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 Jeremy Walton

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.

Jeremy Walton
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 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
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.