A hedge fund manager was charged by the Securities and Exchange Commission for hiding millions of dollars in losses from investors tied to residential mortgage-backed securities.
Walter Morales and his firm Commonwealth Advisors Inc., based in Baton Rouge, La., sold mortgage-backed securities to hedge funds they managed at the lowest and riskiest prices, the SEC alleges. The firm sold its RMBS into the collateralized debt obligation at prices that were four months old, even though the RMBS market had declined over this course of time.
Even as the collateralized debt obligation investments continued to perform poorly, Morales instructed his employees to conduct a series of manipulative trades between the hedge funds they advised in order to conceal a $32 million loss experienced by one of the funds in its Collybus investment.
In order to justify their false valuations, Morales and Commonwealth allegedly created inaccurate internal documents and lied to investors about the amount and value of mortgage-backed assets held in the hedge funds.
The SEC claimed that as subprime RMBS were being downgraded by rating agencies starting in 2007 due to the financial crisis and many investors were sustaining large investment losses, Morales and Commonwealth did not notify its investors about these losses. Overall, at least 150 deceptive cross-trades were executed by Commonwealth employees from two hedge funds at prices below Commonwealth’s own valuation for those securities.
According to the SEC’s complaint filed in U.S. District Court for the Middle District of Louisiana, Commonwealth’s hedge fund clients included pension funds and individual investors.
“Morales and Commonwealth Advisors concealed significant hedge fund losses from investors, including pension fund investors, instead of owning up to them and facing the consequences,” said Robert Khuzami, director of the SEC’s Division of Enforcement. “Investors put their fundamental trust in the hands of their investment adviser, and they deserve better than being manipulated and lied to through deceptive trades and phony documents.”
