Wednesday, December 24, 2014

‘Vultures’ win NY ruling on assets

Argentina had argued the subpoenas that the holdout hedge funds have been seeking could violate international treaties.

Appeals court grants ‘vultures’ discovery rights over assets held in the United States

Argentina and entities linked to the government must give details of the country’s global assets, including diplomatic and military holdings, to the “vulture funds,” who are seeking US$1.6 billion as part of a long-term legal fight over defaulted government bonds, a US appeals court ruled yesterday.

The 2nd US Circuit Court of Appeals in New York rejected Argentina’s appeal against a 2013 ruling, which ordered numerous banks and the federal government to comply with subpoenas and information requests served by bondholders suing for full payment of debts after Argentina’s US$100-billion default in 2002.

The judicial decision comes only eight days before the Rights Upon Future Offers (RUFO) clause expires, which forbids the government from voluntarily making a better offer and reaching an extrajudicial accord with those who have repeatedly refused to restructure defaulted debt than what it offered in its 2005 and 2010 restructurings.

While the court upheld US District Judge Thomas Griesa’s ruling, the three-judge panel stressed “that Argentina — like all foreign sovereigns — is entitled to a degree of grace and comity.” Saying those concerns were of “particular weight” when it came to a country’s diplomatic and sovereign affairs, the 2nd Circuit urged Griesa to prioritize the production of documents “unlikely to prove invasive of sovereign dignity.”

Even though the holdout hedge funds asked the courts to be granted discovery rights on Argentine assets worldwide, yesterday’s ruling only apply to assets located in the United States, attorney specialized on sovereign debt issues and partner at Garrido law firm Eugenio Bruno said.

“Argentina now has to report its assets in the US, including cash and military holdings. But the legal scenario doesn’t change much with yesterday’s ruling. The courts will have to analyze each asset individually to know which one can be seized. The ruling only has a political effect as it puts pressure to reach a deal when the RUFO clause expires,” Bruno said.

Rejected argument

Argentina had argued the subpoenas seeking the information may violate international treaties by targeting such property, as well as diplomatic documents and individuals linked to the country, the federal appeals panel in Manhattan said in its ruling. Nevertheless, the court disagreed.

“We take no view on Argentina’s treaty interpretations because even if those interpretations are correct, appellees’ discovery demands need not be quashed. Insofar as the discovery demands reach diplomatic or consular property that is immune from attachment, Argentina should object if and when appellees actually seek to execute on such property,” the ruling said.

Argentina said that the Foreign Sovereign Immunities Act bars sharing information about sovereign property “that is potentially immune from attachment,” according to the ruling.

The country argued that the demands of holdout investors for documents were too broad because they “reach entities — and, in some cases, individuals — that are not alter egos of the republic and therefore not liable for Argentina’s debts.”

The 2nd Circuit said that insofar as the information demands reached diplomatic or consular property immune from being pursued by the creditors, Argentina should object when the bondholders seek to execute on such property. Argentina may also present certain other objections regarding producing the documents to Griesa on privilege and treaty grounds, the appeals court said.

“At this juncture, it is entirely speculative whether documents Argentina regards as privileged or inviolable will be responsive to appellees’ discovery requests and, if so, whether appellees will persist in demanding such documents in the face of particularized claims of privilege or inviolability by Argentina,” the ruling said.

Court order

The decision implies that entities that are not alter egos of Argentina and aren’t liable for its debts may still have to reveal their assets to creditors seeking repayment on debt from the country’s 2001 default on a record US$95 billion. Argentina says the subpoena might involve assets of President Cristina Fernandez de Kirchner.

The subpoenas seek asset information from hundreds of state-related entities with accounts or operations outside Argentina. Asset categories include bank accounts and physical assets such as diplomatic and military property, a person familiar with the litigation told Bloomberg News yesterday.

For assets in the US to be “attached,” the property would need to be used for a commercial activity, though that might include the purchase of government items including bullets and boots for the military, said the person, who asked not to be identified by name because the discussions are private.

The holdout investors can’t determine whether assets qualify under the judgment unless they first get the information they seek through the subpoenas, the person said. Griesa will still be able to review subpoenas based on individual challenges, and grant or reject them on various grounds, according to yesterday’s ruling.

Jonathan Blackman, one of Argentina’s lawyers, said in arguments before the appeals panel that he did not know whether the country would comply with the subpoenas if they were backed on appeal. He called the requests “unprecedented.”

“No state has ever before been asked to turn over the keys to its defense establishment, its national security establishment, its military establishment, the personal property of its president, and state officials,” Blackman said at the hearing.

The appellate judges repeatedly questioned him about the legitimacy of Argentina’s claim of immunity.

“We have a situation here where you waived sovereign immunity, you submitted yourself to the jurisdiction of the courts of New York,” the appeals court said during oral argument. “You litigated your obligation under these bonds, for years, before this court. You lost.”

Not the first time

This is not the first time the holdout hedge funds have tried to go after Argentine assets abroad as part of their years-long legal battle with the government. The Central Bank’s foreign reserves and state-owned energy firm YPF’s assets have been targetted by NML to no avail. Elliot Management managed to temporarily embargo Argentina’s navy ship, ARA Libertad, a training vessel in October 2012 in Ghana.

At the same time, “vulture fund” Elliot Managment was granted discovery rights in August to 123 companies allegedly linked to Kirchnerite public works tycoon Lázaro Báez in Nevada. The hedge fund suspects the companies were used to launder US$65 million of funds for the government.

Upcoming debate

The RUFO, which prohibits the country from offering a better deal to holdouts than to those who accepted to restructure the country’s defaulted debt, has been cited as the main reason for not offering additional money to the seven percent of owners of Argentine debt that didn’t accept the country’s post-default restructurings since 2002.

The clause expires on January 1, 2015 and speculation is rife over what the federal government will do when that happens. Talks between Argentina, bondholders and mediator Daniel Pollack are expected to resume after the new year, although the parts remain far from reaching an agreement. Economy Minister Axel Kicillof has already said repeatedly that Argentina’s position will not change in January.

Herald with Reuters, online media