Following up an investigation of a hedge fund Weavering Capital and a related offshore firm Weavering Capital Fund Limited, registered in the British Virgin Islands, the UK Fraud Authority started to investigate sales of credit-default swaps and structured-finance products, including collateralized debt obligations. The swaps are derivative contracts used to guard under fluctuations in borrowing costs.
The SFO is looking into whether banks sold such products with flawed values; no specific companies or credit rating agencies have been targeted under the investigation. This may be part of the SFO’s investigations of the collapse of the hedge fund Weavering Capital, and American International Group Inc.’s financial products unit. Also, the Serious Fraud Office commits more resources to probing possible corruption in the private-equity and hedge-fund industries, and looks into the cases of fraud at UK hedge funds.
Using a small auditor was a trait common to many failed hedge funds, most of them may be discounted with larger auditors. In May 2009, two managers of the collapsed fund Weavering Capital were arrested as part of investigation of the fund, which had about $640 mln under management. The investigation of the fund is focused on interest-rate swaps between the hedge fund and a related BVI-registered Weavering Capital Fund Ltd. According to the SFO allegations, the BVI company was used to inflate the net asset value of the fund.