England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		30 May 2012

Mrs Justice Proudman :

1. This is a claim by Weavering Capital (UK) Ltd ("WCUK") and its liquidators (who seek relief under the Insolvency Act 1986 ("the 1986 Act")) against personnel involved in the running of WCUK. The claimants are represented by leading and junior counsel, Mr Anderson QC and Mr Richards. The action relates to investment advice given to, and management of, a Cayman Islands hedge fund, Weavering Macro Fixed Income Fund ("the Macro"). There is a claim in fraud against the first defendant, Mr Magnus Peterson ("Mr Peterson"), the Chief Executive and Managing Director of WCUK. There is also a claim in fraud against the tenth defendant, Mr Edward Platt ("Mr Platt") who, although not a director of WCUK was a senior and highly paid employee. These claims are particularly serious as both Mr Peterson and Mr Platt appear in person. The second defendant ("Mrs Peterson") is Mr Peterson's wife. She was also a director of WCUK. She is represented by solicitors and Mr Aldridge of counsel. Fraud is not alleged against her but it is said that she negligently permitted the alleged fraud to happen. The same is alleged against the ninth defendant, Charanpreet ('Chas') Dabhia ("Mr Dabhia"), another director. Although the claimants do not allege fraud against Mr Dabhia, Mr Peterson has joined him as a third party and does allege fraud in that claim. Mrs Peterson makes a Part 20 claim against Mr Dabhia for a contribution. Again, Mr Dabhia appears in person.
2. There are also outstanding claims against the third to the seventh defendants, recipients of transfers made by Mr Peterson and by WCUK on the authority of Mr and Mrs Peterson. The third defendant is an Isle of Man corporate trustee which, having obtained directions from the Court in the Isle of Man, is content to abide by the decision of the court. Mr Aldridge also holds a brief for the fourth to seventh defendants, known as 'the innocent gift recipients'. The claim has been settled against another recipient of funds, the eighth defendant.
3. Mr Peterson, Mr Dabhia and in particular Mr Platt have expressed bitterness about who is and who is not being sued and who is and who is not alleged to have been fraudulent, claiming that the claimants' selection of defendants is arbitrary in this regard. However I have to consider the claims as pleaded.

Background

4. Mr Peterson started work with a major Swedish bank in Gothenberg as an interest rate and foreign exchange trader. In 1989 he moved to the bank's London office, where he met his future wife, Mrs Peterson. In 1995 he became the bank's Global Head of Proprietary Trading. In or about 1995 he and Mrs Peterson both moved to R J O'Brien and Associates London, an independent US futures brokerage firm.
5. WCUK was incorporated in England in 1998. Mr Peterson left R J O'Brien to set it up; he was its founder and it was established as a family business. Mrs Peterson joined WCUK as Head of Trading Execution in 1999 but remained with R J O'Brien until 2000 when she became a director of WCUK. At all material times Mr Peterson was a director of WCUK, its chief executive officer and principal investment manager. Mr James Stewart had worked with Mr Peterson at the Swedish bank, and he became WCUK's Chief Economist. He was a director of WCUK from January 2009.
6. A few months after WCUK was incorporated, Weavering Capital Fund Limited ("WCF") was incorporated in the British Virgin Islands. Its directors were Mr Peterson's stepfather, Mr Hans Ekstrom, and, until 2006, his brother Mr Stefan Peterson. In 2006 Mr Peterson himself became a director of WCF in lieu of his brother. At all material times Mr Peterson was a shareholder in WCF and, from 2008 when WCUK relinquished its shareholding, he and Mrs Peterson between them had the majority shareholding. From incorporation until 2003 WCF carried on business as a hedge fund and at all material times it was managed by WCUK.
7. The original plan was that WCF would trade in global interest rate markets on the basis of themes generated by Mr Stewart. The principal investors in WCF were Magnumhold Limited ("Magnumhold"), a private investment vehicle owned by Mr and Mrs Peterson, and a Swedish investor. However WCF suffered heavy losses in the autumn of 1998 and ceased to carry on any significant trading. In August 2003 it became the counterparty to over the counter ("OTC") transactions with the Macro. By that stage it had ceased to have any external investors and it had no administrator and no auditors. It is admitted on the pleadings that it had become a private investment vehicle for Mr and Mrs Peterson. I find that at all material times WCF was majority owned, and entirely controlled, by Mr Peterson.
8. In March 2000 Mr Peterson caused another company called Weavering Capital Fund Limited ("Weavering Bahamas") to be incorporated, this time in the Bahamas. It carried on business as a hedge fund and it too was managed by WCUK. Weavering Bahamas, like WCF before it, adopted a high risk volatile investment strategy. It suffered heavy losses following the 9/11 attacks in 2001.
9. On 5^th November 2002 it was noted at a WCUK Board meeting that,

"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.

10. On 2^nd April 2003 Mr Peterson caused the Macro to be incorporated. Mr Ekstrom and Mr Stefan Peterson were the directors of the Macro and it began trading on 11^th August 2003. Unlike the earlier hedge funds, it was said to be intended to achieve a low risk and a more secure return. It was launched on the Irish Stock Exchange on 4^th August 2003. It attracted millions of dollars in investment from financial institutions, funds of funds, pension schemes, charities and high net worth individuals. Its reported assets under management increased from $27m in December 2004 to $583m in December 2008.
11. Mr Dabhia had recently joined WCUK as a consultant and from September 2003 he became a full time employee of WCUK. He became a director of WCUK on 14 October 2004. He attended meetings with investors and prospective investors to discuss the Macro's strategy, holdings and performance, he sent out marketing materials and due diligence questionnaires and he dealt with queries from investors, usually, but not invariably, after consultation with Mr Peterson.
12. PNC Global Investment Servicing (Europe) Limited (at that stage known as 'PFPC' but which for convenience sake I shall throughout call "PNC") became the Macro's Administrator. For fiscal reasons which proved unsuccessful, another Weavering Company, Weavering Capital Management Limited, ("WCM") was appointed to act as investment manager of the Macro from 30^th January 2007. However as WCM delegated to WCUK its functions of advising and managing the Macro, and as the management fees were paid to WCUK, the involvement of WCM can be ignored for present purposes.
13. From 1998 another Weavering company had been appointed to act as investment manager of WCF but, again, that company had, from 1998, appointed WCUK to act as its investment adviser.
14. Thus WCUK acted as investment adviser to, and managed, both the Macro and WCF. The Investment Management Agreement dated 31st July 2003 made between WCUK and the Macro required WCUK to manage the Macro "with a view to achieving the then current investment objectives of the Fund as laid down from time to time by its Directors." Clauses 3.1 and 5.1 of WCUK's Investment Advisory Agreement with WCM and the Macro (dated 30 January 2007, which took over from the 2003 Agreement) obliged WCUK to provide investment advisory services in accordance with the investment objectives and policies and subject to the investment restrictions described in the Offering Memorandum.
15. Managers of hedge funds use particular trading strategies with the specific aim of reducing market risks to produce risk-adjusted returns, which are consistent with investors' desired level of risk. The case turns on the distinction between OTC transactions and exchange-traded transactions. The terms of exchange-traded derivatives are defined by the exchange on which they are traded. OTC derivatives, by contrast, are concluded bilaterally and their terms are negotiated between the parties to the transaction. Futures are always exchange-traded; options may be either exchange-traded or traded OTC. Forward Rate Agreements ("FRAs") and Interest Rate Swaps ("swaps") are traded OTC and may be customised by the parties.
16. The credit or counterparty risk with an exchange-traded derivative is that the exchange's clearing house may fail. The credit or counterparty risk with an OTC is that the particular counterparty to the instrument may fail. It follows that the credit-worthiness of the counterparty to an OTC transaction is vitally important although credit risk may be limited by requirements to deposit collateral or "margin".
17. Exchange-traded derivatives are settled at the exchange; payment for OTCs depends on the terms of the trade. Thus it is possible for real losses suffered in exchange trading to be offset by apparent gains earned through OTC transactions and that is what the claimants allege happened in this case.
18. The Macro's first day of trading was 11^th August 2003 with $539k of assets under management. By 28 August 2003 19.3% of the assets by value were lost in exchange trading. However, within the month, Mr Peterson had caused the Macro to enter into transactions with WCF, namely two OTC options on FRAs, as a result of which the 19.3% loss is recorded as becoming a 3.2% profit. It is noteworthy that these transactions, entered into after the end of the month but attributed to that month, had the paper effect of converting the loss that had been suffered in exchange-trading into a profit allowing the Macro to post a net asset value ("NAV") of 1.34% for the first month's trading. The fact that these transactions were posted after the purported date they bear is evident from the fact that it was not until Monday 1 September 2003 that Mr Peterson, by a facsimile timed at 11.26 pm, faxed the trade tickets from his home fax machine to WCUK's offices. The following day Mr Platt sent the tickets to PNC which calculated the NAV accordingly.
19. Until at any rate November 2005 PNC thought that the valuation was being undertaken by MAN Valuation Services Limited, rather than by Mr Platt on his own. Thereafter, PNC seems to have taken Mr Platt's figures on trust, albeit subject to some checks, until the autumn of 2007 when a valuation was obtained from Markit Group Limited ("Markit") a financial information services company specialising in valuation. There is no evidence to show that PNC knew of the irregularities with the swap confirmation tickets to which I shall refer.
20. Over the course of 2004, Mr Peterson caused the Macro to enter into thirteen further OTC trades in FRAs with WCF. In October 2003 and January 2004 the documents show a similar pattern to that of August 2003 of transformation of a potential loss to a sudden end-of-month increase in the Macro's NAV.
21. In March 2004 the Macro's FRA holdings represented almost 40% of its reported NAV. On 5^th April 2004, Mr Duffy of PNC emailed WCUK asking for an explanation of these holdings and noting that they were being "executed with a related party Weavering Capital Fund". Mr Peterson responded the same day, saying that he intended "to dramatically reduce" the Fund's exposure to WCF so that "the issue will disappear and everything will be expressed as 'on exchange' exposure." Nevertheless the Macro retained FRA holdings through WCF until December 2004.
22. On 17 February 2005 there was a change of tack. The Macro entered into a swap transaction with WCF, the first of 30 opened before 18 February 2009. The position at 17 February 2005 had an attributed value of over £21m.
23. The Macro appeared to investors to be a great success. But in the uncertain market conditions following the collapse of Lehman Brothers in September 2008, the Macro experienced a very high volume of redemption requests which it was unable to meet. In March 2009 PricewaterhouseCoopers LLP ("PwC") were called in, Mr Dabhia says largely at his prompting, with a view to assisting the Macro with its liquidity problems. PwC soon discovered that the Macro had four current interest rate swaps with a reported value of $637m, and that the counterparty to the swaps was WCF. On 3^rd March 2009 the Macro's portfolio consisted of:

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.

24. The claimants contend that there was massive exposure to an un-creditworthy related party as the swaps could have been worth no more to the Macro than the assets of WCF available for distribution.
25. Mr Peterson said that WCF had assets worth about £77m; PwC determined that its actual value was very much lower and his valuation of some of the assets was so grossly over-inflated as to be absurd. For example, WCF's stake in a music video company was valued at $37.25m, although the company's balance sheet for the year in question showed net liabilities of some £50k which increased the following year to £100k. WCF had paid £50 for its investment. Magnumhold's investment of £25 in the same company was valued at par. Money was invested in other idiosyncratic ventures, such as a failed stage musical, to which grossly over-optimistic values were similarly attached.
26. When PwC discovered the other 29 swaps that had purportedly been concluded, the Macro was placed into liquidation and WCUK into administration and thereafter into liquidation.

Representations to investors

27. I was referred over a considerable period of time to, and the witnesses were cross-examined on, various documents prepared by WCUK which are alleged to have constituted false representations to investors. One, the Macro's offering memorandum ("OM"), two, due diligence questionnaires ("DDQs") as to investment (some in common form and some in response to questions posed by individual investors), three, other marketing materials and four, weekly, monthly and annual portfolio summaries and risk reports.
28. The Macro was marketed in its OM (there are 5 versions in the court bundles but for present purposes there is no distinction between them) which formed the contractual basis for the investors' applications to invest.
29. The OM described the Macro as "designed to permit investors to participate in a professionally managed global fixed income portfolio", effecting "capital appreciation by producing long-term risk adjusted returns in excess of those available from investment in traditional financial assets". The investment strategy was said to be that,

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.

30. The OM also stated under the heading "Risk of Special Techniques",

"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."

31. There were 31 forms of DDQs. They contained the following statements,

"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."

