Nine investment funds managed by a Baton Rouge firm have been placed into voluntary Chapter 11 reorganization proceedings in U.S. Bankruptcy Court in Wilmington, Del.

That action was taken last week as a civil suit alleging mismanagement remained pending in Baton Rouge against the management firm Commonwealth Advisors Inc., its president and chief investment officer, Walter A. Morales III, and others.

Commonwealth is not among the firms seeking Bankruptcy Court protection from creditors during reorganization.

“This is an unusual bankruptcy filing because the (investment) funds do not have any debt,” Morales said in a written statement Tuesday.

“The purpose of the filing was to expedite the settlement of litigation involving our (investment) funds, our firm, Cantor Fitzgerald (& Co. of New York) and an investor in the funds,” Morales added.

The Baton Rouge civil suit before U.S. District Judge James J. Brady was filed a year ago by local resident Joseph N. Broyles and other investors. It alleges Louisiana investors owned more than $178 million of the combined assets in four of Commonwealth’s managed funds in October 2007.

The investor suit also alleges that money was part of more than $740 million from Commonwealth-managed investment funds that purchased inflated mortgage notes and other over-valued real estate securities from Cantor Fitzgerald in November 2007 and June 2008.

At least one pension fund has reported placing significant sums with Commonwealth and investment funds under its management. That is the Municipal Employees Retirement System of Louisiana, which has reported investing $30 million since March 2007.

Broyles and other investors also allege in their suit that Cantor Fitzgerald required Commonwealth to purchase the $740 million in real estate assets in return for Cantor Fitzgerald’s hiring of Commonwealth to manage $1 billion in real estate assets.

Both Commonwealth and Cantor Fitzgerald have denied that allegation in federal court.

Broyles said in the suit that the value of his investments decreased by $3 million because of the alleged agreement between Commonwealth and Cantor Fitzgerald.

Meanwhile, the real estate transactions have attracted the attention of the Securities and Exchange Commission.

In July 2009, the SEC told Commonwealth its staff is investigating “possible violations” of the Securities Act of 1933 and the Securities Exchange Act of 1934, according to the investment funds’ Chapter 11 filing in Delaware.

The real estate securities involved in the Louisiana litigation may be among the items of interest to the SEC, according to the investment funds’ filing.

“We disclosed that the SEC has conducted an investigation into the funds for the past two years,” Morales said in his written statement.

“We are fully cooperating and do not know the status of the (SEC) investigation,” Morales added in his statement.

“We believe the bankruptcy filing provides the most efficient avenue for the protection of our clients’ investments in the funds,” Morales added.

“It is our belief that our firm has done nothing wrong, and the drop in the value of our funds was not unique to us, but rather related to the market meltdown of 2008,” Morales said in the statement.

In a separate interview, Morales predicted: “By the end of the year, these (investment) funds will be sitting on nearly $15 million in cash that we would love to distribute to our investors.

“These are mortgage investments that continue to generate cash,” Morales added. “Our clients’ assets are in good hands.”

In his written statement, Morales said: “It is anticipated the investors will ultimately receive back the vast majority of their initial investment.”

And he said in the written statement that “93 percent of investors voted in favor” of the Chapter 11 reorganization plan before it was filed in Delaware.

The nine investment funds under reorganization are: CA Core Fixed Income Fund LLC; CA Core Fixed Income Offshore Fund Ltd.; CA High Yield Fund LLC; CA High Yield Offshore Fund Ltd.; CA Strategic Equity Fund LLC; CA Strategic Equity Offshore Fund Ltd.; Sand Spring Capital III LLC; Sand Spring Capital III Ltd.; and Sand Spring Capital III Master Fund LLC.