Ogier Cayman brought the proceedings against the directors on behalf of the joint official liquidators of the failed Weavering Macro Fixed Income Fund.
The Cayman fund was listed on the Irish Stock Exchange and the fund’s investment manager, Weavering Capital (UK) Ltd, was incorporated and based in England and controlled by Magnus Peterson.
Typically directors of Cayman Islands investment funds are afforded indemnity covering all losses under the terms of the fund’s constitutional documents, except for losses caused by wilful negligence or default in the exercise of their duties.
The liquidators, David Walker and Ian Stokoe of PwC, sought damages against each director for their failure to take any role in the business of the fund.
The court found that the directors had signed documents that were put before them by the investment manager “without applying their minds to their content”. Although the directors acknowledged that they had a high level supervisory duty, Justice Andrew Jones wrote in his judgment, “They never once, in six years, asked any of those they were supposedly supervising to give them a written report or attend a board meeting to provide them with an oral report”.
‘Their behaviour was wrong’
In addition the court found that the directors Stefan Peterson and Hans Ekstrom, who are the brother and stepfather of the investment manager, “consistently signed financial statements, management representation letters, side letters and other documents without making any enquiry whatsoever”.
The fact that the directors had signed the minutes of two board meetings that never took place “leads unequivocally to the conclusion that they knew perfectly well that their behaviour was wrong”, Justice Jones wrote in his judgment.
The plaintiff claimed that if the directors had not acted wilfully negligent or in default of their duties, they would have discovered that the fund’s transactions involving interest rate swaps violated the fund’s investment guidelines and this would have led much earlier to the discovery that those transactions were in fact fictitious.
The court concluded that the directors’ conduct fell well below what was required of them, and that they were guilty of wilful neglect or default “because they consciously chose not to perform their duties to the fund, or at least not in a meaningful way”.
Ogier noted that although Cayman Islands investment funds may be structured differently than traditional corporate entities, in particular by the appointment of and delegation of powers to services providers, such as an investment manager, the fundamental duties owed by a director of a Cayman Islands investment fund are the same as those duties owed by a director of any other corporate entity.
“The case shows that directors of Cayman Islands investment funds cannot sit idly by, leaving the management and control of the fund to its service providers. A director’s duty to supervise the affairs of the company, and to exercise reasonable care, skill and diligence is non-delegable,” said Shaun Folpp, managing associate at Ogier Cayman who, together with Will Jones, associate, acted for the plaintiff, led by David Lord QC.
“Directors of Cayman Islands investment funds can no longer live under the misconception that they are immune from liability for a company’s losses if they do not themselves take an active role in the company’s business,” added Mr. Folpp.
‘Long time coming’
Former CIMA Chairman Tim Ridley said, “This has been a long time coming and should be a real and final wake up call to those few remaining people, and their insurers, who still think ‘just tell me where to sign’ is good enough.”
Chris Johnson, of business recovery and insolvency firm Chris Johnson & Associates, comes to the same conclusion. “This is a welcome decision and a wake-up call to those in the Cayman Islands that provide directors as a career.”
While Mr. Johnson contends that the legal content of the judge’s decision offers very little new, he says the verdict does serve as a reminder that the onus of responsibility is placed on the shoulders of those who are the guardian’s of investors’ monies.
“During the past few years there have been numerous lawsuits, largely brought in the United States courts, rather than the Cayman court, that have illustrated the recklessness of certain directors, several being local residents, in their governance of hedge funds,” Mr. Johnson said. “This is not only bad publicity for the incumbents, but it reflects poorly on the level of expertise that Cayman prides itself in providing to the funds.
“For those professionals providing directorships to hundreds of companies this is a warning that there may be more bad news to come,” he added.
In a commentary on the judgment, Don Seymour, managing director of fund governance firm dms Management, noted it is the first time the court has dealt with a case specifically involving directors’ duties to a hedge fund, and particularly the blockbuster award of US$111 million in damages “should send a strong message to all recalcitrant directors to either perform their duties and responsibilities properly, or pay a heavy price”.
Mr. Seymour argued that although the verdict will not end the debate, it favours professional over amateur fund governance. “[T]he Court did repeatedly confirm its view that independent directors should perform a “high level supervisory role” in a “professional, businesslike manner”, he said.