32. Documents were sent to investors purporting to set out the overall investment position ("a full breakdown of positions", "all the positions") of the Macro. They contained no reference to the swaps. A factsheet was sent to investors and potential investors confirming that the Macro invested in "primarily futures and options" and in which the investment strategy was described by reference to futures and options alone. A strategy document of November 2008 asserted that "we have traded very little in OTC instruments", although at that time swaps accounted for 91.31% of the reported NAV.
33. WCUK also produced a 'toolbox', monthly performance summaries, annual reviews and weekly risk reports for the Macro. The purpose of the weekly risk reports was said in the DDQs to be "to give clients a summary of the portfolio". However none of such reports disclosed the existence of the swaps; they were confined to accounts of the exchange-traded futures and options. NAV, calculated or verified by PNC as independent administrator, did however include the swap values.
34. I was taken to a number of examples of answers given by Mr Peterson to questions posed by investors at meetings.
35. Thus on 1 April 2005 Mr Peterson was questioned by Natexis (later re-named Natixis) about the propriety of the Macro's entry into an FRA OTC instrument with WCF. Mr Peterson stated that he regretted recourse to such a procedure and would never do it again. In fact he had already caused the Macro to enter into OTC swap transactions with WCF which would continue until collapse of the Macro.
36. On 25 September 2007, Mr Peterson had a dialogue with a representative of Wassum AB, an assets management company. Mr Peterson said that he usually traded in exchange-traded securities, and tried to avoid OTC instruments. By that stage however the swap holdings represented 92% of the Macro's NAV and it had exceeded 70% for over a year.
37. In a recorded conference call on 26 March 2008, Mr Peterson told Ermitage, another assets management company, that the Macro had "very liquid underlyings" and "would always use exchange traded options rather than OTC". At that time the swap holdings represented more than 60% of the Macro's NAV.
38. In a recorded conference call with representatives of the VIC Fund on 17 July 2008, Mr Peterson was asked about the swap recorded on the Macro's last financial statements. His reply was,

"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.

39. In September 2008 both Mr Dabhia and Mr Peterson participated in a telephone conversation with Mr Newman of Optima (Asset Management) in which he was told in terms, evidently without correction, that the entire portfolio could be liquidated in a day.

The Cayman Islands proceedings

40. As I have said, Mr Ekstrom and Mr Stefan Peterson were directors of both the Macro and WCF, although in 2006 Mr Peterson replaced his brother as a director of WCF. It seems that they were both aware that the Macro was engaging in swap transactions although both say that they did not learn the identity of the counterparty until 5 March 2009 when they were told by PNC. Correspondence between Mr Peterson and Mr Ekstrom in 2009 shows that the latter (who was by then in his 80s) had forgotten about the existence of WCF and had only a vague understanding of trading in swaps.
41. Neither Mr Ekstrom nor Mr Stefan Peterson was called as a witness in this present action. They reside out of the jurisdiction of this court and in all the circumstances the claimants did not want to call them, relying instead on what they said under oath in the Cayman Islands proceedings (for which see below) and in correspondence. The defendants did not seek to call them either. On the basis of the evidence that I did see and hear I find there to be no doubt but that Mr Peterson operated both the Macro and WCF on his stepfather's and brother's behalf and that Mr Ekstrom had little or no understanding or knowledge of what was happening. Mr Peterson admits to signing his stepfather's name, when PNC asked for signed confirmation of the value of the swaps, and to signing the names of both Mr Ekstrom and Mr Stefan Peterson on an International Swaps and Derivatives Association ("ISDA") Master Agreement, a necessary supporting document for the swaps. He claims that he had their authority to do so but they have both denied this and, as I have said, he did not call them as witnesses.
42. The Macro's liquidators brought proceedings against Mr Ekstrom and Mr Stefan Peterson in the Grand Court of the Cayman Islands. On 26 August 2011 Mr Justice Andrew Jones gave judgment against each of them in the sum of US$ 111m for wilful neglect or default of their duties as directors of the Macro. He held in a detailed judgment that they had failed to detect that Mr Peterson had "dishonestly manipulated the Macro Fund's balance sheet and defrauded its investors."

The SFO

43. In September 2011 the Serious Fraud Office however dropped its investigation into alleged fraud by Mr Peterson in the Weavering companies, owing to lack of evidence, on the ground that there was "no reasonable prospect of conviction".

The witnesses

44. I propose to deal with my general impressions of the witnesses in turn.

The claimants' witnesses other than the investors and experts

45. First, the professionals on the claimants' side involved after 3^rd March 2009, Mr Bouchier, Mr Stokoe and Mr Levy. Their evidence was largely unchallenged and palpably honest. However their evidence dealt mainly with matters occurring after the relevant times and was not crucial to the issues I have to decide. Then there were Mr Stewart and Mr Hemmant, the latter of HedgeStart Partners LLP which acted as WCUK's compliance consultant from October 2005. Their evidence was challenged, particularly on the question of whether they knew of the swaps and of the identity of the counterparty. They maintained they did not, although at one point Mr Hemmant was driven to accept that it did seem likely that he was aware that OTC trades were happening. The focus of the evidence however moved away from this issue.

The defendants' witnesses other than the expert

46. I turn to the defendants' witnesses. First, Mr Peterson. He was described as having a charismatic personality. There is little doubt that he was regarded as having exceptional flair. Having heard his evidence, it seemed to me that he had an answer for everything but that most of his answers depended on an exceptionally plausible manner rooted in his own confidence in himself. He was very persuasive and had a way of explaining his investment strategy as though it was simultaneously very simple and understandable only to himself. He was not at all arrogant in manner but his whole attitude to investment was an arrogant one. He genuinely seemed to believe that if the issue of investment were left to him he could turn anything round through creative investment policy. Everything depended on his own private view of how things should be done. However this is irrelevant if he did not tell his investors what he was actually doing and was, as I inelegantly put it to him, flying by the seat of his pants. As Mr Anderson put it, this is a world away from the structured, solid and low-risk strategy indicated in the OM.
47. Some persons with exceptional financial ability prefer to work in their own companies where matters are not so carefully monitored and their flair can be given free rein; however, that kind of small organisation can allow practices to arise in which the person concerned has complete faith in his or her ability to (in effect) gamble back their losses on the markets. I accept that the reputation of an organisation depends on the skill of its individuals; however it would seem that the fortunes of WCUK were entirely dependent on what was in Mr Peterson's head.
48. His character does I think go some way to answering the points Mr Aldridge made as to the claim in dishonesty against him. Mr Aldridge's submissions were premised on the assumption that even if there had been a fraud by Mr Peterson, Mrs Peterson was not liable. He did not make a positive case that there had not been a fraud. However, as it were in parenthesis, he observed that there were some odd features of the fraud claim with which the claimants had failed to grapple. First, why would Mr Peterson go out of his way to trade fraudulently when, if he had simply backed Mr Stewart's researches, the Macro would have been profitable? Secondly, why (until at any rate some date in 2009, and ignoring the commission made for managing the Macro) did Mr Peterson not seek to take advantage of his alleged fraud by removing large sums of money for his own purposes? Thirdly, why did he not take steps to rename WCF so that it was not so obviously related to WCUK? Fourthly, why did he choose such reputable advisers as PNC, Ernst & Young and HedgeStart, who might have been expected to detect anything untoward? It seems to me that all this ignores the fact that if there was indeed a fraud it may not have been the sort of fraud committed primarily for personal financial gain. It would have been committed out of a sense of invincibility, self-belief, and a gambler's mentality.
49. I believe that Mr Peterson was genuinely exasperated with Mr Dabhia's evidence as he considered that Mr Dabhia knew very well what was being done and to the extent that he did not he was incompetent. His attitude to Mr Platt was more forgiving; it was evident that he regarded Mr Platt as unfairly being sued for fraud and he did not cross-examine him at all aggressively.
50. Secondly, Mrs Peterson. She continues to live in harmony with Mr Peterson as his wife but in court distanced herself from him physically as well as legally. He was unrepresented but she had solicitors and counsel. It became evident at an early stage that she would always have approved her husband's investment strategy. Understandably on a human level, she cannot acknowledge any wrongdoing by Mr Peterson. He is a good husband (and indeed father) and there is no issue between husband and wife in the proceedings.
51. Mrs Peterson's replies to questions in cross-examination demonstrated that she is a very clever woman and one with significant knowledge and understanding of derivatives. Although she has always been a trader rather than a formulator of policy or strategy she well understood at a sophisticated level the differences between exchange-trading and trading OTC, questions relating to the liquidity of the interest rate swap market, practices as to the trading and valuation of swaps, the relevance and customisation of ISDA documentation and the significance of credit risk as a feature of OTC transactions. She specifically said that she was aware of the importance of accounts and gave evidence that she would scrutinise accounts and the information to be supplied to the auditors. She accepted that she would compile the trade blotters for PNC on the basis of the swap tickets and also the 'bible', a spreadsheet of any transaction executed by WCUK. She would therefore be aware of all the trades that were (or were not) being executed, both for the Macro and for WCF. She was aware of WCUK's risk policy, and gave evidence that,

"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."

52. Mrs Peterson was at pains to point out that she started in 'the back office' at the Swedish bank. I note however that she graduated to the middle office in 1987 and by 1989 had graduated to a front office trading role. At R J O'Brien she had a front-office role, marketing and executing exchange-traded trading strategies.
53. She consistently denied liability on the basis that all relevant matters fell outside her specific area of responsibility. She spent time away from her desk on maternity leave during two significant periods (from May 2005 to May 2006 and from July 2008) and she proved beyond doubt that some of the emails which purported to emanate from her did not do so but were simply sent from her computer. I keep in mind that although she was at all material times a director of WCUK her speciality was trading in futures and options and she was never a director of the Macro.
54. Thirdly, Mr Dabhia. On 6^th March 2009 Mr Dabhia told Mr Levy that he had not known that WCF was the counterparty to the swaps and he adhered to this account at trial.
55. However his claim that he thought the counterparty to the swaps was ADM Investor Services International Limited ("ADM"), the Macro's clearing broker for exchange-traded futures and options trades, was little short of risible and he acquitted himself badly in cross-examination on that issue. Several of the documents which he read should have disabused him of the notion, he could not reasonably have thought the swaps were with ADM after November 2005, he was present at discussions with Corazon at which there was mention of the ISDA Master Agreement which envisaged trading with WCF, he was party to discussions about obtaining swap confirmations, if he really thought ADM was the counterparty he would, when redemption requests started to come in, have investigated the question why ADM did not pay up so as to satisfy them, he received Board Packs (although he said he was only a postbox in relation to them) and he was given answers by Mr Peterson to give to the Macro's investor eHedge in relation to discussions which raised the question of the swaps being with a connected counterparty.
56. On the other hand, Mr Milroy of Corazon was given to understand that ADM was the counterparty at a meeting with Mr Peterson on 10 October 2005. Further, since ADM was described on PNC's schedule of investments as the custodian, even Mr Levy believed at first that it was the counterparty. It is notable that when a schedule of investments was supplied to ADM it contained a reference to the Skandinaviska Enskilda Banken as custodian, a prevarication on Mr Peterson's part since ADM would of course have known that it was not itself the custodian or counterparty.
57. On 5 March 2009 Mr Dabhia was sent an email which in terms identified WCF as the counterparty. He said, and it may well be true, that by this stage he was swamped by redemption requests and had no time for reflection.
58. I accept that Mr Dabhia admired, looked up to and relied on Mr Peterson absolutely, taking everything he said on trust. There are many emails from Mr Peterson to Mr Dabhia similar to one of 11 November 2008, "If they [eHedge] come back on OTC, counterparty risk etc. let me help you answer…", and of 5 January 2009, "We need to deal with this" (Dabhia), "I will start working on it today…" (Peterson). When he did deal with it, Mr Peterson wrote to Mr Dabhia, in terms which suggest that Mr Dabhia did not know any different,

"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."

