Gramercy Funds Management LLC and Gramercy Peru Holdings LLC v Republic of Peru - ICSID Case No. UNCT/18/2 - REDACTED Respondent's Post-Hearing Brief on Jurisdiction - 1 July 2020
Reproduced from www.worldbank.org/icsid with permission of ICSID.
Table of Contents
II. FACTS RELATED TO JURISDICTION CONFIRMED AND REVEALED AT THE HEARING
A. GRAMERCY ADMITTED THAT IT ACQUIRED CLAIMS IN A PREEXISTING DOMESTIC DISPUTE OVER AGRARIAN REFORM BONDS
B. GRAMERCY ADMITTED THAT ITS ALLEGED BONDS HAVE NOT BEEN AUTHENTICATED, LAWFULLY OR OTHERWISE
C. GRAMERCY ADMITTED THAT IT ACQUIRED BOND CLAIMS USING CLIENT FUNDS, AND SOLD ALL BUT A DE MINIMIS INTEREST TO THIRD PARTIES
1. Testimony Confirmed That Gramercy Used Client Funds To Acquire The Bonds
2. Testimony Confirmed That Gramercy Sold Bond Interests To Third-Party Beneficiaries
3. Testimony Confirmed That Gramercy Holds Only A De Minimis Interest In The Bonds, While Generating Fees Based On Its Own Invented Valuations
D. GRAMERCY ADMITTED THAT IT ENGAGED IN A LONG-RUNNING ATTACK CAMPAIGN
TO PRESSURE PERU TO RESOLVE THE PREEXISTING DISPUTE
E. GRAMERCY ADMITTED THAT IT MADE SECRET BOND ACQUISITIONS AMIDST THE ARBITRATION AND ATTACK CAMPAIGN
III. TREATY FRAMEWORK FOR JURISDICTIONAL OBJECTIONS
IV. JURISDICTIONAL OBJECTIONS CONFIRMED AT THE HEARING
A. GRAMERCY IS ABUSING THE TREATY
B. GRAMERCY VIOLATED TREATY PRECONDITIONS TO ARBITRATION
1. Gramercy Violated The Non-Retroactivity Requirement
2. Gramercy Violated The Prescription Requirement
3. Gramercy Violated The Waiver Requirement
C. GRAMERCY DID NOT MAKE AN INVESTMENT UNDER THE TREATY
1. The Treaty Text Establishes That Gramercy Did Not Make An Investment Under The Treaty
2. The Treaty's Object And Purpose Confirms That Gramercy Did Not Make An Investment Under The Treaty
3. The Treaty Negotiations Further Confirm That Gramercy Did Not Make An Investment Under The Treaty
4. In Any Event, The Alleged Bonds Remain Unauthenticated
D. GRAMERCY IS NOT AN INVESTOR UNDER THE TREATY
1. Gramercy Made No Investment Involving Its Own Contribution, At Its Own Risk
2. GPH Is Not Entitled To The Benefits Of The Treaty
3. Gramercy Has No Standing As To The Vast Majority Of Bond Interests Beneficially Owned By Third Parties
V. REQUEST FOR RELIEF
1. The Republic of Peru ("Peru") hereby submits its Post-Hearing Brief on Jurisdiction in accordance with Procedural Order No. 11.
2. In this proceeding under the Peru-United States Trade Promotion Agreement (the "Treaty"), it is the purported claimant, Gramercy, that has grossly disregarded the Treaty and demonstrated ongoing disdain for the dispute resolution mechanism established therein, for the Tribunal's orders and admonitions, and for the lawful steps undertaken by Peru that are bringing the Agrarian Reforms Bonds to a comprehensive resolution, notwithstanding Gramercy's outrageous conduct and exorbitant demands that are contrary to law and prejudicial to the Treaty, Peru, and the Peruvian people.
3. The truth of Gramercy and the Agrarian Reform Bonds is now known: Gramercy admits that it paid US$ 33 million funded from third parties for decades-old paper; Gramercy admits that it could receive US$ 34 million if it submitted to the lawfully established payment process through which Peru continues to pay bondholders; yet Gramercy continues to demand US$ 2 billion to which it has no right. Peru reserves the right to address the merits implications of these issues in its next Post-Hearing Brief. Further to the Tribunal's instructions, this submission is focused on the myriad jurisdictional deficiencies fatal to Gramercy's claims.
