When Business Deals Fall Apart Because Of Fraud
Some businesses can attract customers and investors simply by allowing their products to stand on their own merits. If your company deals in tasty sandwiches or attractive footwear, for instance, all you need is some customers to taste or see your merchandise and hope word of mouth spreads. Software as a service is a big business, but it doesn’t exactly advertise itself the way food and shoes can do.
In such an industry, the art of spin, the gift of gab, and making promises so big that they just barely avoid crossing the line into falsehood territory are all part of a day’s work — especially for a startup. If you are trying to attract funding for a startup, or if you are investing in one, it is important to read the fine print and, if you are the one writing the fine print, to tell the truth. A Los Angeles business litigation lawyer can help you resolve disputes over alleged dishonesty between startups and investors.
HeadSpin and the Fictional Unicorn
The allegations against Manish Lachwani, the former CEO of the software as a service company HeadSpin, represent one of the worst possible outcomes of what can happen between a new tech company and its investors. Lachwani founded HeadSpin in 2015; the subscription-based company enables mobile app developers to test the performance of their apps as customers use the apps. Between 2017 and ’19, Lachwani solicited funds for the company by selling promissory notes that would be converted to three different series of shares in the company. By the end of 2019, he had convinced investors that HeadSpin was a unicorn — a startup valued at more than $1.1 billion.
The trouble with that valuation, however, was that Lachwani allegedly falsified the financial records he showed to investors. In March 2020, a HeadSpin employee showed investors the real records, and the figures were quite different from the unicorn that Lachwani had been parading in front of investors. For example, in the first quarter of 2020, HeadSpin had a net loss of more than $15 million; Lachwani told investors the company turned in a profit of more than $3 million (relying on the falsified records). Lachwani left the company soon after.
In August 2021, the Securities and Exchange Commission charged the then-45 Lachwani with wire fraud and securities fraud, claiming he defrauded investors out of $80 million. A conviction would include a sentence requiring him to pay restitution to the investors who suffered financial losses because of his false statements. Even if Lachwani is not convicted, individuals and companies who suffered financial losses because of his false claims will have the right to seek damages from him in civil court.
Speak With a Los Angeles Business Litigation Lawyer
A business litigation lawyer can help you if you were involved in a potentially lucrative business deal, but it fell apart because of fraud or false statements by one of the parties involved in the business project. Contact Obagi Law Group, P.C. in Los Angeles, California to discuss your situation or call 424-284-2401.