Weavering Capital (UK) Ltd ((in Liquidation)) and Another v Charanpreet Dabhia and Another
| Jurisdiction | England & Wales |
| Judge | Lord Justice McCombe,Lord Justice Moore-Bick,Master of the Rolls |
| Judgment Date | 15 February 2013 |
| Neutral Citation | [2013] EWCA Civ 71 |
| Docket Number | Case No: A3/2012/1625,A3/2012/1611(B),A3/2012/1625(B),A3/2012/1611 |
| Court | Court of Appeal (Civil Division) |
| Date | 15 February 2013 |
[2013] EWCA Civ 71
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
The Hon. Mrs Justice Proudman
HC09C01915
Royal Courts of Justice
Strand, London, WC2A 2LL
THE MASTER OF THE ROLLS
Lord Justice Moore-bick
and
Lord Justice Mccombe
Case No: A3/2012/1625,A3/2012/1611(B),A3/2012/1625(B),A3/2012/1611
Richard Mott (instructed by Brown Rudnick LLP) for the First Appellant
Katie Powell (instructed by Berrymans Lace Mawer) for the Second Appellant
Robert Anderson QC (instructed by Jones Day) for the Respondents
Hearing Date: 28 January 2013
(A) Introduction
This is an appeal, brought with the permission of the Judge herself, from the Order of Proudman J of 30 May 2012. By that Order judgment was given for the First Respondent ("WCUK") against each of the Appellants, jointly and severally inter se and jointly and severally with two other defendants in the action, for US$ 450,000,000 and costs. In the Second Appellant's case the costs order was restricted to 75% of WCUK's costs. It was further declared that the sums paid to the Appellants by WCUK by way of salary and bonuses were paid to them in breach of their fiduciary duties to WCUK and that the Appellants were liable to account to WCUK for those payments; directions were given for the taking of accounts. Appeal is now brought against those orders. The Respondents do not resist the appeal brought in respect of the Judge's order relating to the Appellants' salary and bonuses and it is agreed that the appeal should be allowed to that extent.
In the remainder of this judgment I shall call the First Appellant "Mr Dabhia" and the Second Appellant "Mr Platt". WCUK had gone into liquidation and the liquidators (appointed on 8 October 2009) were (together) called the Second Claimant in the action.
(B) Background Facts
The early history I summarise gratefully from the learned Judge's judgment.
Mr Dabhia and Mr Platt were respectively a director and a senior employee of WCUK which was incorporated in England and Wales in 1998. Each received substantial remuneration by way of salary and bonuses. Mr Magnus Peterson ("Mr Peterson") was the leading light in WCUK throughout its life and he and his wife, Mrs Amanda Peterson ("Mrs Peterson"), were also directors of WCUK. They were the First and Second Defendants in the action. They were found liable for the same losses. Neither has appealed against the Judge's order.
Shortly after the incorporation of WCUK, a company called Weavering Capital Fund Limited ("WCF") was incorporated in the British Virgin Islands. Its directors were Mr Peterson's brother, Mr Stefan Peterson, and his step-father, Mr Hans Ekstrom. In 2006 Mr Peterson replaced his brother as director of WCF. From incorporation until 2003 WCF carried on business as a hedge fund, managed by WCUK. Its trading was on the global interest rate markets. Its principal investor was yet another company, owned by Mr and Mrs Peterson and a Swedish investor. The judge found that at the times material to the action WCF was owned, and entirely controlled, by Mr Peterson. WCF suffered heavy losses and ceased significant trading in its own right in 1998.
From 2000, on the Judge's findings, Mr Peterson carried on another hedge fund business, again unsuccessfully, through a second company incorporated this time in the Bahamas, and managed by WCUK. On 2 April 2003, Mr Peterson procured the incorporation of Weavering Macro Fixed Income Fund Limited in the Cayman Islands to carry on a yet further hedge fund operation. It began trading on 11 August 2003. It was managed throughout by WCUK whose main executives were Mr and Mrs Peterson, Mr Dabhia and Mr Platt. In the course of its activities it attracted millions of dollars in investment from financial institutions, investment funds, pension funds, charities and wealthy individuals. It was the misfortunes of this company, known throughout as "the Macro", which led to the liquidation of WCUK and the inception of these proceedings by its liquidators.
