misled and spoke of HeadSpin’s success. “HeadSpin just got very big, very fast,” he said.

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

In one claim, Mr. Allred said a “cohort” of BloomTech’s students had a 100 percent job placement rate, but the “cohort” consisted of one student, the agency said. The C.F.P.B fined BloomTech $164,000 and barred it from making loans.