SFO: Not So Pusillanimous?

The Serious Fraud Office has (for the first time ever) had a change of heart and reopened its investigation into the Weavering Capital hedge fund fraud. This comes after a private court case against the odious Peterson and his band of thieving and/or incompetent allies in crime was concluded. The judge in her high court ruling shed a little light on what actually happened at Weavering:

The hedge fund was launched in 2003. Within less than three weeks it had lost almost 20% of its value. The following month Peterson entered into two OTC option transactions with another fund based in the Virgin Islands which he controlled, and backdated them to the previous month so that the fund appeared to have gained in value during the first month of trading. In other words, right from the outset Peterson chose to defraud investors.

During 2004 Peterson used the same deceit 13 times to cover monthly losses.

From 2005 switched to using swaps, rather than options, but basically continued the same fraud.

In 2009 the fund contained:

  • some worthless bonds
  • $40 million (net) options positions
  • $600 million swaps with Peterson’s company

This portfolio doesn’t really match the fund’s original prospectus which claimed the fund:

  • would construct a portfolio so as “to ensure a balanced and diversified risk profile”.
  • would maintain a “rigorous” and “pro-active” approach to risk management “[i]n order to meet its commitment to capital appreciation”.
  • would endeavour to adhere to investment restrictions, such that “no more than 20% of the value of the Gross Assets of the Company…is exposed to the creditworthiness or solvency of any one counterparty”.
  • adhered to the principle of diversification in the use of derivatives.

Lies, all lies. And there were more lies:

“The majority of the securities we trade are exchange traded, therefore valuation is very simple – LIFFE valuations are taken…”,

“There is currently one fund managed by the firm”,

“Portfolio concentration in terms of amount of instruments and exposure bias…: All positions are expressed through futures and options. N/A”,

“List the instrument types you use by percentage: Options: 75%/Futures: 25%”,

“We could liquidate our portfolio within 1 day; due to our option protection we would protect the overall portfolio within the predefined max loss limits [predefined as 5%]”,

“As all our investments are exchange traded we never have any pricing discrepancies”,

“Please describe any current or potential conflict of interest, any relationships which may affect trading, trading flexibility, e.g. associated broker/dealer: N/A”,

“Are investors informed when minor/major changes are made to the trading, money management, or risk control methods? Yes.”

The judge described Peterson as “… not at all arrogant in manner but his whole attitude to investment was an arrogant one.” With this arrogance he didn’t try to conceal that the transactions were with a related company which also had “Weavering” in its name. He also chose very reputable companies to audit his work. He also didn’t profit from the fraud; he didn’t take any money out of the Virgin Island company. The judge concluded “[the fraud] … been committed out of a sense of invincibility, self-belief, and a gambler’s mentality.”

There’s a lot more detail in the judge’s judgment at:

http://www.bailii.org/ew/cases/EWHC/Ch/2012/1480.html

As for the SFO, do I now consider them to be any less pusillanimous cowards? Absolutely not. I (and others) firmly believe that the only reason they’ve reopened their investigation is that if they hadn’t they’d have been taken to court by the administrators.

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