By Sam Nadler
Sam Nadler is a senior at Vanderbilt University studying history.
The U.S. Supreme Court met on June 12, 2014 to decide the fate of an 11-year long legal battle. On one side was the billionaire investor and head of Elliott Management, Paul Singer, and on the other the nation of Argentina. Argentina had appealed a lower court's decision, which forced Argentina to pay Singer $1.4 billion for bonds that he bought after the country defaulted in 2001. The Court decided not to hear the case, affirming the previous ruling against Argentina.
The significance of this decision cannot be fully understood without the context of the legal actions prior to Argentina’s appeal to the Supreme Court. The story began twenty years ago in New York, when Argentina agreed to the Fiscal Agency Agreement (FAA) with Banker's Trust for the purpose of issuing bonds eventually valued at $82 billion. Section 12(d) of the FAA stated that Argentina would default if, among other eventualities, “a moratorium on the payment of principal of, or interest on, the Public External Indebtedness of the Republic [were] declared by the Republic.” [1] Furthermore, and of specific interest to later legal developments, section 22 of the FAA stated that Argentina was to “expressly accept the jurisdiction [...of] any state or federal court in the City of New York [... for] any action arising out of or based on the Securities or this Agreement by the holder of any Security.” [2] Thus, Argentina fully acknowledged and accepted that any potential future litigation regarding the bonds could be filed in the United States.
Sam Nadler is a senior at Vanderbilt University studying history.
The U.S. Supreme Court met on June 12, 2014 to decide the fate of an 11-year long legal battle. On one side was the billionaire investor and head of Elliott Management, Paul Singer, and on the other the nation of Argentina. Argentina had appealed a lower court's decision, which forced Argentina to pay Singer $1.4 billion for bonds that he bought after the country defaulted in 2001. The Court decided not to hear the case, affirming the previous ruling against Argentina.
The significance of this decision cannot be fully understood without the context of the legal actions prior to Argentina’s appeal to the Supreme Court. The story began twenty years ago in New York, when Argentina agreed to the Fiscal Agency Agreement (FAA) with Banker's Trust for the purpose of issuing bonds eventually valued at $82 billion. Section 12(d) of the FAA stated that Argentina would default if, among other eventualities, “a moratorium on the payment of principal of, or interest on, the Public External Indebtedness of the Republic [were] declared by the Republic.” [1] Furthermore, and of specific interest to later legal developments, section 22 of the FAA stated that Argentina was to “expressly accept the jurisdiction [...of] any state or federal court in the City of New York [... for] any action arising out of or based on the Securities or this Agreement by the holder of any Security.” [2] Thus, Argentina fully acknowledged and accepted that any potential future litigation regarding the bonds could be filed in the United States.
On December 23, 2001, Argentina invoked the aforementioned moratorium and defaulted on $93 billion in bonds, including those issued under the Banker's Trust FAA. A number of global and domestic financial crises impacted Argentina's ability to meet its obligations under the Banker's Trust FAA agreement, forcing the country to default. One of the clearest causes of the default was a deep recession in the late 1990's that created increasingly unsustainable budget deficits. Shortly before and after Argentina defaulted on the bonds, billionaire investor Paul Singer purchased large amounts of the distressed debt under NML Capital, a subsidiary of Elliott Management. An Economist article in 2005 noted that "in the summer of 2002, a few months after Argentina stopped honoring its debts, a brave buyer could have purchased a distressed bond in the secondary market for 20 cents on the dollar or less." [3] Singer was one of many investors, including Blue Angels and Auerlis Capital, who attempted to capitalize on the opportunity by buying the distressed debt. [4]
In the aftermath of the default, Argentina attempted to restructure its debt in order to keep the country fiscally afloat. The first of these attempts was in 2005, when Argentina convinced investors to accept 35-37 cents on the dollar. This initial wave of fiscal restructuring, combined with a second restructuring in 2010, got 93% of debt holders to agree to Argentina’s terms. However, some of the debt holders, like Singer, were not so quick to exchange their bonds for a quick profit. The same 2005 Economist article noted, "Not every vulture will settle for such quick pickings. The more patient among them will hold out for their full pound of flesh in the courts. They take their inspiration from Elliott Associates, an American hedge fund that spent $11.8m on distressed Peruvian debt and, after four years in the courts, forced the government to settle in 2000 for almost $56m." [5] From the start, Singer and Elliott Management were prepared to take on South America's second largest country if Argentina did not fulfill its debt obligations. Although he knew they were in for a lengthy legal battle, Singer was determined to settle on his own terms.
