The Grand Court of the Cayman Islands recently found two hedge fund managers of a now-defunct fund guilty of willful neglect their duties fining them $111 million each.
This case is significant because it's the first time in the context of a failed fund that the court has found two directors guilty of willful neglect or default in the discharge of their duties, HedgeWeek reported.
Long story short, they were fined for sitting on the board of their relative's hedge fund and doing nothing. They were empty suits who never attended a board meeting and signed documents without reading them, according to the Cayman Islands court judge who ruled on the case.
“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," said Shaun Folpp, a managing associate at Olgier Cayman who acted on behalf of the plaintiff.
Stefan Peterson and Hans Erkstrom were the directors slapped with that whopping fine, according a 37-page court document (Download PDF).
The hedge fund they managed was Weavering Macro Fixed Income Fund. The fund was founded by Swedish-born financier, Magnus Peterson, and incorporated in April 2003.
The fund collapsed in 2009 after the fund failed to meet investors redemption requests. PriceWaterhouseCoopers said it could only meet $90 million of the $223 million requests since November of 2008, The Telegraph reported.
It later became the subject of an investigation by the U.K.'s Serious Fraud Office (Yep. That's seriously the agency's name).
Weavering was domiciled in the Cayman Islands, but it was listed on the Irish Stock Exchange. Because it was listed on the Irish Stock Exchange the fund had to have two independent directors.
Both of the directors happened to be closely related to Magnus. Stefan is Magnus Peterson's younger brother and Erkstrom is their stepfather, the court documents said.
Prior to joining Weavering, Stefan was an employee at Storebrand Investments, a large insurance company. He was working in their Oslo, Norway offices as a portfolio manager for its credit hedge fund.
At the time of his appointment to Weavering, Erkstrom was 79 and he had retired from his position as the head of the Trustee Department for Skandinaviska Enskilda Banken for about 13 years. He was 85 when he handed evidence over to the court, the document showed.
While both of the men appeared to have the proper background experience on paper, the judge said in his ruling it's “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."
Apparently, the directors would sign over documents without really reading them. They also never asked for a written report or attended a board meeting while the hedge fund was still active, the judge said in the ruling.
That's why the liquidators sought damages from the directors.
From HedgeWeek:
The proceedings, brought by the Joint Official Liquidators of the failed investment fund, Weavering Macro Fixed Income Fund (the Fund), sought damages against each director flowing from their decision not to take any, or any meaningful, role in the business of the fund, and their decision to simply sign documents which were put before them, without applying their minds to their content.
“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 Folpp.
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