[Page 1]
INTERNATIONAL CENTRE FOR THE SETTLEMENT OF INVESTMENT
DISPUTES
-X
In the matter of Arbitration :
between: :
GRAMERCY FUNDS MANAGEMENT LLC AND :
GRAMERCY PERU HOLDINGS LLC,
Claimants, :
: ICSID Case No.
and : UNCT/18/2
REPUBLIC OF PERÚ,
Respondent. :
-X Volume 1
HEARING ON JURISDICTION, MERITS AND QUANTUM
Friday, February 7, 2020
The World Bank Group
1225 Connecticut Avenue, N.W.
C Building
Conference Room C1-450
Washington, D.C.
The hearing in the above-entitled matter
came on at 9:30 a.m. before:
PROFESSOR JUAN FERNÁNDEZ ARMESTO, President
MR. STEPHEN L. DRYMER, Co-Arbitrator
PROFESSOR BRIGITTE STERN, Co-Arbitrator
In the case of discrepancy, the audio recording in the
original language will prevail.
[Page 2]
ALSO PRESENT:
On behalf of ICSID:
MS. MARISA PLANELLS-VALERO
Secretary of the Tribunal
MS. KRYSTLE M. BAPTISTA
Assistant to the President of the Tribunal
Realtime Stenographers:
MS. DAWN K. LARSON
Registered Diplomate Reporter (RDR)
Certified Realtime Reporter (CRR)
B&B Reporters
529 14th Street, S.E.
Washington, D.C. 20003
United States of America
[email protected]
MR. PAUL PELISSIER
MR. DIONISIO RINALDI
D.R. Esteno
Colombres 566
Buenos Aires 1218ABE
Argentina
(5411) 4957-0083
Interpreters:
MS. SILVIA COLLA
MR. DANIEL GIGLIO
MR. CHARLES ROBERTS
[Page 3]
APPEARANCES:
On behalf of the Claimant:
MR. MARK W. FRIEDMAN
MS. INA C. POPOVA
MR. CARL RIEHL
MS. FLORIANE LAVAUD
MS. BERGLIND HALLDORSDOTTIR BIRKLAND
MR. GUILHERME RECENA COSTA
MS. SARAH LEE
MR. DUNCAN PICKARD
MR. JULIO RIVERA RIOS
MS. MARY GRACE MCEVOY
MR. THOMAS G. MCINTYRE
Debevoise & Plimpton, LLP
919 Third Avenue
New York, New York 10022
United States of America
MR. LUIS BEDOYA
MR. FRANCISCO CARDENAS PANTOJA
Rodrigo, Elias & Medrano
Av. San Felipe 758
Jesús María
Lima 15072
Perú
Representing Gramercy Funds Management LLC:
MR. JAMES TAYLOR
MR. JOSHUA M. O'MELIA
MR. NICK PAOLAZZI
MR. THOMAS NORGAARD
[Page 4]
APPEARANCES: (Continued)
On behalf of the Respondent:
AMBASSADOR HUGO DE ZELA
Republic of Perú
MR. RICARDO AMPUERO
Republic of Perú
MS. MONICA GUERRERO
Republic of Perú
MS. GIOVANNA ZANELLI
Republic of Perú
MR. ALBERTO HART
Republic of Perú
MR. JONATHAN C. HAMILTON
MS. ANDREA MENAKER
MR. RAFAEL LLANO
MR. FRANCISCO JIJÓN
MR. JONATHAN ULRICH
MR. FRANK PANOPOLOUS
MR. JOHN DALEBROUX
White & Case LLP
701 Thirteenth Street, NW
Washington, D.C. 20005-3807
United States of America
MR. ALEJANDRO MARTINEZ DE HOZ
White & Case, S.C.
Torre del Bosque PH
Blvd. Manuel Avila Camacho #24
11000 CDMX
Mexico
[Page 5]
For the United States of America:
MS. LISA GROSH
MS. NICOLE THORNTON
MS. MARGARET SEDGEWICK
MR. JOHN DALEY
Attorney-Advisers
Office of International Claims and
Investment Disputes
Office of the Legal Adviser
U.S. Department of State
Suite 203, South Building
2430 E Street, N.W.
Washington, D.C. 20037-2800
United States of America
MS. AMY COLLINS
U.S. Department of Treasury
[Page 6]
CONFIDENTIAL PORTIONS:
1. ... 60
2. ... 173-180
3. ... 290-291
4. ... 318-324
5. ... 328-330
6. ... 339
7. ... 360-363
[Page 7]
1 PRESIDENT FERNÁNDEZ ARMESTO: Good morning,
2 everyone.
3 This is the Hearing in the Arbitration
4 between Gramercy Funds Management LLC and Gramercy
5 Perú Holdings LLC v. the Republic of Perú.
6 On behalf of the Tribunal, on behalf of the
7 Secretariat and the Tribunal's Assistant, we would
8 like to extend a welcome to you to this Hearing in
9 Washington, and we would like to extend an especially
10 warm welcome to our Stenographers and Interpreters
11 that are going to have a precise version in both
12 languages of what we are saying.
13 A technical matter before we start,
14 today--and I think the lawyers for both Parties know
15 this--if there is any confidential issue of importance
16 that needs to be raised, please, the individual from
17 each side needs to let us know because there is a
18 certain delay in connection with the publication of
19 the data on the internet. But the editing system that
20 we have today is set up that way to edit any phrase
21 said, is not operational, so we do run into this
22 problem.
[Page 8]
1 I give the floor now to Claimant.
2 Mr. Friedman, would you like to introduce your team?
3 MR. FRIEDMAN: Given the size of our team
4 and--well, first let me say: Good morning,
5 Mr. President and Members of the Tribunal.
6 Given the size of our team, I might invite
7 each member of our team to introduce him or herself.
8 That would also give you the opportunity to hear each
9 of them.
10 PRESIDENT FERNÁNDEZ ARMESTO: Please.
11 MS. POPOVA: Good morning. Ina Popova.
12 MR. RIEHL: Good morning. I'm Carl Riehl.
13 MR. THOMPSON: Good morning. Brian Thompson.
14 MS. LAVAUD: Good morning. Floriane Lavaud.
15 MS. HALLDORSDOTTIR BIRKLAND: Good morning.
16 Berglind Halldorsdottir Birkland.
17 MR. RECENA COSTA: Good morning. Guilherme
18 Recena Costa.
19 MR. RIVERA: Good morning. Julio Rivera.
20 MR. BEDOYA: Good morning. Luis Bedoya.
21 MR. O'MELIA: Good morning. Josh O'Melia.
[Page 9]
1 MR. TAYLOR: Good morning. James Taylor.
2 MR. NORGAARD: Good morning. Thomas
3 Norgaard.
4 PRESIDENT FERNÁNDEZ ARMESTO: Very good. It
5 may be easier if you come forward here to this
6 standing platform.
7 MS. LEE: Good morning. Sarah Lee.
8 MR. PICKARD: Good morning. I'm Duncan
9 Pickard.
10 MR. BULLARD: Good morning. Alfredo Bullard.
11 MR. PEGNOVIC: Good morning. Milan Pejnovic.
12 MR. WEGLEIN: Good morning. Samuel Weglein.
13 MR. MCINTYRE: Good morning. Thomas
14 McIntyre.
15 MS. McEVOY: Good morning. Mary Grace
16 McEvoy.
17 MR. CÁRDENAS: Good morning. Francisco
18 Cárdenas.
19 PRESIDENT FERNÁNDEZ ARMESTO: Thank you very
20 much, Mr. Friedman.
21 And now I look to the Respondent, to the
22 Republic of Perú.
[Page 10]
1 Mr. Hamilton, good morning. Would you like
2 to introduce your team?
3 MR. HAMILTON: Thank you very much. Good
4 morning, Mr. President, Members of the Tribunal, Madam
5 Secretary, the Tribunal's Assistant. Good morning,
6 everyone.
7 On behalf of the Republic of Perú, I am
8 Jonathan Hamilton from White & Case. It is a pleasure
9 to be here with you, and I would like to specifically
10 thank the Ambassador of Perú to the United States, who
11 is here, and also Ricardo Ampuero, who is the Special
12 Defender for the Republic of Perú.
13 Each one of the members of White & Case is
14 going to introduce themselves, and then I'm going to
15 give you a list.
16 MS. MENAKER: Andrea Menaker.
17 MR. JIJÓN: Good morning. I'm Francisco
18 Jijón.
19 MR. ULRICH: Good morning. Jonathan Ulrich.
20 MR. CUEVAS: Good morning. Mark Cuevas.
21 MR. DALEBROUX: Good morning. John
22 Dalebroux.
[Page 11]
1 AMBASSADOR AMPUERO: Good morning. I am
2 Ricardo Ampuero.
3 MR. HAMILTON: I'm going to read the
4 list--from a list the names of the other members of
5 our team. Obviously, we have a lot of people here in
6 the room.
7 We have, apart from the individuals who have
8 introduced themselves: Mr. Frank Panopolous,
9 Alejandro Martínez de Hoz, Sandra Huerta, Soledad
10 Pena, Sophia Castillero and Audrey Vivas, John
11 Contrera, Julianna Goodman, and also Rafael Llano from
12 White & Case.
13 From the Embassy, we have the Ambassador,
14 Hugo de Zela, and also we have Giovanna Zanelli and
15 Alberto Hart.
16 We also have a number of Experts present here
17 today from the State of Perú in this matter: Eduardo
18 García-Godos, Pablo Guidotti, Oswaldo Hundskopf,
19 Rafael Artierra, Brent Kaczmarek, Isabel Kunsman, and
20 Norbert Wühler.
21 Also, Professor Reisman and Ms. Arsanjani,
22 they are going to arrive in the next few days.
[Page 12]
1 Thank you.
2 PRESIDENT FERNÁNDEZ ARMESTO: Very well.
3 Thank you very much.
4 Do we have a point of order that any of the
5 Parties would like to raise? Give me the good news
6 that there is none.
7 MR. FRIEDMAN: Sometimes I'm afraid I must
8 disappoint you, Mr. President.
9 There are four what I think of as being
10 fairly modest matters that I would have thought could
11 have been agreed by counsel but unfortunately have not
12 been. We can--yes, we should probably address them.
13 They involve one exhibit, witness
14 sequestration, references to the Bondholder witnesses,
15 and translations. Those are the--those four issues
16 remain outstanding.
17 Shall I identify each of them?
18 PRESIDENT FERNÁNDEZ ARMESTO: Yes, please.
19 MR. FRIEDMAN: Okay. First, there is an
20 exhibit in the record, Respondents' Exhibit R-257,
21 which is a Report from the Ministry of Economy and
22 Finance from 2004 that the copy--we discovered as we
[Page 13]
1 were preparing for the Hearing that the copy in the
2 record is somewhat incomplete. It is missing at least
3 one or two pages.
4 We then asked our colleagues in Perú to help
5 us locate a complete version of the document. We were
6 able to find at least some of the missing pages, and
7 simply propose to substitute the fuller copy as "the
8 document," or put it with the document that's in the
9 record. We simply--it is not a new exhibit. It's a
10 complete version.
11 PRESIDENT FERNÁNDEZ ARMESTO: Mr. Friedman,
12 you speak with Mr. Hamilton or someone from your team,
13 and you solve that. If there is any difficulty, you
14 come back.
15 MR. FRIEDMAN: We have. We have exchanged 18
16 emails over the past days trying to solve this what we
17 thought was a very simple issue, and I don't know what
18 the status is. So we are sort of--we've tried that.
19 PRESIDENT FERNÁNDEZ ARMESTO: Okay.
20 Mr. Hamilton, does R-257 draw a bell?
21 MR. HAMILTON: It rings a bell because this
22 stunt has been evolving for a while now. We are glad
[Page 14]
1 to talk about that document because it is very
2 favorable to the Peruvian State.
3 However, there's a dilemma. The dilemma is
4 very simple: In December of 2018, the Republic of
5 Perú presented this document, together with a witness
6 declaration, demonstrating the origin of the document.
7 We have gone through two submissions by Claimants
8 since that time. They have never mentioned it.
9 They raised this document late. They then
10 raised it in a way that clearly was trying to set up
11 some sort of conflict, in our view, and we have asked
12 them repeatedly: When and where did you obtain this
13 document? We believe that is material to understand
14 the origin of the document, especially because it's
15 been well-documented during the aggravation phase of
16 this case that there have been shenanigans with
17 respect to how they go about obtaining documents from
18 the Peruvian State. So, we simply would like to know:
19 When? How did you obtain this document?
20 Now, we've heard this morning "We asked our
21 colleagues in Perú, and they were able to obtain it."
22 We had been denied multiple times requests for this
[Page 15]
1 simple information. So, it's not the document that is
2 the issue. It is the procedure, as has been the case
3 repeatedly in this proceeding, that we object to.
4 We object to it because we personally--I
5 personally--could share with you many observations
6 about the record that's been put in by Claimant, which
7 is missing pages, full of redactions, and has many
8 other issues. So, we're not sure why this one issue
9 has come up now. We certainly will be glad to talk
10 about this document, and look forward to it, but we
11 would like to know: Where did this document come
12 from? When was it obtained? How was it obtained?
13 Thank you.
14 PRESIDENT FERNÁNDEZ ARMESTO: Okay. That is
15 another question.
16 Your point, Mr. Friedman, is that R-257 lacks
17 certain pages?
18 MR. FRIEDMAN: Correct.
19 PRESIDENT FERNÁNDEZ ARMESTO: Okay. Which
20 pages are lacking? Let's take the bull by the horns.
21 MR. HAMILTON: Mr. President, we don't object
22 to introducing their document, but it clearly is a
[Page 16]
1 different copy, and we would like to know where it
2 came from because we believe that, since we properly
3 presented it, we should know where they got this
4 document.
5 PRESIDENT FERNÁNDEZ ARMESTO: Would you agree
6 that some pages are missing?
7 MR. HAMILTON: There appear to be a couple of
8 pages missing, perhaps.
9 PRESIDENT FERNÁNDEZ ARMESTO: Does the
10 Republic of Perú have a full copy?
11 MR. HAMILTON: We presented the copy that we
12 have, and that is the only copy that we have
13 discovered at this time.
14 PRESIDENT FERNÁNDEZ ARMESTO: You don't have
15 any full copy?
16 MR. HAMILTON: We don't have another full
17 copy available to present, no.
18 PRESIDENT FERNÁNDEZ ARMESTO: Okay. And you
19 have a full copy of a document from Respondent?
20 MR. FRIEDMAN: Yes. May I ask Ms. Popova to
21 be clear on the details that exceed my knowledge?
22 PRESIDENT FERNÁNDEZ ARMESTO: Yes.
[Page 17]
1 Ms. Popova?
2 MS. POPOVA: Yes, Mr. President. We were
3 able to find a copy of the document. The document is
4 a cover letter, a report, and annexes. We found a
5 copy of the document that has the pages that are
6 missing from the body of the report. That copy is
7 missing one of the annexes, which is in R-257.
8 So, what we had proposed to our colleagues is
9 that we submit that document as well so that you
10 have--neither one of them is complete, but taken
11 together, they are getting there. And we have been
12 trying to agree on language to submit it to the
13 Tribunal. That's where we stand as of this morning.
14 MR. FRIEDMAN: May I just add: It's a
15 16-year-old public report by the Ministry of Economy
16 and Finance that has been circulated through the
17 Peruvian Congress, that is referenced in other
18 documents amply, including the Respondent's own other
19 documents. This seems like the most modest of
20 matters, that we have a few more pages that are
21 missing. I just don't understand why this wasn't
22 agreed and already submitted to you in the interest of
[Page 18]
1 completeness.
2 PRESIDENT FERNÁNDEZ ARMESTO: Okay. Let's
3 not lose too much more time on this. It's an old
4 document. They seem to have a copy of the pages which
5 you are missing; you seem to have an annex which they
6 are missing. Can we create a document on which both
7 the Minister of Economy and Finance and the Claimants
8 agree that it is the real document?
9 I think that is the decision. Let's not
10 discuss more on it, Mr. Hamilton.
11 MR. HAMILTON: I'll leave it with this,
12 Mr. President.
13 PRESIDENT FERNÁNDEZ ARMESTO: Let's leave it
14 here.
15 MR. HAMILTON: I'll leave it with this
16 sentence: They will not tell us where they got the
17 document. It's a pattern of conduct. It's a pattern
18 of lack of transparency, and we object to that. We
19 are glad to receive the document, and we look forward
20 to discussing it.
21 Thank you.
22 PRESIDENT FERNÁNDEZ ARMESTO: Okay. And so,
[Page 19]
1 you amalgamate both documents into a real document,
2 and you present it as an exhibit in the Hearing, and
3 we give it a Hearing number so that it is a Tribunal
4 number and it has--your document is your document, and
5 we give a full Hearing number to that document.
6 So, that is solved. First point of order,
7 Mr. Friedman.
8 Let's try to solve the three others in the
9 same fashion.
10 MR. FRIEDMAN: Thank you very much. The
11 next--I hope the others are shorter.
12 The next one is Witness sequestration. We
13 have instructed our Witnesses--because of the Witness
14 sequestration order, we have instructed our Witnesses
15 not to watch the video feed until after the time of
16 their testimony in order to honor the Tribunal's
17 Procedural Order. We have asked for assurances from
18 our friends on the Respondent's side that they will
19 instruct their Witnesses as well accordingly. We have
20 not received a response to that.
21 PRESIDENT FERNÁNDEZ ARMESTO: Mr. Friedman,
22 we are all experienced lawyers and experienced members
[Page 20]
1 of the arbitration community. We know nowadays that
2 sequestration when you have LiveNote or, as in this
3 case, where you have the internet, it goes without
4 saying that Witnesses should not--sequestered
5 Witnesses should not have access either to the
6 LiveNote, nor to the internet; otherwise, the
7 sequestration is purely formal. They are not in the
8 room, but they are de facto following the procedure,
9 and the whole purpose of the sequestration is lost.
10 So, it goes without saying. I don't think I
11 have to remind anyone around this room. I think we
12 are all--we all know what "sequestration" means, and
13 I'm sure that the Republic of Perú and I'm sure that
14 Claimant will adhere to the ethical standards of
15 sequestration.
16 MR. FRIEDMAN: Yes. As I volunteered, we
17 have indeed instructed Gramercy's Witnesses to that
18 effect. We were hoping for the same assurance from
19 Perú, but I understand the President's expectation
20 that that has happened.
21 MR. HAMILTON: Mr. President, I'm sorry, but
22 this is more fake news. We've had emails about this.
[Page 21]
1 We have acknowledged it. It is so obvious, I don't
2 know why we are wasting the Tribunal's time (in
3 Spanish).
4 PRESIDENT FERNÁNDEZ ARMESTO: Very good.
5 Mr. Friedman, third point?
6 MR. FRIEDMAN: We have proposed that both
7 Parties refer in speeches to Bondholder Witnesses by
8 initials, rather than by names, as a simple way of
9 preserving confidentiality.
10 PRESIDENT FERNÁNDEZ ARMESTO: The Bondholders
11 who are appearing as Witnesses and the other
12 Bondholders?
13 MR. FRIEDMAN: Yes, the Bondholders who are
14 appearing as Witnesses, who have submitted Witness
15 Statements, simply to preserve their confidentiality;
16 again, because of the Transcript and the live feed.
17 We would simply want confirmation from--that that will
18 be honored.
19 PRESIDENT FERNÁNDEZ ARMESTO: Mr. Hamilton?
20 MR. HAMILTON: Again, Mr. President, we have
21 had multiple email exchanges. We understand that this
22 is the case. We are not blocking the names of these
[Page 22]
1 individuals, but we are going to respect the Decision
2 of the Tribunal to protect their identities. And
3 that's it. A hundred percent, this is obvious.
4 PRESIDENT FERNÁNDEZ ARMESTO: Great.
5 MR. FRIEDMAN: The last item is that, with
6 translations, there are some documents in the record
7 that are only in one language, and the part--the
8 practice of the Parties until now has been mixed, I
9 think. Sometimes documents and exhibits have been
10 submitted with translations as part of the exhibit;
11 sometimes they have been quoted in written submissions
12 in free translation.
13 What we propose to do is to continue that
14 practice through the Hearing, basically, of being able
15 to use free translation--there are a few in the
16 Slides, frankly, that we have prepared this
17 morning--or submit written copies of translations to
18 the Tribunal.
19 PRESIDENT FERNÁNDEZ ARMESTO: The Tribunal,
20 if we see any mistake in the translation, we will draw
21 your attention to that.
22 Very good.
[Page 23]
1 Any point of order to start for the Republic
2 of Perú?
3 MR. HAMILTON: No, Mr. President. We are
4 ready to start. Thank you very much. We are here in
5 goodwill.
6 PRESIDENT FERNÁNDEZ ARMESTO: Okay. Great.
7 So, we are going to proceed in that manner. In the
8 spirit of cooperation, we are going to start your
9 presentation of Claimant for their initial
10 presentation.
11 Mr. Friedman, do you have any idea how much
12 time you will need? I ask that because of a break, if
13 there will be a need for a break in between.
14 MR. FRIEDMAN: Yes. With respect,
15 Mr. President, we will use all our time, and I suspect
16 everybody will want a break at some point. We've
17 planned for where it might be appropriate, but, of
18 course, we are completely in your hands.
19 PRESIDENT FERNÁNDEZ ARMESTO: Okay. So,
20 except if I see some urgency or some request from our
21 court reporters or the interpreters, we will break
22 whenever you say. If I see that there is a need, you
[Page 24]
1 will please accept that I ask you for a break.
2 MR. FRIEDMAN: Absolutely.
3 PRESIDENT FERNÁNDEZ ARMESTO: And I see some
4 of your colleagues coming with a presentation. That
5 should be the power slide, and we will give it the
6 number H-1.
7 Very good. You have the floor, Mr. Friedman.
8 OPENING STATEMENT BY COUNSEL FOR CLAIMANTS
9 MR. FRIEDMAN: Thank you, Mr. President,
10 Members of the Tribunal. Good morning.
11 On behalf of Gramercy, we thank you for
12 convening this proceeding and devoting so much time
13 and attention to this case already and through the
14 course of the week to come.
15 Today marks the beginning of the end of
16 Perú's ability to sweep under the rug the debt that it
17 owes from its mass expropriation of millions of
18 hectares of land, now 40 to 50 years ago. That debt
19 had substantial value. It represented payment for
20 Perú's sweeping land redistribution program in which
21 it expropriated land the size of Portugal,
22 conservatively valued in an undisputed report at
[Page 25]
1 around $42 billion.
2 But, for decades, Perú has refused to pay
3 what it owes, and the reason for that is not because
4 Peruvian law wasn't sufficiently clear about the fact
5 that Perú had to pay the Bonds' current value. Since
6 2001, Perú's Constitutional Tribunal and Supreme Court
7 confirmed that proposition repeatedly.
8 It is not because there were serious
9 questions about how to achieve current value. Just
10 about everybody recognized that "real current value"
11 meant that you should update the principal for
12 inflation using the Consumer Price Index and add
13 interest.
14 It is not because there was no legal
15 framework for paying them. Bondholders could and did
16 always go to the Courts to get that value calculated
17 and ordered on the basis of bedrock constitutional
18 principles, the right to property, and the express
19 provision of the Civil Code that governs these kinds
20 of debts of value.
21 If the Government had simply accepted the
22 Constitutional Tribunal's 2001 directive to pay the
[Page 26]
1 Bonds' current value, competent officials acting in
2 good faith over several years surely could have
3 figured out how to devise and implement a fair,
4 transparent, and rational process that produced
5 current value and provided a global solution to the
6 Land Bonds debt
7 Instead, the Land Bonds have not been paid
8 simply because the Ministry of Economy and Finance
9 has, for decades, obstinately resisted the central
10 command of paying current value that its own
11 Constitutional Tribunal confirmed was a constitutional
12 imperative. It instead chose years of stonewalling,
13 delay, and putting its head in the sand, so the debt
14 grew to the point where they argued it had grown too
15 big to pay.
16 The genesis of this Arbitration, however,
17 concerns the Ministry of Economy and Finance's
18 attempts to not just continue stalling, but to
19 effectively wipe out the debt altogether for almost no
20 value.
21 In 2013, the Ministry seized a unique
22 opportunity to use false information that paying
[Page 27]
1 current value would bankrupt Perú to get the
2 Constitutional Tribunal, through shocking conduct, to
3 change the current value legal framework, and it
4 exploited, then, that opportunity to foist on
5 Bondholders its so-called "Bondholder Process." That
6 process is arbitrary and unlawful in design and
7 execution. It is a failure in practice, and it is
8 also manifestly unjust.
9 After five years of its vaunted Bondholder
10 Process, Perú has paid, in total, the princely sum to
11 all the Bondholders who have been paid of about
12 USD 450,000, with some Bondholders who endured it
13 receiving less than $1,000 each for the 50-year-old
14 expropriation of their land. It is, in the words of
15 one of those Bondholders, "a joke."
16 It did not have to be this way. Gramercy did
17 everything it could over many years to foster a
18 consensual solution. You will hear from Robert
19 Koenigsberger, Gramercy's founder and Chief Investment
20 Officer. From the day Gramercy invested in
21 Perú--through today, even--Gramercy has held out its
22 hand to work with Perú to reach a productive solution
[Page 28]
1 to this decades-old debt. Its approach was informed
2 by Mr. Koenigsberger's long experience in working with
3 sovereigns with far less capacity to pay and much more
4 intractable issues, including Argentina, Nicaragua,
5 Russia, and other countries, and with his experience
6 with the Brady Plan in Perú that helped revitalize
7 Perú's broken economy and put it on the path to
8 growth.
9 As it had done in other countries, Gramercy's
10 hope was always that, in concert with other
11 Bondholders and the Peruvian Government, it would be
12 able to forge a fair and practical solution to heal
13 this scar on the nation's conscience.
14 PRESIDENT FERNÁNDEZ ARMESTO: You may wish to
15 slow slightly because you are being interpreted as you
16 are going. If you can make some pauses, I'm sure the
17 interpreters will appreciate that.
18 MR. FRIEDMAN: Thank you, Mr. President.
19 Thus, it is not Gramercy, but Perú's,
20 obstinate refusal to even sit down in a room and meet
21 with Mr. Koenigsberger, his colleagues, and other
22 Bondholders that has brought us to this point.
[Page 29]
1 Instead of even trying to find common ground,
2 Perú's former Minister of Economy and Finance and
3 Prime Minister and President, Pedro Pablo Kuczynski,
4 told the press: "I don't think we owe them anything.
5 It is that simple."
6 Justice Urviola, who we will talk about more
7 later, the Chief Justice of the Constitutional
8 Tribunal who cast the decisive vote for the tainted
9 July 2013 Order, echoed that sentiment just last year.
10 He rebuffed a congressional investigation into the
11 shocking circumstances in which that Decision was
12 issued by claiming that behind it are the interests of
13 the "Gramercy Vulture funds," who acted with the sole
14 purpose of harming the Peruvian State by winning an
15 arbitration. He warned the Peruvian Congress not to
16 lift his immunity from prosecution because of the
17 enormous damage that a decision that only favored the
18 Vulture funds would do to Perú. He revealingly added:
19 "We will not allow it."
20 That kind of animus against Gramercy
21 permeates Perú's defense, but it is not and cannot be
22 an answer to Perú's Treaty breaches.
[Page 30]
1 In the rest of our time today, Ms. Popova
2 will address Perú's objections to jurisdiction and
3 admissibility. I will then address the Merits.
4 Mr. Riehl will address remedies, and I will briefly
5 conclude.
6 PRESIDENT FERNÁNDEZ ARMESTO: Thank you.
7 Ms. Popova?
8 MS. POPOVA: Thank you, Mr. President.
9 Perú has raised every conceivable objection
10 to jurisdiction and admissibility: Lack of personal,
11 material, and temporal jurisdiction; no consent; and,
12 even if all of those exist, abuse of process.
13 I will be comparatively brief this morning,
14 because you have our recent Rejoinder, but you'll see
15 that Perú's objections all have one thing in common:
16 They do not rely on what the text of the Treaty
17 actually says. They posit that, despite what it says,
18 Gramercy should somehow be precluded from relying on
19 it. None of these attempts to rewrite the Treaty have
20 any merit.
21 At the risk of upending the classical order,
22 I will begin by addressing why the Land Bonds are
[Page 31]
1 investments within the meaning of the Treaty, and then
2 why Gramercy is an investor.
3 Now, the Treaty defines an investment
4 as: "Every asset that an investor owns or controls,
5 directly or indirectly, that has the characteristics
6 of an investment."
7 It then identifies three such
8 characteristics, but it does not make them either
9 mandatory or cumulative; including, it says, such
10 characteristics as "the commitment of capital or other
11 resources, the expectation of gain or profit, or the
12 assumption of risk."
13 It then adds context to that definition by
14 including a list of forms that an investment may take,
15 which expressly include, among other things, bonds,
16 debentures--rendered in the Spanish as
17 "obligaciones"--other debt instruments, and loans.
18 And then in the footnotes, the Treaty
19 identifies specific assets that do or do not
20 constitute investments. It says some forms of
21 debt--like bonds--are more likely to be investments,
22 while short-term debts from the sale of goods and
[Page 32]
1 services are less likely. It also specifically
2 excludes two kinds of assets that would otherwise
3 qualify as investments under the broad definition of
4 the Treaty. The first is State-to-State loans between
5 the U.S. and Perú, and the second is local court
6 judgments.
7 Then, in Annex 10-F, entitled "Public Debt,"
8 the Treaty states that the purchase of debt issued by
9 a Party entails commercial risk, and it goes on to
10 regulate what claims can be brought about defaults and
11 restructurings and how.
12 Now, this--as the structure of the Treaty
13 shows, the Treaty was negotiated under what is known
14 as the negative list framework. Perú has not denied
15 this, and, indeed, its own summary of the Treaty
16 negotiations confirm that fact.
17 You'll hear next week from Ambassador Peter
18 Allgeier. He was the Deputy U.S. Trade Representative
19 with responsibility for all trade agreements in the
20 western hemisphere and ultimate responsibility for the
21 negotiation of the Andean FTA, from which the
22 U.S.-Perú TPA derives.
[Page 33]
1 Ambassador Allgeier explains that the
2 negative list approach means that, if the State
3 Parties had intended to exclude certain types of asset
4 from the definition of an "investment," it would have
5 been necessary to include specific exclusions.
6 And that's, indeed, what we see in the
7 footnotes of the Treaty in the definition of the
8 "investment" that we just looked at. The Treaty also
9 contains schedules and annexes at the end of each
10 chapter which list the Measures that each Party wants
11 to exclude from the scope of the Treaty, perhaps
12 because they might be politically sensitive for
13 it--for example, bull fighting for Perú, or tuna
14 fishing for the U.S.
15 And that is also the mechanism that Perú used
16 in its Model BIT and in several other Investment
17 Treaties in which Perú, unlike in this Treaty,
18 expressly excluded public debt as a form of covered
19 investment.
20 So, taken together, these Treaty provisions
21 and the very structure of the Treaty confirm that
22 long-term public debt, of which bonds are a
[Page 34]
1 quintessential example, is a form of investment that
2 was covered under this TPA.
3 Perú's own summary of the Treaty negotiations
4 explains that the Treaty's definition of "investment"
5 is "broad. It covers all possible forms of assets";
6 that it "contains an illustrative, not delimited, list
7 of elements, which include, among others, debt
8 instruments, including public debt."
9 Now, we believe that there is no dispute on
10 four basic propositions:
11 First, that the Land Bonds are bonds.
12 Second, that the Land Bonds are sovereign
13 bonds, in that they were issued by Perú.
14 Third, that sovereign bonds are generally a
15 kind of covered investment. Perú appears to accept
16 that what it calls "modern or global sovereign bonds"
17 do qualify as investments within the Treaty's terms.
18 And fourth and finally, that the Treaty does
19 not expressly exclude these Land Bonds from being
20 investments the way it does other kinds of public debt
21 and other kinds of covered assets.
22 So, Perú's objection that these Land Bonds
[Page 35]
1 are not covered investments appears to depend on some
2 kind of extra-textual tacit distinction about the
3 nature of these bonds, as opposed to all other kinds
4 of sovereign bonds.
5 And so, Perú places great emphasis on its
6 submissions on how the bonds were "configured," it
7 says. It says they weren't marketed abroad; they
8 didn't contain Foreign Dispute Resolution Clauses;
9 that they weren't issued in a foreign currency; that
10 they related to another era in Perú's historical
11 development.
12 Now, all of these things might be accurate
13 factual observations, but there's no basis for turning
14 them into mandatory jurisdictional requirements. They
15 don't make the Land Bonds any less of a debt. They
16 don't make them any less of a bond. They don't make
17 them any less an asset that otherwise has all of the
18 characteristics of an investment. And the Treaty
19 makes no such distinctions at all.
20 For example, it makes no distinction based on
21 the vintage of the investment. It protects
22 old-fashioned investments just like "modern" ones, it
[Page 36]
1 protects existing investments just like future ones,
2 and it has no restrictions on how the investment was
3 marketed or to whom. It also does not exclude what
4 Perú calls "speculative" investments. Quite to the
5 contrary, it identifies risk and the expectation of
6 gain as defining features of an investment.
7 It also recognizes that assets that are even
8 more speculative than a 30-year Government bond can be
9 forms of investment; things like shares, futures,
10 options, derivatives. And similarly, the Treaty does
11 not exclude investments that were made in a local
12 currency or governed by local law. In fact, it
13 expressly includes rights conferred pursuant to
14 domestic law, as well as contracts, without any
15 limitation of governing law.
16 Now, prior Investment Decisions involving
17 other kinds of sovereign debt don't help Perú, for the
18 reasons we've said in our papers. Perú invokes
19 several cases which will be familiar to this Tribunal,
20 and all of those cases except Postova found that there
21 was, indeed, jurisdiction. And in Postova, of course,
22 the Treaty did not expressly include as forms of
[Page 37]
1 investment bonds or public debt. It didn't have an
2 express annex on public debt.
3 So, if Perú's laundry list of domestic touch
4 points were really what the Treaty meant about the
5 kinds of covered investments, the Treaty would have
6 looked very different from the way that it does.
7 The Treaty, of course, does not contain any
8 of these limitations. It does, however, identify
9 three features that the State Parties in fact
10 considered relevant. It identifies the commitment of
11 capital, the expectation of profit, and the assumption
12 of risk. And there's no question that the Land Bonds
13 have all of those characteristics.
14 First, Gramercy committed over $32 million in
15 capital to buy the Bonds. It incurred substantial
16 management and opportunity costs, and it paid
17 insurance and storage fees. But it committed other
18 resources, too. It invested its know-how, its
19 contacts, its expertise, its time. It also prepared
20 several thoughtful proposals for a bond swap that
21 could convert Perú's Land Bonds debt into new,
22 productive investments, which it presented to the
[Page 38]
1 Government several times.
2 Second, by investing in the Bonds, Gramercy
3 also had an expectation of profit. It expected that
4 Perú would restructure and pay its Land Bonds debt, as
5 it had done with its Brady Bonds and its Paris Club
6 obligations. If that didn't happen, Gramercy expected
7 that it would be able to go to a Court and get a
8 decision awarding the Land Bonds' current value,
9 consistent with the unequivocal decisions of the
10 Constitutional Tribunal and the Supreme Court.
11 And, finally, Gramercy also assumed risk.
12 The Treaty itself expressly recognizes that the
13 purchase of debt issued by a Party entails commercial
14 risk. Now, the fact that Gramercy raised money from
15 third parties to invest in the bonds, or that it
16 bought them at a discount to their inherent value,
17 doesn't mean that buying Peruvian debt was totally
18 risk-free.
19 Perú doesn't meaningfully challenge any of
20 this evidence. Instead, it argues that the Tribunal
21 should apply the Salini factors as mandatory
22 jurisdictional requirements and then hang its hat on
[Page 39]
1 the fourth Salini criterion to deny jurisdiction,
2 allegedly because Gramercy's purchase of the Land
3 Bonds did not contribute to Perú's economic
4 development.
5 Now, I will not dwell on the trials and
6 tribulations of the fourth prong of Salini, which we
7 set out in our papers. Many Tribunals, of course,
8 have refused to adopt it, most recently in Seo and
9 South Korea, under the identical definition of
10 "investments" in the U.S.-Korea FTA. And, of course,
11 as Ambassador Allgeier puts it in his Reports, "such a
12 requirement would simply be too vague to be workable,
13 and it is contrary to the text of this agreement."
14 Indeed, Perú's own statements about the
15 Treaty tend to confirm that view. Neither Perú's nor
16 the U.S.'s public descriptions of the kinds of assets
17 that it would cover have any mention of a condition
18 that an asset would only be covered if it also
19 contributes to the State's economic development.
20 In any event, Gramercy's investment did, in
21 fact, have the characteristic of contributing to
22 Perú's economy. The whole point of the Land Reform
[Page 40]
1 from which these Land Bonds emerged was, of course, to
2 stimulate Perú's industrialization, its socioeconomic
3 development, and Gramercy's investment in the Bonds
4 had benefits for Perú as well.
5 On the microeconomic level, as
6 Mr. Koenigsberger explains, Gramercy injected millions
7 of dollars into the local economy. It created a
8 secondary market for the stagnated debt. It provided
9 much-needed liquidity to Peruvian nationals, and that,
10 in turn, had multiplier effects of improving their
11 standard of living generally.
12 Gramercy's Witness, Ms. G, confirms those
13 benefits. She describes why she sold her Bonds to
14 Gramercy and how lucky she's been compared to other
15 Bondholders who went through the Government's
16 Bondholder process, only to receive far less after
17 many years than what Gramercy was offering, or even
18 who died without receiving anything at all.
19 She could have told you about the
20 microeconomic effects of Gramercy's investment
21 firsthand, but Perú chose not to call her for
22 cross-examination.
[Page 41]
1 Now, Perú also does not dispute that, if it
2 had accepted Gramercy's various proposals for a
3 restructured bond swap, it would have benefited from
4 what Mr. Koenigsberger calls "the virtuous shock" of
5 cleaning up old debt. Professor Rodrigo
6 Olivares-Caminal, who you will also hear this week, is
7 an expert in sovereign finance, and he confirms those
8 benefits, too.
9 Gramercy studied and prepared several such
10 proposals, outlining them in a presentation that it
11 sent to President García in May 2009. That
12 presentation summarized the benefits of the swap to
13 Perú. It had a whole section on the benefits of the
14 exchange for the country, on the positive impact on
15 investment and economic growth for Perú.
16 So, it's really no answer for Perú to say
17 that Gramercy's hope for a solution to the Bonds
18 didn't pan out, and so it didn't actually contribute
19 to the Peruvian economy. Perú's breaches, of course,
20 is what prevented that from happening. If a State
21 unlawfully expropriates a Mining License before a
22 shovel has hit the ground or a factory before a single
[Page 42]
1 job has been created, that doesn't mean that those
2 assets are not the kinds of assets that investment
3 treaties protect as investments.
4 To see the absurdity of Perú's argument, just
5 consider a hypothetical. Imagine Gramercy had owned a
6 factory outside of Lima that manufactures typewriters.
7 Imagine Gramercy had bought it from a Peruvian owner,
8 paid in Peruvian soles under a contract that provided
9 for resolution of disputes under Peruvian law, before
10 Peruvian Courts, and for which there had been no
11 international tender and no marketing to foreign
12 investors whatsoever. Imagine Perú had then
13 expropriated the factory the very next day, before the
14 factory paid any taxes or created any jobs or built
15 any typewriters. Would you say that that factory is
16 not an investment? There is simply no basis for
17 grafting limitations onto the text of the Treaty that
18 just are not there.
19 Now, your analysis could stop there because
20 that is enough to dismiss Perú's objection to material
21 jurisdiction, but in this case, you have even more.
22 You have lots of evidence about the context in which
[Page 43]
1 this Treaty was negotiated, and that evidence dispels
2 any suggestion that there could possibly have been
3 that the State Parties secretly intended to exclude
4 the Land Bonds but simply forgot to do so expressly.
5 Perú's Land Reforms were very much on the
6 State Parties' radar during the negotiation of the
7 Treaty in at least three ways: First, what the U.S.
8 Congressional Research Service called "one of the most
9 important issues" during the negotiation of the Treaty
10 was Perú's expropriation of U.S. investors, including
11 U.S. companies and citizens that had been victims of
12 Perú's Land Reform.
13 As part of the U.S.'s Andean Trade Preference
14 Program, Perú had committed to resolve these disputes
15 in order to qualify for trade preferences. Ambassador
16 Allgeier can tell you more about that this week, and,
17 as he explains, making progress on resolving them was
18 a condition for Treaty negotiations to begin with
19 Perú, and Perú's slow progress in resolving them
20 almost torpedoed Congressional approval of the Treaty
21 in the first place.
22 Second, several of the Treaty's negotiation
[Page 44]
1 rounds expressly dealt with the kinds of public debt
2 that would be covered under the Treaty and the kinds
3 of claims that could be made about them and how.
4 Now, Perú wanted to exclude all forms of
5 public debt, the U.S. wanted to include them, and
6 their agreed solution was to expressly exclude only
7 state-to-state debt and to regulate claims about other
8 kinds of public debt through the public debt annex.
9 And we have in the record these negotiation summaries
10 that were prepared and issued by MINCETUR, by Perú
11 itself, describing the Parties' negotiation positions,
12 what was conceded, what was obtained, and what the
13 ultimate solution was.
14 Third, at the same time as these
15 negotiations, Perú's Highest Courts were issuing
16 several Decisions reminding the Government that it had
17 to pay the Land Bonds at their properly updated
18 current value, and there were various reports and
19 draft bills, including R-257, that were being prepared
20 at that time to create a global administrative
21 solution for paying them.
22 Now, any one of these three narratives would
[Page 45]
1 independently preclude a finding that the State
2 Parties intended to carve the Bonds out of the Treaty
3 but simply forgot. All three of them taken together,
4 even more so. Given this context, it is not only
5 implausible, it is simply impossible that the U.S. and
6 Perú genuinely intended to exclude the Land Bonds and
7 Perú's Land Reform from the scope of the Treaty but
8 somehow forgot to do so.
9 Now, Perú's objections to personal
10 jurisdiction also require imposing limitations on the
11 Treaty that just are not there. Here's how the Treaty
12 defines "investors": "A national enterprise of a
13 party that attempts through concrete action to make,
14 is making, or has made an investment in the territory
15 of another party."
16 And the Treaty's definition of "investment"
17 is also relevant because it says that "an investment
18 is an asset that an investor owns or controls directly
19 or indirectly."
20 Now, there is no question--there never has
21 been--that both GFM and GPH are U.S. companies. There
22 is also no question that GPH owns and GFM controls the
[Page 46]
1 Land Bonds. And Perú is not invoking the Denial of
2 Benefits clause in the Treaty and nor could it. And
3 nothing in the Treaty excludes investment firms or
4 asset managers from being investors simply because of
5 their line of business.
6 Instead, Perú seems to argue that the fact
7 that Gramercy owns and controls the Bonds is somehow
8 not enough for it to have made an investment. Now,
9 here, too, Perú's argument has no legal basis and it
10 has absurd implications. There is no magic to the
11 word "made." The ordinary meaning of "to make" is
12 just to "cause something to exist" or "to give rise to
13 it." And, here, the Treaty covers not just ownership
14 of investment, but also control, and not just direct
15 ownership or control, but indirect forms too.
16 As Mr. Koenigsberger explains, between them,
17 GPH and GFM not only have both ownership and control,
18 but they are the only entities who do.
19 Against that evidence, Perú has two
20 arguments, neither of which survives scrutiny.
21 First, it says that in this Treaty, "made" an
22 "investment" means something special, that it requires
[Page 47]
1 some form of elusive "active contribution" that would
2 mean something more than what Gramercy did. Now, Perú
3 gives no support for that limitation and no
4 explanation of why it wouldn't be met on the facts of
5 this case, even if it existed. Neither Professor
6 Reisman nor Mr. Herrera endorse this theory, and
7 they're right, because it makes no sense.
8 The reference to "concrete action" in the
9 Treaty, which appears to give rise to this argument,
10 which we heard for the first time only in their
11 Rejoinder, is just a misreading of the text, and the
12 concrete action quite obviously relates to someone who
13 is attempting to make an investment, not someone who
14 already has made one.
15 This is also not a case about a passive
16 investor who inherits an investment with no effort
17 whatsoever. As Mr. Koenigsberger, again, explains,
18 Gramercy developed a strategy to design a global bond
19 swap that would resolve Perú's Land Bonds debt once
20 and for all. It would make Perú attractive for other
21 investors, and Gramercy executed on that strategy by
22 identifying and acquiring a critical mass of bonds, by
[Page 48]
1 developing restructuring proposals, and trying to turn
2 them into reality through dogged efforts to engage
3 with the highest levels of Peruvian Government.
4 So whatever the additional level of active
5 contribution Perú seeks to infer, there can be no
6 question at all on this record that Gramercy plainly
7 mattered.
8 Second, Perú, again in its Rejoinder, says
9 that Gramercy doesn't have "standing" because third
10 parties, Gramercy's clients, also have an indirect
11 interest in the Bonds. This argument, too, is
12 confused. The fact that Gramercy has clients who
13 invest their money in the funds and, thus, have in
14 some sense an indirect economic interest in the
15 performance of those funds, doesn't mean that Gramercy
16 did not make an investment in Perú.
17 As Mr. Koenigsberger observes, Gramercy's
18 clients have neither title to nor control over the
19 Bonds. Perú's logic would disqualify any company from
20 being an investor simply because it has shareholders
21 or lenders or other kinds of stakeholders who in some
22 way have an indirect economic interest in the
[Page 49]
1 performance of its downstream assets. And, once
2 again, the Treaty would have looked very different if
3 that is really what these Parties intended to do.
4 Perú's next set of objections are both more
5 technical and more inconsequential.
6 PRESIDENT FERNÁNDEZ ARMESTO: We will try to
7 let you speak and at the end we will address
8 questions. I think it's better. Please.
9 MS. POPOVA: Okay, Mr. President. Happy to
10 be of assistance.
11 The first of these technical objections is an
12 objection on the basis of the waiver precondition to
13 submission of claims under Article 10.18. This
14 objection is only relevant because of Perú's second
15 inconsequential objection, which is that GFM's claims
16 were submitted late.
17 Now, this is what Article 10.18 actually
18 requires: Perú's waiver objection has no impact on
19 the case for two reasons. First, there is no dispute
20 that both of the Claimants here have, in fact, validly
21 submitted their claims. Every one of Gramercy's three
22 Notices of Arbitration was accompanied by the
[Page 50]
1 Claimants' written waiver of any right to initiate or
2 continue the proceedings with respect to the Measures
3 that they allege were a breach.
4 The only question that Perú raises here is
5 the date on which they should be deemed to have first
6 done so, whether that was in June or July or August of
7 2016.
8 Second, Perú admits that GFM submitted its
9 claims on June 2, and it appears to make no separate
10 time bar objection to GFM's claims as opposed to
11 GPH's. So, this waiver objection is really a moot
12 point. It has no impact whatsoever on the scope of
13 the claims that you will ultimately need to decide.
14 That being said, all that Perú appears to be
15 disputing here is on which one of three dates GPH
16 commenced arbitration. Now, GPH, of course, validly
17 submitted its claims on June 2, 2006. The waiver in
18 that Notice of Arbitration had a reservation in case
19 the Tribunal finds its claims inadmissible or denies
20 jurisdiction. And the Renco Decision,
21 notwithstanding, that waiver complies with both the
22 terms and the purpose of Article 10.18.
[Page 51]
1 In any event, even if you are not with us on
2 that, just days after the Renco Decision, on July 18,
3 GPH submitted a second waiver without any
4 reservations, so there could be no issue about Renco,
5 and we say it validly submitted its claims on that
6 date, even if you follow Renco, which we say you
7 should not.
8 Now, at the time, GPH was a party to court
9 proceedings in which it sought a court-ordered Expert
10 valuation for its Land Bonds as many Bondholders had
11 been forced to do. Those proceedings were not with
12 respect to any measure alleged to constitute a breach
13 of the Treaty, so they didn't need to be waived or
14 discontinued.
15 (Interruption.)
16 MS. POPOVA: But given Perú's continuing
17 objections and to minimize the points of dispute, GPH
18 then withdrew those proceedings, too, and it submitted
19 a further Amended Notice of Arbitration on August 5,
20 2016.
21 Now, Perú seems to say that even that
22 material waiver was not actually effective until some
[Page 52]
1 days later, maybe August 10, because that's when the
2 Peruvian Courts accepted the withdrawal of petitions.
3 I submit to you that that again makes no sense. It's
4 not what the Treaty says, and it would be dangerous
5 because it would make a Claimant's ability to submit
6 its claims dependent on the conduct of the Respondent
7 State. And, again, unsurprisingly Perú offers no
8 authority whatsoever for that interpretation of the
9 waiver requirement in the Treaty.
10 Now, June 2, 2016, is the principled and the
11 correct choice between these three dates, but I will
12 submit to you that it makes no difference because in
13 all of these cases, Gramercy submitted its claims
14 within three years, and Perú's objections on this
15 score fail as well.
16 The Treaty is clear that the time bar runs
17 from when the Claimant has actual or constructive
18 knowledge of both the breach and the loss or damage.