4. Gramercy has failed to meet its burden of proving that the elements of jurisdiction are met. The Tribunal cannot ignore Gramercy's failure to comply with the Treaty, and all of Gramercy's claims must be dismissed.
Facts On Jurisdiction Confirmed And Uncovered At The Hearing
5. Gramercy has failed to submit claims in accordance with the Treaty and failed to meet its burden of proof with respect to the existence of jurisdiction. The testimony of the witnesses and experts has confirmed the factual basis for Peru's objections to jurisdiction. Indeed, the core facts were admitted by Gramercy's own executives and experts during the Hearing. Among other things, the record establishes the following:
Gramercy Purchased Uncertain Bonds To Acquire Claims Against Peru
Agrarian Reform Bonds are decades-old instruments with unique characteristics.
Gramercy chose to speculate in the Bonds after hyperinflation and repeated currency changes had made them worthless on their face and their value was uncertain and the subject of numerous litigations. By its own admission, Gramercy purchased "claims" and sought to "catalyze" a settlement with Peru.
Gramercy Never Authenticated The Uncertain Bonds
The decades-old pieces of paper upon which Gramercy rests its purportedly $2 billion case have never been authenticated, lawfully or otherwise. Despite recognizing the need to authenticate the Bonds as a prerequisite to payment, by its own admission, Gramercy did not submit the Bonds to the authentication process established by Peruvian law, nor did it perform an independent authentication, nor has it even attempted to explain the numerous problems evident on the face of the photographs on which it relies in this proceeding.
Gramercy Committed No Capital To Buy The Bond Claims
Gramercy admits that it paid US$33 million of other people's money to acquire the Bonds for which it demands US$ 2 billion. By its own admission, Gramercy committed no capital (or any other asset) of its own to acquire the Bond claims, and its interest in them is de minimis and indirect. Gramercy relied on third parties for funding, and then sold interests in the claims to the third-party beneficial owners. Gramercy itself does not stand to make any real profit or loss from its alleged "investment," but either way it collects its fees from third parties.
Gramercy Sought To Pressure Peru Through An Attack Campaign
Gramercy contemplated a lobbying campaign to force a settlement of pre- existing claims even before acquiring any Bonds, and admits that it sought to engage in a multi-front effort to pressure Peru into abandoning its legitimate defenses and settling the claims. It has hired lobbyists, commissioned reports, and funded astro-turf bondholder associations, in addition to wielding the Treaty arbitration as a cudgel against Peru. Despite the Tribunal's admonition at the hearing, Gramercy continues to lobby and disseminate misinformation.
Gramercy Made Secret Bond Acquisitions During Its Arbitration And Attack Campaign
A hearing bombshell was Gramercy's unexpected admission that it had continued to acquire Agrarian Reform Bonds as part of a strategy of pressuring Peru to agree to a global settlement. Incredibly, this acquisition was at a time that these arbitration proceedings were underway and while Gramercy continued to make false public accusations that Peru was in default on the Bonds. The Tribunal has ordered Gramercy to produce, inter alia, "any other internal document prepared by Gramercy and/or any of its affiliates to justify the 2017 Purchase" and "any agreement entered into between Gramercy and/or any of its affiliates and the sellers regarding the 2017 Purchase." Gramercy, however, has made only a paltry production, and Peru continues to reserve all of its rights in this regard.
6. The facts relevant to jurisdiction are addressed in Section II, together with the responses to corresponding Tribunal queries.
Gramercy's Mischaracterization Of The Treaty Framework Has Proven Baseless
7. The Treaty is an agreement between two sovereign States, which makes the submission of disputes to arbitration subject to express conditions and limitations on consent.
As is evident from the submissions of the Contracting Parties to the Treaty in this proceeding, the United States and Peru agree on the interpretation of the Treaty, and agree that claims submitted to arbitration that do not comply with the Treaty must be dismissed. The Tribunal is bound to respect the common understanding of the United States and Peru.
