September 24, 2020

Shock U turn on Weavering [Cayman Islands Macro Fund]

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Screen Shot 2015-02-28 at 9.22.19 PMBy The Ned From Chris Johnson

Directors Stefan Peterson and Hans Ekstrom no longer have to pay damages of
$111 million each for being in breach of their duty of supervision of the Weavering Macro Fund. On 12 February 2015 the Cayman Islands Court of Appeal reversed the judgement of Judge Jones, made in August 2011. The Cayman Islands Court of Appeal found that their neglect wasn’t “wilful,” as Judge Jones had found, just incompetent.

The liquidators of the Weavering Macro Fund had argued that the independent directors, Stefan Peterson and Hans Ekstrom, had breached their duty of supervision. It was claimed that they failed to identify that a substantial proportion of the fund’s investments were interest rate swaps the counterparty of which was entirely controlled by Weavering founder and CEO, Magnus Peterson. It turned out that the value of these interest rate swaps was in fact largely fictitious. This was missed by the directors. Their incompetence is not in dispute.

Screen Shot 2015-02-28 at 9.22.53 PMThe liquidators therefore brought a case against them claiming that that they
had breached their duty of supervision, and for a failure to exercise independent judgment as well as to exercise reasonable care and skill and to act in the best interests of the fund.

In what turned out to be probably the most widely publicised legal judgement in the offshore investment industry, at least with regard to fund board matters, the Cayman Court found that Peterson and Ekstrom were guilty of wilful neglect and default in the discharge of their duties.

The court ordered them to pay damages to the fund’s liquidators of
$111 million each, representing the losses suffered by the fund which were caused by their default.

The original judgement generated an enormous amount of comment and reaction across the hedge fund business right around the world. The severity of the sentence imposed on these two independent fund directors by a Cayman court impressed many people, particularly investors in Cayman funds. And it was arguably the catalyst for the recent reforms to the governance regime in Cayman as well as the heightened interest that there has been in this topic around the world.

However, what many missed was that the directors had always disputed that they breached their duty as directors. And they added that even if they were shown to have done so they were entitled to rely on the exculpation clause in the fund’s articles of association, which excluded the directors from liability for their conduct except where they were guilty of “wilful neglect or default”. (Judge Jones, in 2011, had found that the directors had breached their duty and were guilty of wilful neglect or default.) This is what the Cayman Islands Court of Appeal has now overturned, to the astonishment of many.

The Court of Appeal held that there was no evidence of either director having made a deliberate and conscious decision not to read the relevant reports with sufficient care knowing that failure to do so was in breach of their duty. Peterson and Ekstrom claimed, apparently, that they didn’t even know that they were failing to meet their obligations.

The Cayman Islands Court of Appeal did in fact uphold the finding in the initial judgement that the directors were in breach of their duties. But it determined that this did not amount to “wilful neglect.” In effect the Court of Appeal is saying that these independent directors were simply incompetent but it was nothing worse than that. In other words, failing to carry out even the most basic duties of being
a director, such as reading the quarterly reports, carries no legal penalty in Cayman, provided there is an exculpation clause in the fund’s articles of association.

The following summary of the case from Mourant Ozannes provides a brief but broad legal overview of this case:

“The liquidators’ case against the directors was that had they carried out the required high level supervision in accordance with their duties as independent non- executive directors, the fictitious nature of the assets would have been detected sooner and the Fund would not have continued to make redemption payments on the basis of, what later turned out to be, grossly inflated NAVs.
“Unlike the position in England, and some other offshore jurisdictions, exculpatory clauses in Funds’ Articles (which operate to contractually relieve directors of liability for their actions) are permissible in the Cayman Islands: most limit that protection to “carve out” liability attributable to the directors’ fraud, wilful neglect
or default. Weavering’s Articles contained such a clause, which the directors sought to rely upon to avoid liability.

“At first instance, the Grand Court had concluded that, because the directors knew that they had a duty of supervision but consciously chose not to perform it any meaningful way, they were guilty of wilful neglect or default. The Grand Court observed that they would have been protected by the exculpatory provisions had they failed to perform their duties as a result of their carelessness, no matter how gross; in other words that even if they had merely done their “incompetent best” they would have been protected.

“In consequence of the directors’ total failure to perform their duties the Grand Court made an award of damages against them of US$111 million, representing the minimum value of irrecoverable redemption payments made by the Fund during the extended period of its trading on the basis of falsely inflated NAV calculations.

“The directors appealed the Grand Court judgment, particularly in relation to the finding that they had acted in “wilful neglect or default” of their duties, asserting that the Judge could not properly have reached that conclusion on the evidence put before the Court at trial. The liquidators applied for affirmation of the Grand Court decision on the directors’ liability but on additional grounds.

“While affirming the original findings of breach of duty by the directors, the Court of Appeal held that the exculpatory provisions in the Fund’s Articles nonetheless operated to relieve the directors from liability for their actions (and inaction) in the discharge of their duties as directors – and would do so unless it was demonstrated that their actions were so egregious as to amount to “wilful neglect or default” of their obligations. The Court of Appeal (Sir John Chadwick, President, presiding) held that the evidence available to the Grand Court in the earlier hearing was insufficient to support the finding that the directors’ conduct amounted to “wilful neglect or default”, and as a result, the directors were entitled to the protection of the exculpatory provisions. The Court of Appeal accordingly set aside the earlier judgments against the directors for $111 million.”

So consequence of this ruling is Cayman directors are able to rely upon an exemption from liability if that is put into the fund’s articles of association. If the exemption is in the articles it seems that Cayman law suggests they can be as clueless and incompetent as it is possible to be – without any particular consequences.

Some leading lawyers in Cayman have told The NED, off the record, that they thought the original judgement in 2011 was always suspect. This is because they had made his mind up the before the case started. It is said that Jones J believed that he was an expert on the fund industry. No independent expert reports were presented about industry practice back in the 2011 case. One leading Cayman lawyer told The NED the following: “I am not so certain Chadwick J (the Appeals judge) is right but then neither was Jones J. It was ludicrous to conclude that the directors were liable for $111 million. What Jones J failed to develop, because there is no real law in the area was the concept of contributory negligence that is to what extent should a percentage attribution have been place on the directors’ negligence or willful default.”

Another off the record contributor said the following: “If I were part of the ‘show me where to sign up’ brigade, that overpopulates the offshore directorship industry, I would not be rejoicing. Do not rule out an appeal. If the directors were not responsible for willful default they were a hairsbreadth away from it.”
It is possible to appeal to the Privy Council.

All this begs the following question: what on earth is intentional neglect and ‘willful’ default in Cayman? If Peterson and Ekstrom are not guilty of intentional neglect or wilful default it is impossible to imagine who possibly would be. The world will see that Cayman law gives comfort to directors with exemption provisions in funds’ articles of association after all.

Well known Cayman insolvency expert, Chris Johnson, said the following about this judgement: “The Wavering decision by the Court of Appeal does nothing to enhance the reputation of the Cayman Islands as a financial centre and in my opinion causes irreparable damage.”

It is not yet known whether the liquidators intend to appeal.

SOURCE: http://ifiglobal.com

See also iNews Cayman related story published February 18 2015 “Appeal Court judgment clears directors of wilful default” at: http://www.ieyenews.com/wordpress/cayman-islands-weavering-appeal-court-judgment-clears-directors-of-wilful-default/

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