GLOBAL - UK fraud investigators have dropped a criminal investigation into collapsed hedge fund manager Weavering Capital after the evidence failed to convince prosecutors there was a reasonable prospect of conviction. 

The Serious Fraud Office (SFO) yesterday informed witnesses in the investigation that there was insufficient evidence to justify criminal proceedings against managers Magnus Peterson and Edward Platt two years after the hedge fund manager went into liquidation with losses of $500m (€364m).

Swedish pension fund Volvo and Pressens Pensionskassa were investors in the Cayman Islands-based Weavering Macro Fixed Income Fund. Neither responded to requests for comment before deadline today.

Two directors of the firm - both of them related to Peterson - were last month ordered to pay $111m in damages by a court in the Cayman Islands for failing to discharge their obligations as directors of the fund.

An SFO spokesman said: "The burden of proof is higher in criminal investigations. Every prosecutor must make a judgement. It would be capricious and irresponsible to proceed with a prosecution based on evidence that was weak and thin."

He declined to confirm the evidence was either in this case, adding only that it had failed the "evidentiary test".

A civil case against Peterson and other managers is scheduled to begin in October.
Law firm Jones Day, which liquidated the firm, will lead on the case and said this week it had been "surprised" by the SFO's decision not to prosecute.

The civil case will hinge on the fact Weavering Macro Fixed Income fund had as its main asset swaps trades with a company Peterson controlled and that were significantly overvalued.

Another investor, Hudiksvall Municipality, filed fraud charges in 2009 based on Peterson's inflated valuations.

In a note issued today, Mark Surguy, a partner in London law firm Eversheds, said the case was unlikely to be the last of its kind - but raised questions over the SFO's appetite for prosecuting hedge fund fraud.

"Hedge fund fraud will cost innocent investors dearly and will be hugely complicated to unravel," he said.

"Whether the SFO will have the resources and skills to pick over any future sophisticated business in which serious fraud is suspected remains to be seen."

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