8. Throughout this proceeding, Gramercy has sought to mischaracterize the Treaty and its jurisdictional requirements. Not only does this fly in the face of the agreement between the United States and Peru, it is also entirely unsupported as a matter of law, as has been shown by Professor Michael Reisman, a renowned expert on public international law.
Professor Reisman's legal opinions give further support to Peru's arguments in this proceeding, which is why Gramercy (which was unsupported by any expert in international law) sought to disqualify him at the last minute. As addressed in Section III, Gramercy's abusive treatment of Professor Reisman during the hearing failed, and his testimony at the hearing reconfirmed why this case should be dismissed.
Gramercy Has Failed To Establish Jurisdiction Under The Treaty
9. Gramercy has failed to rebut Peru's various objections to jurisdiction and admissibility, any one of which is fatal to its claims:
- Gramercy has abused the Treaty and cannot be entitled to its protections.
- Gramercy has failed to prove it complied with the Treaty's preconditions to
- arbitration, including the Treaty's temporal and waiver requirements.
- Gramercy failed to prove it made a protected "investment" under the Treaty.
- Gramercy failed to prove it is an "investor" under the Treaty.
10. As addressed in Section IV, Gramercy has failed to prove that its claims are subject to Treaty jurisdiction. Despite having multiple chances and repeated do-overs, Gramercy has never (and could never) proved jurisdiction exists. The Treaty is not an excuse for abusive profiteers to attack a diligent sovereign; it is not carte blanche to submit frivolous claims as to disputes that not only are time-barred by the statute of limitations, but preexist the Treaty itself; it does not afford protection to claimants that did not make any contribution of money or other assets, never bore any risks, and never contributed to Peru's development; it is not a blunt tool to be wielded on behalf of third parties by claimants who have no standing of their own.
11. Throughout this proceeding, Gramercy has done its utmost to deprive Peru of due process and aggravate the proceeding, disregarding the Treaty and repeated orders and admonitions by the Tribunal; it has withheld documents, made massive redactions to what few documents it produced, and all the while continued to spread misinformation to the public. Peru has already been prejudiced. Now, the Tribunal has the chance to stop Gramercy's efforts to subvert the Treaty and suppress the truth. This case must be dismissed and Peru awarded all costs for this abusive proceeding.
II. Facts Related To Jurisdiction Confirmed And Revealed At The Hearing
A. Gramercy Admitted That It Acquired Claims In A Preexisting Domestic Dispute Over Agrarian Reform Bonds
12. In the course of this proceeding, Peru has established that the Agrarian Reform Bonds are decades-old instruments with unique origins and characteristics relevant to jurisdiction. Gramercy knew of the unique history and longstanding dispute with respect to the Bonds when it decided to acquire Bonds. Indeed, as the record establishes, Gramercy's alleged investment was expressly predicated on the idea that it could profit from a preexisting dispute among Peruvians over facially worthless Bonds.
13. The Agrarian Reform Bonds are old physical instruments provided decades ago as compensation for land in Peru, in local currency and subject to Peruvian law and jurisdiction; that they were not offered publicly, listed on an exchange or issued into the U.S.
market, and are not comparable to contemporary sovereign bonds, or their secondary markets or restructurings.1 This was confirmed during the hearing by, among others, Vice-Minister Sotelo, who confirmed that the Agrarian Reform Bonds are not comparable to modern sovereign bonds issued by Peru.2 It is undisputed in this proceeding that the nominative values of the Agrarian Reform Bonds became worthless when Peru was struck by hyperinflation in the years following their issuance.3 It is likewise undisputed that beginning in the 1990s, various branches of the Peruvian Government attempted to establish how much, if anything, should be paid for the Bonds,4 and that this was the subject of various local litigations,5 as has been addressed in this proceeding.6
14. It was in this context of ongoing litigation in courts and ongoing debate in the political branches that Gramercy chose to acquire Bonds. The record has long shown that Gramercy's lone due diligence memorandum in January 2006 highlighted the longstanding history and ongoing dispute with respect to the Bonds.7 The testimony of Gramercy's executives further underscored that Gramercy intended to acquire, and did acquire, claims in a preexisting domestic dispute.