In the aftermath of the 2005 debt restructuring, Argentina refused to pay Singer or the other holdouts more than those who agreed to the 'haircuts.' This initiated Singer's legal crusade against the country, and his attempt to collect maximum profits. In this fight, Singer created an organization called the American Task Force Argentina whose mission is to bring about "a just and fair reconciliation of the Argentine Government's 2001 debt default and subsequent restructuring[...and] to encourage the United States government to vigorously pursue a negotiated settlement with the Argentine government in the interests of American stakeholders." [6]
Almost a decade after the initial default, a Manhattan Judge made a significant ruling in 2012 regarding the Singer's and others’ debt claims. Although Singer had already obtained numerous rulings against Argentina, the government had refused to pay or negotiate with the investor. Judge Thomas Griesa ruled on November 21 of that year that:
“In accepting the exchange offers of thirty cents on the dollar, the exchange bondholders bargained for certainty and the avoidance of the burden and risk of litigating their rights on the FAA Bonds. However, decisions have now been handed down by the District Court and the Court of Appeals based on the Pari Passu Clause, which give promise of providing plaintiffs with full recovery of the amounts due to them on their FAA Bonds. This is hardly an injustice. The exchange bondholders made the choice not to pursue the route that plaintiffs [such as Paul Singer] have pursued. Moreover, it is hardly an injustice to have legal rulings, which, at long last, mean that Argentina must pay the debts that it owes. After ten years of litigation this is a just result.” [7]
Griesa firmly supported Elliott and the other so called 'vultures' and strove to end the decade-long fight over the defaulted bonds. Griesa ruled that Argentina must pay the vultures "whenever Argentina ‘pays any amount due’ under the terms of the Exchange Bonds [those of the haircut creditors]. The next time this will occur will be in December 2012, when Argentina is scheduled to make interest payments on the Exchange Bonds of about $3.14 billion." [8] The judge essentially ruled that the country must pay Elliott Management when they pay the holders of the exchange bonds. [9]
In a bizarre twist as the case was making its way to the U.S Court of Appeals in October 2012, Singer obtained judgment against Argentina in Ghana for the detainment of a naval vessel, displaying Singer’s ruthlessness and determination. After numerous appeals, stays, and reaffirmations by the lower courts, Argentina appealed the case to the U.S. Supreme Court in February 2014.
The Supreme Court refused on June 16, 2014 to overturn the lower court rulings, ranting Singer a major victory. This refusal had two major implications for the ongoing altercation. First, Elliott and the other plaintiffs could order discovery against Argentina, enabling them to gain access to bank records and other documents that would undoubtedly give them the upper hand in any settlement negotiation. Second, Argentina was prohibited from paying holders of the exchange bonds unless they paid Singer and the other holders of the original bonds, just as Judge Griesa ruled in February 2012. It also left Argentina's hands tied and on the brink of another default unless it could pay both Singer and the exchange bondholders.
In late July, everyone's worst nightmare came true when Argentina did not make payment on $539 million of its bond obligations and defaulted for the second time in 13 years. On Singer's quest for payment, Agustino Fontevecchia of Forbes noted that "the vulture funds, which legally won their case in three consecutive instances, finally failed to extract any sort of payment for themselves and their investors...these hedge funds ultimately succeeded in alienating Argentina without achieving their goal while eroding the value of their assets spending millions on lawyers, who for now are the only winners in this whole mess." [10]
On September 29, Griesa held Argentina in contempt of court for disobeying orders not to pay any holders of overseas bonds unless Elliott was also paid. Griesa noted, “what has happened is the Republic, in various ways, has sought to avoid, to not attend to, almost to ignore this basic part of its financial obligations.” [11] This move was met by intense scrutiny from Buenos Aires. The Argentine Government released a statement remarking, “Griesa holds the sad record of being the first judge to declare a sovereign state in contempt of court for paying a debt, after failing in his attempt to obstruct Argentina´s external debt restructuring.” [12]
The court proceedings continue, and on November 5, 2014, Singer asked for a court order to prevent an Argentine lawyer from leaving the United States. Singer wants lawyer Cesar Guido Forcieri of the World Bank to appear for questioning and produce certain documents that Singer claims can help his case against Argentina. If this case's history has taught us anything, it is that this battle is far from reaching a conclusion. Until then, all the involved parties can do is continue their crusade in the courts and in the press.
