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NERA's Role in Weavering Macro Fixed Income Fund Limited (In Liquidation) and (1) Stefan Peterson (2) Hans Ekström
The Situation
The Weavering Macro Fixed Income Fund Limited (the "Macro Fund") was an open-ended hedge fund incorporated as an exempted company in the Cayman Islands. The Macro Fund collapsed in 2009 amidst allegations of fraud related to interest rate swap agreements between the Macro Fund and British Virgin Islands-based Weavering Capital Fund (WCF). These transactions were alleged to be fictitious and used to allegedly mask losses incurred on the fund's other trading.
The directors of the Macro Fund were Mr. Stefan Peterson and Mr. Hans Ekström. The liquidators of the Macro Fund sued the directors in a civil case brought before the Grand Court of the Cayman Islands - Financial Services Division. The liquidators claimed damages and/or compensation for loss caused by the directors' alleged breaches of duty (including breaches of fiduciary duty) in the exercise of their powers and the discharge of their duties as directors. Among the alleged breaches, the liquidators claimed that the directors took no action to inform themselves about the interest rate swap agreements, the counterparty to those transactions, and whether payments had been made or received when due.
NERA's Role
Former NERA Senior Vice President Dr. Chudozie Okongwu was retained to provide expert economic analysis on behalf of the Macro Fund's liquidators. Dr. Okongwu confirmed that the information provided in the quarterly reports to the directors could be used to determine the ascribed value of the interest rate swap transactions and the percentage of the Macro Fund's net assets attributable to those transactions. Dr. Okongwu's analysis demonstrated that the cash flows exchanged between the Macro Fund and WCF in relation to the interest rate swaps were not consistent with the economic value of the transactions. Dr. Okongwu also provided evidence that the valuations ascribed to the interest rate swaps did not take into account the counterparty risk associated with WCF and that the Macro Fund could have done so using a method such as a credit (counterparty) value adjustment ("CVA"). Dr. Okongwu's analysis included the application of a CVA to the Macro Fund's valuations of the interest rate swaps held as of December 2008. This analysis demonstrated that the valuation of the interest rate swaps would have been lower had the Macro Fund accounted for the counterparty risk associated with WCF.
The Result
On 26 August 2011, Justice Andrew Jones issued a judgment on behalf of the liquidators, concluding that the directors were guilty of willful neglect or default because they consciously chose not to perform their duties to the Macro Fund, or at least not in any meaningful way. Justice Jones awarded damages of $111 million against each of the directors.