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England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Weavering Capital (UK) Ltd & Anor v Peterson & Ors  EWHC 1480 (Ch) (30 May 2012)
Cite as:  EWHC 1480 (Ch)
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Strand, London, WC2A 2LL
B e f o r e :
| (1) WEAVERING CAPITAL (UK) LIMITED (in liquidation)
(2) GEOFFREY BOUCHIER and PAUL CLARK (liquidators)
|- and -
|(1) ULF MAGNUS MICHAEL PETERSON
(2) AMANDA DAWN PETERSON
(3) CAYMAN NATIONAL BANK AND TRUST COMPANY (ISLE OF MAN) LIMITED
(4) AB (5) CD (6) EF (7) GH
(8) MARKUS WALLIN
(9) CHARANPREET DABHIA
(10) EDWARD PLATT
The 1st, 9th and 10th Defendants (Mr Peterson, Mr Dabhia and Mr Platt) in person
Hearing dates: 17/18/19/20/21/24/25/26/27/28/31 October, 01/02/03/04/07/08/09/10/11/14/15/16/17/18 November, 05/06/08/09 December 2011 plus further written submission 01 February 2012
Crown Copyright ©
Mrs Justice Proudman :
"The key to the future of the firm lay in a fund of funds vehicle with low volatility," and that,
"..the firm's old investors were very, very upset and would be unlikely to be the source of future investments."
Three months later at a board meeting WCUK adopted a formal risk policy.
- Illiquid, unleveraged US Government-backed securities which were however subject to a repurchase agreement ("the GNMAs repo") such that they had no substantial value,
- $40m of net option positions and
- $600m of interest rate swaps of which WCF was the counterparty.
There were some $260m of unpaid redemptions.
Representations to investors
- the Macro would invest in fixed income markets "using bonds and money market instruments and their derivatives, primarily futures and options".
- the Macro would construct a portfolio so as "to ensure a balanced and diversified risk profile".
- the Macro would maintain a "rigorous" and "pro-active" approach to risk management "[i]n order to meet its commitment to capital appreciation".
- the Macro would endeavour to adhere to investment restrictions, such that "no more than 20% of the value of the Gross Assets of the Company…is exposed to the creditworthiness or solvency of any one counterparty". WCUK was obliged by the OM to monitor compliance with the 20% restriction and it was said that it would take immediate corrective action in the event of any breach.
- the Macro did not take "management control of the issuer of any of its underlying investments".
- the Macro adhered to the principle of diversification in the use of derivatives.
"investments may be made in unlisted securities (not quoted on an exchange) or over-the-counter ("OTC") contracts agreed on a case by case basis with a major bank counterparty."
- "The majority of the securities we trade are exchange traded, therefore valuation is very simple- LIFFE valuations are taken…",
- "There is currently one fund managed by the firm",
- "Portfolio concentration in terms of amount of instruments and exposure bias…: All positions are expressed through futures and options. N/A",
- "List the instrument types you use by percentage: Options: 75%/Futures: 25%",
- "We could liquidate our portfolio within 1 day; due to our option protection we would protect the overall portfolio within the predefined max loss limits [predefined as 5%]",
- "As all our investments are exchange traded we never have any pricing discrepancies",
- "Please describe any current or potential conflict of interest, any relationships which may affect trading, trading flexibility, e.g. associated broker/dealer: N/A",
- "Are investors informed when minor/major changes are made to the trading, money management, or risk control methods? Yes."
"we don't actually have anything in those any more because they are closed out. So it's the same view there, that we have taken, that we actually don't want to have anything else in this book than futures, options and cash…So the positions that you now see that we sent out, that is our exposure at the moment and they are all only expressed now in futures and options."
The Macro's swap holdings had a reported value for July 2008 of 77% of its reported NAV.
The Cayman Islands proceedings
The claimants' witnesses other than the investors and experts
The defendants' witnesses other than the expert
"If you are going to have an OTC instrument, it has to have a prior credit assessment, it has to have a credit approval and you have to have proper, I guess, ISDA documentation in place."
"The instruments we use for position taking are exchange traded futures and options.
We do not enter into any OTC instruments any longer to express our views, since we made a decision a year ago that from 2008 onwards we would not use any OTC products for new positions.