The Macro's investment fund was presented to investors as a highly liquid fund invested principally in global fixed income and money markets in the UK and the rest of Europe, USA and Japan, and not exposing more than 20% of its gross assets to the solvency or creditworthiness of any one counterparty.
Mr Dabhia was initially a consultant for WCUK and became its full time employee in September 2003. He became a director of WCUK on 14 October 2004. His principal role in the company was marketing. He attended meetings with investors and prospective investors to discuss strategy, holdings and performance. He sent out marketing materials and "due diligence" questionnaires and dealt with queries from investors "usually, but not invariably" (per the Judge) after consultation with Mr Peterson. He did not question instructions or information given to him by Mr Peterson.
Mr Platt was the assistant investment manager to the Macro, second only to Mr Peterson. He had investment management authorisation from the Financial Services Authority ("FSA") and had authority to place orders on the Macro's behalf. He made trade decisions and was responsible for the day to day fund management of the Macro. He prepared and distributed to relevant persons much of the misleading or inaccurate material, reporting on the Macro's financial status from time to time, including Net Asset Value calculations ("NAVs"). He was not a director of WCUK, but the Judge found that Mr Peterson regarded him as his "right-hand man". Like Mr Dabhia he did not question instructions or information given to him by Mr Peterson.
As already mentioned, WCUK acted as investment adviser to, and manager of, the Macro under Investment Management Agreements of 31 July 2003 and 30 January 2007 and an Investment Advisory Agreement also of 30 January 2007. By clause 10.1 of the Investment Advisory Agreement of January 2007 WCUK agreed to indemnify the Macro against losses to and claims on the Macro arising from the fraud, negligence or wilful default of WCUK. Its liquidators accordingly received claims in respect of losses to the Macro in excess of US $530,000,000 and in the present proceedings sought indemnity from the various defendants, including Mr Dabhia and Mr Platt, in the face of WCUK's inability to meet such claims.
The reasons for the collapse of the Macro, and hence of WCUK, can be shortly stated.
The Macro traded in derivatives, financial instruments whose value derives from the values of underlying variables, such as a stock exchange price, exchange rates or interest rates. The Macro's trades were mainly in interest rate derivatives. Such derivatives can be traded on a public exchange, such as the London International Financial Futures and Options Exchange or "over the counter" ("OTC") arranged between individual parties to the transactions. As the Judge put it, the credit risk with an exchange-traded derivative is that the exchange's clearing house may fail. On the other hand, the risk with an OTC transaction is that the particular counterparty to the derivative instrument may fail.
The problem here was that when the Macro began to trade in August 2003 it swiftly began to make losses on exchange traded transactions, but through Mr Peterson's scheming, it sought to cover such losses by what seemed to be gains through OTC transactions. These transactions were initially forward rate agreements ("FRA"s) by which an agreed fixed interest rate is applied to a specified principal sum over a fixed period of time. However, the counterparty to these OTC transactions was WCF, by then merely a worthless company under the control of Mr Peterson. By March 2004, such OTC transactions represented nearly 40% of the fund's reported NAV. Thereafter, between February 2005 and February 2009, the Macro entered into 30 interest rate swap transactions with WCF as purported counterparty.
Following the collapse of Lehman Brothers in September 2008 the Macro began to receive a large number of requests from investors for redemption of their investments. The supposedly highly liquid Macro could not meet them and in March 2009 a well-known firm of accountants and financial experts was called in to advise. It was then discovered that the fund's largest reported assets consisted of four swap transactions with WCF as counterparty with a reported value of US$ 637 million. The Judge found, and this is not challenged, that these swaps were mere shams. The unpaid redemptions at March 2009 amounted to $260 million and could not be met.
Throughout the period in issue, as the Judge found, WCUK made a number of untruthful representations to investors in its Offering Memorandum, in 31 Due Diligence Questionnaires and other marketing materials, including weekly, monthly and annual portfolio summaries and risk reports. A number of these misrepresentations are quoted by the Judge in paragraphs 29 to 31 of her judgment. In summary, the documents presented to investors a picture of a low-risk, low volatility and high liquidity fund, invested principally in exchange-traded interest rate derivatives. These misrepresentations made over the trading period attracted continuing investments and enabled the fund to stay active until it collapsed under the weight of redemption demands...
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