04/02/2012
The Weavering Case
In light of the economic crisis of 2008, due diligence, regulation, and proper cooperate governance have been key concerns within the hedge fund industry. Recently, a court case has attracted a great deal of media attention to these concepts.
In the jurisdiction case The Weavering Macro Fixed Income Fund Limited vs Stephen Peterson and Hans Ekstrom, the two fund directors were found guilty and personally held liable for neglect..The Weavering fund started up in 2003 and was administered and listed in Dublin. The scheme started when fund director, Magnus Peterson, tried to cover up trading losses by creating fictitious interest rate swap transactions with a in the British Islands.
Despite repeated reports sent from the fund administrator (PNC) that the swap counterparty
could not pay the money due to the fund, the Weavering directors chose to ignore the reports and began authorizing redemption requests based on a false net asset value. The fraud was revealed in 2008 and the fund was put in liquidation.
The court case that followed concluded that the directors ignored reports from PNC stating the fund was not in compliance with investment restrictions. The sum of consequential costs was based on the redemption payments made from November 2008 (when the fund should have been terminated) to its actual liquidation in March 2009.
In the ruling, the Cayman Court released an extended statement of duties and responsibilities to fund directors as well as the consequences of the two directors. The result was the directors personally were fined 111 million USD for failing to discharge their duties and care of diligence to the fund. These additional penalties resulted in the collapse of the fund, with losses ranging over 500 million USD. This ruling marked the first time a Cayman court held directors personally liable for fund losses.
There were some positive industry results from this case. The extended statement from the Cayman court during the hearing indicated clearly what the jurisdiction considers the best practices for cooperate governances for directors in Cayman Islands. This provides the industry an important lesson on the significance of proper governance, as well as the hope of global regulatory reform. As best practices in proper corporate governance worldwide are still being developed, let this be a hard lesson for all on importance of proper global risk and regulation