[1] Fontana v. Republic of Argentina, 415 F.3d 238 (2d Cir. 2005).
[2] Ibid.
[3] "A victory by default?" The Economist. economist.com, 3rd Mar. 2005. Web 13 Nov. 2014. http://www.economist.com/node/3715779
[4] Ibid.
[5] Ibid.
[6] "About Us" American Task Force Argentina, Web 13 Nov. 2014. http://www.atfa.org/about-us/
[7] NML CAPITAL, LTD. v. Republic of Argentina, No. 08 Civ. 6978 (TPG) (S.D.N.Y. Nov. 21, 2012).
[8] Ibid.
[9] Ibid.
[10] Agustino Fontevecchia, " Argentina In Default: Everyone Lost, From Cristina Kirchner And Paul Singer's Elliott To Judge Griesa," Forbes. forbes.com, 31 July 2014. Web 13 Nov. 2014. http://www.forbes.com/sites/afontevecchia/2014/07/31/argentina-in-default-everyone-lost-from-cristina-kirchner-and-paul-singers-elliott-to-judge-griesa/
[11] Alexandra Stevenson, " Judge Holds Argentina in Contempt of Court in Bond Payment Case," Wall Street Journal Dealbook. wsj.com. 29 Sept. 2014. Web 13 Nov. 2014. <http://dealbook.nytimes.com/2014/09/29/judge-finds-argentina-in-contempt-in-bond-case/>
[12] Ibid.
Photo credit: Flickr user Alex Proimos
In the aftermath of the default, Argentina attempted to restructure its debt in order to keep the country fiscally afloat. The first of these attempts was in 2005, when Argentina convinced investors to accept 35-37 cents on the dollar. This initial wave of fiscal restructuring, combined with a second restructuring in 2010, got 93% of debt holders to agree to Argentina’s terms. However, some of the debt holders, like Singer, were not so quick to exchange their bonds for a quick profit. The same 2005 Economist article noted, "Not every vulture will settle for such quick pickings. The more patient among them will hold out for their full pound of flesh in the courts. They take their inspiration from Elliott Associates, an American hedge fund that spent $11.8m on distressed Peruvian debt and, after four years in the courts, forced the government to settle in 2000 for almost $56m." [5] From the start, Singer and Elliott Management were prepared to take on South America's second largest country if Argentina did not fulfill its debt obligations. Although he knew they were in for a lengthy legal battle, Singer was determined to settle on his own terms.
In the aftermath of the 2005 debt restructuring, Argentina refused to pay Singer or the other holdouts more than those who agreed to the 'haircuts.' This initiated Singer's legal crusade against the country, and his attempt to collect maximum profits. In this fight, Singer created an organization called the American Task Force Argentina whose mission is to bring about "a just and fair reconciliation of the Argentine Government's 2001 debt default and subsequent restructuring[...and] to encourage the United States government to vigorously pursue a negotiated settlement with the Argentine government in the interests of American stakeholders." [6]
Almost a decade after the initial default, a Manhattan Judge made a significant ruling in 2012 regarding the Singer's and others’ debt claims. Although Singer had already obtained numerous rulings against Argentina, the government had refused to pay or negotiate with the investor. Judge Thomas Griesa ruled on November 21 of that year that:
“In accepting the exchange offers of thirty cents on the dollar, the exchange bondholders bargained for certainty and the avoidance of the burden and risk of litigating their rights on the FAA Bonds. However, decisions have now been handed down by the District Court and the Court of Appeals based on the Pari Passu Clause, which give promise of providing plaintiffs with full recovery of the amounts due to them on their FAA Bonds. This is hardly an injustice. The exchange bondholders made the choice not to pursue the route that plaintiffs [such as Paul Singer] have pursued. Moreover, it is hardly an injustice to have legal rulings, which, at long last, mean that Argentina must pay the debts that it owes. After ten years of litigation this is a just result.” [7]
Griesa firmly supported Elliott and the other so called 'vultures' and strove to end the decade-long fight over the defaulted bonds. Griesa ruled that Argentina must pay the vultures "whenever Argentina ‘pays any amount due’ under the terms of the Exchange Bonds [those of the haircut creditors]. The next time this will occur will be in December 2012, when Argentina is scheduled to make interest payments on the Exchange Bonds of about $3.14 billion." [8] The judge essentially ruled that the country must pay Elliott Management when they pay the holders of the exchange bonds. [9]
In a bizarre twist as the case was making its way to the U.S Court of Appeals in October 2012, Singer obtained judgment against Argentina in Ghana for the detainment of a naval vessel, displaying Singer’s ruthlessness and determination. After numerous appeals, stays, and reaffirmations by the lower courts, Argentina appealed the case to the U.S. Supreme Court in February 2014.
