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Amateur Hour Cancelled
It was bound to happen. There are over 10,000 directors serving Cayman Islands funds – everyone from rank amateurs to serious professional firms – and fund governance has been one of the fastest growing sectors within the hedge fund industry.
Questions had been raised in the press by some institutional investors about the performance of some independent directors during the recent financial crisis and now many of these questions have been decisively answered by the Grand Court of the Cayman Islands Financial Services Division (the “Court”), in its August 26th, 2011 judgment against the independent directors of the Weavering Macro Fixed Income Fund (the “Fund”).
Substantial case law on directors’ duties and responsibilities to trading companies already exists, but this is the first time that the Court has dealt with a case specifically involving directors’ duties to a hedge fund. In a sound, well reasoned decision, the Court found the independent directors guilty of willful neglect or default in their duties to the Fund and ordered them to pay US$111 million in damages.
This blockbuster award should send a strong message to all recalcitrant directors to either perform their duties and responsibilities properly, or pay a heavy price.
Now this judgment may not end the discussion about whether amateur or professional fund governance is more effective – Luddite beliefs that are deeply ideological – but the Court did repeatedly confirm its view that independent directors should perform a “high level supervisory role” in a “professional, businesslike manner”. Fair minded people can form their own judgments about what “professional” and “businesslike” mean when they see it.
To illustrate, the guilty directors fit the amateur model completely – retired and working from home; numerous years of investment management experience with reputable institutions and no other directorships. The Court found they “had appropriate professional credentials and met the ISE's (Irish Stock Exchange’s) independence requirement.”
For proponents of the amateur model, they could not have been more perfect examples – yet investors suffer devastating losses at their hands. It is highly doubtful that this catastrophe could have occurred in a professional fund governance firm, with professional full-time directors having vast fund directorship experience, ably assisted by professionally qualified staff following established policies and procedures based on industry best practices.
The Court decision reaffirmed what astute fund investors and sponsors already know – the professional fund governance model does far more work and is far more productive than the amateur model. I’ve operated both models and can tell you unequivocally that the professional model is far more effective.
The Court made some meaningful observations in key areas that are instructive to the fund industry:
Board meetings
Some hold that that the number of board meetings is the litmus test for director performance; however, it is not uncommon for some directors to hold frequent meetings to go “through the motions” believing that the more meetings mean the better (especially if the meetings are being held in attractive locales) and that their obligations begin and end in the boardroom. This spectacle is pure form over substance. Amateurs love this approach and scoff at the SEC’s recommendation to hire staff with the appropriate skills to assist them in discharging their duties. Perhaps now they will heed the SEC’s advice and better understand the value of having professional staff and why they can’t simply attend a few meetings, pick up their check and hit the golf course.
The Court exposed this charade and did not accept that the regular quarterly board meetings could be “relied upon as the single most important way in which they claim to have discharged their functions”.
Purely focusing on board meetings misses the big picture, as the Court found, as they maybe held merely to “create the impression that the Directors were reviewing the affairs of the company on a regular quarterly basis”.
Duties and responsibilities
In confirming that director duties go beyond the board meeting, the Court held that directors have “a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company's business to enable them properly to discharge their duties as directors.” They need to satisfy themselves, on a continuing basis, that the various professional service providers are performing their functions in accordance with the terms of their respective contracts and that no managerial and/or administrative functions which ought to be performed are being left undone.” The Court was also critical of the directors in that they never prepared an agenda for the board meetings, never asked any of the service providers to participate in board meetings and never inquired of the service providers – yet another example of where the professional model excels. It is difficult to imagine any directors meeting the Court’s expectations without employing a team of professionals with a broad range of deep hedge fund skills to assist the director in reviewing complex matters, researching issues and asking probing questions.
Fund operations
Fundamentally a hedge fund is different from a trading company in that it operates through delegates and not employees. The Court repeatedly recognized the ability, indeed the necessity, for directors to delegate to competent service providers within the hedge fund structure, but also made very clear that such delegation does not absolve the directors of the duty to supervise such delegation, albeit at a “high level”. Importantly, the Court confirmed that the “directors were not expected to supervise [the "Fund"] trading activities”, making clear that a director is neither a shadow or pseudo investment manager as some have promoted themselves.
Indemnification
Although, these directors were indemnified in the typical manner under the Articles of Association, such indemnification did not protect their egregious conduct. Effectively the Court’s decision proves the speculation that indemnification leads to directors behaving with impunity to be patently false. Indemnification is intended to protect conscientious, well meaning directors from frivolous actions and the Court will not tolerate any misuse of indemnification provisions.
