NetSol Shares Fall Amid Suit
Shares of Calabasas-based NetSol International Inc. on Monday lost 13% after the portfolio manager of the Blue Water hedge fund group, the company’s largest shareholder, was sued last week for allegedly manipulating the stock of the money-losing Pakistani software company.
The Blue Water investors who sued the fund attributed the fund’s 140% first-quarter gain to its manipulation of the thinly traded shares of NetSol, which rose 249% in the first quarter.
Netsol fell $4.50 to $31 Monday, after trading as low as $29, on the Nasdaq Small-Cap Market.
Jonathan Iseson, portfolio manager of Blue Water funds, among the first quarter’s best-performing hedge fund group, was accused of securities fraud by four of the funds’ investors in a $100-million federal lawsuit filed last week in U.S. District Court in Brooklyn, N.Y. The suit alleges that the stellar performance of the funds was achieved by manipulating the shares of NetSol.
The investors allege that the financial viability of the three Blue Water funds, which mirror the same investing strategy, “is in serious jeopardy” because Iseson put much of the cash into NetSol. They want Iseson fired and replaced by a court-appointed receiver.
Iseson and several associates engaged in a “fraudulent, deceptive and manipulative scheme to inflate the value of the funds’ assets through the purchase of NetSol shares at artificially high prices,” the suit charged.
Such manipulation enabled the managers to receive a $12-million performance fee for the quarter, equal to 20% of Blue Water’s increase during that period, the suit says.
Iseson and his co-defendants denied the allegations through their attorney, Corey Winograd.
Netsol shares rocketed from about $20 at the start of the year to a peak of $80 in March. They then plunged to $15.13 by May 22 with the general plunge in tech stocks, before rebounding again in recent weeks to as high as $46.69 last week.
Blue Water owns 25%, or 2.1 million shares, of NetSol, for which it paid $43 million. The hedge fund group had about 55% of its $71 million in net assets invested in NetSol as of May 31, according to Hedgefund.net.
The funds’ assets declined from $160 million at the end of the first quarter, as NetSol sank.
Iseson, reached by telephone at his home office in Manhasset, N.Y., declined to comment on the suit.
NetSol, previously known as Mirage Holdings Inc., went public in 1998 as an importer of exotic clothing from Pakistan. It switched businesses when it bought a software company from the chief executive’s brother and changed its name. About three-quarters of its 290 employees work in Pakistan.
The company reported a quarterly loss of $797,603, or 8 cents a share, on May 12. In the year-earlier period, it lost $174,000.
The suit alleges Iseson hid the NetSol investment because it violated Blue Water’s pledge to neither acquire more than 10% of any company nor put more than 10% of assets into any one stock.
“No later than in March were investors apprised of a heavy concentration in a single position,” Winograd said.
The suit was filed by Tremont International Insurance Ltd., a unit of Tremont Advisors Inc.; Royalton Principal-Protected Fund Ltd.; ZCM Asset Holdings Co. (Bermuda) LTD; and Community Partners. They say their total investment in Blue Water was about $7.7 million.
