Summary

A company's chief executive and managing director who had perpetrated fraud by swap agreements and misrepresentations to investors was liable to the company and its liquidators for breach of his fiduciary duties and in the tort of deceit.

Facts

The claimant company (W) and its liquidators (L) sought relief under theInsolvency Act 1986 against personnel involved in running W.

The first defendant (D1), who was W's chief executive and managing director, had incorporated another company (X) to carry on business as a hedge fund, managed by W. He subsequently caused another hedge fund (M) to be incorporated, also managed by W. Within M's first month of trading, it lost over 19 per cent of its assets by value in exchange trading. D1 caused M to enter into two over the counter (OTC) options on forward rate agreements (FRAs) with X, whereby M's loss was converted on paper into profit. Thereafter, D1 caused M to enter into further OTC trades in FRAs with X. M later entered into swap transactions with X and appeared to investors to be successful. Following difficult market conditions, M experienced a high volume of redemption requests which it was unable to meet. Accountants were called in, who discovered that M's asset valuation was over-inflated. M and W went into liquidation. W and L issued claims in fraud against D1 and the tenth defendant (D10), who was a senior and highly paid employee of W. The second defendant (D2), who was D1's wife and a director of W, was accused of negligently permitting the alleged fraud to happen. The same was alleged against the ninth defendant (D9), another director. There were also outstanding claims against the third to the seventh defendants (D3), who were the recipients of transfers made by D1. The claim against the eighth defendant, another recipient of funds, was settled. It fell to be determined whether a fraud was perpetrated by the swaps and representations made to investors in M's offering memorandum and due diligence questionnaires, and whether the swaps were sham transactions or honest trades entered into as part of an honest trading strategy.

Held

(1) On the evidence, the swaps were consistently wrongly valued and there were serious flaws in the way the paperwork for the swaps was dealt with. There were the deficiencies in the swap tickets: they had been prepared in a "slapdash fashion". The trade confirmations for the swaps were also defective. The reason for the discrepancies might have been that in many instances the swap documentation was backdated, not just by a few days but sometimes by several months. That was not standard industry practice. The backdating of the documents also gave rise to the inference that the trades were not genuine and that production of documentation after the event gave D1 the benefit of hindsight as to what swap positions would produce the best effect on M's reported profits. There was also some suggestion that signatures had been forged. Further, the offering memorandum contained a number of misrepresentations and the due diligence questionnaires contained several misleading statements. The actual risks were completely different from the picture presented. In all the circumstances, the swaps were never intended to be enforceable instruments but were simply used to manipulate figures to give the impression to investors that M was successful. The swaps were shams, Snook v London and West Riding Investments Ltd [1967] 2 Q.B. 786 followed (see paras 106, 110, 112, 114, 116-117, 122-129, 139, 142-143 of judgment). (2) D1 was liable for breach of his fiduciary duties to W as a director and in the tort of deceit (para.147). (3) The test for D2's liability was whether she had done what 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 W's business to discharge her duties. She did not meet that test (para.174). (4) D9 was in breach of his duties to W as director by failing to acquire sufficient knowledge and understanding of its business and failing to satisfy himself as to the details and propriety of the swaps. He was also liable in negligence for failing to act with reasonable care, skill and diligence and for negligently making false representations to investors (paras 182-183, 189). (5) D10 had been over-promoted and had accepted everything that D1 had told him as to trade customs, compensation, authorisation and the like. Although not fraudulent, D10 had plainly been negligent. It was an implied term of his contract with W that he would perform his duties with proper care. D10 was therefore not liable to W for dishonest assistance but liable in negligence (paras 207-210). (6) With one exception, relating to a single payment of £85,000, D1's transfer of assets to D3 were made out of moneys he held on constructive trust for W. Those payments were, accordingly, made in fraud of creditors under s.423 of the Act (para.243). (7) W and L had, accordingly, made out their claims with the exception of the claims in fraud against D10 and the claim in respect of the payment of £85,000 by D1 (para.246).

Judgment for claimants in part