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What Might Remediation Involve When a Firm Confronts an SEC Investigation?

On Behalf of | Aug 1, 2022 | Regulatory Issues (SEC, FINRA)

An SEC investigation is never a welcome turn of events, but wise choices can mitigate the damage an investigation may have on your firm. One strategy for reducing the overall expense and liability is to engage in remediation efforts, as one Silicon Valley company demonstrated earlier this year.

Serious accusations

HeadSpin Inc., a Palo Alto startup that provides mobile app testing, first encountered trouble with the SEC in August 2021, when the agency accused then-CEO Manish Lachwani of defrauding investors out of $80 million. The alleged illegal activity included falsely inflating deals and faking invoices between 2018 and 2020.

The company then received a fresh batch of allegations from the SEC, as the agency leveled claims that the startup falsely inflated key financial metrics and misrepresented internal sales data.

Effective remediation

One might expect that the SEC would fine HeadSpin over the alleged violations and that the fine would be a hefty one, but the startup actually avoided financial penalties by engaging in remediation efforts. These actions included:

  • Cooperating with SEC investigations
  • Revising valuations
  • Compensating investors who were financially harmed by the false valuations and other unlawful acts
  • Hiring new upper management, including a new CEO
  • Expanding its board of directors
  • Instituting new policies and procedures that ensure greater transparency and accuracy in financial reporting

Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, had this to say about HeadSpin’s remediation efforts: “For companies wondering what types of remedial actions and cooperation might be credited by the Commission after a company uncovers fraud, this case offers an excellent example.”

Explore all available options

In this case, remediation proved a successful way of avoiding a potentially catastrophic outcome arising from an SEC investigation. In other cases, the best course of action may be to pay the fine and move on, or to contest the charges more aggressively. The most effective strategy will depend upon the factors at play in each specific situation. Firms that find themselves in similar straits are well-advised to explore remediation  the full array of legal strategies available to them.

If you have questions or concerns about regulatory issues or SEC investigations, we encourage you to contact the securities law attorneys at Ford O’Brien Landy LLP. With offices in New York City and Austin, Texas, we advise and represent clients nationwide.

Source: National Law Review, “SEC Says Remedy Stops Penalty: HeadSpin Avoids Fine in SEC Fraud Action,” Feb. 7, 2022