The Securities and Exchange Commission charged Louisiana-based hedge fund Commonwealth Advisors with defrauding investors by hiding millions of dollars in losses during the global financial crisis from investments tied to ill-fated mortgage-backed securities.
The regulator contends in its complaint that Walter Morales – and his firm Commonwealth – led the hedge funds they managed to buy the lowest and riskiest tranches of collateralize debt obligations. They then sold mortgage-backed securities into those CDOs at prices obtained four months earlier despite knowing that the market was in the midst of a rapid decline, the SEC said.
As the losses for these bad CDO investments piled up, the SEC alleges that Morales told his Commonwealth employees to conduct a series of manipulative trades between the hedge funds they advised in order to hide a $32 million loss by one of the funds in its CDO investment. Afterwards, Morales and Commonwealth lied to investors about the amount and value of mortgage-backed assets held in the hedge funds, the SEC said, adding that they also created fake internal documents to justify their valuations.
"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," SEC director of enforcement Robert Khuzami said. "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."
Rather than coming clean to investors, the SEC contends that Morales had Commonwealth execute more than 150 cross-trades from two hedge funds they advised at prices below Commonwealth's own valuation for those securities. Once those trades were completed, the regulator said that Morales had one of his employees create a fraudulent $19 million gain for the acquiring hedge fund at the expense of the funds that sold.
The SEC added that its investigation is ongoing.