59. Very many, although not all, of Mr Dabhia's communications with investors were dictated by Mr Peterson, and I accept that Mr Dabhia took his lead from his superior.
60. As Mr Aldridge was at pains to extract from the witnesses, there was no culture of bullying or repression at WCUK. But there was quite plainly a culture of awe. Mr Peterson dominated the WCUK offices; his word was invariably accepted and on the strategy side everyone acted in accordance with his instructions.
61. I conclude that Mr Dabhia did not think through what he was actually doing for much of the time and referred virtually all queries about strategy upwards. He had no coherent answer as to why he had felt able to make the very many representations to investors in the DDQs, in emails and face to face, when he ought to have known that those representations were false or misleading, other than to repeat that this was what he had been given to believe by Mr Peterson and he did believe and trust him implicitly, always following his lead.
62. Mr Aldridge submitted that Mr Dabhia's representations made sense on the basis that Mr Dabhia knew that WCF was the counterparty: Mr Dabhia thought that a 'tame' counterparty would enable the swaps to be closed out in a matter of hours. However, I believe the truth is more prosaic and that Mr Dabhia simply did not address the issue of the counterparty. He did not have a trading background and his grasp of what was going on was foggy. He should not have been given responsibility for the DDQs. He himself says that he now wonders why he was picked as a director within less than a year of joining WCUK, "given my age [27] and experience".
63. He seems therefore to accept, and I find, that he was over-promoted and out of his depth. While I find that at one stage he did believe that ADM was the counterparty he soon realised that it was not; but he had only the vaguest notion of what the position was and ought to have been. He did not in fact realise that WCF was the counterparty although at the very least he should have realised that the counterparty was related to WCUK and to Mr Peterson. I accept that when he said to Mr Stewart, "It's just one big fucking swap. Not only that it is with a related party", he was genuinely shocked at the seriousness of the situation; the full reality of what had happened and what Mr Peterson was doing was borne in on him for the first time. I also accept his evidence that this was the reason he called in PwC for help.
64. Mr Platt was not at any time a director of WCUK but was a highly paid employee and Mr Peterson regarded him as his right-hand man. At one point I asked Mr Peterson what would have happened to his trading strategy if something had happened to him; his reply was that he would have relied on Mr Platt to carry out his wishes. Mr Platt's evidence was that he did what he was told to do by Mr Peterson. Like Mr Dabhia, he did not apparently question his instructions. On one occasion Mr Platt reviewed a position statement with Mr Hora of Signet but did not think to tell Mr Hora of the swaps. He justified this on the basis that his job was as a trader in exchange traded instruments only and that was all he was addressing. Mr Platt's grasp of what was going on was blinkered; he regarded his role as confined to options and futures trading and he relied on Mr Peterson's expertise in relation to OTC trades. He too was blinded by his faith in Mr Peterson. His constant theme was that he was lacking in relevant experience and simply followed orders.
65. At one stage Mr Platt asserted that it was an almost universal, and certainly an appropriate, practice to sign documents in the names of others. It is true that Mr Platt only apparently did so once, it was an occasion when WCUK was under pressure, the document was similar to an existing one and he knew that Mr Peterson routinely signed in the name of Mr Ekstrom. However, even if I were to agree (which I do not) that there may be circumstances when it is morally acceptable to imitate someone else's signature, Mr Platt was aware that PNC and Ernst & Young had specified the particular requirement that directors of WCF should sign the relevant documentation. He was also aware that this requirement was imposed because PNC and Ernst & Young wanted to be assured of those directors' knowledge and approval. In such circumstances there could be no justification for Mr Platt signing a document with an imitation of Mr Ekstrom's signature.
66. That said, I take account of the fact that Mr Platt insists he did nothing wrong because he says that Mr Peterson told him that he, Mr Peterson, had Mr Ekstrom's consent to sign in his name. I do not believe that any such statement was expressly made by Mr Peterson although there was undoubtedly an assumption in WCUK's offices, encouraged by Mr Peterson, that he could do what he liked in relation to both WCUK and WCF. Mr Platt's attitude to Mr Peterson was, and seemingly still is, in this as in all matters, one of blind trust.
67. Mr Anderson submitted that as Mr Platt had regular meetings with Mr Peterson in an office with the door closed I ought to infer that the subject of discussion was fraud and the swaps. However this is a leap too far. Mr Platt was another case, like Mr Dabhia, of over-promotion. Both men were good at mechanical tasks and had flair on the trading and marketing side, but neither had any real understanding of, or indeed interest in, strategy.

Investors

68. I also heard evidence from several representatives on behalf of companies which had invested in the Macro: Mr Bauman, the Managing Partner of Cayros Capital AG, Mr Jonsson, the Head of Manager Research at Wassum AB, Mr Milroy, Joint Managing Director and Chief Investment Officer of Corazon Capital Group Limited, Mr Wauton, Chief Investment Officer of Ermitage Asset Management Jersey Limited and Dr Umansky, Chief Investment Officer and Co-head of Investment Management of Signet Capital Management Limited.
69. Mr Peterson complained that these witnesses were selected by the claimants and possibly unrepresentative of the investors as a whole. However, he did not choose to call any other investors himself, and the evidence of these witnesses, to the effect that they were misled by what they were told and would not have invested if they had known the truth, tallied with the supporting documentation.
70. None of the investors admitted even to reading the accounts of the Macro, let alone to applying any form of analysis to them. The witnesses all seemed surprised when Mr Aldridge asked them whether they had had any claims intimated against them, although Mr Bauman admitted that he had "to explain a lot".
71. Some matters were extremely surprising and understandably the defendants made much of them. One was that although PNC and Ernst & Young were aware of the composition of the Macro and of the fact that the swaps were with a related party, neither appears to have queried these matters in any detail- at least, in the case of PNC, since Mr Duffy left PNC having written the email of 5^th April 2004 expressing concerns and having received reassurance from Mr Peterson. PNC as administrator had the primary duty independently to value the investments of the Macro on a monthly basis. It is notable that all the investors were keen to be reassured that there was an independent valuation by an independent administrator.
72. Another surprising thing was that investors gave consistent evidence that it was not at the time customary to call for accounts of funds in which they were to invest, and in circumstances where accounts were supplied, it was not customary to read them with a view to ascertaining the composition of the funds for investment purposes. The Macro's accounts were publicly available and I accept the defendants' evidence that accounts would in any event have been supplied on request. In some cases accounts were supplied but were simply sent by the recipient to an operational due diligence department within the organisation rather than remaining with those making investment decisions. If the accounts had been even briefly perused in the present context the investors could not but have noticed the huge amount by value of swaps, although the identity of the counterparty was not disclosed.
73. I was told that at the relevant time it was the invariable practice in the industry to rely on trust rather than investigation, even such a basic investigation as scrutinising published accounts. This was notwithstanding the fact that the investors were sophisticated professionals investing hundreds of millions of pounds on behalf of others and presumably were well paid for their services. I quote from a passage in Mr Peterson's cross-examination of Mr Bauman:

"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."

74. There was such a common refrain to the effect that no checks were in place, from the claimants' expert Mr Ziff as well as from investors, that I have to accept it. All the investors told me that the practice has changed since the collapse of the Macro and I can only say that I am glad to hear it.
75. I also note that Dr Umansky said that the existence of large swaps would not by itself have rung any alarm bells with him; it was the fact that they were with a related counterparty that was the important factor. That was notwithstanding the very significant matter that a large swap holding was contrary to the express terms of the OM. I do not see room for any application of the doctrine of contributory negligence in relation to the claimants' claims based on lack of care taken by investors, but I accept the defendants' submissions that some at least of the investors must have seen that there were swaps on the books without being unduly troubled by the fact.
76. Apart from one occasion (in the unaudited semi-annual accounts for 2004) when WCF was disclosed as the counterparty to an FRA, the Macro's own accounts did not reveal that the counterparty to the swaps was a related party, that it was WCF, that it was not a major bank or that no account had been taken in the valuation of the swaps of counterparty risk. All the investor witnesses gave evidence that they did not in fact know that the Macro held large OTC swaps with a related counterparty.
77. I also note that the evidence of the investor witnesses as to what they had been told by Mr Peterson, Mr Dabhia and Mr Platt was essentially unchallenged. The focus of challenge by those parties, particularly Mr Peterson and Mr Platt, was as to the meaning of what was said and what would have been understood by it. The focus of challenge by Mr Aldridge on behalf of Mrs Peterson was that each investor ought to have done more, by due diligence, to detect what was really happening and, as it did not, there was no reason why she should have been put on notice that there was anything amiss.

Hearsay witnesses

78. There was also hearsay evidence from three witnesses for the claimants. I will only mention Mr Roche, a director of WCUK who left WCUK in October 2005. I admitted his evidence as hearsay, notwithstanding that the hearsay notice was not served at the same time as the witness statement, on the ground that the parties were not prejudiced by late service and made no application to cross-examine under CPR 33.4.
79. However there is the separate question of what weight I should attach to such evidence in circumstances where Mr Roche did not make himself available for cross-examination. He admittedly left WCUK in acrimonious circumstances and there was consistent evidence that he expressed himself immoderately on a number of occasions. I accept the uncontroversial parts of his evidence dealing with background, but I attach no weight to his evidence that he did not know about the swaps, since that is a matter on which cross-examination would to my mind have been vital before the truth could be ascertained. I do however accept that he complained about Mr Peterson's failure to address compliance issues, although that was in the context of his own redundancy. My acceptance is based on Mr Peterson's admission under cross-examination and a contemporaneous written note of a redundancy meeting.

The experts

80. I heard evidence from two experts on behalf of the claimants, Dr Chudozie Okongwu and Mr Bradley Ziff, and one expert on behalf of Mr Peterson, Mr Donald Bearham.
81. Both Mr Ziff and Dr Okongwu have strong credentials to act as experts. Their experience and expertise were reflected in the authority and clarity of their evidence. Both endeavoured to assist the court rather than to fight the claimants' corner and much of their evidence was in the event unchallenged. Dr Okongwu was prepared to acknowledge a mistake in his report during cross-examination by Mr Peterson, which gave me further confidence in his evidence on other matters. His report was the opposite of superficial, dealing with all relevant matters in considerable detail and great clarity. He considered all questions put to him carefully and courteously and his answers were neither partisan nor dogmatic. I was therefore prepared to accord his views respect where he remained firm in the face of cross-examination. It was his view that much of the case advanced by Mr Peterson was incredible. Both he and Mr Ziff also opined firmly that what was done at WCUK did not, contrary to Mr Peterson's submissions, accord with industry practice.
82. Mr Platt however asserted that Dr Okongwu's evidence was drawn from a second-hand perspective only as he had very limited trading experience compared with Mr Bearham who had worked with swaps for many years and understood the evolving nature of a strategy. He asserted that Dr Okongwu was a partisan witness and both he and Mr Peterson pointed out that whereas in the Cayman Islands proceedings Dr Okongwu said that the swaps were traded inside the daily range he said the opposite for the purposes of the present case. Dr Okongwu did however address this distinction in cross-examination and in a letter to Mr Peterson dated 23^rd November 2011 and to my mind answered it.
83. Mr Platt rated Mr Bearham's evidence more highly than that of Dr Okongwu on the subject of strategy. I do not however believe that Mr Platt was in a position to make that judgment. I have no doubt that Mr Bearham was an honest witness, but his evidence did not begin to stand up against that of the claimants' experts. It was full of unsubstantiated assertions and expressions of understanding gleaned from Mr Peterson. He accepted that he trusted Mr Peterson and much of his evidence was based on that trust. He was not an independent expert; he had personally invested in the Macro and WCF, he is a shareholder in WCUK, he lent money to Magnumhold, he had helped to market the Macro on one occasion, he was a friend of Mr Peterson who at one stage had considered employing him and Mr Peterson had assisted him financially over a personal matter. He had never given expert evidence before and accepted that his expertise in relation to swaps was limited. He said on a number of occasions words to the effect of, "this is beyond my experience". He was supplied with very limited documentation for the purposes of his report so that he was unable, unlike Dr Okongwu, to conduct any analysis of the Macro's holdings and positions.
84. I therefore have no hesitation, despite Mr Platt's submissions, in accepting the evidence of Dr Okongwu and of Mr Ziff (to whom Mr Platt's criticisms about lack of relevant experience do not in any event apply in the same way) on any point of conflict with that of Mr Bearham. While neither may have been 'hands-on' traders, both are and always have been directly concerned with matters of trading strategy.

Was a fraud perpetrated at all and, if so, were the swaps a sham?

