British Virgin Islands

Prev    Next UK fraud authority investigation into BVI company prompts wider probe of structured finance, swaps Published on Tuesday, August 4, 2009 Email To Friend    Print Version By Lindsay Fortado  LONDON, England (Bloomberg) -- The UK Serious Fraud Office is investigating sales of credit-default swaps and structured-finance products, including collateralized debt obligations, prior to the credit crisis, following up an earlier investigation into a hedge fund and a related British Virgin Islands-registered company. The SFO is looking into whether banks sold such products with flawed valuations, said Sam Jaffa, a spokesman for the government agency in London. No specific companies or credit rating agencies have been targeted under the investigation, he said. “We’re looking generically at what might give us a cause for concern or a possible lead for finding out more,” Jaffa said in an e-mail Monday. “There’s no suggesting that across- the-board valuations were flawed. However, how valuations are arrived at, what is bundled into the funds and how they were sold are areas of interest.” The SFO’s investigation comes as regulators in the US and Europe push for greater transparency in the $592 trillion over- the-counter derivatives market, which includes credit-default swaps. The swaps, used to speculate on companies’ or countries’ credit quality, were blamed by some for deepening the biggest financial calamity since the Great Depression. Default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. The products may be part of the SFO’s investigations of the collapse of the London-based hedge fund Weavering Capital, and American International Group Inc.’s financial products unit, Jaffa said. The SFO is committing more resources to probing possible corruption in the private-equity and hedge-fund industries, SFO Director Richard Alderman has said. Default swaps and structured products are “red flag areas,” the SFO is targeting, Jaffa said. The agency is also looking into signs of fraud at UK hedge funds. “We took the hedge-fund area as an industry and started looking at ones that have failed, and whether there were any common denominators,” Jaffa said. Using a “small auditor” was a trait common to many failed hedge funds and, for the purposes of investigation, “you can discount about 80 percent of them with big auditors,” he said. The UK fraud authority arrested two men in May as part of an investigation into Weavering, which once had about $640 million under management and is now in administration. The investigation is focused on interest-rate swaps between the hedge fund and a related company, British Virgin Islands- registered Weavering Capital Fund Ltd. That company was allegedly used to inflate the net asset value of the fund, the SFO said. Interest-rate swaps are derivative contracts used to guard against fluctuations in borrowing costs. CDOs pool fixed-income securities and derivatives, channeling income to investors in portions of differing credit risk and returns. Since taking over the SFO in April 2008, Director Richard Alderman has said he wants to implement a “new, faster approach to tackling fraud,” by encouraging companies to self-report financial crime and by settling cases with a fine rather than prosecuting. The SFO’s investigation was previously reported by the Wall Street Journal.   Reads : 1138   Prev    Next

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