Did Argentina lie to the U.S. Supreme Court?
I may have been too quick to believe that Argentina actually intended to follow through on a pledge to the U.S. Supreme Court.
Last Friday, I credited the Argentine government with an historic concession in its May 27 brief to the court, in which Argentina pledged to comply with an injunction from the 2nd U.S. Circuit Court of Appeals prohibiting it from making payments to holders of its restructured debt before paying off hedge funds that refused to exchange defaulted bonds. Argentina is trying to persuade the Supreme Court to grant review of the 2nd Circuit’s so-called pari passu (or equal footing) injunction, and I believed that the promise of compliance from a country notorious for defying bondholder judgments against it was a show of good faith.
But NML Capital, one of the hedge funds opposing Argentina at the Supreme Court, presented evidence Friday afternoon to a Manhattan federal judge suggesting that the country is secretly planning to evade U.S. court orders in the event that the justices refuse to hear its case. NML told U.S. District Judge Thomas Griesa, who has been presiding over the Argentine bond litigation for more than a decade, about a newly surfaced May 2 memo from Argentina’s lawyers at Cleary Gottlieb Steen & Hamilton to the country’s Minister of Economy and Public Finance. The five-page memo lays out various scenarios for resolving Argentina’s dispute with the hedge fund holdouts and concludes that if the Supreme Court denies cert, the government’s “best option” would be to default “and then immediately restructure all of the external bonds so that the payment mechanism and the other related elements are outside of the reach of American courts.” (NML didn’t file the confidential memo because of privilege concerns, but The Financial Times’s FTAlphaville blog has an English translation of the entire document, which has also been reported in the Argentine press.)
NML contends that a restructuring designed to put Argentine debt beyond the reach of the U.S. courts would violate anti-evasion provisions in trial court orders that have already been affirmed by the 2nd Circuit. The hedge fund, which is represented by Dechert and Gibson, Dunn & Crutcher, went so far as to suggest to Judge Griesa that Argentina may have committed a fraud on the court. According to NML, Cleary’s May 2 memo to the Argentine minister indicates that the law firm and its client are, in fact, contemplating how to avert compliance with the directive that they must pay holders of defaulted bonds — even though lawyers at Cleary assured the judge at a hearing last November that there were “no steps being taken to evade the plan or to evade the injunction.”
So did Argentina mislead the Supreme Court when it said on May 27 that it intended to comply with the 2nd Circuit injunction if the justices denied cert? Here is exactly what the brief by counsel of record Paul Clement of Bancroft said: “Argentina’s recourse to judicial review does not represent unwillingness to comply with its legal obligations, but it shows Argentina’s struggle to continue honoring its debts to the exchange bondholders. Contrary to respondents’ assertions, absent relief Argentina will comply with the injunctions; though, since Argentina lacks the financial resources to pay the holdouts in full (what would amount to $15 billion) while also servicing its restructured debt to 92 percent of bondholders, Argentina will have to face, objectively, a serious and imminent risk of default.”
Nowhere does the Supreme Court brief mention that Argentina would attempt to follow that default, as per Cleary’s description of its “best option,” with a restructuring that would put Argentine debt payments beyond the reach of the 2nd Circuit’s permanent injunction.
At Friday’s hearing, as my Reuters colleague Nate Raymond reported, Cleary argued that there is no secret plan to evade the injunction — and that there’s nothing untruthful in Argentina’s reply brief at the Supreme Court. “We make very clear that the Republic will comply,” said Argentina lawyer Carmine Boccuzzi of Cleary. “But what that means, given the fact that the Republic does not have the resources to pay all of the holdouts, is that there will likely be a default, an across-the-board default. That is what we have said. That is what is going on.” Boccuzzi did not deny the authenticity of the May 2 memo (though he said he believes it’s privileged) but said that NML was reading too much into it. “When one has a default, then one may have to face an attempt to restructure those defaulted obligations and to query whether that can be done consistent with the outstanding (U.S. court) orders,” he said, emphasizing that Cleary was counseling its client on various scenarios. “We have never advised a client just to turn their nose up to the court’s orders and to evade them,” Boccuzzi said.
Boccuzzi’s comments to Griesa indicate two technical defenses to NML’s allegations. First: Even though the memo says Argentina’s best option is to default and restructure its debt “so that the payment mechanism and the other related elements are outside of the reach of American courts,” that’s not really a violation of anti-evasion provisions from U.S. courts because it’s not an actual plan to evade court orders. And second: The memo isn’t actually suggesting that Argentina will be able to restructure its debt to avoid paying the hedge fund holdouts, even though the document says that outcome would be the best option for Cleary’s client.
Those are awfully lawyerly arguments for a defendant that has thoroughly exasperated Griesa and the judges of the 2nd Circuit and inspired six former federal judges (five of them also former high-ranking officials at the Justice Department) to file an amicus brief calling Argentina a fugitive from U.S. justice that doesn’t merit the consideration of the Supreme Court. Argentina wants the justices to ask the Solicitor General for his view of its cert petition. Is the U.S. government really going to support a foreign sovereign that is contemplating a debt restructuring aimed at escaping the reach of the American courts to which its bond contracts granted jurisdiction? And as the justices consider Argentina’s case at their June 12 conference, how much faith should they place in Argentina’s pledge of compliance in light of the Cleary memo?
I sent emails requesting comment to Boccuzzi and his Cleary partner Jonathan Blackman. In response, a Cleary spokeswoman declined to comment, citing ongoing litigation and privilege shielding the May 2 memo. I also emailed Paul Clement to ask if he was aware of the Cleary memo, which mentions him twice in the context of Argentina’s litigation strategy, and whether the memo contradicted Argentina’s representations in its Supreme Court brief. None of the lawyers responded.
NML has asked Griesa to issue a supplemental order to clarify that Argentina is permanently prohibited from taking any action — from making a plan to executing it — to change the manner in which the country pays its debt obligations. Griesa didn’t rule Friday but said he’d consider NML’s filings. A source familiar with the litigation said that the judge’s clerk called the parties late Friday afternoon to say the judge had concluded the May 2 memo is privileged. Griesa’s clerk would not comment except to say that an order from the judge will be docketed in the next few days. It’s not clear how a finding that the memo is privileged would affect the relief NML is asking for.
(This post has been corrected. An earlier version incorrectly reported that Goodwin Procter is counsel to NML.)
(This article has been corrected. An earlier version incorrectly reported that Goodwin Procter is counsel to Aurelius Capital.)
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