Judgment against fund directors overturned

The Court of Appeal has overturned a Grand Court judgment against the two directors of the Weavering Macro Fixed Income fund, which collapsed in March 2009 as a result of fraud committed by the hedge fund manager, Magnus Peterson.

The previous judgment held the directors, Stefan Peterson and Hans Ekstrom, the brother and stepfather of the fund manager, respectively, personally liable for $111 million worth of losses to the fund because they should have identified the fraud earlier had they not neglected their professional duties by signing the minutes of board meetings that never happened and by not reading reports provided to them by the manager.

Under the fund’s articles of association, the directors were protected from personal liability unless they acted “with willful neglect or default” when carrying out their duties.

In order to establish “willful neglect or default” for the purposes of defeating the protection provision, it is necessary to prove “that the director made a deliberate and conscious decision to act or to fail to act in knowing breach of his duty: negligence, however gross, is not enough,” Appeals Court judge Justice John Chadwick wrote.

The judge had never given any reasons for disproving the evidence provided by the directors that they believed they were complying with their duties.

“In my judgment the directors are right to contend that it was not open to the judge to draw the inference that they had each consciously chosen, generally, not to perform their duties to the Company,” Justice Chadwick wrote.

Parts of the case hinged on the directors taking only a cursory glance at a quarterly report which would have revealed that the fund manager had used interest rate swaps, which violated the fund’s investment guidelines, with a company he controlled to inflate the value of the fund.

During the six years the fund operated, Mr. Peterson used fictitious interest rate swap trades to cover up losses, inflate the fund’s investment performance and mislead its investors.

The appeals court ruling said the judge was wrong to conclude that the directors had made a conscious decision not to read a report with sufficient care and that this was the result of willful neglect or default.

Magnus Peterson, 51, the former manager of the failed hedge fund, was sentenced in January to 13 years in prison for the collapse of the fund, which cost investors $536 million.

He was found guilty of eight counts of fraud, forgery, false accounting and fraudulent trading. He was acquitted on seven other charges after a 12-week trial.

At the time, the now-overturned decision and the size of the fine were considered “a wake-up call” for director services providers. Calls for more regulation of fund directors resulted last year in the Directors Registration and Licensing Law.