When the UK's Serious Fraud Office decided in September to drop
an investigation into the collapse in 2009 of Weavering
Capital, a London hedge fund group headed by Magnus Peterson,
the move was greeted with widespread shock and dismay.
To many in the European hedge fund world, it was simply
incredible that the SFO would not be bringing charges against
either Peterson or his associate Edward Platt, a senior
employee at Weavering, on the basis that there was "no
reasonable prospect" of securing a conviction.
The firm's principal Cayman-domiciled vehicle, the Weavering
Macro Fixed Income Fund, purported to have assets of more than
$530 million at the end of 2008, after reporting profits
throughout the financial crisis.
However, in early 2009, the fund was suddenly unable to pay
out redemptions, leading to the discovery that its actual net
asset value was far below what it had been declaring. The fund
went into liquidation in March 2009, with investors suffering
losses now thought to be $500 million or more.
The SFO moved quickly to arrest Peterson and Platt in early
2009 and to investigate certain derivative transactions,
thought to be interest rate swaps, that the fund had entered
into. Reports suggest that these transactions had not been
executed with a recognized ISDA swap dealer but with an obscure
British Virgin Islands company that-surprise, surprise-was
controlled by Peterson himself. These transactions had the
effect of inflating the NAV of the fund and covering up
substantial losses Peterson had incurred in options
This widespread astonishment over the SFO's decision came
just days after a court in the Cayman Islands took a landmark
civil action against the two nonexecutive directors at
Weavering-Peterson's younger brother, Stefan, and his elderly
father-in-law, Hans Ekstrom. In Cayman, a judge reached the
damning conclusion that the nonexecutives were guilty of
"wilful neglect" and awarded damages against them of $111
If a court in Cayman is capable of taking such a decisive
action against nonexecutive directors, why can the SFO
seemingly do nothing against the same firm's full-time
executives? Could Cayman actually be a tougher jurisdiction
than the UK?
These questions may seem ridiculous to ask of the UK, where
the hedge fund industry has been relatively scandal free. As I
have argued consistently over the years, the system of
regulation for hedge fund managers operated by the Financial
Services Authority has generally been effective. Unlike in the
U.S., where there has been a long litany both of blowups (from
Long-Term Capital Management to Amaranth) and egregious frauds
(from Manhattan to Madoff), the UK has seen few of either.
But Weavering does appear to be an important exception. It
has always looked like a pretty open-and-shut case of fraud,
which is why the SFO's sudden abandonment of any action has
caused such alarm.
"The SFO's decision is particularly surprising given the
weight of evidence, the proximity of the civil trial and the
fact that, in related proceedings, a Cayman Islands judge has
already found that Mr. Peterson defrauded Weavering's
investors," said Barnaby Stueck, a partner in the law firm
Jones Day, in a statement. Jones Day is representing the
liquidators of Weavering Capital and bringing a civil action
against Magnus Peterson and others, alleging fraud and breach
of fiduciary duty. Stueck added, "Despite the SFO's stance,
Weavering's investors intend to do everything possible to
ensure a criminal prosecution takes place."
Without access to the fine details of the case, which will
probably not come to light until the civil action goes to
court, it is impossible to know on what grounds the SFO felt it
could not secure a conviction. This has led to speculation
about what rights in the firm's partnership structure or fund
documentation would have allowed the managers to mislead
investors about the performance of the portfolio and get away
Industry consultants like Jerome Lussan of Laven Partners
have highlighted the continuing importance of the caveat emptor
all investments-and doing your own due diligence on a fund's
documentation as well as its operations.
Nonetheless, one is left with the feeling that had such a
case occurred in the U.S., the authorities would still have
found a way to prosecute the Weavering managers.
While the FSA regime has generally proved successful at
preventing fraudsters from setting up hedge funds from the UK,
the SFO-supposedly the UK's main agency for investigating and
prosecuting financial crime-continues to suffer from a
reputation as something of a lapdog watchdog. The Weavering
case does nothing to change that.