85. The first question is whether a fraud was perpetrated at all. I propose to consider Mr Peterson's explanations for the swaps, the apparent misrepresentations made to investors in the OM, the DDQs, other documents, face to face and generally. He maintains, in short, that the swaps were honest trades entered into as part of an honest strategy. The claimants contend that they were shams in the legal sense.
86. In his closing speech and written submissions Mr Peterson made a number of new submissions which had not been previously raised, for example that the swaps were only put on to extend the Macro's product range and that they were not position-taking or trading instruments at all. I find these assertions incoherent and they do not in any event address the fact that the swaps were concluded with a related party, a fact which was concealed from the investors.
87. I start with the undoubted fact that the value attributable to the swaps replicated the losses suffered by trading in futures and options. This is starkly apparent from a graph produced by Mr Stokoe. In simple terms, if the investors were not told the full picture in relation to the swaps the reality underlying the reported NAV of the Macro was entirely hidden from them. The impression was given of a smooth and positive performance of the Macro as a whole.
88. The graph demonstrates that the OTC positions always had a net positive effect on the reported NAV of the Macro. The swaps represented a very substantial proportion of that reported NAV. After July 2006 the swaps were never less than 60% of reported NAV; by the end of 2008 they represented more than 100%, some of the Macro's investment positions having a negative value. In other words, the Macro would have appeared worthless but for the value of the swaps.
89. Mr Peterson riposted with asperity that obviously there was an correlation between gains on the swaps and losses on the futures and options since the swaps were used as part of an option overlay strategy, whereby decreases in the value of the swaps would be offset by increases in the value of the exchange-traded holdings and vice versa.
90. There are however several difficulties with his explanations, not least that the changes in the swap portfolio should have been mirrored by changes in the futures and options positions, but Dr Okongwu's analysis shows that was not the case. Dr Okongwu analysed the Macro's exchange traded positions over a sample period at the end of December 2008 and concluded that they were inconsistent with such a strategy and, so far from operating as a hedge for the swaps, increased the sensitivity of the portfolio to changes in the level of interest rates. Mr Peterson's answer was that the sample period chosen was unrepresentative because of the collapse of Lehman Brothers and the level of redemption requests. Dr Okongwu gave a convincing answer to both what he called "the Lehman effect" and the redemptions point. As to the latter he opined that the only way the Macro was going to have sufficient resources to meet redemptions was to employ hedges to prevent further losses. Dr Okongwu did not believe that the option overlay strategy contended for was in fact adopted.
91. Then there is the fact that, contrary to what is said in the OM, Mr Peterson chose not to use an independent prime broker or a major bank as the counterparty to his OTC transactions but WCF, a company which was never creditworthy in the sense required to support the transactions into which it entered.
92. I accept the evidence of the investors and the claimants' experts that related party transactions are and always have been viewed as abnormal and call for disclosure and proper explanation.
93. I do not accept Mr Peterson's explanation that the terms of the swaps would have been similar if executed with an independent third party. On the contrary, such a third party would have insisted on rigorous due diligence and transparency and the irregularities to which I shall refer would not have been accommodated. Even if Mr Peterson's contention that a major bank would have insisted on an exclusivity clause were correct (and Mr Ziff's evidence, which I prefer, is that such is not the case) that would not have justified the use of WCF as the counterparty.
94. I accept Dr Okongwu's evidence that valuation of the swaps ought to have taken account of counterparty risk. PNC adopted Mr Platt's valuations which did not do so. If one applied the credit rating attributed to the Legal and General Group, (a Moody's Investors Service A1 credit rating), the reported value of the swaps would have been reduced by some £110m. Application of an A3 credit rating would reduce them by £251m. If, however, WCF was insolvent, the maximum value would be WCF's assets available for distribution. The netting arrangements entered into by Mr Peterson were simply insufficient to compensate for counterparty risk.
95. Then there is the issue of the lack of payments at the opening, modification and closing of the swaps. I accept Dr Okongwu's evidence that the trading in swaps involved the creation or surrender of valuable positions which required compensation. His evidence was that 27 of the 30 swaps would have required a payment at inception. Mr Peterson and Mr Platt disagreed but offered no convincing alternative explanation.
96. Further, every time the swaps were modified or closed out compensation was due to reflect the change in value. Dr Okongwu's calculation was that over the lifetime of the swaps the Macro should have paid WCF £274m and should have received £608m from WCF. Although Mr Peterson initially claimed to PwC that the swaps were always closed out at nil value he has now abandoned that position. Instead he says that WCF would have compensated the Macro by some form of futures and options hedging or trading.
97. However Mr Peterson was unable, despite several invitations from the court to explain his assertion by reference to documents, to offer any real explanation of what this form of compensation was. His contentions differed as between his defence, a letter to the claimants' solicitors, his witness statement and the explanation inherent in his cross-examination of Dr Okongwu. His final version appeared to be that WCF was in some way guaranteeing the premium on options purchased by the Macro. Such a guarantee would have had to be in writing and signed by the guarantor and Mr Peterson has failed to produce any document to substantiate his version of events.
98. None of his explanations holds water and I agree with Dr Okongwu that they are not credible for the several reasons he gave. In summary, he said,

"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."

99. In the autumn of 2008 the Macro entered into a series of transactions reducing the gross principal of its swap holdings without requiring any compensating payments from WCF, despite the mounting redemption requests from investors. As the twelve-month LIBOR rate dropped some 3% at that time the Macro would have made a profit of some $220m. In effect, the Macro gave $220m of its positions away.
100. In his closing submissions Mr Peterson gave a new reason for the surrender of these swap positions in autumn 2008. He said it was to enable him to sell the options that were hedging those positions in order to pay redemptions. However, it is plain that the swaps were showing a profit at that time, so that the options must have been showing a loss; it is difficult to see how selling the options could generate cash to pay redemptions. In any event, the submission does not address the fundamental question of why WCF did not compensate the Macro for the loss of its swap positions at a time when the Macro was desperately in need of money.
101. Then there is the absence of interest payments. On one occasion an interest payment fell due from WCF to the Macro but it was never paid. Only five payments of interest were ever made and they were all the other way, from the Macro to WCF, and when they were made there was no allowance for the sum due from WCF to the Macro. Mr Peterson said he could not remember whether the money was paid and that, "it must have been done in a different way", but again he was unable to elaborate. Save for that one occasion, all the swaps were closed out before the first payment date.
102. It is hard to resist the inference that the transactions were structured in the way they were because WCF was always unable to meet its obligations under the swaps. Its only real asset was the positive value which it attributed to the swaps.
103. Mr Peterson's answer was that he would have employed a strategy to enable WCF to meet each of its obligations as and when it fell due. He argued that since WCF had one year's notice of any payment obligation it could necessarily hedge that liability. He did not however explain how he could hedge such a liability outright.
104. I observe that WCF had very limited assets and undertook no futures and options trading at all between May 2007 and August 2008. When in August 2008 it received income payments from the Macro it set up a trading account with SEB and lost more than 70% of the value of the account in the course of only 7 months trading.
105. Mr Peterson has given an elaborate explanation of the trades he would have conducted from March 2009 if he had been permitted to do so in order for WCF to meet its obligations. Although he denies it, that account is constructed from hindsight. It is easy to make a profit with knowledge of how the market actually operated. As Dr Okongwu pointed out, the strategy would have achieved an annualised return of 1,300% which he described in a wry understatement as implausible. As he also said,

"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%."

106. I accept the expert evidence that the swaps were consistently wrongly valued. Every month the values were sent to PNC by Mr Platt. Dr Okongwu uses swap 16 as an example, showing how the wrong interest rate was used and estimated future interest rates are of unknown provenance rather than the generally used market data. The estimates of future LIBOR are always the same and, again, out of accord with standard valuation practice. Dr Okongwu calculated that the effect of this method was that the value of swap 16 was overstated by more than 50%.
107. In October 2007 PNC obtained a third party valuation from Markit. Markit valued the Macro's open swap positions as at 28 September 2007 at some £79m, whereas Mr Platt's valuation was nearer £94m. It is notable that the email trail shows that Mr Platt's explanation, "Either way is correct in a sense depending on how the hedging is done", (described by Dr Okongwu as "incredible"), was drafted for him by Mr Peterson. Dr Okongwu described under cross-examination how the valuation should in his view and in accordance with standard practice have been effected, by constructing a curve of zero coupon rates, probably with the aid of a software tool.
108. Mr Platt was defensive about Dr Okongwu's criticisms, making it clear that he, Mr Platt, did not know the correct valuation method and that he just did the best he could. He pointed out that his method was never criticised by PNC whose job it was to make an independent assessment of NAV.
109. The daily and weekly NAV estimates circulated to investors contained figures which Mr Peterson simply told Mr Platt to include, even when away from the office when travelling or on holiday. Mr Platt said he would just type in the figures he was given and send them. It is notable that the daily estimates show only modest changes whereas the spreadsheets which Mr Platt maintained showed a much more volatile picture. It is to be inferred that the figures dictated by Mr Peterson were not genuine figures but designed to portray the Macro as having low volatility. On 10 November 2008 Patrice Neyret of GT Finance (an assets management investor) queried a discrepancy between the daily NAV estimates and PNC's final NAV. Mr Dabhia responded with an answer given to him by Mr Peterson for the purpose, and Mr Peterson additionally sent his response to Mr Platt, "so you know".
110. There were also serious flaws in the way the paperwork for the swaps was dealt with. First, there were omissions and irregularities in the trade tickets and the documentation generally. Both Mr Peterson and Mr Platt dismissed these flaws as trivial matters, but it is only common sense that there should be proper records to document such huge trades. It was therefore no surprise to learn from Mr Ziff that proper documentation and record-keeping is standard industry practice.
111. I believe that Briggs J has described the ISDA Master Agreement as the most important standard financial agreement in the world. The accent is on standard. The derivatives market has highly standardised documentation as this is critical to the hedging process. The ISDA Master Agreement between the Macro and WCF is amateurish and irregular. There is no schedule as one would expect and although the body of the agreement has been crudely amended to provide for this, some 30 references to the non-existent schedule remain. Dr Okongwu's view was that the modifications to the standard form were so internally inconsistent as to jeopardise its usefulness. I agree with Mr Anderson's surmise that it is unlikely that Mr Roche, a solicitor trained at Clifford Chance who specialised in ISDA agreements, would have drafted the ISDA Master Agreement. In any event it looks as if the final form was produced some time after he left WCUK.
112. Then there are the deficiencies in the swap tickets. They were prepared in what can at best be described as a slapdash fashion. Many are missing altogether and in the ones that survive important information, such as the frequency of interest payments, is missing. There are also inherent inconsistencies. To take the example of swap 1, the ticket (dated 17 February 2005) records a fixed interest rate of 4.395%, whereas the corresponding trade blotter records a rate of 5.04%. All the other records, including Mr Platt's valuations, record 4.395%. Mr Platt's rather lame explanation was that possibly a ticket showing 5.04% had been produced to PNC in November 2005 and that he must have filled out another (backdated) one when the trade was reduced some nine months later. Again, however, it looks as though Mr Platt was simply doing what he was told.
113. Mr Peterson's explanation (given for the first time in his closing submissions) was that as the original rate of swap 1 was 5.04%, only £45,000 was due. The flaw in his argument is in treating this amount as negligible; even if I were to accept the premise that the original rate was 5.04%, there is no reason why the Macro should neglect to collect a payment of £45,000.
114. The trade confirmations for the swaps are also defective. Of the 80 swap transactions, 43 are missing. The available ones also contain inconsistencies. The frequency of interest rate payments is missing. The swap 1 confirmation was created months after the date it was entered into. Many show a new trade when other records indicate that they related to a variation of an existing swap. The trade confirmation of 15 September 2008 shows WCF as receiving both the fixed and floating legs of the swap.
115. Mr Platt accepted that his bookkeeping was flawed: "My procedures…weren't the best of procedures", but he seemed oblivious of how serious this was. His evidence was that the tickets were in a cupboard which was open and generally available and that this should have been enough to satisfy the critics.
116. It emerged that the reason for the discrepancies may have been that in many instances the swap documentation was backdated, not just by a few days but sometimes by several months. Again unsurprisingly, this is not standard industry practice although Mr Platt found this hard to accept. Mr Peterson accepted that the ISDA Master Agreement, which bears the date 20 January 2005, was not even purportedly executed until May 2006, a year and three months after swap 1 was entered into, when Ernst & Young asked to see it. The backdating of the documents also gives rise to the inference that the trades were not genuine and that production of documentation after the event gave Mr Peterson the benefit of hindsight as to what swap positions would produce the best effect on the Macro's reported profits.
117. In addition to backdating issues there is also the question of using forged signatures. As I have said, PNC required WCUK to produce confirmation from WCF as to the value of the swaps. Initially these were simply unsigned letters on WCF's headed paper which emanated from WCUK's offices. However, from 6^th November 2007 Mr Frank Barden of PNC asked for these confirmations to bear the signature of a director of WCF. In an emailed letter of the same date he made it clear that the NAV was "reliant" on such a signed confirmation. Mr Peterson accepts that on 31 December 2007 and for ten months thereafter he (and in one case Mr Platt) produced such a confirmation purportedly signed by Mr Ekstrom but in fact signed by Mr Peterson. Again, the ISDA Master Agreement purportedly bears the signatures of Mr Ekstrom on behalf of the Macro and Mr Stefan Peterson on behalf of WCF. Mr Peterson admits that he appended those signatures.
118. Mr Peterson said in cross-examination that the swap value confirmations were bureaucratic and insignificant. It was his case that he was authorised to sign in the names of Mr Ekstrom and Mr Stefan Peterson but both men denied this in the Cayman Islands proceedings. When faced with email correspondence with Mr Ekstrom, Mr Peterson appeared to accept that he was not given a specific power to sign on Mr Ekstrom's behalf. He said,

"[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."

