Retired tech exec's hedge fund hit with lawsuit |
Date: Monday, August 23, 2010
Author: Pete Carey, Mercury News
A father and son who ran a pair of small hedge funds
catering to Silicon Valley Indian professionals are defending themselves against
a lawsuit filed by angry investors who say the two hid big losses in 2008. The lawsuit is a sour turn for what started as a small investment fund for
the family of retired tech executive Vishwas Godbole and a few close friends. By
2008, it had grown to about 150 investors with $90 million in two separate
funds, Opulent and Opulent Lite. The investors were valley professionals,
graduates of India's top tech schools, and people who came from the same region
in western India. The lawsuit alleges that the Godboles, after telling investors in 2008 the
funds were weathering the market crash without major damage, stunned their
clients in 2009 by saying the funds' value had actually dropped by a combined
$18 million. Almost $12 million of that was in the Opulent Lite fund, whose
shares were worth about 50 percent less after they were restated. Most of the more than 50 plaintiffs in the lawsuit were investors in Opulent
Lite. The suit alleges a "systematic and organized family scheme" to conceal
losses and overcharges on fees. It was filed last year in San Francisco Superior
Court and is now in arbitration. Godbole, 64, of Saratoga, called the allegations against him and his family
"absurd and false" and said the lawsuit is mainly directed at Opulent Lite, the
fund run by his son Neil. The younger Godbole declined Vishwas Godbole retired from the tech business in 2001 after 25 years in
Silicon Valley companies. An IIT Bombay engineering graduate, he has several
patents, including one for the fax modem. He co-founded one company, Navin
Communications, which had several prominent investors including Sabeer Bhatia, a
founder of Hotmail, an e-mail service that Microsoft later bought. After several years of statistically analyzing the major index funds, Godbole
founded Opulent Fund in 2001. Opulent Lite, for a less wealthy tier of
investors, was launched in 2004. Neil Godbole, now 29, began directing Opulent Lite's investments in 2005
after a stint at Google. A 2002 UCLA graduate in cognitive science and an
amateur musician, Neil has written that he picked up his investment know-how
from his father. Hedge fund adviser Robert A. Green of
GreenTraderTax.com said there are thousands of small, lightly regulated
funds like Opulent and Opulent Lite, with lean management and sometimes ran from
the manager's home. "Often they shut down after a few years," Green said. The senior Godbole managed the Opulent Fund from his Saratoga home. Neil
Godbole directed Opulent Lite's investments mostly from his 2,500-square-foot
condo on San Francisco's Front Street, although he also had an office nearby. Mainly, he wrote in a newsletter to investors, he followed his father's
strategy "for extracting meaningful information out of the selectively ordered
chaos that is the American stock market." The strategy involved betting that major stock market indexes would trade
within a certain range, providing a band of safety, according to the Godboles'
lawyer, Jahan Raissi. "Where it's not so safe is when an extraordinary jolt to the market" sends
the indexes outside the band of safety, Raissi said. "This is by no stretch a
guaranteed, cannot-lose strategy. It's just designed to be in most markets a
little more steady." The lawsuit claims Godbole told investors he had a proven investment strategy
that would almost guarantee investors a return of 12 percent a year. He and his son were paid a fee based on their funds' balances and, in the
case of Opulent, an additional performance fee. Each month, a statement of the
funds' assets and share value was delivered at monthly meetings in Vishwas
Godbole's Saratoga home. Attendees described them as convivial affairs, with drawings for prizes
following the presentation. Many of the investors knew one another. A
representative of Charles Schwab was usually on hand, until 2008 when meetings
were held quarterly. The reports of the funds' performance were almost always "rosy," according an
investor who is a plaintiff in the lawsuit but who asked not to be named. Neil's
Opulent Lite had a slightly more aggressive strategy and soon was getting better
returns than his father's fund. For example, in 2007, Opulent had an 11 percent
return for the year, and Opulent Lite an 18 percent return. In 2008, the worst year of the financial meltdown, Lite seemed to weather the
crisis well, ending the year at about $130 a share, near where it was at the
beginning of the year. But in early 2009, Neil had some bad news. The share values were wrong. He
explained that the fund had sustained a big loss in early 2008, and he had
employed a "rollover" strategy to try to recover the losses instead of cashing
out investments at the end of each month, as he had done in the past. During the
year, he had been giving investors a "projected" share value rather than an
actual one. He restated Lite's December share value to $77.60 and to $66 a share
as of January, for a sudden devaluation of about 50 percent. In an e-mail to an investor last year, Neil Godbole wrote that "I had never
done rollovers previously, and I sincerely wish I had never gotten into doing
them this year (or ever). It really completely messed up the fund's accounting." "Altering your strategies -- that's when red flags go up," said Peter
Laurelli, vice president of Hedgefund.net, a
source of hedge fund news and performance with 7,100 funds in its database. The senior Godbole had some more bad news. He had discovered a "major
accounting error" for the month of September that carried over to the year's
end. Shares in the Opulent Fund were actually worth about 17 percent less than
investors had been told in the previous three or four months and were down 26.2
percent for the year. "I am devastated with this discovery," he wrote. Investors were already worried when these announcements hit, because the
Charles Schwab brokerage had severed its relationship with the funds in January
over what it said were "questions about the valuation of the funds" and some
transactions. Schwab was accused in the lawsuit of lending an air of credibility to the two
funds through its employee's attendance at the monthly investor meetings. The
company says it was merely a custodian of the funds' assets and had no
obligation to vouch for the accuracy of the share values, and the employee's
activities were "strictly in keeping with Schwab's limited role as custodian of
the fund assets." The senior Godbole settled with all but a few of his investors who were part
of the suit, and his hedge fund is still going, with about 25 investors. He
promised more "oversight" and "structural changes," and followed up with a
series of accounting reforms to increase his fund's transparency. Neil's fund was liquidated. He is currently working on his music, according
to someone who knows him. In a letter last year to an investor who was withdrawing what was left of his
investment in Opulent Lite, Neil wrote mournfully, "Please stay in touch with me
or Vishwas. "This fund has always been a community affair from the very beginning, and I
feel very badly at the end result at this time for the fund."
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