Fact Check: Argentina

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SINCE RUFO EXPIRED

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Máximo Kirchner’s Offices Raided in Hotesur Corruption Case

Bad News Coincides with Release of Latest Poverty Statistics

Argentine federal judge Claudio Bonadio and prosecutor Carlos Stornelli ordered a raid on the offices of Presidential son and La Cámpora leader, Máximo Kirchner, Monday, seeking accounting information as part of the ongoing Hotesur K-money laundering and corruption case.

Máximo Kirchner was not present during the raid on Idea SA (which belongs to him) and Valle Mitre; both companies are administrators of the hotels owned by President Cristina Fernández, who was traveling at the time.

All reports indicate that the Kirchner family and its associates were not expecting these developments; Clarin reports that “her [Kirchner’s] family showed signs of nervousness about the proceedings…”

For example in El Calafate, when the police arrived sent by Bonadio to the Hotel Los Sauces, city prosecutor Natalia Mercado approached. She is the daughter of Alicia Kirchner, the president’s niece, cousin of Máximo and sister to Romina Mercado, president of Hotesur. She tried to impose a gesture of authority, but federal officials explained to her that she had nothing she could do there.

It was, for certain, a precedent-setting event:

Never in the twelve years of K-power has the Federal Court come to ring the door bell at the house on Avenida Néstor Carlos Kirchner, number 496, Rio Gallegos: it is the operational center of some of the most important business of the presidential family, and its partners.

The raid itself represented the execution of Judge Bonadio’s “procedural orders” seeking information about 35 separate companies with ties to the Kirchner family and its business interests, specifically including “banks and companies” associated with K-businessman Lázaro Báez – the number one recipient of public works contracts during the Kirchner administration. Báez is a business partner of President Kirchner, and the former administrator of her largest hotel, Alto Calafate.

Argentina’s creditors have undertaken a great effort to reveal the extent of corruption by Báez and other Kirchner confidantes. Earlier this summer in Nevada, Judge Cam Ferenbach rejected a petition by Mossack Fonseca’s alter ego M.F. Corporate Services to stay discovery. In Nevada and in Bonadio’s court, the tide is turning against corruption.

Unsurprisingly, K-confidantes were quick to publicly undermine the raid, with Kirchner’s Cabinet Chief, Aníbal Fernández, calling it “inconceivable,” and then assailing the action on a semantic level, claiming, this “is not a raid, but an information inquiry.”

Presidential cronies will have an equally difficult time refuting just-released evidence that the government’s global isolation as a result of its inability to settle with its creditors is crushing the Argentine economy: the Argentine Catholic University released a report yesterday that the Argentine poverty level has increased to 28.7%. That means 11.5 million Argentines are living below the poverty level.

This is in marked contrast to the figures cited by President Kirchner last month, when she “sparked controversy” by endorsing “widely disputed government figures,” and claiming that the poverty rate was “below five percent.”

We’ve long documented the Kirchner administration’s discomfort with hard economic data (it simply stopped publishing poverty statistics in 2013), but we continue to be baffled by its recalcitrant attitude towards negotiating a solution to its debt. Relief for the Argentine people would soon follow.

New Sanctions Filing by Creditors

Argentina’s “willful disregard” of a discovery order issued by the U.S. District Court for the Southern District of New York merits sanctions, says a filing made today by creditor NML Capital.  That motion is based on orders by the District Court, the Second Circuit Court of Appeals and a U.S. Supreme Court ruling that issued in June 2014.

In the fall of 2013, the District Court ordered Argentina to produce documents regarding assets that could be used to satisfy their judgments, and inquiries that certain entities controlled by Argentina, including YPF, ENARSA and BCRA, are its alter egos.

