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Wednesday, May 22, 2024 | Back issues
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SEC Claims Hedge Fund Adviser Lied

BATON ROUGE, La. (CN) - A Baton Rouge hedge fund adviser ordered his employees to lie to conceal $32 million in losses on risky collateral debt obligations, the SEC claims in Federal Court.

The SEC sued Walter A. Morales, 50, and his company, Commonwealth Advisors, both of Baton Rouge.

"Since at least 2007, Commonwealth, a Louisiana investment adviser and Morales, its principal, engaged in a scheme to hide losses in certain hedge funds they advised," the complaint states. "These losses were realized, in part, from significant investments that the funds held in residential mortgage-backed securities ('RMBS') which had deteriorated in value during the recent downturn in the residential housing market. To hide these losses, Defendants executed improper trades across the funds ('cross-trades') that benefitted certain clients at the expense of other clients. Defendants also made materially false representations to investors about the amount and value of, as well as the process for valuing certain mortgage-backed assets held in the funds and fabricated internal documents to justify the false valuations."

Morales caused the hedge funds he manages to buy the lowest, and riskiest, tranches of a CDO called Collybus, the SEC said.

In a statement announcing its lawsuit, the SEC said: "They sold mortgage-backed securities into the CDO at prices they 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 instructed Commonwealth employees to conduct a series of manipulative trades between the hedge funds they advised (called cross-trades) in order to conceal a $32 million loss experienced by one of the funds in its Collybus investment. 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 seeks disgorgement, penalties and an injunction. It said its investigation continues.

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