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Opulent Lies

Hedge Fund Manager Neil Godbole is fined by the SEC for defrauding investors

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A San Francisco hedge-fund manager has been fined and barred from the securities industry for five years by the Securities and Exchange Commission for defrauding and concealing $14.5 million in trading losses from his mostly Indian investors.

Neil Godbole, 29, who managed $30 million in assets for Opulent Lite, is accused of fraudulent and misleading conduct in a cease and desist order by the SEC. Godbole and his father Vishwas Godbole, founder of Navin Mail, who manages the Opulent Fund and founded Opulent Lite before transferring it to his son, are being sued by nearly 100 Indian investors who accuse them in court filings of orchestrating “a systematic and organized family scheme.”

 
According to an SEC cease and desist order issued on Dec. 1, Opulent Lite suffered its largest loss of $8.3 million in February 2008, which Godbole concealed from his investors. “Throughout 2008,” the SEC said, “Godbole continued to misrepresent the fund’s trading results and asset values, overstating them by as much as 81 percent in December 2008.”

A Little India investigative report in August 2009 had documented the misstatements of assets by both Opulent Lite and Opulent Fund to their investors. Nearly 100 investors, mostly Indian technology professionals from the Bay Area, lost a combined $20 million in the two funds after they restated their unit values, the Little India investigation found.

 
In its order, the SEC concluded: “He (Neil Godbole) repeatedly underreported Opulent Lite’s trading losses to investors. For example, in September, Godbole reported trading losses of $859,000, when in fact the fund had lost $4 million; at the same time, he reported the fund’s asset value as $29 million, when in reality it had fallen to $19 million.... By December 2008, when Godbole had informed investors that the fund had an asset value of over $26 million, the fund had actually fallen below $14.4 million in assets — an 81% overstatement.”

The SEC said that Godbole falsely attributed the losses to a “‘rollover strategy,’ minimizing these declines as merely artificial ‘paper’ losses or ‘projected’ losses tied to open option positions. In reality, these losses represented actual, realized trading losses.” The SEC also concluded that Godbole paid himself inflated management fees during the period he was falsifying the accounts. He reimbursed the fund for the overpaid management fees in February 2009 after the fraudulent scheme unraveled.

The agency ruled: “Godbole willfully violated Sections 206(1) and (2), which prohibit fraudulent and misleading conduct by an investment adviser. He also violated Section 206(4) and Rule 206(4)-8 thereunder by providing false information to the fund’s investors.”

The SEC sanctions also include the satisfaction by Godbole of any disgorgement orders and arbitration and restitution awards before he can apply for readmission after the 5-year ban to engage in securities services.

Opulent Lite restated its net unit value by over 50% and Opulent Fund by almost 20% in February 2009, soon after their broker Charles Schwab dropped both funds, “due to questions about the valuation of the Funds and recent transactions between the Funds’ accounts at Schwab,” according to a Jan. 15, 2009 letter from Schwab Vice President Brian McDonald to investors in the fund.

 
The investor lawsuit, which is currently under arbitration, charges that Neil Godbole and his father Vishwas Godbole deposited paper checks for $6.5 million each in each other’s funds on the afternoon of Dec. 31, 2008 in a kiting scheme to inflate the values of both funds to cover up a $20 million shortfall. The lawsuit alleges: “Vishwas Godbole and Neil Godbole knew that the checks would clear on or after January 2, 2009 (January 1, 2009 being a bank holiday), as a result temporarily inflating both fund values, and covering up losses that the funds had sustained and defendants hidden from the plaintiff investors.”

The Opulent Lite Fund liquidated in February 2009 after a run by investors, many of who lost more than half their investment. The Opulent Fund shriveled to a quarter of its size as panicked investors redeemed their accounts.

Throughout 2008, as both funds were imploding from market losses the Godboles reported rosy projections to their investors. On Dec. 22, 2008, weeks before the fund went down, for instance, Neil Godbole wrote to Opulent Lite investors: “We have limited our loss to less than 10% for the year. This is in sharp contrast to the S&P500, which is down close to 40% for 2008.” That same week, on Dec. 19, 2008, Vishwas Godbole wrote to his Opulent Fund investors: “It was very fortunate that we liquidated most of our positions and limited our loss after the first major sell off. This allowed us to eliminate further downside while managing the remaining positions rolled over to December. We have recovered gradually throughout this difficult period.” Opulent Fund restated its net unit values by 20 percent a few weeks later, blaming it, according to Godbole’s attorney Jahan Raissi, on an “accounting error” in September 2008, which “propagated through the subsequent periods....”

Michael Liberty, attorney for the investors, said, “The SEC sanctions against Neil represent a total vindication of my clients lawsuit claims against him and others,” adding, that “The SEC findings are the tip of the iceberg, because we will show that Neil was acting at the directions of other persons and entities. The real responsible parties are equally liable.”

 
Liberty asserted that Neil Godbole was manager in name only and that “Vishwas Godbole was the architect of the fraudulent scheme and the evidence will show that he was masterminding both funds.”

Neither Godbole responded to Little India requests to comment. Asked to respond to the criticism by some investors that the SEC sanctions constituted a slap on the wrist for egregious violations, his attorney Raissi demurred, noting that his client had cooperated with the SEC and has been “barred for five years and faces a large fine.”

 

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Business | Magazine | January 2011 | August 2011

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