Crisis management
Historically independent directors responded to a crisis by resigning and distancing themselves from a fund. During the recent financial crisis, questions arose whether directors acted too precipitously in imposing gates or acted too slowly in liquidating positions. Reasonableminds can debate these issues, but these directors found a way to do even worse – they did nothing. Despite not having any other directorships, these directors did not perform effectively. Directors prove their worth in a crisis and the 2008 financial crisis was the true stress test of a director’s capacity to perform effectively. The Court agrees “the way in which these Directors behaved during this most serious financial crisis is, in my judgment, the most compelling evidence that they never intended to perform their duties as directors.”
Recordkeeping
The Court found that the directors were “not able to explain why he signed these agreements or how he thought that the arrangement could benefit the … Fund.” They were also not able to demonstrate the basis for approving certain side letters observing that “there is no evidence that the Directors made any enquiry or sought to understand whether or not the execution of side letter agreements of this sort could impact adversely on the macro fund.” The Court further observed that “whilst it is common practice for Cayman Islands funds to enter into side letters of this sort, it seems to me that independent directors need to be alive to the issues which are likely to arise.”
While the case did not turn on this issue, the industry should find the Court’s emphasis on documentation noteworthy.
Overall, this is an excellent decision for fund investors and continued confidence in the Cayman Islands fund and alternative investment industry. It proves that the system works effectively and should blunt any criticism by those proposing extreme concepts and agitating for radical overhaul. Simply put, the Cayman Islands will hold directors accountable for their poor performance.
Don Seymour is the founder and a Managing Director of dms Management Ltd.
A very muscular brand of Christianity
(The Guardian): When you hear the name Jesus, is the first image that comes to mind a dewy-eyed pretty boy with flowing locks? If so, think again. After 2,000 years, the Messiah is getting a makeover. This time he's less "gentle Jesus, meek and mild" and more of a kick-ass action hero – a Chuck Norris in sandals. No more cissy Kumbaya stuff. In this testosterone-fuelled theology, the Saviour finally has the rippling biceps he would have developed as a carpenter from a working-class home in Nazareth. The macho Jesus movement has been bolstered by books like No More Mr Christian Nice Guy and The Church Impotent – the Feminisation of Christianity.
But it's artist Stephen Sawyer, whose paintings of the Son of God as a tattooed biker and boxer have captured the imagination of Christian men searching for a more manly role model.
CIG reneged on promise to young college student
(CNS): Community Affairs Minister Mike Adam and the Premier McKeeva Bush’s Young Nation Builders Programme have provided financial assistance in part to Japheth Ebanks, an American teenager with Caymanian parents who was accepted into the Florida Atlantic University (FAU)at age 13. According to Japheth’s mother, Marvel Ebanks, after the boy was accepted by FAU they were contacted by Adam, who said that the Cayman Islands Government would be there to support his educational expenses. However, she claims that the government has stopped paying their expenses and Japheth is now at risk of having to leave the university.
According to Marvel Ebanks, she and Japheth were living in Washington at the time he was accepted into FAU and was contacted by Adam, who said that the government would be there to support Japheth’s educational expenses. At the minister's request, government officials made flight arrangements for Ebanks and her son to get to Miami and assured them that they would be flown back to collect their remaining belongings.
“The Cayman Islands Government’s assistance at that point was the only reason that Japheth was able to start college at 13-years-old,” said Ebanks. “The child's momentum and enthusiasm was in high gear as he eagerly entered into a very demanding and challenging course load.”
Ebanks claims that when Japheth started college, they had no transportation or accommodation close to the campus and he was not eligible to live in the campus dormitories due to his age, so they were forced to walk miles to catch a bus or train to the university, and as a result they often experienced delays in getting there. When classes finished in the afternoon, the whole process of getting there was repeated again in reverse, and he often collapsed at night from exhaustion, she said.
Later on, he was offered a scholarship from the premier’s Young Nation Builders Programme. However, due to the fact that Ebanks was Caymanian and Japheth was American, they requested his birth certificate. “The premier emailed me a letter that government would pay for his educational and living expenses through his doctoral level,” said Ebanks. However, the application has yet to be approved, and they have also not been provided with the promised trip back to Washington to pick up their belongings, which they are now in danger of losing.
“It is unfortunate at this time that a way was provided and not sustained because of lack of follow-through and answers by the Cayman Islands Government,” she said.
Government also paid for motel accommodation that was six minutes away from the university and government officials even visited the university, met the owners of the motel, got billing information and amounts, and reassured them that they would cover the expenses. However, the accommodation was mouldy and this made Japheth so sick that he had to see his paediatrician.
