Veritas – London a closed shop when it comes to hedge fund collapses

Hedge funds might be known for their ability to react quickly to changing markets. Hedge fund collapses are often similarly rapid. But the clearing-up afterwards can proceed sometimes glacially.

So it has been with Weavering Capital, London’s largest hedge fund collapse.

It imploded suddenly over three years ago (March 2009) after it emerged its $640m Weavering Macro Fixed Income fund was almost wholly supported by an interest rate swap agreement with a related party. Investors lost over $530m, on some estimates.

Retrieving this has been slow, even though lawyers for Duff & Phelps – liquidators since 2010 – recently won $450m damages in court against the four primary defendants: founder Magnus Peterson, his wife Amanda Peterson, chief operating officer Charanpreet Dabhia and senior employee Edward Platt.

One victim of the fraud, who spoke on the basis of anonymity, argues London service providers to hedge funds, and their liquidators when things go wrong, need a “bulldog mentality” more akin to Irving Picard, who is recouping cash for the victims of Bernard Madoff.

He so far recovered or settled on $9.133bn, according to his website, www.madofftrustee.com – or $7m per day for the defrauded since December 2008. Admittedly, only $1.1bn of this has been paid out or advanced already, but the amount is sizeable nevertheless.

Picard notes: “Uncovering the machinery of [Madoff’s] fraud and its players has required the review of millions of documents and decades of fraudulent accounting and fabricated customer statements, intricate investigations across the globe [over 30 jurisdictions], and the preparation of court documents on complex questions of fact and law.”

The Weavering case also involves multiple jurisdictions – the UK, Cayman Islands, British Virgin Islands and of investors through the Continent – complicating recovery work.

But the Weavering victim’s complaint goes further. The hedge fund community in London, Europe’s hedge fund centre, effectively ‘close ranks’ when things go wrong, he argues.

Administrators and auditors take too little responsibility, and recovering money is slow.

“We claim to have all the systems and infrastructures and a code of self-regulation in place, but if the danger signals are not picked up, there is no-one to protect you during the events, or to help you afterwards.”

Liquidators should have “gone up against the service providers” more aggressively, as Picard has in the US vis a vis Madoff, he adds.

“It is an oligopoly of the big firms. “[An administratrors’] ‘safety role’ is zero, and if the manager asks them to jump, they ask, ‘how high?'”

Weavering’s fund directors should also have stepped in, he says, though the system of offshore regulation allowed the board to be peopled by the manager, or family relations of him.

“Weavering is smaller in size [than Madoff], but similar in terms of the vice and pathology the market has. If an investor is unlucky to invest in a fund where the manager is a ‘bad apple’, the current structure does not have the inherent mechanisms to protect them, even the post-fraud actions. When the plane went down it did not raise any alarms. This is not how investors are attracted to invest in a hedge fund.”

He is right. A hedge funds collapse is an ugly sight, as it rapidly becomes clear it is not the auditor’s job to uncover fraud, nor the administrator’s job to report suspected mis-doing, or act on it, and the light-touch ‘regulation’ in places like Cayman means directors can be closely related to the manager.

With such a state of affairs it is right hedge funds are only for ‘professional investors’. But such investors do not deserve the apparent lack of safeguards in the offshore fund system, or apparently a similar lack built into the onshore system of duties and responsibilities of fund service providers.

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