In latest Argentina bond flap, mediator scolds hedge fund lawyer for disclosures

February 25, 2016

(Reuters) – Big news came from an unexpected quarter on Wednesday. At an open hearing on an arcane procedural issue before a panel of judges at the 2nd U.S. Circuit Court of Appeals, a lawyer for hedge funds entrenched in a 15-year fight with Argentina over defaulted sovereign bonds revealed that the hedge funds and Argentina have worked out the economic terms of a $5 billion settlement. The only remaining obstacles to a deal, according to hedge fund counsel Matthew McGill of Gibson Dunn & Crutcher, were “hiccups on mechanics.”

My Reuters colleague Nate Raymond was among the reporters who rushed to get out word of the breakthrough in the long-running Argentine bond saga, which has seen more twists and turns than a telenovela. But one player in the drama was not at all happy about McGill’s disclosure. On Wednesday afternoon, court-appointed special settlement master Daniel Pollack of McCarter & English issued a press release scolding the hedge fund lawyer.

According to Pollack, revelation of the $5 billion deal “violated the confidentiality of the discussions between the parties, which is an inviolable principle of all negotiations through me as special master,” his statement said. “If and when there is a signed agreement in principle reached between those or any other parties, I will announce it as special master.”

So obviously, if there is to be a definitive settlement agreement of a case that has stymied U.S. courts, dominated Argentine politics and prompted global soul-searching about sovereign debt and international bankruptcy, Pollack wants to declare it.

Who can blame him? When the special master was appointed by U.S. District Judge Thomas Griesa of Manhattan in 2014, Argentina’s previous administration was publicly mocking defaulted bondholders NML Capital and Aurelius Capital as vultures and insisting that the country would never pay distressed debt holders more than they would have received if they had exchanged their bonds in Argentina’s post-2001 restructurings. Now the new Argentine administration has already reached settlements with about 20 percent of the holdouts and is on the verge of a deal with NML, Aurelius and two other hedge fund holdouts, which account for another 65 percent of the defaulted bonds. Pollack undoubtedly deserves a fair share of credit for those developments.

But the flap over McGill’s disclosure raises a couple of questions. First, was Pollack justified in accusing the hedge fund lawyer of breaching the confidentiality of settlement talks? And second, will McGill’s revelation end up helping or hindering the final negotiations to resolve the case?

For context: The hearing at the 2nd Circuit was to determine whether Judge Griesa, who has been presiding over litigation between Argentina and holdout investors for more than a decade, has jurisdiction to lift the critical injunction that forced Argentina into talks with the bondholders. As I explained last week, Argentina’s new administration asked the judge to dissolve 2012 and 2015 rulings that barred the government from making payments to exchange bondholders without paying off the holdouts. The hedge funds argued that he should not tamper with the leverage that drove Argentina to the negotiating table. Judge Griesa nevertheless opined last Friday that he would lift the injunctions if he had authority but that he did not have jurisdiction because Argentina had appealed several of his rulings to the 2nd Circuit.

Argentina, represented since early February by Cravath Swaine & Moore, promptly moved to dismiss those appeals, which led to Wednesday’s hearing before 2nd Circuit Judges John Walker, Regina Raggi and Peter Hall.

Argentina, represented at the hearing by Cravath partner Michael Paskin, said the new government wants the injunctions lifted before the Argentine Congress begins its session on March 1. On behalf of the hedge funds, McGill urged the appeals court to ignore the March 1 deadline and keep the injunctions in place until deal terms are finalized.

The appellate judges, according to audio of the hearing, asked why they should get involved with timing questions that properly belong to Judge Griesa. That line of inquiry prompted McGill to disclose how close the two sides are to a final resolution.

“We have had an agreement on economic terms with Argentina since Thursday. We are this close to a deal,” he said. Problems, he said, had cropped up in the payment mechanics suggested by the special master, and the hedge funds wanted to nail down the details of how they would receive their $5 billion before they signed off. “If we just have a little time, we can finish the deal,” he said. He urged the 2nd Circuit to exercise its discretion “to facilitate the end of this litigation.”

Did McGill step out of bounds? Not according to Richard Painter, a law professor at the University of Minnesota. As long as there is no court order or written non-disclosure agreement governing settlement talks, he said, client interests should guide lawyers’ disclosures. According to the professor, if McGill believed he needed to reveal deal terms to persuade the 2nd Circuit to keep the injunctions in place – and as long as his clients authorized the disclosure – he didn’t breach ethics rules.

“The special master has good reasons for wanting the negotiations to be confidential,” Painter said. “But that doesn’t create a legal obligation.”

In the short term, the hedge funds won back a bit of leverage from the 2nd Circuit, which suggests McGill’s revelation didn’t hurt. In an order issued after the hearing, the appeals court remanded the injunction issue to Judge Griesa but said (pursuant to the parties’ agreement) that he must allow full briefing and that if he decides to lift the injunctions, the hedge funds can appeal and seek a stay. The continued viability of the injunctions means Argentina still has a strong incentive to finalize deal terms with the hedge funds.

I’m sure the case will now proceed on two tracks, with one battalion of lawyers from each side negotiating the payment process before special master Pollack and another battalion litigating the injunctions before Judge Griesa. In the best-case scenario for the hedge funds, they wrap up the settlement quickly and drop the fight to keep the injunctions in place. After all, as McGill told the 2nd Circuit on Wednesday, the holdouts don’t want to get bogged down in yet another round of appeals. They want their $5 billion.

They’ll have to go through Pollack to get it, and they may have to win back the special master’s graces. But if a settlement is really as close as McGill said, Pollack will soon get to announce the good news.

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