Weavering Macro Fixed Income Fund Ltd v Ernst & Young Chartered Accountants
| Jurisdiction | Cayman Islands |
| Judge | Mr. Justice Charles Quin |
| Judgment Date | 21 January 2014 |
| Court | Grand Court (Cayman Islands) |
| Docket Number | Cause No: FSD 58/2013 |
(In Official Liquidation)
(A Firm)
(A Firm)
The Hon. Mr. Justice Charles Quin
Cause No: FSD 58/2013
IN THE GRAND COURT OF THE CAYMAN ISLANDS
FINANCIAL SERVICES DIVISION
Mr. James Thom Q.C. instructed by Mr. Michael Makridalds of Carey Olsen on behalf of the Plaintiff/Respondent
Mr. Francis Fenwick Q.C. instructed by Mr. Michael Mulligan and Mr. Ben Hobden of Conyers Dill & Pearman on behalf of the Defendants/Applicants
This is the hearing of the Applicants'/Defendants' Summons issued on the 9 th January 2014 to set aside my ex parte Order dated the 19 th December 2013, extending the validity of the Writ of Summons filed in these proceedings on the 7 th May 2013 until the 6 th January 2014 pursuant to GCR O.6 r.8 and further, that service of the Writ in these proceedings be set aside pursuant to GCR O.12 r.8(1)(a).
The Defendants' Summons is grounded by the affidavit of Devika Parchment (“Ms. Parchment”) — sworn on the 10 th January 2014.
The Plaintiff relies on the first affidavit of Sophia Harrison (“Ms. Harrison”) dated the 2 nd December 2013 and a second sffidavit of Ms. Harrison dated the 14 th January 2014.
I am grateful to the attorneys for both parties for their helpful agreed Case Memorandum which sets out the relevant background to the Defendants' application to strike out the extension of the validity of the Writ in these proceedings.
The Plaintiff was incorporated in the Cayman Islands on the 2 nd April 2003. It traded as an open-ended investment fund from about August 2003 until March 2009. It entered liquidation on the 19 th March 2009.
The Plaintiff's case is, in short, that a fraud was perpetrated by Magnus Peterson, a director and Chief Operating Officer of the Plaintiff's investment manager Weavering Capital (UK) Limited (“WCUK”). Further, that Magnus Peterson's stepfather, Hans Ekstrom, and brother, Stefan Peterson, who were, at all material times, the directors of the Fund/Plaintiff, acted in deliberate breach of their fiduciary duties by consciously abstaining from carrying out their duty of oversight of the Plaintiff's affairs and thus failed to detect or prevent the fraud.
The Plaintiff alleges that Magnus Peterson dishonestly inflated the reported net asset value (“NAV”) of the Fund by using sham transactions with a related party (which he also controlled), Weavering Capital Fund Limited (“WCF”). In particular it alleges that sham over-the-counter (“OTC”) Interest Rate Swap (“IRS”) transactions between WCF and the Fund were used to this end by creating a value for the Fund which was booked as an unrealised gain, which was effectively rolled into further IRS transactions between the parties such that the unrealised gain was never realised in the way of a payment by WCF to the Plaintiff. It is alleged that WCF was never in a position to make any such payments in any event.
The Plaintiff alleges that as a consequence of the dishonestly inflated NAV there was an increase in investment in the Fund with the result that the continuing surplus of investment proceeds over redemption payments assisted the Plaintiff to continue to appear solvent.
The Plaintiff retained the Defendants (it matters not for present purposes to distinguish between them) in relation to the audit of its financial statements for the periods ending 31 st December 2004, 2005, 2006, and 2007.
The Plaintiff alleges that the Defendants acted dishonestly in relation to the audits of the financial statements for the periods ended 31 st December 2005, 2006 and 2007. It alleges that three separate individuals employed by the Defendants acted dishonestly in respect of the three separate audits for the years ended 2005, 2006 and 2007. It also alleges that the Defendants acted in breach of contract and/or negligently as regards the audit.
The claim is denied in full by the Defendants. The Defendants also assert a counterclaim arising out of Letters of Representation signed by the directors of the Plaintiff, which they contend extinguishes the claim by circuity of action.
The Plaintiff alleges that had the Defendants not produced dishonest audit reports then the (allegedly) true NAV position of the Plaintiff would have been revealed and it would, as a result, have entered into liquidation sooner, avoiding, it is said, losses of (depending on which version of the case is considered) anything up to something like US$400 million.
The Defendants dispute causation, loss and damage — both in law and on the facts.
For present purposes a more detailed list of the issues which arise in the proceedings is unnecessary.
The Plaintiff has also brought proceedings in this Court against its directors (Messrs. Peterson and Ekstrom) and is also pursuing proceedings against the Administrator of the Fund, BNY Mellon Investment Servicing (International) Limited (“PNC”).