However we do have some interest rate swaps that have been on the Fund's books for several years. We are reducing this exposure on a monthly basis and have done so throughout 2008. We have also made sure that all exposures to banks are gone in these instruments.
Also, to clarify, we manage five funds within the Weavering Capital Group (incl. Sweden).
With one of them we hold interest rate swaps. That makes it a lot easier to reduce those positions in an orderly fashion.
An interest rate swap is equivalent to a strip of futures contracts and interest rate swaps are therefore priced straight off the futures curve.
The swaps are hedged in the futures and options markets so consequently as we reduce them we also have to take off the hedges. We are doing this in a an orderly way to minimise cost and our aim is to get the swaps off the Fund's books during this year."
"Peterson: Are your clients aware that when you invest in a hedge fund you don't ask for audited accounts, you consider the offering memorandum a bureaucratic document, you don't speak to the portfolio manager and you don't speak to the head of research, and you invest in the hedge fund; are they aware of that?
Bauman: They don't have to be aware of that."
Was a fraud perpetrated at all and, if so, were the swaps a sham?
"If there were a method by which I could sell $39m of option premium risklessly, I'd be doing it every day. It's just not credible that there was a method in place that was essentially a money machine that could guarantee hundreds of millions of dollars with no risk."
"I would be more inclined to credit that if the WCF had been employing such a strategy in a systematic fashion previously, prior to the demise of the Macro Fund. But in fact there was I think about a year when there was absolutely no trading and the trading that was engaged in didn't perform anything like this trading with the benefit of hindsight. As a matter of fact it was I think a loss of about 77%."
"[It] was more an understanding that we had between us and I felt I had his understanding for that and obviously he is more talking about here [in the evidence given to the Grand Court of the Cayman Islands] giving a direct power of attorney, almost, which he didn't."
"…it is the understanding from a position-taking point of view, if you like, that it is a strip of futures, and hedging the positions that way, it could have been clearer, I agree, but that is the sort of meaning behind it."
Again, it is not the subjective meaning of the words but how they were understood and intended to be understood. This is emphasised by the answer, "All positions are expressed through futures and options. N/A", to the request for "Portfolio concentration in terms of amount of instruments and exposure bias…"
"We are sent a document that has as its sort of main headings 'Exchange traded' in terms of CME and LIFFE and…that definitely sends investors on a path that says: we are looking at listed instruments.
There is nothing to say that the majority of the risk or the positions that constitute the fund that investors should be aware of are in something completely different to what we have been told.
…credit risk was by far and away the biggest risk and there is no mention of it in 45 risk reports that we were sent in the course of our investment. I think that is highly misleading."
"acts done or documents executed by the parties to the "sham" which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. But one thing, I think, is clear in legal principle, morality and the authorities (see Yorkshire Railway Wagon Co. v. Maclure and Stoneleigh Finance Ltd. v. Phillips), that for acts or documents to be a "sham," with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating."
Claims against Mr Peterson
"the care, skill and diligence that would be exercised by a reasonably diligent person with-
(a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and
(b) the general knowledge, skill and experience that the director has."
"A person who accepts the office of director of a particular company undertakes the responsibility of ensuring that he or she understands the nature of the duty a director is called upon to perform. That duty will vary according to the size and business of the particular company and the experience or skills that the director held himself or herself out to have in support of appointment to the office. None of this is novel. It turns upon the natural expectations and reliance placed by shareholders on the experience and skill of a particular director…The duty includes that of acting collectively to manage the company."
"…it was not part of my job to be aware of the specific underlying interest rate swap transactions. I was only aware of them in the general sense…"
Mrs Peterson's Part 20 claim against Mr Dabhia
- That his role in relation to investors and marketing meant that he should have been, but was not, fully aware of the trading strategy;
- That his statements to investors, and statements and promises made by others which he did not correct, seem to have been one of the means by which trading was able to continue, whereas Mrs Peterson had a minimal role in relation to investors;
- He had a role interacting with PNC and Ernst & Young, which Mrs Peterson did not;
- He worked full-time throughout the relevant period, which Mrs Peterson did not;
- He was party to discussions about the appropriateness of FRAs, including discussions as to positions being closed out without compensating payments.
- He represented to Natexis in a DDQ in 2004 that WCF had been closed down.
- In an email to Ermitage dated 11 September 2007 Mr Dabhia twice represented that all the Macro's instruments were exchange-traded.
