This is a story that may seem a bit complicated but, in reality, it's a fairly basic tale. Stripped of all its Wall Street jargon, we are once again confronted with the all-too-familiar tragedy in which a misguided soul made a mistake and tried to undo the damage -- only to find that the problem went from bad to worse.
For starters, we have Opulent Lite, LP, a California limited partnership that was a hedge fund with approximately 70 investors and assets under management of approximately $30 million. Next, we have Trueblue Strategies, LLC, an investment adviser that provided advised Opulent Lite, Now, enter, Neil Godbole, age 29, who was the sole principal and owner of Trueblue Strategies, and beginning in 2005, was wholly responsible for managing Opulent Lite, including its trading decisions, recordkeeping and communications with investors.
A Strategy Gone Sour
Apparently starting sometime around 2005, Godbole's trading strategy was to invest most of Opulent Lite's funds in short-term treasury bonds that would mature at the end of the fund's monthly trading period. The remainder of the cash was invested in S&P index options that would expire at the end of the monthly trading period.
So far, so good -- and then, so far, so bad.
During the February 2008 trading period, Godbole lost approximately $8.3 million as a result of a series of highly unprofitable trades. He failed, however, to disclose the loss. He also misrepresented the new total value of the fund, telling investors the fund had a value of $28.7 million, rather than the accurate $18.5 million.
Rollover - as in roll over and play dead
In an effort to make up losses (and to stem further losses), Godbole began to use what he called a "rollover" strategy. Prior to 2008, Godbole ended each monthly trading period fully in cash. However, in 2008, he began to open option positions toward the end of the trading period. Instead of expiring at the end of the monthly trading period, the option contracts had expiration dates extending into the next trading periods. While the strategy may have seemed like a good idea to Godbole, in fact, it did not stem further losses.
It's generally around this time with such investment messes that panic sets in and folks exercise truly atrocious judgment. Throughout 2008, Godbole continued to misrepresent the fund's trading results and asset value. He repeatedly under-reported 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. Even in the few months when the fund experienced gains, Godbole under-reported those gains, allowing him to smooth the fund's returns and conceal the losses he had failed to report previously.
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.
In addition to misrepresenting the value of the fund, Godbole also misrepresented the reason for the undisclosed losses. During several trading periods throughout 2008, Godbole blamed the losses on the "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.
During the year, Godbole caused the fund to pay his management fees based on the inflated fund value. In addition, he caused the fund to redeem units at the inflated value, to the detriment of investors who remained in Opulent Lite as well as the fund itself.
In February 2009, Godbole informed investors of the accurate results for 2008, disclosing both accurate trading losses and the fund's value. He also reimbursed the fund for overpayment of management fees. Although Godbole disclosed that actual losses were incurred in early 2008, he attributed the losses for the year to the "rollover strategy" -- when there were additional realized losses throughout 2008. The fund was fully liquidated by March 2009.
The SEC Arrives
As a result of the conduct described above, the SEC alleged that Godbole willfully violated the Investment Advisers Act of 1940:
Pursuant to an Offer of Settlement, the Godbole consented to the entry of the Order instituting proceedings and a Cease and Desist.. Further, Godbole was barred from from association with any investment adviser, with the right to reapply for association after five (5) years to the appropriate self-regulatory organization, or if there is none, to the Commission. Finally, Godbole agreed to pay a civil money penalty in the amount of $40,000.
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