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 trading.
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 million each.
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 with it.
Industry consultants like Jerome Lussan of Laven Partners have highlighted the continuing importance of the caveat emptor principle in
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.