119. It is evident from the correspondence to which I have referred that Mr Peterson did not in fact consult his stepfather about the swaps but simply assumed, without contradiction from Mr Ekstrom, that he could use his name with impunity. That does not, as I have said, tally with the requirement of PNC that there should be a signature on the confirmations. Indeed Mr Peterson was by the end of 2007 himself a director of WCF but he either chose not to sign the confirmations in his own name or he understood that PNC required confirmation from a director independent of WCUK.
120. Looked at from the perspective of the counterparty, it is hard to see what was the commercial justification for the swaps from WCF's viewpoint. Mr Peterson contends that the benefit to WCF lay in the cash flow under the swaps which WCF would use for trading. However very little money was ever received by WCF and over 70% of that was quickly lost. Mr Peterson repeatedly drew attention to the fact that he would play the two funds off against each other on the basis that he could predict fluctuations in interest rates before any money became payable. However this does not accord with what actually happened.
121. Mr Peterson also said that as WCF accounted on the accruals basis and the Macro accounted on a mark-to-market basis this justified valuing the swaps in WCF's books as a positive asset. However, this ignores the fact that the Macro itself accounted on an accruals basis in its audited accounts and the fact that WCF's accounting basis would not in any event entitle it to ignore prospective liabilities, which is what WCF consistently did.
122. The OM contained a number of misrepresentations. It said that the Macro invested "primarily in options and futures". It did not. Mr Peterson contended that futures includes FRAs and swaps, on the basis that a swap is properly characterised as a "strip of futures", "priced from the futures curve". Semantics aside, this fails to acknowledge the obvious and simple fact that swaps, unlike exchange traded futures, carry significant counterparty risk.
123. Secondly, the OM stated that OTC contracts would be concluded "with a major bank counterparty". Mr Peterson contended that in this context the expression "OTC contracts" is to be interpreted as meaning only exotic OTC contracts such as OTC options. However I prefer Mr Ziff's evidence that this is not how such a statement would be understood by an investor in the industry.
124. Thirdly, there is the issue of whether the value of the swaps breached the 20% investment restriction. Mr Peterson stressed that there was a difference for this purpose between the NAV and the value of the gross assets of the Macro. He contended in his defence that the rules of the Irish Stock Exchange require calculation of the gross asset value of the swaps by reference to the long or short position in underlying investments based on the delta adjusted notional amount of the derivatives. On this basis he contended that the Macro's gross assets totalled more than $119bn of which the swaps constituted only 7%. However I find the suggestion that the Macro should be treated as having more than $100bn of gross assets for the purpose of assessing its exposure to counterparty risk to be patently absurd. In any event these calculations are inconsistent with the definition of 'Gross Assets' contained in the OM itself, which requires valuation of all investments held before deduction of liabilities including borrowing. Dr Okongwu pointed out that the rules of the Irish Stock Exchange specifically do not apply Mr Peterson's methodology to breaches of the 20% restriction. In short, in circumstances where a very large proportion of the gross assets of the Macro was exposed to WCF's insolvency I prefer Dr Okongwu's evidence that the 20% restriction was indeed breached.
125. Mr Peterson also contended, if I understood his pleading correctly, that the 20% restriction did not apply to the swaps because they had a nil value at the point of trade so that the restrictions had no application to concentrations in the Macro's portfolio caused by fluctuations in the swaps value thereafter. However the OM expressly provided for this situation, in that the Investment Manager is not under a duty to take immediate corrective action in such circumstances. I agree with Mr Ziff and Dr Okongwu that the 20% restriction is not to be interpreted (and to Mr Peterson's knowledge would not have been interpreted by the investors) to mean that the Investment Manager could simply ignore concentrations in exposure caused by changes to value after the date of trade.
126. In any event, several of the swaps were not opened at nil value and even on Mr Peterson's case the 20% restriction would have been contravened on nearly a third of the swap trade dates. Mr Peterson's contention in closing that the GNMAs repo should be omitted from any calculation of Gross Assets for the purpose of the 20% restriction ignores the fact that even on this basis there was a breach of the 20% restriction from 2006 onwards.
127. However it does not much matter whether or not the 20% restriction was breached when one looks at the impression given by the OM overall.
128. Turning to the DDQs, Mr Peterson at first argued that the OM was the exclusive basis of an investor's decision to invest. Mr Ziff said that was not the case, and it is hard to see what the point was of the DDQs if their contents had to be disregarded. Mr Peterson was constrained to admit in cross-examination that the DDQs were important documents which went together with the OM.
129. The DDQs contained several misleading statements. First, that "The majority of the securities we trade are exchange traded, therefore valuation is very simple- LIFFE valuations are taken". It was accepted that the values of swaps could not just be taken from LIFFE (the London International Financial Futures and options Exchange). Mr Peterson gave two reasons for contending that this statement was not misleading. First, he said at one point that the Macro held many more exchange-traded instruments than swaps. It seems to me that volume as opposed to value is irrelevant. Secondly, he said or implied that "trading" was a term of art such that it would be understood that it would exclude OTC derivatives. A semantic debate is arid in this context; what is important is the impression given to investors which was plain. No-one would understand a portfolio consisting of 80% swaps to comply with the statement that the majority of traded securities are exchange-traded. This is emphasised by later statements that "as all our investments are exchange traded we never have any pricing discrepancies", and listing the instrument types used by percentage as "Options 75%, Futures, 25%". Even if, as Mr Peterson at first asserted (and I do not accept on the basis of the investors' evidence and Mr Ziff's evidence), the term "futures" would be construed as including the swaps, the Macro did not invest 25% in futures taking into account the value of the swaps.
130. Again, Mr Peterson explained the answer "All positions are expressed through futures and options", given in response to a request for portfolio concentration in terms of amount of instruments and exposure bias, on the basis that "expressed" did not mean, and would not have been understood to mean, that there were no swaps. He said that he did not use the phrase "express positions", in the context of a hedge mitigating credit risk. There is perhaps some support for this contention in Dr Umansky's evidence. However, the weight of the expert evidence was against Mr Peterson.
131. Mr Peterson blamed Mr Dabhia for the wording of the DDQs but nevertheless insisted that these statements were no more than ambiguous on the following basis:

"…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…"

132. Further, there was not, as was said in the DDQs, only one fund under management by WCUK. WCUK purported to manage WCF as well. The answer gives the impression that there was no scope for related party trading between funds controlled by WCUK. This is underlined by the answers to a request to describe current or potential conflicts of interest relationships, to which the bald answer was "N/A".
133. I do not accept Mr Peterson's assertion in his Defence (contradicted by Mr Ziff) that it is standard market practice not to regard transactions between funds which have the same management, directorship and ownership as related party transactions. Although certain types of conflict of interest may be unavoidable, for example where an investment manager oversees multiple funds, I accept Mr Ziff's evidence that it is the manager's responsibility to manage and if possible eliminate such conflicts, and in all cases to disclose them expressly. WCUK had a compliance manual with a conflicts policy but this policy was not complied with. The OM explicitly stated that WCUK did not take management or control of the issuer of any of its underlying investments. Whatever the merits or demerits of some of these arguments, the OM contained this unambiguous prohibition which was squarely breached.
134. Lastly, there was the representation that the portfolio could be liquidated in a day. Mr Peterson accepted that this was obviously untrue (as was proved in practice when the Macro could not meet the redemption requests) and maintained that it could not have been intended to have been taken literally. However it is hard to see what was the point of such a statement in a DDQ if it was not intended to be taken at face value, a point also made by Mr Ziff who added that it is not uncommon for hedge fund credit risk officers to evaluate a hedge fund on the basis that it could liquidate its assets within a day. It could have done so if it had indeed consisted entirely of exchange-traded options and futures.
135. Mr Peterson was adamant that he would not have used the word "liquidate", meaning taking all the holdings off in a single day. He says what he meant was that the positions could have been closed within a single day. He blames Mr Dabhia for the use of liquidate. This ignores the fact that Mr Peterson was present and participated in a telephone conversation where that very statement was indeed made.
136. In the marketing tools other than the OM and DDQs much was made of diversification, but as a principle diversification was simply ignored. The very many position statements, the toolbox, the weekly risk reports, the monthly performance summaries, the annual reviews and the factsheets all refer solely to the exchange-traded futures and options and make no mention of swaps, OTC transactions or counterparty risk. Indeed, one presentation states "Trading exchange traded liquid instruments ensures timely valuation and reduced counterparty risk-very attractive in current environment". All these documents give the impression that a summary of the entire portfolio is being shown to enable the investors to evaluate risk. In the context of trading with WCF I do not accept that Mr Peterson presented a "package deal" such that the "hedged packet" meant that the summaries and reviews did not need to mention the swaps at all.
137. One has only to look at the weekly risk reports to see the impression that investors were being given. At the foot of each page they list the assets under management and the NAV of the entire portfolio immediately above the summary of the 'Greeks' by geographic region. This implies that the listed Greeks represent the Macros' entire interest risk rate exposure. Moreover the regional tables take no account of, and are thus inconsistent with, the swap holdings.
138. I agree with Dr Okongwu that if an investor were to read the information about futures pricing from LIFFE, CME (the Chicago Mercantile Exchange) and TIFFE (the Tokyo International Financial Futures Exchange), it would understand that it was a summary of the Macro's risk exposure and infer that the risk was all on exchange. Credit risk was not mentioned anywhere.
139. I accept Mr Wauton's evidence that the actual risks were completely different from the picture presented. He said,

"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."

140. As I have already said, Mr Peterson had an answer for everything and it is possible that he could justify many of the individual statements as being literally true. However, it is not the literal meaning of the words in WCUK's marketing material that is crucial but rather the impression given. It does not matter if something is literally true if it is nevertheless thoroughly misleading. Looking at the documentation as a whole I have no doubt that the impression was given, and intended to be given, to most of the investors that there were no, or insignificant, OTC trades. I also have little doubt that the impression was given, and intended to be given, to those investors who were either aware that there were some OTC trades or, like Dr Umansky, were not concerned about OTC trades in principle, that such trades were with an unrelated and creditworthy counterparty. I do not accept Mr Peterson's assertions that the investors understood his strategy very well at the time. He cannot show any document in which he explained it. All the documentation runs the other way. Further I do not accept that he did not know or understand the impression Mr Dabhia was giving to the investors in the DDQs.
141. The claimants' primary case is that the swaps were not genuine commercial transactions at all but shams in the legal sense: see Snook v. London & West Riding Investments [1967] 2 QB 86 at 802 C-F per Diplock LJ:

"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."

142. In all the circumstances it is my view that these swaps were never intended to be enforceable instruments but were simply used to manipulate the NAV figures to give the impression to investors that the Macro was successful.
143. It does not seem to me to matter much in relation to the point I have to decide whether fraud was planned in advance or whether it simply comprised an attempt to cover up trading mistakes. The swaps were indeed shams in the Snook sense.

Claims against Mr Peterson

144. I now turn to analyse the claims against Mr Peterson.
145. Clause 10.1 of the Investment Advisory Agreement between the Macro, WCM and WCUK (executed by Mr Dabhia and Mr Peterson as directors of WCUK) obliges WCUK to indemnify the Macro in respect of all losses and liabilities suffered or sustained by the Macro resulting or arising in any way from the fraud, negligence or wilful default of WCUK. The Macro claims that it is exposed to a huge liability to its investors. It has submitted a proof of debt asserting a primary claim of US$ 536.1m, dwarfing the claims of all other creditors, for breaches of the Investment Advisory Agreement, breaches of fiduciary duty, negligence, conspiracy, and fraudulent/negligent misstatement in WCUK's purported performance of its duties as investment advisor to the Macro. In a witness statement Mr Bouchier has subjected the claim to careful and detailed analysis. Immediately following judgment WCUK's liquidators intend to admit the claim in the sum of at least $450m.
146. That stance has not been seriously challenged. Although Mr Aldridge on Mrs Peterson's behalf commented that WCUK's liquidators should have waited to be sued by the Macro so that they could join PNC as a party to the proceedings, he appeared to acknowledge that rejecting the claim was not an option. His argument that the litigation was piecemeal so that the defendants were unable to obtain full disclosure did not stand up to the evidence that all documents have in fact been disclosed, and this aspect of the argument was not in the event vigorously pursued.
147. Mr Peterson admittedly owed WCUK fiduciary duties as a director. For example, to act at all times in good faith and in WCUK's best interests, not to put himself in a position where his interests and duties conflicted, to act in accordance with WCUK's constitution, statutory duties under s. 171-177 of the 2006 Act and duties to exercise reasonable care, skill and diligence in performing his duties as a director. There are many other potential duties, such that Mr Peterson is to be treated as trustee of WCUK's assets in his possession or under his control (see Re Duckwari plc [1998] Ch 253 at 262A per Nourse LJ) and contractually implied terms as an employee to act at all times in good faith in the best interests of WCUK, see e.g. Malik v. BCCI [1998] AC 20.
148. It is also alleged that Mr Peterson is liable to WCUK in the tort of inducing a breach of contract (see OBG Ltd v. Allan [2008] 1 AC 1 at [39]-[44]), that is to say that WCUK has breached its express duties under the terms of the Investment Advisory Agreement to provide services in accordance with the OM and to exercise such judgment which a prudent investment adviser would exercise in the proper discharge of its duties.
149. Mr Peterson takes issue with some of the detail of these duties (e.g. whether he was an employee of WCUK and whether all the duties were fiduciary in nature) although he accepts them in general terms. On the basis of my findings of fact however I find that Mr Peterson is liable for breach of his duties to WCUK and in the tort of deceit.

