Magnus Peterson, the founder of Weavering Capital and investment manager of the Cayman-registered Weavering Macro Fixed Income Fund, has been found guilty of eight counts of fraud, forgery, false accounting and fraudulent trading after a three-month trial at Southwark Crown Court in the U.K.
The Weavering fund collapsed in March 2009, prompting an investigation by the U.K.’s Serious Fraud Office.
The investigation focused mainly on a number of interest rate swap trades between the Weavering Macro Fund and another offshore company, Weavering Capital Fund Ltd. in the British Virgin Islands, which Swedish-born Mr. Peterson also owned and controlled.
During the six years the fund operated, Mr. Peterson used fictitious interest rate swap trades to cover up losses, inflate the fund’s investment performance and mislead its investors. The reported value of the fund grew steadily based on bad debt generated by the swap trades with the related counterparty.
When the $780 million Weavering Macro Fund collapsed in March 2009, it was found that its net worth was based largely on the valueless swaps, even though it had been marketed as a low risk and liquid fund primarily engaged in exchange-based trading.
The fraud unraveled when the fund was unable to pay investors who attempted to redeem their investments after the financial crisis in December 2008.
The fund ceased trading on the Irish Stock Exchange in March 2009 and liquidators were appointed. The net losses to investors are estimated to be US$536 million.
In an earlier civil trial in 2012, the British High Court awarded $450 million in damages against Mr. Peterson and three other directors, including Mr. Peterson’s wife.
The case also caused ripples in Cayman’s hedge fund community in 2011, when two of the fund’s directors were ordered to pay damages of $111 million each by the Cayman Islands Grand Court in a civil action brought by the fund’s liquidators. The two directors, respectively the brother and stepfather of Mr. Peterson, were found guilty of wilful neglect or default in the discharge of their duties.
The two directors, who were based outside of Cayman and who were not paid, did not act on reports from the administrator, which would have revealed that the fund was operating outside of its investment remit. They also never held board meetings, but rubber-stamped board minutes supplied by the investment manager.
The verdict sparked a debate about fund governance standards in general and the duties of directors of Cayman funds in particular.
In the latest trial, the jury heard that Mr. Peterson also forged the signatures of the directors on the forward rate agreements used in the fraud.
“Throughout the fund’s existence, Mr. Peterson rewarded himself handsomely from investors’ monies, to the value of £5.8 million between 2005 and 2009,” the SFO said in a statement. “Whilst Mr. Peterson knew full well what the true value of the fund was when it collapsed, his investors did not. To them, the extensive losses they suffered came as a complete shock.”
Mr. Peterson, who has been remanded in custody, will be sentenced at Southwark Crown Court on Friday.