15. At the hearing, Mr. Koenigsberger confirmed his written testimony that Peru had purportedly "defaulted" on the Bonds "long before [he] learned about them"; that the Bonds "had been issued in an outdated and massively devalued currency"; and that the face value of the Bonds was "worthless" before Gramercy acquired them.8 He further confirmed that Gramercy's due diligence included "looking at court rulings at the highest court of the land, looking at local courts, conversations with counsel."9 According to Mr. Koenigsberger, Gramercy also was aware, in the weeks prior to its first Bond acquisition, that the president of Peru had vetoed a pending Agrarian Reform bill. In Mr. Koenigsberger's view, this showed that the government "wanted to kick the can to the next administration," and that "part of the difficulty for bondholders over many years is this notion that no government has really wanted to deal with it, and they have just kind of moved it to the next government."10
16. In other words, Mr. Koenigsberger and Gramercy understood that, for many years, the Bonds had been subject to litigation in Peruvian courts and various unsuccessful attempts at resolution in the Peruvian political branches. Indeed, the fact that the Bonds were burdened with this preexisting domestic dispute is precisely why Gramercy viewed them as appropriate for its distressed asset portfolio.11
17. Gramercy's acquisition of claims is likewise evidenced by the more than 21,000 pages of purchase contracts and associated documents which Gramercy previously withheld from the Tribunal. The purchase contracts underscore, among other issues, that Gramercy acquired claims in a preexisting domestic dispute.
The very first provision of the contract recites a history of the Bonds, beginning with the 1969 Land Reform Act, the land expropriation process, and various decrees and court decisions beginning in 2000 that sought to shape the resolution of decades-old questions regarding Bond valuation and payment.12
The first provision also defines the "Assets" being assigned as the Bonds and "[t]he claim against the Peruvian State," including "any ancillary litigious and/or inchoate rights as may pertain to said Bonds."13 Gramercy's own Peruvian law expert testified that the Assets under the contract "include all the supplementary rights or the rights to sue."14
The third clause provides that the seller guaranteed that the "compensation payable to her, derived from and related to the Assets, is awaiting payment by the Peruvian State," and that, "notwithstanding the time elapsed, it has not been possible for her to collect the debt that the Peruvian State maintains payable to her."15 Underscoring this point, it states that the "possibility of actual collection of the compensation derived from the Assets constitutes an expectative right whose materialization is at the risk of [Gramercy]."16 As Dr. Hundskopf explained, an expectative right is not one for which there is certainty of payment: "It's a gamble. . . . It is something that could be remotely possible, even."17
18. Thus, on its face, the Gramercy purchase contract confirmed that the Bonds and claims associated therewith were already subject to dispute, and that the matter of compensation remained unresolved. Indeed, as seen at the hearing - consistent with Gramercy's purchase of "claims" under the contract - Gramercy repeatedly characterized its acquisition as "claims" or even "legacy claims" in internal documents and communications with clients,18 and also valued the acquisition as a claim in its financial statements.19
19. Notably, Mr. Koenigsberger also testified that Gramercy "took over the existing litigations" by Peruvian bondholders in Peruvian court as to certain Bonds it acquired.20 And Gramercy placed considerable emphasis in both argument and testimony on the 2001 Constitutional Tribunal decision in Peruvian bondholder litigation.21 The plain fact that bondholder litigation had been ongoing at various levels of the Peruvian judiciary for years, and that Gramercy "took over" claims already pending in Peruvian court, leaves no doubt that there was a preexisting domestic dispute with respect to the Bonds well before Gramercy sought to acquire them.
B. Gramercy Admitted That Its Alleged Bonds Have Not Been Authenticated, Lawfully Or Otherwise
20. As Peru has raised throughout these proceedings, the decades-old pieces of paper upon which Gramercy rests its purportedly $2 billion case have never been authenticated.22 Gramercy has relied solely on photographs of some 9,600 certificates, and made a show at the hearing of presenting two certificates to the Tribunal, without any indication of how they could be authenticated. In fact, Gramercy's own executives confirmed the importance of Bond authentication in their testimony:
Q. Gramercy couldn't expect to get paid if it acquired invalid pieces of paper; right?
A. That's right. We obviously wanted to make sure that we were acquiring valid Bonds, real Bonds, right.
Q. Right. So Bond authentication then is important. It's necessary.
Q. Can we agree, Mr. Lanava, that a photocopy or a scan or a photograph wasn't going to be
good enough for Bond authentication?
