Judge finds directors negligent in Cayman fund

| 29/08/2011

(CNS): In what is being described by local legal professionals as a landmark judgement the Grand Court of the Cayman Islands has, for the first time in the context of a failed investment fund, found two directors guilty of wilful neglect. In a ruling delivered Friday the judge ordered that the two directors pay the liquidators, who brought the proceedings on behalf of the failed investment fund, Weavering Macro Fixed Income Fund, US$111 million in damages. The court found that the directors' conduct fell well below what was required of them and were said to have not taken any meaningful role in the business of the fund, merely signing documents which were put in front of them.

Like many Cayman Islands investment funds, the directors enjoyed an indemnity under the terms of the Fund's constitutional documents covering all losses, but it doesn’t cover the two men for losses which were found to be down to the directors' own wilful neglect or default.

Local lawyers Ogier, who represented the official liquidators, David Walker and Ian Stokoe of Pricewaterhousecoopers, said the landmark decision confirms that although Cayman Islands investment funds may be structured differently to traditional corporate entities, the fundamental duties owed by a director of a Cayman Islands investment fund are the same as those duties owed by a director of any other corporate entity.

"The case shows that directors of Cayman Islands investment funds cannot sit idly by, leaving the management and control of the fund to its service providers. A director's duty to supervise the affairs of the company, and to exercise reasonable care, skill and diligence are non-delegable,” said Shaun Folpp, Managing Associate at Ogier Cayman, who, together with Will Jones Associate, acted for the successful plaintiff led by David Lord QC.

“Directors of Cayman Islands investment funds can no longer live under the misconception that they are immune from liability for a company's losses if they do not themselves take an active role in the company's business," Folpp warned.

In his ruling the judge said directors Hans Ekstrom and Stefan Peterson had consciously chosen not to perform their duties in a meaningful way, signing documents without reading them, applying their minds to the content or making any enquiry about the fund “whatsoever”. The judge stated that they never once asked for a written report or attended a board meeting in the six years of the fund’s life.

The fund was incorporated in April 2003 and the directors were both close family members of the principal investment manager, Magnus Peterson, who appointed them. One was his elderly step-father, who was 85 when he gave evidence in the trial, and the other was Peterson’s younger brother.

The judge said that while on paper the two men had appropriate credentials to act as directors, with the benefit of hindsight it was “difficult to avoid the conclusion that Mr Magnus Peterson chose to appoint his relatives as a means of meeting the minimum legal requirements without burdening himself with a real board of directors,” that would have supervised the fund in a businesslike manner.

See full judgement here.

Category: Finance

Comments (25)

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  1. Anonymous says:

    What about Grand island fund and that little gang since one person has been convicted. Oh well i guess that will never happen too many local big shots involved.

    • Anonymous says:

      Not to mention SEGOES.., When are those teachers gonna get their life savings back? Who were the auditors on that again? Who were the legal counsel? Some deep pockets but to prosecute would be damaging to a few people's reputation – CAN'T HAVE THAT!! They believe it is better for the masses to suffer than a few to lose face – that's messed up!!

    • Anonymous says:

      That is very unfair.  Lawyers act on instructions.  It is the 'victims' who choose not to pursue compensation.  Judging by the attitudes on this forum I'm sure  that many lawyers in Cayman would love nothing more than to cross-examine a wealthy Caymanian in public if given the opportunity.

      • Anonymous says:

        The victims don't pursue because they cannot afford to throw good money after bad…. however much " lawyers would love to cross examine the wealthy" etc…but they don't do it for free…!!…and knowing this, the guilty get away with it time and again…lets hope the Grand Island jokers get what they deserve.

        White collar crime is also committed by those who fail in their duty to safeguard their clients funds, except they're disguised in starched white shirts and shiny neckties….Oh and they do go to Church on Sudays.

