The SEC charged Walter A. Morales III and the firm he founded, Commonwealth Advisors, with defrauding investors by hiding $32 million of losses from investments in residential mortgage-backed securities in a hedge fund family.
The civil complaint, filed in U.S. District Court in Baton Rouge, La., alleges that Commonwealth Advisors and Mr. Morales, its president and chief investment officer, invested in RMBS in “the lowest and riskiest tranches” of a collateralized-debt obligation called Collybus, according to an SEC news release.
Mr. Morales and the Baton Rouge, La.-based firm are alleged to have tried to cover up losses in the RMBS CDO through cross-trading among the firm's hedge funds.
“(Mr.) 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 valuation,” according to the SEC's release.
Among institutional investors in Commonwealth Funds are two Baton Rouge funds — The $800 million Louisiana Municipal Employees' Retirement System, with an initial investment in Commonwealth hedge funds of $30 million; and the $1 billion Louisiana Firefighters' Retirement System, with $63.5 million in the firm's hedge funds. Both pension funds are plaintiffs in an ongoing civil lawsuit filed in 2010, along with other institutional and individual investors alleging mismanagement by Commonwealth Advisors.
Robert Rust, LAMPERS' director, said he can't comment on pending litigation. Steven Stockstill, Louisiana Firefighters' executive director and legal counsel, did not return a call seeking reaction to the SEC's suit.
The $2.2 billion San Antonio Fire & Police Pension Fund, which also was a Commonwealth investor, filed suit against Commonwealth in Bexar County District Court in mid-October alleging fraud and seeking the return of its $30 million investment.
Erik Dahler, staff attorney for the San Antonio fund, did not return a call seeking comment about the SEC's action against Mr. Morales and his company.
The SEC's complaint also refers repeatedly to the experiences of an unidentified “large investor” which is “an investment adviser to several large institutional clients including pension funds and hedge funds” that invested a total of $149 million of client assets in Commonwealth's family of nine hedge funds between August 2007 and May 2008.
Gerald Hodgkins, associate director in the SEC's division of enforcement, said he could not name the large investors due to privacy laws.
Another source who insisted on anonymity said the investor is Crestline Management.
Jesus Payan, Crestline's general counsel, could not be reached by press time for comment.
According to Crestline Management's most recent ADV filing, assets under management totaled $6.4 billion as of Jan. 31.
Mr. Morales did not respond to calls seeking comment, but an e-mailed statement from Commonwealth Advisors said: “We seriously dispute the SEC's version of what happened … 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.”
According to Commonwealth's SEC ADV filing, dated July 26, the firm managed $275 million as of Dec. 31, 2010. It is unusual for an ADV filing to contain such an outdated figure for assets under management.
Commonwealth Advisors filed for Chapter 11 bankruptcy protection in late 2011 for the nine hedge funds in its Commonwealth and Sand Spring Capital families. Kinetic Partners US assumed management in order to wind down the hedge funds earlier this year.