The federal courthouse in Baton Rouge may play host to a lawsuit filed by Securities and Exchange Commission alleging that a local hedge fund manager failed to disclose mortgage-backed securities losses to investors. The business litigation centers on claims that Commonwealth Advisors, Inc. defrauded investors by covering up more than $32 million in losses in the mortgage-backed fund and misrepresented a $19 million gain in a different investment fund.
An attorney for the Securities and Exchange Commission said that the fund advisor duped investors through false documentation and misleading trade activities. The fund manager denies the SEC claims and asserts that the agency has painted a flawed picture of cross-trading activities with allegations that the trades were intended to conceal losses or shift losses between different investment funds.
Amidst crashing home prices during the credit crisis of 2008, markets for mortgage-backed securities declined significantly. The fund manager countered the SEC allegations of investor fraud by pointing out that funds managed by the company succeeded in returning above-average profits for investors at a time when foreclosures saw record levels nationwide.
The SEC lawsuit parallels a civil suit filed by investors claiming that the fund advisor purchased over-valued mortgage notes from investment bank Cantor Fitzgerald in return for an opportunity to manage $1 billion worth of real estate assets. According to the hedge fund manager, a settlement with investors may still be possible even though a breakdown in negotiations preceded the SEC action.
The likelihood of successful settlement negotiations may be questionable, however, as the fund’s assets are currently tied up in bankruptcy reorganization proceedings. Bankruptcy records show that fund investors include the Firefighters Retirement System of Louisiana and the Municipal Employees Retirement System of Louisiana. With more than $100 million in investments implicated just between the two retirement Louisiana retirement funds, all parties involved will need the counsel of experienced business law professionals to sort out a fair resolution.
Source: The Advocate, “SEC sues BR hedge fund manager,” Bill Lodge, Nov. 9, 2012
