Co-Founder and Former CEO of Headspin Charged with Fraud | Hacker News Reader

Co-Founder and Former CEO of Headspin Charged with Fraud

justice.gov

47 pointshdk22 comments

I had never heard of the company before but really interesting how there was no due diligence by the financiers/VCs before they wired in the money. Is this generally the norm?

Also surprising that a company that became a unicorn at its last financing round didn't have a CFO and that the CEO 'maintained control over operations, sales, and record-keeping, including invoicing, and he was the final decision maker on what revenue was booked and included in the company’s financial records.'

Googled the person, apparently he co-founded a company previously that was acquired by Google and he claims to have previously served as the CTO of Zynga and holds 60 technology patents - so perhaps the stellar credentials were a check in the column against auditing financials.

Other tidbits:

  - Founded in 2015:
  - Series A: $11 mil (at inception)
  - Convertible Notes: $24.7 mil (Apr '17 to May '18)
  - Series B: $20 mil (Sep/Oct 2018) | valuation: ~$500 mil
  - Series C: $60 mil (Nov '19 to Jan '20) | valuation: ~$1.1 bil

While raising Series C round, overstated ARR by about $51 to $55 million in investor presentations. And after audit (in May 2020), valuation dropped to about $300 million.

There are apparently at least two people claiming to be Zynga CTO in 2011-2012: https://mobile.twitter.com/om/status/1291146438265602048

Minor correction: the valuation dropped to approximately $300 million.

A considerably more significant revaluation.

Thanks for catching that and pointing it out, I misread it I guess. Edited now.

At my funded company: external accountant / renta-cfo, selected from a list of two or three shared by one of the VCs. We could have fought for a person we wanted, but why? At early stages, one competent cfo is probably the same as any other. That person attends board meetings and directly communicates with the board.

Tech people generally love to under invest in accounting and legal services early in a start up, but cases like this show why investors should consider audits to be valuable even in early stage.

Naïve question: Aren't yearly audits the norm? In Sweden, you need audited reports as soon as you have 3 employees. And no, not to protect investors, but to protect the state's pocket. But as a nice side-effect, investors can trust the books too.

Has anyone used their services? Seems like a solid product idea

Ah, yes, Securities Fraud as a Service

Definitely call it "SFAS", which also stands (or did) for Statements of Financial Accounting Standards promulgated by the FASB.

https://en.wikipedia.org/wiki/List_of_FASB_pronouncements

It amazes me how many people willingly defraud investors in the hopes that when the fbi knocks on their door they will find they were acting in good faith. You must wonder if these people believe in their own lies, but it’s so easily proved in District Court: did your business need your down payment on your house and a new Tesla? White collar criminals are by far the dumbest people on earth.

This was the top link on HN an hour ago and now it’s not even on the front page.

How is that even possible? Aren’t the books and statement audited?

>"How is that even possible? Aren’t the books and statement audited?"

From the article:

>"The company’s unaudited financial statements were reviewed by an auditing firm in May 2020. According to the complaint, the review concluded that Headspin’s cumulative revenues from inception through the first half of 2020 totaled only approximately $26.3 million, instead of the $95.3 million originally reported by the company. The review also calculated the cumulative net loss from Headspin’s inception through the first half of 2020, totaling approximately $15.9 million, instead of the $3.7 million net income originally reported by the company."

The first audit found the fraud (which probably means it just wasn't well covered-up).

Yeah but after how long.. 5 years and 10s of millions

I know nothing about finance but I'd love to understand how such a scheme can fool inverstors.

At the end of the day cashInBank==investment+sales-costs. How can close to $80 millions be missing on the balance sheet without anyone noticing!? Genuinely curious.

You can put down whatever number you want for all of the variables in your formula. It's the auditor's job to make sure that a) they add up and b) they are correct.

Balance sheets can be cooked. You need to compare against bank statements that you received from the bank and not the companyWhich again could be cooked.

I think the general idea is that outright fraud like this is highly likely to get caught eventually, and leads to jail time, meaning it’s quite uncommon for otherwise smart people to make such idiotic moves.

In other words it’s just not a big source of losses in the VC industry and so you don’t need to spend much effort guarding against it. (Especially considering that VCs expect most of their investments to fail for some reason or other.)

Yea I'm surprised the later rounds didn't require an audit.

Too much follow on money that said oh I'm sure the previous guy did it.

I wonder what triggered the audit though. If he knew he was cooking the books then why allow it?

According to TechCrunch it was initiated by the board: https://techcrunch.com/2021/08/25/the-sec-and-the-doj-just-c...

ah thanks

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