Weavering Macro Fixed Income Fund Ltd ((in Liquidation)) Claimant/Respondent to Appeal v 1) Stefan Peterson (2) Hans Ekstrom Defendants/Appellants

JurisdictionCayman Islands
JudgeAbdulai Conteh,Sir John Chadwick
Judgment Date12 February 2015
CourtCourt of Appeal (Cayman Islands)
Docket NumberCICA 10 of 2011
Date12 February 2015
Between:
Weavering Macro Fixed Income Fund Limited (In Liquidation)
Claimant/Respondent to Appeal
and
1) Stefan Peterson
(2) Hans Ekstrom
Defendants/Appellants
[2012] CICA J0405-1

The Rt Hon Sir John Chadwick, President

The Hon Dr Abdulai Conteh, Justice of Appeal

The Rt Hon Sir Anthony Campbell, Justice of Appeal

CICA 10 of 2011 (Cause No 113 of 2010 AJJ)
IN THE COURT OF APPEAL OF THE CAYMAN ISLANDS
Sir John Chadwick
1

This is an appeal from an order made on 26 August 2011 by Justice Andrew Jones QC in proceedings brought by Weavering Macro Fixed Income Fund Limited (formerly known as Weavering Fixed Income Fund Limited), a company in insolvent liquidation acting by its Joint Official Liquidators, (‘the Company’ or ‘the Macro Fund’) against its former directors, Stefan Peterson and Hans Ekstrom (together ‘the Directors’). It is alleged on behalf of the Company that, during the whole of the period that they held office, the Directors acted in breach of their duties to exercise independent judgment, to exercise reasonable care and skill and to act in its best interests. The judge upheld that allegation.

2

In particular, it is alleged that the Directors acted in breach of their duties in failing to inform themselves of the identity of the counter-party to substantial Interest Rate Swap (‘IRS’) contracts into which the Company had entered in 2005 and thereafter. The judge upheld that allegation. He held that the Directors ought to have discovered, not later than early November 2008, that the counter-party to the IRS contracts then outstanding was Weavering Capital Fund Ltd (‘WCF’).

3

Further, the judge held that, had the Directors discovered in early November 2008 that WCF was the counter-party to the IRS contracts then shown as assets of value in the unaudited interim balance sheet of the Company, they would have appreciated that the values attributed to those contracts could not be justified; that the Company was seriously insolvent; and that it should be put into immediate liquidation. He found that, in the period between early November 2008 and March 2009 (when voluntary liquidators were appointed), the Company had paid out to investors, by way of irrecoverable redemption payments, sums in excess of US$141 million; and that this had led to a loss to the Company (being the difference between what was actually paid out in respect of redemptions and what would have been payable based on a realistic Net Asset Value after taking account of the true value of the IRS contacts) of not less than US$111 million.

4

In those circumstances, the judge expressed himself satisfied that the loss suffered by the Company by reason of what he had held to be the Directors' wilful neglect or default was at least US$111 million; and he gave judgment against each of them in that sum. The Directors appeal from the order which gave effect to that judgment.

The underlying facts
5

The following facts were agreed between the parties for the purposes of the trial:

  • (1) The Company was incorporated in April 2003 under the laws of the Cayman Islands as an exempted company. It was established in order to carry on business as an open-ended investment fund. The share capital of the Company was US$50,000 divided into 100 management shares of US$1.00 each and 4,990,000 participating shares of US$0.01 each. The participating shares were admitted to listing on the Irish Stock Exchange; and the Company was subject to the Irish Stock Exchange Listing Requirements. At all material times from itsincorporation Mr Stefan Peterson and Mr Ekstrom were the sole directors of the Company.

  • (2) By a written agreement dated 30 July 2003 (‘the Administration and Accounting Services Agreement’) the Company appointed PNC Global Investment Servicing (Europe) Limited (‘PNC’), a company incorporated in the Republic of Ireland, as its administrator and PNC International Bank Limited as its custodian.

  • (3) By a written agreement dated 31 July 2003 (‘the Advisory Agreement’) the Company appointed Weavering Capital (UK) Limited (‘WCUK’), a company incorporated in England and Wales, as its advisor and investment manager. Mr Magnus Peterson, the elder brother of Mr Stefan Peterson and the stepson of Mr Ekstrom, was a director and the chief executive officer of WCUK and was its ‘Principal Investment Advisor’.