19 Perú says that Gramercy's claims all derive from the
20 July 16, 2013, Constitutional Tribunal Order. Now,
21 that's not actually true, but even on that case, all
22 of GFM's claims are within the three-year period
[Page 53]
1 because it submitted its claims on June 2, 2016, less
2 than three years after the CT Order.
3 And even if you find that GPH only submitted
4 its claims sometime later, only in August, that would
5 still not make any of GPH's claims inadmissible. The
6 only event that would fall outside that window is the
7 mere issuance of the July 16, 2013, Order. But, of
8 course, as we've explained in our Briefs, Gramercy
9 could not possibly know from the face of that decision
10 itself everything that would happen later. It could
11 not know that Perú had committed the breaches it now
12 claims, or that Gramercy had suffered the losses that
13 it claims in this Arbitration.
14 The entire Bondholder process, of course,
15 including Gramercy's inability to go to Peruvian
16 Court, derived from the January 2014 Supreme Decrees,
17 and the gross irregularities that led to the July 16
18 Order weren't uncovered until 2015 and much later.
19 So, really the only question is whether
20 Gramercy did or should have appreciated that Perú had
21 expropriated its investment and thwarted its
22 entitlement to current value merely from the face of
[Page 54]
1 the July 16 Order itself. And you could not reach
2 such a conclusion from reading the Decision itself, as
3 I'm sure that you will.
4 You also have testimony from
5 Mr. Koenigsberger and documents in the record that
6 show you how Gramercy was interpreting that Decision
7 at the time that it received it, and the months of
8 uncertainty in which it remained.
9 Mr. Koenigsberger explains in his statements
10 that that Order came as a surprise, that the Decision
11 simply did not provide enough information for Gramercy
12 to assess its impact. Gramercy's contemporaneous
13 emails confirm that fact. They show that Gramercy
14 believed that the Decision was an opening gambit, that
15 it would have to wait for the MEF to issue the Decrees
16 that the Constitutional Tribunal ordered MEF to issue
17 before it would know what Perú really intended to do.
18 And Gramercy believes that that was an opportunity
19 again for negotiation with the MEF.
20 And this sort of uncertainty about what the
21 Order meant or what the State would do, it's just not
22 the kind of knowledge that can trigger the Treaty's
[Page 55]
1 time bar. The recent decisions in Resolute Forest
2 Products and in Mobil Investments, for example, which
3 Perú has never addressed, confirm that conclusion.
4 In its Rejoinder, Perú invoked a letter that
5 Mr. Koenigsberger had written to President García in
6 December 2013, and the argument appears to be that
7 because Gramercy reserved its rights under the Treaty
8 in this December letter, that that shows it had
9 knowledge of breach and loss several months earlier.
10 In fact, that cannot be true. The fact that
11 one writes a letter reserving rights in December
12 cannot establish knowledge of breach and loss many
13 months before that.
14 Moreover, the letter, in fact, corroborates
15 Gramercy's conviction that there was still scope for
16 negotiating a debt restructuring with the MEF.
17 Earlier in the letter, Mr. Koenigsberger, in fact,
18 says "a combination of factors has now created a
19 historic opportunity for Perú to resolve this
20 situation once and for all and to do so in a way that
21 benefits all the Parties involved." And after
22 reserving rights, he ends, "at the same time, we hope
[Page 56]
1 you can appreciate the sincerity with which we are
2 sending this letter and our clear preference to help
3 Perú find a consensual nonconflictive solution to the
4 difficult situation of the Land Reform Bonds."
5 Perú's argument that the Tribunal does not
6 have temporal jurisdiction suffers from the same
7 confusion of what Gramercy's claims are and what the
8 Treaty's language says. The Treaty provides that it
9 does not apply in relation to "any act or fact that
10 took place or any situation that ceased to exist
11 before the entry into force of this Agreement," which
12 is February 1, 2009.
13 Perú's temporal breach argument appears to be
14 that Gramercy's claims for breaches arising out of
15 conduct in 2013, '14, and later are, in fact, the same
16 dispute as the underlying Land Reform expropriation in
17 the 1960s and '70s, and so they are temporally barred.
18 This objection is also conceptually flawed in
19 a number of ways: First, Gramercy's claims are, of
20 course, not that Perú breached the Treaty by
21 expropriating land in the 1970s. As you can see on
22 this timeline, all of the acts or facts to which
[Page 57]
1 Gramercy seeks to apply the Treaty occurred well after
2 February 1, 2009.
3 Second, this Treaty does not determine
4 jurisdiction by whether the dispute that was submitted
5 for Decision is the same dispute as the dispute that
6 had already arisen before the Treaty came into force,
7 as some treaties do. Instead, it links temporal
8 jurisdiction by when the acts or facts that took
9 place, whether they occurred before the entry into
10 force of the Agreement or not.
11 And even in Perú's argument that the dispute
12 is about Perú's nonpayment of the Bonds at their
13 current value, well, that situation did not cease to
14 exist before the entry into force of the Treaty.
15 Again, a point that Perú has never addressed.
16 This brings us to Perú's final argument. And
17 this is one that really infuses all of its objections
18 to jurisdiction, that even though Gramercy is a
19 qualifying investor with a qualifying investment that
20 timely and validly submitted its claims, Gramercy
21 should be precluded from exercising its Treaty rights
22 that it undoubtedly has on account of an alleged Abuse
[Page 58]
1 of Process.
2 This Tribunal will appreciate that an
3 argument of Abuse of Process amounts to one of bad
4 faith and that the standard is high.
5 Perú's arguments come nowhere near that high
6 threshold. The relevant facts are, again, not in
7 dispute. There is no change of nationality of the
8 investor. GPH and GFM are, and they always have been,
9 U.S. investors. And the timing itself disproves
10 Perú's claims. Gramercy didn't buy the Land Bonds
11 after Perú breached the Treaty, but seven years
12 before. And it commenced this Arbitration 10 years
13 after it invested.
14 As Mr. Koenigsberger had explained in detail,
15 this Arbitration was Gramercy's last resort. It was
16 not its primary goal. Gramercy invested for the
17 purpose of recovering the real value of its Bonds by
18 catalyzing an agreement on a fair and comprehensive
19 solution that would benefit both Bondholders and Perú,
20 which Gramercy believed could really happen through a
21 bond swap proposal like it had done in other
22 countries.
[Page 59]
1 And this wasn't just posturing. The record
2 shows that Gramercy carried through on that investment
3 strategy. I'm about to show you a confidential
4 document, so I would kindly ask the Non-Disputing
5 Parties to leave the room and the feed to be
6 interrupted.
7 (End of open session. Attorneys' Eyes Only
8 information follows.)
[Page 60]
[Redacted]
(End of Attorneys' Eyes Only session.)
[Page 61]
1 MS. POPOVA: Gramercy made several proposals
2 to Perú in line with that plan, which Perú does not
3 even mention in its papers. For example, In May 2009,
4 it sent President García its detailed proposal for
5 that bond swap that it thought would achieve a
6 definitive and constructive solution to the Land
7 Bonds.
8 In June 2009, it submitted a similar proposal
9 to the Agrarian Commission of Perú's Congress, which
10 was considering legislative proposals to do just that
11 at the time. And Gramercy continued advocating for
12 this kind of solution even in late 2013 and even again
13 after the arbitrary 2014 Supreme Decrees.
14 Yet, again, Perú does not challenge any of
15 this evidence, and nor could it. Its entire Abuse of
16 Process argument appears to be that Gramercy knew that
17 a Treaty had been signed that might protect its
18 investments if everything didn't go to plan and that
19 through this Arbitration Gramercy is trying to take
20 advantage of remedies that are foreclosed to Peruvian
21 Bondholders.
[Page 62]
1 This is one example of what they say in their
2 papers.
3 Relying on a Treaty to make an investment is
4 not abusive. It's the opposite. It's the intended
5 effect of investment treaties in the first place.
6 And, again, the fact that Nationals do not have claims
7 against their home states under an investment treaty
8 is also not abusive. It's an inherent feature of the
9 system.
10 So, it is not abusive that Perú must answer
11 for its arbitrary and expropriatory conduct before
12 this Tribunal.
13 If anything is abusive, it's that Perú has
14 not done right by its own thousands of Peruvian
15 Bondholders who have no effective remedy at all and
16 who today have scraps of paper when they should have
17 farms and land.
18 You have statements in the record from some
19 of these people whose families had their livelihoods
20 and futures taken away from them. They won't be able
21 to tell their stories this week, so I encourage you to
22 read those statements.
[Page 63]
1 Even today, Mr. Koenigsberger continues
2 hoping that Perú will do the right thing by those
3 Bondholders. So far, Perú has chosen not to handle
4 its Land Bonds debt in a transparent, consensual,
5 responsible manner like so many other sovereigns have
6 done.
7 As Mr. Friedman will now explain, it has
8 chosen to unlawfully wipe out that debt, in violation
9 of the Treaty and the elementary notions of justice
10 that it reflects.
11 PRESIDENT FERNÁNDEZ ARMESTO: Thank you,
12 Ms. Popova, and we give the floor to Mr. Friedman.
13 MR. FRIEDMAN: Thank you, Mr. President.
14 As I turn to the merits of the case, I will
15 concentrate during these remarks mostly on the facts,
16 but at the beginning, I say a few preliminary words
17 about the law.
18 Gramercy's first claim, of course, as you
19 know, is for its expropriation. Article 10.7 of the
20 Treaty prohibits a party from expropriating an
21 investment, except in very limited circumstances,
[Page 64]
1 namely for a public purpose in a nondiscriminatory
2 manner and upon payment of prompt, adequate, and
3 effective compensation.
4 The Treaty expressly recognizes that a
5 measure can be expropriatory, even if there has been
6 no formal transfer of title or outright seizure, so
7 long as it has the effect equivalent to direct
8 expropriation. In other words, it recognizes indirect
9 expropriations.
10 It is, of course, settled law and not, I
11 think, seriously disputed that an indirect
12 expropriation occurs when the effect is significant or
13 substantial deprivation of the value of the
14 investment.
15 Perú doesn't dispute that, but it seeks to
16 evade liability by arguing that it is actually,
17 through its Bondholder process, imparted value to
18 these Bonds where previously there was none. We will
19 show that that's false in just a moment.
20 Before I get to that, though, I just want to
21 address one argument that Perú made for the first time
22 in its Rejoinder, based on a misreading of Annex 10-B
[Page 65]
1 of the Treaty.
2 The Annex states that, "except in rare
3 circumstances, nondiscriminatory regulatory actions by
4 a party that are designed and applied to protect
5 legitimate public welfare objectives, such as public
6 health, safety, and the environment, do not constitute
7 an indirect expropriation."
8 In its Brief, Perú cites this language but
9 conveniently omits the words from this provision,
10 "such as public health, safety, and the environment,"
11 to create what it claims is a presumption against
12 expropriation.
13 Without citing any authority, Perú
14 essentially argues that as long as the State has
15 articulated some justification for its expropriatory
16 measure, that measure is unimpeachable or at least
17 strongly presumptively okay. But that is a gross
18 misreading of the Treaty.
19 Every expropriating State articulates some
20 justification, some purpose that it claims to have for
21 its government acts. So Perú's construction would
22 deprive the expropriation clause of any real meaning
[Page 66]
1 and allow this public welfare exception to swallow the
2 rule.
3 In any event, as you'll see, factually Perú's
4 measures were not designed and applied to protect
5 legitimate public welfare objectives, such as public
6 health, safety, and the environment. They have
7 nothing to do with any of those activities. And as we
8 will show, they were intended, in fact, to extinguish
9 Perú's Land Bonds debt and compromise on the right to
10 have that debt paid at current value.
11 Gramercy's second claim is that Perú's
12 actions violate the Minimum Standard of Treatment in
13 violation of Article 10.5 of the Treaty.
14 Article 10.5 imposes on Perú the obligation
15 to accord Gramercy "treatment in accordance with the
16 customary international law, including fair and
17 equitable treatment, and full protection and
18 security." And this Minimum Standard of Treatment
19 includes the obligation not to deny justice and
20 requires that Perú act in accordance with the
21 principle of due process embodied in the principal
22 legal systems of the world."
[Page 67]
1 The Minimum Standard of Treatment is a
2 dynamic and multifaceted standard that requires an
3 assessment of the facts as a whole. As Professor
4 Reisman, the Respondent's Expert in this case has
5 argued in his academic writings, it is "an evolving
6 concept, whose contents overlap with or are congruent
7 with the fair and equitable treatment standard as it
8 has been interpreted by international investment
9 tribunals."
10 While not subject to the narrow and
11 reductionist approach Perú advocates, this standard
12 has certain frequently recognized dimensions or
13 manifestations, some of which are expressly mentioned
14 in the Treaty language and others of which have been
15 elaborated in cases upon which both Parties rely in
16 their papers. These include the protection of an
17 investor's legitimate expectations, the prohibition
18 against arbitrary conduct, and the prohibition against
19 denial of justice.
20 In its Rejoinder, Perú cites to the United
21 States' Non-Disputing Party submission for the
22 proposition that "determining a breach of the Minimum
[Page 68]
1 Standard of Treatment must be made in light of the
2 high measure of deference that international law
3 generally extends to the right of domestic authorities
4 to regulate matters within their borders."
5 Well, there is, of course, a margin within
6 which a State can act. It is limited by the State's
7 obligations under the law and by the Treaty. Numerous
8 Tribunals have recognized that "deference" does not
9 excuse Treaty violations, and, of course, it couldn't.
10 For example, the Tribunal in
11 TECO v. Guatemala explained that deference to a
12 State's regulatory powers cannot amount to condoning
13 behaviors that are manifestly arbitrary,
14 idiosyncratic, or that show a complete lack of candor
15 in the conduct of the regulatory process, and it is up
16 to an International Arbitration Tribunal to sanction
17 Decisions that amount to an abuse of power, are
18 arbitrary, or taken in manifest disregard of
19 applicable legal rules and in breach of due process
20 and regulatory matters."
21 The Tribunal in Foresight Luxembourg
22 similarly explained that the right to regulate must be
[Page 69]
1 subject to limitations if investor protections are not
2 to be rendered meaningless. And as the Tribunal in
3 Burlington v. Ecuador explained, the principle applies
4 also to national court decisions, for otherwise the
5 purpose of investment arbitration would be seriously
6 jeopardized, if not defeated.
7 Now, measures such as the ones at issue in
8 this Arbitration deserve no deference, as we will
9 show.
10 Gramercy's third claim arises under
11 Article 10.4 of the Treaty. As we've explained in our
12 papers, the most-favored nation clause imposes on Perú
13 the obligation to afford "effective means" to
14 Gramercy, but it has failed to do so. Perú has
15 deprived Gramercy of effective means for enforcing its
16 rights by imposing a mandatory and exclusive
17 Bondholder process, which denied Gramercy the recourse
18 it had previously enjoyed in Perú's Courts.
19 And Gramercy's forth claim arises under
20 Article 10.3, which imposes on Perú the obligation to
21 afford Gramercy treatment no less favorable than what
22 it affords to its own citizens. As we have shown, and
[Page 70]
1 Perú has not seriously rebutted, Perú has
2 discriminated against Gramercy by placing "speculative
3 investors," a term clearly intended to single out
4 Gramercy, at the very end of the payment queue in its
5 Bondholder process.
6 Now, I won't say more about the law--or not
7 much more about the law right now because this is a
8 hearing--a factual hearing. We have a lot of
9 Witnesses here, and I do want to concentrate on the
10 evidence. And while the case may seem highly complex,
11 even in an evidentiary sense, we have over 2,000
12 exhibits, 19 Witnesses and Experts. Your decision in
13 this case is very likely to turn on how you resolve
14 just four key factual issues.
15 Those issues are first: Prior to 2013, was
16 the current value principal just an amorphous idea, so
17 uncertain as to be meaningless in practice, as Perú
18 contends, or did it have real meaning, such that
19 Gramercy and other Bondholders could ultimately expect
20 a value based on CPI-updating plus interest?
21 Second, are the 2013 Constitutional Tribunal
22 Orders perfectly normal Decisions of the country's
[Page 71]
1 highest Constitutional Court, as Perú contends, or are
2 they, in the manner in which they came about, tainted
3 and part of Perú's illegal conduct?
4 Third, are the Supreme Decrees and the
5 Bondholder process they create a proper, lawful, and
6 well-supported set of administrative regulations
7 simply executing the 2013 Constitutional Tribunal
8 Orders and, as Perú puts it, conferring value on Land
9 Bonds, or are they arbitrary, illegal, and
10 unjustifiable efforts to destroy value?
11 And fourth, did the possibility of, perhaps,
12 having exceptional claims, like Amparo proceedings,
13 provide effective means for Gramercy to obtain current
14 value in Perú as Perú contends, or did the
15 Constitutional Tribunal and Ministry of Economy and
16 Finance actions deprive Gramercy of effective means to
17 obtain current value through their conduct?
18 Those four issues will very likely end up
19 determining how you conclude the case. So I want to
20 turn to the first of them now, which is that current
21 value had clear meaning.
22 From at least 2001, current value had a real
[Page 72]
1 meaning about the Land Bonds. It meant one thing. It
2 meant CPI plus interest. Current value was not, as
3 Perú claims, hopelessly uncertain and meaningless.
4 Now, the current value principle itself was
5 already a staple of Peruvian law, and, as this
6 Tribunal will know, a staple of other civil law
7 systems as well, well before the 2001 Decision.
8 Article 1236 of Perú's 1984 Civil Code explicitly
9 recognized this principle for debts of value. Yet, in
10 1996, Perú enacted a law that would have made the Land
11 Bonds an exception to this Article 1236 principle and
12 allowed Perú to extinguish the Land Bond debt on
13 nominal terms. The nominal value of those amounts was
14 essentially worthless.
15 So while the law formally recognized the
16 State's obligation to pay principal and interest, in
17 reality it was an attempt to avoid paying anything at
18 all.
19 A local Bondholder organization at the time,
20 the Engineers Bar Association, challenged the
21 Constitutionality of this law, and it won.
22 In 2001, the Constitutional Tribunal made
[Page 73]
1 clear that it would be manifestly contrary to Perú's
2 constitution to pay the Bonds at their nominal value
3 because this violated the current value principle that
4 is inherent to property, a right protected under
5 Article 70 of Perú's Constitution.
6 The Tribunal recalled that Perú's
7 Constitution protects the rights to property and fair
8 compensation for expropriation, and that in response
9 to what it called "a basic sense of justice," any
10 deferred payments must, therefore, reflect an updated
11 valuation of the Land Bonds. The Constitutional
12 Tribunal explained that while the 1933 Constitution
13 authorized payment of compensation through Bonds,
14 doing so was constitutional only if the Government
15 paid the current value, adjusted for inflation of the
16 Bonds, not their nominal value, which was and
17 continues to be, unconstitutional, and, as they put
18 it, which turns confiscations--expropriations into
19 confiscations.
20 Now, in doing so, the Constitutional Tribunal
21 explicitly found that a failure to apply the current
22 value principle violated Bondholders' rights. In
[Page 74]
1 other words, in 2001, the Constitutional Tribunal made
2 crystal clear that Perú's Constitution required Perú
3 to pay the Land Bonds and to do so pursuant to Article
4 1236's current value principle, "which requires that
5 debts be updated according to the current economic
6 indices."
7 Now, the meaning of the current value
8 principle was not--was actually clear. It was not
9 meaningless or uncertain, as Perú contends. Instead,
10 it had three very specific and concrete implications.
11 First, it meant that Land Bond debt had to be
12 inflation-adjusted using the Consumer Price Index, or
13 CPI.
14 You've read the Report of Justice Delia
15 Revoredo, one of the Justices who sat on the
16 Constitutional Tribunal and joined in the 2001
17 Decision. She testified that the Decision ordered
18 Perú to pay the current value of the Bonds and that
19 the Peruvian Courts have used CPI in order to comply
20 with the Constitution, the Civil Code, and the 2001
21 Decision.
22 You've also read the Report of Professor
[Page 75]
1 Mario Castillo Freyre. He is the leading Expert on
2 Peruvian law obligations. He's coauthored a treatise
3 on the subject with the principal drafter of Perú's
4 Civil Code.
5 Both Justice Revoredo and Perú's legal
6 expert, Dr. Hundskopf, have relied on Professor
7 Castillo's writings as an authoritative exposition of
8 the current value principle. And Peruvian Courts,
9 including the Peruvian Supreme Court, also cite him on
10 this topic.
11 He, too, concludes that the Land Bonds are
12 and have always been subject to the current value
13 principle. And he explained in his treatise and other
14 writings that the Courts are not at liberty to choose
15 any updating factor in applying the current value
16 principle pursuant to Article 1236. Rather, the
17 factor used must reflect the nature of the obligation
18 in question.
19 In applying this notion to the Land Bonds,
20 which embody an obligation of value, it is clear that
21 the 2001 Decision did not even need to expressly
22 mention Peruvian CPI because its use was implicitly
[Page 76]
1 required. After all, CPI is the economic index that
2 measures the very thing that the Constitutional
3 Tribunal said had to be eliminated, which is the
4 erosion in value because of inflation.
5 Second, current value required that any
6 updating of principal has to be done by reference to
7 the Land Bonds' issuance date, not some later date.
8 This reflects the very purpose of the current value
9 principle, which, as Justice Revoredo explains, is to
10 protect the value of the obligation as originally
11 undertaken, vis-à-vis the loss in purchasing power of
12 the currency used for the payment of such debt or
13 obligation.
14 And Professor Castillo further explains that
15 the only issuance--only the issuance date captures the
16 value of the underlying obligation at the time it
17 arose. The choice to update from any other later
18 point in time is arbitrary and distorts the current
19 value principle.
20 Now, to explain this, just consider a brief
21 example. If I expropriated from you two cases of very
22 good wine--Spanish wine, French wine, Canadian wine,
[Page 77]
1 if we have some--a total of 24 wine bottles--
2 (Comments off microphone.)
3 MR. FRIEDMAN: A total of 24 wine bottles,
4 but instead of paying compensation in cash, I give you
5 24 coupons, 24 certificates, each worth one--the
6 equivalent of one of those bottles to be paid over
7 24 years. During the first 12 years, you cash in the
8 coupons on a regular basis and you receive a total
9 payment nominally worth 12 units of that currency, and
10 so the first 12 bottles are basically paid for.
11 However, at that point in time, 12 units of
12 currency are no longer enough to buy that case of
13 wine. Instead, due to inflation, they can only buy
14 one bottle of wine. So, you stop cashing the
15 remaining coupons. And suppose further at the end of
16 the 24-year period, the 12 units of currency are all
17 but worthless, what does the current value principle
18 require with respect to the 12 coupons that were still
19 outstanding?
20 Well, if you pay nominal value today, you
21 will receive nothing. That is, you'll get the empty
22 box. You will not get any bottles of wine even though
[Page 78]
1 you are still due the 12 that were taken from you
2 24 years ago. Even Perú doesn't advocate that that's
3 the right solution in this proceeding, at least.
4 But consider the alternatives, if you update
5 from issuance, which ensures that--that ensures that
6 you will receive, today, an amount of currency that
7 will allow you to buy all the 12 bottles that you were
8 supposed to have 24 years ago. That's exactly the
9 idea of the current value principle.
10 But the second method, and the one that Perú
11 has adopted in its Bondholder process means something
12 else. It is the equivalent of paying you for just
13 that one bottle, which was the erosion in price after
14 12 years. And, consequently, what Perú's method does
15 is it expropriates again the 11 other bottles that you
16 were due from the beginning in the first place.
17 Finally, the third element of the
18 Constitutional Tribunal's 2001 Decision is that
19 Bondholder is also entitled to receive interest on the
20 unpaid principal. Like other creditors, Bondholders
21 must be compensated for the loss of use of money or
22 the return that they would have earned had they had
[Page 79]
1 the opportunity to invest that principal.
2 Professor Castillo explains this is separate
3 and distinct from updating for inflation and payment
4 of interest, of course, simply puts the expropriated
5 Party in the position it would have been in absent the
6 expropriation, and creditors' entitlement to interest
7 under Peruvian law is clear.
8 Now, despite the clarity of these principles
9 under Peruvian law, Perú's core defense in this
10 arbitration is that in 2001 the Constitutional
11 Tribunal Decision was not clear enough. Perú contends
12 that the Decision left open more questions than it
13 answered and ushered in what it calls "years of legal
14 uncertainty."
15 That contention is false. The evidence shows
16 that for over a decade, there was a consensus, as a
17 legal matter, that the 2001 CT Decision required
18 CPI-updating and compensatory interest. From 2001
19 until 2013, the Peruvian Courts, including Perú's
20 Supreme Court, uniformly held that.
21 For example, in a 2003 Decision, the Peruvian
22 Supreme Court held that the Land Bonds had to be
[Page 80]
1 updated, so that they represent the value for which
2 they were issued, plus compensatory interest accrued
3 over the course of time.
4 In a July 2006 Decision, the Supreme Court
5 again confirmed that Perú had to pay the Land Bonds at
6 current value, awarding CPI-based updating and
7 interest. In a September 2007 Decision, the Supreme
8 Court again held that the "debt must be assessed
9 according to the current value principle embodied in
10 Article 1236 of the Civil Code and it said, i.e.,
11 according to the economic indices in effect on the
12 date of payment."
13 In 2010, the Supreme Court issued yet another
14 Decision confirming the settled framework. It held
15 that the plaintiff must be paid the updated value of
16 the Bonds using the Automatic Readjustment Index set
17 by the Central Reserve Bank of Perú and also ordering
18 the payment of compensatory interest."
19 Moreover, the Supreme Court did not
20 consider--this is the Perú Supreme Court--did not
21 consider that there was any uncertainty about that
22 issue. To the contrary, the Court criticized the
[Page 81]
1 Minister of Economy and Finance's appeal against that 2 Order as in reality an attempt to reopen a debate that 3 has been sufficiently settled by the lower courts. 4 In fact, the Peruvian Courts had since 2001 5 uniformly updated the Land Bond Debt for inflation 6 using CPI, and awarded interest on that updated amount 7 to compensate for lost opportunity. 8 For example, in--and these are just a few 9 examples. There are hundreds of cases. In June 2007, 10 the Superior Court of La Libertad ordered CPI updating 11 and interest. In August 2008, the Superior Court of 12 Lima did the same. In January 2010, Pacasmayo ordered 13 the same. 14 And in the Pomalca Case, which concerned a 15 subset of Gramercy's Bonds, the Court-appointed 16 Experts used CPI from issuance date and applied 17 compound interest. That approach valued those Bonds 18 alone, just a portion of Gramercy's Bonds, at more 19 than USD 250 million. 20 A decade after the 2001 Constitutional 21 Tribunal Decision, Congress described Perú's--what it 22 called "uniform jurisprudence"--uniform jurisprudence,
[Page 82]
1 with respect to CPI updating. In contrast to that 2 record, Perú has not identified a single court 3 Decision employing an approach other than CPI updating 4 and interest to arrive at the updated value of Land 5 Bonds. Not a single case. 6 Given this record, it is not just wrong but 7 disingenuous for Perú to argue that there was 8 uncertainty about the legal framework or contend that 9 there was no consensus as to how the March 2001 10 sentence should be interpreted. Perú's courts, 11 including its Supreme Court and its lower courts, 12 discerned no such uncertainty, and through their 13 judgments and rulings reflected a widely-shared 14 consensus. 15 Perú has never been able to understand how 16 its own courts converged on these holdings, if the 17 situation had really been so uncertain and there was 18 no value in the Bonds, intrinsically. Instead, it 19 offers two arguments in support of that claim, both of 20 which, though, are meritless. 21 First, Perú relies on the August 2004 22 Decision of the Constitutional Tribunal, but that
[Page 83]
1 Decision, which predated the Decisions we just saw, 2 neither indicated nor created any kind of uncertainty 3 about what current value meant or how it applied to 4 the Land Bonds. To the contrary, that Decision 5 actually confirms the CPI-plus interest framework. 6 Let me explain. The August 2004 Decision 7 addressed the validity of an emergency Decree that the 8 Ministry of Economy and Finance had issued in 2000, 9 before the 2001 Decision. That Decree provided for 10 the conversion of the unpaid principal into U.S. 11 dollars at the time of the Land Bonds' issuance, plus 12 interest at an annually compounding rate of 13 7.5 percent. 14 Now, I pause to note the irony that the 15 updating method in that Decree from 20 years ago 16 actually produces value that is many, many multiples 17 of anything the Ministry has offered in its current 18 Bondholder process. In any event, the Ica Bar 19 Association, another association of Bondholders, 20 challenged that Decree in court, and they were not 21 alone in seeing problems in the Decree, as Perú itself 22 acknowledges.
[Page 84]
1 In February 2004 an Executive Branch 2 commission that the MEF formed concluded that that 3 Emergency Decree would contravene some aspects of the 4 2001 Decision. And so, for Perú to claim that it's 5 wrong to argue--skip the next slide. 6 To salvage that Decree, therefore, the 7 Ministry of Economy and Finance itself told the 8 Constitutional Tribunal in that 2004 case that this 9 Emergency Decree was not mandatory but just an option 10 for Bondholders instead of going Peruvian Courts. And 11 that was the overarching basis on which the CT denied 12 the constitutional challenge. 13 It specified that the Decrees could survive 14 because it does not seek to preclude the possibility 15 of going to court, seeking a judgment to enforce the 16 payment of the Bond, but merely constitutes an 17 alternative, which the Bondholder has the opportunity 18 to accept or reject. 19 Perú focuses on what the Tribunal said in a 20 part of that Decision where it--about the Decree, but 21 even there the Tribunal again noted first that the 22 Decree did not purport to impose any formula on the
[Page 85]
1 Bondholders, and only then to note that, unlike the 2 provisions that had been struck down as 3 unconstitutional in 2001, the Decree did not purport 4 to pay nominal value. 5 That is, it did use some form of updating. 6 It did not, however, say that that particular method 7 or dollarization in general complied with current 8 value. In fact, in dealing with another argument 9 raised in the complaint, the Court implicitly 10 acknowledged that dollarization meant something 11 different from true current value, but that did not 12 pose a problem because of the Decree's optional 13 character. 14 Justice Revoredo, who was still on the 15 Tribunal at the time and took part in that 2004 16 Decision confirms that the Constitutional 17 Decision--the Tribunal decided that the Emergency 18 Decree was constitutional insofar as it was an option 19 for the creditor but did not preclude resort to the 20 judicial branch. And the Peruvian Congress, analyzing 21 the legal situation, said exactly the same thing 22 several years later.
[Page 86]
1 So, what the Constitutional Tribunal's 2004 2 Decision actually established was that the Ministry 3 could, indeed, propose optional payment mechanisms, 4 optional, that were not nominal, including maybe using 5 dollarization, but could not deprive Bondholders of 6 the right to go to court to seek the true current 7 value, which, as we have seen, was CPI plus interest. 8 Perú's second argument here in support of its 9 uncertainty contention is actually even more 10 misleading. Perú contends that the current value was 11 an empty concept because various legislative proposals 12 attempted to establish a process to pay the Land Bond 13 debt. 14 In 2006, the Peruvian Congress passed, and 15 again in 2011 was about to pass legislation 16 establishing an optional Bondholder swap program, but 17 the Executive Branch vetoed or effectively vetoed both 18 of those bills. From that fact, Perú argues "the very 19 existence of attempts to establish a clear legal 20 framework is evidence that no such framework existed." 21 But this argument confuses two things that we 22 must separate out. These bills were not legislation
[Page 87]
1 to establish what current value means or to displace 2 what Perú's courts had already said it means. 3 Instead, they were attempts to address the 4 fact that, despite the Bondholders' legal rights and 5 all the results Bondholders were achieving in courts, 6 the Ministry of Economy and Finance continued to 7 resist payment without court judgments compelling it 8 to do so. If you went to the MEF and you said, please 9 pay my bonds, they said, sue me, get a judgment, and 10 then I'll pay. 11 So, this legislation sought to create simply 12 an alternative, and I stress "optional payment 13 mechanism," so that Bondholders would not have to go 14 to court to obtain payment. 15 Now, without going any further, that basic 16 fact about the nature of the legislation defeats 17 Perú's argument that this created uncertainty. The 18 fact that Perú came close to but ultimately failed to 19 legislate an additional payment mechanism outside of 20 the Peruvian Courts in no way undermines the clear 21 legal rights that Bondholders had established and 22 continued to enjoy in the Peruvian Courts.
[Page 88]
1 The absence of a legislative framework for 2 paying the Bonds through an administrative process 3 simply does not negate the fact that there most 4 certainly was a legal framework for determining their 5 current value through a judicial process. 6 And if we do go further in looking into this 7 legislation that took place in 2006 and 2011, it only 8 confirms the widespread consensus in favor of CPI plus 9 interest. 10 First, you should understand that the process 11 that produced this legislation was an incredibly 12 thoughtful, transparent, and widely representative one 13 that contained all different perspectives. It was a 14 consensus view. 15 The range of participants involved in the 16 2006 legislation show that the Congressional Agrarian 17 Commission which led the work on developing that bill 18 formed a task force that included representatives from 19 the Ministry of Agriculture, Bondholder associations, 20 Perú's National Agricultural Convention, the 21 Association of Water Usage, and aides to both the 22 Commission and the Congressman who had presented draft
[Page 89]
1 bills. 2 The Commission also received comments from, 3 among other entities, the Public Defender's Office, 4 the Central Bank, the Presidency of the Council of 5 Ministers, the Financial Corporation of Development, 6 the Agrobank, the National Superintendence of State 7 Assets and ProInversion. 8 It also received input from Economic Experts, 9 including the Expert who had assisted the Ministry of 10 Economy and Finance Commission that had existed prior 11 to that, which also endorsed an adjusted CPI method, 12 and the representative from the Perú's National 13 Institute of Statistics and Informatics, which 14 publishes the official Consumer Price Index. The 15 Commission held 15 working sessions, engaged in a real 16 and broad-based effort and ultimately produced a 17 thorough, detailed and sensible 46-page Report. 18 And that group's assessment was clear, and 19 not the least bit uncertain. The Commission's Report 20 included a comprehensive review of the existing legal 21 framework. It explained that the Peruvian Civil Code 22 required that "current value debts shall be updated in
[Page 90]
1 accordance with the Reserve Bank correction factors" 2 and that "debt instruments expressed in local 3 currency" had to be updated using CPI, which it noted 4 is "the official factor applied by the State to the 5 national accounts." 6 The Commission also noted that both the 7 judges of the Republic and the Ministry of Agriculture 8 were already applying CPI to the Land Bonds, and it 9 further emphasized that the full updated value of the 10 Land Bonds encompassed not only inflation-updating but 11 also paying interest on the updated debt to reflect 12 the opportunity costs of the debt. 13 Hence, the draft law that the Commission 14 issued and that Congress passed required that the Land 15 Bonds be updated by applying the Consumer Price Index 16 for metropolitan Lima, using the date of issuance of 17 the Supreme Decree of Expropriation as a reference 18 date for the calculation plus compound interest at a 19 real rate of 6.7 percent. 20 So, far from creating uncertainty about how 21 current value meant CPI plus interest, this bill and 22 the work that led up to it strongly reinforced that
[Page 91]
1 conclusion. 2 Now, Perú tries to resist that result by 3 pointing out that President Toledo, in his final days 4 in office, and then Prime Minister Pedro Pablo 5 Kuczynski vetoed the Bond Swap bill. So, it did not 6 become law. That meant, of course, that the 7 Bondholders did not have an optional payment mechanism 8 that the bill would have provided. 9 But the veto cannot detract from the 10 widespread recognition of the Bondholders' legal 11 rights, which the bill reflected and built upon. You 12 couldn't go into court and plead that Congress had 13 failed to pass a law, and so now we just don't owe a 14 debt. 15 Perú also makes much of the fact that a 16 single member of Congress introduced a bill on 17 June 27, 2003, which called for dollarization. Unlike 18 the Bond Swap bill, whose provenance I've just 19 described to you, that loan dollarization draft bill 20 never gained the support of anyone other than its 21 author, and even he expressly cautioned that were 22 serious questions about whether dollarization was
[Page 92]
1 consistent with the 2001 Decision. 2 Dollarization was so far from serious 3 consideration that even the Ministry of Economy and 4 Finance's own commission, which issued a Report in 5 2004, concluded that valuing the Land Bond debt by 6 reference to the U.S. dollar significantly 7 underestimates the value of the Land Reform debt. 8 Moreover, if mere draft bills that did not 9 ripen into actual legislation or any measure, during 10 this period five other bills were also proposed to 11 Congress calling for CPI updating plus interest. 12 And in 2011, when the Congressional 13 Commission made a second attempt to pass legislation 14 creating an optional administrative payment process, 15 it, once again, concluded that the CPI should be used 16 to adjust the value of the Land Bonds for inflation, 17 plus compound interest at the coupon face rate. 18 Like the proposals and bills that preceded 19 it, the 2001 legislation did not come into law, but it 20 did not create any legal uncertainty about the current 21 value principle, all of the work, all of the studies, 22 and all of the reports, end result that led up to it
[Page 93]
1 confirmed and reaffirmed that principle. 2 Now, Gramercy, as you know, invested right in 3 the middle of that 10-year period. It accordingly 4 formed legitimate expectations that it would 5 eventually be able to recover payment on its Land 6 Bonds at a value determined by CPI plus interest. 7 And on the basis of those expectations, it 8 bought nearly 10,000 of the Land Bonds like these, 9 which are two original Land Bonds, that can be 10 found--the photocopies of which can be found at 11 CE-224A, Appendix B, and production number is 12 GCM-16704 and 6834. 13 Through painstaking effort in Perú, Gramercy 14 bought thousands upon thousands of these Land Bonds. 15 Now, the abrogation-- 16 PRESIDENT FERNÁNDEZ ARMESTO: These are the 17 originals? 18 MR. FRIEDMAN: These are two of the 19 originals. 20 PRESIDENT FERNÁNDEZ ARMESTO: Is there any 21 problem if we have a look at them? 22 MR. FRIEDMAN: We would be delighted.
[Page 94]
1 MR. HAMILTON: Mr. President, point of order, 2 the Republic of Perú would like to point out this is 3 the first time we have ever seen any of their original 4 bonds. They have never been authenticated. Thank 5 you. 6 PRESIDENT FERNÁNDEZ ARMESTO: That is fair, 7 but us neither, so I do have some--if we can have a 8 look, we will, of course, give them back. 9 MR. FRIEDMAN: Yes. And I will mention for 10 the record. 11 (Laughter.) 12 MR. FRIEDMAN: Yes, I will mention for the 13 record that Gramercy has offered repeatedly to make 14 all of the Bonds available to Perú for its inspection 15 and has been rejected in every one of those efforts. 16 MR. HAMILTON: Objection. We disagree. We 17 will save our comments for later. Thank you. 18 PRESIDENT FERNÁNDEZ ARMESTO: Thank you. 19 MR. FRIEDMAN: You will see that there is one 20 that has a number of coupons clipped and another that 21 is pristine and has no coupons clipped. 22 I digress. But to give you an example.
[Page 95]
1 PRESIDENT FERNÁNDEZ ARMESTO: Yeah. Give us 2 one second to have a look, and then we come back. 3 (Comments off microphone.) 4 PRESIDENT FERNÁNDEZ ARMESTO: Just a quick 5 factual question. All bonds are for 1,000 soles 6 nominal value. 7 MR. FRIEDMAN: No. 8 PRESIDENT FERNÁNDEZ ARMESTO: No. These two 9 are? 10 MR. FRIEDMAN: These two are. Yes, these two 11 happen to be. 12 PRESIDENT FERNÁNDEZ ARMESTO: But others have 13 other nominal values? 14 MR. FRIEDMAN: Others have other nominal 15 values, different amount of coupons, different 16 interest rates. It depends. They were issued in a 17 complex way in the country in a whole series of 18 measures and issuances over a number of years, with 19 variables based also on the nature of the land and 20 where it was located that determined what rights would 21 attach, what value would attach to it. 22 PRESIDENT FERNÁNDEZ ARMESTO: We give them
[Page 96]
1 back. 2 MR. FRIEDMAN: Okay. 3 MR. HAMILTON: Excuse me, Mr. President. 4 PRESIDENT FERNÁNDEZ ARMESTO: There too. 5 (Laughter.) 6 PRESIDENT FERNÁNDEZ ARMESTO: Yes. 7 MR. HAMILTON: Can we invite simply to 8 confirm which particular bonds these are, so that we 9 can take note of that. 10 PRESIDENT FERNÁNDEZ ARMESTO: I think it 11 would be fair that we show them also to the Republic 12 of Perú. 13 MR. FRIEDMAN: Yes. 14 PRESIDENT FERNÁNDEZ ARMESTO: So, let's do 15 the following: Let's make--would it be a good moment 16 now to make a break? 17 MR. FRIEDMAN: Not--if you would bear with 18 me, I have about five to seven minutes and then a 19 break. 20 PRESIDENT FERNÁNDEZ ARMESTO: Would it be 21 okay if he finalizes, and during the break you have 22 the opportunity of looking at these two bonds?
[Page 97]
1 MR. HAMILTON: Of course, Mr. President. 2 PRESIDENT FERNÁNDEZ ARMESTO: Okay. 3 MR. FRIEDMAN: So, on the basis of that, 4 those--what I've just described as the legal framework 5 existing at the time, Gramercy bought almost 10,000 of 6 those. And, as you know, under Investment Law, the 7 abrogation of legitimate expectations violates the 8 Minimum Standard of Treatment. 9 And an investor is entitled to protection 10 even if its expectations are not based on explicit 11 assurances by the host State, although these are 12 specific, explicit assurances to pay certain amounts. 13 It may hold legitimate expectations based on an 14 objective assessment of the legal framework, so the 15 relevant question is simply whether that framework was 16 stable and predictable. 17 And the contemporaneous record and the 18 testimony of Gramercy's Chief Investment Officer, 19 Mr. Koenigsberger, confirms that Gramercy made its 20 investment in reliance on just such an objective 21 assessment about how the Courts and also the 22 legislature were working to implement the 2001
[Page 98]
1 Constitutional Tribunal Decision. 2 A 2006 memorandum summarizing Gramercy's 3 initial due diligence, that's in the record, for 4 example, notes that "the landmark court rulings have 5 reestablished the rights of Bondholders to 6 inflation-adjusted value of their claims." They 7 recognize that--those courts recognize that the claims 8 had to be paid at its real value adjusted for 9 inflation. 10 And they also observed at the time that 11 Bondholders have won all lawsuits since the 12 Constitutional Tribunal Decision was published, 13 including in the Supreme Courts. The Supreme Court 14 judges have clearly and explicitly said they are now 15 applying the value principle as ordered by the 16 Constitutional Tribunal, using Consumer Price Index 17 for inflation adjustment, plus retroactive interest as 18 required by law. 19 That's a contemporaneous memo from 20 January 2006, recognizing the objective legal 21 framework that I've just described to you. In other 22 words, Gramercy understood at that time, as it should
[Page 99]
1 have, that the Peruvian Courts at all levels 2 recognized and were enforcing a clear legal 3 entitlement to updated value using CPI plus interest. 4 And Mr. Koenigsberger has described to you 5 how Gramercy has invested on the expectation that this 6 "clear legal rule" would ultimately be upheld and 7 continue. 8 Subsequent events that took place after the 9 investment period of 2006 and 2008, some of which I 10 just described to you as well, only further confirmed 11 Gramercy's initial exceptions. Accordingly, 12 Mr. Koenigsberger has testified and will confirm at 13 the Hearing that Gramercy justifiably relied on that 14 objective assessment of a stable and predictable legal 15 framework. 16 Unfortunately, starting in 2013, Perú 17 completely reversed that basic legal framework under 18 which Gramercy had invested in the Land Bonds. It did 19 so in a way that was not only arbitrary and unjust but 20 also constituted a denial of justice in violation of 21 basic notions of due process, which we will turn to in 22 just a moment.
[Page 100]
1 And I respectfully suggest, Mr. President, 2 that this may be an appropriate time for a break. 3 PRESIDENT FERNÁNDEZ ARMESTO: Very good. So, 4 it is now 11:14. We will come back at 11:30. 5 (Brief recess.) 6 PRESIDENT FERNÁNDEZ ARMESTO: We resume the 7 Hearing. 8 Could I kindly ask the Secretary for a time 9 check? 10 SECRETARY PLANELLS-VALERO: Thank you, 11 Mr. President. 12 The Claimants have used 1 hour and 13 15 minutes, and they have 1 hour and 15 minutes left. 14 PRESIDENT FERNÁNDEZ ARMESTO: Okay. So, the 15 break was right in the middle. 16 MR. FRIEDMAN: Perfect. Thank you. 17 MR. HAMILTON: Excuse me. Could I return to 18 the point of order from before, just to confirm the 19 particular Bonds that had been presented today for the 20 record? 21 PRESIDENT FERNÁNDEZ ARMESTO: Sure. Have you 22 had a chance to see them?
[Page 101]
1 MR. HAMILTON: We may avail ourselves of the 2 chance to do so, but in the middle of the hearing room 3 is maybe not the moment we would do that. 4 PRESIDENT FERNÁNDEZ ARMESTO: Okay, but the 5 Respondents do have the right to see these Bonds, and, 6 yes, we should get to the record so that we know. 7 Maybe let's do two things: First of all, 8 please do give us the number of the Bonds. 9 MR. FRIEDMAN: Yes. So, the number of the 10 Bonds--there is Number 002231 and 009121. These 11 Bonds, the images of these Bonds, are in the record. 12 They can both be found at document--a very voluminous 13 document called CE-224A Appendix B, and the specific 14 pages on which these images, the images of these 15 Bonds, can be found can be referenced by production 16 number. 17 The production number for the first 18 Bond--that is, the 9121 Bond--is GMZY-0016704 and 705, 19 the front and the back. And the production number for 20 the second Bond, which is the 2231 Bond, can be found 21 as GMZY-0006834 and 6835. 22 Again, just--
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1 PRESIDENT FERNÁNDEZ ARMESTO: With that said, 2 thank you for the position. Anyway, I would like that 3 the Respondent has opportunity to see the originals. 4 MR. FRIEDMAN: Of course. And we did offer 5 them to them over the break, and they did not want to 6 look at them at this time, and we will offer them 7 another opportunity to look at them later. 8 MR. HAMILTON: We did not speak over the 9 break. We did not know this was going to occur. We 10 will coordinate in an appropriate manner and a 11 respectful manner. Thank you. 12 PRESIDENT FERNÁNDEZ ARMESTO: Thank you. 13 Thank you very much. 14 So, we give you the floor back, Mr. Friedman. 15 MR. FRIEDMAN: Thank you, Mr. President. 16 I now turn to the second of the four key 17 issues, namely that the 2013 Constitutional Tribunal 18 Order was not a justification for Perú's actions. 19 Instead, it was part of Perú's arbitrary and unlawful 20 conduct in eliminating Gramercy's rights and 21 expectations. 22 First, although none of us could know the
[Page 103]
1 implications at the time, in hindsight, the 2013 2 Constitutional Tribunal Order constituted a reversal 3 that changed the legal landscape from requiring the 4 Government to pay current value to permitting it to 5 pay something less than current value. Instead of 6 requiring payment of current value directly, the 2013 7 Constitutional Tribunal Order purports to balance 8 current value against other undefined budgetary 9 considerations, what they call the principle of 10 balanced budgets. 11 And, consequently, the Government--and they 12 referred the reference to how much ought to be paid to 13 the debtor itself, which is the State of Perú. And 14 so, instead of requiring Perú to simply pay the 15 current value, as had been done all along, they 16 authorized Perú to do something maybe potentially 17 different than that. 18 Now, both Justice Revoredo and Professor 19 Castillo confirmed that the 2013 Constitutional 20 Tribunal Order subverts the 2001 Decision and offends 21 the current value principle, the Peruvian law of 22 obligations more generally, and basic canons of
[Page 104]
1 judicial reasoning. Professor Castillo also says that 2 he is nothing short of astonished by judicial 3 reasoning that is clearly designed to reduce the 4 amount of the debt in favor of the State. It is like 5 saying: "We took your land; you are supposed to get 6 compensation for it, but we haven't really allocated a 7 budget for that, so maybe we'll pay you less." 8 Second, the stated rationale for this 9 reversal rests on two false, unfounded, and, frankly, 10 irrational premises. 11 The first rationale that the Constitutional 12 Tribunal identified was that CPI is an inaccurate 13 method in times of hyperinflation, and, on that basis, 14 the Tribunal speculated that CPI updating would 15 disproportionately increase the value of the debt. 16 But, as Professor Edwards has explained, and as you'll 17 hear him say at the Hearing, that argument is baseless 18 if you simply do CPI in the right way. 19 First, during periods of inflation in Perú, 20 prices increased throughout the economy, and baskets 21 of goods and services that underlie the CPIs are 22 rebalanced in any event to account for the
[Page 105]
1 substitution effects that this argument relates to. 2 But, moreover, even assuming that the CPI 3 statistics from Perú itself during the period of 4 hyperinflation were useless and you couldn't use them 5 for anything, that they had become so disconnected 6 from the economy that they were inaccurate, that would 7 not affect for one second updating the Land Bonds debt 8 through current value, because--through CPI, because, 9 as Professor Edwards will explain, when you update the 10 Land Bonds debt at a period of time like 2020, what 11 you do is you look at the value--what the CPI was at 12 the time of placement of the Bond, which took place 13 only up until 1980, so before the period of 14 hyperinflation, and then you look at the period of 15 time today and whatever the CPI is, and whatever those 16 prices are, there is no question that they are totally 17 accurate and responsible. So, this whole notion that 18 during the period of hyperinflation, people might not 19 have bought bananas, and so the price of bananas 20 doesn't count anymore is simply irrelevant. It's a 21 false issue. 22 Finally, and this is most astonishing of all,
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1 every one of the Ministry of Economy and Finance 2 formulas in the Supreme Decrees also incorporates 3 Peruvian CPI. 4 The second rationale is that the payment of 5 the Land Bonds' full updated value would be too 6 onerous for Perú, thus warranting some discount to 7 current value. 8 Now, the three Justices who endorsed that 9 Opinion based their choice of dollarization 10 on--selected dollarization by saying that the other 11 valuation methods described would generate severe 12 impacts on the budget of the Republic, to the point of 13 making impracticable the very payment of the debt. In 14 other words, they were saying it was so colossal that 15 Perú can't pay the debt if we actually apply current 16 value in the way that it's done routinely in Perú up 17 until now. 18 Put Professor Edwards has explained that Perú 19 could, and still can, pay the full updated value of 20 the Land Bonds. In fact, Perú's Quantum Experts agree 21 with Professor Edwards that paying the Land Bonds debt 22 would barely dent Perú's finances because it can float
[Page 107]
1 Bonds and pay over time effectively, and it would add 2 almost nothing to its debt-to-GDP ratio. And outside 3 rating agencies that Perú has hired in its own 4 issuances of public debt have confirmed the same 5 thing. And they are not talking about dollarization 6 value through the process. They are talking about 7 true CPI value. 8 Moreover, the Constitutional Tribunal did not 9 cite any evidence in support of this key central 10 finding, the real basis for them departing and moving 11 away from the current value principle. And, despite 12 being under an obligation to do so in this 13 arbitration, Perú has also never produced a single 14 document substantiating that claim. They have never 15 actually proven to you that they cannot pay the debt 16 at CPI value or that it would cause a budgetary or 17 fiscal crisis. There is not a bit of evidence in 18 that, including from their own Experts, who say the 19 opposite. 20 Third, the circumstances that led to the 2013 21 Order likewise fall below the minimum standard and 22 are, frankly, shocking and, I submit, likely
[Page 108]
1 unprecedented in your experience. 2 Let me explain. In October 2011, the 3 Engineers Bar Association asked the Constitutional 4 Tribunal to enforce the original 2001 Decision. They 5 had sort of had enough. They said: "Okay. We can go 6 through Courts and get our judgments, but why are you 7 dragging us through the Peruvian court system time 8 after time? Can the Constitutional Tribunal just 9 please make clear to the Government that it just has 10 to pay the debt?" 11 The Constitutional Tribunal took up that case 12 from October of 2011 and deliberated for nearly 13 two years, and by Tuesday, July 9, 2013, the majority 14 of the Tribunal's Justices endorsed a Draft Decision 15 prepared by the Rapporteur, Justice Eto, which used 16 CPI plus interest, consistent with the 17 well-established legal framework that existed at that 18 time and that all the other Courts in Perú had been 19 using. On the same day, President Humala publicly 20 warned the Constitutional Tribunal, whose members were 21 about to finish their term, to abstain from ruling on 22 Land Bonds.