A. For who?
Q. Well, according to Gramercy's own assessment in this memo that we were just looking
at. It required three documents, the certificate, the title, the sentencia. It required
physical review, and it required satisfaction that all of those documents were authentic;
21. Thus, Gramercy determined, prior to its acquisitions, that physical review of original Bond certificates was one of several mandatory steps to confirm the validity of the Bonds. Further, Mr. Koenigsberger acknowledged that Peru "also considers it important to authenticate old Land Bonds before making any payment on them."24
22. Notwithstanding the undisputed need for authentication, Gramercy's executives confirmed at the hearing that Gramercy did not engage any forensic (or other) expert to perform an independent verification of the Bonds, let alone the exacting authentication required as part of Peru's Bondholder Process.25 Instead, Gramercy hired Deloitte simply to photograph Bond certificates and create an inventory of the photographs.
The resulting report includes a "Disclaimer" specifying that Deloitte "does not express any certification, attestation, or opinion of any kind other than as explicitly set forth herein. This includes attestations on the authenticity of the Bonds inspected, validity of signatories or notaries present on the Bonds, or present valuation of the Bonds."26
23. In this proceeding, Gramercy did not conduct an expert review of its alleged Bonds, or even make a serious proposal for any authentication process. Instead, it resorted to an eleventh-hour stunt, where it brandished two alleged Bond certificates on the first day of the hearing, and attempted to present them to a member of Peru's team for purported inspection in the hallway during a break.27 On the sixth hearing day, Gramercy again made a point of recording on the transcript that the Bonds were "available" if Peru "would like to look at them."28 Peru strongly objected and underscored that none of Gramercy's Bonds, including the two alleged Bonds presented in the hallway, have ever been authenticated. 29 The President of the Tribunal confirmed: "we know that they are not authenticated."30
24. In fact, the unauthenticated - and, indeed, unreliable - nature of Gramercy's alleged Bonds was on display for all to see during the cross-examination of Mr. Lanava. Mr.
Lanava had detailed Gramercy's acquisition process in his written statement, including a representation that "all of the Land Bonds that Gramercy acquired are valid and authentic."31 On cross-examination, however, he repeatedly testified that he had no experience in or knowledge of Gramercy's review of the Bonds, and could not speak to authentication issues.32 He acknowledged that Gramercy withdrew over 100 Bonds from this proceeding due to discrepancies that were discovered years after Gramercy purportedly authenticated all Bonds.33 And he had no explanation for why the document Gramercy submitted as Bond Number 023679 dated February 1972 was instead a computer printout dated September 2006.34 Indeed, it was plain on the face of the document that it could not be the Bond alleged.
C. Gramercy Admitted That It Acquired Bond Claims Using Client Funds, And Sold All But A De Minimis Interest To Third Parties
25. From the outset of the case, and through multiple successive amended pleadings, Gramercy has maintained that the only relevant facts with respect to ownership of the Bonds are that Claimant GPH allegedly holds title to Bonds, and Claimant GFM controls Bonds by virtue of managing GPH. Through its first eight filings, Gramercy submitted a total of one corporate document to this effect. Beginning with the discovery phase, however, a more complicated picture emerged with respect to the Gramercy structure, and the manner in which Gramercy acquired and held its alleged Bonds. At the hearing, Gramercy made a point of noting that Peru first raised certain objections regarding these issues in its Statement of Rejoinder.35 Indeed, it was not until after Gramercy was ordered to produce relevant documents, after the first round of briefing, that Peru was able to piece together the true nature of the alleged investment, which Gramercy had long obscured.36
26. The hearing testimony of Gramercy's three executives confirmed, inter alia, that (i) Gramercy relied entirely on funding from its third-party clients to acquire the Bonds, and committed no capital, or any other asset, of its own; (ii) Gramercy set up a network of funds, and third-party funds invested in Gramercy funds, to sell interests in the Bonds to third parties who are the ultimate beneficiaries of the alleged Bond "investment"; and (iii) GPH has no real economic interest arising from its alleged title to the Bonds, and GFM has only a de minimis indirect interest through holdings in another Gramercy entity.