SEC Says Hedge Fund's Fishy Trades Hid CDO Losses

Nov 9 2012 | 10:41am ET

Five years after the mortgage market collapsed, federal regulators have accused a Louisiana hedge fund of hiding losses suffered in that collapse.

The U.S. Securities and Exchange Commission sued Commonwealth Advisors and its head, Walter Morales, accusing it of not disclosing $32 million in losses suffered on a collateralized debt obligation, Collybus. According to the SEC, Morales told his employees to make a series of trades between two hedge funds designed to conceal those losses, which came on the lowest-rated tranches of the CDO.

While the trades in question, about 150 of them, were made at prices below Baton Rouge-based Commonwealth's own internal valuations, Morales had an employee mark the securities at fair market value, anyway, the SEC said. That created a bogus $19 million for one hedge fund and losses for the other.

"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," Robert Khuzami, the SEC's enforcement chief, said.

Commonwealth said it planned to fight the charges.

"We seriously dispute the SEC's version of what happened," a lawyer for the hedge fund and Morales said in a statement. "We plan to vigorously defend the action and we are confident that, in the end, the decisions made by Commonwealth and its management will be vindicated in the courts."

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