[Page 109]
1 And then, over the course two of days, from 2 Wednesday, July 10 through Friday, July 12, 2013, 3 several meetings took place between members of the 4 Constitutional Tribunal and representatives of the 5 Executive Branch on an ex parte basis. On Wednesday, 6 July 10, Chief Justice Urviola acknowledged that the 7 President's advisors had visited the Constitutional 8 Tribunal in regard to the Land Bonds case. That same 9 day, former Minister of Economy, Luis Castilla, who is 10 here as a Witness by video, and the President of the 11 Council of Ministers met ex parte with Chief Justice 12 Urviola. Then, likely on July 11, the entire 13 Constitutional Tribunal had a meeting with the 14 Ministry of Economy and Finance, and after-hours, 15 President Humala's personal advisor, Roy Gates, who 16 has since resigned under corruption allegations, 17 visited the Constitutional Tribunal to discuss the 18 case with Chief Justice Urviola. 19 On that same day, July 11, Minister Castilla 20 publicly expressed to the press confidence that the 21 Constitutional Tribunal would act with responsibility 22 and would not harm the country's fiscal balance, and
[Page 110]
1 Minister Castilla was right to be confident on 2 July 11, because he knew exactly what had transpired 3 in his meetings with the Constitutional Tribunal. 4 MR. HAMILTON: For the record, could I 5 understand the citation to the record for the 6 allegation related to the Minister? Thank you. 7 MR. FRIEDMAN: I'm getting to it right now. 8 Justice Eto described these events in sworn 9 testimony before Perú's Congress. The Constitutional 10 Tribunal and the Minister of Economy and Finance held 11 what Justice Eto described as a historic meeting as 12 part of what Justice Eto described in terms that, I 13 must say, puzzle anyone who has faith in separation of 14 powers as an interinstitutional relationship dealing 15 with an interinstitutional issue. 16 At this historic interinstitutional meeting, 17 former Minister Castilla himself told the 18 Constitutional Tribunal Justices that paying the Land 19 Bonds using CPI could cost Perú USD 18.5 billion, and 20 USD 18.5 billion, as Justice Eto put it, was a 21 stratospheric amount. 22 According to Justice Eto, this was all
[Page 111]
1 conveyed during just that one interinstitutional 2 meeting, without even the benefit of a written Report, 3 without affording the Parties to the case any 4 opportunity to comment on this exchange, and 5 apparently without any interrogation of the 6 information that the Minister provided. 7 This tactic had its intended effect. Because 8 of that meeting, the Constitutional Tribunal backed 9 away from the actual current value principle and the 10 CPI method that they were about to endorse, and 11 instead decided to cut it down with what Justice Eto 12 described in his testimony before Perú's Congress as 13 "the principle of pro-government interpretation," in 14 which every Constitutional Tribunal must favor the 15 State and not the litigant in budgetary matters. 16 But, as we now know, on the basis of the 17 Ministry of Economy and Finance's own documents, 18 information provided to the Constitutional Tribunal 19 was false and baseless. The Ministry never prepared 20 any estimates, calculations, or studies to back up 21 this $18.5 billion figure. But even that remarkable 22 tale of making up numbers, as far as we can tell, is
[Page 112]
1 only half the story in this remarkable sequence of 2 event. 3 Now, these all became known only to Gramercy 4 much later, but they make clear exactly why Gramercy 5 feels so aggrieved in this case. It turns out that on 6 Friday, July 12--so, right after the Statement by 7 Minister Castilla about his confidence that the 8 Tribunal would act responsibly--on Friday, July 12, 9 Chief Justice Urviola provided Justice Eto with an 10 alternative Draft rejecting CPI in favor of 11 dollarization. 12 And on Tuesday, July 16, 2013--so, the 13 following--after the weekend, Justice Eto submitted 14 Justice Urviola's Draft Order to the other Justices 15 for discussion as if this were his own. But this 16 last-minute change of position away from the CPI 17 method that the Tribunal had built up to over 18 two years, and changed in just days, had grave 19 consequences for the Tribunal's deliberation and due 20 process. 21 First, Justice Alvarez signed the 2013 CT 22 Order without even really knowing its implications.
[Page 113]
1 Justice Alvarez testified before the Peruvian Congress 2 that he remembered that he-- 3 PRESIDENT FERNÁNDEZ ARMESTO: It is 4 impossible--it is impossible to hear you, to read 5 this, and you must--Mr. Friedman, we will give you 6 some more time if you need it, and--we will give you 7 some more time, but it is--I cannot follow it. 8 MR. FRIEDMAN: Okay. Thank you. 9 PRESIDENT FERNÁNDEZ ARMESTO: It is important 10 that I can follow it, and it is just--you jump from 11 one document to the next, and it goes too fast. And 12 I'm sure that the relief from our court reporters will 13 be high if you go somewhat slower. 14 Thank you. 15 MR. FRIEDMAN: Yes. So, Justice Alvarez's 16 testimony was that they were discussing the--they were 17 deliberating on that Tuesday, July 16, and he says 18 that he withdrew because, in the end, the discussion 19 was no longer on the Merits, whether it was right or 20 not. It was on the formula for payment, a technical 21 issue of whose consequences we were at the time 22 unaware.
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1 So, there were two possibilities, and as most 2 of us were constitutional lawyers, the truth is that, 3 at the time, we were unsure of the consequences of 4 either of them, so we withdrew and Liquid Paper was 5 used. As a result, he and Justice Urviola endorsed 6 Justice Eto's alternative Draft that had this bespoke 7 unusual dollarization approach. 8 And the second implication of this haste that 9 Justice Urviola was imposing is that Justice Mesía 10 refused to subscribe to the new Opinion. Instead, he 11 requested, as was his right, 48 hours to review the 12 new Draft and write a dissenting Opinion. But Chief 13 Justice Urviola denied Justice Mesía's request, 14 disregarding the Constitutional Tribunal's own 15 procedural rules. 16 Instead, Chief Justice Urviola and others 17 doctored the existing draft. Whiteout correction 18 fluid was applied to the original signature of Justice 19 Eto, as well as to the signature blocks for Justice 20 Alvarez and Urviola. And the sentence at the end, the 21 decretal sentence at the end of the Judgment, had 22 originally had the language that said: "For these
[Page 115]
1 reasons, the Constitutional Tribunal, with the 2 authority conferred on it by the Political 3 Constitution of Perú, resolves" for CPI updating. But 4 that was whited out, and in its place was typed the 5 words: "For these reasons, my opinion is for," so as 6 to turn what had been the Draft majority opinion into 7 a forged dissent by Justice Mesía. And then, armed 8 with that forged dissent--you know, the Decision 9 now--Chief Justice Urviola concluded that there was 10 now a 3-3 tie on the court and, consequently, he was 11 entitled to issue a casting vote, which he did in 12 favor of dollarization, and issued that Decision, 13 along with the forged dissent and two other dissents, 14 on that same day. That is how the 2013 Constitutional 15 Tribunal Order came into existence. 16 Now, I submit to you that this is, by any 17 stretch of the imagination, a remarkable story of 18 impropriety: Secret ex parte meetings, materially 19 false information, forgery of official documents, 20 denial of the Parties' right to due process, 21 violations of the Court's own rules, and a breakdown 22 in the separation of powers.
[Page 116]
1 Perú does not deny the majority of those 2 extraordinary facts, nor could they. That misconduct 3 has been the subject of multiple criminal proceedings 4 and a Congressional investigation in Perú, and proved 5 by the forensic report from the Lima police 6 department. Instead, Perú seeks to downplay its 7 misconduct by stating that the use of whiteout is part 8 of the Constitutional Tribunal's habitual practice in 9 order to make formal corrections without varying 10 Decisions. 11 Now, we have some reason to question that 12 factual description of the Tribunal's practice. 13 Justice Alvarez seemed to testify that whiteout is 14 used, essentially, to prevent Justices from changing 15 their minds. What he said is he can remember there 16 were some circumstances when whiteout was used, and, 17 he said, why? Because it is preferable not to waste 18 the signatures that are already on a Draft Opinion, 19 because if we made another one again, remember that a 20 high-ranking Tribunal is usually composed of public 21 figures who are often older with very strong academic 22 egos. Therefore, it is often the case that, if the
[Page 117]
1 draft is passed round again because someone has left 2 or withdrawn, the same number of signatures may not be 3 obtained and, because of that, Liquid Paper is used. 4 In any event, the 2013 Constitutional 5 Tribunal Order was definitely not a case where 6 whiteout was used to correct some minor clerical 7 error; a typo, a misspelling, or even a mistaken 8 calculation. Here, it was used to transform a 9 majority Opinion into a forged dissenting Opinion, 10 violate the Court's own rules, and fabricate a tie. 11 Now, these concerted actions between the 12 Executive Branch and certain Constitutional Tribunal 13 members fall below the minimum standard, but through 14 them, the Ministry of Economy and Finance had finally 15 achieved its long-held ambition, which is subverting 16 current value and paying as little as it could 17 possibly get away with. 18 The fourth aspect of this dimension of the 19 case is that, rather than take the opportunity to 20 redeem itself and make things right, the 21 Constitutional Tribunal later chose to further violate 22 Gramercy's and other Bondholders' rights through
[Page 118]
1 subsequent Decisions. 2 In the August 2013 Resolution, the Tribunal 3 made the unusual dollarization method contained in its 4 July Order mandatory for all Bondholders and said that 5 claims on the Land Bonds had to be channeled through 6 the MEF's exclusive procedure, which wasn't even 7 created at that time. Then, in November 2013's 8 Resolution, the Tribunal disclaimed any responsibility 9 for how it had chosen the methodology would work, 10 stating that the Bondholders' requests for 11 clarification were premature, and that the formula was 12 a matter for the MEF to work out by itself--in other 13 words, the debtor could come up with how it was going 14 to pay. 15 In March 2015, after the Ministry had issued 16 its First and Second Supreme Decrees, the country's 17 largest Bondholders organization at the time, joined 18 by 300 individual Bondholders, including Gramercy, 19 petitioned the Constitutional Tribunal over the 20 Supreme Decrees. This petition was accompanied by 21 thousands of pages of supporting material, including 22 Expert Reports from Deloitte and Perú's former
[Page 119]
1 Minister of Economy and Finance, Ismael Benavides, as 2 well as international and local Experts. 3 Yet, after just three weeks, the 4 Constitutional Tribunal dismissed it summarily, 5 stating again that the challenges were premature, even 6 though they showed what the MEF's Supreme Decrees 7 would produce in terms of value if you ran Bonds 8 through them and, astonishingly, the Constitutional 9 Tribunal said that these 300 Bondholder petitioners 10 had not provided any evidence of social 11 representativeness. 12 Even today, the validity of the 2013 Order is 13 still under a cloud, and not just from these 14 proceedings, but within the Constitutional Tribunal 15 itself. As recently as July 2019, four Justices 16 declined to admit a motion to retract the 2013 Order 17 on procedural grounds. This time they said that the 18 challenge was too late, whereas before they had said 19 it was premature. But three Justices joined in a 20 scathing dissent that leaves no doubt as to its 21 invalidity, where they say that the 2013 Order is void 22 because it denaturalizes and fails to comply with the
[Page 120]
1 seminal Decision of 15 March 2001. 2 Now, the 2013 Constitutional Tribunal Order 3 and the subsequent rulings do not excuse Perú's 4 liability. Quite to the contrary, we submit, they are 5 part and parcel of Perú's Treaty breaches and a basis 6 for that liability. 7 With that, I now turn to the third of the 8 four key issues, and that is that the Bondholder 9 Process that the Ministry created is not a fair or 10 legitimate program to update the value of Bonds. 11 Rather, it was intended to and does, in fact, destroy 12 value so substantially as to be expropriatory and was 13 carried out in ways that fell below the minimum 14 standard of treatment. 15 In this Arbitration and elsewhere, the 16 Ministry has touted this Bondholder Process as one 17 that imparts value on the Bonds and that established a 18 clear legal framework and is a transparent, detailed, 19 carefully regulated procedure. These claims are 20 false. 21 In creating the process, the Ministry badly 22 bungled the job, promulgating a series of arbitrary
[Page 121]
1 valuation formulas, failing to abide by basic 2 requirements of Peruvian administrative law, and 3 ignored important elements of the Tribunal's own 4 Orders. The process has been a failure, and far from 5 creating value, it unjustly destroys it. 6 First, the valuation formulas that are at the 7 heart of the Supreme Decrees are irrational and 8 arbitrary. Now, we submit to you that a Government 9 act is irrational if it is not logical or reasonable, 10 it makes no sense, or is clearly wrong, and it is 11 arbitrary if it is based on random choice or whim 12 rather than reason, or if the Measures are taken for 13 reasons that are different from those that are put 14 forward by the State. 15 The Ministry's Decrees have precisely those 16 characteristics. Now, by now, it should be beyond 17 dispute that the Ministry's original 2014 18 formulas--those are the formulas in place when 19 Gramercy commenced this Action--are irrational and 20 arbitrary. Professor Edwards demonstrated that the 21 formula has no basis in economics and yields 22 arbitrarily low valuations that are entirely
[Page 122]
1 disconnected from the true, updated value of the Land 2 Bonds. And just think about some of the 3 characteristics of those Decrees and the formulas in 4 them. They absurdly valued all of Gramercy's Bonds at 5 less than $900,000--a sum, just by reference, that is 6 182 times smaller than what even the Ministry's 7 Optional Dollarization Decree of 2000 would have 8 provided for those Bonds. 9 They reduced--the formulas in them reduced to 10 the mathematical impossibility that X equals X 11 squared. They yielded parity exchange rates that 12 could not be reconciled with actual exchange rates. 13 Even the Ministry has now abandoned them in its 14 subsequent Decrees, and Perú has not offered anyone to 15 defend their substance in this Arbitration. 16 Now, the Witnesses and Experts that Perú has 17 tendered on the subject of the Supreme Decrees are 18 either silent about or disclaim responsibility for the 19 formulas. Former Ministry Castilla purports to stand 20 by the Ministry's decision-making process, but he 21 cautions that he was "unaware of any issue related to 22 the Decrees."
[Page 123]
1 Dr. Wühler purports to opine on the 2 legitimacy of the process, but he makes clear that he 3 makes no assessment of the formula used to calculate 4 current values. And Dr. García-Godos purports to 5 vouch for the reasonableness of the Decrees, but he 6 does not provide an opinion on technical, 7 mathematical, or economic matters. So, Perú has 8 brought you no Witness who will vouch for the validity 9 of the formulas in the Decrees. 10 Moreover, documents Perú was forced to 11 disclose in this Arbitration have revealed that these 12 formulas were never even intended to carry out the 13 Constitutional Tribunal's 2013 Orders, or even 14 seriously evaluated by the Ministry prior to founding 15 the entire Bondholder valuation process on them. 16 It turns out that the 2014 Supreme Decree 17 formulas were simply copied and pasted from slapdash 18 work of a Peruvian economist hired two years 19 previously for a different purpose. On March 31, 20 2011, while Congress was working on Bondholder swap 21 legislation, the Executive issued a Decree intended to 22 "generate greater public savings" which authorized the
[Page 124]
1 hiring of a financial Expert to produce a Report on 2 the Land Bonds, and the Ministry hired a Peruvian 3 economist named Bruno Seminario to come up with the 4 alternative valuation approaches that would prioritize 5 not true current value, but what the Ministry called 6 in his contract "fiscal sustainability." 7 In short, they hired him to come up with ways 8 of paying less than current value. He certainly 9 wasn't hired to help the Ministry implement the 10 Constitutional Tribunal's 2013 Decrees, because this 11 was--that was still two years in the future. 12 Now, the Ministry has never explained or 13 produced documents to show how or why, in 2014, when 14 they were putting together their Decrees, they decided 15 to use Seminario's work, which had been prepared 16 earlier, or whether anyone at the Ministry even 17 evaluated its substance, or why they chose to take 18 from his work, which included six formulas, the one 19 that yielded the lowest value, or what, if any, other 20 formulas they considered and rejected, or why they 21 were prepared to establish national policy on what 22 they now say was an exercise designed solely on
[Page 125]
1 theoretical grounds and that the Ministry apparently 2 did not even test on a single Bond. 3 Moreover, Seminario's think piece was never a 4 serious study that could form the basis for important 5 Administrative Acts and national policy. The Ministry 6 paid him 33,000 soles--about $10,000--for three weeks 7 of work. It apparently took him all of two days to 8 jettison, on a speculative and inaccurate basis, the 9 CPI plus interest framework that the Courts, the 10 Agrarian Commission, and the Congress had repeatedly 11 endorsed, and his hasty work is riddled with problems 12 and errors. 13 Despite not bringing Seminario here as a 14 Witness, Perú has offered no justification for its 15 2014 valuation formulas other than its reliance on 16 Seminario. 17 The Ministry's subsequent conduct in dealing 18 with the valuation formulas is even less defensible, 19 for the Ministry then tried dishonestly to cover up 20 the problems with more equally irrational and 21 arbitrary formulas. 22 If the Ministry had not known about the
[Page 126]
1 unreliability of Seminario's work prior to publishing 2 the January Decrees, it learned about it soon 3 thereafter. Gramercy pointed out some of the 4 formula's flaws as early as April 21, 2014, and ABDA, 5 that Bondholder organization, exposed some of them in 6 its March 2015 application to the Constitutional 7 Tribunal. 8 Eventually, after receiving some proposed 9 precisions from Seminario and a quick review of those 10 precisions by another economist named Carlos Lapuerta, 11 in February 2017, the Ministry published, with no 12 prior notice or consultation, a new Supreme Decree 13 with what it called a "clarification" of the original 14 valuation formulas. 15 This so-called "clarification" included a 16 statement--it was hardly a clarification. It was an 17 obfuscation. It included a statement in one of the 18 clarifications that, in their formula, U.S. CPI is 19 expressed in soles de oro. 20 That clarification simply makes no sense. It 21 is as arbitrary and irrational as the original 22 formulas were, for, as Professor Edwards has
[Page 127]
1 explained, the U.S. CPI is, by definition, a price 2 index. As such, the U.S. CPI cannot be expressed in 3 soles de oro, or, indeed, in U.S. dollars or any other 4 currency. It would be like expressing the number of 5 people in this room in degrees Celsius. It's 6 irrational. 7 Trying to make sense of this clarification, 8 Professor Edwards demonstrated that it could indicate 9 at least six equally possible formulas. Those 10 formulas yielded a range of value for Gramercy's 11 Bonds--a range--of over $2.5 billion. In other words, 12 even the World Bank's former chief economist for Latin 13 America, Professor Edwards, couldn't make sense of the 14 Ministry's so-called "clarification" in its formula. 15 Given that range of values, Gramercy wrote to 16 the Ministry with a most modest request, that the 17 Ministry at least disclose the actual valuation 18 formula that incorporated this so-called 19 "clarification." But Perú never responded. 20 Then, in August 2017, the Ministry did it 21 again. As before, the Ministry refused to acknowledge 22 the fundamental problems in its valuation formulas and
[Page 128]
1 to engage with Bondholders. Instead, what it did was, 2 unilaterally and without consultation, issue yet 3 another Decree containing what it called 4 "clarifications to specific variables of the 5 mathematical expressions." But the Ministry was, once 6 again, not being quite straight on that. These were 7 not mere clarifications. The August 2017 formula was 8 an entirely new formula which purported to rely on a 9 data series published by the Central Bank that the 10 Ministry had never mentioned before. 11 Professor Edwards testifies that this formula 12 constitutes a radical departure from its predecessors. 13 It's not a clarification. It's new. And this 14 unprecedented formula not only has substantive 15 problems of its own, but it is, if anything, even more 16 arbitrary than the Ministry's prior attempts, because 17 with the prior attempts, the Ministry at least has 18 described some basis, however bizarre and 19 unsupportable, in Seminario's deficient paper and its 20 hopeless corrections, but the Ministry's August 2017 21 formula cannot claim even that provenance. There is 22 literally not a single piece of paper in the record
[Page 129]
1 that justified that formula. No explanation of where 2 it came from, who prepared it; no articulation of the 3 reasons for choosing it or considering other formulas; 4 and, yet again, no Witness to defend it. It appears 5 from the records in this case to have literally 6 emerged out of thin air, fully formed, on August 19, 7 2017, the publication date of the Decree. 8 Now, I submit to you that this is the essence 9 of arbitrary and unjust conduct. In the words of the 10 Lemire and Waste Management Tribunals, Perú acted for 11 reasons that are different from those put forward by 12 the decision-maker and it engaged in conduct that is 13 arbitrary, grossly unfair, unjust, or idiosyncratic, 14 and acted with a complete lack of transparency and 15 candor. 16 Second, the Supreme Decrees were issued in a 17 manner that violates central tenets of Peruvian law. 18 You will hear from Professor Bullard, who is a 19 prominent Peruvian lawyer and academic and who helped 20 create Perú's administrative jurisprudence on the 21 validity of executive regulations. And he points out 22 that, under Peruvian law, every act of authority must
[Page 130]
1 comply with basic principles of legality and 2 reasonableness, which have certain just core elements. 3 The legality principle requires discussing 4 and rigorously evaluating alternative regulations, 5 consulting with the public on draft proposals, and 6 assessing the regulations' compliance with procedures. 7 And the reasonableness principle requires 8 that an act, including a regulation, be adequate, be 9 necessary, which means it must be the least 10 restrictive of private rights, and proportional. In 11 other words, the benefit of the regulation must not 12 outweigh the cost. 13 These principles are so vital to the 14 accountability in Perú's system that they also require 15 government agencies to produce a report showing 16 compliance with them. 17 But in this case, as Dr. Bullard has shown, 18 the Ministry's regulations failed to meet every one of 19 these fundamental requirements. 20 For example, as we saw before, none of the 21 Decrees explains the valuation formulas or how they're 22 supposed to achieve current value or what other
[Page 131]
1 alternatives they considered. The Ministry didn't 2 publish a draft of the Decree for comments, preventing 3 stakeholders from expressing views and maybe even 4 corrections. And the Ministry's legal office didn't 5 even properly scrutinize the draft decree. In fact, 6 it couldn't have done so, as it approved the draft 7 just hours after it received it, according to the 8 timestamps. 9 Moreover, of course, there is no regulatory 10 report published, which is a complete violation of 11 Peruvian law. 12 The illegality of the Supreme Decrees under 13 domestic law, is, of course, a distinct question from 14 their legality under international law, but the fact 15 that they also violate Perú's own internal procedures 16 and would be void under domestic law, certainly is an 17 element that indicates their inconsistency with the 18 Minimum Standard of Treatment that the Treaty imposes. 19 Third, and this is very strange, that the 20 Supreme Decrees are not even what the Constitutional 21 Tribunal ordered or thought it was ordering because 22 the Ministry took every opportunity to reduce value
[Page 132]
1 wherever it could. So, in trying to exploit the 2013 2 Decrees, the Ministry just created all kinds of other 3 traps that weren't required by the Tribunal Order. 4 So, we've already seen how they came up with several 5 instances of arbitrary and inexplicable 6 value-destroying formulas for parity exchange rates. 7 Additionally, although the Tribunal--the 8 Constitutional Tribunal instructed the MEF that it 9 should inflation-update using--converting to dollars, 10 and then using what it said was the interest rate of 11 United States Treasury Bonds, the Ministry took that 12 as an invitation to use the yields on one year U.S. 13 Treasury Bills, rather than 20- or 30-year U.S. Bonds 14 whose tenors better correspond to the Land Bond Debt. 15 And the Ministry altogether ignored an even 16 more important requirement, which was to pay interest. 17 Peruvian law requires it, and you will recall that the 18 Constitutional Tribunal ordered the Ministry to issue 19 a Supreme Decree to quantify the debt according to the 20 method it specified, and it continued: "This 21 procedure must show the updated amount of the Land 22 Reform Debt Bonds plus the interest."
[Page 133]
1 The Tribunal thus ordered that interest would 2 be attached also to the updated amount, as was fair 3 and required under Peruvian law. But this aspect of 4 the Constitutional Tribunal's July 2013 holding, was 5 reiterated by Justice Blume of the Constitutional 6 Tribunal in 2015, again observed that the Tribunal had 7 ordered the Ministry to pay the full updated amount, 8 plus interest, and this is precisely how the Peruvian 9 Supreme Court has interpreted the 2013 Decisions. 10 In October 2015, October 2016, October 2017, 11 and, again in April 2018, the Supreme Court held that 12 under the 2013 Constitutional Tribunal Order, 13 Bondholders should receive first the updated value of 14 their Bonds, calculated using dollarization, plus the 15 interest rate of U.S. Treasury Bonds, and 16 second--second, compensatory interest at the face 17 coupon rates of 4, 5, or 6 percent. 18 This is a massive omission from the Perú's 19 Bondholder Process because you can imagine the 20 interest on Bonds over 40 years is rather substantial. 21 In fact, the majority of value is in the interest. 22 Now, the other way that you can understand
[Page 134]
1 about--that this was a real requirement of the 2 Constitutional Tribunal is that it's evident that the 3 Constitutional Tribunal considered that the Land Bond 4 Debt was very large and that it would be costly to 5 repay even under their unusual dollarization approach. 6 Justice Eto, in his testimony to the Peruvian 7 Congress, told the Congress that the dollarization 8 method that the Court required would require payment 9 to Bondholders of USD 2 billion. And that was why--if 10 you understand that's their thinking, you can go back 11 and look at the Decision, and you can understand why 12 they went to such great lengths in that Decision to 13 talk about options for the Government and how to pay 14 that amount, including potential payments-in-kind by 15 giving them land, new Bond issuances, a payment 16 schedule over eight years, all kinds of freedom to 17 come up with payment mechanisms, because they thought 18 the number was going to be big. 19 Yet, the figures that Perú's Vice Minister of 20 Economy, Ms. Betty Sotelo, who is a Witness here, has 21 submitted, show that the Bondholder Process is 22 actually paying tiny amounts, and over all this will
[Page 135]
1 be a mere rounding error for Perú. After more than 2 five years, Perú has paid a grand total of 1.5 million 3 nuevo soles, the equivalent of approximately USD 4 440,000. After five years. $143,000 in cash and 5 $297,000 in new Bonds. That alone is far less than 6 the advances on costs in this Arbitration. 7 Furthermore, based on the data that Perú has 8 made available, it appears the total payments to all 9 Bondholders through the Bondholder Process will be 10 trivial, even in the aggregate. Let me explain. 11 So far, according to the Ministry's own data, 12 the Ministry has submitted Bonds with a face value of 13 36 million soles de oro to its updating process, its 14 actualization, its process of determining what's that 15 actually worth under our formula. And the result of 16 that has been an updated amount, for those 36 million 17 soles de oro face value, of 7 million nuevo soles. 18 PRESIDENT FERNÁNDEZ ARMESTO: So to get these 19 numbers straight, the first one is the addition of the 20 1,000 soles face value of each of the Bonds--summing 21 up all the existing Bonds--the face value of all 22 existing Bonds?
[Page 136]
1 MR. FRIEDMAN: That have been submitted--yes, 2 that have been submitted through the actualization 3 stage of the process. You recall their process has 4 four phases, and towards the end they get to the phase 5 where they say here's what value we would give you. 6 And that's called actualization. 7 And in that phase, 35 million face value of 8 Bonds, of all different denominations, have gotten 9 that far in that process. 10 PRESIDENT FERNÁNDEZ ARMESTO: But remind me, 11 there was like 10 percent went to actualization. I 12 mean, only a small percentage of Bondholders did 13 actually go to actualization. 14 MR. FRIEDMAN: So a very small number got 15 to--we'll come up to-- 16 PRESIDENT FERNÁNDEZ ARMESTO: Okay. 17 MR. FRIEDMAN: A very small number got--there 18 is another stage after actualization, which is then 19 you have to also say, okay, now you've told me the 20 value, and now I need to be paid. And then you have 21 to negotiate over payment. 22 A very, very small fraction of people have
[Page 137]
1 gotten to that final stage. Only 13 Bondholders have 2 actually been paid after all this time. But we use 3 actualization for this analysis because there are more 4 people at that stage of the process. And so this face 5 amount is bigger than the face amount that's already 6 been paid. 7 In any event, the Ministry has assigned a 8 value to this original face amount of 35 million soles 9 de oro, 36 million, of about 7 million nuevo sol. And 10 on that basis, we can calculate kind of the average 11 for each soles de oro on face value. And so for each 12 5 soles de oro in face value, the Bondholder Process 13 has yielded an updated amount of basically 1 nuevo 14 sol. In other words, it's about a little less than 15 20 percent correspondence. 16 And now we also know the total aggregate face 17 value of the Bonds that have been authenticated to 18 date is 205 million soles de oro. The total 19 population in the Bondholder Process is 205 million. 20 So, if we simply apply that same ratio of 21 19.85 percent, we can estimate that the total 22 aggregate updated amount will be about 41 million
[Page 138]
1 nuevo sol. At today's exchange rate, that is less 2 than USD 12 million. 3 Now, we don't have the data to know whether 4 the rest of the Bonds in the process are like the 5 Bonds that have already actualized. We asked for that 6 data, but it wasn't provided to us. But assuming that 7 it is, and we don't have any reason to doubt it from 8 the testing that we've done on that information, 9 according to Perú's own numbers, Perú would exhaust 10 all the Bonds in the Bondholder Process for less than 11 $12 million. 12 That is anything but the sort of amount that 13 the Constitutional Tribunal had in mind and which 14 might warrant invoking the principles of balance, 15 sustainability, and budgetary progressiveness or that 16 would be financially impossible to pay in a single 17 sum, as the Tribunal had in mind. 18 MR. HAMILTON: Excuse me. Just to confirm, 19 the data that you just demonstrated, that's not in the 20 record. That's something that you've calculated up 21 for today? 22 MR. FRIEDMAN: From R-1062, which is
[Page 139]
1 Ms. Sotelo's--exhibits to Ms. Sotelo's Report. 2 MR. HAMILTON: Right. But these calculations 3 have never been put before Perú before. This is being 4 presented for the first time today; is that correct? 5 MR. FRIEDMAN: That is correct. 6 MR. HAMILTON: Thank you for confirming. 7 MR. FRIEDMAN: So we submit to you-- 8 PRESIDENT FERNÁNDEZ ARMESTO: To understand 9 that, the total population of Bonds, which has been 10 submitted to authentication, is 205 million soles in 11 face value. 12 MR. FRIEDMAN: That have been authenticated, 13 yes. 14 PRESIDENT FERNÁNDEZ ARMESTO: Submitted to 15 authentication. That is the gross submitted to 16 authentication. Out of those, 35 million have 17 actually been now updated--at the rate of from 35 to 18 7, at the rate of 20 percent. And you then take that 19 rate and apply it to the total population. 20 MR. FRIEDMAN: Yes, exactly. 21 MR. HAMILTON: Mr. President, just to 22 confirm, we've never seen any of these numbers before.
[Page 140]
1 They have made them up for the argument. Thank you. 2 MR. FRIEDMAN: Well, they have seen--the 3 numbers come from Perú. The data comes from Perú. 4 The calculations are a demonstrative on this slide. 5 MR. HAMILTON: And they are new. Thank you. 6 PRESIDENT FERNÁNDEZ ARMESTO: I'm sure you'll 7 have the opportunity to go with them through with the 8 Experts to see exactly what they imply. 9 MR. FRIEDMAN: And it's certainly the case 10 that Gramercy requested calculations by the 11 Government, by Perú--in this Arbitration, has 12 requested calculations of what they calculate the debt 13 to be, and they haven't produced any documents. So, 14 maybe they have never done this calculation. 15 In any event-- 16 PRESIDENT FERNÁNDEZ ARMESTO: To be very 17 objective, assume that only 10 percent of the 18 Bondholders have actually gone into this process. 19 Then the total Bonds would be 10 times more. It would 20 be 120. The payment of the total outstanding Bonds 21 would then be 120 million. 22 MR. FRIEDMAN: Yes, that's correct, if you
[Page 141]
1 assume that all the Bonds existing in the world, yes, 2 that's right. It would be about 120--maybe even a 3 little more, 140 million, I think, by doing that 4 ratio, which is a lot less than 2 billion and not the 5 kind of thing that would indicate a budgetary impact 6 that would be financially impossible for Perú to pay. 7 PRESIDENT FERNÁNDEZ ARMESTO: Thank you. 8 MR. FRIEDMAN: Next, the Bondholder Process 9 also unjustly deprives Bondholders, including 10 Gramercy, of current value. And, therefore, it's hard 11 to understand how Perú can contend that this process 12 actually imparts value, what they say to Bonds that 13 are worthless on their face, or they establish, 14 through this process, a clear legal framework for 15 payment of the Bonds. 16 The process does not create value. It 17 destroys it in a way that is expropriatory and 18 violates the Minimum Standard of Treatment. And it 19 should thus come as no surprise that the participation 20 rates in the process--and this gets to the point you 21 were just raising, Mr. Chairman--the participation 22 rates have been abysmal.
[Page 142]
1 If the process actually created value in a 2 great legal framework, Bondholders would run to it. 3 They would have said, great, we'd love to submit our 4 Bonds. And this would have been a great way of 5 attracting people to Peru in solving this problem. 6 But that hasn't happened. As Professor 7 Olivares-Caminal's calculations, based on the data 8 Peru itself has provided show, the process attracted 9 only about 8 percent by face value of the outstanding 10 Bonds, which is the point the President was just 11 making. 12 If a debt exchange attracts less than 13 90 percent of Bondholders, it is often considered a 14 failure. So, an 8 percent rate is just appallingly 15 low. The bottom line is that this Bondholder Process 16 is not solving Perú's Land Bond problems. 17 Now, Perú has insinuated that this low 18 participation rate is due to Gramercy's negative 19 publicity about the process. But Perú has not even 20 attempted to prove any such cause and effect. Indeed, 21 Gramercy is not alone in criticizing the process. 22 There are many critics of it in Peru. And, moreover,
[Page 143]
1 there is a lot of negative news that they've generated 2 themselves. Gramercy didn't make up the White-Out 3 Scandal. It learned about it from the press, just 4 like everybody else. 5 The more likely process of why you have these 6 appallingly low rates is that it's just so 7 value-depriving. Gramercy has presented to you, as 8 you know, the Witness testimony of two Bondholders who 9 participated in good faith in this process, only to be 10 kind of devastated by it. 11 First, the Tribunal will recall the testimony 12 of Ms. L whose family farm was expropriated in '73, 13 creating a major financial blow to her family and 14 leaving them in very precarious conditions. It took 15 more than four years for Ms. L to receive a valuation 16 of her Bonds, only to find out that Perú was only 17 offering her the equivalent of USD 67--$67, which is 18 less than a dollar for each of the hectares of land 19 that were left unpaid. 20 As she's testified, by any definition of 21 value, the Ministry's valuation is absurd. She 22 challenged that resolution, but the Ministry dismissed
[Page 144]
1 her appeal. After completing the Bondholder Process, 2 Ms. L said she felt completely betrayed and deceived 3 by her own Government. 4 Mr. S has suffered a similar experience. 5 He's a 91-year-old agronomist and father of 10 6 children who has testified that when Peru expropriated 7 his farm in 1975, he and his family were left with 8 nothing. He waited three years to receive a valuation 9 from the Ministry and was crushed to learn that it was 10 only the equivalent of USD 240. As he says, he could 11 not believe the Ministry was offering to pay so little 12 after three years and eight months of having started 13 the administrative procedure and more than 40 years 14 since he had lost his land. 15 He called the offer to pay him $240 a joke 16 and pointed out, of course, that with that little 17 money he would not be able to buy back a single 18 hectare of the 56 hectares the Government had 19 expropriated. 20 Like Ms. L, he appealed the valuation, but, 21 again, his appeal was dismissed. 22 Sadly, the experience of these two
[Page 145]
1 Bondholders is consistent with the experience of 2 others, as we've pointed out in the Briefs. So, the 3 fact that Perú touts this process as consistent with 4 international standards just defies reality. The 5 process is no defense to Perú's conduct. It is 6 another violation of its obligations under the Treaty. 7 With that, I turn to the fourth and last set 8 of facts I want to discuss, and that concerns 9 Gramercy's ability to vindicate its rights to current 10 value before the Peruvian Courts. 11 You will recall that in 2004, the 12 Constitutional Tribunal upheld the 2000 Emergency 13 Decree because it was "merely an option" and affirmed 14 the Bondholders' rights to go to court to obtain 15 judgments on their Bonds using CPI-updating, plus 16 interest. And hundreds of Bondholders did that and 17 were availing themselves of this right. 18 As Mr. Koenigsberger has testified, when 19 Gramercy made its investment, it best legitimately 20 believed that if Peru failed to pay the Land Bonds, 21 Gramercy would be able to initiate or participate in 22 proceedings in Peruvian Courts to demand fair
[Page 146]
1 compensation. 2 Prior to 2013, that is what Gramercy did. In 3 2010, it filed a series of conciliation requests, 4 which are precursors to filing lawsuits. And then in 5 2011, when Perú refused to meet and conciliate, it 6 reopened seven Court cases. In one of them, as I've 7 mentioned before, the Pomalca case, the 8 Court appointed Experts assessed the value of 44 of 9 Gramercy's Bonds at roughly USD 250 million. That 10 valuation used CPI to update the principal, plus 11 compound interest. 12 As Mr. Riehl will explain later this morning, 13 Professor Edwards has shown that if the same method 14 was applied to Gramercy's entire portfolio, the 15 portfolio would be worth about 840 million as of 16 May 2018. However, the August 2013 Tribunal 17 resolution, coupled with the value-destroying 18 January 2014 Supreme Decrees, deprived Gramercy of the 19 right to obtain current value in Peruvian Courts by 20 imposing this Ministry's grossly defective and 21 value-destroying formula. 22 That formula, at its best, at its most
[Page 147]
1 generous, would have valued those same Gramercy Bonds 2 at less than 4 percent of the value. They would have 3 had, through a normal court process, a 96 percent 4 haircut, and more if you look at the original 2014 5 Decrees. 6 As Mr. Koenigsberger has explained, following 7 these measures, Gramercy realized that proceeding 8 further in Peruvian Courts had been futile. Either 9 the Government could assert the Supreme Decrees as a 10 basis, or the Court would on its own, or Perú would 11 use them as a basis to excuse enforcement. 12 Now, Perú contends that the Bondholder 13 Process includes both judicial and administrative 14 appeal and others are potentially available. Yet, 15 these potential remedies are fictional. For example, 16 as we've shown, the contentious administrative action 17 available under Peruvian law does not allow a Claimant 18 to challenge the validity of the valuation formula or 19 the mandatory process by the Supreme Decrees. It 20 simply allows you to challenge that they apply their 21 own Decrees correctly. 22 In any event, the idea that a party has a
[Page 148]
1 theoretical right to try some extraordinary challenge 2 in Peruvian Courts, like amparo they cite in their 3 papers, is far different from actually having 4 available the Court remedy that was there all along. 5 As you know, amparo is an extraordinary 6 remedy that requires a showing at a very high 7 standard, and so that alone would disqualify it. But 8 look at the practical experience of the Bondholders 9 who tried that very route. 10 Both Ms. L and Mr. S, the two Bondholders I 11 mentioned before, both attempted and failed to secure 12 relief through these very same amparo procedures in 13 Peruvian Courts. 14 So, with the August 2013 resolution and the 15 Supreme Decrees proved to deprive Gramercy of the 16 basic form of effective means to assert its claim and 17 enforce its right in local courts, which, as we've 18 explained, had consistently vindicated Bondholders' 19 rights to CPI-updated value, plus interest. 20 Before concluding this merits part of the 21 opening, I'd like to invite the Tribunal to step back 22 for a moment and reflect upon the issues that Perú
[Page 149]
1 raises which are simply not relevant. You have heard 2 a lot of about what Perú calls aggravation during the 3 course of these proceedings. These allegations are 4 legally irrelevant have no bearing on any claim or 5 defense in this case. They're just prejudicial. 6 They are also totally unfair. As we have 7 just shown, Perú has been, in a word, deceitful about 8 how it dealt with the Land Bonds for over a decade. 9 So, it was perfectly legitimate for Gramercy to try to 10 shine light on Perú's so-called "process," especially 11 after the events of the White-Out and other things 12 that came to light for the first time. 13 Moreover, while Perú seeks to demonize 14 Gramercy and its people as vultures who engage in bad 15 practices and try to terrorize a poor helpless State, 16 consider what the evidence actually shows. For more 17 than a decade, Mr. Koenigsberger and his colleagues at 18 Gramercy have been the ones reaching out to Perú 19 trying to create a fair settlement process for all 20 Bondholders, not just for Gramercy, involving--and 21 that settlement process could have involved negotiated 22 discounts to value, Bond swaps, so payment over time,
[Page 150]
1 reinvestment in Perú of the proceeds from the Bond 2 swaps. And every time--every time, Gramercy has had 3 the door slammed in their face. 4 And consider also the people on whose behalf 5 you are being told this story. Many of the senior 6 government officials involved in the Land Bond Debt 7 during this past decade are, even as we sit here 8 today, subject to criminal charges or investigation. 9 These officials include former presidents Toledo, 10 García, Humala, and Kuczynski. They include former 11 Chief Justice of the Constitutional Tribunal Urviola, 12 who was brought to Congress on the idea that maybe 13 they'd lift his immunity from prosecution, and a 14 criminal prosecution underway against the Tribunal's 15 Chief Secretary Oscar Díaz for the White-Out. 16 It also includes the former advisor to the 17 President--President Humala--Roy Gates, who we saw 18 visited the Court during that critical week in July. 19 And, of course, it involves Perú's main fact Witness 20 in this Arbitration, former Finance Minister Castilla. 21 The real story is that the Ministry has tried 22 to subvert its country's own constitutional norms for
[Page 151]
1 a decade. Since 2001, the clear legal rule in Perú 2 was that as a constitutional matter, the Land Bonds 3 had to be paid not at nominal value but at current 4 value. That's what the Civil Code said, and the Court 5 applied that to the Land Bonds. 6 And, yet, throughout this period, the 7 Ministry has continued to argue in courts, in 8 resisting Bondholder lawsuits, that the Bonds should 9 be paid only at nominal value, as it did in May 2001, 10 for example, just months after the Tribunal had ruled 11 the opposite. 12 And the Ministry continued doing that in 13 recent cases, recently as 2016, and probably even 14 today. They're going to courts in Perú and saying 15 that current value doesn't apply to the Land Bonds, 16 that they're nominal obligations. 17 Now, these facts, we submit, lay bare the 18 true motivation of Perú and its Ministry of Economy 19 and Finance. There was never an effort to try to pay 20 Bondholders true current value. And since 2013, until 21 the present day, Perú went even further and tried to 22 wipe out that debt for a pittance, and that violates
[Page 152]
1 the Treaty. 2 With that, I would like to turn now to 3 remedies and ask Mr. Riehl to the stand. 4 MR. RIEHL: Thank you. Mr. President, could 5 I ask your indulgence in getting a time check, please, 6 since there was some interchange? 7 PRESIDENT FERNÁNDEZ ARMESTO: Of course. 8 Could we ask the Secretary. 9 SECRETARY PLANELLS-VALERO: Claimants have 27 10 minutes and 40 seconds remaining. 11 MR. RIEHL: Thank you very much. 12 SECRETARY PLANELLS-VALERO: Thank you. 13 PRESIDENT FERNÁNDEZ ARMESTO: I would rather 14 you go slowly and not very fast. If you need five or 15 ten minutes more, that is better than if you go very, 16 very fast. 17 MR. RIEHL: Thank you very much, 18 Mr. President. We greatly appreciate that. 19 PRESIDENT FERNÁNDEZ ARMESTO: We will, of 20 course, do exactly the same with the Respondent. 21 MR. RIEHL: Mr. President, Members of the 22 Tribunal, I will now turn to the third part of our
[Page 153]
1 presentation today, the remedy to which Gramercy is 2 entitled. 3 As Mr. Friedman described, Perú's Treaty 4 breaches stripped Gramercy of its entitlement to be 5 paid the full updated value of its Land Bonds. 6 Instead of honoring Gramercy's entitlement to that 7 value, Perú eviscerated it. 8 Perú imposed a mandatory Bondholder Process 9 that would have paid Gramercy less than a thousandth 10 of a percent of the true value of its Land Bonds. 11 Perú must now make Gramercy whole. 12 Under the applicable full reparation 13 standard, Gramercy is entitled to the full updated 14 value of its Land Bonds. That value was USD 1.8 15 billion in May 2018, as Professor Edwards calculated 16 in his Reports. It has increased since then as 17 inflation has continued in Perú and as Land 18 Bondholders have missed out on additional 19 opportunities to invest the unpaid principal. 20 In the alternative, Gramercy is entitled to 21 what it would have received if it had been allowed to 22 vindicate its rights in Perú's Courts. That's the
[Page 154]
1 CPI-updating, plus interest, that Mr. Friedman 2 described. 3 Professor Edwards calculated that Gramercy's 4 Bonds were worth USD 842 million in May 2018 using 5 that approach, which was actually applied to some of 6 Gramercy's Land Bonds in the Pomalca case. Like the 7 full updated value, that $842 million value has also 8 continued to increase over time. 9 Finally, although Gramercy does not agree 10 with Perú that Fair Market Value applies here, even by 11 that measure, Gramercy's damages would be far higher 12 than the price it paid for its Land Bonds more than a 13 decade ago. 14 All of the evidence contemporaneous with the 15 Constitutional Tribunal's 2013 Order shows that 16 Gramercy's Land Bonds had a Fair Market Value of more 17 than USD 500 million immediately before Perú began the 18 conduct that breached the Treaty. 19 I will discuss each of these remedies, in 20 turn. 21 First, though, I will address the applicable 22 legal standard. I will be brief because Perú has not
[Page 155]
1 disputed that the customary full reparation standard 2 applies here. Perú argues for Fair Market Value as 3 the Measure of damages, but Perú has not disputed that 4 Chorzów Factory articulated the proper legal standard 5 that a measure must meet. 6 Indeed, there is no reason to depart from the 7 customary international law standard in this case. 8 Under that standard, as described in Chorzów Factory, 9 Gramercy is entitled to an award that will, as far as 10 possible, wipe out all the consequences of Perú's 11 illegal acts. That award should take the form of 12 restitution-in-kind or its monetary equivalent. 13 Under the full reparation standard, the 14 question to ask to determine the proper remedy is: 15 What has Gramercy lost? And the answer to that 16 question is straightforward. Perú has stripped 17 Gramercy of its legal entitlement to be paid the full 18 value--the full updated value of its Land Bonds. 19 That full updated value is therefore the 20 proper measure of Gramercy's loss. Gramercy's 21 entitlement to that value is what must be restored 22 under the full reparation standard.