Mrs Peterson

150. There was a measure of agreement as to the scope of Mrs Peterson's duties owed to WCUK. It was accepted, for example, that she owed duties to WCUK under s. 174 of the 2006 Act, namely to act with,

"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."

151. Thus the standard which she was required to meet is that to be expected of a director generally in the role which she has and it is informed by the general knowledge, skill and experience which she actually has. Mrs Peterson was also bound by the directors' duties stipulated in s. 171-173, 175 and 177 of the 2006 Act.
152. In addition, Mrs Peterson was cross-examined in detail on her understanding of her duties as a FSA Approved Person exercising the controlled function of a director. Her compliance duties (under WCUK's Compliance Manual, Personal Account Dealing Policy and Quarterly Compliance return) were incorporated into her contract of employment. She was required not to "deliberately not disclose a conflict of interest", to "disclose material issues to the regulator through the firm", to "keep adequately informed of the affairs of the business", not to "permit transactions without understanding the risks" and to "monitor" "adequate systems and controls".
153. The issue as far as Mrs Peterson is concerned is not so much the scope of her duties as whether she has breached them negligently and, if so, whether such breaches were causative of loss.
154. Mrs Peterson's defence on breach rested largely on three matters. First, what was alleged to be her very limited and confined role at WCUK, involved only in the execution of exchange-trading as opposed to investment management strategy.
155. Mr Aldridge submitted that none of the authorities deals with the separation of functions and their allocation between the directors as opposed to delegation, in the strict sense, of functions to non-directors. S 174 requires the court to have regard to "the functions carried out by the director in relation to the company". A director cannot be expected to monitor every department of the business. Her competence must be assessed in the context of and by reference to the role in the management of WCUK in fact assigned to her: Re Barings plc (No 5) [1999] 1 BCLC 433 at 484 b-e per Jonathan Parker J citing Hoffmann LJ in Bishopsgate Investment Management Limited (in liq) v. Maxwell (No 2) [1993] BCLC 1282 at 1285. In contending that Mrs Peterson had a more general role the claimants were, Mr Aldridge submitted, eliding Mrs Peterson's role as a director of WCUK with the role that could be expected of a director of the Macro itself.
156. Secondly, it was said that in the circumstances Mrs Peterson acted reasonably in assuming that Mr Peterson, Mr Platt and Mr Dabhia were managing the Macro properly. Mr Aldridge submitted that Mrs Peterson could only have been liable if she had had cause (in the form of what was described as a 'red flag') to be alerted to the fact that there was something amiss. On the contrary, submitted Mr Aldridge, there was no cause for concern. No issues arose in more than five years about non-payment of redemptions. Mrs Peterson was surrounded by a large number of other people whose job it was to ensure that nothing untoward was happening. In the absence of a red flag, it was contended that Mrs Peterson was entitled to rely on the probity and competence of those around her. She could not be expected to suspect that signatures were being simulated, documents backdated or swaps closed for no payment.
157. Mr Aldridge mentioned the following as constituting layers of control and oversight on which he says Mrs Peterson was entitled to rely. Mr Ekstrom and Mr Stefan Peterson, the directors of the Macro. Mr Peterson himself. Mr Roche, who oversaw the legal side of matters and acted as a compliance officer. Mr Dabhia, Mr Stewart and Mr Platt. PNC, whose job it was independently to value the Macro's investments on a monthly basis, having due regard to such matters as counterparty risk and to have flagged any doubtful issues. Ernst & Young, the auditors of the Macro, and Reeves & Neylan, WCUK's auditors. Mr Hall, the financial controller of WCUK. Hedgestart, which reviewed the trade tickets. NCB Stockbrokers, the Macro's sponsoring broker on the Irish Stock Exchange which was supposed to ensure compliance with the ISE Rules. And last but not least, the investors and potential investors.
158. It was said that a reasonably competent director in Mrs Peterson's position would not have raised queries about the swaps. It is true that she knew that the swaps were with WCF, but so apparently did PNC and Ernst & Young. PNC and Ernst & Young did not say it was unacceptable, Mr Platt was unconcerned by it, Reeves & Neylan raised no concerns. The information was readily available and Mrs Peterson had no reason to be concerned about the swaps which were, to the best of her understanding, being traded as part of a structured strategy.
159. She knew the value of the swaps, but again, so did PNC and Ernst & Young (and apparently Mr Saunders and Mr Grice of WCUK) and there was no secret about it as it was evident on the face of the accounts. Baker Tilly, who undertook a valuation of WCUK for the purposes of the potential sale of Mr Roche's shares, looked at WCUK's accounts and also the Macro's accounts and raised no concerns.
160. She knew that the value of the swaps could be affected by the creditworthiness of the counterparty. Again, PNC and Ernst & Young expressed no concerns and nor did any of the investors who had seen the accounts. Mrs Peterson had no reason to suppose, it is said, that any information was being withheld from the directors of the Macro or from investors. She had WCF's informal accounting records available to her but there was no reason why she should consider them in any detail since she did not know that WCF was being used other than as part of the mechanics of an overall strategy of which WCF was just one part of the mechanism and in which WCF was positioning its own strategy in such a way as to enable it to honour its obligations under the swaps. The claimants' case, it is said, relies heavily on hindsight. A director must be entitled to assume that she is dealing with an honest and competent co-director. Mrs Peterson had no reason to read any documents or parts of documents which did not relate to her circumscribed area of responsibility, exchange trading.
161. Mr Anderson too relied on the observations of Jonathan Parker J in Re Barings (No 5) (affirmed in the Court of Appeal at [2000] 1 BCLC 523), and in particular the duties of directors to inform themselves about the company's affairs. Jonathan Parker J cited (at 488) as representing English law the judgment of the Supreme Court of New South Wales in Daniels v. Anderson (1995) 16 ACSR 607 at 668, as follows,

"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."

162. While Mr Anderson of course accepted that directors were entitled to delegate particular functions he maintained that the exercise of the power to delegate did not in this case absolve Mrs Peterson from the duty to supervise the discharge of the delegated functions. As Jonathan Parker J said (at 489 c-d), everything depends on the facts of each particular case.
163. Mr Anderson pointed out that WCUK was, as such firms go, relatively small, and although there was a demarcation of roles, everyone was aware of what everyone else did and often one director would fill in for another.
164. Mrs Peterson was highly paid and her level of reward is a relevant factor (see Barings (No 5) at 488 d-g) in resolving the issue of the extent of her duties and responsibilities. It is not that her fitness depends on how much she was paid but rather that the higher the level of reward, the greater the responsibilities reasonably to be expected (prima facie at least) to go with it.
165. Further, in addition to her specialist understanding of derivatives Mrs Peterson had some very specific knowledge about the swaps. She knew that WCUK acted as investment adviser to the Macro and was aware that WCUK was under an obligation to manage the Macro in accordance with the restrictions contained in the OM. She was aware that the directors of WCUK accepted responsibility for the contents of the OM. She knew the terms for suspension of redemptions and subscriptions, the terms of the share application form, the Macro's accounting basis and that the OM contained no 'gate' provision. She accepted that she would have read the risk warning that OTC contracts might be put on with a "major bank counterparty".
166. She accepted not only that she discussed the Macro's entry into the swaps with Mr Peterson but, significantly, that she approved it. She knew the proportion of the Macro's NAV constituted by the swaps. She eventually accepted that she read the accounts and would as a matter of hard fact have seen it from the accounts. She also knew that the Macro was making considerable real losses on its exchange-traded futures and options position, off-set by the large paper profits on the swaps. She knew when interest payments were due under the swaps.
167. She knew, importantly, that WCF was the counterparty to the swaps. She also knew that WCF was not disclosed in the Macro's audited accounts (which she read) as a related party. Her evidence about her knowledge of the ownership of WCF was however unsatisfactory. She declined to plead at all to Mr Peterson's ownership of WCF in her defence and was evasive thereafter in her answers to requests for information. Eventually, through her solicitors, she admitted that she was aware that her husband had a substantial majority interest in WCF, although she somewhat resiled from this admission under cross-examination.
168. She did know on any basis that WCF was ostensibly managed by WCUK but paid no fees for this service; that WCF had no external administrator; that WCF had limited assets and that WCUK was not conducting any trades on behalf of WCF for extended periods. She was also aware that none of the materials sent to investors mentioned the swaps although she read the monthly and annual reviews and looked at the geographical breakdown of profits. She also participated in some meetings with investors.
169. As I have said, she approved of Mr Peterson's trading of the swaps between WCUK and WCF, both in terms of his option overlay strategy for the Macro and in terms of WCF's strategy. She approved WCF as a counterparty, although she had no reason to believe that PNC knew that WCF had no external investors and was majority owned by Mr Peterson. When asked why (when, as she acknowledged, it would have been inappropriate for Mr Peterson to be the counterparty) the interposition of a BVI limited company without auditors or administrator made a difference, her only answer was that WCF was in name a hedge fund and had assets. When the question was raised by PNC why there were no close-out payments on modification or reduction she merely replied that she only considered herself responsible for the exchange-traded business and did not concern herself with OTC queries:

"…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…"

170. She did not concern herself with WCF's ability to meet its obligations under the swaps, saying that she had an honest and reasonable belief that WCF had sufficient assets to meet its liabilities as they arose. However she knew the approximate mark-to-market value of the swaps and the sort of sums WCF would have needed. She had no knowledge of any credit facilities available to WCF, she knew that WCF was not trading significantly and that it had no substantial assets of its own.
171. Mrs Peterson never inquired as to the extent of the duties of PNC or Ernst & Young and, in any event, I keep on coming back to the fact that she had approved Mr Peterson's trading strategy by at latest the beginning of 2005. The state of knowledge of other parties is in any event irrelevant as Mrs Peterson did not assert, let alone adduce evidence to prove, that investors knew and tolerated the Macro's use of swaps with a related party, that PNC and Ernst & Young knew the details of the swaps, that it was an acceptable or customary practice not to disclose the use of related parties or that PNC and Ernst & Young had been told all relevant matters by Mr Peterson or Mr Dabhia.
172. In all these circumstances, there is no answer to the questions why Mrs Peterson was not alerted by her knowledge of WCF, its ownership, assets (or lack of them) and trading activities, the fact that the swaps trading put the Macro fund in breach of WCUK's Risk Control policy and of the OM, the non-disclosure of WCF as a related party in the Macro's accounts, or the fact that those accounts gave the impression that the counterparty to the swaps was ADM and/or Fortis.
173. Mrs Peterson cannot escape liability for negligence by saying that she had a confined area of responsibility. WCUK was a small firm in which, as I have said, all parties occasionally fulfilled the functions of the others. She herself said that no single person would be able to execute a trade without the other employees knowing about it. This was a deliberate part of a system which she and her fellow directors designed and implemented as a system of internal control in order to prevent and detect fraud. I find it both factually and legally unsustainable for her to assert that she can escape liability by saying she only had a limited role in the management of WCUK and was not alerted to wrongdoing by her husband: see Re City Equitable Fire Insurance Co Limited [1925] Ch 407 at 429.
174. The test is whether what Mrs Peterson did was that which a reasonable director of a hedge fund management company in her position, with her experience, actual knowledge and intelligence should have done, and whether she acquired a sufficient knowledge of WCUK's business to discharge her duties. In my view she did not meet that test.
175. Mr Aldridge raised a further argument on causation. He submitted that Mrs Peterson could not reasonably have done anything which would have led to any different result. The only place at which she would have first raised questions would have been either with Mr Peterson or at a Board meeting. The answers would only, it was said, have allayed her fears. It was pointed out that ADM raised questions with Mr Peterson in November 2005 to which he gave plausible answers which seem to have been accepted by ADM.
176. As I have said, Mrs Peterson would always have approved her husband's strategy. Thus nothing would have induced her to acknowledge fraud on his part. The question is not what Mrs Peterson herself would have done, but what a reasonable director would have done. Mrs Peterson's pleading does not identify or assert what plausible explanation Mr Peterson would or might have given which ought to have been satisfactory to her and relieved her of the obligation of further inquiries.
177. I make two additional observations; first that Mrs Peterson not only omitted to ask questions, but positively approved the swap trading strategy. If she had acquired a sufficient knowledge and understanding of WCUK's business, she would have known that the swaps contravened the OM and could not, consistently with her duties, have approved that strategy.
178. Secondly, as soon as Mr Levy of PwC, a hedge fund professional of roughly similar age and experience to that of Mrs Peterson, discovered that the swaps had been put on with a related party, he ensured that WCUK's so-called trading strategy came to an end. Mrs Peterson's knowledge, experience and duties were such that she could and should have pursued a similar course.