    • Anonymous says:

      Agree, the Grand Island fund directors and administrators and bankers were so busy taking fees and bonuses that they forgot to protect the very investors who paid them those fees and annual bonuses….I truly hope an example will be made of them just to put aside the "too many big shots .." fear we live with in the local business community.

    • Anonymous says:

      Interesting point. The same liquidation firm, Pricewaterhouse did both liquidations. Odd nothing has been disclosed on the Grand Cayman funds. Wonder why.

  2. Capitalism A Love Story says:

    This ruling would be truly a Landmark Decision IF…..it could also cover the blatant abuse and insider trading which transpired on Wall Street during the "Economic Meltdown." To whit: Hundreds of thousands of people lost their retirement savings. And/or their homes and jobs. Because of mismanagement and fraud.

    Even with tape-recorded evidence- none of those directors have suffered any personal consequences.

    Other than being given hugebonuses, sitting in front of panels with contrite looks, and then being appointed by the administration to advise Obama on Financial Reform.

    Who runs Washington?  Take a guess.

  3. Anonymous says:

    Well yeah, if your name is Hans and Peter and Christiansen expect to pay – however if your name is Ebanks and Bush and any other generic Caymanian name expect to be let off even if you're guilty as sin.

    • Anonymous says:

      Rather than your racist rant, I think the issue has to do whether the Directors' conduct was covered by the relevant indemnity clause in the Articles of Association. In this case – wilful neglect or default – it wasn't.

  4. Anonymous says:

    What everyone should have realized all along.  Be very worried about the 200 directorships your holding.

  5. Janus says:

    Good Ruling – Price of bussiness (directors) going up

    • Anonymous says:

      Will the qualtity also go up?

      OR will it be as ususal in the financial industry – over paid prima donnas feeding at the food bowl of the poor investors?

  6. Anonymous says:

    So who gets the $111 mil?

  7. Anonymous says:

    Is it too late for First Cayman Bank to be revisited???

    • Anonymous says:

      Too late. It was settled for a paltry sum, and in any event the limitation period has long since expired. Who would've known that saying "I didn't go to any meetings so I didn't know what they were doing" was not a good defence? LOL. 

      • Anonymous says:

        Ask the liquidator if fraud was involved!

        Papers circulated the Island purporting to be questions from the liquidator to the Attorney General.

        In them he asked the Attorney General about a transfer of assets at under value just before the fall, if that did happen, then its fraud, and whoever signed the transfer should have been prosecuted! 

        Could have saved yourselves so much trouble by prosecuting the alleged miscreant then.

        • Anonymous says:

          If the liquidator considered that fraud was involved and did not sue the Directors on the basis of that fraud (rather than settling with a miscreant for say a couple of hundred thousand dollars) then the liquidator was in breach of his duties and should have been sued by the creditors.

          • Anonymous says:

            Presumably thats why he asked the Attorney General, so the question is why did he not want legal action taken?

            Maybe to avoid bringing CI into disrepute?

            Of course, all the above assumes those papers circulating were real, and that must be a matter of public record.

            • Anonymous says:

              What did it have to do with the Attorney General? A liquidator does not need the AG's permission to sue an MLA acting in his private capacity. There is no sovereign immunity involved.  

              As for bringing CI into disrepute, it is sweeping matters like this under the carpet that brings it into disrepute.  

          • Observer says:

            There are liquidators and there are liquidators. Many do not want to upset the establishment and neither do their lawyers.

    • Robin Hood says:

      Not if fraud is involved. No statute of limitations.

      • Anonymous says:

        Correct, but no suggestion of fraud on the part of that individual. Just greed and stupidity.

        • Anonymous says:

          Isn't that what fraud is, at the end of the day – greed and stupidity?  Wise and selfless people don't commit fraud.

          • Anonymous says:

            Fraud is motivated by greed, but requires dishonesty. Whether the fraud was stupid or not depends on how easily detectable it was. Ergo, greed and stupidity do not equal fraud.