[Page 156]
1 Importantly, Gramercy is not claiming that it 2 lost merely the right to sell its Land Bonds. That's 3 why Fair Market Value does not apply here. Gramercy 4 was deprived of the full value Perú's constitution and 5 laws required Perú to pay to redeem its Land Bonds and 6 not merely the value someone else might have paid to 7 buy those Bonds. 8 In addition, to the extent the Bonds' Market 9 Value was less than the amount Perú was required to 10 pay on the Bonds, that was entirely because of the 11 risk that Perú would not meet its legal obligation to 12 pay that full legal value, which was intrinsic to the 13 Bonds. 14 Awarding Gramercy a Market Value lower than 15 its Bonds' intrinsic legal value would improperly 16 reward Perú for its illegal conduct and at the same 17 time would not make Gramercy whole for the loss of the 18 full intrinsic value which is the loss Gramercy 19 suffered. Such an award would violate the 20 international law norm against rewarding wrongdoing, 21 while at the same time failing to satisfy the 22 customary full reparation standard.
[Page 157]
1 So what is the full updated value of 2 Gramercy's Land Bonds that must be restored? There 3 are two components. 4 First, the unpaid principal has to be updated 5 to its current value from issuance using CPI in order 6 to erase the effects of inflation and restore the 7 value of the principal to its original purchasing 8 power. 9 Second, in order to compensate the 10 Bondholders for the opportunity they missed out on to 11 use the principal in other investments, interest has 12 to be added to the inflation-adjusted current value 13 from the date of the first missed payment at the 14 actual average historical Rate of Return on investment 15 in Perú. 16 Although the Parties disagree about how 17 current value is to be calculated under Peruvian law, 18 Perú acknowledges that the current value principle 19 applies to the Land Bonds. And Perú also maintains 20 that the MEF's Bondholder Process includes at least 21 some compensation for foregone opportunity costs. 22 So, Perú's argument is not that the current
[Page 158]
1 value principle does not apply. Rather, Perú argues 2 that there was no certainty about how to calculate the 3 Bonds' updated value until the Constitutional Tribunal 4 issued its 2013 Order. 5 Perú tries to address that uncertainty 6 argument up as two different quantum arguments, but it 7 is actually just the same uncertainty argument that 8 Perú makes on the Merits. 9 When Perú says that Gramercy has not proven 10 its damages with reasonable certainty, what it means, 11 as it explains in the text of its Brief, is that there 12 is purportedly uncertainty as to how to calculate the 13 value of Agrarian Reform Bonds. 14 And when Perú says that Gramercy has not 15 proven causality, what it means, again, is that 16 Gramercy's claim is purportedly based solely on its 17 own beliefs about what the calculation formula should 18 be. 19 Mr. Friedman has already addressed Perú's 20 uncertainty arguments thoroughly. I will therefore 21 limit my comments on this point to showing that 22 Professor Edwards calculated the full updated value of
[Page 159]
1 Gramercy's Land Bonds correctly. 2 Professor Edwards first updated the value of 3 the unpaid principle for inflation using CPI. As 4 Professor Edwards described in his Reports, the 5 easiest and most accurate way to update for inflation 6 is to use Perú's official CPI measurements. That's 7 what economists, bankers, governments, and businesses 8 do literally all the time, not only in Perú but 9 throughout the world. Professor Edwards has provided 10 a number of examples of this in his reports. 11 And as Mr. Friedman has already described in 12 detail, CPI is the usual method that is used to apply 13 the current value standard under Peruvian law. 14 The wide-ranging and vastly lower values 15 produced by the MEF's various formulas do not show 16 that there was uncertainty. They show only that the 17 MEF did not update for inflation correctly. 18 In any event, Perú has not challenged either 19 the appropriateness or the methodology and formulas 20 that Professor Edwards used to update for inflation or 21 the accuracy of his results. Perú has faulted 22 Professor Edwards for updating from issuance rather
[Page 160]
1 than some later date, but has not identified any 2 computational errors in his inflation-updating 3 formulas. 4 Professor Edwards' second step was to apply 5 interest to the inflation updated current value of the 6 rate needed to compensate Bondholders fully for the 7 value of their foregone opportunities. To calculate 8 the value of Bondholders' lost opportunity, Professor 9 Edwards looked at what other investors in Perú 10 actually earned on their investments during the same 11 time period. He used a well-established macroeconomic 12 method to estimate very conservatively the average 13 Rate of Return that other investors actually earned. 14 Perú does not challenge the accuracy of 15 Professor Edwards' computation of that rate. In their 16 First Report, Perú's Quantum Experts did raise several 17 technical criticisms, but Professor Edwards responded 18 to each of those criticisms in his Reply Report 19 showing that adopting Perú's Experts' suggestions 20 would have actually increased the Rate of Return that 21 he calculated. 22 Perú and its Experts have not challenged
[Page 1]
INTERNATIONAL CENTRE FOR THE SETTLEMENT OF INVESTMENT
DISPUTES
-X
In the matter of Arbitration :
between: :
GRAMERCY FUNDS MANAGEMENT LLC AND :
GRAMERCY PERU HOLDINGS LLC,
Claimants, :
: ICSID Case No.
and : UNCT/18/2
REPUBLIC OF PERÚ,
Respondent. :
-X Volume 1
HEARING ON JURISDICTION, MERITS AND QUANTUM
Friday, February 7, 2020
The World Bank Group
1225 Connecticut Avenue, N.W.
C Building
Conference Room C1-450
Washington, D.C.
The hearing in the above-entitled matter
came on at 9:30 a.m. before:
PROFESSOR JUAN FERNÁNDEZ ARMESTO, President
MR. STEPHEN L. DRYMER, Co-Arbitrator
PROFESSOR BRIGITTE STERN, Co-Arbitrator
In the case of discrepancy, the audio recording in the
original language will prevail.
[Page 2]
ALSO PRESENT:
On behalf of ICSID:
MS. MARISA PLANELLS-VALERO
Secretary of the Tribunal
MS. KRYSTLE M. BAPTISTA
Assistant to the President of the Tribunal
Realtime Stenographers:
MS. DAWN K. LARSON
Registered Diplomate Reporter (RDR)
Certified Realtime Reporter (CRR)
B&B Reporters
529 14th Street, S.E.
Washington, D.C. 20003
United States of America
[email protected]
MR. PAUL PELISSIER
MR. DIONISIO RINALDI
D.R. Esteno
Colombres 566
Buenos Aires 1218ABE
Argentina
(5411) 4957-0083
Interpreters:
MS. SILVIA COLLA
MR. DANIEL GIGLIO
MR. CHARLES ROBERTS
[Page 3]
APPEARANCES:
On behalf of the Claimant:
MR. MARK W. FRIEDMAN
MS. INA C. POPOVA
MR. CARL RIEHL
MS. FLORIANE LAVAUD
MS. BERGLIND HALLDORSDOTTIR BIRKLAND
MR. GUILHERME RECENA COSTA
MS. SARAH LEE
MR. DUNCAN PICKARD
MR. JULIO RIVERA RIOS
MS. MARY GRACE MCEVOY
MR. THOMAS G. MCINTYRE
Debevoise & Plimpton, LLP
919 Third Avenue
New York, New York 10022
United States of America
MR. LUIS BEDOYA
MR. FRANCISCO CARDENAS PANTOJA
Rodrigo, Elias & Medrano
Av. San Felipe 758
Jesús María
Lima 15072
Perú
Representing Gramercy Funds Management LLC:
MR. JAMES TAYLOR
MR. JOSHUA M. O'MELIA
MR. NICK PAOLAZZI
MR. THOMAS NORGAARD
[Page 4]
APPEARANCES: (Continued)
On behalf of the Respondent:
AMBASSADOR HUGO DE ZELA
Republic of Perú
MR. RICARDO AMPUERO
Republic of Perú
MS. MONICA GUERRERO
Republic of Perú
MS. GIOVANNA ZANELLI
Republic of Perú
MR. ALBERTO HART
Republic of Perú
MR. JONATHAN C. HAMILTON
MS. ANDREA MENAKER
MR. RAFAEL LLANO
MR. FRANCISCO JIJÓN
MR. JONATHAN ULRICH
MR. FRANK PANOPOLOUS
MR. JOHN DALEBROUX
White & Case LLP
701 Thirteenth Street, NW
Washington, D.C. 20005-3807
United States of America
MR. ALEJANDRO MARTINEZ DE HOZ
White & Case, S.C.
Torre del Bosque PH
Blvd. Manuel Avila Camacho #24
11000 CDMX
Mexico
[Page 5]
For the United States of America:
MS. LISA GROSH
MS. NICOLE THORNTON
MS. MARGARET SEDGEWICK
MR. JOHN DALEY
Attorney-Advisers
Office of International Claims and
Investment Disputes
Office of the Legal Adviser
U.S. Department of State
Suite 203, South Building
2430 E Street, N.W.
Washington, D.C. 20037-2800
United States of America
MS. AMY COLLINS
U.S. Department of Treasury
[Page 6]
PAGE
OPENING STATEMENTS
ON BEHALF OF THE CLAIMANTS:
QUESTIONS FROM THE TRIBUNAL. ... 189
ON BEHALF OF THE RESPONDENT:
QUESTIONS FROM THE TRIBUNAL. ... 353
CONFIDENTIAL PORTIONS:
1. ... 60
2. ... 173-180
3. ... 290-291
4. ... 318-324
5. ... 328-330
6. ... 339
7. ... 360-363
[Page 7]
1 PRESIDENT FERNÁNDEZ ARMESTO: Good morning,
2 everyone.
3 This is the Hearing in the Arbitration
4 between Gramercy Funds Management LLC and Gramercy
5 Perú Holdings LLC v. the Republic of Perú.
6 On behalf of the Tribunal, on behalf of the
7 Secretariat and the Tribunal's Assistant, we would
8 like to extend a welcome to you to this Hearing in
9 Washington, and we would like to extend an especially
10 warm welcome to our Stenographers and Interpreters
11 that are going to have a precise version in both
12 languages of what we are saying.
13 A technical matter before we start,
14 today--and I think the lawyers for both Parties know
15 this--if there is any confidential issue of importance
16 that needs to be raised, please, the individual from
17 each side needs to let us know because there is a
18 certain delay in connection with the publication of
19 the data on the internet. But the editing system that
20 we have today is set up that way to edit any phrase
21 said, is not operational, so we do run into this
22 problem.
[Page 8]
1 I give the floor now to Claimant.
2 Mr. Friedman, would you like to introduce your team?
3 MR. FRIEDMAN: Given the size of our team
4 and--well, first let me say: Good morning,
5 Mr. President and Members of the Tribunal.
6 Given the size of our team, I might invite
7 each member of our team to introduce him or herself.
8 That would also give you the opportunity to hear each
9 of them.
10 PRESIDENT FERNÁNDEZ ARMESTO: Please.
11 MS. POPOVA: Good morning. Ina Popova.
12 MR. RIEHL: Good morning. I'm Carl Riehl.
13 MR. THOMPSON: Good morning. Brian Thompson.
14 MS. LAVAUD: Good morning. Floriane Lavaud.
15 MS. HALLDORSDOTTIR BIRKLAND: Good morning.
16 Berglind Halldorsdottir Birkland.
17 MR. RECENA COSTA: Good morning. Guilherme
18 Recena Costa.
19 MR. RIVERA: Good morning. Julio Rivera.
20 MR. BEDOYA: Good morning. Luis Bedoya.
21 MR. O'MELIA: Good morning. Josh O'Melia.
[Page 9]
1 MR. TAYLOR: Good morning. James Taylor.
2 MR. NORGAARD: Good morning. Thomas
3 Norgaard.
4 PRESIDENT FERNÁNDEZ ARMESTO: Very good. It
5 may be easier if you come forward here to this
6 standing platform.
7 MS. LEE: Good morning. Sarah Lee.
8 MR. PICKARD: Good morning. I'm Duncan
9 Pickard.
10 MR. BULLARD: Good morning. Alfredo Bullard.
11 MR. PEGNOVIC: Good morning. Milan Pejnovic.
12 MR. WEGLEIN: Good morning. Samuel Weglein.
13 MR. MCINTYRE: Good morning. Thomas
14 McIntyre.
15 MS. McEVOY: Good morning. Mary Grace
16 McEvoy.
17 MR. CÁRDENAS: Good morning. Francisco
18 Cárdenas.
19 PRESIDENT FERNÁNDEZ ARMESTO: Thank you very
20 much, Mr. Friedman.
21 And now I look to the Respondent, to the
22 Republic of Perú.
[Page 10]
1 Mr. Hamilton, good morning. Would you like
2 to introduce your team?
3 MR. HAMILTON: Thank you very much. Good
4 morning, Mr. President, Members of the Tribunal, Madam
5 Secretary, the Tribunal's Assistant. Good morning,
6 everyone.
7 On behalf of the Republic of Perú, I am
8 Jonathan Hamilton from White & Case. It is a pleasure
9 to be here with you, and I would like to specifically
10 thank the Ambassador of Perú to the United States, who
11 is here, and also Ricardo Ampuero, who is the Special
12 Defender for the Republic of Perú.
13 Each one of the members of White & Case is
14 going to introduce themselves, and then I'm going to
15 give you a list.
16 MS. MENAKER: Andrea Menaker.
17 MR. JIJÓN: Good morning. I'm Francisco
18 Jijón.
19 MR. ULRICH: Good morning. Jonathan Ulrich.
20 MR. CUEVAS: Good morning. Mark Cuevas.
21 MR. DALEBROUX: Good morning. John
22 Dalebroux.
[Page 11]
1 AMBASSADOR AMPUERO: Good morning. I am
2 Ricardo Ampuero.
3 MR. HAMILTON: I'm going to read the
4 list--from a list the names of the other members of
5 our team. Obviously, we have a lot of people here in
6 the room.
7 We have, apart from the individuals who have
8 introduced themselves: Mr. Frank Panopolous,
9 Alejandro Martínez de Hoz, Sandra Huerta, Soledad
10 Pena, Sophia Castillero and Audrey Vivas, John
11 Contrera, Julianna Goodman, and also Rafael Llano from
12 White & Case.
13 From the Embassy, we have the Ambassador,
14 Hugo de Zela, and also we have Giovanna Zanelli and
15 Alberto Hart.
16 We also have a number of Experts present here
17 today from the State of Perú in this matter: Eduardo
18 García-Godos, Pablo Guidotti, Oswaldo Hundskopf,
19 Rafael Artierra, Brent Kaczmarek, Isabel Kunsman, and
20 Norbert Wühler.
21 Also, Professor Reisman and Ms. Arsanjani,
22 they are going to arrive in the next few days.
[Page 12]
1 Thank you.
2 PRESIDENT FERNÁNDEZ ARMESTO: Very well.
3 Thank you very much.
4 Do we have a point of order that any of the
5 Parties would like to raise? Give me the good news
6 that there is none.
7 MR. FRIEDMAN: Sometimes I'm afraid I must
8 disappoint you, Mr. President.
9 There are four what I think of as being
10 fairly modest matters that I would have thought could
11 have been agreed by counsel but unfortunately have not
12 been. We can--yes, we should probably address them.
13 They involve one exhibit, witness
14 sequestration, references to the Bondholder witnesses,
15 and translations. Those are the--those four issues
16 remain outstanding.
17 Shall I identify each of them?
18 PRESIDENT FERNÁNDEZ ARMESTO: Yes, please.
19 MR. FRIEDMAN: Okay. First, there is an
20 exhibit in the record, Respondents' Exhibit R-257,
21 which is a Report from the Ministry of Economy and
22 Finance from 2004 that the copy--we discovered as we
[Page 13]
1 were preparing for the Hearing that the copy in the
2 record is somewhat incomplete. It is missing at least
3 one or two pages.
4 We then asked our colleagues in Perú to help
5 us locate a complete version of the document. We were
6 able to find at least some of the missing pages, and
7 simply propose to substitute the fuller copy as "the
8 document," or put it with the document that's in the
9 record. We simply--it is not a new exhibit. It's a
10 complete version.
11 PRESIDENT FERNÁNDEZ ARMESTO: Mr. Friedman,
12 you speak with Mr. Hamilton or someone from your team,
13 and you solve that. If there is any difficulty, you
14 come back.
15 MR. FRIEDMAN: We have. We have exchanged 18
16 emails over the past days trying to solve this what we
17 thought was a very simple issue, and I don't know what
18 the status is. So we are sort of--we've tried that.
19 PRESIDENT FERNÁNDEZ ARMESTO: Okay.
20 Mr. Hamilton, does R-257 draw a bell?
21 MR. HAMILTON: It rings a bell because this
22 stunt has been evolving for a while now. We are glad
[Page 14]
1 to talk about that document because it is very
2 favorable to the Peruvian State.
3 However, there's a dilemma. The dilemma is
4 very simple: In December of 2018, the Republic of
5 Perú presented this document, together with a witness
6 declaration, demonstrating the origin of the document.
7 We have gone through two submissions by Claimants
8 since that time. They have never mentioned it.
9 They raised this document late. They then
10 raised it in a way that clearly was trying to set up
11 some sort of conflict, in our view, and we have asked
12 them repeatedly: When and where did you obtain this
13 document? We believe that is material to understand
14 the origin of the document, especially because it's
15 been well-documented during the aggravation phase of
16 this case that there have been shenanigans with
17 respect to how they go about obtaining documents from
18 the Peruvian State. So, we simply would like to know:
19 When? How did you obtain this document?
20 Now, we've heard this morning "We asked our
21 colleagues in Perú, and they were able to obtain it."
22 We had been denied multiple times requests for this
[Page 15]
1 simple information. So, it's not the document that is
2 the issue. It is the procedure, as has been the case
3 repeatedly in this proceeding, that we object to.
4 We object to it because we personally--I
5 personally--could share with you many observations
6 about the record that's been put in by Claimant, which
7 is missing pages, full of redactions, and has many
8 other issues. So, we're not sure why this one issue
9 has come up now. We certainly will be glad to talk
10 about this document, and look forward to it, but we
11 would like to know: Where did this document come
12 from? When was it obtained? How was it obtained?
13 Thank you.
14 PRESIDENT FERNÁNDEZ ARMESTO: Okay. That is
15 another question.
16 Your point, Mr. Friedman, is that R-257 lacks
17 certain pages?
18 MR. FRIEDMAN: Correct.
19 PRESIDENT FERNÁNDEZ ARMESTO: Okay. Which
20 pages are lacking? Let's take the bull by the horns.
21 MR. HAMILTON: Mr. President, we don't object
22 to introducing their document, but it clearly is a
[Page 16]
1 different copy, and we would like to know where it
2 came from because we believe that, since we properly
3 presented it, we should know where they got this
4 document.
5 PRESIDENT FERNÁNDEZ ARMESTO: Would you agree
6 that some pages are missing?
7 MR. HAMILTON: There appear to be a couple of
8 pages missing, perhaps.
9 PRESIDENT FERNÁNDEZ ARMESTO: Does the
10 Republic of Perú have a full copy?
11 MR. HAMILTON: We presented the copy that we
12 have, and that is the only copy that we have
13 discovered at this time.
14 PRESIDENT FERNÁNDEZ ARMESTO: You don't have
15 any full copy?
16 MR. HAMILTON: We don't have another full
17 copy available to present, no.
18 PRESIDENT FERNÁNDEZ ARMESTO: Okay. And you
19 have a full copy of a document from Respondent?
20 MR. FRIEDMAN: Yes. May I ask Ms. Popova to
21 be clear on the details that exceed my knowledge?
22 PRESIDENT FERNÁNDEZ ARMESTO: Yes.
[Page 17]
1 Ms. Popova?
2 MS. POPOVA: Yes, Mr. President. We were
3 able to find a copy of the document. The document is
4 a cover letter, a report, and annexes. We found a
5 copy of the document that has the pages that are
6 missing from the body of the report. That copy is
7 missing one of the annexes, which is in R-257.
8 So, what we had proposed to our colleagues is
9 that we submit that document as well so that you
10 have--neither one of them is complete, but taken
11 together, they are getting there. And we have been
12 trying to agree on language to submit it to the
13 Tribunal. That's where we stand as of this morning.
14 MR. FRIEDMAN: May I just add: It's a
15 16-year-old public report by the Ministry of Economy
16 and Finance that has been circulated through the
17 Peruvian Congress, that is referenced in other
18 documents amply, including the Respondent's own other
19 documents. This seems like the most modest of
20 matters, that we have a few more pages that are
21 missing. I just don't understand why this wasn't
22 agreed and already submitted to you in the interest of
[Page 18]
1 completeness.
2 PRESIDENT FERNÁNDEZ ARMESTO: Okay. Let's
3 not lose too much more time on this. It's an old
4 document. They seem to have a copy of the pages which
5 you are missing; you seem to have an annex which they
6 are missing. Can we create a document on which both
7 the Minister of Economy and Finance and the Claimants
8 agree that it is the real document?
9 I think that is the decision. Let's not
10 discuss more on it, Mr. Hamilton.
11 MR. HAMILTON: I'll leave it with this,
12 Mr. President.
13 PRESIDENT FERNÁNDEZ ARMESTO: Let's leave it
14 here.
15 MR. HAMILTON: I'll leave it with this
16 sentence: They will not tell us where they got the
17 document. It's a pattern of conduct. It's a pattern
18 of lack of transparency, and we object to that. We
19 are glad to receive the document, and we look forward
20 to discussing it.
21 Thank you.
22 PRESIDENT FERNÁNDEZ ARMESTO: Okay. And so,
[Page 19]
1 you amalgamate both documents into a real document,
2 and you present it as an exhibit in the Hearing, and
3 we give it a Hearing number so that it is a Tribunal
4 number and it has--your document is your document, and
5 we give a full Hearing number to that document.
6 So, that is solved. First point of order,
7 Mr. Friedman.
8 Let's try to solve the three others in the
9 same fashion.
10 MR. FRIEDMAN: Thank you very much. The
11 next--I hope the others are shorter.
12 The next one is Witness sequestration. We
13 have instructed our Witnesses--because of the Witness
14 sequestration order, we have instructed our Witnesses
15 not to watch the video feed until after the time of
16 their testimony in order to honor the Tribunal's
17 Procedural Order. We have asked for assurances from
18 our friends on the Respondent's side that they will
19 instruct their Witnesses as well accordingly. We have
20 not received a response to that.
21 PRESIDENT FERNÁNDEZ ARMESTO: Mr. Friedman,
22 we are all experienced lawyers and experienced members
[Page 20]
1 of the arbitration community. We know nowadays that
2 sequestration when you have LiveNote or, as in this
3 case, where you have the internet, it goes without
4 saying that Witnesses should not--sequestered
5 Witnesses should not have access either to the
6 LiveNote, nor to the internet; otherwise, the
7 sequestration is purely formal. They are not in the
8 room, but they are de facto following the procedure,
9 and the whole purpose of the sequestration is lost.
10 So, it goes without saying. I don't think I
11 have to remind anyone around this room. I think we
12 are all--we all know what "sequestration" means, and
13 I'm sure that the Republic of Perú and I'm sure that
14 Claimant will adhere to the ethical standards of
15 sequestration.
16 MR. FRIEDMAN: Yes. As I volunteered, we
17 have indeed instructed Gramercy's Witnesses to that
18 effect. We were hoping for the same assurance from
19 Perú, but I understand the President's expectation
20 that that has happened.
21 MR. HAMILTON: Mr. President, I'm sorry, but
22 this is more fake news. We've had emails about this.
[Page 21]
1 We have acknowledged it. It is so obvious, I don't
2 know why we are wasting the Tribunal's time (in
3 Spanish).
4 PRESIDENT FERNÁNDEZ ARMESTO: Very good.
5 Mr. Friedman, third point?
6 MR. FRIEDMAN: We have proposed that both
7 Parties refer in speeches to Bondholder Witnesses by
8 initials, rather than by names, as a simple way of
9 preserving confidentiality.
10 PRESIDENT FERNÁNDEZ ARMESTO: The Bondholders
11 who are appearing as Witnesses and the other
12 Bondholders?
13 MR. FRIEDMAN: Yes, the Bondholders who are
14 appearing as Witnesses, who have submitted Witness
15 Statements, simply to preserve their confidentiality;
16 again, because of the Transcript and the live feed.
17 We would simply want confirmation from--that that will
18 be honored.
19 PRESIDENT FERNÁNDEZ ARMESTO: Mr. Hamilton?
20 MR. HAMILTON: Again, Mr. President, we have
21 had multiple email exchanges. We understand that this
22 is the case. We are not blocking the names of these
[Page 22]
1 individuals, but we are going to respect the Decision
2 of the Tribunal to protect their identities. And
3 that's it. A hundred percent, this is obvious.
4 PRESIDENT FERNÁNDEZ ARMESTO: Great.
5 MR. FRIEDMAN: The last item is that, with
6 translations, there are some documents in the record
7 that are only in one language, and the part--the
8 practice of the Parties until now has been mixed, I
9 think. Sometimes documents and exhibits have been
10 submitted with translations as part of the exhibit;
11 sometimes they have been quoted in written submissions
12 in free translation.
13 What we propose to do is to continue that
14 practice through the Hearing, basically, of being able
15 to use free translation--there are a few in the
16 Slides, frankly, that we have prepared this
17 morning--or submit written copies of translations to
18 the Tribunal.
19 PRESIDENT FERNÁNDEZ ARMESTO: The Tribunal,
20 if we see any mistake in the translation, we will draw
21 your attention to that.
22 Very good.
[Page 23]
1 Any point of order to start for the Republic
2 of Perú?
3 MR. HAMILTON: No, Mr. President. We are
4 ready to start. Thank you very much. We are here in
5 goodwill.
6 PRESIDENT FERNÁNDEZ ARMESTO: Okay. Great.
7 So, we are going to proceed in that manner. In the
8 spirit of cooperation, we are going to start your
9 presentation of Claimant for their initial
10 presentation.
11 Mr. Friedman, do you have any idea how much
12 time you will need? I ask that because of a break, if
13 there will be a need for a break in between.
14 MR. FRIEDMAN: Yes. With respect,
15 Mr. President, we will use all our time, and I suspect
16 everybody will want a break at some point. We've
17 planned for where it might be appropriate, but, of
18 course, we are completely in your hands.
19 PRESIDENT FERNÁNDEZ ARMESTO: Okay. So,
20 except if I see some urgency or some request from our
21 court reporters or the interpreters, we will break
22 whenever you say. If I see that there is a need, you
[Page 24]
1 will please accept that I ask you for a break.
2 MR. FRIEDMAN: Absolutely.
3 PRESIDENT FERNÁNDEZ ARMESTO: And I see some
4 of your colleagues coming with a presentation. That
5 should be the power slide, and we will give it the
6 number H-1.
7 Very good. You have the floor, Mr. Friedman.
8 OPENING STATEMENT BY COUNSEL FOR CLAIMANTS
9 MR. FRIEDMAN: Thank you, Mr. President,
10 Members of the Tribunal. Good morning.
11 On behalf of Gramercy, we thank you for
12 convening this proceeding and devoting so much time
13 and attention to this case already and through the
14 course of the week to come.
15 Today marks the beginning of the end of
16 Perú's ability to sweep under the rug the debt that it
17 owes from its mass expropriation of millions of
18 hectares of land, now 40 to 50 years ago. That debt
19 had substantial value. It represented payment for
20 Perú's sweeping land redistribution program in which
21 it expropriated land the size of Portugal,
22 conservatively valued in an undisputed report at
[Page 25]
1 around $42 billion.
2 But, for decades, Perú has refused to pay
3 what it owes, and the reason for that is not because
4 Peruvian law wasn't sufficiently clear about the fact
5 that Perú had to pay the Bonds' current value. Since
6 2001, Perú's Constitutional Tribunal and Supreme Court
7 confirmed that proposition repeatedly.
8 It is not because there were serious
9 questions about how to achieve current value. Just
10 about everybody recognized that "real current value"
11 meant that you should update the principal for
12 inflation using the Consumer Price Index and add
13 interest.
14 It is not because there was no legal
15 framework for paying them. Bondholders could and did
16 always go to the Courts to get that value calculated
17 and ordered on the basis of bedrock constitutional
18 principles, the right to property, and the express
19 provision of the Civil Code that governs these kinds
20 of debts of value.
21 If the Government had simply accepted the
22 Constitutional Tribunal's 2001 directive to pay the
[Page 26]
1 Bonds' current value, competent officials acting in
2 good faith over several years surely could have
3 figured out how to devise and implement a fair,
4 transparent, and rational process that produced
5 current value and provided a global solution to the
6 Land Bonds debt
7 Instead, the Land Bonds have not been paid
8 simply because the Ministry of Economy and Finance
9 has, for decades, obstinately resisted the central
10 command of paying current value that its own
11 Constitutional Tribunal confirmed was a constitutional
12 imperative. It instead chose years of stonewalling,
13 delay, and putting its head in the sand, so the debt
14 grew to the point where they argued it had grown too
15 big to pay.
16 The genesis of this Arbitration, however,
17 concerns the Ministry of Economy and Finance's
18 attempts to not just continue stalling, but to
19 effectively wipe out the debt altogether for almost no
20 value.
21 In 2013, the Ministry seized a unique
22 opportunity to use false information that paying
[Page 27]
1 current value would bankrupt Perú to get the
2 Constitutional Tribunal, through shocking conduct, to
3 change the current value legal framework, and it
4 exploited, then, that opportunity to foist on
5 Bondholders its so-called "Bondholder Process." That
6 process is arbitrary and unlawful in design and
7 execution. It is a failure in practice, and it is
8 also manifestly unjust.
9 After five years of its vaunted Bondholder
10 Process, Perú has paid, in total, the princely sum to
11 all the Bondholders who have been paid of about
12 USD 450,000, with some Bondholders who endured it
13 receiving less than $1,000 each for the 50-year-old
14 expropriation of their land. It is, in the words of
15 one of those Bondholders, "a joke."
16 It did not have to be this way. Gramercy did
17 everything it could over many years to foster a
18 consensual solution. You will hear from Robert
19 Koenigsberger, Gramercy's founder and Chief Investment
20 Officer. From the day Gramercy invested in
21 Perú--through today, even--Gramercy has held out its
22 hand to work with Perú to reach a productive solution
[Page 28]
1 to this decades-old debt. Its approach was informed
2 by Mr. Koenigsberger's long experience in working with
3 sovereigns with far less capacity to pay and much more
4 intractable issues, including Argentina, Nicaragua,
5 Russia, and other countries, and with his experience
6 with the Brady Plan in Perú that helped revitalize
7 Perú's broken economy and put it on the path to
8 growth.
9 As it had done in other countries, Gramercy's
10 hope was always that, in concert with other
11 Bondholders and the Peruvian Government, it would be
12 able to forge a fair and practical solution to heal
13 this scar on the nation's conscience.
14 PRESIDENT FERNÁNDEZ ARMESTO: You may wish to
15 slow slightly because you are being interpreted as you
16 are going. If you can make some pauses, I'm sure the
17 interpreters will appreciate that.
18 MR. FRIEDMAN: Thank you, Mr. President.
19 Thus, it is not Gramercy, but Perú's,
20 obstinate refusal to even sit down in a room and meet
21 with Mr. Koenigsberger, his colleagues, and other
22 Bondholders that has brought us to this point.
[Page 29]
1 Instead of even trying to find common ground,
2 Perú's former Minister of Economy and Finance and
3 Prime Minister and President, Pedro Pablo Kuczynski,
4 told the press: "I don't think we owe them anything.
5 It is that simple."
6 Justice Urviola, who we will talk about more
7 later, the Chief Justice of the Constitutional
8 Tribunal who cast the decisive vote for the tainted
9 July 2013 Order, echoed that sentiment just last year.
10 He rebuffed a congressional investigation into the
11 shocking circumstances in which that Decision was
12 issued by claiming that behind it are the interests of
13 the "Gramercy Vulture funds," who acted with the sole
14 purpose of harming the Peruvian State by winning an
15 arbitration. He warned the Peruvian Congress not to
16 lift his immunity from prosecution because of the
17 enormous damage that a decision that only favored the
18 Vulture funds would do to Perú. He revealingly added:
19 "We will not allow it."
20 That kind of animus against Gramercy
21 permeates Perú's defense, but it is not and cannot be
22 an answer to Perú's Treaty breaches.
[Page 30]
1 In the rest of our time today, Ms. Popova
2 will address Perú's objections to jurisdiction and
3 admissibility. I will then address the Merits.
4 Mr. Riehl will address remedies, and I will briefly
5 conclude.
6 PRESIDENT FERNÁNDEZ ARMESTO: Thank you.
7 Ms. Popova?
8 MS. POPOVA: Thank you, Mr. President.
9 Perú has raised every conceivable objection
10 to jurisdiction and admissibility: Lack of personal,
11 material, and temporal jurisdiction; no consent; and,
12 even if all of those exist, abuse of process.
13 I will be comparatively brief this morning,
14 because you have our recent Rejoinder, but you'll see
15 that Perú's objections all have one thing in common:
16 They do not rely on what the text of the Treaty
17 actually says. They posit that, despite what it says,
18 Gramercy should somehow be precluded from relying on
19 it. None of these attempts to rewrite the Treaty have
20 any merit.
21 At the risk of upending the classical order,
22 I will begin by addressing why the Land Bonds are
[Page 31]
1 investments within the meaning of the Treaty, and then
2 why Gramercy is an investor.
3 Now, the Treaty defines an investment
4 as: "Every asset that an investor owns or controls,
5 directly or indirectly, that has the characteristics
6 of an investment."
7 It then identifies three such
8 characteristics, but it does not make them either
9 mandatory or cumulative; including, it says, such
10 characteristics as "the commitment of capital or other
11 resources, the expectation of gain or profit, or the
12 assumption of risk."
13 It then adds context to that definition by
14 including a list of forms that an investment may take,
15 which expressly include, among other things, bonds,
16 debentures--rendered in the Spanish as
17 "obligaciones"--other debt instruments, and loans.
18 And then in the footnotes, the Treaty
19 identifies specific assets that do or do not
20 constitute investments. It says some forms of
21 debt--like bonds--are more likely to be investments,
22 while short-term debts from the sale of goods and
[Page 32]
1 services are less likely. It also specifically
2 excludes two kinds of assets that would otherwise
3 qualify as investments under the broad definition of
4 the Treaty. The first is State-to-State loans between
5 the U.S. and Perú, and the second is local court
6 judgments.
7 Then, in Annex 10-F, entitled "Public Debt,"
8 the Treaty states that the purchase of debt issued by
9 a Party entails commercial risk, and it goes on to
10 regulate what claims can be brought about defaults and
11 restructurings and how.
12 Now, this--as the structure of the Treaty
13 shows, the Treaty was negotiated under what is known
14 as the negative list framework. Perú has not denied
15 this, and, indeed, its own summary of the Treaty
16 negotiations confirm that fact.
17 You'll hear next week from Ambassador Peter
18 Allgeier. He was the Deputy U.S. Trade Representative
19 with responsibility for all trade agreements in the
20 western hemisphere and ultimate responsibility for the
21 negotiation of the Andean FTA, from which the
22 U.S.-Perú TPA derives.
[Page 33]
1 Ambassador Allgeier explains that the
2 negative list approach means that, if the State
3 Parties had intended to exclude certain types of asset
4 from the definition of an "investment," it would have
5 been necessary to include specific exclusions.
6 And that's, indeed, what we see in the
7 footnotes of the Treaty in the definition of the
8 "investment" that we just looked at. The Treaty also
9 contains schedules and annexes at the end of each
10 chapter which list the Measures that each Party wants
11 to exclude from the scope of the Treaty, perhaps
12 because they might be politically sensitive for
13 it--for example, bull fighting for Perú, or tuna
14 fishing for the U.S.
15 And that is also the mechanism that Perú used
16 in its Model BIT and in several other Investment
17 Treaties in which Perú, unlike in this Treaty,
18 expressly excluded public debt as a form of covered
19 investment.
20 So, taken together, these Treaty provisions
21 and the very structure of the Treaty confirm that
22 long-term public debt, of which bonds are a
[Page 34]
1 quintessential example, is a form of investment that
2 was covered under this TPA.
3 Perú's own summary of the Treaty negotiations
4 explains that the Treaty's definition of "investment"
5 is "broad. It covers all possible forms of assets";
6 that it "contains an illustrative, not delimited, list
7 of elements, which include, among others, debt
8 instruments, including public debt."
9 Now, we believe that there is no dispute on
10 four basic propositions:
11 First, that the Land Bonds are bonds.
12 Second, that the Land Bonds are sovereign
13 bonds, in that they were issued by Perú.
14 Third, that sovereign bonds are generally a
15 kind of covered investment. Perú appears to accept
16 that what it calls "modern or global sovereign bonds"
17 do qualify as investments within the Treaty's terms.
18 And fourth and finally, that the Treaty does
19 not expressly exclude these Land Bonds from being
20 investments the way it does other kinds of public debt
21 and other kinds of covered assets.
22 So, Perú's objection that these Land Bonds
[Page 35]
1 are not covered investments appears to depend on some
2 kind of extra-textual tacit distinction about the
3 nature of these bonds, as opposed to all other kinds
4 of sovereign bonds.
5 And so, Perú places great emphasis on its
6 submissions on how the bonds were "configured," it
7 says. It says they weren't marketed abroad; they
8 didn't contain Foreign Dispute Resolution Clauses;
9 that they weren't issued in a foreign currency; that
10 they related to another era in Perú's historical
11 development.
12 Now, all of these things might be accurate
13 factual observations, but there's no basis for turning
14 them into mandatory jurisdictional requirements. They
15 don't make the Land Bonds any less of a debt. They
16 don't make them any less of a bond. They don't make
17 them any less an asset that otherwise has all of the
18 characteristics of an investment. And the Treaty
19 makes no such distinctions at all.
20 For example, it makes no distinction based on
21 the vintage of the investment. It protects
22 old-fashioned investments just like "modern" ones, it
[Page 36]
1 protects existing investments just like future ones,
2 and it has no restrictions on how the investment was
3 marketed or to whom. It also does not exclude what
4 Perú calls "speculative" investments. Quite to the
5 contrary, it identifies risk and the expectation of
6 gain as defining features of an investment.
7 It also recognizes that assets that are even
8 more speculative than a 30-year Government bond can be
9 forms of investment; things like shares, futures,
10 options, derivatives. And similarly, the Treaty does
11 not exclude investments that were made in a local
12 currency or governed by local law. In fact, it
13 expressly includes rights conferred pursuant to
14 domestic law, as well as contracts, without any
15 limitation of governing law.
16 Now, prior Investment Decisions involving
17 other kinds of sovereign debt don't help Perú, for the
18 reasons we've said in our papers. Perú invokes
19 several cases which will be familiar to this Tribunal,
20 and all of those cases except Postova found that there
21 was, indeed, jurisdiction. And in Postova, of course,
22 the Treaty did not expressly include as forms of
[Page 37]
1 investment bonds or public debt. It didn't have an
2 express annex on public debt.
3 So, if Perú's laundry list of domestic touch
4 points were really what the Treaty meant about the
5 kinds of covered investments, the Treaty would have
6 looked very different from the way that it does.
7 The Treaty, of course, does not contain any
8 of these limitations. It does, however, identify
9 three features that the State Parties in fact
10 considered relevant. It identifies the commitment of
11 capital, the expectation of profit, and the assumption
12 of risk. And there's no question that the Land Bonds
13 have all of those characteristics.
14 First, Gramercy committed over $32 million in
15 capital to buy the Bonds. It incurred substantial
16 management and opportunity costs, and it paid
17 insurance and storage fees. But it committed other
18 resources, too. It invested its know-how, its
19 contacts, its expertise, its time. It also prepared
20 several thoughtful proposals for a bond swap that
21 could convert Perú's Land Bonds debt into new,
22 productive investments, which it presented to the
[Page 38]
1 Government several times.
2 Second, by investing in the Bonds, Gramercy
3 also had an expectation of profit. It expected that
4 Perú would restructure and pay its Land Bonds debt, as
5 it had done with its Brady Bonds and its Paris Club
6 obligations. If that didn't happen, Gramercy expected
7 that it would be able to go to a Court and get a
8 decision awarding the Land Bonds' current value,
9 consistent with the unequivocal decisions of the
10 Constitutional Tribunal and the Supreme Court.
11 And, finally, Gramercy also assumed risk.
12 The Treaty itself expressly recognizes that the
13 purchase of debt issued by a Party entails commercial
14 risk. Now, the fact that Gramercy raised money from
15 third parties to invest in the bonds, or that it
16 bought them at a discount to their inherent value,
17 doesn't mean that buying Peruvian debt was totally
18 risk-free.
19 Perú doesn't meaningfully challenge any of
20 this evidence. Instead, it argues that the Tribunal
21 should apply the Salini factors as mandatory
22 jurisdictional requirements and then hang its hat on
[Page 39]
1 the fourth Salini criterion to deny jurisdiction,
2 allegedly because Gramercy's purchase of the Land
3 Bonds did not contribute to Perú's economic
4 development.
5 Now, I will not dwell on the trials and
6 tribulations of the fourth prong of Salini, which we
7 set out in our papers. Many Tribunals, of course,
8 have refused to adopt it, most recently in Seo and
9 South Korea, under the identical definition of
10 "investments" in the U.S.-Korea FTA. And, of course,
11 as Ambassador Allgeier puts it in his Reports, "such a
12 requirement would simply be too vague to be workable,
13 and it is contrary to the text of this agreement."
14 Indeed, Perú's own statements about the
15 Treaty tend to confirm that view. Neither Perú's nor
16 the U.S.'s public descriptions of the kinds of assets
17 that it would cover have any mention of a condition
18 that an asset would only be covered if it also
19 contributes to the State's economic development.
20 In any event, Gramercy's investment did, in
21 fact, have the characteristic of contributing to
22 Perú's economy. The whole point of the Land Reform
[Page 40]
1 from which these Land Bonds emerged was, of course, to
2 stimulate Perú's industrialization, its socioeconomic
3 development, and Gramercy's investment in the Bonds
4 had benefits for Perú as well.
5 On the microeconomic level, as
6 Mr. Koenigsberger explains, Gramercy injected millions
7 of dollars into the local economy. It created a
8 secondary market for the stagnated debt. It provided
9 much-needed liquidity to Peruvian nationals, and that,
10 in turn, had multiplier effects of improving their
11 standard of living generally.
12 Gramercy's Witness, Ms. G, confirms those
13 benefits. She describes why she sold her Bonds to
14 Gramercy and how lucky she's been compared to other
15 Bondholders who went through the Government's
16 Bondholder process, only to receive far less after
17 many years than what Gramercy was offering, or even
18 who died without receiving anything at all.
19 She could have told you about the
20 microeconomic effects of Gramercy's investment
21 firsthand, but Perú chose not to call her for
22 cross-examination.
[Page 41]
1 Now, Perú also does not dispute that, if it
2 had accepted Gramercy's various proposals for a
3 restructured bond swap, it would have benefited from
4 what Mr. Koenigsberger calls "the virtuous shock" of
5 cleaning up old debt. Professor Rodrigo
6 Olivares-Caminal, who you will also hear this week, is
7 an expert in sovereign finance, and he confirms those
8 benefits, too.
9 Gramercy studied and prepared several such
10 proposals, outlining them in a presentation that it
11 sent to President García in May 2009. That
12 presentation summarized the benefits of the swap to
13 Perú. It had a whole section on the benefits of the
14 exchange for the country, on the positive impact on
15 investment and economic growth for Perú.
16 So, it's really no answer for Perú to say
17 that Gramercy's hope for a solution to the Bonds
18 didn't pan out, and so it didn't actually contribute
19 to the Peruvian economy. Perú's breaches, of course,
20 is what prevented that from happening. If a State
21 unlawfully expropriates a Mining License before a
22 shovel has hit the ground or a factory before a single
[Page 42]
1 job has been created, that doesn't mean that those
2 assets are not the kinds of assets that investment
3 treaties protect as investments.
4 To see the absurdity of Perú's argument, just
5 consider a hypothetical. Imagine Gramercy had owned a
6 factory outside of Lima that manufactures typewriters.
7 Imagine Gramercy had bought it from a Peruvian owner,
8 paid in Peruvian soles under a contract that provided
9 for resolution of disputes under Peruvian law, before
10 Peruvian Courts, and for which there had been no
11 international tender and no marketing to foreign
12 investors whatsoever. Imagine Perú had then
13 expropriated the factory the very next day, before the
14 factory paid any taxes or created any jobs or built
15 any typewriters. Would you say that that factory is
16 not an investment? There is simply no basis for
17 grafting limitations onto the text of the Treaty that
18 just are not there.
19 Now, your analysis could stop there because
20 that is enough to dismiss Perú's objection to material
21 jurisdiction, but in this case, you have even more.
22 You have lots of evidence about the context in which
[Page 43]
1 this Treaty was negotiated, and that evidence dispels
2 any suggestion that there could possibly have been
3 that the State Parties secretly intended to exclude
4 the Land Bonds but simply forgot to do so expressly.
5 Perú's Land Reforms were very much on the
6 State Parties' radar during the negotiation of the
7 Treaty in at least three ways: First, what the U.S.
8 Congressional Research Service called "one of the most
9 important issues" during the negotiation of the Treaty
10 was Perú's expropriation of U.S. investors, including
11 U.S. companies and citizens that had been victims of
12 Perú's Land Reform.
13 As part of the U.S.'s Andean Trade Preference
14 Program, Perú had committed to resolve these disputes
15 in order to qualify for trade preferences. Ambassador
16 Allgeier can tell you more about that this week, and,
17 as he explains, making progress on resolving them was
18 a condition for Treaty negotiations to begin with
19 Perú, and Perú's slow progress in resolving them
20 almost torpedoed Congressional approval of the Treaty
21 in the first place.
22 Second, several of the Treaty's negotiation
[Page 44]
1 rounds expressly dealt with the kinds of public debt
2 that would be covered under the Treaty and the kinds
3 of claims that could be made about them and how.
4 Now, Perú wanted to exclude all forms of
5 public debt, the U.S. wanted to include them, and
6 their agreed solution was to expressly exclude only
7 state-to-state debt and to regulate claims about other
8 kinds of public debt through the public debt annex.
9 And we have in the record these negotiation summaries
10 that were prepared and issued by MINCETUR, by Perú
11 itself, describing the Parties' negotiation positions,
12 what was conceded, what was obtained, and what the
13 ultimate solution was.
14 Third, at the same time as these
15 negotiations, Perú's Highest Courts were issuing
16 several Decisions reminding the Government that it had
17 to pay the Land Bonds at their properly updated
18 current value, and there were various reports and
19 draft bills, including R-257, that were being prepared
20 at that time to create a global administrative
21 solution for paying them.
22 Now, any one of these three narratives would
[Page 45]
1 independently preclude a finding that the State
2 Parties intended to carve the Bonds out of the Treaty
3 but simply forgot. All three of them taken together,
4 even more so. Given this context, it is not only
5 implausible, it is simply impossible that the U.S. and
6 Perú genuinely intended to exclude the Land Bonds and
7 Perú's Land Reform from the scope of the Treaty but
8 somehow forgot to do so.
9 Now, Perú's objections to personal
10 jurisdiction also require imposing limitations on the
11 Treaty that just are not there. Here's how the Treaty
12 defines "investors": "A national enterprise of a
13 party that attempts through concrete action to make,
14 is making, or has made an investment in the territory
15 of another party."
16 And the Treaty's definition of "investment"
17 is also relevant because it says that "an investment
18 is an asset that an investor owns or controls directly
19 or indirectly."
20 Now, there is no question--there never has
21 been--that both GFM and GPH are U.S. companies. There
22 is also no question that GPH owns and GFM controls the
[Page 46]
1 Land Bonds. And Perú is not invoking the Denial of
2 Benefits clause in the Treaty and nor could it. And
3 nothing in the Treaty excludes investment firms or
4 asset managers from being investors simply because of
5 their line of business.
6 Instead, Perú seems to argue that the fact
7 that Gramercy owns and controls the Bonds is somehow
8 not enough for it to have made an investment. Now,
9 here, too, Perú's argument has no legal basis and it
10 has absurd implications. There is no magic to the
11 word "made." The ordinary meaning of "to make" is
12 just to "cause something to exist" or "to give rise to
13 it." And, here, the Treaty covers not just ownership
14 of investment, but also control, and not just direct
15 ownership or control, but indirect forms too.