Mrs Peterson's Part 20 claim against Mr Dabhia

179. Mrs Peterson asks for an order that Mr Dabhia pay a just and equitable contribution to her in respect of any liability she is found to owe to the claimants for breach of duty. Her claim is made on the basis that Mr Dabhia is at least equally liable in respect of the same damage since he was bound by duties equivalent to those which she owed in relation to the swap transactions, the conduct of the other directors of WCUK, the OM, the DDQs, the calculation of the Macro's NAV and all representations made by or on behalf of WCUK.
180. This claim is likely to be of academic interest as it is my understanding that between them Mrs Peterson and Mr Dabhia will not be able to satisfy any judgment in full. However it is alleged that as between the two of them, Mr Dabhia should bear by far the greater burden of blame and thus he should be ordered to contribute the vast majority of the value of the claim against Mrs Peterson as "her culpability is infinitely below his". This is said to be on the following basis:

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.

181. It is true that Mr Dabhia was a marketer who made direct misrepresentations to investors while Mrs Peterson was primarily an exchange trader. However it seems to me that in approving Mr Peterson's strategy in relation to the swaps in the knowledge that they were entered into with WCF, a related party, her culpability was far greater than that of Mr Dabhia. I am not therefore minded to make any order in her favour in her Part 20 claim.

Mr Dabhia

182. Mr Dabhia's primary responsibility was marketing the Macro to investors. He accepted that in order to fulfil that role he was required to understand the rudiments of derivatives trading and of the Macro's investment strategy. He accepted that he understood the difference between exchange traded investments and OTC investments and that swaps and FRAs fell into the latter category. He also knew that related party OTC transactions were a cause for serious concern and that Mr Peterson had promised not to enter into them again. He accepted that he knew that the swaps existed, that they were large in size and that they came to form a large part of the Macro's portfolio. However, as I have said, I find that his understanding of what Mr Peterson was doing was foggy and that he did not realise that WCF was the counterparty to the swaps, or understand the credit risk this presented, until March 2009.
183. None of this alters the fact that Mr Dabhia owed duties to WCUK as a director. It is no answer to a claim for breach of those duties that he failed to apply his mind to the important question of the counterparty. He should have realised that something was seriously amiss with the swaps and that the requirements of the OM were not being observed. He should have realised that the swaps were being concealed from the investors, he should have asked the identity of the counterparty (whether the swaps were placed with a major bank, for example) and considered the issue of the 20% restriction and made inquiries as to how WCF could meet its obligations. Instead he participated in misrepresentations to the investors.
184. As far as the outside world was concerned, he was the person primarily responsible for the DDQs and he understood, on his own admission, that they were important; indeed he described them as a significant marketing tool.
185. He accepted under cross-examination that the general impression given by the DDQs was that the Macro's portfolio would primarily comprise liquid, exchange-traded, futures and options which could be liquidated in a day with a maximum 5% loss to the portfolio. He ought reasonably to have appreciated, if he did not in fact know, that the majority of the Macro's portfolio was not exchange-traded and its positions were not all or primarily expressed through futures and options, let alone 75% options and 25% futures. He ought reasonably to have known that the portfolio could not be liquidated in a day.
186. In addition to the OM and the DDQs, Mr Dabhia was also aware of the other marketing materials sent to investors and should reasonably have appreciated that they were misleading by their omission of any reference to the swaps.
187. He also made a number of specific misrepresentations and it is no defence that many of these statements may have originated with Mr Peterson. Thus, some blatant examples are as follows,

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".

188. In my judgment, Mr Dabhia was therefore in breach of his duties to WCUK as director, by failing to acquire a sufficient knowledge and understanding of its business and failing to satisfy himself as to the details and propriety of the swaps. He is also liable in the tort of negligence for failing to act with reasonable care, skill and diligence and for negligently making false representations to investors.

Counterclaim

189. In his counterclaim, Mr Peterson makes various allegations that Mr Dabhia acted fraudulently, asserting that in so acting, Mr Dabhia acted both on his own behalf and on behalf of WCUK, "which acted through him and is responsible for his conduct".
190. The allegation is that from 6 March 2009 onwards Mr Dabhia dishonestly, maliciously and deceitfully (in order to ensure that Mr Peterson rather than Mr Dabhia was held responsible for the Macro's inability to meet redemption requests) made false statements causing the Macro to enter into liquidation, causing WCUK to enter into administration, resulting in a freezing injunction against Mr Peterson, causing the liquidation of WCF and causing the arrest of Mr Peterson by the Serious Fraud Office. Mr Peterson relies on the torts of causing loss by unlawful means and of malicious falsehood. These allegations were made while Mr Peterson was represented by solicitors, leading and junior counsel.
191. One of the principal difficulties that Mr Peterson has in relation to these allegations is that the statements complained of were true. Thus, he complains of the announcements of 11 March 2009 to the Irish Stock Exchange and to investors that material related party swap transactions had been revealed and were under investigation. The announcement attached to an email sent out by Kaye Scholer LLP was true in its entirety. An email sent out by Mr Dabhia to investors (and his statements to investors in conversation) in similar terms was likewise true.
192. None of the implied statements pleaded by Mr Peterson in his defence (for example that the swaps had been discovered by WCUK rather than the Macro) can be read into these statements and each statement was carefully drafted with input from lawyers and was, presumably deliberately, neutrally expressed.
193. In any event, the documents show that the wording of both statements had been specifically approved by the Boards of both the Macro and of WCUK. It is therefore impossible to infer any malice on Mr Dabhia's part. Further this approval would have broken the chain of causation since any wrongful act on the part of Mr Dabhia would have been superseded by the Boards' approval.
194. Mr Peterson also complained that Mr Hall's letter to the FSA of 13 March 2009 was false in a material respect in that it wrongly stated that WCUK's Board had resolved to place the investigation of the swaps into the hands of Mr Dabhia and Mr Stewart. However it seems clear that their membership of an investigation committee was discussed at a board meeting on 12 March 2009 and that Mr Dabhia had been acting de facto in that capacity. If indeed the letter was wrong any inaccuracy was not in my judgment attributable to malice.
195. Mr Peterson also relies on Mr Dabhia's statement to Mr Stewart that "It is just one big…swap…with a related party." Again, this statement was in essence true. To the extent that the burden of Mr Peterson's complaint is that the position did not come as a surprise to Mr Dabhia, I do not accept either that Mr Dabhia was wholly aware of and complicit in Mr Peterson's fraud or that this statement had any causative effect on subsequent events.
196. It therefore seem to me that Mr Peterson's counterclaim is bound to fail on the facts. It also falls far short of what is required to establish liability in law. It is also impossible to see how any malice or deceit could be attributed to WCUK since WCUK was as much a victim of any false statements as Mr Peterson himself: see Belmont Finance v. Williams Furniture [1979] Ch 250 at 261H-262A and Armagas Limited v. Mundogas SA (The Ocean Frost) [1986] AC 717, 799H-782H.
197. In any event Mr Peterson would have difficulties of establishing causation since the Macro itself made an independent decision to recommend liquidation and Mr Peterson admitted under cross-examination that he was instrumental in that decision. Corazon was also taking advice about the liquidation, which was inevitable. Mr Peterson also accepted that he personally agreed to appoint the WCUK administrators.
198. Most importantly, Mr Peterson cannot in my judgment rely on his own wrongdoing, which was the cause of the collapse of the Macro and WCUK.

Mr Platt

199. The claimants' primary case against Mr Platt is one of dishonestly assisting Mr Peterson in his fraud. Their secondary case is framed in negligence, namely that he failed to act with reasonable skill and care in the performance of his duties as an employee.
200. The classic definition of dishonest assistance is contained in the speech of Lord Nicholls in Royal Brunei Airlines v. Tan [1995] AC 378 at 392. There are a number of requirements to make out such a case. First, a trust or, as here, other fiduciary relationship. Secondly, a breach of the fiduciary duty on the part of the fiduciary, in this case Mr Peterson. Thirdly, a causal link between the breach and a loss to the beneficiaries (or between the breach and a gain to the defendant, as the case may be). Fourthly, assistance by the defendant in the breach and fifthly a dishonest state of mind on the part of the defendant.
201. I should say that I felt keenly the lack of representation on Mr Platt's behalf. For example, this is a case where there is plainly a fiduciary relationship between Mr Peterson and WCUK. However, it is WCUK which is suing and not the Macro. The property misapplied was that of the Macro and its investors; WCUK's loss relates to the indemnity which it gave to the Macro. I would have liked to have been addressed on the question whether liability for dishonest assistance can lie in such circumstances. It seems to me that in principle it can since there would be loss or damage resulting directly from the breach of fiduciary duty which has been dishonestly assisted.
202. The most important issue is that of dishonesty. The mental state required is analysed in Royal Brunei, Twinsectra v. Yardley [2002] 2 AC 164, and Barlow Clowes v. Eurotrust [2006] 1 WLR 1476. In Royal Brunei, Lord Nicholls made it clear (at 389) that the test for dishonesty is an objective one so that individuals are not free to set their own standards of honesty. However he also said that dishonesty has a subjective element in that conduct must be assessed in the light of what a person actually knew at the relevant time as distinct from what a reasonable person would have known or appreciated. In Twinsectra, it seemed that the House of Lords required the defendant to be aware that he was transgressing the standards of ordinary and reasonable people. The Privy Council revisited the question in Barlow Clowes, and Lord Hoffmann stated that in Twinsectra neither he nor Lord Hutton had meant to say that a defendant must have addressed the question of what normally acceptable standards of honest conduct might be: they had merely meant to say that a defendant must have known about those aspects of the relevant transaction which made his participation transgress those standards. This line has been followed subsequently by the Court of Appeal, for example in Abou-Rahmah v. Abacha [2006] EWCA Civ 1492.
203. Thus a defendant will be liable for dishonest assistance whenever his conduct transgresses the ordinary standard of honest behaviour, whether or not he is aware of the fact.
204. In alleging fraud the claimants rely on Mr Platt's position as assistant investment manager to the Macro (second only to Mr Peterson), his sole authority to place orders on the Macro's behalf and his investment management authorisation from the FSA. He also had sole authority with Mr Peterson to move the Macro's cash and was the person who liaised with PNC over the question of the NAV calculation. He made trade decisions and was responsible for day to day fund management of the Macro. The claimants point to the many defects in Mr Platt's documentation of the swaps, including backdating them, applying flawed swap calculations, and on the one occasion signing in the name of another. He did not read the OM or the compliance materials sent to him by Mr Hemmant. When asked whether he had heard of the phrase "clear, fair and not misleading" in the requirement imposed by the FSA, his response was "I've not really read many FSA rules, to be honest". He uncritically forwarded Mr Peterson's responses to investors and to PNC, for example that the Macro was "in the process of reducing swap exposure and replacing it in our portfolio with futures and options." He was also unrepentant that when asked to show Mr Hora of Signet the Macro's positions he only went through "his" futures and options and did not mention the swaps.
205. The claimants say that Mr Platt's conduct was obviously and knowingly fraudulent. For example, the origin of the weekly risk reports was a request from the investor AIS for risk data in the format received from another investment manager. Mr Platt said that he knew that the investors were using the reports to assess risk and he was trying the best that he could to replicate the other investment manager's template. The claimants say that he did not in fact do so since not only the swaps but also the hedges purportedly relating to them were omitted from his reports. It is also said that his NAV estimates were so inaccurate that they must have been deliberately misleading. Again, it is said that he must have known that swap trades were put on retrospectively in order to take advantage of price discrepancies and benefit from retrospective knowledge of movements in the market.
206. I cannot infer that Mr Platt was doing other than his 'incompetent best'. He accepted that he knew about the swaps, but when asked in cross-examination to confirm that it was part of his role to deal with them he replied:

"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."

