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."


In Depth

Part II: Roubini Talks Risk, Recovery And The Threat Of A Triple Dip Recession

Oct 21 2014 | 12:41pm ET

In the second half of our interview with Nouriel Roubini, FINalternatives editor...

Lifestyle

Balyasny Pays Over $6M For Lakefront House

Oct 22 2014 | 10:29am ET

A venture headed by hedge fund manager Dmitry Balyasny just paid $6.2 million for...

Guest Contributor

Hedge Funds Weather A Data Management Perfect Storm

Oct 22 2014 | 12:28pm ET

From a regulatory standpoint, nearly every development since the crisis has placed...

 

Videos

Editor's Note

    Guidelines for Guest Articles

    Oct 22 2014 | 9:46am ET

    We are always looking for guest articles from hedge fund managers and buy-side firms.

    If you are interested in submitting a contributed piece for possible publication on FINalternatives, please take a look at the specs. Read more…

 

Futures Magazine

October 2014 Cover

Deeply flawed risk benchmark

Most traders agree that proper risk management is the key to successful trading. However, many traders depend on the deeply flawed measure of standard deviation as a benchmark of risk. Here we put it ...

The Alpha Pages

TAP July/August 2014 Cover

The Alpha Pages Interview: Senator Rand Paul

Senator Paul sat down in the debut series of the Alpha Pages Interview to discuss the broken tax code, regulation surrounding Bitcoin, and his plans for the 2016 Presidential election.