16 As Mr. Koenigsberger explains, between them,
17 GPH and GFM not only have both ownership and control,
18 but they are the only entities who do.
19 Against that evidence, Perú has two
20 arguments, neither of which survives scrutiny.
21 First, it says that in this Treaty, "made" an
22 "investment" means something special, that it requires
[Page 47]
1 some form of elusive "active contribution" that would
2 mean something more than what Gramercy did. Now, Perú
3 gives no support for that limitation and no
4 explanation of why it wouldn't be met on the facts of
5 this case, even if it existed. Neither Professor
6 Reisman nor Mr. Herrera endorse this theory, and
7 they're right, because it makes no sense.
8 The reference to "concrete action" in the
9 Treaty, which appears to give rise to this argument,
10 which we heard for the first time only in their
11 Rejoinder, is just a misreading of the text, and the
12 concrete action quite obviously relates to someone who
13 is attempting to make an investment, not someone who
14 already has made one.
15 This is also not a case about a passive
16 investor who inherits an investment with no effort
17 whatsoever. As Mr. Koenigsberger, again, explains,
18 Gramercy developed a strategy to design a global bond
19 swap that would resolve Perú's Land Bonds debt once
20 and for all. It would make Perú attractive for other
21 investors, and Gramercy executed on that strategy by
22 identifying and acquiring a critical mass of bonds, by
[Page 48]
1 developing restructuring proposals, and trying to turn
2 them into reality through dogged efforts to engage
3 with the highest levels of Peruvian Government.
4 So whatever the additional level of active
5 contribution Perú seeks to infer, there can be no
6 question at all on this record that Gramercy plainly
7 mattered.
8 Second, Perú, again in its Rejoinder, says
9 that Gramercy doesn't have "standing" because third
10 parties, Gramercy's clients, also have an indirect
11 interest in the Bonds. This argument, too, is
12 confused. The fact that Gramercy has clients who
13 invest their money in the funds and, thus, have in
14 some sense an indirect economic interest in the
15 performance of those funds, doesn't mean that Gramercy
16 did not make an investment in Perú.
17 As Mr. Koenigsberger observes, Gramercy's
18 clients have neither title to nor control over the
19 Bonds. Perú's logic would disqualify any company from
20 being an investor simply because it has shareholders
21 or lenders or other kinds of stakeholders who in some
22 way have an indirect economic interest in the
[Page 49]
1 performance of its downstream assets. And, once
2 again, the Treaty would have looked very different if
3 that is really what these Parties intended to do.
4 Perú's next set of objections are both more
5 technical and more inconsequential.
6 PRESIDENT FERNÁNDEZ ARMESTO: We will try to
7 let you speak and at the end we will address
8 questions. I think it's better. Please.
9 MS. POPOVA: Okay, Mr. President. Happy to
10 be of assistance.
11 The first of these technical objections is an
12 objection on the basis of the waiver precondition to
13 submission of claims under Article 10.18. This
14 objection is only relevant because of Perú's second
15 inconsequential objection, which is that GFM's claims
16 were submitted late.
17 Now, this is what Article 10.18 actually
18 requires: Perú's waiver objection has no impact on
19 the case for two reasons. First, there is no dispute
20 that both of the Claimants here have, in fact, validly
21 submitted their claims. Every one of Gramercy's three
22 Notices of Arbitration was accompanied by the
[Page 50]
1 Claimants' written waiver of any right to initiate or
2 continue the proceedings with respect to the Measures
3 that they allege were a breach.
4 The only question that Perú raises here is
5 the date on which they should be deemed to have first
6 done so, whether that was in June or July or August of
7 2016.
8 Second, Perú admits that GFM submitted its
9 claims on June 2, and it appears to make no separate
10 time bar objection to GFM's claims as opposed to
11 GPH's. So, this waiver objection is really a moot
12 point. It has no impact whatsoever on the scope of
13 the claims that you will ultimately need to decide.
14 That being said, all that Perú appears to be
15 disputing here is on which one of three dates GPH
16 commenced arbitration. Now, GPH, of course, validly
17 submitted its claims on June 2, 2006. The waiver in
18 that Notice of Arbitration had a reservation in case
19 the Tribunal finds its claims inadmissible or denies
20 jurisdiction. And the Renco Decision,
21 notwithstanding, that waiver complies with both the
22 terms and the purpose of Article 10.18.
[Page 51]
1 In any event, even if you are not with us on
2 that, just days after the Renco Decision, on July 18,
3 GPH submitted a second waiver without any
4 reservations, so there could be no issue about Renco,
5 and we say it validly submitted its claims on that
6 date, even if you follow Renco, which we say you
7 should not.
8 Now, at the time, GPH was a party to court
9 proceedings in which it sought a court-ordered Expert
10 valuation for its Land Bonds as many Bondholders had
11 been forced to do. Those proceedings were not with
12 respect to any measure alleged to constitute a breach
13 of the Treaty, so they didn't need to be waived or
14 discontinued.
15 (Interruption.)
16 MS. POPOVA: But given Perú's continuing
17 objections and to minimize the points of dispute, GPH
18 then withdrew those proceedings, too, and it submitted
19 a further Amended Notice of Arbitration on August 5,
20 2016.
21 Now, Perú seems to say that even that
22 material waiver was not actually effective until some
[Page 52]
1 days later, maybe August 10, because that's when the
2 Peruvian Courts accepted the withdrawal of petitions.
3 I submit to you that that again makes no sense. It's
4 not what the Treaty says, and it would be dangerous
5 because it would make a Claimant's ability to submit
6 its claims dependent on the conduct of the Respondent
7 State. And, again, unsurprisingly Perú offers no
8 authority whatsoever for that interpretation of the
9 waiver requirement in the Treaty.
10 Now, June 2, 2016, is the principled and the
11 correct choice between these three dates, but I will
12 submit to you that it makes no difference because in
13 all of these cases, Gramercy submitted its claims
14 within three years, and Perú's objections on this
15 score fail as well.
16 The Treaty is clear that the time bar runs
17 from when the Claimant has actual or constructive
18 knowledge of both the breach and the loss or damage.
19 Perú says that Gramercy's claims all derive from the
20 July 16, 2013, Constitutional Tribunal Order. Now,
21 that's not actually true, but even on that case, all
22 of GFM's claims are within the three-year period
[Page 53]
1 because it submitted its claims on June 2, 2016, less
2 than three years after the CT Order.
3 And even if you find that GPH only submitted
4 its claims sometime later, only in August, that would
5 still not make any of GPH's claims inadmissible. The
6 only event that would fall outside that window is the
7 mere issuance of the July 16, 2013, Order. But, of
8 course, as we've explained in our Briefs, Gramercy
9 could not possibly know from the face of that decision
10 itself everything that would happen later. It could
11 not know that Perú had committed the breaches it now
12 claims, or that Gramercy had suffered the losses that
13 it claims in this Arbitration.
14 The entire Bondholder process, of course,
15 including Gramercy's inability to go to Peruvian
16 Court, derived from the January 2014 Supreme Decrees,
17 and the gross irregularities that led to the July 16
18 Order weren't uncovered until 2015 and much later.
19 So, really the only question is whether
20 Gramercy did or should have appreciated that Perú had
21 expropriated its investment and thwarted its
22 entitlement to current value merely from the face of
[Page 54]
1 the July 16 Order itself. And you could not reach
2 such a conclusion from reading the Decision itself, as
3 I'm sure that you will.
4 You also have testimony from
5 Mr. Koenigsberger and documents in the record that
6 show you how Gramercy was interpreting that Decision
7 at the time that it received it, and the months of
8 uncertainty in which it remained.
9 Mr. Koenigsberger explains in his statements
10 that that Order came as a surprise, that the Decision
11 simply did not provide enough information for Gramercy
12 to assess its impact. Gramercy's contemporaneous
13 emails confirm that fact. They show that Gramercy
14 believed that the Decision was an opening gambit, that
15 it would have to wait for the MEF to issue the Decrees
16 that the Constitutional Tribunal ordered MEF to issue
17 before it would know what Perú really intended to do.
18 And Gramercy believes that that was an opportunity
19 again for negotiation with the MEF.
20 And this sort of uncertainty about what the
21 Order meant or what the State would do, it's just not
22 the kind of knowledge that can trigger the Treaty's
[Page 55]
1 time bar. The recent decisions in Resolute Forest
2 Products and in Mobil Investments, for example, which
3 Perú has never addressed, confirm that conclusion.
4 In its Rejoinder, Perú invoked a letter that
5 Mr. Koenigsberger had written to President García in
6 December 2013, and the argument appears to be that
7 because Gramercy reserved its rights under the Treaty
8 in this December letter, that that shows it had
9 knowledge of breach and loss several months earlier.
10 In fact, that cannot be true. The fact that
11 one writes a letter reserving rights in December
12 cannot establish knowledge of breach and loss many
13 months before that.
14 Moreover, the letter, in fact, corroborates
15 Gramercy's conviction that there was still scope for
16 negotiating a debt restructuring with the MEF.
17 Earlier in the letter, Mr. Koenigsberger, in fact,
18 says "a combination of factors has now created a
19 historic opportunity for Perú to resolve this
20 situation once and for all and to do so in a way that
21 benefits all the Parties involved." And after
22 reserving rights, he ends, "at the same time, we hope
[Page 56]
1 you can appreciate the sincerity with which we are
2 sending this letter and our clear preference to help
3 Perú find a consensual nonconflictive solution to the
4 difficult situation of the Land Reform Bonds."
5 Perú's argument that the Tribunal does not
6 have temporal jurisdiction suffers from the same
7 confusion of what Gramercy's claims are and what the
8 Treaty's language says. The Treaty provides that it
9 does not apply in relation to "any act or fact that
10 took place or any situation that ceased to exist
11 before the entry into force of this Agreement," which
12 is February 1, 2009.
13 Perú's temporal breach argument appears to be
14 that Gramercy's claims for breaches arising out of
15 conduct in 2013, '14, and later are, in fact, the same
16 dispute as the underlying Land Reform expropriation in
17 the 1960s and '70s, and so they are temporally barred.
18 This objection is also conceptually flawed in
19 a number of ways: First, Gramercy's claims are, of
20 course, not that Perú breached the Treaty by
21 expropriating land in the 1970s. As you can see on
22 this timeline, all of the acts or facts to which
[Page 57]
1 Gramercy seeks to apply the Treaty occurred well after
2 February 1, 2009.
3 Second, this Treaty does not determine
4 jurisdiction by whether the dispute that was submitted
5 for Decision is the same dispute as the dispute that
6 had already arisen before the Treaty came into force,
7 as some treaties do. Instead, it links temporal
8 jurisdiction by when the acts or facts that took
9 place, whether they occurred before the entry into
10 force of the Agreement or not.
11 And even in Perú's argument that the dispute
12 is about Perú's nonpayment of the Bonds at their
13 current value, well, that situation did not cease to
14 exist before the entry into force of the Treaty.
15 Again, a point that Perú has never addressed.
16 This brings us to Perú's final argument. And
17 this is one that really infuses all of its objections
18 to jurisdiction, that even though Gramercy is a
19 qualifying investor with a qualifying investment that
20 timely and validly submitted its claims, Gramercy
21 should be precluded from exercising its Treaty rights
22 that it undoubtedly has on account of an alleged Abuse
[Page 58]
1 of Process.
2 This Tribunal will appreciate that an
3 argument of Abuse of Process amounts to one of bad
4 faith and that the standard is high.
5 Perú's arguments come nowhere near that high
6 threshold. The relevant facts are, again, not in
7 dispute. There is no change of nationality of the
8 investor. GPH and GFM are, and they always have been,
9 U.S. investors. And the timing itself disproves
10 Perú's claims. Gramercy didn't buy the Land Bonds
11 after Perú breached the Treaty, but seven years
12 before. And it commenced this Arbitration 10 years
13 after it invested.
14 As Mr. Koenigsberger had explained in detail,
15 this Arbitration was Gramercy's last resort. It was
16 not its primary goal. Gramercy invested for the
17 purpose of recovering the real value of its Bonds by
18 catalyzing an agreement on a fair and comprehensive
19 solution that would benefit both Bondholders and Perú,
20 which Gramercy believed could really happen through a
21 bond swap proposal like it had done in other
22 countries.
[Page 59]
1 And this wasn't just posturing. The record
2 shows that Gramercy carried through on that investment
3 strategy. I'm about to show you a confidential
4 document, so I would kindly ask the Non-Disputing
5 Parties to leave the room and the feed to be
6 interrupted.
7 (End of open session. Attorneys' Eyes Only
8 information follows.)
[Page 60]
[Redacted]
(End of Attorneys' Eyes Only session.)
[Page 61]
1 MS. POPOVA: Gramercy made several proposals
2 to Perú in line with that plan, which Perú does not
3 even mention in its papers. For example, In May 2009,
4 it sent President García its detailed proposal for
5 that bond swap that it thought would achieve a
6 definitive and constructive solution to the Land
7 Bonds.
8 In June 2009, it submitted a similar proposal
9 to the Agrarian Commission of Perú's Congress, which
10 was considering legislative proposals to do just that
11 at the time. And Gramercy continued advocating for
12 this kind of solution even in late 2013 and even again
13 after the arbitrary 2014 Supreme Decrees.
14 Yet, again, Perú does not challenge any of
15 this evidence, and nor could it. Its entire Abuse of
16 Process argument appears to be that Gramercy knew that
17 a Treaty had been signed that might protect its
18 investments if everything didn't go to plan and that
19 through this Arbitration Gramercy is trying to take
20 advantage of remedies that are foreclosed to Peruvian
21 Bondholders.
[Page 62]
1 This is one example of what they say in their
2 papers.
3 Relying on a Treaty to make an investment is
4 not abusive. It's the opposite. It's the intended
5 effect of investment treaties in the first place.
6 And, again, the fact that Nationals do not have claims
7 against their home states under an investment treaty
8 is also not abusive. It's an inherent feature of the
9 system.
10 So, it is not abusive that Perú must answer
11 for its arbitrary and expropriatory conduct before
12 this Tribunal.
13 If anything is abusive, it's that Perú has
14 not done right by its own thousands of Peruvian
15 Bondholders who have no effective remedy at all and
16 who today have scraps of paper when they should have
17 farms and land.
18 You have statements in the record from some
19 of these people whose families had their livelihoods
20 and futures taken away from them. They won't be able
21 to tell their stories this week, so I encourage you to
22 read those statements.
[Page 63]
1 Even today, Mr. Koenigsberger continues
2 hoping that Perú will do the right thing by those
3 Bondholders. So far, Perú has chosen not to handle
4 its Land Bonds debt in a transparent, consensual,
5 responsible manner like so many other sovereigns have
6 done.
7 As Mr. Friedman will now explain, it has
8 chosen to unlawfully wipe out that debt, in violation
9 of the Treaty and the elementary notions of justice
10 that it reflects.
11 PRESIDENT FERNÁNDEZ ARMESTO: Thank you,
12 Ms. Popova, and we give the floor to Mr. Friedman.
13 MR. FRIEDMAN: Thank you, Mr. President.
14 As I turn to the merits of the case, I will
15 concentrate during these remarks mostly on the facts,
16 but at the beginning, I say a few preliminary words
17 about the law.
18 Gramercy's first claim, of course, as you
19 know, is for its expropriation. Article 10.7 of the
20 Treaty prohibits a party from expropriating an
21 investment, except in very limited circumstances,
[Page 64]
1 namely for a public purpose in a nondiscriminatory
2 manner and upon payment of prompt, adequate, and
3 effective compensation.
4 The Treaty expressly recognizes that a
5 measure can be expropriatory, even if there has been
6 no formal transfer of title or outright seizure, so
7 long as it has the effect equivalent to direct
8 expropriation. In other words, it recognizes indirect
9 expropriations.
10 It is, of course, settled law and not, I
11 think, seriously disputed that an indirect
12 expropriation occurs when the effect is significant or
13 substantial deprivation of the value of the
14 investment.
15 Perú doesn't dispute that, but it seeks to
16 evade liability by arguing that it is actually,
17 through its Bondholder process, imparted value to
18 these Bonds where previously there was none. We will
19 show that that's false in just a moment.
20 Before I get to that, though, I just want to
21 address one argument that Perú made for the first time
22 in its Rejoinder, based on a misreading of Annex 10-B
[Page 65]
1 of the Treaty.
2 The Annex states that, "except in rare
3 circumstances, nondiscriminatory regulatory actions by
4 a party that are designed and applied to protect
5 legitimate public welfare objectives, such as public
6 health, safety, and the environment, do not constitute
7 an indirect expropriation."
8 In its Brief, Perú cites this language but
9 conveniently omits the words from this provision,
10 "such as public health, safety, and the environment,"
11 to create what it claims is a presumption against
12 expropriation.
13 Without citing any authority, Perú
14 essentially argues that as long as the State has
15 articulated some justification for its expropriatory
16 measure, that measure is unimpeachable or at least
17 strongly presumptively okay. But that is a gross
18 misreading of the Treaty.
19 Every expropriating State articulates some
20 justification, some purpose that it claims to have for
21 its government acts. So Perú's construction would
22 deprive the expropriation clause of any real meaning
[Page 66]
1 and allow this public welfare exception to swallow the
2 rule.
3 In any event, as you'll see, factually Perú's
4 measures were not designed and applied to protect
5 legitimate public welfare objectives, such as public
6 health, safety, and the environment. They have
7 nothing to do with any of those activities. And as we
8 will show, they were intended, in fact, to extinguish
9 Perú's Land Bonds debt and compromise on the right to
10 have that debt paid at current value.
11 Gramercy's second claim is that Perú's
12 actions violate the Minimum Standard of Treatment in
13 violation of Article 10.5 of the Treaty.
14 Article 10.5 imposes on Perú the obligation
15 to accord Gramercy "treatment in accordance with the
16 customary international law, including fair and
17 equitable treatment, and full protection and
18 security." And this Minimum Standard of Treatment
19 includes the obligation not to deny justice and
20 requires that Perú act in accordance with the
21 principle of due process embodied in the principal
22 legal systems of the world."
[Page 67]
1 The Minimum Standard of Treatment is a
2 dynamic and multifaceted standard that requires an
3 assessment of the facts as a whole. As Professor
4 Reisman, the Respondent's Expert in this case has
5 argued in his academic writings, it is "an evolving
6 concept, whose contents overlap with or are congruent
7 with the fair and equitable treatment standard as it
8 has been interpreted by international investment
9 tribunals."
10 While not subject to the narrow and
11 reductionist approach Perú advocates, this standard
12 has certain frequently recognized dimensions or
13 manifestations, some of which are expressly mentioned
14 in the Treaty language and others of which have been
15 elaborated in cases upon which both Parties rely in
16 their papers. These include the protection of an
17 investor's legitimate expectations, the prohibition
18 against arbitrary conduct, and the prohibition against
19 denial of justice.
20 In its Rejoinder, Perú cites to the United
21 States' Non-Disputing Party submission for the
22 proposition that "determining a breach of the Minimum
[Page 68]
1 Standard of Treatment must be made in light of the
2 high measure of deference that international law
3 generally extends to the right of domestic authorities
4 to regulate matters within their borders."
5 Well, there is, of course, a margin within
6 which a State can act. It is limited by the State's
7 obligations under the law and by the Treaty. Numerous
8 Tribunals have recognized that "deference" does not
9 excuse Treaty violations, and, of course, it couldn't.
10 For example, the Tribunal in
11 TECO v. Guatemala explained that deference to a
12 State's regulatory powers cannot amount to condoning
13 behaviors that are manifestly arbitrary,
14 idiosyncratic, or that show a complete lack of candor
15 in the conduct of the regulatory process, and it is up
16 to an International Arbitration Tribunal to sanction
17 Decisions that amount to an abuse of power, are
18 arbitrary, or taken in manifest disregard of
19 applicable legal rules and in breach of due process
20 and regulatory matters."
21 The Tribunal in Foresight Luxembourg
22 similarly explained that the right to regulate must be
[Page 69]
1 subject to limitations if investor protections are not
2 to be rendered meaningless. And as the Tribunal in
3 Burlington v. Ecuador explained, the principle applies
4 also to national court decisions, for otherwise the
5 purpose of investment arbitration would be seriously
6 jeopardized, if not defeated.
7 Now, measures such as the ones at issue in
8 this Arbitration deserve no deference, as we will
9 show.
10 Gramercy's third claim arises under
11 Article 10.4 of the Treaty. As we've explained in our
12 papers, the most-favored nation clause imposes on Perú
13 the obligation to afford "effective means" to
14 Gramercy, but it has failed to do so. Perú has
15 deprived Gramercy of effective means for enforcing its
16 rights by imposing a mandatory and exclusive
17 Bondholder process, which denied Gramercy the recourse
18 it had previously enjoyed in Perú's Courts.
19 And Gramercy's forth claim arises under
20 Article 10.3, which imposes on Perú the obligation to
21 afford Gramercy treatment no less favorable than what
22 it affords to its own citizens. As we have shown, and
[Page 70]
1 Perú has not seriously rebutted, Perú has
2 discriminated against Gramercy by placing "speculative
3 investors," a term clearly intended to single out
4 Gramercy, at the very end of the payment queue in its
5 Bondholder process.
6 Now, I won't say more about the law--or not
7 much more about the law right now because this is a
8 hearing--a factual hearing. We have a lot of
9 Witnesses here, and I do want to concentrate on the
10 evidence. And while the case may seem highly complex,
11 even in an evidentiary sense, we have over 2,000
12 exhibits, 19 Witnesses and Experts. Your decision in
13 this case is very likely to turn on how you resolve
14 just four key factual issues.
15 Those issues are first: Prior to 2013, was
16 the current value principal just an amorphous idea, so
17 uncertain as to be meaningless in practice, as Perú
18 contends, or did it have real meaning, such that
19 Gramercy and other Bondholders could ultimately expect
20 a value based on CPI-updating plus interest?
21 Second, are the 2013 Constitutional Tribunal
22 Orders perfectly normal Decisions of the country's
[Page 71]
1 highest Constitutional Court, as Perú contends, or are
2 they, in the manner in which they came about, tainted
3 and part of Perú's illegal conduct?
4 Third, are the Supreme Decrees and the
5 Bondholder process they create a proper, lawful, and
6 well-supported set of administrative regulations
7 simply executing the 2013 Constitutional Tribunal
8 Orders and, as Perú puts it, conferring value on Land
9 Bonds, or are they arbitrary, illegal, and
10 unjustifiable efforts to destroy value?
11 And fourth, did the possibility of, perhaps,
12 having exceptional claims, like Amparo proceedings,
13 provide effective means for Gramercy to obtain current
14 value in Perú as Perú contends, or did the
15 Constitutional Tribunal and Ministry of Economy and
16 Finance actions deprive Gramercy of effective means to
17 obtain current value through their conduct?
18 Those four issues will very likely end up
19 determining how you conclude the case. So I want to
20 turn to the first of them now, which is that current
21 value had clear meaning.
22 From at least 2001, current value had a real
[Page 72]
1 meaning about the Land Bonds. It meant one thing. It
2 meant CPI plus interest. Current value was not, as
3 Perú claims, hopelessly uncertain and meaningless.
4 Now, the current value principle itself was
5 already a staple of Peruvian law, and, as this
6 Tribunal will know, a staple of other civil law
7 systems as well, well before the 2001 Decision.
8 Article 1236 of Perú's 1984 Civil Code explicitly
9 recognized this principle for debts of value. Yet, in
10 1996, Perú enacted a law that would have made the Land
11 Bonds an exception to this Article 1236 principle and
12 allowed Perú to extinguish the Land Bond debt on
13 nominal terms. The nominal value of those amounts was
14 essentially worthless.
15 So while the law formally recognized the
16 State's obligation to pay principal and interest, in
17 reality it was an attempt to avoid paying anything at
18 all.
19 A local Bondholder organization at the time,
20 the Engineers Bar Association, challenged the
21 Constitutionality of this law, and it won.
22 In 2001, the Constitutional Tribunal made
[Page 73]
1 clear that it would be manifestly contrary to Perú's
2 constitution to pay the Bonds at their nominal value
3 because this violated the current value principle that
4 is inherent to property, a right protected under
5 Article 70 of Perú's Constitution.
6 The Tribunal recalled that Perú's
7 Constitution protects the rights to property and fair
8 compensation for expropriation, and that in response
9 to what it called "a basic sense of justice," any
10 deferred payments must, therefore, reflect an updated
11 valuation of the Land Bonds. The Constitutional
12 Tribunal explained that while the 1933 Constitution
13 authorized payment of compensation through Bonds,
14 doing so was constitutional only if the Government
15 paid the current value, adjusted for inflation of the
16 Bonds, not their nominal value, which was and
17 continues to be, unconstitutional, and, as they put
18 it, which turns confiscations--expropriations into
19 confiscations.
20 Now, in doing so, the Constitutional Tribunal
21 explicitly found that a failure to apply the current
22 value principle violated Bondholders' rights. In
[Page 74]
1 other words, in 2001, the Constitutional Tribunal made
2 crystal clear that Perú's Constitution required Perú
3 to pay the Land Bonds and to do so pursuant to Article
4 1236's current value principle, "which requires that
5 debts be updated according to the current economic
6 indices."
7 Now, the meaning of the current value
8 principle was not--was actually clear. It was not
9 meaningless or uncertain, as Perú contends. Instead,
10 it had three very specific and concrete implications.
11 First, it meant that Land Bond debt had to be
12 inflation-adjusted using the Consumer Price Index, or
13 CPI.
14 You've read the Report of Justice Delia
15 Revoredo, one of the Justices who sat on the
16 Constitutional Tribunal and joined in the 2001
17 Decision. She testified that the Decision ordered
18 Perú to pay the current value of the Bonds and that
19 the Peruvian Courts have used CPI in order to comply
20 with the Constitution, the Civil Code, and the 2001
21 Decision.
22 You've also read the Report of Professor
[Page 75]
1 Mario Castillo Freyre. He is the leading Expert on
2 Peruvian law obligations. He's coauthored a treatise
3 on the subject with the principal drafter of Perú's
4 Civil Code.
5 Both Justice Revoredo and Perú's legal
6 expert, Dr. Hundskopf, have relied on Professor
7 Castillo's writings as an authoritative exposition of
8 the current value principle. And Peruvian Courts,
9 including the Peruvian Supreme Court, also cite him on
10 this topic.
11 He, too, concludes that the Land Bonds are
12 and have always been subject to the current value
13 principle. And he explained in his treatise and other
14 writings that the Courts are not at liberty to choose
15 any updating factor in applying the current value
16 principle pursuant to Article 1236. Rather, the
17 factor used must reflect the nature of the obligation
18 in question.
19 In applying this notion to the Land Bonds,
20 which embody an obligation of value, it is clear that
21 the 2001 Decision did not even need to expressly
22 mention Peruvian CPI because its use was implicitly
[Page 76]
1 required. After all, CPI is the economic index that
2 measures the very thing that the Constitutional
3 Tribunal said had to be eliminated, which is the
4 erosion in value because of inflation.
5 Second, current value required that any
6 updating of principal has to be done by reference to
7 the Land Bonds' issuance date, not some later date.
8 This reflects the very purpose of the current value
9 principle, which, as Justice Revoredo explains, is to
10 protect the value of the obligation as originally
11 undertaken, vis-à-vis the loss in purchasing power of
12 the currency used for the payment of such debt or
13 obligation.
14 And Professor Castillo further explains that
15 the only issuance--only the issuance date captures the
16 value of the underlying obligation at the time it
17 arose. The choice to update from any other later
18 point in time is arbitrary and distorts the current
19 value principle.
20 Now, to explain this, just consider a brief
21 example. If I expropriated from you two cases of very
22 good wine--Spanish wine, French wine, Canadian wine,
[Page 77]
1 if we have some--a total of 24 wine bottles--
2 (Comments off microphone.)
3 MR. FRIEDMAN: A total of 24 wine bottles,
4 but instead of paying compensation in cash, I give you
5 24 coupons, 24 certificates, each worth one--the
6 equivalent of one of those bottles to be paid over
7 24 years. During the first 12 years, you cash in the
8 coupons on a regular basis and you receive a total
9 payment nominally worth 12 units of that currency, and
10 so the first 12 bottles are basically paid for.
11 However, at that point in time, 12 units of
12 currency are no longer enough to buy that case of
13 wine. Instead, due to inflation, they can only buy
14 one bottle of wine. So, you stop cashing the
15 remaining coupons. And suppose further at the end of
16 the 24-year period, the 12 units of currency are all
17 but worthless, what does the current value principle
18 require with respect to the 12 coupons that were still
19 outstanding?
20 Well, if you pay nominal value today, you
21 will receive nothing. That is, you'll get the empty
22 box. You will not get any bottles of wine even though
[Page 78]
1 you are still due the 12 that were taken from you
2 24 years ago. Even Perú doesn't advocate that that's
3 the right solution in this proceeding, at least.
4 But consider the alternatives, if you update
5 from issuance, which ensures that--that ensures that
6 you will receive, today, an amount of currency that
7 will allow you to buy all the 12 bottles that you were
8 supposed to have 24 years ago. That's exactly the
9 idea of the current value principle.
10 But the second method, and the one that Perú
11 has adopted in its Bondholder process means something
12 else. It is the equivalent of paying you for just
13 that one bottle, which was the erosion in price after
14 12 years. And, consequently, what Perú's method does
15 is it expropriates again the 11 other bottles that you
16 were due from the beginning in the first place.
17 Finally, the third element of the
18 Constitutional Tribunal's 2001 Decision is that
19 Bondholder is also entitled to receive interest on the
20 unpaid principal. Like other creditors, Bondholders
21 must be compensated for the loss of use of money or
22 the return that they would have earned had they had
[Page 79]
1 the opportunity to invest that principal.
2 Professor Castillo explains this is separate
3 and distinct from updating for inflation and payment
4 of interest, of course, simply puts the expropriated
5 Party in the position it would have been in absent the
6 expropriation, and creditors' entitlement to interest
7 under Peruvian law is clear.
8 Now, despite the clarity of these principles
9 under Peruvian law, Perú's core defense in this
10 arbitration is that in 2001 the Constitutional
11 Tribunal Decision was not clear enough. Perú contends
12 that the Decision left open more questions than it
13 answered and ushered in what it calls "years of legal
14 uncertainty."
15 That contention is false. The evidence shows
16 that for over a decade, there was a consensus, as a
17 legal matter, that the 2001 CT Decision required
18 CPI-updating and compensatory interest. From 2001
19 until 2013, the Peruvian Courts, including Perú's
20 Supreme Court, uniformly held that.
21 For example, in a 2003 Decision, the Peruvian
22 Supreme Court held that the Land Bonds had to be
[Page 80]
1 updated, so that they represent the value for which
2 they were issued, plus compensatory interest accrued
3 over the course of time.
4 In a July 2006 Decision, the Supreme Court
5 again confirmed that Perú had to pay the Land Bonds at
6 current value, awarding CPI-based updating and
7 interest. In a September 2007 Decision, the Supreme
8 Court again held that the "debt must be assessed
9 according to the current value principle embodied in
10 Article 1236 of the Civil Code and it said, i.e.,
11 according to the economic indices in effect on the
12 date of payment."
13 In 2010, the Supreme Court issued yet another
14 Decision confirming the settled framework. It held
15 that the plaintiff must be paid the updated value of
16 the Bonds using the Automatic Readjustment Index set
17 by the Central Reserve Bank of Perú and also ordering
18 the payment of compensatory interest."
19 Moreover, the Supreme Court did not
20 consider--this is the Perú Supreme Court--did not
21 consider that there was any uncertainty about that
22 issue. To the contrary, the Court criticized the
[Page 81]
1 Minister of Economy and Finance's appeal against that 2 Order as in reality an attempt to reopen a debate that 3 has been sufficiently settled by the lower courts. 4 In fact, the Peruvian Courts had since 2001 5 uniformly updated the Land Bond Debt for inflation 6 using CPI, and awarded interest on that updated amount 7 to compensate for lost opportunity. 8 For example, in--and these are just a few 9 examples. There are hundreds of cases. In June 2007, 10 the Superior Court of La Libertad ordered CPI updating 11 and interest. In August 2008, the Superior Court of 12 Lima did the same. In January 2010, Pacasmayo ordered 13 the same. 14 And in the Pomalca Case, which concerned a 15 subset of Gramercy's Bonds, the Court-appointed 16 Experts used CPI from issuance date and applied 17 compound interest. That approach valued those Bonds 18 alone, just a portion of Gramercy's Bonds, at more 19 than USD 250 million. 20 A decade after the 2001 Constitutional 21 Tribunal Decision, Congress described Perú's--what it 22 called "uniform jurisprudence"--uniform jurisprudence,
[Page 82]
1 with respect to CPI updating. In contrast to that 2 record, Perú has not identified a single court 3 Decision employing an approach other than CPI updating 4 and interest to arrive at the updated value of Land 5 Bonds. Not a single case. 6 Given this record, it is not just wrong but 7 disingenuous for Perú to argue that there was 8 uncertainty about the legal framework or contend that 9 there was no consensus as to how the March 2001 10 sentence should be interpreted. Perú's courts, 11 including its Supreme Court and its lower courts, 12 discerned no such uncertainty, and through their 13 judgments and rulings reflected a widely-shared 14 consensus. 15 Perú has never been able to understand how 16 its own courts converged on these holdings, if the 17 situation had really been so uncertain and there was 18 no value in the Bonds, intrinsically. Instead, it 19 offers two arguments in support of that claim, both of 20 which, though, are meritless. 21 First, Perú relies on the August 2004 22 Decision of the Constitutional Tribunal, but that
[Page 83]
1 Decision, which predated the Decisions we just saw, 2 neither indicated nor created any kind of uncertainty 3 about what current value meant or how it applied to 4 the Land Bonds. To the contrary, that Decision 5 actually confirms the CPI-plus interest framework. 6 Let me explain. The August 2004 Decision 7 addressed the validity of an emergency Decree that the 8 Ministry of Economy and Finance had issued in 2000, 9 before the 2001 Decision. That Decree provided for 10 the conversion of the unpaid principal into U.S. 11 dollars at the time of the Land Bonds' issuance, plus 12 interest at an annually compounding rate of 13 7.5 percent. 14 Now, I pause to note the irony that the 15 updating method in that Decree from 20 years ago 16 actually produces value that is many, many multiples 17 of anything the Ministry has offered in its current 18 Bondholder process. In any event, the Ica Bar 19 Association, another association of Bondholders, 20 challenged that Decree in court, and they were not 21 alone in seeing problems in the Decree, as Perú itself 22 acknowledges.
[Page 84]
1 In February 2004 an Executive Branch 2 commission that the MEF formed concluded that that 3 Emergency Decree would contravene some aspects of the 4 2001 Decision. And so, for Perú to claim that it's 5 wrong to argue--skip the next slide. 6 To salvage that Decree, therefore, the 7 Ministry of Economy and Finance itself told the 8 Constitutional Tribunal in that 2004 case that this 9 Emergency Decree was not mandatory but just an option 10 for Bondholders instead of going Peruvian Courts. And 11 that was the overarching basis on which the CT denied 12 the constitutional challenge. 13 It specified that the Decrees could survive 14 because it does not seek to preclude the possibility 15 of going to court, seeking a judgment to enforce the 16 payment of the Bond, but merely constitutes an 17 alternative, which the Bondholder has the opportunity 18 to accept or reject. 19 Perú focuses on what the Tribunal said in a 20 part of that Decision where it--about the Decree, but 21 even there the Tribunal again noted first that the 22 Decree did not purport to impose any formula on the
[Page 85]
1 Bondholders, and only then to note that, unlike the 2 provisions that had been struck down as 3 unconstitutional in 2001, the Decree did not purport 4 to pay nominal value. 5 That is, it did use some form of updating. 6 It did not, however, say that that particular method 7 or dollarization in general complied with current 8 value. In fact, in dealing with another argument 9 raised in the complaint, the Court implicitly 10 acknowledged that dollarization meant something 11 different from true current value, but that did not 12 pose a problem because of the Decree's optional 13 character. 14 Justice Revoredo, who was still on the 15 Tribunal at the time and took part in that 2004 16 Decision confirms that the Constitutional 17 Decision--the Tribunal decided that the Emergency 18 Decree was constitutional insofar as it was an option 19 for the creditor but did not preclude resort to the 20 judicial branch. And the Peruvian Congress, analyzing 21 the legal situation, said exactly the same thing 22 several years later.
[Page 86]
1 So, what the Constitutional Tribunal's 2004 2 Decision actually established was that the Ministry 3 could, indeed, propose optional payment mechanisms, 4 optional, that were not nominal, including maybe using 5 dollarization, but could not deprive Bondholders of 6 the right to go to court to seek the true current 7 value, which, as we have seen, was CPI plus interest. 8 Perú's second argument here in support of its 9 uncertainty contention is actually even more 10 misleading. Perú contends that the current value was 11 an empty concept because various legislative proposals 12 attempted to establish a process to pay the Land Bond 13 debt. 14 In 2006, the Peruvian Congress passed, and 15 again in 2011 was about to pass legislation 16 establishing an optional Bondholder swap program, but 17 the Executive Branch vetoed or effectively vetoed both 18 of those bills. From that fact, Perú argues "the very 19 existence of attempts to establish a clear legal 20 framework is evidence that no such framework existed." 21 But this argument confuses two things that we 22 must separate out. These bills were not legislation
[Page 87]
1 to establish what current value means or to displace 2 what Perú's courts had already said it means. 3 Instead, they were attempts to address the 4 fact that, despite the Bondholders' legal rights and 5 all the results Bondholders were achieving in courts, 6 the Ministry of Economy and Finance continued to 7 resist payment without court judgments compelling it 8 to do so. If you went to the MEF and you said, please 9 pay my bonds, they said, sue me, get a judgment, and 10 then I'll pay. 11 So, this legislation sought to create simply 12 an alternative, and I stress "optional payment 13 mechanism," so that Bondholders would not have to go 14 to court to obtain payment. 15 Now, without going any further, that basic 16 fact about the nature of the legislation defeats 17 Perú's argument that this created uncertainty. The 18 fact that Perú came close to but ultimately failed to 19 legislate an additional payment mechanism outside of 20 the Peruvian Courts in no way undermines the clear 21 legal rights that Bondholders had established and 22 continued to enjoy in the Peruvian Courts.
[Page 88]
1 The absence of a legislative framework for 2 paying the Bonds through an administrative process 3 simply does not negate the fact that there most 4 certainly was a legal framework for determining their 5 current value through a judicial process. 6 And if we do go further in looking into this 7 legislation that took place in 2006 and 2011, it only 8 confirms the widespread consensus in favor of CPI plus 9 interest. 10 First, you should understand that the process 11 that produced this legislation was an incredibly 12 thoughtful, transparent, and widely representative one 13 that contained all different perspectives. It was a 14 consensus view. 15 The range of participants involved in the 16 2006 legislation show that the Congressional Agrarian 17 Commission which led the work on developing that bill 18 formed a task force that included representatives from 19 the Ministry of Agriculture, Bondholder associations, 20 Perú's National Agricultural Convention, the 21 Association of Water Usage, and aides to both the 22 Commission and the Congressman who had presented draft
[Page 89]
1 bills. 2 The Commission also received comments from, 3 among other entities, the Public Defender's Office, 4 the Central Bank, the Presidency of the Council of 5 Ministers, the Financial Corporation of Development, 6 the Agrobank, the National Superintendence of State 7 Assets and ProInversion. 8 It also received input from Economic Experts, 9 including the Expert who had assisted the Ministry of 10 Economy and Finance Commission that had existed prior 11 to that, which also endorsed an adjusted CPI method, 12 and the representative from the Perú's National 13 Institute of Statistics and Informatics, which 14 publishes the official Consumer Price Index. The 15 Commission held 15 working sessions, engaged in a real 16 and broad-based effort and ultimately produced a 17 thorough, detailed and sensible 46-page Report. 18 And that group's assessment was clear, and 19 not the least bit uncertain. The Commission's Report 20 included a comprehensive review of the existing legal 21 framework. It explained that the Peruvian Civil Code 22 required that "current value debts shall be updated in
[Page 90]
1 accordance with the Reserve Bank correction factors" 2 and that "debt instruments expressed in local 3 currency" had to be updated using CPI, which it noted 4 is "the official factor applied by the State to the 5 national accounts." 6 The Commission also noted that both the 7 judges of the Republic and the Ministry of Agriculture 8 were already applying CPI to the Land Bonds, and it 9 further emphasized that the full updated value of the 10 Land Bonds encompassed not only inflation-updating but 11 also paying interest on the updated debt to reflect 12 the opportunity costs of the debt. 13 Hence, the draft law that the Commission 14 issued and that Congress passed required that the Land 15 Bonds be updated by applying the Consumer Price Index 16 for metropolitan Lima, using the date of issuance of 17 the Supreme Decree of Expropriation as a reference 18 date for the calculation plus compound interest at a 19 real rate of 6.7 percent. 20 So, far from creating uncertainty about how 21 current value meant CPI plus interest, this bill and 22 the work that led up to it strongly reinforced that
[Page 91]
1 conclusion. 2 Now, Perú tries to resist that result by 3 pointing out that President Toledo, in his final days 4 in office, and then Prime Minister Pedro Pablo 5 Kuczynski vetoed the Bond Swap bill. So, it did not 6 become law. That meant, of course, that the 7 Bondholders did not have an optional payment mechanism 8 that the bill would have provided. 9 But the veto cannot detract from the 10 widespread recognition of the Bondholders' legal 11 rights, which the bill reflected and built upon. You 12 couldn't go into court and plead that Congress had 13 failed to pass a law, and so now we just don't owe a 14 debt. 15 Perú also makes much of the fact that a 16 single member of Congress introduced a bill on 17 June 27, 2003, which called for dollarization. Unlike 18 the Bond Swap bill, whose provenance I've just 19 described to you, that loan dollarization draft bill 20 never gained the support of anyone other than its 21 author, and even he expressly cautioned that were 22 serious questions about whether dollarization was
[Page 92]
1 consistent with the 2001 Decision. 2 Dollarization was so far from serious 3 consideration that even the Ministry of Economy and 4 Finance's own commission, which issued a Report in 5 2004, concluded that valuing the Land Bond debt by 6 reference to the U.S. dollar significantly 7 underestimates the value of the Land Reform debt. 8 Moreover, if mere draft bills that did not 9 ripen into actual legislation or any measure, during 10 this period five other bills were also proposed to 11 Congress calling for CPI updating plus interest. 12 And in 2011, when the Congressional 13 Commission made a second attempt to pass legislation 14 creating an optional administrative payment process, 15 it, once again, concluded that the CPI should be used 16 to adjust the value of the Land Bonds for inflation, 17 plus compound interest at the coupon face rate. 18 Like the proposals and bills that preceded 19 it, the 2001 legislation did not come into law, but it 20 did not create any legal uncertainty about the current 21 value principle, all of the work, all of the studies, 22 and all of the reports, end result that led up to it
[Page 93]
1 confirmed and reaffirmed that principle. 2 Now, Gramercy, as you know, invested right in 3 the middle of that 10-year period. It accordingly 4 formed legitimate expectations that it would 5 eventually be able to recover payment on its Land 6 Bonds at a value determined by CPI plus interest. 7 And on the basis of those expectations, it 8 bought nearly 10,000 of the Land Bonds like these, 9 which are two original Land Bonds, that can be 10 found--the photocopies of which can be found at 11 CE-224A, Appendix B, and production number is 12 GCM-16704 and 6834. 13 Through painstaking effort in Perú, Gramercy 14 bought thousands upon thousands of these Land Bonds. 15 Now, the abrogation-- 16 PRESIDENT FERNÁNDEZ ARMESTO: These are the 17 originals? 18 MR. FRIEDMAN: These are two of the 19 originals. 20 PRESIDENT FERNÁNDEZ ARMESTO: Is there any 21 problem if we have a look at them? 22 MR. FRIEDMAN: We would be delighted.
[Page 94]
1 MR. HAMILTON: Mr. President, point of order, 2 the Republic of Perú would like to point out this is 3 the first time we have ever seen any of their original 4 bonds. They have never been authenticated. Thank 5 you. 6 PRESIDENT FERNÁNDEZ ARMESTO: That is fair, 7 but us neither, so I do have some--if we can have a 8 look, we will, of course, give them back. 9 MR. FRIEDMAN: Yes. And I will mention for 10 the record. 11 (Laughter.) 12 MR. FRIEDMAN: Yes, I will mention for the 13 record that Gramercy has offered repeatedly to make 14 all of the Bonds available to Perú for its inspection 15 and has been rejected in every one of those efforts. 16 MR. HAMILTON: Objection. We disagree. We 17 will save our comments for later. Thank you. 18 PRESIDENT FERNÁNDEZ ARMESTO: Thank you. 19 MR. FRIEDMAN: You will see that there is one 20 that has a number of coupons clipped and another that 21 is pristine and has no coupons clipped. 22 I digress. But to give you an example.
[Page 95]
1 PRESIDENT FERNÁNDEZ ARMESTO: Yeah. Give us 2 one second to have a look, and then we come back. 3 (Comments off microphone.) 4 PRESIDENT FERNÁNDEZ ARMESTO: Just a quick 5 factual question. All bonds are for 1,000 soles 6 nominal value. 7 MR. FRIEDMAN: No. 8 PRESIDENT FERNÁNDEZ ARMESTO: No. These two 9 are? 10 MR. FRIEDMAN: These two are. Yes, these two 11 happen to be. 12 PRESIDENT FERNÁNDEZ ARMESTO: But others have 13 other nominal values? 14 MR. FRIEDMAN: Others have other nominal 15 values, different amount of coupons, different 16 interest rates. It depends. They were issued in a 17 complex way in the country in a whole series of 18 measures and issuances over a number of years, with 19 variables based also on the nature of the land and 20 where it was located that determined what rights would 21 attach, what value would attach to it. 22 PRESIDENT FERNÁNDEZ ARMESTO: We give them
[Page 96]
1 back. 2 MR. FRIEDMAN: Okay. 3 MR. HAMILTON: Excuse me, Mr. President. 4 PRESIDENT FERNÁNDEZ ARMESTO: There too. 5 (Laughter.) 6 PRESIDENT FERNÁNDEZ ARMESTO: Yes. 7 MR. HAMILTON: Can we invite simply to 8 confirm which particular bonds these are, so that we 9 can take note of that. 10 PRESIDENT FERNÁNDEZ ARMESTO: I think it 11 would be fair that we show them also to the Republic 12 of Perú. 13 MR. FRIEDMAN: Yes. 14 PRESIDENT FERNÁNDEZ ARMESTO: So, let's do 15 the following: Let's make--would it be a good moment 16 now to make a break? 17 MR. FRIEDMAN: Not--if you would bear with 18 me, I have about five to seven minutes and then a 19 break. 20 PRESIDENT FERNÁNDEZ ARMESTO: Would it be 21 okay if he finalizes, and during the break you have 22 the opportunity of looking at these two bonds?
[Page 97]
1 MR. HAMILTON: Of course, Mr. President. 2 PRESIDENT FERNÁNDEZ ARMESTO: Okay. 3 MR. FRIEDMAN: So, on the basis of that, 4 those--what I've just described as the legal framework 5 existing at the time, Gramercy bought almost 10,000 of 6 those. And, as you know, under Investment Law, the 7 abrogation of legitimate expectations violates the 8 Minimum Standard of Treatment. 9 And an investor is entitled to protection 10 even if its expectations are not based on explicit 11 assurances by the host State, although these are 12 specific, explicit assurances to pay certain amounts. 13 It may hold legitimate expectations based on an 14 objective assessment of the legal framework, so the 15 relevant question is simply whether that framework was 16 stable and predictable. 17 And the contemporaneous record and the 18 testimony of Gramercy's Chief Investment Officer, 19 Mr. Koenigsberger, confirms that Gramercy made its 20 investment in reliance on just such an objective 21 assessment about how the Courts and also the 22 legislature were working to implement the 2001
[Page 98]
1 Constitutional Tribunal Decision. 2 A 2006 memorandum summarizing Gramercy's 3 initial due diligence, that's in the record, for 4 example, notes that "the landmark court rulings have 5 reestablished the rights of Bondholders to 6 inflation-adjusted value of their claims." They 7 recognize that--those courts recognize that the claims 8 had to be paid at its real value adjusted for 9 inflation. 10 And they also observed at the time that 11 Bondholders have won all lawsuits since the 12 Constitutional Tribunal Decision was published, 13 including in the Supreme Courts. The Supreme Court 14 judges have clearly and explicitly said they are now 15 applying the value principle as ordered by the 16 Constitutional Tribunal, using Consumer Price Index 17 for inflation adjustment, plus retroactive interest as 18 required by law. 19 That's a contemporaneous memo from 20 January 2006, recognizing the objective legal 21 framework that I've just described to you. In other 22 words, Gramercy understood at that time, as it should
[Page 99]
1 have, that the Peruvian Courts at all levels 2 recognized and were enforcing a clear legal 3 entitlement to updated value using CPI plus interest. 4 And Mr. Koenigsberger has described to you 5 how Gramercy has invested on the expectation that this 6 "clear legal rule" would ultimately be upheld and 7 continue. 8 Subsequent events that took place after the 9 investment period of 2006 and 2008, some of which I 10 just described to you as well, only further confirmed 11 Gramercy's initial exceptions. Accordingly, 12 Mr. Koenigsberger has testified and will confirm at 13 the Hearing that Gramercy justifiably relied on that 14 objective assessment of a stable and predictable legal 15 framework. 16 Unfortunately, starting in 2013, Perú 17 completely reversed that basic legal framework under 18 which Gramercy had invested in the Land Bonds. It did 19 so in a way that was not only arbitrary and unjust but 20 also constituted a denial of justice in violation of 21 basic notions of due process, which we will turn to in 22 just a moment.
