The Cayman Islands Court of Appeal has dismissed the $111 million fine imposed on two directors who sat on the board of the failed Weavering Capital hedge fund in a decision that is likely to tarnish Cayman’s reputation on corporate governance standards.
This decision comes less than one month after Magnus Peterson, the former CEO of Weavering Capital, was jailed for 13 years in the UK for multiple counts of fraud and forgery, which facilitated losses of $530 million for investors. The directors of the fund were both related to Peterson and were found guilty in 2011 in the Cayman courts for wilful neglect or default of duties and fined $111 million each in what was considered a landmark case for corporate governance standards, or lack of.
The latest judgement ruled there had been insufficient evidence to suggest the directors had intentionally breached their fiduciary duties to the fund, although the judge ruled both men had failed to meet their duties. The court said both directors were entitled to an exemption of liability for errors made at the now defunct hedge fund. Weavering Capital went into administration in March 2009 when it failed to meet redemption requests. A probe subsequently revealed that the Weavering Macro Fixed Income Fund’s sole asset was a $637 million swap agreement with a company that was controlled by Weavering itself.
This judgement comes as the Cayman Islands seeks to bolster its regulation of corporate governance. The Directors Registration and Licensing Law required certain directors of Cayman Islands domiciled mutual funds and hedge funds to register with the Cayman Islands Monetary Authority (CIMA) by the end of 2014. Many experts in the industry had predicted this initiative would prove to be a precursor to a public database which would list the boards on which directors sat, although this is unlikely to materialise due to potential conflicts with Caymanian confidentiality laws.
Directors of mutual funds have increasingly been subjected to CIMA inspections and had to adhere to the Statement of Guidance issued by CIMA by January 2014. The guidance for regulated mutual funds outlined the minimum standards CIMA expected from mutual fund board directors, including independence, the necessary skill-sets, engagement with service providers and disclosure of any conflicts of interest.
Investor awareness of corporate governance has risen since the financial crisis with 71% of respondents telling a Carne Group survey in October 2013 that it had become a more important issue over the last four years. Eighty-three per-cent of investors said they would like fund boards to be comprised of a majority of independent directors and 62% stated it was essential to have an independent chairman to mitigate the risk of conflicts of interest and misdemeanours at the fund level.
In terms of corporate governance shortcomings, lack of independence and experience were cited as investors’ biggest concerns in the Carne Group study, with a number of respondents wanting directors to have greater expertise in risk management as opposed to a legal background. A study by CIMA in conjunction with Ernst & Young (EY) revealed just 11% felt corporate governance was fit for purpose and no single investor rated hedge fund governance standards as being outstanding. Seventy-one per-cent said major improvements needed to be made.