Earlier this month, Chief Justice Smellie made a historic ruling in the Cayman Islands Grand Court by which he ordered the winding up of a hedge fund so that its major investors – three United States pension funds – could recoup its investments.
Campbells was the Cayman law firm which represented the investors.
Ross McDonough, partner and head of litigation at Campbells, and senior associate Guy Cowan, were the attorneys who had conduct of the case.
Mr. McDonough explained the background to the case: “Three pension funds based in Louisiana, the Firefighters’ Retirement System, the New Orleans Fire Fighters’ Pension and Relief Fund and the Municipal Employees’ Retirement System of Louisiana, had collectively invested US$100 million into the FIA Leveraged Fund, a hedge fund incorporated in the Cayman Islands. The investors tried to redeem out of the fund and the fund purported to pay them in kind by transferring to them shares in a newly created company.”
This payment in kind had been rejected by the investors, Mr. McDonough said, because the shares had been created after the redemption process had taken place, which was contrary to the terms of the fund’s governing documents and because the investors would have been required to pay an additional US$65 million to exercise a stock purchase option, without which the new shares were worthless.
Mr. Cowan said the verdict was historic because the Cayman Court considered for the first time whether the payment in kind properly represented what was owed to the investors.
“The chief justice agreed with the investors in finding the new shares did not provide the investors with the value they were entitled to.
Importantly, the court found the fund to be insolvent under Cayman law, which allowed for the winding up of the fund,” he said.
“Also, the directors who had allowed the fund’s investment manager, Fletcher Asset Management, to offer the new shares in compensation were also found to have failed in their duty because the payment in kind was effectively worthless.
The court found that the directors owed their shareholders/investors a fiduciary duty to act in good faith and they had not done so in this case.”
Mr. McDonough said it was a landmark decision and sent a strong message to investment managers and directors of hedge funds alike.
“The case provides an example of the commitment of the Cayman Court to ensure that investors’ rights are upheld,” he said. “Fund managers cannot play fast and loose with investors’ money in the Cayman Islands and this ruling should provide a level of comfort for investors in Cayman funds that their rights will be vigorously defended.”