SEC Charges Hedge Fund Manager in RMBS Fraud

The Securities and Exchange Commission today charged a hedge fund manager in Baton Rouge, Louisiana with defrauding investors by hiding millions of dollars in losses suffered during the financial crisis from investments tied to residential mortgage-backed securities (RMBS).

The SEC alleges that Walter A. Morales and his firm Commonwealth Advisors Inc. caused the hedge funds they managed to buy the lowest and riskiest tranches of a collateralized debt obligation (CDO) called Collybus.

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.

The defendants are being represented by Michael Ungar at McDermott Will & Emery in Washington and Frederick Tulley at Taylor Porter in Baton Rouge.

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.

“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 SEC enforcement chief Robert Khuzami. “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.”

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