[Page 100]
1 And I respectfully suggest, Mr. President, 2 that this may be an appropriate time for a break. 3 PRESIDENT FERNÁNDEZ ARMESTO: Very good. So, 4 it is now 11:14. We will come back at 11:30. 5 (Brief recess.) 6 PRESIDENT FERNÁNDEZ ARMESTO: We resume the 7 Hearing. 8 Could I kindly ask the Secretary for a time 9 check? 10 SECRETARY PLANELLS-VALERO: Thank you, 11 Mr. President. 12 The Claimants have used 1 hour and 13 15 minutes, and they have 1 hour and 15 minutes left. 14 PRESIDENT FERNÁNDEZ ARMESTO: Okay. So, the 15 break was right in the middle. 16 MR. FRIEDMAN: Perfect. Thank you. 17 MR. HAMILTON: Excuse me. Could I return to 18 the point of order from before, just to confirm the 19 particular Bonds that had been presented today for the 20 record? 21 PRESIDENT FERNÁNDEZ ARMESTO: Sure. Have you 22 had a chance to see them?
[Page 101]
1 MR. HAMILTON: We may avail ourselves of the 2 chance to do so, but in the middle of the hearing room 3 is maybe not the moment we would do that. 4 PRESIDENT FERNÁNDEZ ARMESTO: Okay, but the 5 Respondents do have the right to see these Bonds, and, 6 yes, we should get to the record so that we know. 7 Maybe let's do two things: First of all, 8 please do give us the number of the Bonds. 9 MR. FRIEDMAN: Yes. So, the number of the 10 Bonds--there is Number 002231 and 009121. These 11 Bonds, the images of these Bonds, are in the record. 12 They can both be found at document--a very voluminous 13 document called CE-224A Appendix B, and the specific 14 pages on which these images, the images of these 15 Bonds, can be found can be referenced by production 16 number. 17 The production number for the first 18 Bond--that is, the 9121 Bond--is GMZY-0016704 and 705, 19 the front and the back. And the production number for 20 the second Bond, which is the 2231 Bond, can be found 21 as GMZY-0006834 and 6835. 22 Again, just--
[Page 102]
1 PRESIDENT FERNÁNDEZ ARMESTO: With that said, 2 thank you for the position. Anyway, I would like that 3 the Respondent has opportunity to see the originals. 4 MR. FRIEDMAN: Of course. And we did offer 5 them to them over the break, and they did not want to 6 look at them at this time, and we will offer them 7 another opportunity to look at them later. 8 MR. HAMILTON: We did not speak over the 9 break. We did not know this was going to occur. We 10 will coordinate in an appropriate manner and a 11 respectful manner. Thank you. 12 PRESIDENT FERNÁNDEZ ARMESTO: Thank you. 13 Thank you very much. 14 So, we give you the floor back, Mr. Friedman. 15 MR. FRIEDMAN: Thank you, Mr. President. 16 I now turn to the second of the four key 17 issues, namely that the 2013 Constitutional Tribunal 18 Order was not a justification for Perú's actions. 19 Instead, it was part of Perú's arbitrary and unlawful 20 conduct in eliminating Gramercy's rights and 21 expectations. 22 First, although none of us could know the
[Page 103]
1 implications at the time, in hindsight, the 2013 2 Constitutional Tribunal Order constituted a reversal 3 that changed the legal landscape from requiring the 4 Government to pay current value to permitting it to 5 pay something less than current value. Instead of 6 requiring payment of current value directly, the 2013 7 Constitutional Tribunal Order purports to balance 8 current value against other undefined budgetary 9 considerations, what they call the principle of 10 balanced budgets. 11 And, consequently, the Government--and they 12 referred the reference to how much ought to be paid to 13 the debtor itself, which is the State of Perú. And 14 so, instead of requiring Perú to simply pay the 15 current value, as had been done all along, they 16 authorized Perú to do something maybe potentially 17 different than that. 18 Now, both Justice Revoredo and Professor 19 Castillo confirmed that the 2013 Constitutional 20 Tribunal Order subverts the 2001 Decision and offends 21 the current value principle, the Peruvian law of 22 obligations more generally, and basic canons of
[Page 104]
1 judicial reasoning. Professor Castillo also says that 2 he is nothing short of astonished by judicial 3 reasoning that is clearly designed to reduce the 4 amount of the debt in favor of the State. It is like 5 saying: "We took your land; you are supposed to get 6 compensation for it, but we haven't really allocated a 7 budget for that, so maybe we'll pay you less." 8 Second, the stated rationale for this 9 reversal rests on two false, unfounded, and, frankly, 10 irrational premises. 11 The first rationale that the Constitutional 12 Tribunal identified was that CPI is an inaccurate 13 method in times of hyperinflation, and, on that basis, 14 the Tribunal speculated that CPI updating would 15 disproportionately increase the value of the debt. 16 But, as Professor Edwards has explained, and as you'll 17 hear him say at the Hearing, that argument is baseless 18 if you simply do CPI in the right way. 19 First, during periods of inflation in Perú, 20 prices increased throughout the economy, and baskets 21 of goods and services that underlie the CPIs are 22 rebalanced in any event to account for the
[Page 105]
1 substitution effects that this argument relates to. 2 But, moreover, even assuming that the CPI 3 statistics from Perú itself during the period of 4 hyperinflation were useless and you couldn't use them 5 for anything, that they had become so disconnected 6 from the economy that they were inaccurate, that would 7 not affect for one second updating the Land Bonds debt 8 through current value, because--through CPI, because, 9 as Professor Edwards will explain, when you update the 10 Land Bonds debt at a period of time like 2020, what 11 you do is you look at the value--what the CPI was at 12 the time of placement of the Bond, which took place 13 only up until 1980, so before the period of 14 hyperinflation, and then you look at the period of 15 time today and whatever the CPI is, and whatever those 16 prices are, there is no question that they are totally 17 accurate and responsible. So, this whole notion that 18 during the period of hyperinflation, people might not 19 have bought bananas, and so the price of bananas 20 doesn't count anymore is simply irrelevant. It's a 21 false issue. 22 Finally, and this is most astonishing of all,
[Page 106]
1 every one of the Ministry of Economy and Finance 2 formulas in the Supreme Decrees also incorporates 3 Peruvian CPI. 4 The second rationale is that the payment of 5 the Land Bonds' full updated value would be too 6 onerous for Perú, thus warranting some discount to 7 current value. 8 Now, the three Justices who endorsed that 9 Opinion based their choice of dollarization 10 on--selected dollarization by saying that the other 11 valuation methods described would generate severe 12 impacts on the budget of the Republic, to the point of 13 making impracticable the very payment of the debt. In 14 other words, they were saying it was so colossal that 15 Perú can't pay the debt if we actually apply current 16 value in the way that it's done routinely in Perú up 17 until now. 18 Put Professor Edwards has explained that Perú 19 could, and still can, pay the full updated value of 20 the Land Bonds. In fact, Perú's Quantum Experts agree 21 with Professor Edwards that paying the Land Bonds debt 22 would barely dent Perú's finances because it can float
[Page 107]
1 Bonds and pay over time effectively, and it would add 2 almost nothing to its debt-to-GDP ratio. And outside 3 rating agencies that Perú has hired in its own 4 issuances of public debt have confirmed the same 5 thing. And they are not talking about dollarization 6 value through the process. They are talking about 7 true CPI value. 8 Moreover, the Constitutional Tribunal did not 9 cite any evidence in support of this key central 10 finding, the real basis for them departing and moving 11 away from the current value principle. And, despite 12 being under an obligation to do so in this 13 arbitration, Perú has also never produced a single 14 document substantiating that claim. They have never 15 actually proven to you that they cannot pay the debt 16 at CPI value or that it would cause a budgetary or 17 fiscal crisis. There is not a bit of evidence in 18 that, including from their own Experts, who say the 19 opposite. 20 Third, the circumstances that led to the 2013 21 Order likewise fall below the minimum standard and 22 are, frankly, shocking and, I submit, likely
[Page 108]
1 unprecedented in your experience. 2 Let me explain. In October 2011, the 3 Engineers Bar Association asked the Constitutional 4 Tribunal to enforce the original 2001 Decision. They 5 had sort of had enough. They said: "Okay. We can go 6 through Courts and get our judgments, but why are you 7 dragging us through the Peruvian court system time 8 after time? Can the Constitutional Tribunal just 9 please make clear to the Government that it just has 10 to pay the debt?" 11 The Constitutional Tribunal took up that case 12 from October of 2011 and deliberated for nearly 13 two years, and by Tuesday, July 9, 2013, the majority 14 of the Tribunal's Justices endorsed a Draft Decision 15 prepared by the Rapporteur, Justice Eto, which used 16 CPI plus interest, consistent with the 17 well-established legal framework that existed at that 18 time and that all the other Courts in Perú had been 19 using. On the same day, President Humala publicly 20 warned the Constitutional Tribunal, whose members were 21 about to finish their term, to abstain from ruling on 22 Land Bonds.
[Page 109]
1 And then, over the course two of days, from 2 Wednesday, July 10 through Friday, July 12, 2013, 3 several meetings took place between members of the 4 Constitutional Tribunal and representatives of the 5 Executive Branch on an ex parte basis. On Wednesday, 6 July 10, Chief Justice Urviola acknowledged that the 7 President's advisors had visited the Constitutional 8 Tribunal in regard to the Land Bonds case. That same 9 day, former Minister of Economy, Luis Castilla, who is 10 here as a Witness by video, and the President of the 11 Council of Ministers met ex parte with Chief Justice 12 Urviola. Then, likely on July 11, the entire 13 Constitutional Tribunal had a meeting with the 14 Ministry of Economy and Finance, and after-hours, 15 President Humala's personal advisor, Roy Gates, who 16 has since resigned under corruption allegations, 17 visited the Constitutional Tribunal to discuss the 18 case with Chief Justice Urviola. 19 On that same day, July 11, Minister Castilla 20 publicly expressed to the press confidence that the 21 Constitutional Tribunal would act with responsibility 22 and would not harm the country's fiscal balance, and
[Page 110]
1 Minister Castilla was right to be confident on 2 July 11, because he knew exactly what had transpired 3 in his meetings with the Constitutional Tribunal. 4 MR. HAMILTON: For the record, could I 5 understand the citation to the record for the 6 allegation related to the Minister? Thank you. 7 MR. FRIEDMAN: I'm getting to it right now. 8 Justice Eto described these events in sworn 9 testimony before Perú's Congress. The Constitutional 10 Tribunal and the Minister of Economy and Finance held 11 what Justice Eto described as a historic meeting as 12 part of what Justice Eto described in terms that, I 13 must say, puzzle anyone who has faith in separation of 14 powers as an interinstitutional relationship dealing 15 with an interinstitutional issue. 16 At this historic interinstitutional meeting, 17 former Minister Castilla himself told the 18 Constitutional Tribunal Justices that paying the Land 19 Bonds using CPI could cost Perú USD 18.5 billion, and 20 USD 18.5 billion, as Justice Eto put it, was a 21 stratospheric amount. 22 According to Justice Eto, this was all
[Page 111]
1 conveyed during just that one interinstitutional 2 meeting, without even the benefit of a written Report, 3 without affording the Parties to the case any 4 opportunity to comment on this exchange, and 5 apparently without any interrogation of the 6 information that the Minister provided. 7 This tactic had its intended effect. Because 8 of that meeting, the Constitutional Tribunal backed 9 away from the actual current value principle and the 10 CPI method that they were about to endorse, and 11 instead decided to cut it down with what Justice Eto 12 described in his testimony before Perú's Congress as 13 "the principle of pro-government interpretation," in 14 which every Constitutional Tribunal must favor the 15 State and not the litigant in budgetary matters. 16 But, as we now know, on the basis of the 17 Ministry of Economy and Finance's own documents, 18 information provided to the Constitutional Tribunal 19 was false and baseless. The Ministry never prepared 20 any estimates, calculations, or studies to back up 21 this $18.5 billion figure. But even that remarkable 22 tale of making up numbers, as far as we can tell, is
[Page 112]
1 only half the story in this remarkable sequence of 2 event. 3 Now, these all became known only to Gramercy 4 much later, but they make clear exactly why Gramercy 5 feels so aggrieved in this case. It turns out that on 6 Friday, July 12--so, right after the Statement by 7 Minister Castilla about his confidence that the 8 Tribunal would act responsibly--on Friday, July 12, 9 Chief Justice Urviola provided Justice Eto with an 10 alternative Draft rejecting CPI in favor of 11 dollarization. 12 And on Tuesday, July 16, 2013--so, the 13 following--after the weekend, Justice Eto submitted 14 Justice Urviola's Draft Order to the other Justices 15 for discussion as if this were his own. But this 16 last-minute change of position away from the CPI 17 method that the Tribunal had built up to over 18 two years, and changed in just days, had grave 19 consequences for the Tribunal's deliberation and due 20 process. 21 First, Justice Alvarez signed the 2013 CT 22 Order without even really knowing its implications.
[Page 113]
1 Justice Alvarez testified before the Peruvian Congress 2 that he remembered that he-- 3 PRESIDENT FERNÁNDEZ ARMESTO: It is 4 impossible--it is impossible to hear you, to read 5 this, and you must--Mr. Friedman, we will give you 6 some more time if you need it, and--we will give you 7 some more time, but it is--I cannot follow it. 8 MR. FRIEDMAN: Okay. Thank you. 9 PRESIDENT FERNÁNDEZ ARMESTO: It is important 10 that I can follow it, and it is just--you jump from 11 one document to the next, and it goes too fast. And 12 I'm sure that the relief from our court reporters will 13 be high if you go somewhat slower. 14 Thank you. 15 MR. FRIEDMAN: Yes. So, Justice Alvarez's 16 testimony was that they were discussing the--they were 17 deliberating on that Tuesday, July 16, and he says 18 that he withdrew because, in the end, the discussion 19 was no longer on the Merits, whether it was right or 20 not. It was on the formula for payment, a technical 21 issue of whose consequences we were at the time 22 unaware.
[Page 114]
1 So, there were two possibilities, and as most 2 of us were constitutional lawyers, the truth is that, 3 at the time, we were unsure of the consequences of 4 either of them, so we withdrew and Liquid Paper was 5 used. As a result, he and Justice Urviola endorsed 6 Justice Eto's alternative Draft that had this bespoke 7 unusual dollarization approach. 8 And the second implication of this haste that 9 Justice Urviola was imposing is that Justice Mesía 10 refused to subscribe to the new Opinion. Instead, he 11 requested, as was his right, 48 hours to review the 12 new Draft and write a dissenting Opinion. But Chief 13 Justice Urviola denied Justice Mesía's request, 14 disregarding the Constitutional Tribunal's own 15 procedural rules. 16 Instead, Chief Justice Urviola and others 17 doctored the existing draft. Whiteout correction 18 fluid was applied to the original signature of Justice 19 Eto, as well as to the signature blocks for Justice 20 Alvarez and Urviola. And the sentence at the end, the 21 decretal sentence at the end of the Judgment, had 22 originally had the language that said: "For these
[Page 115]
1 reasons, the Constitutional Tribunal, with the 2 authority conferred on it by the Political 3 Constitution of Perú, resolves" for CPI updating. But 4 that was whited out, and in its place was typed the 5 words: "For these reasons, my opinion is for," so as 6 to turn what had been the Draft majority opinion into 7 a forged dissent by Justice Mesía. And then, armed 8 with that forged dissent--you know, the Decision 9 now--Chief Justice Urviola concluded that there was 10 now a 3-3 tie on the court and, consequently, he was 11 entitled to issue a casting vote, which he did in 12 favor of dollarization, and issued that Decision, 13 along with the forged dissent and two other dissents, 14 on that same day. That is how the 2013 Constitutional 15 Tribunal Order came into existence. 16 Now, I submit to you that this is, by any 17 stretch of the imagination, a remarkable story of 18 impropriety: Secret ex parte meetings, materially 19 false information, forgery of official documents, 20 denial of the Parties' right to due process, 21 violations of the Court's own rules, and a breakdown 22 in the separation of powers.
[Page 116]
1 Perú does not deny the majority of those 2 extraordinary facts, nor could they. That misconduct 3 has been the subject of multiple criminal proceedings 4 and a Congressional investigation in Perú, and proved 5 by the forensic report from the Lima police 6 department. Instead, Perú seeks to downplay its 7 misconduct by stating that the use of whiteout is part 8 of the Constitutional Tribunal's habitual practice in 9 order to make formal corrections without varying 10 Decisions. 11 Now, we have some reason to question that 12 factual description of the Tribunal's practice. 13 Justice Alvarez seemed to testify that whiteout is 14 used, essentially, to prevent Justices from changing 15 their minds. What he said is he can remember there 16 were some circumstances when whiteout was used, and, 17 he said, why? Because it is preferable not to waste 18 the signatures that are already on a Draft Opinion, 19 because if we made another one again, remember that a 20 high-ranking Tribunal is usually composed of public 21 figures who are often older with very strong academic 22 egos. Therefore, it is often the case that, if the
[Page 117]
1 draft is passed round again because someone has left 2 or withdrawn, the same number of signatures may not be 3 obtained and, because of that, Liquid Paper is used. 4 In any event, the 2013 Constitutional 5 Tribunal Order was definitely not a case where 6 whiteout was used to correct some minor clerical 7 error; a typo, a misspelling, or even a mistaken 8 calculation. Here, it was used to transform a 9 majority Opinion into a forged dissenting Opinion, 10 violate the Court's own rules, and fabricate a tie. 11 Now, these concerted actions between the 12 Executive Branch and certain Constitutional Tribunal 13 members fall below the minimum standard, but through 14 them, the Ministry of Economy and Finance had finally 15 achieved its long-held ambition, which is subverting 16 current value and paying as little as it could 17 possibly get away with. 18 The fourth aspect of this dimension of the 19 case is that, rather than take the opportunity to 20 redeem itself and make things right, the 21 Constitutional Tribunal later chose to further violate 22 Gramercy's and other Bondholders' rights through
[Page 118]
1 subsequent Decisions. 2 In the August 2013 Resolution, the Tribunal 3 made the unusual dollarization method contained in its 4 July Order mandatory for all Bondholders and said that 5 claims on the Land Bonds had to be channeled through 6 the MEF's exclusive procedure, which wasn't even 7 created at that time. Then, in November 2013's 8 Resolution, the Tribunal disclaimed any responsibility 9 for how it had chosen the methodology would work, 10 stating that the Bondholders' requests for 11 clarification were premature, and that the formula was 12 a matter for the MEF to work out by itself--in other 13 words, the debtor could come up with how it was going 14 to pay. 15 In March 2015, after the Ministry had issued 16 its First and Second Supreme Decrees, the country's 17 largest Bondholders organization at the time, joined 18 by 300 individual Bondholders, including Gramercy, 19 petitioned the Constitutional Tribunal over the 20 Supreme Decrees. This petition was accompanied by 21 thousands of pages of supporting material, including 22 Expert Reports from Deloitte and Perú's former
[Page 119]
1 Minister of Economy and Finance, Ismael Benavides, as 2 well as international and local Experts. 3 Yet, after just three weeks, the 4 Constitutional Tribunal dismissed it summarily, 5 stating again that the challenges were premature, even 6 though they showed what the MEF's Supreme Decrees 7 would produce in terms of value if you ran Bonds 8 through them and, astonishingly, the Constitutional 9 Tribunal said that these 300 Bondholder petitioners 10 had not provided any evidence of social 11 representativeness. 12 Even today, the validity of the 2013 Order is 13 still under a cloud, and not just from these 14 proceedings, but within the Constitutional Tribunal 15 itself. As recently as July 2019, four Justices 16 declined to admit a motion to retract the 2013 Order 17 on procedural grounds. This time they said that the 18 challenge was too late, whereas before they had said 19 it was premature. But three Justices joined in a 20 scathing dissent that leaves no doubt as to its 21 invalidity, where they say that the 2013 Order is void 22 because it denaturalizes and fails to comply with the
[Page 120]
1 seminal Decision of 15 March 2001. 2 Now, the 2013 Constitutional Tribunal Order 3 and the subsequent rulings do not excuse Perú's 4 liability. Quite to the contrary, we submit, they are 5 part and parcel of Perú's Treaty breaches and a basis 6 for that liability. 7 With that, I now turn to the third of the 8 four key issues, and that is that the Bondholder 9 Process that the Ministry created is not a fair or 10 legitimate program to update the value of Bonds. 11 Rather, it was intended to and does, in fact, destroy 12 value so substantially as to be expropriatory and was 13 carried out in ways that fell below the minimum 14 standard of treatment. 15 In this Arbitration and elsewhere, the 16 Ministry has touted this Bondholder Process as one 17 that imparts value on the Bonds and that established a 18 clear legal framework and is a transparent, detailed, 19 carefully regulated procedure. These claims are 20 false. 21 In creating the process, the Ministry badly 22 bungled the job, promulgating a series of arbitrary
[Page 121]
1 valuation formulas, failing to abide by basic 2 requirements of Peruvian administrative law, and 3 ignored important elements of the Tribunal's own 4 Orders. The process has been a failure, and far from 5 creating value, it unjustly destroys it. 6 First, the valuation formulas that are at the 7 heart of the Supreme Decrees are irrational and 8 arbitrary. Now, we submit to you that a Government 9 act is irrational if it is not logical or reasonable, 10 it makes no sense, or is clearly wrong, and it is 11 arbitrary if it is based on random choice or whim 12 rather than reason, or if the Measures are taken for 13 reasons that are different from those that are put 14 forward by the State. 15 The Ministry's Decrees have precisely those 16 characteristics. Now, by now, it should be beyond 17 dispute that the Ministry's original 2014 18 formulas--those are the formulas in place when 19 Gramercy commenced this Action--are irrational and 20 arbitrary. Professor Edwards demonstrated that the 21 formula has no basis in economics and yields 22 arbitrarily low valuations that are entirely
[Page 122]
1 disconnected from the true, updated value of the Land 2 Bonds. And just think about some of the 3 characteristics of those Decrees and the formulas in 4 them. They absurdly valued all of Gramercy's Bonds at 5 less than $900,000--a sum, just by reference, that is 6 182 times smaller than what even the Ministry's 7 Optional Dollarization Decree of 2000 would have 8 provided for those Bonds. 9 They reduced--the formulas in them reduced to 10 the mathematical impossibility that X equals X 11 squared. They yielded parity exchange rates that 12 could not be reconciled with actual exchange rates. 13 Even the Ministry has now abandoned them in its 14 subsequent Decrees, and Perú has not offered anyone to 15 defend their substance in this Arbitration. 16 Now, the Witnesses and Experts that Perú has 17 tendered on the subject of the Supreme Decrees are 18 either silent about or disclaim responsibility for the 19 formulas. Former Ministry Castilla purports to stand 20 by the Ministry's decision-making process, but he 21 cautions that he was "unaware of any issue related to 22 the Decrees."
[Page 123]
1 Dr. Wühler purports to opine on the 2 legitimacy of the process, but he makes clear that he 3 makes no assessment of the formula used to calculate 4 current values. And Dr. García-Godos purports to 5 vouch for the reasonableness of the Decrees, but he 6 does not provide an opinion on technical, 7 mathematical, or economic matters. So, Perú has 8 brought you no Witness who will vouch for the validity 9 of the formulas in the Decrees. 10 Moreover, documents Perú was forced to 11 disclose in this Arbitration have revealed that these 12 formulas were never even intended to carry out the 13 Constitutional Tribunal's 2013 Orders, or even 14 seriously evaluated by the Ministry prior to founding 15 the entire Bondholder valuation process on them. 16 It turns out that the 2014 Supreme Decree 17 formulas were simply copied and pasted from slapdash 18 work of a Peruvian economist hired two years 19 previously for a different purpose. On March 31, 20 2011, while Congress was working on Bondholder swap 21 legislation, the Executive issued a Decree intended to 22 "generate greater public savings" which authorized the
[Page 124]
1 hiring of a financial Expert to produce a Report on 2 the Land Bonds, and the Ministry hired a Peruvian 3 economist named Bruno Seminario to come up with the 4 alternative valuation approaches that would prioritize 5 not true current value, but what the Ministry called 6 in his contract "fiscal sustainability." 7 In short, they hired him to come up with ways 8 of paying less than current value. He certainly 9 wasn't hired to help the Ministry implement the 10 Constitutional Tribunal's 2013 Decrees, because this 11 was--that was still two years in the future. 12 Now, the Ministry has never explained or 13 produced documents to show how or why, in 2014, when 14 they were putting together their Decrees, they decided 15 to use Seminario's work, which had been prepared 16 earlier, or whether anyone at the Ministry even 17 evaluated its substance, or why they chose to take 18 from his work, which included six formulas, the one 19 that yielded the lowest value, or what, if any, other 20 formulas they considered and rejected, or why they 21 were prepared to establish national policy on what 22 they now say was an exercise designed solely on
[Page 125]
1 theoretical grounds and that the Ministry apparently 2 did not even test on a single Bond. 3 Moreover, Seminario's think piece was never a 4 serious study that could form the basis for important 5 Administrative Acts and national policy. The Ministry 6 paid him 33,000 soles--about $10,000--for three weeks 7 of work. It apparently took him all of two days to 8 jettison, on a speculative and inaccurate basis, the 9 CPI plus interest framework that the Courts, the 10 Agrarian Commission, and the Congress had repeatedly 11 endorsed, and his hasty work is riddled with problems 12 and errors. 13 Despite not bringing Seminario here as a 14 Witness, Perú has offered no justification for its 15 2014 valuation formulas other than its reliance on 16 Seminario. 17 The Ministry's subsequent conduct in dealing 18 with the valuation formulas is even less defensible, 19 for the Ministry then tried dishonestly to cover up 20 the problems with more equally irrational and 21 arbitrary formulas. 22 If the Ministry had not known about the
[Page 126]
1 unreliability of Seminario's work prior to publishing 2 the January Decrees, it learned about it soon 3 thereafter. Gramercy pointed out some of the 4 formula's flaws as early as April 21, 2014, and ABDA, 5 that Bondholder organization, exposed some of them in 6 its March 2015 application to the Constitutional 7 Tribunal. 8 Eventually, after receiving some proposed 9 precisions from Seminario and a quick review of those 10 precisions by another economist named Carlos Lapuerta, 11 in February 2017, the Ministry published, with no 12 prior notice or consultation, a new Supreme Decree 13 with what it called a "clarification" of the original 14 valuation formulas. 15 This so-called "clarification" included a 16 statement--it was hardly a clarification. It was an 17 obfuscation. It included a statement in one of the 18 clarifications that, in their formula, U.S. CPI is 19 expressed in soles de oro. 20 That clarification simply makes no sense. It 21 is as arbitrary and irrational as the original 22 formulas were, for, as Professor Edwards has
[Page 127]
1 explained, the U.S. CPI is, by definition, a price 2 index. As such, the U.S. CPI cannot be expressed in 3 soles de oro, or, indeed, in U.S. dollars or any other 4 currency. It would be like expressing the number of 5 people in this room in degrees Celsius. It's 6 irrational. 7 Trying to make sense of this clarification, 8 Professor Edwards demonstrated that it could indicate 9 at least six equally possible formulas. Those 10 formulas yielded a range of value for Gramercy's 11 Bonds--a range--of over $2.5 billion. In other words, 12 even the World Bank's former chief economist for Latin 13 America, Professor Edwards, couldn't make sense of the 14 Ministry's so-called "clarification" in its formula. 15 Given that range of values, Gramercy wrote to 16 the Ministry with a most modest request, that the 17 Ministry at least disclose the actual valuation 18 formula that incorporated this so-called 19 "clarification." But Perú never responded. 20 Then, in August 2017, the Ministry did it 21 again. As before, the Ministry refused to acknowledge 22 the fundamental problems in its valuation formulas and
[Page 128]
1 to engage with Bondholders. Instead, what it did was, 2 unilaterally and without consultation, issue yet 3 another Decree containing what it called 4 "clarifications to specific variables of the 5 mathematical expressions." But the Ministry was, once 6 again, not being quite straight on that. These were 7 not mere clarifications. The August 2017 formula was 8 an entirely new formula which purported to rely on a 9 data series published by the Central Bank that the 10 Ministry had never mentioned before. 11 Professor Edwards testifies that this formula 12 constitutes a radical departure from its predecessors. 13 It's not a clarification. It's new. And this 14 unprecedented formula not only has substantive 15 problems of its own, but it is, if anything, even more 16 arbitrary than the Ministry's prior attempts, because 17 with the prior attempts, the Ministry at least has 18 described some basis, however bizarre and 19 unsupportable, in Seminario's deficient paper and its 20 hopeless corrections, but the Ministry's August 2017 21 formula cannot claim even that provenance. There is 22 literally not a single piece of paper in the record
[Page 129]
1 that justified that formula. No explanation of where 2 it came from, who prepared it; no articulation of the 3 reasons for choosing it or considering other formulas; 4 and, yet again, no Witness to defend it. It appears 5 from the records in this case to have literally 6 emerged out of thin air, fully formed, on August 19, 7 2017, the publication date of the Decree. 8 Now, I submit to you that this is the essence 9 of arbitrary and unjust conduct. In the words of the 10 Lemire and Waste Management Tribunals, Perú acted for 11 reasons that are different from those put forward by 12 the decision-maker and it engaged in conduct that is 13 arbitrary, grossly unfair, unjust, or idiosyncratic, 14 and acted with a complete lack of transparency and 15 candor. 16 Second, the Supreme Decrees were issued in a 17 manner that violates central tenets of Peruvian law. 18 You will hear from Professor Bullard, who is a 19 prominent Peruvian lawyer and academic and who helped 20 create Perú's administrative jurisprudence on the 21 validity of executive regulations. And he points out 22 that, under Peruvian law, every act of authority must
[Page 130]
1 comply with basic principles of legality and 2 reasonableness, which have certain just core elements. 3 The legality principle requires discussing 4 and rigorously evaluating alternative regulations, 5 consulting with the public on draft proposals, and 6 assessing the regulations' compliance with procedures. 7 And the reasonableness principle requires 8 that an act, including a regulation, be adequate, be 9 necessary, which means it must be the least 10 restrictive of private rights, and proportional. In 11 other words, the benefit of the regulation must not 12 outweigh the cost. 13 These principles are so vital to the 14 accountability in Perú's system that they also require 15 government agencies to produce a report showing 16 compliance with them. 17 But in this case, as Dr. Bullard has shown, 18 the Ministry's regulations failed to meet every one of 19 these fundamental requirements. 20 For example, as we saw before, none of the 21 Decrees explains the valuation formulas or how they're 22 supposed to achieve current value or what other
[Page 131]
1 alternatives they considered. The Ministry didn't 2 publish a draft of the Decree for comments, preventing 3 stakeholders from expressing views and maybe even 4 corrections. And the Ministry's legal office didn't 5 even properly scrutinize the draft decree. In fact, 6 it couldn't have done so, as it approved the draft 7 just hours after it received it, according to the 8 timestamps. 9 Moreover, of course, there is no regulatory 10 report published, which is a complete violation of 11 Peruvian law. 12 The illegality of the Supreme Decrees under 13 domestic law, is, of course, a distinct question from 14 their legality under international law, but the fact 15 that they also violate Perú's own internal procedures 16 and would be void under domestic law, certainly is an 17 element that indicates their inconsistency with the 18 Minimum Standard of Treatment that the Treaty imposes. 19 Third, and this is very strange, that the 20 Supreme Decrees are not even what the Constitutional 21 Tribunal ordered or thought it was ordering because 22 the Ministry took every opportunity to reduce value
[Page 132]
1 wherever it could. So, in trying to exploit the 2013 2 Decrees, the Ministry just created all kinds of other 3 traps that weren't required by the Tribunal Order. 4 So, we've already seen how they came up with several 5 instances of arbitrary and inexplicable 6 value-destroying formulas for parity exchange rates. 7 Additionally, although the Tribunal--the 8 Constitutional Tribunal instructed the MEF that it 9 should inflation-update using--converting to dollars, 10 and then using what it said was the interest rate of 11 United States Treasury Bonds, the Ministry took that 12 as an invitation to use the yields on one year U.S. 13 Treasury Bills, rather than 20- or 30-year U.S. Bonds 14 whose tenors better correspond to the Land Bond Debt. 15 And the Ministry altogether ignored an even 16 more important requirement, which was to pay interest. 17 Peruvian law requires it, and you will recall that the 18 Constitutional Tribunal ordered the Ministry to issue 19 a Supreme Decree to quantify the debt according to the 20 method it specified, and it continued: "This 21 procedure must show the updated amount of the Land 22 Reform Debt Bonds plus the interest."
[Page 133]
1 The Tribunal thus ordered that interest would 2 be attached also to the updated amount, as was fair 3 and required under Peruvian law. But this aspect of 4 the Constitutional Tribunal's July 2013 holding, was 5 reiterated by Justice Blume of the Constitutional 6 Tribunal in 2015, again observed that the Tribunal had 7 ordered the Ministry to pay the full updated amount, 8 plus interest, and this is precisely how the Peruvian 9 Supreme Court has interpreted the 2013 Decisions. 10 In October 2015, October 2016, October 2017, 11 and, again in April 2018, the Supreme Court held that 12 under the 2013 Constitutional Tribunal Order, 13 Bondholders should receive first the updated value of 14 their Bonds, calculated using dollarization, plus the 15 interest rate of U.S. Treasury Bonds, and 16 second--second, compensatory interest at the face 17 coupon rates of 4, 5, or 6 percent. 18 This is a massive omission from the Perú's 19 Bondholder Process because you can imagine the 20 interest on Bonds over 40 years is rather substantial. 21 In fact, the majority of value is in the interest. 22 Now, the other way that you can understand
[Page 134]
1 about--that this was a real requirement of the 2 Constitutional Tribunal is that it's evident that the 3 Constitutional Tribunal considered that the Land Bond 4 Debt was very large and that it would be costly to 5 repay even under their unusual dollarization approach. 6 Justice Eto, in his testimony to the Peruvian 7 Congress, told the Congress that the dollarization 8 method that the Court required would require payment 9 to Bondholders of USD 2 billion. And that was why--if 10 you understand that's their thinking, you can go back 11 and look at the Decision, and you can understand why 12 they went to such great lengths in that Decision to 13 talk about options for the Government and how to pay 14 that amount, including potential payments-in-kind by 15 giving them land, new Bond issuances, a payment 16 schedule over eight years, all kinds of freedom to 17 come up with payment mechanisms, because they thought 18 the number was going to be big. 19 Yet, the figures that Perú's Vice Minister of 20 Economy, Ms. Betty Sotelo, who is a Witness here, has 21 submitted, show that the Bondholder Process is 22 actually paying tiny amounts, and over all this will
[Page 135]
1 be a mere rounding error for Perú. After more than 2 five years, Perú has paid a grand total of 1.5 million 3 nuevo soles, the equivalent of approximately USD 4 440,000. After five years. $143,000 in cash and 5 $297,000 in new Bonds. That alone is far less than 6 the advances on costs in this Arbitration. 7 Furthermore, based on the data that Perú has 8 made available, it appears the total payments to all 9 Bondholders through the Bondholder Process will be 10 trivial, even in the aggregate. Let me explain. 11 So far, according to the Ministry's own data, 12 the Ministry has submitted Bonds with a face value of 13 36 million soles de oro to its updating process, its 14 actualization, its process of determining what's that 15 actually worth under our formula. And the result of 16 that has been an updated amount, for those 36 million 17 soles de oro face value, of 7 million nuevo soles. 18 PRESIDENT FERNÁNDEZ ARMESTO: So to get these 19 numbers straight, the first one is the addition of the 20 1,000 soles face value of each of the Bonds--summing 21 up all the existing Bonds--the face value of all 22 existing Bonds?
[Page 136]
1 MR. FRIEDMAN: That have been submitted--yes, 2 that have been submitted through the actualization 3 stage of the process. You recall their process has 4 four phases, and towards the end they get to the phase 5 where they say here's what value we would give you. 6 And that's called actualization. 7 And in that phase, 35 million face value of 8 Bonds, of all different denominations, have gotten 9 that far in that process. 10 PRESIDENT FERNÁNDEZ ARMESTO: But remind me, 11 there was like 10 percent went to actualization. I 12 mean, only a small percentage of Bondholders did 13 actually go to actualization. 14 MR. FRIEDMAN: So a very small number got 15 to--we'll come up to-- 16 PRESIDENT FERNÁNDEZ ARMESTO: Okay. 17 MR. FRIEDMAN: A very small number got--there 18 is another stage after actualization, which is then 19 you have to also say, okay, now you've told me the 20 value, and now I need to be paid. And then you have 21 to negotiate over payment. 22 A very, very small fraction of people have
[Page 137]
1 gotten to that final stage. Only 13 Bondholders have 2 actually been paid after all this time. But we use 3 actualization for this analysis because there are more 4 people at that stage of the process. And so this face 5 amount is bigger than the face amount that's already 6 been paid. 7 In any event, the Ministry has assigned a 8 value to this original face amount of 35 million soles 9 de oro, 36 million, of about 7 million nuevo sol. And 10 on that basis, we can calculate kind of the average 11 for each soles de oro on face value. And so for each 12 5 soles de oro in face value, the Bondholder Process 13 has yielded an updated amount of basically 1 nuevo 14 sol. In other words, it's about a little less than 15 20 percent correspondence. 16 And now we also know the total aggregate face 17 value of the Bonds that have been authenticated to 18 date is 205 million soles de oro. The total 19 population in the Bondholder Process is 205 million. 20 So, if we simply apply that same ratio of 21 19.85 percent, we can estimate that the total 22 aggregate updated amount will be about 41 million
[Page 138]
1 nuevo sol. At today's exchange rate, that is less 2 than USD 12 million. 3 Now, we don't have the data to know whether 4 the rest of the Bonds in the process are like the 5 Bonds that have already actualized. We asked for that 6 data, but it wasn't provided to us. But assuming that 7 it is, and we don't have any reason to doubt it from 8 the testing that we've done on that information, 9 according to Perú's own numbers, Perú would exhaust 10 all the Bonds in the Bondholder Process for less than 11 $12 million. 12 That is anything but the sort of amount that 13 the Constitutional Tribunal had in mind and which 14 might warrant invoking the principles of balance, 15 sustainability, and budgetary progressiveness or that 16 would be financially impossible to pay in a single 17 sum, as the Tribunal had in mind. 18 MR. HAMILTON: Excuse me. Just to confirm, 19 the data that you just demonstrated, that's not in the 20 record. That's something that you've calculated up 21 for today? 22 MR. FRIEDMAN: From R-1062, which is
[Page 139]
1 Ms. Sotelo's--exhibits to Ms. Sotelo's Report. 2 MR. HAMILTON: Right. But these calculations 3 have never been put before Perú before. This is being 4 presented for the first time today; is that correct? 5 MR. FRIEDMAN: That is correct. 6 MR. HAMILTON: Thank you for confirming. 7 MR. FRIEDMAN: So we submit to you-- 8 PRESIDENT FERNÁNDEZ ARMESTO: To understand 9 that, the total population of Bonds, which has been 10 submitted to authentication, is 205 million soles in 11 face value. 12 MR. FRIEDMAN: That have been authenticated, 13 yes. 14 PRESIDENT FERNÁNDEZ ARMESTO: Submitted to 15 authentication. That is the gross submitted to 16 authentication. Out of those, 35 million have 17 actually been now updated--at the rate of from 35 to 18 7, at the rate of 20 percent. And you then take that 19 rate and apply it to the total population. 20 MR. FRIEDMAN: Yes, exactly. 21 MR. HAMILTON: Mr. President, just to 22 confirm, we've never seen any of these numbers before.
[Page 140]
1 They have made them up for the argument. Thank you. 2 MR. FRIEDMAN: Well, they have seen--the 3 numbers come from Perú. The data comes from Perú. 4 The calculations are a demonstrative on this slide. 5 MR. HAMILTON: And they are new. Thank you. 6 PRESIDENT FERNÁNDEZ ARMESTO: I'm sure you'll 7 have the opportunity to go with them through with the 8 Experts to see exactly what they imply. 9 MR. FRIEDMAN: And it's certainly the case 10 that Gramercy requested calculations by the 11 Government, by Perú--in this Arbitration, has 12 requested calculations of what they calculate the debt 13 to be, and they haven't produced any documents. So, 14 maybe they have never done this calculation. 15 In any event-- 16 PRESIDENT FERNÁNDEZ ARMESTO: To be very 17 objective, assume that only 10 percent of the 18 Bondholders have actually gone into this process. 19 Then the total Bonds would be 10 times more. It would 20 be 120. The payment of the total outstanding Bonds 21 would then be 120 million. 22 MR. FRIEDMAN: Yes, that's correct, if you
[Page 141]
1 assume that all the Bonds existing in the world, yes, 2 that's right. It would be about 120--maybe even a 3 little more, 140 million, I think, by doing that 4 ratio, which is a lot less than 2 billion and not the 5 kind of thing that would indicate a budgetary impact 6 that would be financially impossible for Perú to pay. 7 PRESIDENT FERNÁNDEZ ARMESTO: Thank you. 8 MR. FRIEDMAN: Next, the Bondholder Process 9 also unjustly deprives Bondholders, including 10 Gramercy, of current value. And, therefore, it's hard 11 to understand how Perú can contend that this process 12 actually imparts value, what they say to Bonds that 13 are worthless on their face, or they establish, 14 through this process, a clear legal framework for 15 payment of the Bonds. 16 The process does not create value. It 17 destroys it in a way that is expropriatory and 18 violates the Minimum Standard of Treatment. And it 19 should thus come as no surprise that the participation 20 rates in the process--and this gets to the point you 21 were just raising, Mr. Chairman--the participation 22 rates have been abysmal.
[Page 142]
1 If the process actually created value in a 2 great legal framework, Bondholders would run to it. 3 They would have said, great, we'd love to submit our 4 Bonds. And this would have been a great way of 5 attracting people to Peru in solving this problem. 6 But that hasn't happened. As Professor 7 Olivares-Caminal's calculations, based on the data 8 Peru itself has provided show, the process attracted 9 only about 8 percent by face value of the outstanding 10 Bonds, which is the point the President was just 11 making. 12 If a debt exchange attracts less than 13 90 percent of Bondholders, it is often considered a 14 failure. So, an 8 percent rate is just appallingly 15 low. The bottom line is that this Bondholder Process 16 is not solving Perú's Land Bond problems. 17 Now, Perú has insinuated that this low 18 participation rate is due to Gramercy's negative 19 publicity about the process. But Perú has not even 20 attempted to prove any such cause and effect. Indeed, 21 Gramercy is not alone in criticizing the process. 22 There are many critics of it in Peru. And, moreover,
[Page 143]
1 there is a lot of negative news that they've generated 2 themselves. Gramercy didn't make up the White-Out 3 Scandal. It learned about it from the press, just 4 like everybody else. 5 The more likely process of why you have these 6 appallingly low rates is that it's just so 7 value-depriving. Gramercy has presented to you, as 8 you know, the Witness testimony of two Bondholders who 9 participated in good faith in this process, only to be 10 kind of devastated by it. 11 First, the Tribunal will recall the testimony 12 of Ms. L whose family farm was expropriated in '73, 13 creating a major financial blow to her family and 14 leaving them in very precarious conditions. It took 15 more than four years for Ms. L to receive a valuation 16 of her Bonds, only to find out that Perú was only 17 offering her the equivalent of USD 67--$67, which is 18 less than a dollar for each of the hectares of land 19 that were left unpaid. 20 As she's testified, by any definition of 21 value, the Ministry's valuation is absurd. She 22 challenged that resolution, but the Ministry dismissed
[Page 144]
1 her appeal. After completing the Bondholder Process, 2 Ms. L said she felt completely betrayed and deceived 3 by her own Government. 4 Mr. S has suffered a similar experience. 5 He's a 91-year-old agronomist and father of 10 6 children who has testified that when Peru expropriated 7 his farm in 1975, he and his family were left with 8 nothing. He waited three years to receive a valuation 9 from the Ministry and was crushed to learn that it was 10 only the equivalent of USD 240. As he says, he could 11 not believe the Ministry was offering to pay so little 12 after three years and eight months of having started 13 the administrative procedure and more than 40 years 14 since he had lost his land. 15 He called the offer to pay him $240 a joke 16 and pointed out, of course, that with that little 17 money he would not be able to buy back a single 18 hectare of the 56 hectares the Government had 19 expropriated. 20 Like Ms. L, he appealed the valuation, but, 21 again, his appeal was dismissed. 22 Sadly, the experience of these two
[Page 145]
1 Bondholders is consistent with the experience of 2 others, as we've pointed out in the Briefs. So, the 3 fact that Perú touts this process as consistent with 4 international standards just defies reality. The 5 process is no defense to Perú's conduct. It is 6 another violation of its obligations under the Treaty. 7 With that, I turn to the fourth and last set 8 of facts I want to discuss, and that concerns 9 Gramercy's ability to vindicate its rights to current 10 value before the Peruvian Courts. 11 You will recall that in 2004, the 12 Constitutional Tribunal upheld the 2000 Emergency 13 Decree because it was "merely an option" and affirmed 14 the Bondholders' rights to go to court to obtain 15 judgments on their Bonds using CPI-updating, plus 16 interest. And hundreds of Bondholders did that and 17 were availing themselves of this right. 18 As Mr. Koenigsberger has testified, when 19 Gramercy made its investment, it best legitimately 20 believed that if Peru failed to pay the Land Bonds, 21 Gramercy would be able to initiate or participate in 22 proceedings in Peruvian Courts to demand fair
[Page 146]
1 compensation. 2 Prior to 2013, that is what Gramercy did. In 3 2010, it filed a series of conciliation requests, 4 which are precursors to filing lawsuits. And then in 5 2011, when Perú refused to meet and conciliate, it 6 reopened seven Court cases. In one of them, as I've 7 mentioned before, the Pomalca case, the 8 Court appointed Experts assessed the value of 44 of 9 Gramercy's Bonds at roughly USD 250 million. That 10 valuation used CPI to update the principal, plus 11 compound interest. 12 As Mr. Riehl will explain later this morning, 13 Professor Edwards has shown that if the same method 14 was applied to Gramercy's entire portfolio, the 15 portfolio would be worth about 840 million as of 16 May 2018. However, the August 2013 Tribunal 17 resolution, coupled with the value-destroying 18 January 2014 Supreme Decrees, deprived Gramercy of the 19 right to obtain current value in Peruvian Courts by 20 imposing this Ministry's grossly defective and 21 value-destroying formula. 22 That formula, at its best, at its most
[Page 147]
1 generous, would have valued those same Gramercy Bonds 2 at less than 4 percent of the value. They would have 3 had, through a normal court process, a 96 percent 4 haircut, and more if you look at the original 2014 5 Decrees. 6 As Mr. Koenigsberger has explained, following 7 these measures, Gramercy realized that proceeding 8 further in Peruvian Courts had been futile. Either 9 the Government could assert the Supreme Decrees as a 10 basis, or the Court would on its own, or Perú would 11 use them as a basis to excuse enforcement. 12 Now, Perú contends that the Bondholder 13 Process includes both judicial and administrative 14 appeal and others are potentially available. Yet, 15 these potential remedies are fictional. For example, 16 as we've shown, the contentious administrative action 17 available under Peruvian law does not allow a Claimant 18 to challenge the validity of the valuation formula or 19 the mandatory process by the Supreme Decrees. It 20 simply allows you to challenge that they apply their 21 own Decrees correctly. 22 In any event, the idea that a party has a
[Page 148]
1 theoretical right to try some extraordinary challenge 2 in Peruvian Courts, like amparo they cite in their 3 papers, is far different from actually having 4 available the Court remedy that was there all along. 5 As you know, amparo is an extraordinary 6 remedy that requires a showing at a very high 7 standard, and so that alone would disqualify it. But 8 look at the practical experience of the Bondholders 9 who tried that very route. 10 Both Ms. L and Mr. S, the two Bondholders I 11 mentioned before, both attempted and failed to secure 12 relief through these very same amparo procedures in 13 Peruvian Courts. 14 So, with the August 2013 resolution and the 15 Supreme Decrees proved to deprive Gramercy of the 16 basic form of effective means to assert its claim and 17 enforce its right in local courts, which, as we've 18 explained, had consistently vindicated Bondholders' 19 rights to CPI-updated value, plus interest. 20 Before concluding this merits part of the 21 opening, I'd like to invite the Tribunal to step back 22 for a moment and reflect upon the issues that Perú
[Page 149]
1 raises which are simply not relevant. You have heard 2 a lot of about what Perú calls aggravation during the 3 course of these proceedings. These allegations are 4 legally irrelevant have no bearing on any claim or 5 defense in this case. They're just prejudicial. 6 They are also totally unfair. As we have 7 just shown, Perú has been, in a word, deceitful about 8 how it dealt with the Land Bonds for over a decade. 9 So, it was perfectly legitimate for Gramercy to try to 10 shine light on Perú's so-called "process," especially 11 after the events of the White-Out and other things 12 that came to light for the first time. 13 Moreover, while Perú seeks to demonize 14 Gramercy and its people as vultures who engage in bad 15 practices and try to terrorize a poor helpless State, 16 consider what the evidence actually shows. For more 17 than a decade, Mr. Koenigsberger and his colleagues at 18 Gramercy have been the ones reaching out to Perú 19 trying to create a fair settlement process for all 20 Bondholders, not just for Gramercy, involving--and 21 that settlement process could have involved negotiated 22 discounts to value, Bond swaps, so payment over time,
[Page 150]
1 reinvestment in Perú of the proceeds from the Bond 2 swaps. And every time--every time, Gramercy has had 3 the door slammed in their face. 4 And consider also the people on whose behalf 5 you are being told this story. Many of the senior 6 government officials involved in the Land Bond Debt 7 during this past decade are, even as we sit here 8 today, subject to criminal charges or investigation. 9 These officials include former presidents Toledo, 10 García, Humala, and Kuczynski. They include former 11 Chief Justice of the Constitutional Tribunal Urviola, 12 who was brought to Congress on the idea that maybe 13 they'd lift his immunity from prosecution, and a 14 criminal prosecution underway against the Tribunal's 15 Chief Secretary Oscar Díaz for the White-Out. 16 It also includes the former advisor to the 17 President--President Humala--Roy Gates, who we saw 18 visited the Court during that critical week in July. 19 And, of course, it involves Perú's main fact Witness 20 in this Arbitration, former Finance Minister Castilla. 21 The real story is that the Ministry has tried 22 to subvert its country's own constitutional norms for
[Page 151]
1 a decade. Since 2001, the clear legal rule in Perú 2 was that as a constitutional matter, the Land Bonds 3 had to be paid not at nominal value but at current 4 value. That's what the Civil Code said, and the Court 5 applied that to the Land Bonds. 6 And, yet, throughout this period, the 7 Ministry has continued to argue in courts, in 8 resisting Bondholder lawsuits, that the Bonds should 9 be paid only at nominal value, as it did in May 2001, 10 for example, just months after the Tribunal had ruled 11 the opposite. 12 And the Ministry continued doing that in 13 recent cases, recently as 2016, and probably even 14 today. They're going to courts in Perú and saying 15 that current value doesn't apply to the Land Bonds, 16 that they're nominal obligations. 17 Now, these facts, we submit, lay bare the 18 true motivation of Perú and its Ministry of Economy 19 and Finance. There was never an effort to try to pay 20 Bondholders true current value. And since 2013, until 21 the present day, Perú went even further and tried to 22 wipe out that debt for a pittance, and that violates
[Page 152]
1 the Treaty. 2 With that, I would like to turn now to 3 remedies and ask Mr. Riehl to the stand. 4 MR. RIEHL: Thank you. Mr. President, could 5 I ask your indulgence in getting a time check, please, 6 since there was some interchange? 7 PRESIDENT FERNÁNDEZ ARMESTO: Of course. 8 Could we ask the Secretary. 9 SECRETARY PLANELLS-VALERO: Claimants have 27 10 minutes and 40 seconds remaining. 11 MR. RIEHL: Thank you very much. 12 SECRETARY PLANELLS-VALERO: Thank you. 13 PRESIDENT FERNÁNDEZ ARMESTO: I would rather 14 you go slowly and not very fast. If you need five or 15 ten minutes more, that is better than if you go very, 16 very fast. 17 MR. RIEHL: Thank you very much, 18 Mr. President. We greatly appreciate that. 19 PRESIDENT FERNÁNDEZ ARMESTO: We will, of 20 course, do exactly the same with the Respondent. 21 MR. RIEHL: Mr. President, Members of the 22 Tribunal, I will now turn to the third part of our
[Page 153]
1 presentation today, the remedy to which Gramercy is 2 entitled. 3 As Mr. Friedman described, Perú's Treaty 4 breaches stripped Gramercy of its entitlement to be 5 paid the full updated value of its Land Bonds. 6 Instead of honoring Gramercy's entitlement to that 7 value, Perú eviscerated it. 8 Perú imposed a mandatory Bondholder Process 9 that would have paid Gramercy less than a thousandth 10 of a percent of the true value of its Land Bonds. 11 Perú must now make Gramercy whole. 12 Under the applicable full reparation 13 standard, Gramercy is entitled to the full updated 14 value of its Land Bonds. That value was USD 1.8 15 billion in May 2018, as Professor Edwards calculated 16 in his Reports. It has increased since then as 17 inflation has continued in Perú and as Land 18 Bondholders have missed out on additional 19 opportunities to invest the unpaid principal. 20 In the alternative, Gramercy is entitled to 21 what it would have received if it had been allowed to 22 vindicate its rights in Perú's Courts. That's the
[Page 154]
1 CPI-updating, plus interest, that Mr. Friedman 2 described. 3 Professor Edwards calculated that Gramercy's 4 Bonds were worth USD 842 million in May 2018 using 5 that approach, which was actually applied to some of 6 Gramercy's Land Bonds in the Pomalca case. Like the 7 full updated value, that $842 million value has also 8 continued to increase over time. 9 Finally, although Gramercy does not agree 10 with Perú that Fair Market Value applies here, even by 11 that measure, Gramercy's damages would be far higher 12 than the price it paid for its Land Bonds more than a 13 decade ago. 14 All of the evidence contemporaneous with the 15 Constitutional Tribunal's 2013 Order shows that 16 Gramercy's Land Bonds had a Fair Market Value of more 17 than USD 500 million immediately before Perú began the 18 conduct that breached the Treaty. 19 I will discuss each of these remedies, in 20 turn. 21 First, though, I will address the applicable 22 legal standard. I will be brief because Perú has not
[Page 155]
1 disputed that the customary full reparation standard 2 applies here. Perú argues for Fair Market Value as 3 the Measure of damages, but Perú has not disputed that 4 Chorzów Factory articulated the proper legal standard 5 that a measure must meet. 6 Indeed, there is no reason to depart from the 7 customary international law standard in this case. 8 Under that standard, as described in Chorzów Factory, 9 Gramercy is entitled to an award that will, as far as 10 possible, wipe out all the consequences of Perú's 11 illegal acts. That award should take the form of 12 restitution-in-kind or its monetary equivalent. 13 Under the full reparation standard, the 14 question to ask to determine the proper remedy is: 15 What has Gramercy lost? And the answer to that 16 question is straightforward. Perú has stripped 17 Gramercy of its legal entitlement to be paid the full 18 value--the full updated value of its Land Bonds. 19 That full updated value is therefore the 20 proper measure of Gramercy's loss. Gramercy's 21 entitlement to that value is what must be restored 22 under the full reparation standard.
