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Argentina’s default in late December on $132 billion in sovereign debt is a sad but familiar story among developing nations and the financial institutions that deal with them, novel perhaps only for the record-breaking amounts at issue. Far less familiar is the legal landscape to be navigated. Until fairly recently, countries were able to renegotiate their debt in relative safety from the specter of lawsuits, protected by the sovereign immunity doctrine. That is no longer the case. Now, not only can defaulting countries expect to get sued, but so can their agents and even third parties. In fact, although Argentina has barely begun the tedious and difficult process of restructuring its debt, its default has already spun off at least four lawsuits. The most recent, filed last month in the U.S. District Court for the Southern District of New York, pits a Florida investment fund, Allen Applestein TTEE FBO D.C.A. Grantor Trust, against the Republic of Argentina. The complaint alleges that Argentina defaulted on two bonds held by the plaintiff, and worth some $1.3 million, when the country declared a moratorium on the payment of interest and principal on all sovereign debt late last year. Argentina did not answer the complaint, and on Monday the investment fund moved for a default judgment. Allen Applestein’s lawyer, Marc Dreier of New York’s Dreier & Baritz, said in his client’s case, there was little point in waiting to see what Argentina was able to work out with the other governments and large institutional creditors to whom it is indebted. “It’s a bond — it’s an obligation to a private investor,” he said. “It’s not a government-to-government obligation.” Dreier suggested that his case was just the first of many to be filed against Argentina for its failure to honor its bond obligations. “There are a lot of bonds out there,” he said. J.P. MORGAN FACES SUITS Third parties are also being hit with lawsuits stemming from Argentina’s financial woes. In late January and early February, two hedge funds and a Korean bank sued investment bank J.P. Morgan Chase & Co. in separate actions in the Southern District of New York. The claims arise out of a financial transaction known as a credit swap, which over the last five years has become an increasingly popular way to manage risk. J.P. Morgan offered credit swaps as default protection to many of the hedge funds that invested in Argentinian bonds in the expectation that the country would remain solvent, including two of the plaintiffs, HBK Master Fund LP and Eternity Global Master Fund Ltd. To hedge its own position, J.P. Morgan took the other side of a credit swap with the third plaintiff, Daehan Investment Trust & Securities Ltd., a South Korean bank. In each case, the party offering default protection — J.P. Morgan in two cases and Daehan in the third — was required to pay off on the contract in the event of a “credit event,” or when and if Argentina effectively defaulted on its bonds. There is no question that Argentina formally defaulted on its debt in late December. But the timing is critical — at least one of the credit swaps had expired by that time — and at issue in each case is whether Argentina had in fact defaulted weeks before, in November, when it announced and subsequently enforced a partial restructuring plan. The three cases put J.P. Morgan in the awkward position of arguing that a default occurred in November, thus obligating Daehan to pay off on its contract, while at the same time maintaining that no such default occurred at that time for purposes of its contracts with the two hedge funds. J.P. Morgan spokesman Michael Dorfsman said that differing contractual language allowed it to take such a seemingly incongruous stance. “Specifically, the Daehan transaction … contained a broad definition of restructuring which was triggered by Argentina’s actions in late November and early December. The other two contracts, with Eternity and HBK, were governed by … a narrower definition of restructuring,” Dorfsman said. “It’s something to say but it’s not persuasive,” countered Eternity’s lawyer, William A. Brewer III, of New York’s Bickel & Brewer, “because the event that everyone is focusing on is whether Argentina attempted to restructure its debt in November.” One expert, who asked not to be named, said that J.P. Morgan, which is facing enormous potential losses from its dealings with the bankrupt energy company Enron, may have even more at stake here. “It’s not just these three lawsuits,” he said. “This is part of J.P. Morgan’s bread and butter business. When these things go bad, they face substantial exposure.” COURT SEEN AS OPTION For a couple of reasons, lawyers said that they expected to see more lawsuits down the pike. First, creditors holding sovereign debt have become much more willing to go to court, explained Charles D. Schmerler, a partner at Arent Fox in New York who has represented both bondholders and governments. In the first wave of sovereign defaults in the 1980s, the larger creditors were mostly big banks who were constrained by regulations and a desire to retain their relationship with the debtor country, he explained. As a result, lawsuits were a rarity. But since that time, the traditional banking relationships have slowly been replaced with bondholder relationships. Bondholders can run the gamut, from the distressed debt department of a major investment bank to individual investors in Europe and around the world, Schmerler explained. What they do have in common is that they are not necessarily looking to maintain a relationship with a sovereign nation. Rather, he said, “they’re looking to maximize the return on their investments.” PERU PAYS $58 MILLION Bondholders may also be buoyed by a 1999 decision by the 2nd U.S. Circuit Court of Appeals, Elliott Associates, L.P. v. Banco De La Nacion and the Republic of Peru,194 F.3d 363. The case involved a small hedge fund that paid $11 million for government-backed Peruvian bank debt on the secondary market in 1996. The fund refused to participate in the swap of those securities for Brady Bonds, which are used to reduce sovereign debt by reducing the face value of the loans and turning them into bonds. Instead, Elliott took Peru to court. It won, and ultimately the case settled for some $58 million. The Elliott case was not that different from earlier cases in which U.S. courts have held that sovereigns should make good on their defaulted debt, said Farisa Zarin, an analyst with Moody’s Investors Service. What distinguished Elliott, however, is that unlike prior cases, the plaintiff was able to get an attachment of U.S.-based assets of the sovereign’s agent, Banco de La Nacion. As Zarin explained in a special report on the Elliott case, “that an investor may have this option available to it turns his suit from an academic and avenging ‘I told you so’ exercise to a more lethal weapon lending the disconsolate investor’s bark a bit more bite.” It is not clear yet how strong a precedent the Elliott case will be, Zarin said, in part because Peru settled the case before all its appeals were exhausted, and because litigation is still a long, expensive and uncertain route. But, Zarin added, “every year the lawyers get a little more gutsy and a little more willing to go to court.”

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