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ANALYSIS WEAVERING
WHAT DOES THE WEAVERING
VERDICT MEAN
FOR CAYMAN
DIRECTORS?
The Court of Appeal’s decision surprised most industry observers
BY MAIYA KEIDAN & SAM DALE
T
he shock decision to clear the directors of the
Weavering Macro Fixed Income Fund of liability after its collapse has led some to question whether the increase in director pay and
governance standards seen since the original
decision could be put at risk.
However, most experts say the case is unlikely to trigger
a lessening of the standards or increased professionalism
that is now demanded by investors.
Last month, the Cayman Islands Court of Appeal
overturned a 2012 decision by Justice Jones in the Grand
Court finding, which ordered the Weavering directors to
pay $111m to liquidators of the fund.
In January, Weavering Capital founder Magnus Peterson was sentenced in London to 13 years in prison for
fraud after his $536m fund collapsed in 2008. Peterson
was found to have created fake interest rate swaps to conceal the fund’s true value after big losses, a ruling he intends to appeal.
The liquidators argued the Cayman directors should
have investigated who was on the other side of the interest
rate swaps trades and that if they had done the fund would
not have paid out $111m that was now irrecoverable.
The Grand Court originally found both directors, Stefan Peterson and Hans Ekstrom, who are both relations of
Peterson, had failed in their duty of care as directors.
The fund terms excluded liability for directors unless
they were guilty of “wilful neglect or default”, which the
Grand Court decided was the case.
However, the Court of Appeal overturned the decision,
insisting that a director cannot be guilty of wilful neglect
or default unless he or she knows they are committing or
intend to commit a breach of duty or they are reckless regarding a breach of duty.
Lawyers and investors have expressed their surprise at
the new verdict and the liquidators are aiming to appeal
the case to the UK’s Privy Council.
19 -2 5 M A R 2 01 5
“I have to wonder, if this was not a poster case for finding directors at fault then what is?” says Jim Webb, an independent director.
Mads Jensen, owner of directorship firm Jensen Capital
Management, tells HFMWeek: “I was quite surprised. It is
quite unfortunate and I hope this will not prompt renewed
doubt or loss of confidence in directors. But I think investors are smarter than that.”
Andrew King, partner at Travers Smith who represented the Weavering directors in the case, says the decision
will allow directors using exclusion clauses to avoid negligence claims if they act honestly.
“If they make a mistake then they don’t need to worry
they will be made bankrupt by it,” he says. “Just because
they are not liable doesn’t mean they shouldn’t try and do
their best.
“If in doing their best they make a mistake then they can
sleep at night knowing they are safe from claims. In reality
if you are the director of a collapsed hedge fund then you
DUTIES OF DIREC TORS
Directors’ duties, according to the August 2011
Grand Court of the Cayman Islands judgment
in the case of Weavering Macro Fixed Income
Fund Limited (in liquidation) vs Stefan Peterson
and Hans Ekstrom
„ Directors owe fiduciary duties to their
companies to act bona fide in what they
consider to be the best interests of the
company
„ A director must exercise his powers
independently, without subordinating
those powers to the will of others, except
to the extent that they have properly
delegated their powers
„ The directors’ duty to exercise reasonable
care, skill and diligence comprises both
an objective and a subjective element
„ Directors are required to exercise the
knowledge, skill and experience which
they actually possess
„ Directors have a duty to exercise an
independent judgment
„ They are expected to act in a
professional, business-like manner
„ They are expected to satisfy themselves
(on a continuing basis) that the
investment manager’s strategy is fairly
described in the offering document
and that the investment manager is
complying with whatever investment
criteria and restrictions have been
adopted by the fund
H F M W E E K . C O M 19
ANALYSIS WEAVERING
will not be allowed to be a director of another hedge fund
from a reputational view.”
King says directors will be looking closely at the drafting of the Weavering clause to ensure they are protected
in their own contracts.
Hedge fund directors have been increasing corporate
governance standards since the crisis and pay packets have
increased as a result, from approximately $8,000 per fund
pre-crisis to upwards of $20,000/$25,000 per fund today.
By reducing the liability on the facts of this case, some
lawyers argue compensation packets could reduce among
hedge fund directors.
“If directors were only well paid because of increased
liability then it should be reduced,” says Travers Smith’s
King. “But cases like Weavering and Bernie Madoff show
investors that if you want to be happy with investments
then you need to pay a reasonable sum of money to do a
reasonable job.
