Cayman Islands: Weavering Macro Fixed Income Limited (In Liquidation) V Peterson And Ekstrom - Hedge Fund Directors Are Told To Jump, But How High?

Last Updated: 8 September 2011
Article by Appleby  

The Financial Services Division of the Grand Court has just delivered what is already being hailed as a seminal judgment on the subject of directors' duties in the context of offshore hedge funds.

In Weavering Macro Fixed Income Fund Limited (In liquidation) v Peterson and Ekstrom, the Court found a fund's independent directors guilty of wilful default in the discharge of their duties, and ordered them to pay damages to the fund's liquidators in the sum of US$111 million, representing the losses suffered by the fund which were caused by their default.

It was a case of extreme facts: the fund's investment manager (Magnus Peterson) arranged the appointment of his younger brother and elderly stepfather to serve as the fund's directors on a gratuitous basis, merely to meet minimum legal requirements rather than to form a real board of directors. For the next 6 years, they did nothing to discharge their functions as directors beyond signing any number of documents at the manager's request, and even signed fictitious minutes of two board meetings which never took place. This semblance of corporate governance allowed the manager (while deceiving the directors and other service providers) to fraudulently inflate the fund's NAV by booking fictitious interest rate swap transactions to disguise substantial losses which the fund was suffering. By the time this scheme was discovered and the fund was put into insolvent liquidation, over $141 million had been wrongly paid out to investors by way of redemptions based on NAVs which were artificially inflated to the tune of $111 million in aggregate. In these circumstances, it was easy for the Court to find the directors guilty of wilful default – an essential finding, since it disqualified them from relying on an indemnity from the fund which would otherwise have blocked the liquidators' claim.

Directors' duties defined

These facts also made a convenient platform for the trial judge to make a series of stern statements of principle about the duties of hedge fund directors. These statements are important because the Court took long-standing principles concerning the duties of non-executive directors in a conventional company structure and adapted them for the unique structure of a hedge fund – with its array of professionals independently performing various critical functions in support of management

The key statements are as follows:

  • The Cayman Islands investment fund industry works on the basis that investment management, administration and accounting functions will be delegated to professional service providers and a company's independent non-executive directors will exercise a "high level supervisory role". They must also make sure that the scope of their own supervisory role is clearly understood by all concerned.
  • At the fund formation stage, directors must satisfy themselves that the offering document complies with Cayman Islands law; that the terms of the service providers' contracts are reasonable and consistent with industry standards; and that the overall structure of the fund will ensure a proper division of responsibility amongst the service providers. Directors must act in the best interests of the fund which, in this context, means its potential investors.
  • Whilst independent directors rarely have the technical expertise and experience to be able to monitor sophisticated investment strategies and trading techniques in a direct hands-on manner, they are expected to satisfy themselves (on a continuing basis) that the fund is complying with investment restrictions set out in the offering documents and to acquire a proper understanding of the financial results of the investment and trading activity, without which they would not be in a position to perform an overall supervisory role.
  • It is their duty to satisfy themselves that there is an appropriate division of function and responsibility between the investment manager and administrator. They need to satisfy themselves, on a continuing basis, that the various 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 left undone.
  • Independent directors must do more than simply react to whatever problems may be brought to their attention by the other professional service providers. They must apply their minds and exercise an independent judgment in respect of all matters falling within the scope of their supervisory responsibilities.
  • Reviews of financial accounts must be conducted in an inquisitorial manner, the directors making appropriate enquiries of the administrator and auditor. The directors are not entitled to assume that the other service providers have all performed their respective roles (actual or perceived) and therefore do not need to be supervised in any way whatsoever.
  • Independent directors are expected to be able to read a balance sheet and have a basic understanding of the audit process. If they accept a responsibility for a fund's financial statements (by issuing management representation letters and signing the financial statements), it is their duty to exercise an independent judgment in satisfying themselves that the financial statements do present fairly the fund's financial condition

Directors' reliance on indemnities

Where directors have the benefit of an indemnity for all loss causing conduct other than that constituting "wilful neglect or default" (the current industry standard), liability can only accrue where they know that they are committing, and intend to commit, a breach of duty; or are recklessly careless in the sense of not caring whether their act or omission is a breach of duty.

In this case, the Court held that directors who effectively do nothing for a period of years, while knowing they had a duty to supervise, will be found to have intentionally neglected their duties and thus liable; on the other hand, directors who make a serious attempt to perform their duty but fail as a result of carelessness or incompetence, no matter how gross, will be relieved from liability by virtue of the standard indemnity.

Given the extreme facts of the Weavering case, the Court did not have to decide the question whether appreciation by directors of a possible breach of duty coupled with a conscious decision to carry on regardless would satisfy the lesser test of "reckless indifference". In most cases, where the facts are not as stark, this will continue to be a fertile ground for debate.

Caveats, open issues and unanswered questions

This represents the first rather than the last word on hedge fund directors' duties. This judgment was delivered only on 26 August 2011. It may still be subject to appeal; and no other court has yet had an opportunity to comment on its findings or apply its statements of general principle.

There was no difficulty in applying those statements of principle in the Weavering case, because the directors in question "consciously chose not to perform their duties to the fund" while they also "knew perfectly well that their behaviour was wrong". In other cases, the question of what constitutes a "high level of supervision" will be subjected to more rigorous scrutiny.

In particular, the proper interaction between directors and other key service providers calls for closer review. At one point in the Weavering judgment, the Court did indicate that the directors were entitled to rely on the fund's administrator and auditor to use reasonable skill, care and professional judgment in (respectively) preparing financial statements and conducting audits of those statements. But it is not entirely clear what directors can safely rely on, if it is also "their duty to exercise an independent judgment in satisfying themselves that the financial statements do present fairly the fund's financial condition".

The judgment also stated, conversely to the proposition advanced above, that administrators and auditors "are entitled to rely upon the directors to perform their role". This begs a number of questions about the question of contribution and third party claims in situations where a number of actors are involved in the preparation, issue and approval of financial statements which turn out to be wrong.

These questions did not have to be addressed in the Weavering judgment, because there is no suggestion that the liquidators were also advancing claims against the administrator or and auditor; nor that the directors sought to join them in these proceedings. In future cases, clearer distinctions will need to be drawn between supervision of the process by which other service providers perform their functions and the content of what they produce as a result.

Finally, a word about the damages award: it was fixed by reference to the amount of irrecoverable redemption payments based on falsely inflated NAV calculations after the fund continued trading when the directors should have discovered the fraud and terminated its business. The judgment says nothing about why those redemption payments were irrecoverable, which is surprising when there are many cases ongoing (in Cayman and elsewhere) where 'clawback' claims are being made against investors who redeemed in similar circumstances

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions