Magnus Peterson, the founder of the $600 million Weavering hedge fund that collapsed in the wake of the credit crisis in 2009, pleaded not guilty to 16 fraud-related charges at his London trial on Tuesday.
The Swedish-born financier, who sat with his legal team as a jury was selected and the prosecution opened its case, is accused of offences ranging from fraud by misrepresentation and forgery to fraud by abuse of position and fraudulent trading between 2003 and 2009.
The high-profile trial, due to last 10 to 12 weeks, comes at a time of renewed scrutiny of Britain's Serious Fraud Office (SFO), with fresh questions asked this week in parliament about its competency and fitness for purpose.
The SFO dropped its investigation into Weavering in 2011 due to a lack of evidence, but re-opened it under the new leadership of David Green, who has vowed to focus on top-drawer fraud and instil fresh confidence in the agency's fraud-busting abilities.
On the second day of Peterson's trial, the SFO's leading counsel Amanda Pinto alleged he deceived not only investors, but his family, who were business directors, auditors Ernst & Young in Dublin, Swedish investment consultants Wassum AB, brokers ADM Investor Services, investment manager Corazon Capital and others in the run-up to Weavering's collapse.
WEAVING THE WEAVERING WEB
Peterson marketed his flagship Weavering Macro Fixed Income fund, a Cayman Islands-incorporated and Dublin-listed group, as a low-risk, liquid investment opportunity that invested in financial instruments traded on an exchange.
However, when the fund started to underperform, Pinto alleged Peterson "had a light bulb moment" and bolstered its stated -- rather than actual -- performance using private, over-the-counter trades with another fund he owned and controlled, Weavering Capital Fund (WCF) in the British Virgin Islands.
The SFO alleges the Macro fund failed because its net asset value had been artificially inflated by deals such as interest rate swaps and options on forward rate agreements, which should have led to premium payments, with unsuitable counterparty WCF.
Pinto alleged WCF was "purely his (Peterson's) baby". It had no auditors, no accountants, no administrators and no independent directors -- just Peterson's Swedish-based step father and brother. The paperwork to support the trades was incomplete and inconsistent, she said.
These "IOUs" served nevertheless to bolster the Macro fund's books, showed improving value and in turn attracted fresh investment and investors.
"Over a period of years, WCF never paid a penny in cash," Pinto said. "In effect, WCF wrote the Macro fund bigger and bigger IOUs so the Macro fund looked as if it were doing better and better."
When the credit crisis hit and investors wanted to withdraw their funds, Peterson first attempted to ride it out by using fresh investments to pay redemptions. But in the end, WCF had nowhere near enough assets to cover its liabilities.
Pinto alleged Peterson, however, did make money. His Weavering Capital UK group collected two percent of the net asset value of the Macro fund and also collected a 20 percent performance fee. Over the period, she alleged, he collected well over 7 million pounds ($11 million).