The Supreme Court refused on June 16, 2014 to overturn the lower court rulings, ranting Singer a major victory. This refusal had two major implications for the ongoing altercation. First, Elliott and the other plaintiffs could order discovery against Argentina, enabling them to gain access to bank records and other documents that would undoubtedly give them the upper hand in any settlement negotiation. Second, Argentina was prohibited from paying holders of the exchange bonds unless they paid Singer and the other holders of the original bonds, just as Judge Griesa ruled in February 2012. It also left Argentina's hands tied and on the brink of another default unless it could pay both Singer and the exchange bondholders.
In late July, everyone's worst nightmare came true when Argentina did not make payment on $539 million of its bond obligations and defaulted for the second time in 13 years. On Singer's quest for payment, Agustino Fontevecchia of Forbes noted that "the vulture funds, which legally won their case in three consecutive instances, finally failed to extract any sort of payment for themselves and their investors...these hedge funds ultimately succeeded in alienating Argentina without achieving their goal while eroding the value of their assets spending millions on lawyers, who for now are the only winners in this whole mess." [10]
On September 29, Griesa held Argentina in contempt of court for disobeying orders not to pay any holders of overseas bonds unless Elliott was also paid. Griesa noted, “what has happened is the Republic, in various ways, has sought to avoid, to not attend to, almost to ignore this basic part of its financial obligations.” [11] This move was met by intense scrutiny from Buenos Aires. The Argentine Government released a statement remarking, “Griesa holds the sad record of being the first judge to declare a sovereign state in contempt of court for paying a debt, after failing in his attempt to obstruct Argentina´s external debt restructuring.” [12]
The court proceedings continue, and on November 5, 2014, Singer asked for a court order to prevent an Argentine lawyer from leaving the United States. Singer wants lawyer Cesar Guido Forcieri of the World Bank to appear for questioning and produce certain documents that Singer claims can help his case against Argentina. If this case's history has taught us anything, it is that this battle is far from reaching a conclusion. Until then, all the involved parties can do is continue their crusade in the courts and in the press.
[1] Fontana v. Republic of Argentina, 415 F.3d 238 (2d Cir. 2005).
[2] Ibid.
[3] "A victory by default?" The Economist. economist.com, 3rd Mar. 2005. Web 13 Nov. 2014. http://www.economist.com/node/3715779
[4] Ibid.
[5] Ibid.
[6] "About Us" American Task Force Argentina, Web 13 Nov. 2014. http://www.atfa.org/about-us/
[7] NML CAPITAL, LTD. v. Republic of Argentina, No. 08 Civ. 6978 (TPG) (S.D.N.Y. Nov. 21, 2012).
[8] Ibid.
[9] Ibid.
[10] Agustino Fontevecchia, " Argentina In Default: Everyone Lost, From Cristina Kirchner And Paul Singer's Elliott To Judge Griesa," Forbes. forbes.com, 31 July 2014. Web 13 Nov. 2014. http://www.forbes.com/sites/afontevecchia/2014/07/31/argentina-in-default-everyone-lost-from-cristina-kirchner-and-paul-singers-elliott-to-judge-griesa/
[11] Alexandra Stevenson, " Judge Holds Argentina in Contempt of Court in Bond Payment Case," Wall Street Journal Dealbook. wsj.com. 29 Sept. 2014. Web 13 Nov. 2014. <http://dealbook.nytimes.com/2014/09/29/judge-finds-argentina-in-contempt-in-bond-case/>
[12] Ibid.
Photo credit: Flickr user Alex Proimos
