For years, money manager Walter A. Morales III had a sterling reputation for delivering consistently above-average investment returns to Baton Rouge’s wealthy, counting among his clients the billionaire Bass Family of Texas, affluent professionals and pension funds. These clients invested some $750 million in Morales’s firm, Commonwealth Advisors, at its zenith.
This week, he settled a Securities and Exchange Commission lawsuit that charged he and Commonwealth with fraud and mismanagement that led to the loss of more than $178 million in client funds he had invested in high-yield, subprime and residential mortgage-backed securities.
In addition to a $130,000 fine, Morales agreed to be barred from associating with any investment advisor. Commonwealth, which he founded, agreed to the revocation of its SEC registration for what the agency terms an “alleged financial crisis-era scheme.” Commonwealth Advisors is not related to Waltham, Mass.-based broker-dealer Commonwealth Financial.
According to the SEC’s allegations, Morales lied to his clients about hefty MBS losses, which he tried to hide through a complex series of trades between his various hedge funds using fraudulent prices.
Morales had vowed to fight the charges brought by the SEC in 2012. He insisted in a statement put out by his attorney that Commonwealth got caught in the 2008 crash of the mortgage-backed securities market and engaged in complex, little-understood transactions to try to help, not hurt, its investors. As for fraud, he says it simply didn’t happen.
But he also admitted to the Baton Rouge Business Report at the time that the charges were a “hell of a black eye.”
In 2013, Morales shuttered Commonwealth Advisors, while the retail side of the business was moved to an employee-owned firm called 3rd Street Capital Management.
The SEC suit alleged that Morales defrauded his clients, particularly a single, “large investor” that had $149 million invested in various Commonwealth funds. The large client is actually a family, according to reports, the billionaire Bass brothers of Fort Worth, widely considered brilliant investors.
During the 1970s and 1980s, the Bass family diversified their investments, turning the oil business they inherited from wildcatter Sid Richardson into what was considered the fastest growing family fortune in America. In the process, they became the largest shareholders of Disney Corp., among other investments. The four Bass brothers are believed to be the wealthiest family in Texas.
Specifically, the SEC suit claimed Morales used New York-based investment bank Cantor Fitzgerald & Co. to create a complex collateralized debt obligation (CDO), which he then used to hide losses from investors.