SEC Sues Commonwealth Advisors Over Collybus I CDO

The Securities and Exchange Commission filed a Complaint today against Commonwealth Advisors, Inc. and Walter A. Morales in connection with the Collybus I CDO offering in November 2007. See the SEC Complaint and the Collybus I CDO Offering Document.

The SEC alleges amongst other things that the Defendants used the Collybus I CDO offering to shift losses from its hedge funds by causing the CDO to purchase impaired RMBS from Commonwealth's hedge funds at values which did not reflect recent market declines. Commonwealth Advisors was the Collateral Manager for the Collybus I CDO. Because the Collybus I CDO Trust purchased RMBS from Commonwealth's hedge funds at above market prices, investors in the lower tranches of the Collybus I CDO suffered substantial undisclosed losses on the CDO's issue date.

We have previously written about LCM VII and Bryn Mawr II CLOs issued by Banc of America in July 2007 which had similar defects. See our working paper on the Banc of America CLOs and our previous blog post. Prompted by our research and a New York Times article, these CLOs were the subject of a subpoena issued by Massachusetts to Bank of America (See the WSJ story).