- In March 2008 he replied to queries from an investor (Intesa SanPaolo SpA) which was concerned about "terms of margin financing, margin lockups, swap financing, repo arrangements and derivative intermediation facilities" in terms that questions about exposure to counterparty risk and ISDA termination rights were "N/A" and that the Macro ran a "very liquid exchange traded portfolio".
- In November 2007 (to AIG Inc), February 2008 (to Mirabaud & Cie) and May 2008 (to eHedge) he sent to investors what purported to be a full portfolio which did not mention the swaps.
- In an email to Natixis in September 2008 in response to a query about the identity of counterparties he stated baldly "we do not trade OTC transactions".
- Following the collapse of Lehman Brothers Mr Dabhia wrote to investors in October 2008 with the weekly performance estimate saying "I wanted to take this opportunity to give you some reassuring words in this current crisis" and claiming, "we will continue to trade exchange traded liquid investments".
- And as late as January 2009 Mr Dabhia was writing on Mr Peterson's instructions to eHedge which asked for "more colour on the 'fund' entity that you use for your OTC agreements as well as a more recent portfolio snapshot," claiming that the Macro, "trades liquid exchange traded instruments so pricing of such assets is derived from the exchanges rather than a counterparty".
"But that's a separate issue, isn't it? That's administrating the swaps, that's dealing with the paperwork which goes with it, which I've said to you on numerous occasions, for me that was a very – as much as they could be 300%, that was a small part of the job as far as I was concerned. Mr role was to come in and deal with the futures and options, and that was to monitor them and that took up pretty much all the time I was there, and then every now and again, if Magnus traded, I would try and put together the admin for that."
When asked about valuing the swaps he went on to say,
"At the time when I was there, doing my job, it was just a constant flow of doing this. So you go from doing that, to doing that, back to that. It wasn't like you're now looking back, saying: "this is what you did". I did do that. But it was part of- it was, to me a small part of the job and the monitoring and the futures and options and the amount of stuff that Magnus traded was incredibly hard to keep on top of."
Payment to Cayman National Bank and Trust Company (Isle of Man) Limited ("CNB") as trustee of the Weavering Capital Employee Retention Trust ("the ERT")
- WCUK entered administration and thereafter liquidation within the meaning of s. 238 (1),
- The ERT payment was a transaction at an undervalue within the meaning of s. 238 (4) since no consideration was given for it,
- The ERT payment was made at a relevant time for the purposes of s. 240 (2) since it was made on 27 October 2008, that is to say within the period of six months ending with the entry of WCUK into insolvency by the filing of the notice of appointment on 19 March 2009 under paragraph 22 of Schedule B1 to the 1986 Act.
"(a) that the company which entered into the transaction did so in good faith and for the purpose of carrying on its business, and
(b) that at the time it did so there were reasonable grounds for believing that the transaction would benefit the company."
Payments to an account at EFG Bank SA ("EFG Bank")
Mr Peterson's director's loan
Payments by Mr Peterson out of assets he held personally in February and March 2009
- £181,227.80 on 2nd February 2009 to discharge Mr and Mrs Peterson's joint mortgage liability on their home in Maidstone. The claimants contend this constituted a transfer of £90,613.90 to Mrs Peterson.
- £25,000 on 10th February 2009 to a builder for building works on that property. The claimants contend this was a transfer of £12,500 for the benefit of Mrs Peterson.
- £24,719 on 11th February 2009 to discharge a mortgage on a flat in Mrs Peterson's sole ownership.
- Payments on 9th and 10th March 2009 to Mr Peterson's son of about £120,000.
- Payments on 10th March 2009 of £100,000 each to the innocent gift recipients.
- A further £85,000 (in aggregate) to the innocent gift recipients between 9th February 2009 and 12th March 2009.
"if he makes a gift to the other person or he otherwise enters into a transaction with the other on terms that provide for him to receive no consideration"
"he enters into a transaction with the other for a consideration the value of which…is significantly less than the value…of the consideration provided by himself."
"that it was entered into by him for the purpose- (a) of putting assets beyond the reach of a person who is making, or may at any time make, a claim against him, or (b) of otherwise prejudicing the interests of such a person in relation to the claim which he is making or may make".
Recovery of salary, bonuses and benefits