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
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
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
all investments—and doing your own due diligence on
a fund’s documentation as well as its
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.