Bankrupt Mayfair hedge fund boss Magnus Peterson has been convicted at Southwark crown court, in London, of multiple counts of forgery and fraud six years after his rogue investment fund Weavering Capital collapsed, losing duped investors $530m (£350m).
Peterson, who had once been head of proprietary trading at Swedish bank SEB, created $600m of bogus swap contracts between the Weavering Macro Fixed Income Fund and WCF, a near-worthless company based in the British Virgin Islands which Macro fund investors said he did not make clear was also under his control.
Peterson will be sentenced on Friday and is likely to face years behind bars despite his continued insistence that he had been following a complex, but legitimate, trading strategy which his creditors and the courts had failed to understand.
Seemingly valuable trades with WCF masked disastrous trading right from the first month of the Macro fund’s inception in 2003, and up to its collapse in 2009. Meanwhile, Peterson paid himself a total of £7m over the period.
While investors eventually lost an estimated $530m, there is no suggestion that Peterson salted funds away. Money trails show that the cash had, instead, been lost, largely on high-risk, ill-fated bets on financial derivatives.
Although Peterson had a reputation for generous client hospitality at big sporting events and other occasions, when SFO investigators searched his Kent home in 2009 they found none of the trappings associated with an extravagant lifestyle. Thatch Hall, an unostentatious house near Maidstone, where he lived with his wife and four children, was last year sold for less than £1m by trustees in the couple’s bankruptcy.
The Macro fund had listed on the Irish stock exchange in 2003, attracting investment from pension schemes, charities, super-rich individuals and so-called “fund of funds” hedge fund investors – though almost none have admitted publicly to being duped by Peterson.
WCF, meanwhile, registered in the British Virgin Islands, a well-known secrecy haven, had practically no assets, no independent accounts and no auditors.
Aside from Peterson, the directors of WCF were Peterson’s younger brother Stefan Peterson and his elderly stepfather Hans Ekstrom. His two relatives were also directors of the Macro fund. Neither were charged with any offence.
The fraud unravelled in the middle of the credit crisis in 2009 as clients tried to redeem investments in what they believed was a low-risk and secure fund. The Macro fund had advertised itself as being highly liquid, able to return investments on a month’s notice. In the end it collapsed with $260m of unpaid redemption demands.
When outside experts were first called in to push through redemptions, Peterson claimed there were interest rate swaps worth $600m on the fund’s books. But he glossed over the fact that these were four contracts with his business WCF.
On closer inspection WCF appeared to have nothing like the assets required to meet swap obligations, even if the swap contracts had been enforceable.
Peterson then claimed WCF had assets of $77m, but even this proved an exaggeration. Among WCF’s investments was an interest in Lobos Gris, a documentary about a plan for Hitler to escape Allied forces by U-boat to Argentina, and a stake in Spring Awakening, a rock musical about adolescent sexuality.
Counsel for the Serious Fraud Office told the jury at Southwark crown court that confirmations of swaps between the Weavering Macro fund and WCF — required as independent proof of the value of the fund — never included a genuine signature from WCF directors other than Peterson. The failed hedge fund boss, however, told the court he had been given permission by his relatives to sign using their names.
Correspondence between Peterson and his Swedish-based stepfather in 2009 showed Ekstrom, then in his 80s, had forgotten about the existence of WCF and had only a vague understanding of swaps trading. In August 2011, however, a civil court in the Cayman Islands ruled against Ekstrom and Stefan Peterson in the sum of $111m for “wilful neglect or default” of their duties as directors.
The Cayman judge found they had failed to realise Magnus Peterson had “dishonestly manipulated the Macro fund’s balance sheet and defrauded its investors”.
Despite this damning judgment, the then SFO director Richard Alderman a month later wrote to Peterson saying that he had closed his agency’s investigation into Weavering owing to lack of evidence.
His decision, which sparked outrage among creditors, was made about the same time as Alderman controversially elected not to take on an investigation into allegations of Libor interest rate fixing by major financial institutions in the City.
The SFO’s decision to drop the case again came under renewed pressure the following year when liquidators won a civil court finding of fraud against Peterson and others, awarding damages of $450m and ruling the swap trades “were indeed shams”. Three months later Alderman’s successor as SFO director David Green QC reopened the case. He also opened an investigation into Libor, which has resulted in a number of charges and one guilty plea to date.
Both the Weavering Capital and Peterson himself had been regulated by part of the Financial Services Authority which is now known as the Financial Conduct Authority.
Despite the fraud having lasted for six years, the regulator has not commented on its oversight of the business. A spokesperson noted that regulation had changed greatly since the credit crisis and firms such as Weavering were now subject to much greater disclosure requirements under new European rules for hedge funds.
Ernst & Young Ireland, which had audited the Macro fund, is the subject of an ongoing legal claim being brought on behalf of creditors. A spokesperson for the accountancy firm declined to comment. During the criminal trial, the prosecution alleged that Peterson had lied to auditors.
The UK’s accountancy regulator, the Financial Reporting Council, which has enforcement powers covering certain accountancy groups in Ireland, is understood to be closely monitoring the Weavering case, including the role of auditors. It is thought to be monitoring the actions of Irish professional bodies, which also have disciplinary enforcement powers.
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