Fraud office arrests two in hedge fund probe

LONDON Mon May 18, 2009 4:13am EDT

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LONDON (Reuters) - The Serious Fraud Office SFO.L arrested two men on Friday in a probe into collapsed hedge fund Weavering Capital, which it said used swaps to artificially inflate its value.

The watchdog searched two houses in Kent and Surrey, and the two men, aged 43 and 45, were taken to a police station for questioning, it said.

An SFO spokesman declined to name the two, the first arrests of hedge fund managers in this country since the start of the credit crisis. No further arrests were expected for the moment.

Liquidators to the Weavering Macro Fixed Income hedge fund were appointed in March after the firm told investors it had unearthed a large interest rate swap position where the counterparty was a firm related to Weavering.

The investigation is focused on the swaps, which "inflated the apparent net asset value of the Macro fund", and were between the fund and a company registered in the British Virgin Islands, Weavering Capital Fund Limited, the SFO said.

The hedge fund industry has been marred by a number of high-profile scandals, most notably that by U.S. financier Bernard Madoff, who was found guilty of fraud.

(Editing by Joel Dimmock; Editing by David Cowell and Rupert Winchester)

(To read the Reuters Hedge Fund Blog click on blogs.reuters.com/hedgehub; for the Global Investing Blog click here)

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