“The paediatrician, who was gravely concernedabout the motel causing the child to become sick, wrote the Cayman Islands Government to inform them that accommodations were desperately needing to be changed since our current placement was causing the child to become sick and be prevented from remaining in school, being so sick,” said the boy's mother.
Ebanks and her son had to eventually leave the motel with over US$5,000 still owing and were forced to live with Ebanks’ mother, who lived in a different city. She then accompanied her son once more on a two hour trip each way by public transport.
“The lack of these basic necessities of food, accommodation and school supplies caused him to suffer, as well as his grades, from a 4.0 GPA the first semester college classes in his first year to failing some of his classes at the completion of his second year last month, which has caused him to be placed on academic probation with the university and could possibly exit him from the university if not rectified immediately”, said Ebanks
“I, as a Caymanian, am prayfully hoping that with the recent announcement that the Cayman Islands Government is seeking to increase the population, that they will now urgently re-visit this issue and grant my 15-year old son his Caymanian Status, so that he can continue to thrive, because he was on track to make history at Florida Atlantic University as being 17-years old with his Bachelors Degree,” said Ebanks.
“The delay of not getting paperwork done, as well as no answers being given to basic questions, is causing this amazing opportunity to be placed in jeopardy," she said.
All roads lead to Dartville
You have made up your minds. There is little anyone can say that will change your likes and dislikes when it comes to political thought and policy. I will not try to change your mind. Rather, this letter serves to enlighten and inform and to make clear what I see that others may have overlooked. In the Wizard of OZ, the Yellow Brick Road led to Emerald City, the golden glowing edifice that Dorothy and her friends were seeking in desperation for having their greatest wishes granted.
If you know the story, you know the Wizard turned out to be just a regular man who used trickery to deceive people in order to make Oz look most inviting.
In Cayman we have a similar scenario happening in the form of Camana Bay. And of course we all know who the Wizard is. I will not express my opinion on this matter. My concern lies more with the Yellow Brick Road. There is a major difference between the Yellow Brick Road leading to Oz and the roads leading to Camana Bay. The yellow brick road was barren. It meandered through hollow forests and open meadow. There was no commerce along that road. No place to stop and get a meal or see a movie. It was simply a means of getting the traveler to Oz.
In Cayman, all roads used to lead to the Capital of George Town. It was once the center of commerce. It was our Oz. Now we have a Wizard amongst us who has built his own Oz which I called Camana Bay. Of course to get there the Wizard needs a system of roads to capture the travelers and make it more likely that they will be diverted there. I have no problem with this either. If I were the Wizard I would want as many Yellow Brick Roads as possible leading to my Oz.
The problem here is this: this Wizard wants his village to be everything to everybody. In this effort he is opening shops and businesses that copy or duplicate others in the community to include, movie theater, book store, coffee shop, restaurants, clothing stores, office complexes, entertainment facilities, gyms, jewellery shops and more. It doesn’t matter to the Wizard that these establishments already exist in the community and are hurt by his doing this. He does what he wants to suit his needs under the pretense that it is for the greater good and the ultimate success of Oz. Again, although I do have a problem with this, I will not address it here.
The problem of greater concern, which most people have overlooked, is the road situation. By diverting the road on Seven Mile Beach and creating a parallel road leading to Camana Bay and his other developments, numerous existing businesses and shopping centers will have their existing Yellow Brick Road bypassed. And eventually, as the new route becomes the norm, new businesses will sprout up which the Wizard himself will likely have a hand in, which will completely destroy the existing businesses that managed to survive.
If this is for the greater good and serves to make us better, I would like someone to please show me what I’m missing here. If you own a business on West Bay Road and can see what’s coming, maybe now would be a good time for you to speak up.
Advice to the premier
I was very impressed by a recent comment by a young Caymanian journalist (see below). It shows an understanding of the issues that far exceed anything which the premier's statements reflect. Like her, I think many young people in this country find the statements of the premier to be offensive and not conducive to civil society and good governance. I maintain that religous society would have a similar view.
I do not at times agree with the editorials of the Compass but whatever the case, those are opinions that they are free to hold and as a free press they should be able to express them. They reflect the views of society to one degree or another and on this matter I would suggest it is to a very high degree.
Our leadership has reached the point where any criticism no matter how objective is rejected immediately and these sort of aggressive Repugnatorials are issued in response. Threats of legal action against talk shows, the media and individuals to stifle free speech and the exchange of opinions and ideas seem to be a weapon that is employed frequently these days as well.
