Walter Morales, Commonwealth Advisors and the hedge funds they managed bought the lowest and riskiest tranches of a collateralised debt obligation (CDO) called Collybus, the SEC said. Morales then hid millions of dollars in losses suffered during the financial crisis from investments tied to residential mortgage-backed securities (RMBS).
The SEC alleges that the team sold mortgage-backed securities into the CDO at prices they had obtained four months earlier while knowing that the RMBS market had declined precipitously in the meantime. As the CDO investments continued to perform poorly, Morales instructed Commonwealth employees to conduct a series of manipulative trades between the hedge funds they advised (called cross-trades) in order to conceal a $32m loss experienced by one of the funds in its Collybus investment.
The SEC alleges that Morales directed Commonwealth to execute more than 150 deceptive cross-trades from two hedge funds they advised to another one of their hedge funds in June 2008 at prices below Commonwealth’s own valuation for those securities. After the trades, Morales directed a Commonwealth employee to mark the securities at fair market value, which created a fraudulent $19m gain for the acquiring hedge fund at the expense of the funds that sold.
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