As we all know, Bernie Madoff is currently serving a minimum 150 year sentence at a federal jail in Butner, North Carolina. Other high profile hedge fund fraudsters are also reflecting on their sins from the inside of a US penitentiary, notably Sam Israel of Bayou, "I've faked my suicide" fame.
Against this background, it was surprising to read this past week (see link to FT) that the UK Serious Fraud Office has decided not to pursue any charges against the founder and principal of Weavering Capital, Magnus Peterson. Peterson previously held the high profile role of head of trading at the major Swedish bank SEB - as such, he is another example where apparent hedge fund fraud is conducted by established and senior industry professionals, rather than small time opportunists.
In early 2009, Weavering was unable to meet redemption requests, and it turned out that the fund's primary asset was a private swap transaction with a related party company set up in the British Virgin Islands (see an investigative piece written at the time by the Daily Telegraph). Given that Weavering couldn't pay its investors back yet claimed assets of $639 million, it would appear that the aforementioned swaps were fake. However, according to the SFO, there is now "insufficient evidence to secure convictions".
What is even more surprising is that, just a week ago, Weavering was involved in a landmark judgment against the two directors of its offshore fund (see Fin Alternatives), who conveniently happened to be Peterson's 80 year old father and his brother in law. Much to the delight of the Cayman directorship services industry (given that the two directors involved - probably more by good luck than management - weren't Caymanian), the two individuals were each fined $111 million. Certainly, someone thinks that there was criminal wrongdoing associated with the Weavering case.
According to one commentary, the SFO's decision not to take action against Peterson has "caused investors to raise serious questions about the ability and will of British prosecuting authorities to bring criminal charges in substantial fraud cases, which can only be damaging to the City's position as a center of international finance."
Hmm. And, of course, this isn't the first time this has happened. Despite the UK's efforts to infer that fraud is unlikely in Mayfair given the oversight provided by the FSA, there have been other examples of UK hedge funds blowing up under a cloud of accused wrongdoing. In 2006, the FSA banned Jae Wook Oh, the founder of the hedge fund Regent's Park, from any "controlled function" for three years. Given that no prison time was involved, this can only be described as a wrap across the knuckles.
According to the regulator, "it appears that over a number of months in 2005 there was a difference between the realisable value of certain investments and the valuations provided by Regent's Park." Yes well...while all that happened to Wook Oh was apparently a three year time out from money management, Regent's Park's administrator, GlobeOp, was found liable in a $43 million compensation case - again, someone obviously thought that something had gone severly wrong.
Still, having called out the UK, let's remember that the US also has problems with its prosecution process. In a process which took nearly a decade to get to court, Michael Lauer, the founder of Lancer group, was recently acquitted of stock fraud. According to prosecutors, Lauer bought shares in tiny shell companies and then put in buy orders at the end of each month to provide a temporary bump to the price used in the fund's NAV. However, the jury disagreed and Lauer now expects to return to money management. Due diligence, anyone?
Hedge Fund Operational Due Diligence
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