I am particularly concerned that this sort of behaviour is instructive to elements of our society that this is the way to resolve issues and the way to get ahead. Leaders are supposed to lead by example and be role models in society. Sadly it seems that is not a concept that is recognised much these days.
If we are to have a better society and our leadership is to have less occasion to bitterly complain about criticism how about trying these suggestions for a start:
Stop the outrageous stuff which gives reason to criticise.
Stop attacking the media for doing their job and exercising their rights.
Stop trying to turn the various nationalities of our cosmopolitan society against each other for political convenience.
Stop apparently breaching or abrogating the laws, regulations, rules and processes of the country that are there to create a more perfect society, to give certainty, to deliver fairness and the same opportunity for all.
Stop promoting every harebrained idea that comes across your desks.
Stop supporting the destructionof our natural environment.
Stop appearing to ignore or embrace conflicts of interest as if they are opportunities for the privileged who enjoy the spoils of a less than perfect democracy.
Stop offending society's sense of right and wrong, of justice, of comity.
Stop destroying the national psyche.
Stop this latest tactic of using religion as a cloak, as a shield and as a spear!
The present and future of this country like this young Caymanian journalist are looking to you as an example of good, for right, for principles and values, for national pride, for motivation, for inspiration. Stop dissapointing them!
This is not nation building. It is destructive and frankly scary.
Comment by lilpressgyal (Wed, 08/17/2011 – 11:03) on Mac goes on attack
Alexis de Tocqueville, a renowned political philosopher in his age whose writings on democracy are respected to this day, once wrote about the importance of newspapers to the survival of a proper democracy.
He wrote: "When men are no longer united among themselves by firm and lasting ties, it is impossible to obtain the co-operation of any great number of them unless you can persuade every man whose help you require that his private interest obliges him voluntarily to unite his exertions to the exertions of all the others. This can be habitually and conveniently effected only by means of a newspaper… Newspapers therefore become more necessary in proportion as men become more equal and individualism more to be feared. To suppose that they only serve to protect freedom would be to diminish their importance: they maintain civilization."
The press, if they do their job properly, maintain our civilization. To attack them for edtorialising on current affairs, for publicising blatent breaches of transparency, is to attack the foundation of our society. That is what McKeeva is doing.
If McKeeva truly cared about the good of this country, he would follow its laws, he would spend the budget wisely, and he would not attempt to silence the news media.
I am a young Caymanian journalist and I can only do good in my country by writing. If my own government tries to stop me, nothing but my love for these shores will keep me here and keep me writing … and I do not know how long my love for Cayman would sustain me if my job was taken away.
I would love to see McKeeva call me a devil-worshipper to my face. If he did, that's one more young Caymanian he could add to the growing brain-drain.
MI5 helps Met find looters who used BBM
(The Guardian): The security service MI5 and the electronic interception centre GCHQ have been asked by the government to join the hunt for people who organised last week's riots, the Guardian has learned. The agencies, the bulk of whose work normally involves catching terrorists inspired by al-Qaida, are helping the effort to catch people who used social messaging, especially BlackBerry Messenger (BBM), to mobilise looters. A key difficulty for law enforcers last week was cracking the high level of encryption on the BBM system.
The moral decay of our society
(The Telegraph): David Cameron, Ed Miliband and the entire British political class came together yesterday to denounce the rioters. They were of course right to say that the actions of these looters, arsonists and muggers were abhorrent and criminal, and that the police should be given more support. But there was also something very phony and hypocritical about all the shock and outrage expressed in parliament. MPs spoke about the week’s dreadful events as if they were nothing to do with them.
I cannot accept that this is the case. Indeed, I believe that the criminality in our streets cannot be dissociated from the moral disintegration in the highest ranks of modern British society. The last two decades have seen a terrifying decline in standards among the British governing elite. It has become acceptable for our politicians to lie and to cheat. An almost universal culture of selfishness and greed has grown up.
British PM announces moves to tackle gang culture
(The Guardian): David Cameron has signalled a new drive against gang culture following police reports in Manchester, Salford and London that a nucleus of the rioters were organised by inner-city gang leaders. Senior police have briefed MPs and political leaders, including Cameron, that well-known gang leaders were at the centre of the second and third day of the looting, even though the majority of rioters were not gang members. Cameron told MPs "gangs were at the heart of the protests and have been behind the coordinated attacks". He has also asked the home secretary Theresa May to work with figures such as Bill Bratten, the former chief of police in New York and Los Angeles, on how to combat gangs. The announcement of a new drive is an admission that the government approach has so far been ill co-ordinated and under-resourced.
