Britain Plans Hedge Fund Fraud Detector

May 21 2009 | 10:39am ET

Britain’s Serious Fraud Office is setting up a hedge-fund fraud detection system, it said yesterday.

The SFO announcement comes less than a week after it made its first arrests of hedge fund employees—Weavering Capital CEO Magnus Peterson and another employee of the firm— since the beginning of the credit crisis.

“We’re looking in particular at a system of red flags to give warnings in respect of hedge funds,” SFO chief Richard Alderman said. “We want to be able to help the market, as it recovers, in knowing what are the features of hedge funds that can give rise to fraud.”

How effective such a mechanism will be is open to question: Reuters reports that the SFO is looking at U.S. practices in intelligence gathering—using a hedge fund’s auditor and people who have worked at the firm, for example—despite the fact that U.S. regulators have proven somewhat less-than-adept at detecting hedge fund fraud.

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