Baton Rouge hedge fund manager Walter A. Morales was sued Thursday by the Securities and Exchange Commission for allegedly defrauding investors of millions of dollars by concealing losses in mortgage-backed securities in 2007 and 2008.
The SEC lawsuit, filed in Baton Rouge federal court, alleged one of the concealed losses totaled $32 million. SEC officials also alleged that Morales and his Commonwealth Advisors Inc. created a fraudulent $19 million gain in another investment.
“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 Robert Khuzami, director of the SEC’s enforcement division.
“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.”
Morales said he and Commonwealth Advisors will fight the SEC allegations.
“We are disappointed by the SEC’s action, and we seriously dispute the SEC’s version of what happened,” Morales, 50, said.
“Commonwealth Advisors managed several investment funds that invested in mortgage-backed securities. In the credit crisis of 2008, the market for such securities froze. Since that time, the country has experienced record amounts of foreclosures and record drops in home prices.
“Securities held by the Commonwealth funds have nevertheless continued to generate cash for the investment funds and have performed at above-average levels for these types of investments.”
Although Morales insisted those funds remain solvent, he said they are tied up in bankruptcy reorganization proceedings in Delaware.
“Efforts are under way to craft a settlement … involving investors in the funds, Cantor Fitzgerald, and Commonwealth,” he said.
Cantor Fitzgerald & Co. of New York served as Commonwealth’s investment bank.
Baton Rouge resident Joseph N. Broyles and other investors allege in a pending civil suit before U.S. District Judge James J. Brady that Cantor Fitzgerald required Commonwealth to purchase $740 million in inflated mortgage notes. In return, the investors allege, Cantor Fitzgerald hired Commonwealth to manage $1 billion in real estate assets.
Both Commonwealth and Cantor Fitzgerald have denied that allegation in court filings.
Records of the Delaware bankruptcy case show the Municipal Employees Retirement System of Louisiana invested $44.2 million with three of Morales’ funds.
The Firefighters Retirement System of Louisiana invested another $63.3 million through Commonwealth, bankruptcy records show.
SEC officials alleged in a statement, separate from the lawsuit filed Thursday, “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.”
“That isn’t true,” Morales responded in a second statement. “The SEC’s allegations regarding cross trading, which they allege was designed to mask losses or shift losses from one fund to another, tell a completely biased and incorrect account of facts.”
The SEC’s lawsuit, Morales said, follows an investigation of more than four years.
“It has been an arduous process, consuming more than $2 million in legal costs,” Morales said. He said “months of settlement talks broke down, and the SEC filed this action. 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.”
The SEC’s lawsuit is assigned to Chief U.S. District Judge Brian A. Jackson.
Assistant U.S. Attorney John J. Gaupp and SEC attorney Matthew A. Rossi ask Jackson in the lawsuit to issue a permanent injunction barring Morales and Commonwealth from violations of SEC rules and regulations. Gaupp and Rossi also ask Jackson to order Morales and Commonwealth to pay an unspecified sum for investor funds alleged to have been mishandled.