“If you pay them $10,000 a year then you can expect
them to do very little; if you pay them $50,000 then you
can expect them to do more.
“Salaries that have been inflated will now be justified on
the basis that we are doing more to protect investor interests so they can hold the salaries where they are. Market
expectations for what directors have to do has increased.”
Julian Mant, principal at Mercer Investment Consulting, says the latest decision could encourage high-profile
industry figures to become hedge fund non-executive directors again where they may previously have balked at
the risks.
“People were frightened of becoming a non-executive
director of a hedge fund after the $111m fine was handed
out,” he says. “If you are risking being made bankrupt and
IF YOU PAY THEM $10,000 A YEAR THEN YOU CAN
EXPECT THEM TO DO VERY LITTLE; IF YOU PAY THEM
$50,000 THEN YOU CAN EXPECT THEM TO DO MORE
”
ANDREW KING, TRAVERS SMITH
destitute then no one would want to do it. This case could
bring people back.
“But the underlying message is still that if you are becoming a director then you have to take it seriously and do
it properly. You can’t just turn up for a half an hour board
meeting and then play golf.”
Some directors expect the case may lead to a tightening
up of indemnification clauses, which dictates that a party
must compensate the other for losses or damages.
“The lesson would certainly appear to be that a higher
standard of care than wilful default is required if directors are to be held accountable through the courts,” says
John Ackerley, director at Carne Group. “I’m positive
this will be an area of increased investor focus although
my experience is that institutional investors are already
looking at this.”
“I would expect some investor requests to tighten up
the liability and indemnification language for all parties in
fund documents to make it explicit that knowledge of the
fraudulent/illegal act is not required,” says Webb.
Siddhya Mukerjee, senior analyst, operational due diligence at Aksia, notes that managers negotiate indemnifica19 -2 5 M A R 2 01 5
tion clauses with directors and that investors come in after
the agreements are set. However, she says: “Even though
investors aren’t negotiating the contracts themselves, they
still have a lot of power, so they need to voice their opinion.”
However, Chris Goodeve-Ballard at consultant Aon
Hewitt doubts strengthening the clauses is a useful exercise as “suing the directors just uses up investor money”.
“It’s far more useful to have a decent directors and officers
(D&O) liability policy in place which will at least cover
legal fees,” he says. “Harmonisation makes sense as then at
least everybody would have an understanding of the starting position.”
The initial Cayman judgment that found the directors
guilty and ordered them to pay losses also set out minimum responsibilities for directors, such as not placing
themselves in a position of conflict, exercising their powers independently and supervising the discharge of functions they delegate to others. Directors say this initial
judgment in August 2011 formed the basis of minimum
standards for corporate governance and despite the overturning, these standards will endure.
Unlike the Weavering directors, current directors of
regulated Cayman Islands funds are now subject to the
detailed Statement of Guidance on corporate governance
duties issued by the Monetary Authority and all directors
of such funds are subject to the Directors Registration and
Licensing Law.
Investors agree the decision reiterates the importance
of corporate governance. Lisa Fridman, director at Paamco, says: “It would be good for investors to figure out how
many funds the director represents, whether they focus on
the industry, which firm they are from, if more than one
independent director represents the firms. In Weavering’s
case it was outside the standard practice.”
Mant says US investors remain worried about governance of offshore funds but there are more important issues
than director liability such as independence and number
of fund directorships held.
“Hedge funds have had independent directors for some
time and while they are being forever kicked they have led
on corporate governance issues for investors,” he says.
“Most offshore hedge funds have independent directors
primarily to protect the interests of investors.”
Some lawyers suggest the case was a “technical ball
drop” as the directors were never cross-examined on
whether they believed they had fulfilled their duties.
Paul Govier, partner at Maples and Calder, says the decision has been “misconstrued” and the appeal was overturned purely on the facts of the case.
“Because the decision was overturned, it might be incorrectly inferred that somehow directors’ duties under
Cayman law are in some way less onerous than prior to the
decision,” he says. “That is not the case. The case doesn’t
change the legal position at all for directors.”
Don Ebanks, executive director and chief compliance
officer at DMS Offshore Investment Services, agrees.
“Since the financial crisis of 2008, investors have been
increasing their focus on the role of the independent,
professional director and this has filtered through to investment managers and advisers as well,” he says. “This
evolution is unlikely to slow down, much less reverse,
and we think that intensified engagement with those
allocating capital to alternative funds regarding fund
governance and a heightened awareness of the role of
independent directors is essential to the future of the alternative funds industry.” H F M W E E K . C O M 21