Posts tagged ‘mortgage-backed securities fraud’

SEC Charges Baton Rouge-Based Investment Adviser With Hiding Losses from Mortgage-Backed Securities Investments

The Securities and Exchange Commission (the “SEC”) recently announces that it has charged a hedge fund manager in Baton Rouge, La., with defrauding investors by hiding millions of dollars in losses suffered during the financial crisis from investments tied to residential mortgage-backed securities.

The SEC alleges that Walter A. Morales and his firm Commonwealth Advisors Inc. caused the hedge funds they managed to buy the lowest and riskiest tranches of a collateralized debt obligation called Collybus. They sold mortgage-backed securities into Collybus at prices they had obtained four months earlier while knowing that the residential mortgage-backed securities 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 $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.

According to the SEC’s complaint filed in U.S. District Court for the Middle District of Louisiana, Commonwealth’s hedge fund clients included pension funds and individual investors. Morales and Commonwealth invested a significant portion of hedge fund assets in residential mortgage-backed securities. When the mortgage markets began to decline dramatically in 2007, bond rating agencies began to aggressively downgrade subprime residential mortgage-backed securities. Therefore, Commonwealth clients were sustaining heavy investment losses and Morales knew those losses would probably continue.

The SEC alleges that rather than come clean with investors, 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 $19 million gain for the acquiring hedge fund at the expense of the funds that sold. Morales ordered the cross-trades even though Commonwealth had represented in forms filed with the SEC that it would not execute such trades between these hedge fund clients. Moreover, when the trades raised concern from the prime broker, Morales falsely represented that the transactions were for a legitimate business purpose and at prevailing market prices.

The SEC further alleges that Morales deceived Commonwealth’s largest investor about its exposure to Collybus. Morales agreed to limit the investor’s exposure to Collybus through its investment in a particular Commonwealth hedge fund to 10 percent of that hedge fund’s equity. Morales, however, abided by this agreement only temporarily, and the investor’s exposure to Collybus more than doubled by mid-2008. After the large investor learned that Commonwealth was not following its stated valuation procedures, the investor requested valuation committee meeting minutes to review. Morales allegedly prepared false minutes that were delivered to the investor purporting to describe meetings that never occurred.

The foregoing information, which is publicly available on the SEC’s website, is being provided by The White Law Group.  The White Law Group is a national securities fraud and investor protection law firm with offices in Chicago, Illinois and Boca Raton, Florida.  For more information on The White Law Group visit

Settlement Announced Involving Morgan Keegan Subprime-Mortgage-Backed Securities

According to the Investment News, Regions Financial Corp. will pay $210 million to settle federal and state regulatory charges involving subprime-mortgage-laden mutual funds managed by its investment banking subsidiary, Morgan Keegan & Co.

The bank announced today in a press release that it had hired The Goldman Sachs Group Inc. to “explore potential strategic alternatives” for the investment bank. One potential alternative: selling the brokerage business and its approximately 1,250 advisers to another firm.

The charges and settlement with the Securities & Exchange Commission, Finra and five state securities regulators relate to the firm’s valuation of subprime-mortgage-backed securities in five fixed-income mutual funds managed by the asset management division Morgan Asset Management.

According to Finra, the firm made exaggerated performance claims and failed to disclose growing risks in the funds as the housing market declined in 2006-07.

The SEC accused former Morgan Keegan portfolio manager James C. Kelsoe Jr. of making arbitrary “price adjustments” to many of the mortgage-backed securities in the funds as they plummeted in value. The result was the publication of inaccurate net asset values for the five funds, the commission said.

“The falsification of fund values misrepresented critical information exactly when investors needed it most — when the subprime mortgage meltdown was impacting the funds,” said Robert Khuzami, director of the SEC’s Division of Enforcement.

About 39,000 investors lost $1.5 billion in the investments, according to regulators. They will receive $200 million of the settlement amount.

Mr. Kelsoe agreed to pay a $500,000 penalty and was barred from the securities industry. Former company comptroller Joseph Thompson Weller agreed to pay a $50,000 fine.

But the settlement isn’t the end of the matter for Regions and Morgan Keegan. There are still many arbitration claims before Finra on the matter, as well as other investors with claims that have not filed yet.

For more information on the settlement or to see if you have a separate arbitration claim against Morgan Keegan to recover your investment losses, please contact the securities attorneys of The White Law Group.

To speak with a securities attorney, please call the firm’s Chicago office at 312/238-9650.

The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida.

For more information on The White Law Group, please visit our website at


FINRA Investigates Long Island brokerage firm David Lerner & Associates

According to the New York Post, in May 2010, FINRA accused Long Island brokerage firm David Lerner Associates and its head trader, William Mason, of charging customers “excessive” markups on normally safe municipal bonds and high-grade mortgage-backed securities.

According to the FINRA complaint, David Lerner & Associates between 2005 and 2007 charged brokerage customers, many of whom were individual investors, markups of up to 5.78 percent on more than 1,500 muni-bond transactions and up to 12.81 percent on more than 1,800 high-grade mortgage securities.

By jacking up the price it charged customers to buy those securities, David Lerner & Associates was able to collect a higher commission.

But because bond prices and yields move inversely of each other, the higher prices that David Lerner & Associates charged resulted in its customers being paid a lower yield by the bond issuers.

In one example outlined in the complaint, David Lerner & Associates is said to have bought in May 2006 250 muni bonds tied to New York City’s Municipal Water Finance Authority at a price of $97.625 each.

The day after buying them, David Lerner & Associates unloaded the bonds to three customers at a price of $101.875 — a premium of 4.35 percent and resulting in a yield of 4.268 percent.

Other broker-dealers were selling the same bonds for between $99.916 and $100 each, resulting in yields of 4.5 percent and higher, according to the complaint.

FINRA is seeking from the Syosset-based firm a fine, disgorgement of ill-gotten gains and full restitution to customers.

This isn’t David Lerner & Associates’ first time in FINRA’s crosshairs.

In 2005, the watchdog fined David Lerner & Associates $115,000 for misleading radio spots, including some advertising “returns of 10 percent and more,” and other misleading communications with investors.

In 2006, David Lerner & Associates was fined $400,000 for problems relating to sales of complex insurance vehicles known as variable annuities (variable annuities are traditionally one of the highest commission products sold by a financial advisor).

If you have questions about investments you made with David Lerner & Associates, the securities attorneys of The White Law Group may be able to help.  For a free consultation, call the firm’s Chicago office at 312-238-9650.

The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida. With over 30 years of securities law experience, including experience working at FINRA (f/k/a the NASD) and the SEC, The White Law Group has the expertise to help investors defrauded in securities, investment and financial business transactions.

For more information on The White Law Group, please visit our website at