Argentina, of course, appealed, claiming that the Foreign Sovereign Immunities Act (FSIA) grants broad immunities from discovery. This past December, the Second Circuit Court of Appeals affirmed “in all respects” the District Court’s original discovery order. (The Court of Appeals waited until the resolution of a related case in the U.S. Supreme Court, which last year confirmed that Argentina does not have immunities from discovery.)  Despite these rulings, Argentina refuses to comply with the court’s order and has not produced any documents.  In doing so, the Republic has now exposed itself to sanctions by the Court, including the requests by NML that:

– Argentina be forbidden from contesting assertions that the discovery sought to demonstrate, including that Argentina’s property in the U.S. is being used for commercial activity and that YPF, ENARSA, BCRA are not alter egos of the Argentine government.

– The court deems that Argentina has waived any privilege related to producing documents.

– Argentina and its counsel should compensate NML for the expense of bringing Argentina in compliance with the discovery.

Argentina’s behavior is nothing short of outrageous. It uses the U.S. courts’ valuable time and energy to appeal unfavorable rulings, and then when Argentina loses those appeals, it simply refuses to obey. Argentina’s lawless conduct undermines the foundation of the U.S. judicial system.

One of the sanctions sought by creditors would preclude Argentina from contesting NML’s alter ego claims and from asserting immunities. The filing says that this sanction is just because Argentina has “thwarted this inquiry by willfully withholding information that goes to the heart of the alter-ego question.”

Later, the filing lays out a series of findings as to that alter ego status:

  1. Argentina’s property in the United States is being used for commercial activity in the United States;
  2. High ranking officials of Argentina also act as high-ranking officers, directors, or employees of BCRA, ENARSA and YPF, and vice versa;
  3. BCRA, ENARSA and YPF report to Argentina and act on its behalf, and vice versa;
  4. BCRA, ENARSA and YPF use their assets for the benefit of each other and for the benefit of Argentina;
  5. BCRA, ENARSA, and YPF are responsible for the debts and obligations of Argentina, and vice versa;
  6. Argentina determines all the important policies of BCRA, ENARSA and YPF, including policies related to borrowing, repayment of debts, interest rate setting, lending guidelines, monetary policy, and the accumulation of foreign reserves; and
  7. Argentina regularly reviews, negotiates, approves guarantees, and pays the debts and obligations of BCRA, ENARSA and YPF, and vice versa.         

Presuming these facts as true and precluding Argentina from contesting them gets creditors considerably closer to attaching the assets of these entities in order to satisfy their judgments. The expropriation of YPF was a centerpiece of President Kirchner’s populist economic agenda. As the alter ego of the state, the business’ assets would be subject to seizure.

That should provide a lot for President Kirchner and her lawyers at Cleary Gottlieb to think about.  Argentina’s strategy of ignoring court orders has not been a winning gambit for the country.  Deciding to default, rather than to negotiate, has been a self-inflicted wound on Argentina’s economy, creating an unnecessary mess for the next President.

The Economist recently stated “the next president will have to deal with bondholders if the country is to borrow at reasonable interest rates.” But it’s not too late for this President of Argentina to change course and to negotiate a settlement with creditors, which would immediately put an end to all of this.

Closing In On The K Money Trail

Earlier today, we posted on the “me-toos” ruling, noting the deepening legal troubles for Argentina. Another legal blow came last week in Nevada when Judge Cam Ferenbach rejected a petition by M.F. Corporate Services, which the court previously determined to be the alter ego of notorious Panamanian law firm Mossack Fonseca, to stay the discovery that had previously been granted to NML Capital.  The Nevada process has unearthed massive systemic corruption by businessmen with close ties to President Kirchner and her son, Máximo Kirchner.  For instance, the Nevada discovery process has helped expose direct ties between Cristóbal López and the Kirchner family, through their hotel businesses, which always seem to make money.  La Nacion and Clarin have reported on the direct payments from López to the Kirchner family.