Cayman team seeks glory in squash championship
(CNS): The 2011 edition of the Senior Caribbean Squash Championships commences on Monday, 8 August, with eleven teams set to take their chances for podium glory. The competition is to last three days for the individuals and then three days for the most patriotic stage of the tournament—the team event. Cayman will be represented by 14 individuals for singles event. In the Men’s and Women’s divisions, Guyanese players Richard Chin and Nicolette Fernandes are predicted to take the gold whilst Cayman’s elite duo, Cameron Stafford (left) and Marlene West, are ranked third in the Men’s Division seeded fourth in the Women’s Division respectively.
In 2009, the Cayman Islands hosted the same event and managed to pull through with placing second overall. The team bagged 1st place in the Veterans division over Barbados, finished 2nd in the Women’s division behind Trinidad & Tobago in a nail-biting final and the men’s side managed to squeeze past Jamaica for the bronze.
Although Cayman is expected to come home with the gold this year on home turf, three key players are unavailable for this year’s championship. Mark Chaloner, a resident of the Cayman Islands and former World #7 on the Professional Men’s Circuit, was deemed ineligible to play this year. CASA (the executive board of Caribbean Squash) had discovered that Chaloner did not satisfy tournament regulations for participation due to the fact that he has not lived in the Cayman Islands for four consecutive years. Caroline Heal, Islands Games Gold Medallist, is off-island for the event and had other important obligations to complete; lastly Jackie Ridgeway, Silver Medallist at the Island Games is away in South Africa and could not take part as well due to other personal obligations. Although the Cayman side is lacking three key players, they are, nonetheless predicted to come home with Gold in the Men’s, Women’s and Vet’s side respectively.
The Cayman side is being led by national coach Glenn Stark—one of the most experienced and successful squash coaches the squash world has seen. With the Men’s and Women’s and Vet’s sides being spearheaded by Cameron Stafford and Marlene West and John Macrury, the chances for Gold are limitless. The Women’s side is equipped with an arsenal of experienced players: Marlene West is ranked #80 on the Women’s Professional Circuit; Alison Strobridge is a seasoned veteran; Chantelle Day is a former Caribbean U19 Junior Champion and a former Commonwealth Games’ team player; Samantha Hennings is a former Caribbean U17 Junior Champion and a valiant team player who usually pulls the upsets in the Team Events; and Eilidh Bridgeman is the team captain of the Junior Girls’ Team that brought home the Bronze Medal from Guyana in July.
Cayman Brac economy
Upon seeing for myself the current economic distress in Cayman Brac, I feel compelled to call on the government to begin immediately a program of sustainable economic development in Cayman Brac. At this time there are few private sector jobs for our young people after completing high school or tertiary education. They are forced to relocate to Grand Cayman in search of employment.
Because of this, Cayman Brac has an aging and shrinking population with few encouraging prospects.
I have continued to help Cayman Brac throughout my life. I have tried to provide everything, from airline service to the construction and operating of two hotels. At this time I am more concerned for the future of Cayman Brac than I have been at any time in my life. Failure to act quickly will result in Cayman Brac getting to the point at which it will no longer have a viable population. I am hereby suggesting the following in an effort to change the current situation:
Reduction of planning fees, especially those fees pertaining to clearing of beach property.
A complete review of the planning laws with a view to simplification, reducing restrictions, reducing fees and being made more builder friendly.
The total reinstatement of the duty concession that was in place for Cayman Brac from the mid 1990s until it was allowed to partially expire on 30 June, 2011.
Upgrading of the airport to accommodate international departures.
After airport improvements, provide concessions to any airline providing service to Cayman Brac from non CAL destinations.
Enhancement of the Cayman Brac tourism product, with a greater part of DoT’s budget earmarked to promote the Brac.
Low license fee and exemption of work permit fee for the first 2 years for any business that relocates to Cayman Brac, with a total of 15 or more employees.
Change the purpose of the new hurricane shelter to that of a facility which can provide back-office support to various government departments in Grand Cayman. It could still
function as an emergency shelter when needed.
Provide fee incentives to any financial service business, that is willing to be located in Cayman Brac.
Enhance the high school and UCCI facilities in Cayman Brac to better prepare our young people.
Encourage the building of a marina, and reduce duty for boats and yachts that are imported into, and home ported in Cayman Brac.
Offer special concessions for high-tech firms to locate in Cayman Brac.
Identify, preserve and enhance Cayman Brac’s natural features (i.e. caves, splits, ponds, etc.), while also ensuring access and information to residents and tourists.
Review the feasibility of allowing water sports inside of the reef of the south west coast of Cayman Brac.