  • (4) In 2007 the structure established by the Advisory Agreement was altered; at least in form. By a written agreement dated 30 January 2007 (“the IM Agreement”) the Company appointed Weavering Capital Management Ltd (‘WCM’) as its investment manager. WCM had been incorporated in the Cayman Islands on or about 7 July 2006. The directors of WCM were, at all material times, Mr Stefan Peterson and Mr Ekstrom. Also on 30 January 2007 the Company, WCM and WCUK entered into an Investment Advisory Agreement (‘the IA Agreement’) pursuant to which WCUK was appointed as the Investment Advisor. In practice, the introduction of WCM as the Company's investment manager — and the formal insertion of WCM between the Company and WCUK — made no difference to the manner in which the affairs of the Company were conducted.

  • (5) The Directors appointed Ernst & Young (‘EY’) to be the Company's auditor. EY's Cayman office was the Company's statutory auditor for the purposes of the Mutual Funds Law. The appointment was upon terms recorded in letters of engagement exchanged between EY and the Directors. In connection with the audit of the 2005, 2006 and 2007 financial statements, the Directors signed representation letters addressed to EY (in June of the year following the financial year under audit). With each of the financial statements there was a Directors' Report signed by the Directors in which they reviewed the development of theCompany's business and explained the investment objective and strategy and the results, activities and future developments.

  • (6) The Company issued Offering Memoranda inviting investors to subscribe for participating shares in the Company.

  • (7) Until early 2005, the Company's trading assets comprised, in the main, interest rate derivatives referenced to the London Interbank Overnight Rate (‘LIBOR’): in particular, its trading assets included futures and options contracts traded through the London International Financial Futures and Options Exchange (‘LIFFE’) (together ‘Exchange Traded Instruments’) and LIBOR referenced Future Rate Agreements (‘FRAs’).

  • (8) From 2005 onwards, the Company continued to trade in Exchange Traded Instruments; but it began, also, to enter into LIBOR referenced IRS contracts with WCF. At all material times Mr Ekstrom was a director of WCF. Mr Stefan Peterson was a director of WCF until early 2006.

  • (9) Shortly before they entered into the first of the IRS contracts, the Company and WCF purportedly entered into an ISDA 2002 Master Agreement dated 20 January 2005 in anticipation of entering into swap transactions. Over the following three years, the Company purportedly entered into thirty IRS contracts with WCF. The reported combined value of the IRS contracts rose from US$2.6 million in February 2005 to US$637.1 million in the draft statement of Net Asset Value as at 28 February 2009. The IRS contracts were not Exchange Traded Instruments: they were ‘over the counter’ contracts. They were not traded on public exchanges; but were direct contractual transactions between party and counter-party with no financial intermediary.

  • (10) Between February 2005 and February 2009 the Company purportedly entered into forty three termination or ‘step down’ transactions. Under each such transaction one of the IRS contracts was either terminated outright (as was the case in twenty six of the transactions) or the notional value was reduced. In the twenty six transactions under which an IRS contract was terminated outright, no payments were made from the Company to WCF or from WCF to the Company. The only payments that were made pursuant to the IRS contracts were alleged interest payments (amounting to £8 million or thereabouts) made by the Companyto WCF between July 2006 and September 2007. In 2007 and 2008 the Company made substantial losses in respect of options trading on LIFFE. But, nevertheless, the value attributed to the IRS contracts was such as to cause the Net Asset Value (‘NAV’) of the Company to increase over that period.

  • (11) From October 2008 — following the failure of Lehman Brothers — the Company received a large volume of redemption requests from investors. Redemption payments were to be made within 30 calendar days after the ‘Redemption Day’; which was defined as the first business day of each calendar month. Redemption requests totalling US$138.4 million were processed on the 3 November 2008 Redemption Day; redemption requests totalling US$54.7 million were processed on the 1 December 2008 Redemption Day; and redemption requests totalling US$30 million were processed on the 1 January 2009 Redemption Day. The Company was unable to make the redemption payments in respect of those redemption requests in full; but it was able to make (and did make) redemption payments of US$7.6 million in December 2008, US$72.3 million in January 2009 and US$10.2 million in February 2009.

  • (12) On 13 December 2008 the Directors, pursuant to article 38 of the Company's Articles of Association, determined that redemption payments would be ‘deferred to such time as liquidity returned to the fixed income market and assets could be realised at fair value on the basis of an orderly liquidation’. Further redemption requests received by the Company in January and February 2009 had the effect that the Company's liquidity problem increased.

  • (13) In early March 2009, the Company's legal advisors, at the instigation of WCUK, approached PricewaterhouseCoopers UK hedge fund restructuring team to seek advice on possible restructuring options. A draft balance sheet as at 27...

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