The Securities and Exchange Commission has charged a hedge fund manager in Baton Rouge, LA, for hiding "millions of dollars" in losses from investments tied to residential mortgage-backed securities incurred during the financial crisis.

The SEC alleges that Walter Morales and his firm Commonwealth Advisors bought the "lowest and riskiest" tranches of a collateralized debt obligation called Collybus. They then sold securities at prices they had obtained four months earlier, knowing that the RMBS market had declined "precipitously" in the meantime.

Morales instructed Commonwealth employees to conduct a series of manipulative trades between the hedge funds they advised, concealing a $32 million loss experienced by one of the funds in its Collybus investment.

"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," the SEC said in a statement.

The SEC’s complaint - filed in US District Court for the Middle District of Louisiana - states that when the mortgage markets started to decline in 2007, bond rating agencies began aggressively downgrading sub-prime residential mortgage-backed securities. Commonwealth clients were therefore sustaining heavy investment losses and "Morales knew those losses would probably continue," the regulator said.

Rather than "come clean" with investors, the SEC alleges that Morales directed Commonwealth to execute over 150 deceptive cross-trades in June 2008, at prices below the firm's own valuation for those securities. Morales then directed an employee to mark the securities at fair market value, creating a fraudulent $19 million gain for the acquiring hedge fund at the expense of the funds that sold.

Further, the SEC contends that Morales deceived Commonwealth’s largest investor about its exposure to the CDO; Morales agreed to limit the investor’s exposure to Collybus through its investment in a particular Commonwealth hedge fund to 10 per cent of its equity. He kept to this agreement "only temporarily," causing the investor’s exposure to more than double by mid-2008.

Moreover, when the large investor eventually learned that Commonwealth was not following its valuation procedures and requested valuation committee meeting minutes to review, Morales prepared false minutes which were delivered to the investor - purporting to describe meetings that did not occur.

The investigation continues.