And in news from the Argentine justice system, the latest attempts by the Kirchner family to subvert the Argentine courts from investigating corruption in their hotel business also appear doomed.  Prosecutor Carlos Stornelli told Judge Claudio Bonadio on Wednesday that he opposes the Kirchner family’s attempt to move the investigation out of Bonadio’s court – where it has been advancing at record speed – to a more malleable court in the family’s native Patagonia.  Bonadio has been zeroing in on alleged use of the Kirchner hotels to launder millions of pesos in bribes from businessman Lázaro Báez, the former bank clerk turned top public works contractor during the Kirchner years.  Deputy Margarita Stolbizer, a center-left presidential candidate, filed a petition on Friday asking Bonadio to expand his investigation into Hotesur, the Kirchner’s holding company, to determine whether Cristina Kirchner herself used the company to launder money from corruption.  Stolbizer raised questions about irregularities and inconsistencies in the President’s public wealth disclosures that strengthen the suspicion of criminal behavior.

Argentina’s Legal Troubles Deepen

Will Rogers once said, “If you find yourself in a hole, stop digging.”  Argentina’s government can’t seem to stop clawing its way deeper. On Friday, the U.S. District Court ruled in favor of hundreds of creditors known as the “me toos.”  The “me toos” collectively hold more than $5.5 billion of New York law bonds that Argentina defaulted on in 2001. Earlier this year – after the RUFO clause expired and it became apparent that Argentina’s use of the RUFO clause as an excuse not to negotiate was a sham all along – the “me toos” sought to enforce their pari passu rights.  On Friday, the court agreed that Argentina violated their pari passu rights. (The same court had previously ruled in 2012 that holders of $1.3 billion of similar New York law bonds were entitled to enforce their pari passu rights against Argentina.) The original pari passu plaintiffs and the “me toos” comprise the vast majority of New York law bondholders remaining since the 2001 default.

Importantly, Friday’s ruling did not increase the amount that Argentina owes to its New York law bondholders.  The “me toos” had already received money judgments from the U.S. court based on the full amount of their claim prior to Friday’s ruling.  Friday’s ruling merely confirmed that the “me toos” are also able to enforce their pari passu rights.

Not surprisingly, Argentina’s Economy Ministry immediately trashed the ruling, calling it “blackmail,” an “illegal decision” and “impossible” to comply with.  This is petulant and counterproductive.   It’s time for Argentina’s leaders to stop digging, and to get out of the hole they’ve made for themselves by choosing to default last summer and refusing to negotiate with creditors. Argentina’s management of its debt situation has been completely irresponsible, and this latest ruling illustrates just how irresponsible it is.  Argentina complained incessantly about the original pari passu ruling. And yet it did nothing to negotiate a settlement. Instead, it sat on its hands waiting for hundreds of more creditors to get pari passu status. Argentina may continue to complain, but it has no one but itself to blame.

Belgium’s Bond Law Will Have No Effect

Belgium, a country that has recently debated the rationale for its own existence, today provided even more reason to continue having that discussion.  By a unanimous vote of the Belgian Parliament’s Finance Committee, a provision was passed that attempts to limit the amount so-called “vulture lenders” could collect on debt.

It is striking to note that in casting their votes today, Belgian lawmakers ignored their own Central Bank, which sent a letter warning the members of the Committee against its adoption.  In its letter, the Central Bank specifically warned against legal problems that the bill would likely bring, and it admonished lawmakers to set “more objective” criteria.

While Argentina’s government, which lobbied heavily in favor of the bill’s passage, will no doubt trumpet today’s action as an important development, make no mistake:  Belgium’s law won’t have any effect on Argentina’s self-imposed predicament.  Argentina still faces judgments ordering it to honor contracts that it agreed to.  Moreover, Argentina is still locked out of capital markets until it resolves its dispute with creditors.

For more on Belgium’s misguided attack on creditor rights, check out ATFA Chairman Robert Shapiro’s op-ed in last week’s Wall Street Journal Europe.  Importantly, Shapiro noted that the bill’s own authors seemed to recognize the limited impact of their actions, and that they were hoping that its symbolism would spur “broader national and international initiatives.”  Perhaps as a premonition of coming legal challenges, the bill’s own text includes a giant qualifier, stating that, “this law is applied subject to the application of international treaties, EU law and bilateral treaties.”

Instead of lobbying for meaningless anti-creditor legislation that will have no effect on its own situation, Argentina’s leaders should be negotiating with creditors.

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