Alternative Market Briefing

SEC accuses Commonwealth Advisors and founder of concealing $32m hedge fund losses from investors

Friday, November 09, 2012

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Walter A. Morales Benedicte Gravrand, Opalesque Geneva - The U.S. Securities and Exchange Commission (SEC) charged a hedge fund manager with defrauding investors by hiding millions of dollars in losses suffered during the financial crisis from investments tied to residential mortgage-backed securities (RMBS).

This lawsuit reportedly follows a four-year long investigation.

Walter A. Morales and his firm Commonwealth Advisors Inc., located in Baton Rouge, LA, allegedly bought the lowest and riskiest tranches of a collateralized debt obligation (CDO) called Collybus. According to the SEC, Morales sold MBSs into the CDO at prices he had obtained four months earlier, while knowing that the RMBS market had declined precipitously in the meantime. As the CDO investments continued to perform poorly, Morales and his firm conducted a series of manipulative trades between the hedge funds they advised (called cross-trades) in order to conceal a $32m loss experienced by one of the funds in its Collybus investment. After the trades, Morales directed a Commonwealth employee to mark the securities at fair market value, which created a fraudulent $19m gain for the acquiring hedge fund at the expense of the funds that sold.

Morales and Commonwealth lied to investors about the amount and value of mortgage-backed assets held in the hedge funds, and they created phony internal documents to justify their false valuations, the SEC states.

Robert Khuzami, Director of the SECs Division of Enforcemen......................

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