[Page 156]
1 Importantly, Gramercy is not claiming that it 2 lost merely the right to sell its Land Bonds. That's 3 why Fair Market Value does not apply here. Gramercy 4 was deprived of the full value Perú's constitution and 5 laws required Perú to pay to redeem its Land Bonds and 6 not merely the value someone else might have paid to 7 buy those Bonds. 8 In addition, to the extent the Bonds' Market 9 Value was less than the amount Perú was required to 10 pay on the Bonds, that was entirely because of the 11 risk that Perú would not meet its legal obligation to 12 pay that full legal value, which was intrinsic to the 13 Bonds. 14 Awarding Gramercy a Market Value lower than 15 its Bonds' intrinsic legal value would improperly 16 reward Perú for its illegal conduct and at the same 17 time would not make Gramercy whole for the loss of the 18 full intrinsic value which is the loss Gramercy 19 suffered. Such an award would violate the 20 international law norm against rewarding wrongdoing, 21 while at the same time failing to satisfy the 22 customary full reparation standard.
[Page 157]
1 So what is the full updated value of 2 Gramercy's Land Bonds that must be restored? There 3 are two components. 4 First, the unpaid principal has to be updated 5 to its current value from issuance using CPI in order 6 to erase the effects of inflation and restore the 7 value of the principal to its original purchasing 8 power. 9 Second, in order to compensate the 10 Bondholders for the opportunity they missed out on to 11 use the principal in other investments, interest has 12 to be added to the inflation-adjusted current value 13 from the date of the first missed payment at the 14 actual average historical Rate of Return on investment 15 in Perú. 16 Although the Parties disagree about how 17 current value is to be calculated under Peruvian law, 18 Perú acknowledges that the current value principle 19 applies to the Land Bonds. And Perú also maintains 20 that the MEF's Bondholder Process includes at least 21 some compensation for foregone opportunity costs. 22 So, Perú's argument is not that the current
[Page 158]
1 value principle does not apply. Rather, Perú argues 2 that there was no certainty about how to calculate the 3 Bonds' updated value until the Constitutional Tribunal 4 issued its 2013 Order. 5 Perú tries to address that uncertainty 6 argument up as two different quantum arguments, but it 7 is actually just the same uncertainty argument that 8 Perú makes on the Merits. 9 When Perú says that Gramercy has not proven 10 its damages with reasonable certainty, what it means, 11 as it explains in the text of its Brief, is that there 12 is purportedly uncertainty as to how to calculate the 13 value of Agrarian Reform Bonds. 14 And when Perú says that Gramercy has not 15 proven causality, what it means, again, is that 16 Gramercy's claim is purportedly based solely on its 17 own beliefs about what the calculation formula should 18 be. 19 Mr. Friedman has already addressed Perú's 20 uncertainty arguments thoroughly. I will therefore 21 limit my comments on this point to showing that 22 Professor Edwards calculated the full updated value of
[Page 159]
1 Gramercy's Land Bonds correctly. 2 Professor Edwards first updated the value of 3 the unpaid principle for inflation using CPI. As 4 Professor Edwards described in his Reports, the 5 easiest and most accurate way to update for inflation 6 is to use Perú's official CPI measurements. That's 7 what economists, bankers, governments, and businesses 8 do literally all the time, not only in Perú but 9 throughout the world. Professor Edwards has provided 10 a number of examples of this in his reports. 11 And as Mr. Friedman has already described in 12 detail, CPI is the usual method that is used to apply 13 the current value standard under Peruvian law. 14 The wide-ranging and vastly lower values 15 produced by the MEF's various formulas do not show 16 that there was uncertainty. They show only that the 17 MEF did not update for inflation correctly. 18 In any event, Perú has not challenged either 19 the appropriateness or the methodology and formulas 20 that Professor Edwards used to update for inflation or 21 the accuracy of his results. Perú has faulted 22 Professor Edwards for updating from issuance rather
[Page 160]
1 than some later date, but has not identified any 2 computational errors in his inflation-updating 3 formulas. 4 Professor Edwards' second step was to apply 5 interest to the inflation updated current value of the 6 rate needed to compensate Bondholders fully for the 7 value of their foregone opportunities. To calculate 8 the value of Bondholders' lost opportunity, Professor 9 Edwards looked at what other investors in Perú 10 actually earned on their investments during the same 11 time period. He used a well-established macroeconomic 12 method to estimate very conservatively the average 13 Rate of Return that other investors actually earned. 14 Perú does not challenge the accuracy of 15 Professor Edwards' computation of that rate. In their 16 First Report, Perú's Quantum Experts did raise several 17 technical criticisms, but Professor Edwards responded 18 to each of those criticisms in his Reply Report 19 showing that adopting Perú's Experts' suggestions 20 would have actually increased the Rate of Return that 21 he calculated. 22 Perú and its Experts have not challenged
[Page 161]
1 those responses on rebuttal. But even if there were
2 minor computational issues, they would be dwarfed by
3 the supreme conservatism of Professor Edwards'
4 calculation.
5 Professor Edwards described in his Reports a
6 number of ways in which his calculation was
7 conservative. The most significant is that
8 Professor Edwards calculated the average return on
9 debt rather than the average overall investment return
10 on debt and equity. As Professor Edwards describes,
11 investments in equity yield higher returns than
12 investments in debt. As a result, the 7.22 percent
13 average return on debt that he uses is lower than the
14 average overall return on investments, which he
15 calculated to be 10.97 percent.
16 And, although Perú's Quantum Experts dropped
17 their technical challenges on rebuttal, they raised a
18 number of new conceptual challenges for the first
19 time. Those new conceptual challenges also lack
20 merit. Perú's Experts' new arguments include that no
21 one knows what the individual Bondholders would have
22 invested in and that it is purportedly improper to use
[Page 162]
1 ex post data and Rates of Return other than risk-free
2 rates to assess the value of their lost investment
3 opportunities.
4 These arguments all ignore the fundamental
5 fact that the average actual historical Rate of Return
6 that Professor Edwards estimated is not a hypothetical
7 rate.
8 Professor Edwards did not build in any
9 assumptions about risk or individual investment
10 choices or expectations. He estimated the Rate of
11 Return that was actually earned collectively by all
12 investors in Perú. That actual rate captures all the
13 risks and benefits of investing in Perú as they
14 actually manifested during the time the Bondholders
15 were deprived of their opportunity to invest.
16 Now, there are two different ways to think
17 about why the actual average return on investment in
18 Perú is the correct measure of foregone opportunity.
19 First, the value of the investment
20 opportunity that the Bondholders collectively lost is
21 equal to the average value of all the potential
22 investments they might have made. If Bondholders had
[Page 163]
1 been paid the unpaid principal when it came due, they
2 could have used it to choose from a wide variety of
3 other investments in Perú.
4 No one knows what any particular Bondholder
5 would have invested in or how their individual
6 investments would have turned out. The Bondholders
7 themselves probably don't know that since they never
8 actually faced the choice of how to invest. On
9 average, though, the Bondholders would have earned the
10 same average Rate of Return as other investors in
11 Perú.
12 And even though some individual Bondholders
13 might have earned less and some might have earned
14 more, that is not relevant. The value of the Bonds
15 does not vary from Bondholder to Bondholder. It
16 doesn't depend on how any particular individual
17 Bondholder's investments would have turned out.
18 Indeed, it's not even possible to know that.
19 Instead, the value of the Bonds must
20 compensate the Bondholders collectively for the
21 aggregate returns that they missed out on
22 collectively.
[Page 164]
1 The other way to think about this is from the
2 perspective of the people who actually did get to
3 invest the Land Bonds' unpaid principal, namely, Perú
4 and its taxpayers. The expropriated land itself was a
5 productive asset that earned returns that went to Perú
6 and the Peruvians to whom it was redistributed rather
7 than to the Land Bondholders. And because Perú never
8 paid the unpaid principal, Perú's taxpayers retained
9 the capital and were able to invest it instead of
10 paying it to the Land Bondholders. When they invested
11 it, what they earned on average was the average actual
12 Return on Capital in Perú during this period, which is
13 what Professor Edwards estimated conservatively.
14 Those actual returns that Perú's taxpayers
15 actually earned on the unpaid principal are, quite
16 literally, the value of the opportunity that was lost
17 to the Land Bondholders that has instead been enjoyed
18 by Perú's taxpayers.
19 So, either way you look at it, the interest
20 rate needed to compensate the Land Bondholders' lost
21 opportunity is, in fact, the average actual return on
22 investments in Perú.
[Page 165]
1 So, to sum up, Professor Edwards' formula,
2 which is shown on this slide, correctly and accurately
3 calculates the full updated value of Gramercy's Land
4 Bonds under Perú's constitution and laws as of May 31,
5 2018. This formula accurately updates for inflation
6 from issuance using CPI and then applies interest to
7 that updated value from the date of the first missed
8 payment at a rate that conservatively compensates the
9 Bondholders' foregone investment opportunities.
10 As I mentioned before, that full updated
11 value is not static. It was USD 1.8 billion on
12 May 31, 2018, but it continues to grow over time. The
13 value at any particular date is obtained by
14 substituting that date for May 31, 2018 in the full
15 updated value equation.
16 Before Perú breached the Treaty, it had an
17 obligation to pay Gramercy that full updated value.
18 Restoring that obligation would effect restitution in
19 kind under the full reparation standard. And that can
20 be accomplished through an order requiring Perú to pay
21 the full updated value as of the Award date, along
22 with post-award interest calculated at the
[Page 166]
1 7.22 percent compound real interest rate that was
2 used in the full updated value formula.
3 I will now turn to Gramercy's alternative
4 claim. That alternative claim is that Gramercy is
5 entitled to at least the value it would have received
6 under the standard approach that Perú's courts took to
7 valuing Land Bonds. Mr. Friedman has described in
8 more detail that Perú's courts consistently used CPI
9 to update the unpaid principle to current value and
10 then added interest.
11 Most significantly, that is the approach set
12 out in the Constitutional Tribunal's original majority
13 Opinion in its 2013 Order. That's the Opinion that
14 was converted by whiteout into Justice Mesía Ramírez's
15 dissent. That Opinion is particularly relevant
16 because it shows the specific valuation approach that
17 Perú's highest Constitutional Court was going to adopt
18 immediately before Perú started the course of conduct
19 that violated the Treaty. It confirmed that, absent
20 Perú's Treaty breaches, Perú's courts would have
21 awarded Gramercy the current value of its unpaid
22 principal, updated for inflation from issuance using
[Page 167]
1 CPI plus compound interest at the original coupon
2 rates.
3 Indeed, court-appointed Experts in the
4 Pomalca Case used exactly that same method to value
5 some of Gramercy's Land Bonds. Now, Peru argues that
6 Gramercy's reliance on Pomalca is misplaced because it
7 says only a minor portion of Gramercy's Agrarian Bonds
8 were part of the local court proceedings, but that is
9 both misleading and beside the point.
10 The Bonds in the seven court cases Gramercy
11 filed made up a relatively small portion of Gramercy's
12 Bonds numerically, but they account for 27 percent of
13 the total value of Gramercy's Land Bonds calculated
14 using Professor Edwards' methods.
15 And even if that were not the case, the
16 method that court-appointed Experts actually used to
17 value Gramercy Bonds in a Peruvian court proceeding
18 provides compelling evidence of how Perú's courts
19 would have valued the rest of Gramercy's portfolio.
20 Thus, Peru's argument that Gramercy's
21 alternative remedy is inherently speculative and
22 merely reflects predictions about hypothetical cases
[Page 168]
1 is incorrect.
2 Under the applicable legal standard, Gramercy
3 need only establish its entitlement to damages on the
4 balance of the probabilities, not least because any
5 uncertainty as to the but-for world is attributable
6 exclusively to Perú here as a consequence of its
7 failure to pay what it owed on the Bonds.
8 And Gramercy relies not on hypothetical
9 cases, but on the one actual case that involved
10 Gramercy Land Bonds, the original Constitutional
11 Tribunal 2013 Majority Opinion, and all of the other
12 Peruvian Land Bond cases, which all used CPI and then
13 applied interest.
14 That evidence is more than sufficient to
15 establish that, on the balance of the probabilities,
16 Gramercy very likely would have secured a valuation
17 using that approach.
18 Professor Edwards calculated that Gramercy's
19 Land Bond portfolio was worth USD 842 million in
20 May 2018 using the method from Pomalca in the original
21 Constitutional Tribunal 2013 Opinion. Like the full
22 updated value of Gramercy's Case-in-Chief, that value
[Page 169]
1 has also grown since then as there has been further
2 inflation in Perú and Gramercy has continued to miss
3 out on the opportunity to invest the unpaid principal.
4 As with the full updated value, the best way
5 to effect restitution under the full reparation
6 standard on this alternative claim would be to issue
7 an award equal to the value of Gramercy would have
8 received on the award date under the methodology used
9 in Pomalca and then to add to that post-award interest
10 calculated at inflation plus the original coupon rates
11 consistent with that methodology.
12 I will turn now to the Fair Market Value of
13 Gramercy's Land Bonds immediately before the
14 Constitutional Tribunal issued its 2013 order.
15 There are two reasons why Fair Market Value
16 does not provide the appropriate damages here. First,
17 the Land Bonds are not like physical assets like
18 factories or mines, which do not have legally
19 prescribed values. The price a factory owner will
20 receive if they sell their factory is not established
21 by law. In the absence of such a legally prescribed
22 intrinsic value, when factories are expropriated,
[Page 170]
1 adjudicative bodies must rely on market pricing to
2 determine their value.
3 But financial instruments like the Land Bonds
4 are in their essence legal obligations to pay specific
5 amounts. The only way to restore Gramercy to the
6 position it was in before Perú stripped it of its
7 entitlement to be paid the amount that Perú owed as a
8 matter of law is to restore Perú's obligation to pay
9 that legally required amount.
10 Consistent with that logic, and as Gramercy
11 has described in its pleadings without rebuttal from
12 Perú, courts and Tribunals seized with claims to
13 payment on debt obligations have consistently
14 compensated Claimants for the full intrinsic legal
15 values of those obligations rather than their Fair
16 Market Values.
17 Perú's courts too have awarded Bondholders
18 the full intrinsic value of their Land Bonds and not
19 their Fair Market Value.
20 The second reason why Fair Market Value is
21 inappropriate in this case is because it would reward
22 Perú for its long history of attempting improperly to
[Page 171]
1 evade its obligations under the Land Bonds.
2 As Professor Edwards described in his Reply
3 Report, the Fair Market Value of the Land Bonds would
4 have converged with their intrinsic legal value if
5 there had been no risk of nonpayment.
6 Instead, Perú's active efforts to avoid
7 paying the Land Bonds even more than a decade after
8 the Constitutional Tribunal's 2001 ruling greatly
9 exacerbated that nonpayment risk and drove down the
10 Fair Market Value. And that nonpayment risk, as we
11 all know, ultimately manifested in the expropriatory
12 Bondholder Process. That is the opposite of what
13 should have happened. Sovereigns are supposed to pay
14 their debts.
15 Awarding Fair Market Value would improperly
16 reward Perú for its improper behavior in violation of
17 the clear international law norm that wrongdoers
18 should not benefit from their own bad conduct.
19 As Perú's own Expert Professor Reisman
20 describes it, "It is a venerable and general legal
21 principle that a delictor may not benefit from its own
22 delict."
[Page 172]
1 Should the Tribunal nevertheless determine
2 that Fair Market Value does provide the appropriate
3 measure of damages, all of the contemporaneous
4 evidence of the Market Value shows that Gramercy's
5 Land Bonds had a Fair Market Value exceeding
6 USD 500 million shortly before the 2013 Constitutional
7 Tribunal Decision.
8 And at this point, Mr. President, I'm going
9 to discuss confidential information. So, I would
10 request that non-parties leave the room and the video
11 be stopped.
12 (End of open session. Attorneys' Eyes Only
13 information follows.)
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6 (End of Attorneys' Eyes Only session.)
[Page 181]
1 OPEN SESSION
2 MR. RIEHL: In contrast to the
3 contemporaneous evidence of the Fair Market Value of
4 Gramercy's Land Bonds, from 2013 and late 2012, Perú's
5 Quantum Experts argue that the Tribunal should look
6 exclusively at evidence from a half decade or more
7 earlier.
8 Perú argues that the USD 33 million Gramercy
9 paid to acquire its Land Bonds from 2006 to 2008
10 provides the best estimate of their Fair Market Value
11 a half decade or more later, and that "intervening
12 developments would not have caused the Gramercy Bonds
13 to either clearly decrease or increase in value."
14 That is frankly preposterous.
15 As Gramercy described in its Reply, Market
16 Value does not remain fixed over time. At the most
17 basic level, Perú's Experts ignore that Perú's payment
18 obligation under the Land Bonds was not static but
19 continued to increase over time. The methods for
20 valuing the Land Bonds that have been proposed since
21 2001, including the MEF formulas, have included both
22 updating the value of the unpaid principal for
[Page 182]
1 inflation and applying interest in addition to the
2 inflation updating.
3 So, no matter what updating method is proper
4 under Peruvian law, the intrinsic value of the Land
5 Bonds was higher in 2013 than it had been in the 2006
6 to 2008 period. Perú experienced additional inflation
7 during that time that increased the intrinsic value,
8 and interest continued to accrue and accumulate.
9 That higher intrinsic value would necessarily
10 also increase the Land Bonds' Fair Market Value unless
11 other events increased the risk that Perú would not
12 fully pay its obligations under the Land Bonds.
13 In fact, though, a number of other
14 circumstances that affected Market Value had also
15 increased the Land Bonds' Market Value.
16 Those include: Numerous court judgments
17 awarding Land Bond holders substantial value using CPI
18 updating plus interest, substantial Congressional
19 efforts to compensate Land Bond holders, including the
20 Land Reform Bond Debt Swap bill, which called for CPI
21 updating plus interest at the coupon rates, the
22 petition filed in the Constitutional Tribunal in 2011
[Page 183]
1 to enforce the 2001 Decision coupled with the Chief
2 Justice's public statement that the Tribunal would
3 issue a Decision ordering adequate compensation for
4 Bondholders, and steady improvements in Perú's economy
5 that lowered Perú's default risk with respect to all
6 of its obligations, notably Perú's sovereign debt
7 rating was below investment grade when Gramercy
8 purchased its Land Bonds, but had increased steadily
9 to a solidly investment grade rating by 2013.
10 As Gramercy's CFO, Mr. Joannou, has described
11 in his Witness Statement, Gramercy's own internal
12 valuations increased substantially during this period
13 because there were many positive signs during the
14 initial years of the investment.
15 In light of all these factors, it is simply
16 not credible that the Fair Market Value of Gramercy's
17 Land Bonds in 2013 had not increased from the
18 USD 33 million Gramercy initially paid to acquire
19 them.
20 Even if the Tribunal doesn't adopt Fair
21 Market Value as the Measure of damages, the evidence I
22 discussed during the confidential portion of this
[Page 184]
1 presentation provides clear evidence that the price
2 Gramercy would have received for its Land Bonds in a
3 fair market transaction in 2013 would have exceeded
4 USD 500 million. That amount plus pre-award interest
5 is the proper amount of damages under the Fair Market
6 Value measure.
7 I would like to conclude by pointing out
8 that, at their core, Gramercy's primary and
9 alternative remedies claims both involve the same two
10 elements that Perú's courts consistently recognized.
11 CPI, to adjust to current value plus
12 interest. The only difference between Gramercy's two
13 claims is the interest rate. But whichever interest
14 rate is used, and even under the Fair Market Value
15 standard, Gramercy's Bonds clearly have substantial
16 value. And that is the necessary consequence of the
17 Constitutional Tribunal's 2001 ruling that Land Bonds
18 are obligations of value that must not be repaid at
19 nominal value.
20 The value of Gramercy's Bonds is substantial
21 because Perú expropriated lands the size of Portugal
22 and used the Land Bonds to compensate that
[Page 185]
1 expropriation.
2 The sizable value of the unpaid principal
3 when Perú issued the Bonds remains substantial when it
4 is properly updated to erase the effects of inflation
5 as the Constitutional Tribunal ordered in 2001 and
6 using Perú's own Consumer Price data.
7 In addition to that, Bondholders have been
8 deprived of the use of that principal for 30, 40, in
9 some cases even 50 years. If you or I put money into
10 a retirement account and left it there for several
11 decades, it would grow to a sizable multiple of its
12 original value. That's precisely the sort of
13 opportunity that Bondholders missed out on because
14 they did not have the principal to invest.
15 Because Perú did not pay the full updated
16 value of the Bonds in accordance with the 2001
17 Constitutional Tribunal Decision and the multiple
18 court cases implementing that Decision, the size of
19 the debt has grown. But it is nevertheless a debt
20 that Perú owes and it is a debt that Perú must now
21 pay.
22 With that, I will turn the microphone back
[Page 186]
1 over to Mr. Friedman, for concluding remarks.
2 PRESIDENT FERNÁNDEZ ARMESTO: Thank you,
3 Mr. Riehl.
4 MR. FRIEDMAN: This will be both brief and
5 slow.
6 Gramercy, along with all other Bondholders,
7 has suffered greatly from Perú's misconduct in trying,
8 after all these years, in the words of the 2001
9 Constitutional Tribunal, to turn expropriations into
10 confiscations, to eliminate its debt by literally
11 whiting it out on the basis of false information,
12 arbitrary formulas and a robotic insistence that Perú
13 has offered a Bondholder Process, no matter how
14 arbitrary and unjust that process is.
15 And if I could oversimplify just a little bit
16 to reduce this case to its core. It is pretty simple.
17 Gramercy invested from 2006 to 2008 under a very
18 clear, current value legal framework, with at least
19 the ability to vindicate those rights in Peruvian
20 Courts. There was no question at all about that or
21 what the Courts were doing. Perú has now taken that
22 away in favor of a process that imposes a haircut of
[Page 187]
1 96 to 99 percent on the value even that the Courts
2 would have applied at that time.
3 So, much so, that this Bond that we were
4 looking at before, 2231, on our calculations, under
5 Perú's formula, is worth less than a quarter of one
6 cent. It is probably not worth the paper that it is
7 printed on. Yet it represents 9/25ths of land that
8 was expropriated 35 years ago. So, the U.S.-Perú Free
9 Trade Agreement and international law protect
10 precisely against such conduct, arbitrary, irrational
11 and value depriving.
12 So, contrary to Perú's overarching complaint
13 that Gramercy has no right to be here and is abusing
14 the Treaty process, this case is a paradigmatic
15 example of the critical importance of investment
16 Treaties and investment arbitration, to provide a
17 neutral forum, to scrutinize critical--scrutinize
18 critically Government Acts that have value deprivation
19 and no real basis.
20 It is like many other cases that have come
21 before in investment arbitration, including the dozens
22 of cases involving Argentina, which basically just
[Page 188]
1 changed the valuation principle on which it was
2 offering to pay its debts. Changed it from dollars to
3 pesos, and did so on a basis that did not have
4 adequate justification under international law, even
5 though it claimed a crisis.
6 And what Perú is doing here is the same kind
7 of thing, but with less, defensively, even than
8 Argentina. Argentina at least had a real fiscal
9 crisis. Its officials had not spent years undermining
10 its own constitutional norms.
11 It did not use false information about the
12 crisis, it didn't use whiteout, secrecy, and other
13 dubious means to manufacture a justification for its
14 actions, and it took away, through the pesification, a
15 "mere"--I put that in quotes--70 percent of the
16 investors' value rather than the more than 95 percent
17 of the value that Perú's conduct here has destroyed."
18 Now, Argentina eventually made peace with its
19 creditors and came to consensual resolutions with them
20 to its considerable benefit. Perú has had every
21 opportunity to do the same and to amicably work out
22 this problem with Gramercy and many, many other
[Page 189]
1 Bondholders, but to a remarkable degree for a State
2 that has ample capacity to pay, it has simply refused
3 to do so and, instead, has engaged in the nefarious
4 conduct that we've outlined today and in our papers.
5 And so, we turn to you to ensure that Perú
6 now faces simply the consequences for its unlawful
7 acts in violation of the Treaty.
8 Thank you, Mr. President.
9 PRESIDENT FERNÁNDEZ ARMESTO: Thank you,
10 Mr. Friedman.
11 I think Professor Stern has had a question.
12 ARBITRATOR STERN: Not only one.
13 PRESIDENT FERNÁNDEZ ARMESTO: A lot of
14 questions.
15 QUESTIONS FROM THE TRIBUNAL
16 ARBITRATOR STERN: Yes. My question will
17 concentrate on what you consider to be an investment,
18 so it is mainly to Ms. Popova and maybe to others.
19 At one point in your presentation, you said
20 "long-term public debt is a quintessential example of
21 a form of investment."
22 And I would like you to comment on Note 12 in
[Page 190]
1 the Treaty, in the BIT, which I read: "Some forms of
2 debt such as bond debenture and long-term notes are
3 more likely to have the characteristics of an
4 investment, while other forms of debts such as claims
5 to payments that are immediately due and result from
6 the sale of goods or services are less likely to have
7 such characteristics."
8 So, I personally understand this that some
9 form of Bonds and debts are investment and some others
10 are not.
11 Do you have another reading?
12 MS. POPOVA: I think I do, Professor Stern.
13 This footnote, as I read it, distinguishes between
14 different kinds of debt and not different kinds of
15 Bonds.
16 ARBITRATOR STERN: Okay. So, how do you--can
17 you explain? Because that is just a statement.
18 MS. POPOVA: Yes. Yes, of course. So, it
19 says some forms of debt, such as Bonds, are more
20 likely to have the characteristics of an investment.
21 And so, it is giving the example of Bonds as a
22 subcategory of debt that is, on one end of the
[Page 191]
1 spectrum, that is more likely to be an investment.
2 And then it contrasts that with the kinds of
3 debt that it says are less likely to have such
4 characteristics. And if you look at the example that
5 it gives, I think that is very different from the
6 long-term public debt that I described as a
7 quintessential kind of investment. It gives the
8 example of claims to payment that are immediately due
9 and result from the sale of goods and services.
10 And so, while the Treaty covers debt
11 instruments in general, it also specifically mentions
12 Bonds. I think the support--and the footnote also
13 refers to long-term notes. This footnote to our
14 reading supports the idea that a long-term debt like a
15 Bond is more likely to be a form of investment.
16 ARBITRATOR STERN: Okay. Thank you for your
17 explanation.
18 So, still, you know, trying to understand the
19 limits of investment and, as you see it, without any
20 reference to the Salini test or especially to the
21 contribution to the development of a State, isn't it
22 almost a layman understanding of an "investment" that
[Page 192]
1 an investment is a contribution to an economic venture
2 that creates value?
3 MS. POPOVA: I believe that's a fair
4 description of a layman's understanding of an
5 investment. You commit resources of capital and you
6 expect that you will have something that has more
7 value in return. And I believe that is exactly what
8 Gramercy did here. The economic venture, if you will,
9 is not just buying scraps of paper.
10 The venture is investing, not only in these
11 Bonds, which themselves had a lot of value, and
12 Gramercy hoped that they would be paid just like
13 anyone else who invests in stocks and Bonds.
14 But there is also something else in this case
15 that I think is important, which is the story that
16 Mr. Koenigsberger and others have explained in their
17 statements as to why Gramercy did that, that there was
18 a broader economic venture behind that, that Gramercy
19 hoped not just to be one of thousands of nameless
20 investors, but it could actually create a solution
21 that would help Perú solve this issue for the benefit
22 of all Bondholders, not just for Gramercy but for
[Page 193]
1 everyone, that it could create a consensual debt
2 restructuring like it had for Argentina, like it had
3 for Nicaragua, like it had for Russia, that would help
4 Perú improve its investment ratings and attract new
5 investment, that it would get all other Bondholders
6 paid, not just Gramercy.
7 So, if you're thinking about in terms of
8 contribution to an economic venture, I would submit
9 that there is a very valuable economic venture here
10 that Gramercy honestly and earnestly intended, and you
11 see that in the testimony in the documents, and that,
12 I think, is a little different from just looking at it
13 simply as a financial instrument like any other.
14 ARBITRATOR STERN: Okay. Well, maybe we can
15 go back to this because you have a specific
16 presentation of what you call an economic venture, but
17 I wonder whether--at one point you said, well, look,
18 if Gramercy had a factory, would you say that this
19 factory is not an investment?
20 I think this is precisely the example that
21 shows that there is a big difference. I feel there is
22 a big difference between Gramercy's operation and what
[Page 194]
1 is the situation of investing in a factory which
2 creates new goods, et cetera.
3 MS. POPOVA: Well, I think we would agree
4 that it's not just a factory that can be an
5 investment. And the fact that the--
6 ARBITRATOR STERN: You gave the example, so
7 this is why I ask you.
8 MS. POPOVA: Yes, exactly. The Treaty here
9 protects lots of different forms of investment, beyond
10 things like a tangible factory. I gave the investment
11 simply--gave that example simply to show you the kinds
12 of distinctions that Perú is making really are not
13 what you need to be looking at. What defines an
14 investment is not whether it was marketed abroad, or
15 whether it was denominated in soles, or whether--all
16 of those things. That was the purpose of my example.
17 But if you look at this Treaty, further
18 support for the fact that financial instruments can be
19 investments, it doesn't just cover Bonds. It covers
20 things like derivatives and futures and options and
21 stocks and mortgages and liens, and it even goes so
22 far as to say, you know, court judgments might even be
[Page 195]
1 covered if we don't exclude them specifically in this
2 footnote.
3 So, I think what everyone might take as the
4 layman's understanding of an investment, and I'm
5 conscious there is a whole body of jurisprudence about
6 what Tribunals have held that to mean, if you look at
7 this particular Treaty and how it was structured, if
8 you look at the fact that the Parties specifically
9 negotiated, okay, is public debt going to be included,
10 what kind of debt, what kind of claims could arise out
11 of it. How can they be made?
12 I believe in this particular Treaty, whatever
13 one might think about the inherent characteristics of
14 an investment, in this Treaty there are so many
15 signals that public debt of this kind is covered, that
16 it is almost--one can agree on whatever you wish to
17 take as the inherent characteristics of an investment,
18 and they would all be satisfied given the language of
19 this Treaty and the nature of Gramercy's investment.
20 ARBITRATOR STERN: So, you think there is no
21 interest to know what the public debt was for? For
22 example, I mean, I guess you would agree with me that
[Page 196]
1 a sale is not an investment.
2 MS. POPOVA: It depends on what kind of sale.
3 ARBITRATOR STERN: Ah. Okay. Go ahead.
4 MS. POPOVA: Well, you're asking me to agree
5 with you what kind of sales.
6 ARBITRATOR STERN: No, I mean, I just take
7 this as a statement and want to know if you agree. I
8 mean, I think this is common knowledge, no? That the
9 sale is not an investment?
10 MS. POPOVA: A commercial sale of an asset
11 between private parties that has--that does not create
12 a debt on the part of the State?
13 ARBITRATOR STERN: No, I mean, a sale, in
14 general, is not an investment. You have an exchange
15 of--you have an exchange of value. You have not a
16 creation of value.
17 MS. POPOVA: I think it's hard to agree with
18 you without specific facts on which you are basing
19 that hypothesis, so I think I will beg to disagree,
20 but if what we're looking at, again, is to take that
21 test of the exchange or the creation of value, this is
22 not a simple exchange of value.
[Page 197]
1 To go back to what I was saying earlier, the
2 proposition here is that not only are there multiplier
3 effects of injecting $32 million into the Peruvian
4 economy, and you have people who have testified about
5 that, you have Professor Rodrigo Olivares-Caminal who
6 confirms that, Robert Koenigsberger has seen that in
7 other countries.
8 That--and I would say Perú has never disputed
9 any of that. It is not only them. It is not just the
10 microeconomic benefits of injecting that kind of
11 liquidity into a market that had been stagnant for
12 40 years. There is also the macroeconomic benefit
13 behind that, which, again, Perú has not denied.
14 ARBITRATOR STERN: Okay. So, would you say
15 also that the Bonds before they were sold were an
16 investment?
17 MS. POPOVA: Well, the Treaty said--
18 ARBITRATOR STERN: Because you seem to say
19 that it's the fact that they were bought that it's an
20 investment. So, I ask you the question: Were the
21 Bonds given to the landowners an investment?
22 MS. POPOVA: I think they would be, but you
[Page 198]
1 would also have to account for the fact that the--that
2 you also--for them to be a "covered investment,"
3 strictly speaking under the Treaty, they have to have
4 been bought by a covered investor.
5 ARBITRATOR STERN: Okay. Okay.
6 MS. POPOVA: But taking just the definition
7 of investment, yes.
8 ARBITRATOR STERN: You would say so?
9 MS. POPOVA: Yes, I would.
10 ARBITRATOR STERN: Okay. Thank you. Maybe
11 let's go a little bit further.
12 In the statement of Rejoinder--in
13 Paragraph 186, you say we have been in regular contact
14 with the Government of Perú. You cite an email. "We
15 have been in regular contact with the Government of
16 Perú since we started investing in these claims."
17 So, isn't that recognition that Gramercy has
18 bought claims rather than made an investment in an
19 economic venture? I mean, it is your Statement.
20 MS. POPOVA: I'm sorry, it's Paragraph 136?
21 ARBITRATOR STERN: 186.
22 MS. POPOVA: 186. It's Rejoinder--
[Page 199]
1 ARBITRATOR STERN: And it cites an email.
2 Yeah, it's the Statement of Rejoinder, Paragraph 186,
3 and it starts--it mentions an email. I can tell you
4 which one.
5 MS. POPOVA: I'm sorry. I believe I might be
6 looking at the wrong--in Gramercy Statement of
7 Rejoinder, submitted in November, Paragraph 186 which
8 begins "Perú's continued mischaracterization of
9 Berkowitz."
10 ARBITRATOR STERN: Wait a minute.
11 PRESIDENT FERNÁNDEZ ARMESTO: Berkowitz.
12 MS. POPOVA: Yes.
13 PRESIDENT FERNÁNDEZ ARMESTO: Mine refers to
14 Berkowitz, the Interim Award.
15 MS. POPOVA: Yes. Mine too. Correct.
16 ARBITRATOR STERN: Statement of Rejoinder.
17 Wait a minute. Maybe I have a wrong--
18 PRESIDENT FERNÁNDEZ ARMESTO: It seems to be
19 all dedicated to Berkowitz.
20 ARBITRATOR STERN: No, no, no. Well, we
21 can--wait a minute.
22 MS. POPOVA: Would it help if I--if you're
[Page 200]
1 asking me whether Gramercy invested in an existing
2 Investment Treaty Claim, so whether it bought a claim
3 rather than an investment? Was that your question?
4 ARBITRATOR STERN: That was what I read, yes,
5 but I can give you--
6 (Overlapping speakers.)
7 PRESIDENT FERNÁNDEZ ARMESTO: Ms. Popova,
8 just address this, this point?
9 MS. POPOVA: Yes. At the time that Gramercy
10 invested, which was from 2006 to 2008, none of the
11 Acts that we currently say are breaches of the Treaty
12 had occurred. So, what we invested in at the time
13 were the Land Bonds, and not the claims that we are
14 asserting today which didn't happen until many years
15 later.
16 ARBITRATOR STERN: Okay. So, maybe we will
17 leave this question of the definition of "investment."
18 I was giving a lecture in the mids for many years and
19 I used 10 hours, but it was not enough. So, here it
20 is only 10 minutes.
21 MS. POPOVA: Yes, the feeling is familiar. I
22 need to condense lots to say in little time.
[Page 201]
1 ARBITRATOR STERN: Okay.
2 MS. POPOVA: Thank you for your questions.
3 ARBITRATOR STERN: So, just two questions,
4 not on this topic. A question which has an
5 important--which might relate to the waiver. I'm not
6 sure I have understood the exact relation between GFM
7 and GPH. GFM was a management company.
8 MS. POPOVA: Correct.
9 ARBITRATOR STERN: Can you explain a little
10 bit better? Because I'm not sure I understood.
11 MS. POPOVA: Yes, in part, because that
12 involves some confidential information, and also
13 because Gramercy's Witnesses will be able to explain
14 it to you far better than I can, but that is
15 essentially right. GPH bought and owns the Bonds and
16 GFM manages them, and all of that is explained in much
17 greater detail in the Witness Statements of Robert
18 Lanava and Robert Koenigsberger as well. And I'm sure
19 they will be very happy to answer those questions.
20 ARBITRATOR STERN: Okay. So, GFM has no
21 shares in GPH?
22 MS. POPOVA: Yes. There is one item of--the
[Page 202]
1 answer is no, but the reason is confidential. It is
2 in--it is, again, it is in Mr. Lanava and
3 Mr. Koenigsberger's statements.
4 ARBITRATOR STERN: Okay.
5 MS. POPOVA: It does have an economic
6 interest.
7 PRESIDENT FERNÁNDEZ ARMESTO: We'll ask
8 Mr. Koenigsberger about that, and we'll also ask him
9 about his relationship with the investors, so that we
10 get a fair view of the relationship between investors
11 and Gramercy.
12 MS. POPOVA: Yes. If it helps to think about
13 it this way, GFM is the managing member. Yes. Yes.
14 ARBITRATOR STERN: Yes, this is what I
15 understood, but it was a little bit cloudy. And now
16 maybe a last question which might be more academic,
17 but still I'm interested in your view.
18 You relied quite heavily on Gramercy's
19 legitimate expectation that it was maybe not
20 you--maybe you--so, I would just like you to comment
21 on what you probably know on what the ICJ said in the
22 Judgment on the Merits of October 2018 between Bolivia
[Page 203]
1 and Chile, obligation to negotiate access to the
2 Pacific Ocean in Paragraph 162.
3 We can read: "The Court notes that references
4 to legitimate expectation may be found in arbitral
5 Awards concerning disputes between a foreign investor
6 and the Host State that applied Treaty clauses
7 providing for fair and equitable treatment."
8 And this is what is--on what I would like you
9 to comment more, what comes now. "It does not follow
10 from such references that there exists in general
11 international law a principle that would give rise to
12 an obligation on what could be--to an obligation on
13 what could be considered a legitimate expectation."
14 PRESIDENT FERNÁNDEZ ARMESTO: I am not sure
15 where that Judgment is in the record.
16 ARBITRATOR STERN: But it's knowledge.
17 PRESIDENT FERNÁNDEZ ARMESTO: At least it
18 does not ring a bell to me at this stage. If you want
19 to--we should get it into the record, I mean, now that
20 it has been referred to.
21 ARBITRATOR STERN: I'm sorry. I didn't know.
22 PRESIDENT FERNÁNDEZ ARMESTO: We will bring
[Page 204]
1 it into the record. If you want to make your comment
2 now, that's fine. If you want to do it afterwards,
3 that's also fine. You have not referred to it in your
4 presentation.
5 MS. POPOVA: Thank you. We will take a look
6 at it. If your question is what the content of the
7 Minimum Standard of Treatment is and whether our
8 legitimate expectations are relevant to that, we do
9 address that in our papers at some length.
10 ARBITRATOR STERN: Yeah, but I wanted you to
11 address it taking this into account.
12 MS. POPOVA: We will take it into account on
13 the break and will get back to you.
14 ARBITRATOR STERN: Okay. Thank you.
15 PRESIDENT FERNÁNDEZ ARMESTO: And let's get,
16 to be very frank, I was not aware of that Judgment.
17 Let us get it. Any Opinion from the International
18 Court of Justice is important. So, if you agree, we
19 will double-check whether it is in the record, because
20 it's a very, very large record. I don't remember
21 having seen it. It would have raised my awareness,
22 but maybe I overlooked it. If not, we will get it in
[Page 205]
1 and we will then give the Parties the opportunity to
2 address it.
3 MS. POPOVA: Thank you, Mr. President.
4 And Paragraph 162, Professor Stern. Thank
5 you.
6 ARBITRATOR STERN: Yes. And it's the Merits.
7 MS. POPOVA: Yes.
8 ARBITRATOR STERN: It's 1st October 2018.
9 MS. POPOVA: Thank you.
10 ARBITRATOR STERN: Obligation to negotiate
11 access to the Pacific Ocean between Bolivia and Chile.
12 PRESIDENT FERNÁNDEZ ARMESTO: Mr. Drymer, any
13 questions?
14 ARBITRATOR DRYMER: No, Mr. President.
15 PRESIDENT FERNÁNDEZ ARMESTO: Very good.
16 Thank you very much to Claimants for their
17 presentation. Let us get a final time check.
18 Let's, of course, exclude the time of the
19 Tribunal, but let's see the time of the presentation,
20 Madam Secretary.
21 SECRETARY PLANELLS-VALERO: Thank you,
22 Mr. President. The Claimants used 2 hours and
[Page 206]
1 40 minutes.
2 PRESIDENT FERNÁNDEZ ARMESTO: So, you can
3 also take 2 hours, 40 minutes if you wish.
4 So, it is now 1:22. Shall we be back at
5 2:30? 2:30? So, that you have also a couple of
6 minutes more time to react. 2:30. Now, we are off
7 the record.
8 (Whereupon, at 1:23 p.m., the Hearing was
9 adjourned until 2:30 p.m., the same day.)
[Page 207]
1 AFTERNOON SESSION
2 PRESIDENT FERNÁNDEZ ARMESTO: Now we resume
3 our Hearing. We are going to give the floor to the
4 Republic of Perú.
5 Mr. Hamilton?
6 We just received a presentation that we are
7 going to call H-2.
8 (Discussion off the record.)
9 PRESIDENT FERNÁNDEZ ARMESTO: Now we do start
10 the Hearing. We will resume the Hearing, and we do so
11 in order to give the floor to the Republic of Perú.
12 Dr. Hamilton?
13 OPENING STATEMENT BY COUNSEL FOR RESPONDENT
14 MR. HAMILTON: Thank you very much,
15 Mr. President, Members of the Tribunal.
16 On behalf of White & Case, it is an honor to
17 represent the Republic of Perú, and to be delivering
18 these Oral Arguments.
19 Perú is a sovereign country which is
20 economically stable and fiscally responsible. It is a
21 close partner of the U.S., it is a country that holds
22 legal investment, and it is also a trustworthy issuer
[Page 208]
1 of sovereign bonds. The Land Reform is a historical
2 issue in Perú for more than 50 years now, always under
3 the laws of Perú.
4 The Peruvian State has implemented a process
5 for the historical resolution of the debt, originating
6 with the Land Reform with all of the Bondholders that
7 decided to participate in this legally established
8 process. This process has worked properly, but the
9 campaign to--in spite of the campaign by Gramercy to
10 undermine its reputation, which has made an effort to
11 cause damage to Perú and to Peruvians, to create an
12 international case that is foundless. Gramercy is
13 trying to obtain chaos, chaos to reap benefits, and
14 our efforts--the efforts by Gramercy to present Perú
15 as a country in arrears does not have any basis.