The parties entered into Standstill Deeds dated the 9 th May, 20 th July, 12 th September and 21 st October 2012.
The proceedings were commenced by the Plaintiff by a Writ of Summons issued on the 30 th November 2012 (the “First Writ”). In Cause Number FSD 160/2012 (CQJ) the First Writ was issued by the Court at a time prior to 5 p.m. on the 30 th November 2012. The Writ was served on the 26 th March 2013 by service on Conyers Dill & Pearman (“Conyers”) — the latter having confirmed that they were instructed to accept service earlier that day. In doing so Conyers reserved the rights and position of the Defendants.
By a Second Letter on the 2 nd April 2013 Conyers asserted that, by issuing the First Writ before 5 p.m. on the 30 th November 2012, the Plaintiff had acted in breach of the terms of the Standstill Deeds.
By letter dated the 5 th April 2013 Ogier 1, among other things, agreed that the First Writ was issued before 5 p.m. on the 30 th November 2012, but denied that the Plaintiff had, thereby, acted in breach of the Standstill Deeds.
On the 7 th May 2013 the Plaintiff filed a further Writ of Summons (the “Second Writ”) in Cause Number FSD 58/2013 (CQJ) which is in identical terms to the First Writ.
On the 8 th and 9 th August 2013 a hearing took place in FSD 160 of 2012 — the First Writ — pursuant to GCR O.14(a) to address the issue of construction of the Standstill Deed dated the 21 st October 2012 and whether in issuing the First Writ before 5 p.m. on the 30 th November 2012 the Plaintiff had acted in breach of the terms of that Standstill Deed.
On the 2 nd October 2013 the Grand Court handed down a judgment in favour of the Plaintiff—finding that service of the First Writ before 5 p.m. on the 30 th November 2012 was not a breach of the terms of the Standstill Deed.
On the 17 th October 2013 the Defendants applied for leave to appeal the judgment of the Grand Court dated the 2 nd October 2013.
On the 4 th November 2013 the Plaintiff issued a Summons in FSD 58 of 2013 — the Second Writ — for, amongst other things, extension of the validity of the Second Writ to the 6 th January 2014 pursuant to GCR O.6 r.8.
On the 19 th December 2013 the Plaintiff's Summons in FSD 58 of 2013 was heard ex parte and I ordered that the validity of the Second Writ be extended to the 6 th January 2014.
On the 3 rd January 2014 the Second Writ was served on the offices of Conyers who were instructed to accept service on behalf of the Defendants.
On the 9 th January 2014 the Defendants filed the Summons which is the subject of this hearing — seeking to set aside the extension of the validity of the Second Writ.
On the 20 th January 2014 the Defendants obtained leave to appeal to the Court of Appeal against the Grand Court judgment in Cause FSD 160 of 2012 dated the 2 nd October 2013, which decided that service of the First Writ before 5 p.m. on the 30 th November 2012 was not a breach of the terms of the Standstill Deed.
In relation to the Defendants' Appeal against the judgment of the Court dated the 2 nd October 2013, there are three possible outcomes:
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(a) The appeal could be dismissed;
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(b) The Plaintiff's claim in relation to the 2005 audit could be struck out leaving only the claims in relation to the 2006 and 2007 audit;
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(c) The Court of Appeal could order the First Writ struck out in its entirety.
It was common knowledge between the parties during the hearing on the 8 th and 9 th August 2013 (pursuant to the GCR O.14(a)) that the Second Writ was a protective Writ to preserve the Plaintiff's claim in relation to the 2006 and 2007 audits.
On the 19 th December 2013 I acceded to the ex parte application brought by the Plaintiff and extended the validity of the Writ of Summons filed in these proceedings on the 7 th May 2013 until the 6 th January 2014 pursuant to GCR O.6 r.8. The Plaintiff's application was grounded by the first affidavit of Ms. Harrison filed on the 3 rd December 2013. In her affidavit Ms. Harrison stated at paragraph 17: “The reason for not serving the Second Writ in the present case was to avoid incurring costs on service and in subsequent proceedings which would have been unnecessary if the Plaintiff had won the O.14A Summons (as it did) and the Defendants had accepted the decision (which they did not.).”
In my Extempore Ruling dated the 19 th December 2013 I found that the Plaintiff's application was a Category (3) application, pursuant to the judgment of the House of Lords in Kleinwort Benson Ltd, v. Barbrak Ltd., The Myrto (No.3) 1987 A.C. 597.
I found, on the evidence before me, that the Plaintiff had given good reason for the renewal of the Second Writ and relied on the Summary of Principles provided by Ord.6, r.8 of the Rules...
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