207. Having heard Mr Platt over a number of days, my conclusion is that he was simply over-promoted and that he swallowed everything that Mr Peterson told him as to trade customs, compensation, authorisation and the like. He thought, indeed still thinks, that Mr Peterson's explanations made sense, especially as they were not apparently queried by Ernst & Young or by PNC. I do not think he believed that the swaps were not genuine instruments or that his statements to PNC were false. He was given too much to do and did it unquestioningly.
208. However, although not fraudulent within the Twinsectra test, Mr Platt was in my judgment plainly negligent. It was an implied term of his contract with WCUK that he would perform his duties with proper care: see e.g. Lister v. Romford Ice and Cold Storage Co Ltd [1957] AC 555 at 572.
209. I also find that Mr Platt's duties to WCUK were fiduciary in nature. He was highly paid and he was entrusted with a position of unique responsibility, safeguarding the cash and investments which WCUK had under management. He therefore owed a duty to act in the employer's interests within the test propounded by Elias J in University of Nottingham v. Fishel [2000] ICR 1462 at 1489D-1493H. On any basis it was a term of his contract of employment that he should abide by WCUK's own compliance procedures, incorporating the FSA's Principles, and indeed comply with Principles 1-4 of the FSA's Statements of Principle and Code of Practice for Approved Persons (APER). As a senior employee, he did not conduct the firm's business with due care, skill and diligence (APER Principle 2) nor did he take reasonable care to organise and control WCUK's affairs responsibly and effectively, with adequate risk management systems (APER Principle 3).
210. In my judgment, therefore, although Mr Platt is not liable to WCUK for dishonest assistance he is nevertheless liable in the tort of negligence.

Payment to Cayman National Bank and Trust Company (Isle of Man) Limited ("CNB") as trustee of the Weavering Capital Employee Retention Trust ("the ERT")

211. On 23 October 2008 Mr and Mrs Peterson resolved as directors of WCUK to make a payment of £4m to CNB as an addition to an appointed sub-fund of the ERT. £3m was to go to the family of Mr and Mrs Peterson and the remainder to the families of Mr Dabhia and Mr Stewart.
212. The WCUK liquidators seek to recover the sum on three grounds. First, on the basis that the payment was a transaction at an undervalue within s. 238 of the 1986 Act, secondly that the payment was made in breach of Mr and Mrs Peterson's fiduciary duties to WCUK and represents property to which WCUK is beneficially entitled and thirdly, by way of a restitutionary claim.
213. CNB has obtained directions from the High Court of the Isle of Man to the effect that it should adopt a neutral stance and defendants 4-7, beneficiaries of the ERT, only oppose the claim to the extent of ensuring that full argument is heard on the issue. In essence they too take a neutral stance.
214. Subject to s. 238 (5) and s. 240(2) the provisions of s. 238 are plainly applicable in that,

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.

215. S 238 (5) debars the court from making an order under s. 238 if it is satisfied,

"(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."

216. Mr Peterson contended in closing that the payment was made in good faith and raised in support the assertion that £4m was the minimum payment required to set up the ERT. I note that Magnumhold set up an ERT with a contribution of £1m, and there is nothing to explain under what provision such a requirement was imposed.
217. I am not satisfied under either limb of s. 238 (5). The ERT payment cannot be said to have been made in good faith in view of Mr Peterson's fraud in relation to WCUK and there were no reasonable grounds for believing that the transfer would benefit WCUK. The payment was purportedly made to assist in retaining the services of Mr Peterson, Mrs Peterson and Mr Dabhia but those services were in fact, and to the knowledge at least of Mr Peterson, worthless.
218. S. 240 (2) provides that a time is only a relevant time for the purposes of s. 238 if the company is unable to pay its debts. S. 132 (2) of the 2006 Act provides that a company is deemed to be unable to pay its debts if the court is satisfied that the value of the company's assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities. I am so satisfied because of the claim that the Macro has (and had on 27 October 2008) in the sum of at least $450m, compared with WCUK's net assets as at 31 March 2008 of only some £10.2m at most.
219. I am therefore prepared to make an order under s. 238 (3) requiring CNB to restore the £4m ERT payment to the claimants.
220. On the facts I have found I would also be able to make orders in the claims as alternatively framed, namely in breach of trust and restitution.

Payments to an account at EFG Bank SA ("EFG Bank")

221. Between 7 July 2005 and 2 February 2009 WCUK made 30 payments to an account at EFG Bank controlled by Mr Peterson. They were recorded in WCUK's accounting records as "introductory fees".
222. Mr Peterson's case is that these were legitimate applications of WCUK's property being made for the benefit of certain Swedish investors, Messrs Petter and Henrik Wingstrand. Mr Peterson maintains that the payments were fees for introductory services provided to WCUK by Messrs Wingstrand and by way of compensation for losses suffered by investing in Weavering Bahamas.
223. There are a number of problems with this explanation. The two principal ones are first, that Messrs Wingstrand in correspondence with the claimants categorically deny having provided "any services or assistance to any Weavering companies of funds whatsoever". Mr Peterson has not called any witnesses or documentary evidence to corroborate his assertion that on the contrary they did.
224. Secondly, WCUK was under no legal liability to compensate Messrs Wingstrand for losses suffered in relation to Weavering Bahamas. Mr Peterson claims that WCUK had agreed to support a written guarantee dated 31 July 2001 by which Magnumhold guaranteed Messrs Wingstrand's investment. However this is contrary to the guarantee document itself under which only Magnumhold was liable to compensate Messrs Wingstrand for their losses in Weavering Bahamas.
225. Mr Peterson explained this by saying that Magnumhold had given the guarantee on behalf of WCUK because WCUK could not do so (nor could there be any record of the transaction in WCUK's books) in compliance with FSA capital adequacy ratio requirements. If that is correct, the purpose of the Magnumhold Guarantee was to deceive the FSA and I cannot take account of a contradictory purpose in such circumstances.
226. Mrs Peterson believed that her husband wanted to use WCUK funds to keep an important investor "on side". Her fellow directors appeared content, as were Mr Hall, Reeves Neylan, Mr Roche and Mr Roche's accountants.
227. There is no evidence that the Magnumhold Guarantee was discussed within WCUK. Mrs Peterson said she had not seen it before these proceedings and that all her information about it came from Mr Peterson. The EFG payments were not discussed with or approved by WCUK's other directors. Although it seems that Messrs Wingstrand did acquire some shares in the Macro there is no evidence that the EFG payments were used for this purpose and in any event WCUK was under no obligation to make payments for the benefit of Messrs Wingstrand.
228. There is no explanation as to reconciliation of conflicts of interest between Mr and Mrs Peterson's duties to WCUK and their interests in Magnumhold or how they could have complied with the duties of disclosure imposed on directors by s. 182 (1) of the 2006 Act.
229. I note that there is evidence that other payments out of WCUK were described falsely as "introductory fees" (e.g. to a Mr Ulvegarde) in order to ensure that they could be deductible for corporation tax purposes.
230. If all other claims fail, it is my view that Mr Peterson would be liable for the amount of the EFG payments on the basis of knowing receipt. The elements of such a claim are: (see El Ajou v. Dollar Land Holdings plc [1994] 2 All ER 685 at 700) (i) a disposal of the claimants' assets in breach of fiduciary duty; (ii) the beneficial receipt by the defendant of assets traceable as assets of the claimants, (iii) knowledge on the part of the defendant that the assets are traceable to a breach of fiduciary duty. As to (iii), all that is necessary is that the defendant's state of knowledge should make it unconscionable for him to retain the benefit of the receipt: BCCI (Overseas) Limited v. Akindele [2001] Ch 437 at 455E. All these requirements are fulfilled.

Mr Peterson's director's loan

231. The claimants claim repayment of a loan made by WCUK to Mr Peterson of £519,815.91 which the WCUK administrators demanded by letter dated 7 April 2009.
232. Mr Peterson's sole defence to the claim for repayment, made in debt or alternatively under s. 197 and s. 213 of the 2006 Act, is that there was an agreement that the loan would only be repayable from dividends which were expected to be (but of course were not) declared in April 2009.
233. There is no evidence of such an agreement beyond Mr Peterson's assertion. WCUK's accounts suggest that the loan was indeed repayable on demand. In any event there is no evidence of a resolution of members within s. 197 (1) of the 2006 Act or that any memorandum was made available within s. 197 (3). None of the circumstances specified in s. 213 (2) applies. Accordingly the effect of the demand on 7 April 2009 would have been to avoid the loan and render Mr Peterson liable in restitution and to give an account and indemnity in respect of the loan: see Tait Consibee (Oxford) Limited v. Tait [1997] 2 BCLC 349 at 351.
234. Further, there is no basis for any set-off as claimed in the defence. WCUK has no liability to Mr Peterson and in any event it would in all the circumstances be manifestly inequitable to permit a set-off in the circumstances of this case: see Bim Kemi AB v. Blackburn Chemicals Limited [2001] EWCA Civ 457.

Payments by Mr Peterson out of assets he held personally in February and March 2009

235. At a time when the Macro was collapsing, Mr Peterson admittedly made certain transfers out of assets he held personally, as follows:

£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.

236. The claimants contend that they are entitled to recover all such moneys on the basis (a) that the payments were made out of moneys held on constructive trust for WCUK and over which WCUK is entitled to assert a proprietary claim and/or (b) under s. 423 of the 1986 Act as transfers defrauding creditors.
237. The proprietary claim is a claim to trace all WCUK's funds: see e.g. Agip (Africa) v. Jackson [1990] 1 Ch 265 at 290 E-F. It is not suggested that any recipient was a bona fide purchaser for value. Further it is not suggested that the moneys transferred by Mr Peterson did not represent benefits wrongfully acquired from WCUK. However, the claimants have not proved that the sums were the same unmixed sums as were paid to Mr Peterson by way of salary or bonus, let alone that they derived from performance fees paid to WCUK by the Macro. I do not think that can simply be assumed.
238. I therefore turn to the claim under s. 423 of the 1986 Act. S. 425 and s. 423 (2) enable the court to make a variety of orders if satisfied that there has been a transaction defrauding creditors within s. 423. That section applies in relation to transactions entered into at an undervalue. A person enters into such a transaction with another person (s. 423(1)),

"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"

or

"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."

239. Mr Aldridge submits that the payment directly to the builder cannot fall within these words. However, although the builder will have given consideration for the payment, it is nevertheless a transaction with Mrs Peterson on terms that provide for Mr Peterson to receive no consideration. In short, Mr Peterson paid for works to a house in which Mrs Peterson had a substantial interest.
240. Her rather vague claim that there was always an arrangement between Mr and Mrs Peterson whereby they each bore responsibility for different items of household expenditure so that she gave consideration for the payment in that way does not in my judgment bear scrutiny.
241. A transaction is only one defrauding creditors if the court is satisfied (s. 423 (3)),

"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".

242. Mr Aldridge submitted that the payments had certain features strongly suggesting that Mr Peterson was not motivated by the necessary intent. In particular he submitted that none of the payments was so large or anomalous as to be abnormal. In my judgment the most important factor is the time when these payments were made, namely when it was clear (February 2009) that the redemption requests could not be met and (3^rd March 2009) PwC were going to be called in. On 6^th March 2009 PwC discovered that WCF was the counterparty to the swaps and on 9^th March 2009 the Macro resolved to suspend determination of its NAV. It is plain that Mr Peterson realised that there was a crisis and he made payments as a result which, as he accepted, were of a nature he had not made before.
243. Accordingly, I am satisfied that, with one exception, all the payments were made in fraud of creditors under s. 423 of the 1986 Act. That exception relates to the payment of £85,000 in respect of which I allowed an amendment for the claimants to make an additional claim. Mr Peterson was not cross-examined about this payment and defendants 4-7 (who have no independent knowledge) did not have the opportunity to take advantage of anything he might have said. In those circumstances I cannot just assume that the claim has been made out. I will disallow that part of it.

Recovery of salary, bonuses and benefits

244. The claimants seek to recover the salary, bonuses and other benefits paid to each of Mr Peterson, Mrs Peterson, Mr Dabhia and Mr Platt. I have already said that I am dubious that a proprietary claim has been made out and it seems to me that the restitutionary claim pleaded (on the ground of total failure of consideration) is unnecessarily complex. I find it hard to be satisfied on the evidence before me that the services of these defendants (and indeed the claims in respect of bonus payments to other employees who are not parties) were rendered wholly nugatory and useless for all purposes.
245. However on the facts before me WCUK can claim an account of profits on the simple ground that Mr Peterson, Mrs Peterson and Mr Dabhia were all paid on the basis of breaches of fiduciary duties to WCUK. Mr Platt was not a director of WCUK but, as I have found, he was a fiduciary in relation to WCUK's assets and was in breach of his fiduciary duties so that he too is liable to account.

Conclusion

246. I therefore find that the claimants have made out their claims with the exception of the claims in fraud against Mr Platt and the additional claim in respect of the payment of £85,000 by Mr Peterson.