16 Instead of participating in this legitimate
17 process, Gramercy is attacking the process that has
18 been created to offer a solution to this historical
19 problem. Gramercy, not Perú, has abused and violated
20 the Treaty between Perú and the U.S.
21 This is a case under a Treaty. This is not a
22 contract case; this is a case under a Treaty with very
[Page 209]
1 clear standards applicable on the terms of the Treaty
2 as well as under applicable international law. This
3 Treaty between the United States and Perú dates back
4 over a decade, to 2009. It is important to emphasize
5 that Perú has demonstrated over time a commitment to
6 the rule of law, to macroeconomic stability and a
7 reliable partnership with the United States, and on
8 behalf of Perú, we welcome the participation of the
9 representatives of the United States Government, the
10 non-disputing Party to this proceeding.
11 It bears mentioning that this is only the
12 second investment case that has been filed under the
13 U.S.-Perú Treaty. The first case, the Renco Case,
14 concluded in 2016 and was decided in favor of Perú.
15 As a matter of fact, it was decided in favor of Perú
16 at a time that proved to be quite infelicitous and
17 inconvenient for Gramercy, with implications that are
18 highly negative for its case, as we will discuss. And
19 in this case, it is Gramercy and not Perú that has not
20 only violated, but abused, the Treaty between Perú and
21 the United States.
22 In October 2015, Perú hosted the meetings of
[Page 210]
1 the World Bank and the International Monetary Fund,
2 and at that time it was the first such meeting held in
3 Latin America in about half a century. Christine
4 Lagarde said in her remarks: "Perú is no longer the
5 proverbial country of the future; it is the country of
6 the present." How ironic that this positive meeting
7 hosting world leaders was one of the moments that
8 Gramercy used to try to attack Perú for its own gain,
9 in an improper manner, as we will discuss.
10 The reason that Perú is so well-regarded by
11 the international monetary community is specifically
12 because of its dedication to fiscal responsibility.
13 Most of the world knows Perú for the World Heritage
14 site of Machu Picchu, but Perú is internationally
15 respected as a fiscally responsible sovereign, as a
16 trusted ally of the United States. Multilateral
17 institutions, the international markets, leading
18 rating agencies, all consistently praise Perú for its
19 continuing record of fiscal responsibility.
20 Gramercy's propaganda campaign has fallen
21 flat. Perú, to this day and to this year, continues
22 to be lauded for its fiscal responsibility. As Fitch
[Page 211]
1 Ratings has summed up: "Perú's creditworthiness is
2 underpinned by its established track record of macro
3 policy credibility, consistency, and flexibility,
4 which has delivered macroeconomic and financial
5 stability."
6 Indeed, it is specifically because of Perú's
7 fiscal responsibility that it does not simply make
8 exorbitant payments to bullies. Claimants routinely
9 sue States for old debt. They routinely lose. Perú
10 has defeated billions of dollars of claims in federal
11 courts here in the U.S. just in the last two years
12 alone on old paper Bonds.
13 The "Land Bonds," as Gramercy refers to them,
14 relate to agrarian debt with unique historical origins
15 dating back half a century to 1969, to an era of
16 agrarian reforms adopted across Latin America. These
17 old bearer instruments are subject to local law and
18 jurisdiction, and they were simply provided as
19 compensation for land. That's why the other guys call
20 them "Land Bonds" and insist on calling them "Land
21 Bonds." They were payments for land. They were
22 nothing more and nothing less than that. They are old
[Page 212]
1 IOUS. They are utterly different from contemporary
2 sovereign bonds.
3 After years of hyperinflation, two currency
4 changes, and economic crises spanning the 1980s and
5 the 1990s, the status of these Land Bonds became
6 uncertain and fell into dispute. Court rulings, at
7 best, left many loose ends. Efforts to establish a
8 legal framework repeatedly failed.
9 After years of uncertainty, the legal status
10 of the Land Bonds was settled by a Resolution of the
11 Constitutional Tribunal of Perú on July 16, 2013. It
12 was the ruling of July 16, 2013 which provided at last
13 for the establishment of an Administrative Procedure
14 and valuation for payment of the Bonds. Further to
15 that mandate, the Ministry of Economy and Finance
16 adopted Implementing Decrees, and it implemented and
17 has advanced a process to pay legitimate Bondholders.
18 Perú already has authenticated well over
19 11,000 Bonds, more than the total number of old Bonds
20 that Gramercy claims to hold. Bondholders are being
21 paid, but Gramercy has attempted to undermine the
22 procedure for its own self-interest in a bid for
[Page 213]
1 vastly more preferential treatment than any Peruvian
2 Bondholder could receive under the lawfully
3 established procedure. Gramercy is not looking for a
4 payment because it has been discriminated against. It
5 wants extreme discrimination in its favor.
6 Allegations of a default are absolutely
7 inaccurate. From the time that a legal framework was
8 put into place, Perú has diligently established a
9 procedure. It is paying Bondholders. The suggestions
10 of default, even in this city, are faker than "fake
11 news."
12 Where does Gramercy fall into this storyline?
13 Because the storyline I just told is a historical
14 storyline under domestic law about a domestic issue
15 that Gramercy chose to interject itself into.
16 Gramercy is a fund that focuses on distressed
17 debt. Distressed--the distressed piece is what
18 Gramercy wants. It is what Gramercy seeks. It is a
19 U.S.-based fund with varied entities and complex
20 structures that, today, it will hide from the U.S.
21 Government sitting here and kick them out of the room
22 because they are unwilling to let our own Government
[Page 214]
1 in Washington see the truth about the Gramercy
2 structures.
3 Whereas an investor typically, in a claim
4 arising under a treaty, would look for legal
5 stability, long-term investment, a factory that
6 actually produces something, Gramercy looks for
7 uncertainty, even instability, and rampant
8 speculation. It is telling that Gramercy was the lone
9 fund that elected to amass Land Bonds, and we will see
10 today how Gramercy obscured the documents behind its
11 purchases of these old IOUS from Peruvians. As a
12 matter of fact, we sat through hours of argument from
13 Gramercy, and they did not once discuss and explain
14 the Purchase Contracts that they withheld from this
15 Tribunal. They did not reveal these contracts. We
16 have them here with us today: 24 binders of material
17 that were withheld from Perú during this proceeding
18 and not revealed to the Tribunal. And we will see why
19 that must have been the case. Even now, Gramercy
20 continues to obscure relevant facts and evidence
21 behind claims of commercial confidentiality.
22 There's one more piece that we need to
[Page 215]
1 address in the introduction, and that is the--
2 (Comments off microphone.)
3 MR. HAMILTON: Gramercy--we obtained a
4 document, a Gramercy document about distressed debt
5 from 2010. And in this document, it lauds, I guess,
6 the Gramercy philosophy: "Buy when there's blood in
7 the street, even if the blood is your own." The
8 Article says that it's citing Rothschild, but it can't
9 prove the cite, but I think the sentiment speaks for
10 itself. This is almost the opposite of what you would
11 normally hear sitting in this hearing room, and
12 similar hearing rooms, about a diligently structured
13 investment based on clear legal rules.
14 Now, one of the most telling aspects of the
15 utter weakness of Gramercy's Treaty claims is the fact
16 that you, Members of the Tribunal, I'm afraid to say,
17 are merely treated as a secondary piece of a larger
18 strategy that Gramercy has been pursuing, and that is
19 a campaign to try to disgrace the Republic of Perú
20 internationally, in an effort to humiliate Perú,
21 damage its international relations with multilateral
22 institutions and its Treaty partner, the United States
[Page 216]
1 of America, and thereby force Perú to do what Gramercy
2 wants, despite what Peruvian law tells us to do.
3 This campaign is not a minor tangent.
4 Gramercy has developed an attack campaign that it has
5 been carrying out for years against Perú. We see
6 smiles and the sounds of violins before the Tribunal.
7 The reality has been knives into the gut of the
8 Republic of Perú and a constant attack campaign that
9 utterly disrespects the Tribunal and the Treaty.
10 There is ample information in the record regarding the
11 Gramercy campaign, but just a few details will suffice
12 to reveal the depth of this totally unacceptable
13 campaign meant to force a sovereign to change its laws
14 for the benefit of a fund that made a strange choice
15 about acquiring old pieces of paper.
16 In mid-2015--and I'm on Slide 7 of the
17 presentation. In mid-2015, Gramercy created an entity
18 called Peruvian American Bondholders For Justice.
19 This entity was set up by a representative of Gramercy
20 who is sitting in the room today and set up through
21 the law firm of Debevoise & Plimpton. They set about
22 trying to create propaganda at events--where is our
[Page 217]
1 photograph, the big photograph?
2 One of their first events to focus on was the
3 friendly soccer match between Perú and the United
4 States which was held in September 2015, where they
5 handed out T-shirts and propaganda materials for free.
6 You could go onto the website: "Sign up, and you'll
7 be eligible to win two free tickets to the U.S.-Perú
8 football match." That was one of the signs of the
9 campaign was getting underway. I know because I stood
10 in line to go into that soccer match and talk to
11 people about the T-shirts they were wearing who told
12 me, "I have no idea what it's about, but I got it for
13 free. Gratis."
14 The campaign intensified at the time of the
15 aforementioned meeting of the World Bank and the IMF
16 in Lima in October of 2015. Lobbyists and lobbyists
17 and lobbyists were retained. There's a whole list of
18 lobbyists who have been retained and involved
19 over years. Gramercy has not contributed to the
20 economic development of Perú. That much is clear. It
21 has, however, done wonders for the lobbying industry
22 in the City of Washington, and if any of the lobbyists
[Page 218]
1 were left off from this list, we apologize. There are
2 so many it is hard to keep up.
3 Now, not only did Gramercy intentionally try
4 to interfere with the bilateral relationship, exactly
5 contrary to the object and purpose of this Treaty; it
6 sought to further internationalize its interference.
7 It issued reports posing an independent reports. It
8 used its relationships with these Bondholder groups
9 and an entity that it formed in the U.S. to put out
10 negative propaganda not only with the IMF, not only
11 with other organizations, but with the OECD, in an
12 effort to try to interfere with Perú's Accession to
13 the OECD.
14 Bring it on down. You can lean it up right
15 here.
16 PRESIDENT FERNÁNDEZ ARMESTO: I must ask
17 Professor Stern, because she has sat on many more
18 Tribunals than me and than anyone else in the world:
19 But have you ever seen a photograph of a football
20 match at an Investment Arbitration?
21 ARBITRATOR STERN: No, I don't think so.
22 PRESIDENT FERNÁNDEZ ARMESTO: So, that's a
[Page 219]
1 first. But you must--we cannot see it. You must--oh,
2 put it there. Yeah.
3 MR. HAMILTON: Well, I take note of the
4 comment, and I will just say: If it is a first, it is
5 because it is a highly unusual situation that an
6 Investor spends its time creating fake propaganda at
7 football matches when it claims to want to be pursuing
8 a Treaty case. And one of the most telling comments
9 among all of the propaganda that has been distributed
10 in this matter was when a representative of Gramercy
11 said: "We will stop when Perú stops seeking
12 membership in the OECD."
13 Now, we have heard the crocodile tears today
14 that Gramercy is here for Peruvian victims. Gramercy
15 has been the tip of the spear in a campaign to try to
16 stop Perú from admission to the OECD. There is no way
17 that is good for Peruvians, or for the economic
18 development of Perú.
19 And the final thing we would say about this
20 campaign, which goes on and on and on--rewriting
21 Wikipedia with information that clearly sounds like it
22 was derived from Briefs that we read here--all of this
[Page 220]
1 is in the record, from the unique and unusual
2 two-round aggravation phase that started this Case.
3 The Tribunal has, time and again, instructed that the
4 Parties should abstain from action or conduct that may
5 result in aggravation of the dispute, and the pattern
6 continues and continues and continues. The lobbying
7 reports are before you. You can look in the
8 newspapers. It's abhorrent. It's abhorrent, it's
9 irresponsible, and it undermines the legitimacy of
10 this case. It is not a trivial aside.
11 Investor-State dispute settlement is designed
12 to channel disputes into a neutral procedure. That is
13 what the United States and Perú agreed to do when
14 ratifying this Treaty. Professor Reisman of Yale
15 University, the sole international Legal Expert before
16 this Tribunal, shared the following comments on this
17 issue in his First Report: "The system in an
18 Investor-State dispute settlement rests upon the great
19 compact in International Investment Law.
20 Investor-States waive the deployment of their
21 diplomatic protection powers in return for Host States
22 agreeing to submit disputes with those Investors to
[Page 221]
1 international arbitration by independent third-party
2 determination. The consequence of this great compact
3 is to depoliticize the process of resolving
4 international disputes, which are channeled through a
5 neutral procedural mechanism that is removed from the
6 politics of the traditional diplomatic mechanism. By
7 initiating arbitration under the Treaty, Gramercy has
8 subjected itself to the norms regulating this system
9 and the integrity of the arbitration process,
10 including specific requirements set forth under the
11 Treaty itself and, of course, by specific rulings of
12 this Tribunal."
13 As you look within this propaganda campaign,
14 you learn more about the fallacy of the arguments that
15 you hear under the Treaty. The focal point of the
16 Gramercy campaign has been the ceaseless repetition of
17 an invented number, $1.8 billion. That is the amount
18 that Gramercy claims in its Treaty claim and diffuses
19 through its propaganda campaign.
20 It reminds me of the best pie at the best
21 restaurant in my hometown. There's a tiny, thin piece
22 of crust, and then there's about three inches of
[Page 222]
1 meringue, and there's whipped cream on top of that.
2 That's what we're talking about here. That is the
3 number that has been used. It has been inserted into
4 press releases. It has been inserted into paid
5 Experts that they pay and release as supposed
6 independent people to attack Perú.
7 Let's look in context, and I refer you to
8 Quantum Expert Report 2, Appendix 6. Now, we've heard
9 Gramercy itself said that the face value of these old
10 Land Bonds were worthless, worthless at the time that
11 it chose to purchase them. But what did we learn
12 during the course of this proceeding?
13 Well, for a long time, we did not even have
14 the Bonds. We've never seen an original Bond until
15 today, but we did not even have copies of the Bonds
16 for a long period of time.
17 Those Bonds that were withheld, they weren't
18 attached to the Statement of Claim, not to the First
19 Statement of Claim, not to the Second Statement of
20 Claim, not to the Third Statement of Claim. They've
21 got a lot of different Statements of Claims because
22 their cases kept evolving, the whole time hiding
[Page 223]
1 everything you see right here.
2 Now, just along the bottom level alone you
3 see here 11 binders, copies of the Gramercy Land Bonds
4 that ultimately we obtained from Gramercy. These Land
5 Bonds have never gone through an authentication
6 process as required under Peruvian law. No Expert
7 Report has been submitted by Gramercy to authenticate
8 these Bonds. They provide a report by Deloitte that
9 says "these are actual copies." That's it. That's
10 what you're riding on.
11 But there's a second piece that Gramercy
12 didn't speak about today, did not discuss, did not
13 attach to one, two, three, four versions of its Notice
14 and Statement of Claim. Those are 24 binders, over
15 21,000 pages of Bond purchase contracts, because they
16 want you to focus on this old paper, Bonds, and sneak
17 through the definition of "investment" like that.
18 They don't want to talk about these
19 contracts. If you look at these contracts--and it
20 most certainly is the reason that they hid them for
21 years--you can look at these contracts and determine
22 that Gramercy paid $33 million to purchase certain
[Page 224]
1 rights related to old paper, $33 million.
2 So Gramercy, meanwhile, out in the world,
3 using figures like $1.8 billion, or the completely
4 invented figure of $5 billion for Agrarian debt, was
5 concealing from this Tribunal and certainly from the
6 United States Government and others the reality they
7 paid $33 million.
8 In addition, Gramercy has now admitted that
9 it could have obtained $34 million through the
10 Peruvian Bondholder process. So, Gramercy, by
11 participating in the lawfully established process,
12 could have recuperated 100 percent of the purchase
13 amounts for those Bonds. It chose not to do so. It
14 chose not to do so.
15 And, instead, it comes before this Tribunal,
16 and it seeks a return in excess of 5500 percent. No
17 lawful investor has any reasonable expectation of a
18 return of 5500 percent. No Treaty provides any
19 reasonable expectation of 5500 percent.
20 To the contrary, this was pure speculation,
21 and as Gramercy tells its own investors, "you could
22 lose everything."
[Page 225]
1 One final detail: In the middle of this, the
2 Gramercy valuations. Gramercy used the chart today.
3 I will not show it because they want to keep it
4 confidential, but it was Slide Number 215 of their
5 presentation. And they gave you data over a certain
6 period of years. They then the cut off the data that
7 they showed to you.
8 Members of the Tribunal, the Republic of Perú
9 is not going to request at this moment that the
10 non-disputing party leave the room, but we'll just
11 share a piece of paper with you.
12 PRESIDENT FERNÁNDEZ ARMESTO: So that should
13 be H-3. We receive a paper and we give it the number
14 H-3.
15 MR. HAMILTON: H-3, Mr. President, is the
16 confidential version of Page 10 of Respondent's
17 Opening Argument. We will leave that document with
18 you, and you can take a look at it yourself, and we
19 will certainly be discussing these issues, I'm sure,
20 all together as the Hearing proceeds.
21 What's the bottom line of this campaign, of
22 these inflated figures, of the hiding of information?
[Page 226]
1 The Economist figured this out a few years ago. The
2 Economist published an article on this issue, and it
3 concluded as follows: "No reasonable person could
4 construe Gramercy's speculative punt on archaic local
5 IOUS as a foreign investment of the kind that the FTA
6 is designed to protect. By invoking the FTA, Gramercy
7 is doing its bit to discredit free trade and
8 globalization. Its case should be thrown out."
9 Exacto.
10 Respondent has structured its Opening
11 Statement as follows: We're going to talk about the
12 facts, and then we're going to talk about the law.
13 We're going to talk about the facts by going through
14 chronologically the storyline from 1969 to the
15 present. We're going to go to the law, and we're
16 going to talk about jurisdiction, merits, and
17 compensation.
18 I will be assisted on the facts by my
19 partner, Francisco X. Jijón, and Ms. Andrea Menaker
20 will handle the argument on the law. And I would like
21 to add also that you will be hearing during the days
22 ahead from all of Perú's Witnesses and Experts,
[Page 227]
1 including the former Minister of Finance and
2 Ambassador of Perú to the United States, Luis Miguel
3 Castilla; Betty Sotelo of the Ministry of Economy and
4 Finance; Carlos Herrera, an experienced Peruvian
5 public servant who personally participated in the
6 negotiations for the U.S. Perú Treaty.
7 You will also hear from Professor Reisman.
8 You will hear from Peruvian law experts,
9 Messrs. Hundskopf and García-Godos. You will hear
10 from Messrs. Wühler and Guidotti with regard to
11 payment procedures, compensation procedures,
12 restructurings, the characteristics of Bonds. And,
13 finally, from Quantum Experts Mr. Kaczmarek and
14 Ms. Kunsman.
15 Let's look at the facts.
16 ARBITRATOR DRYMER: Mr. Hamilton, excuse me.
17 Without leading you into terrain that shouldn't be
18 publicized--broadcast, can you tell me what we're
19 supposed to make of H-3? Is this meant to be to
20 scale?
21 MR. HAMILTON: It is based exactly on a chart
22 that is in the record from the Quantum Experts.
[Page 228]
1 ARBITRATOR DRYMER: Okay.
2 MR. HAMILTON: As a matter of fact, their
3 chart is precisely what was used to make that
4 presentation.
5 ARBITRATOR DRYMER: Understood. Thank you.
6 MR. HAMILTON: Yeah.
7 On the facts, we are going to discuss four
8 elements: The origins of the Agrarian debt, the
9 purchases of the Land Bonds by Gramercy, the ongoing
10 uncertainty after Gramercy purchased Land Bonds, and,
11 finally the Resolution through the July 16, 2013,
12 Court Decision and subsequent establishment of a
13 functioning Bondholder procedure.
14 I'm now to Slide 16. We will be a little bit
15 more evidence-driven in this segment.
16 Regarding the origins of the Land Bonds, this
17 period basically stretches from 1969 to 2006. That's
18 when Gramercy appeared. And looking over that period
19 of decades, what you see is an Agrarian reform
20 established in Perú, followed by inflation and
21 currency changes, the closure of the Agrarian Bank in
22 the early 1990s, subsequent laws and decrees and court
[Page 229]
1 rulings that left uncertainty about the status of the
2 Land Bonds.
3 One example of that were the entire series of
4 failed bills from 2001 to 2006 that were attempting to
5 clarify the status of the Land Bonds, all of which
6 failed. Let's look at this in more detail now.
7 Regarding the Agrarian Reform Bonds, these
8 Land Bonds, as Gramercy calls them, relate to payments
9 for land subject to local law in courts. They are the
10 product of a unique era in Latin America history, one
11 which we heard colorful comments about from Gramercy
12 this morning, but, of course, what happened in 1969 is
13 not subject of claims in this contemporary Treaty
14 proceeding.
15 As indicated on Slide 18, an article from
16 1969 from the Foreign Affairs Publication, "Agrarian
17 reform is an extremely complex process interlocked
18 with the whole of sociopolitical and economic
19 structure of a nation."
20 In Peru, the Agrarian Reform Law, Decree-Law
21 17716 was adopted on the 24th of June 1969. It's in
22 the record as RA-155. And at the time that that law
[Page 230]
1 was promulgated in the month of June 1969, the day was
2 dubbed "the day of the campesinos"--"the day of
3 campesinos" because Agrarian Reform was designed to
4 redistribute land. That was the point. Like it or
5 not. You can't claim about that.
6 It was not only something that happened
7 throughout the region at the time, but it is something
8 that the United States Government even encouraged
9 certain reforms at the time, and all of this is
10 explained in the record.
11 So in Perú, the Agrarian Reform Law was
12 established, and on that basis the Executive Power was
13 given the authority to compensate landowners for the
14 expropriation of their land. That's the origins of
15 these old instruments. Exactly the opposite of a
16 contemporary sovereign Bond issuance that you go and
17 market internationally.
18 And the law specifically authorized the
19 admission of Bonds paying specific landowners, land
20 IOUS. And over more than a decade, Perú redistributed
21 millions of hectares of land to numerous beneficiaries
22 and adopted multiple Supreme Decrees authorizing the
[Page 231]
1 issuance of the Agrarian Reform Bonds. That is the
2 story of the Agrarian Reform Bonds.
3 Just to be sure, consistent with their unique
4 place in history and the targeted purpose of
5 compensating landowners, these Land Bonds had very
6 particular characteristics. The Bonds were provided
7 as compensation for land. They were not issued to
8 generate proceeds for the general use of the State or
9 similar uses of contemporary Bonds. They were
10 provided to landowners as part of a domestic land
11 reform program. Perú never went on a roadshow to
12 promote investment in these Bonds. They were given to
13 expropriated landowners. They were not available for
14 investment or listed on a stock exchange.
15 Whereas, contemporary Bonds are structured to
16 attract international purchasers, the Land Bonds were
17 issued in local currency, soles de oro, and
18 subsequently impacted by two different currency
19 changes. And, of course, subject to local law,
20 subject to local jurisdiction, issued in paper, which
21 I think becomes quite smelly over time, and it is part
22 of the reason that an authentication process is
[Page 232]
1 important to prevent fraud on the State.
2 Over the course of the 1980s and 1990s--early
3 1990s, Perú, like much of the region, faced
4 hyperinflation, two currency changes, the end of the
5 Agrarian Reform, and, finally the closure of the
6 Agrarian Reform Bank in 1992. So the fate of these
7 Bonds fell into uncertainty.
8 It is no surprise, then, that both the
9 Quantum Experts of Perú, as well as the Quantum Expert
10 of Gramercy, agree that the face value of these Bonds
11 was virtually worthless, virtually worthless.
12 Slide 23. What happened after the
13 hyperinflation and currency changes? A law in 1996,
14 Exhibit RA-256, established nominal payment of these
15 Bonds. Subsequently, in the year 2000, a decree,
16 Exhibit RA-226, provided for dollarization. In 2001,
17 in a court ruling of the Constitutional Tribunal, the
18 Court held that nominal value was unconstitutional.
19 This is the decision that Gramercy now claims
20 was the cornerstone of all of its Investment
21 Decisions. This short decision made no reference to
22 payment procedure, no reference to valuation method,
[Page 233]
1 no reference to timing, and no reference to interest.
2 This is not something you stake your claim on.
3 And what occurred over the subsequent
4 several years before Gramercy began to purchase
5 through all of these contracts that were hidden from
6 you, Members of the Tribunal, left things uncertain,
7 and they remained uncertain all the way until July 16,
8 2013.
9 Mr. Jijón will now summarize in further
10 detail the legal status of the Land Bonds during this
11 period from 2001 to 2006.
12 PRESIDENT FERNÁNDEZ ARMESTO: You have the
13 floor.
14 MR. JIJÓN: Thank you, Mr. President. I'm
15 going to speak English.
16 Mr. President, and Members of the Tribunal,
17 I'm going to be addressing the value principle under
18 Peruvian law, and I think it's very important that we
19 define what it is we're talking about because what we
20 heard this morning from my esteemed colleagues was
21 incorrect as a matter of Peruvian law.
22 And they began their presentation this
[Page 234]
1 morning by saying--by making reference to the value of
2 their Bonds, saying "we know this has to be a
3 significant amount because this was given out for
4 compensation in exchange for land the size of
5 Portugal." They also closed with a similar argument.
6 I think that we need to be very clear: We
7 are talking here about valuing Bonds, not valuing
8 land. And nobody in this procedure, as far as I know,
9 has seriously argued that the value of the land is a
10 relevant reference point for the value of these Bonds.
11 These Bonds were given out in exchange for
12 land as part of the Agrarian Reform. At that moment,
13 the Bonds had a debt, which was to be paid over time,
14 and what the Constitutional Tribunal did in 2001 was
15 to say that that value had to be brought up to--had to
16 be updated.
17 The question, however, is what does that
18 mean? What does that mean to update the value of the
19 Bonds? And, unfortunately, the 2001 Constitutional
20 Tribunal Decision was not clear about that. They said
21 that the Congressional law that declared that the
22 Bonds should be paid at a nominal amount was
[Page 235]
1 unconstitutional, but they did not establish any
2 alternatives.
3 Just for the record, I think it's important
4 to note that that Decision was not only about Article
5 2 of that Congressional law. Today, I believe that
6 Gramercy showed you the wrong provision of the
7 Decision. They made reference to a part of that
8 Decision that was referencing Article 1.
9 In reality, Article 2 is what we should be
10 looking at. Article 2 is the one that says Bonds
11 should be paid at nominal value. And what the
12 Tribunal was saying, no, we don't pay at nominal
13 value, but it didn't say what we do pay.
14 Now, once we get that straight, what can we
15 take from that? Now, my colleagues on the other side
16 have said, "well, yeah, it was implicit. Current
17 value or the value principle, it has a clear meaning."
18 They talk about a legal entitlement and they talk
19 about consensus, and they said just about everybody
20 knew what this meant.
21 On Slide 26 of the presentation, you will see
22 what the Civil Code actually says about the value
[Page 236]
1 principle. There are two provisions: Article 1235
2 and Article 1236.
3 Article 1235 makes reference to a series of
4 different ways that an obligation can be updated that
5 includes reference to different indices that are fixed
6 by the Central Reserve Bank of Perú, reference to
7 other currencies, or to goods.
8 Article 1236 does not reference those, but
9 nor does it reference anything else.
10 So, in saying that we need to look to Article
11 1236, so what? How do we just derive CPI from Article
12 1236? CPI is not mentioned in Article 1236. Well,
13 what Gramercy says is everybody knew that that's what
14 it meant, and, in particular, they talk about a
15 uniform jurisprudence. They said the Courts had
16 uniformly held that 1236 meant you apply CPI. And, in
17 fact, they today said that there is not a single case
18 to the contrary. Well, that's just wrong.
19 If you look on Slide 27, you will see four
20 cases. These are four cases that are in the record,
21 dating back to around this time, 1998 through 2004.
22 In each of these cases, a Peruvian Court referred to
[Page 237]
1 using the dollar as a reference for updating an
2 obligation. The Chamber used the dollar factor.
3 And in each of these cases, you see something
4 similar. I'm not going to read them because I think
5 it's clear.
6 PRESIDENT FERNÁNDEZ ARMESTO: These cases
7 refer to "bonos agrarios"?
8 MR. JIJÓN: No. These cases are just, in
9 general, applications of CPI. Sorry, general
10 applications of the dollarization method.
11 PRESIDENT FERNÁNDEZ ARMESTO: If we can, can
12 we use the proper--because a lot of confusion arises
13 because we use English translation of Spanish legal
14 terms. "Teoria valorista," that's the legal concept of
15 the whole structure, of the whole--of the concept in
16 Peruvian law, "teoria valorista."
17 MR. JIJÓN: Correct.
18 PRESIDENT FERNÁNDEZ ARMESTO: So that is what
19 we are really discussing: La teoría valorista del
20 pago de las obligaciones. "This is the current value
21 theory in the payment of obligations."
22 MR. JIJÓN: That's right, the "teoria
[Page 238]
1 valorista" does not have an easy translation. And for
2 precision, we can call it that. Current value
3 principle is something that was made up for the
4 purposes of this case.
5 Now, on the next slide, you're going to see
6 some other cases, and these cases are cases where the
7 Courts were updating the value of Agrarian Reform
8 Bonds. And here, what can we see?
9 Again, no clear legal rule. Various
10 different indices, at least two types of CPI, plus one
11 reference to the Central Bank's automatic adjustment
12 indexes.
13 What about the reference date? One of the
14 cases said we'll update it from the placement date.
15 Another one didn't say when they were updating it
16 from. And a third case referred to updating from the
17 last clipped coupon date.
18 The same, you see different methods of
19 calculating interest as well.
20 PRESIDENT FERNÁNDEZ ARMESTO: Can I make
21 another point, just for clarification for everyone?
22 Because otherwise we will get lost. These Bonds have
[Page 239]
1 something very special, that the coupons also relate
2 to the principal. So, when we speak--normally when
3 you speak about coupons, you only refer to the coupons
4 for the interest. And in Spanish, to cut a coupon
5 means to collect the interest, but these Bonds,
6 surprisingly, have also coupons for the partial
7 amortization of the capital, so, when it last clipped
8 coupon can mean the last date when interest was
9 collected or the last date when a portion of the
10 principal was repaid. It's important that we keep
11 that in mind because otherwise we will--a lot of the
12 economic analysis does not make sense.
13 MR. JIJÓN: Of course, Mr. President, and
14 that's an excellent point. On the last clipped coupon
15 date, what we're really talking about is the last time
16 that a Bondholder collected a payment on that Bond,
17 and that's interesting because it really does go to
18 the heart of what these Bonds were, and they are very
19 different, as the President has noted, from other
20 types of instruments, and I think that it shows why
21 some of the analogies we heard this morning, such as
22 putting money in a retirement account or buying crates
[Page 240]
1 full of wine, they don't work. And the reason for
2 that is these Bonds were not--they didn't have a
3 separate interest coupon. No. They were really IOUS
4 that were fixing payment on the principal, just fixing
5 payment over time. So, the initial amount of the
6 principal was not owed on the day of the
7 expropriation. It was to be paid by Perú over time.
8 And that's an excellent point.
9 Okay. What I think we can take away from the
10 slide--and I don't want to get bogged down in the
11 details anymore. I think what is clear here is not
12 that any one of these methods was the "right method."
13 The point here is there wasn't a consensus. There
14 were various ways of looking at these Bonds, what
15 these Bonds might have been worth, and someone who did
16 a thorough due diligence at the time could have seen
17 this.
18 If you look on the next slide, here is
19 Slide 29. What we see is there's also not a clear
20 legal rule in any of the legislation that was being
21 talked about at the time, and this morning we heard
22 that actually the legislation doesn't mean that there
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wasn't a clear legal rule. All it meant was that Congress was trying to think of some payment method, a new alternative to the courts.
Well, that is just clearly not the case. If you go through the bills--and we have--they have different valuation methods considered in them. They have different ways of talking about interest, as well as different ways of paying the updated principal.
Again, what's relevant here is not that any of these is the right rule. It is that there could not be a consensus if every single one of these bills was looking at a different method. So, to talk about a consensus or a clear legal rule or--it is just factually wrong.
And this is very important because when we talk about how there's a haircut or there's been some wiping out of value, well, first, you have to know what the value is, and the problem is that without knowing the methodology, you can't know the value. And what we see here is that there were lots of different methodologies. Lots of them were being talked about. Again, none of these passed. So, on
[Page 242]
their face there was no consensus.
I'd like to make reference to R-257. This is the Report of the Commission 148. We've already heard about this document today. This is the document that was brought up by Claimants during the housekeeping portion, and as Mr. Hamilton anticipated at the time, this document is devastating to Gramercy's case.
Now, this document, Gramercy has tried to spin as showing that there was a clear legal rule because this Commission decided to apply CPI. They considered CPI to be one of the ways that they could go forward, but if you look at what the Commission actually said, and I'm going to read this in Spanish so that it is no confusion.
ARBITRATOR DRYMER: Can you give us the page reference, page number reference, please, as you're going forward.
(Comments off microphone.)
MR. JIJÓN: We will get that, sir.
ARBITRATOR DRYMER: Thank you.
PRESIDENT FERNÁNDEZ ARMESTO: Let me get the facts clear. This is the Commission which was created
[Page 243]
to study the Agrarian Bonds?
MR. JIJÓN: That's right. This Commission--
PRESIDENT FERNÁNDEZ ARMESTO: And it was with people from civil society and politicians. That is the Commission?
MR. JIJÓN: Yes, sir. You're anticipating some of my following comments. This Commission included members of the Government, and it included some Bondholder group representatives as well. And we'll get to that because that's an important point. One of the things that is important here is that this Commission was established to study: "All right, what do we do? How can we apply the 2001 Decision?"
And let's see what they say: "According to technical studies on the basis of the Commission's work, current legal regulations do not restrict nor limit the factors or indices that may be used to update the land debt.
The only restriction in the interpretation of the above-mentioned reports is that the index or factor to be used respect the current value principle."
[Page 244]
What does that say? It means that the only limitation was you had to--and I am being told this is on Page 8.
So what does this say? This means that the Commission recognized there was no limitation in Peruvian law at that time as to what framework--sorry, as to what index or other factors should be taken into account in updating these instruments, these old Bonds. And the Commission went on and they tried to figure out how to proceed. So, they specifically considered three different types of index. They considered dollarization. That is "TC" on that table. They considered CPI, "IPC," and they considered adjusted CPI, "IPC ajustado"; three different types of index.
And what happened?
They did not go with dollarization. They did not go with CPI. They opted for a middle ground.
Now, what's interesting here is even opting for CPI, this which Gramercy has said well, look, this Commission, they opted for CPI; hence, CPI was the rule. They used an adjusted form of CPI, which, even
[Page 245]
in their calculations, gave a value less than half of what CPI would give you.
Obviously, what we're talking about here is figuring out a methodology to find value, not starting from a value and then working backwards to a methodology. In the interest of time, I'm going to move forward. The one point that I would add is that--to the President's question, the Bondholders who were part of that Commission, they didn't agree with this result, and they actually were quite critical of the decision. So, to present this as a consensus view is also wrong, just on the facts.
PRESIDENT FERNÁNDEZ ARMESTO: But do you agree? I mean, do you agree that they proposed--I think it is in Page 14--that they proposed "usted de acuerdo que ellos establecieron un IPC ajustado"--in accordance with--so, at the end the formula is based not on "IPC ajustado y al final", in accordance with a certain financial formula?
MR. JIJÓN: Yes, Mr. President. That was a recommendation of the Commission. It ended up going into one of these draft bills. Actually, I'm not sure
[Page 246]
if it's here.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah. It is on the same document.
MR. JIJÓN: And the point was--again, it did not become law.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah.
MR. JIJÓN: Again, there were lots of different methods being thrown around, talked about, not one of them became law because there was no consensus.
MR. FRIEDMAN: Forgive me, I'm sorry, but I think the--my references before to the bill that the draft legislation that had broad social representativeness was different from this. And I think it's being asserted that I made certain representations about this. This is a so-called "148 Commission" that was led by the Government. But what I was referring to was the Agrarian Commission, which was part of the 2005 and 2006 legislative efforts.
MR. HAMILTON: Have no fear, we will get there.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. There
[Page 247]
are two Commissions. That was my question. There are two Commissions.
MR. JIJÓN: The following Commission, as you will be able to see in a few minutes, imported this analysis.
PRESIDENT FERNÁNDEZ ARMESTO: Very good.
MR. JIJÓN: I will move quickly.
2004, what happened? Again, the issue of the Bonds goes before the Constitutional Tribunal. What's important here is that the Court upheld dollarization. And Gramercy has tried to make this into a nonissue. They say it's not important, that the Court upheld dollarization because they didn't make this mandatory. They said it was an option.
But, if we look at what the Court actually said--because one of the issues that the Court was asked to decide was how this squared with the 2001 decision? This is the Court addressing the issue of whether this was res judicata. They said that dollarization was acceptable because--and, again, I'm going to read in Spanish: "So, it says that this regulation that is now being put into question does
[Page 248]
not seek to provide fair price."
My apologies.
What they are saying is the 2001 Decision, in their view, was--had ordered updating. You couldn't pay a nominal value, and here dollarization was okay because it was a method of updating and not paying nominal value.
Clearly, if this was only about giving Bondholders a choice, then it wouldn't matter whether it was about nominal value or updating because, you know, you could have given Bondholders a choice to take nominal value too; right? Presumably. Okay. Moving on.
I'd like to call your attention to Paragraph 29 of Dr. Revoredo Expert Report. That was put to your attention this morning as well. I think it is important here to note how Gramercy's legal arguments have evolved. We have here a red line of Dr. Revoredo's original report versus her amended one. In the original one, Dr. Revoredo took the position that Peruvian Courts had generally held Land Bonds have to be updated using CPI, and that the
[Page 249]
Constitution, the Civil Code, and the 2001 Court Decision all imposed an obligation on the Government to pay the current value of the Land Bonds under CPI.
Now, Dr. Revoredo later walked that back, and she said that they generally had held this as a consequence of considering that the methodology respects obligations set up in the Constitution Civil Code and 2001 Court Decision.
Now, we would have loved to have Dr. Revoredo here to cross-examine. As Gramercy's attorneys have reminded us, she was part of the 2001 Constitutional Tribunal and would have been very good as a witness of what happened there and in 2004. However, we are not able to cross-examine her, either as a witness, and she certainly cannot be considered an expert now that she has withdrawn. She has said that this is for health reasons. We've known Dr. Revoredo a long time. Dr. Revoredo, in fact, when she was approached by Claimant to assist them in this proceeding, asked White & Case to be a reference.
So, we really were looking forward to cross-examining her. It is disappointing that we
[Page 250]
can't cross-examine her. It is particularly since, even after this letter, we had held out hope that she might have reconsidered and been available, particularly since we have recently seen her making public appearances and statements by video.
Since she is not here, we will just point out that Dr. Revoredo's impartiality has been a concern with respect to the Agrarian Reform Bonds, and this is not a recent concern. This--all of this is in the record. This is, in fact, all in the record of the Constitutional Tribunal Decision itself. Dr. Revoredo was asked to recuse herself from that--from considering that case because an impediment that was thought to bring her impartiality into question. She refused. And we are unfortunately not able to cross-examine her about that or about whether she has some personal interest in the bonds or anything else.
And, with that, I am going to hand this over to my colleague, Mr. Hamilton.
PRESIDENT FERNÁNDEZ ARMESTO: Just to be--you are putting here some clips from newspapers?
MR. JIJÓN: Correct.
[Page 251]
PRESIDENT FERNÁNDEZ ARMESTO: I was trying to find them, and is it R-462?
MR. JIJÓN: Correct. R-462 is the record of the Constitutional Tribunal case.
PRESIDENT FERNÁNDEZ ARMESTO: No. That's not my question. You see here there is an article (in Spanish), and I see a photograph of a lady--
MR. JIJÓN: Yes.
PRESIDENT FERNÁNDEZ ARMESTO: --who may--or not. I don't know her--but it may be the Justice. And then (in Spanish), and it seems--reading it quickly, it seems that there is some impartiality problem, and it seems to affect Justice Revoredo. My point to you was, are these documents in the record?
MR. JIJÓN: Yes, they are, in R-426. They are in the record of this case and in the record of the Constitutional Tribunal Decision.
PRESIDENT FERNÁNDEZ ARMESTO: Okay.
ARBITRATOR DRYMER: Once again, I'll ask you for page references in due course.
MR. JIJÓN: I believe they are on the slide. I think they are Pages 160-169 of R-462. It's quite a
[Page 252]
large record.
(Overlapping speakers.)
PRESIDENT FERNÁNDEZ ARMESTO: Okay. Yes. Let me say that it is extremely helpful because when we want to then double-check, it is a very, very--this is why I thought it could not be there because it starts with a judicial document.
ARBITRATOR DRYMER: It's at 163 of the PDF and following.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. So, it is there. This is--please, that goes for both Parties to put the page numbers so that we can actually. Oh, yeah, there are some pages there. Yeah. (in Spanish).
Sorry. Why do we have--I see this is a document with 3,596 pages. That's not really to be encouraged because it is impossible to find something. Why is this document 3,500 pages? What is the R-462?
MR. JIJÓN: That is the entire record of the Constitutional Tribunal's Decision in that case, Case Number 22/1996 brought by the Engineers Bar Association. That is an important case in our case because that is where the 2001 sentence came from, as
[Page 253]
well as the 2013 Resolution that we will get to in a few moments.
PRESIDENT FERNÁNDEZ ARMESTO: So, you have been--under Peruvian law, you can get a copy of the whole case?
MR. JIJÓN: Yes. We obtained the whole copy and put it in the record.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. And so, these documents are here regarding Justice Revoredo. Are documents from the 1997 where she was challenged?
MR. JIJÓN: She was challenged by the Congress at that time, which considered that she should not be hearing the case because of an impediment, specifically a link--a personal link that she had with the representatives of the plaintiffs.
Just to be clear, we are not alleging any--we do not want to disparage Ms. Revoredo or anything of the like. However, we do think it is important to note that she has given what appears to be almost witness testimony at times, and we have not had the opportunity to cross-examine her.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. Thank
[Page 254]
you.
ARBITRATOR DRYMER: This was in evidence in that record.
MR. JIJÓN: Correct. Correct.
(Interruption.)
ARBITRATOR DRYMER: Pardon me. This is evidence in that record.
MR. JIJÓN: Yeah.
ARBITRATOR DRYMER: It's not a record of the Decision itself? It's the record of the case that appeared as it was filed before the Tribunal? Is that correct?
MR. JIJÓN: Correct, sir.
ARBITRATOR DRYMER: Yeah. Thank you.
PRESIDENT FERNÁNDEZ ARMESTO: Okay.
MR. JIJÓN: Mr. President--
PRESIDENT FERNÁNDEZ ARMESTO: Okay. In any case, these are things which happened in the past century? Because it is a 1997 case, so challenges would be in 1997, 1998, and that led then to the 2001 Decision?
MR. JIJÓN: Correct.
[Page 255]
(Overlapping speakers.)
PRESIDENT FERNÁNDEZ ARMESTO: Yes. Okay.
MR. FRIEDMAN: And they were resolved a few pages later. You can see the Decision of the Court.
PRESIDENT FERNÁNDEZ ARMESTO: Sorry.
MR. FRIEDMAN: You can see the Decision of the Court resolving that challenge--
PRESIDENT FERNÁNDEZ ARMESTO: Okay.
MR. FRIEDMAN: --a few pages later in the PDF if you're interested.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. To be very frank, I was not aware of that.
MR. HAMILTON: All issues we will never have the opportunity to ask Dr. Revoredo about before you.
So, to conclude, as of 2005, as a matter of Peruvian law, there had been commissions, there had been various draft laws, but there was not only uncertainty but there was an ongoing dispute regarding the Agrarian Reform Bonds. It was precisely a dispute scenario that existed when Gramercy enters the story.
I told you we were going to discuss four things, the origins of the Agrarian Reform Bonds and
[Page 256]
the uncertainties in dispute that already existed, the purchases by Gramercy, the ongoing uncertainties after their purchases and then the resolution. We are now on the second segment, which is the purchases of the Agrarian Reform Bonds by Gramercy. And I'm on Slide Number 37 right now.
Keep in mind that Gramercy touts a business model aimed at "exploiting distressed investment opportunities." So, distress is a part--is central to what Gramercy does, and that's why Gramercy advises investors, American pension funds, pension funds involving American workers, teachers, firefighters, state employees.
They tell them that the investment's performance may be volatile and investors may lose all or a substantial portion of their investment. They tell them clients must be prepared to bear the loss of their entire investment. And I refer you to Exhibits R-71 and R-540, page numbers listed on Page 37.
So, Gramercy's business model centers on distress. They tell American workers and pension funds whose money they bring into their fund: "You
[Page 257]
may lose everything." But they demand of this Tribunal and in propaganda to the United States Government that they should magically be amped up from spending $33 million on purchase Contracts to receive over $1.8 billion. It is an incredible business model.
And one of the reasons it is so incredible is if you look at this Land Bond situation, what was their due diligence? They tell us now everything was so clear based on their deep research.
Let's look at Slide 38. Now, Slide 38 not only shows what is purported to be the Gramercy due diligence memorandum, and that's a due diligence memorandum dated 24 January 2006, CE-114.
But we also demonstrate here an email of the same date, CE-729, which is on the left side of this page. And what you see by comparing these two exhibits, which ended up in the record at different moments of this case, is that, on the left side, these are notes--and it says, "subject, ADAEPRA notes." These are notes that a Gramercy representative took in discussions with the Bondholders association
[Page 258]
representatives.
Same day they turned that into a due diligence memorandum. If you look in the center of the page, you can see the changes that were made from the email notes write-up to what has been presented in this case as a due diligence memo. And let me point you to July 5 of 2016, a date I remember well because it interfered with July 4th, when Perú filed its preliminary response and we pointed out there the strangeness that this due diligence memo, the due diligence memo had no letterhead, seemed a little loose in terms of its provenance.
And we see now that this is actually a copy/paste of an email with a few tweaks, and an email based on notes from a discussion with the local Bondholders association. There is no other due diligence memo on the record.
There is one memo from later in 2006 that was withheld on the ground of privilege that appears to be related to the development of these purchase Contracts that they hid. This is their due diligence, and their own due diligence memo, if you look at Slide 39, this
[Page 259]
is what it said.
It said: "The Peruvian Government serviced these Bonds until 1987 when President Alan García declared a default on Perú's obligations. Although Perú has reconciled most of its past debts, the Land Reform Bonds remain in arrears. The Land Reform Bonds have been in default for a period of 18 years. Why would the Government seek to reconcile these obligations now?" Good question.
They specified process of transferring title in Bonds is a bit complex. So, complex that they hid 21,000 pages from you through three or four submissions.
"Further complicating matters is the total updated debt denominated in nuevo soles." That's their due diligence memorandum.
And it goes on. Slide 40, the original Land Reform debt totaled 25 billion Soles de Oro, which today is worth approximately 25 nuevos soles. USD 1 equal 3.35 soles. Then it has various ranges of data, none of which was precise at all, and they went ahead and set out--and, again, I'm on Slide 41.
[Page 260]
As I mentioned, this is a copy/paste from an email, notes from a discussion with the Bondholder representative. And they say: "ADAEPRA"--bondholder group--"is pursuing a parallel strategy, a transactional solution"--solution to what?--"solution to the dispute that already existed." "Negotiating a settlement," a settlement of what? "Of a dispute that already existed. A judicial track demanding payment. One potential strategy would be to lobby Congress." Lobby Congress to do what? "To change the law, to make things clear, to give us certainty."
And how did they target that change in law? "Let's focus on the period of time between the elections in April and inauguration at the end of July. During this lame duck period, a Congress representative may be willing to call for a vote."
So, let's see what happened in 2006. They tried it again in 2011; they failed. They tried it again in 2016, intentionally filing their Request for Arbitration, just prior to the second runoff for the election; they failed. They failed because they tried to force clarity to give them an exorbitant payout to
[Page 261]
which they were never entitled. "Punto final."
Now, it's very telling that in 2006 how did their commencement of Bond purchases unfold? And let's look at this timeline on Slide 36.
The due diligence memorandum was from January 2006. In March of 2006, Congress approved a bill. Presidential elections were held on the 9th of April. The U.S.-Perú Treaty was signed on April 12, 2006. Obviously not in force, and, of course, as Perú has explained did not even cover these old instruments. Five days later Gramercy established GPH in Delaware. Two days after that, the President vetoed the bill that, in principle, would have brought legal clarity to the situation.
What did Gramercy do in the face of this ongoing uncertainty? They started buying thousands of Contracts. And even at that time, June 2006, when they started acquiring these Contracts, signing these Contracts, they--what was the status contemporaneously inside the Ministry of Economy and Finance? I'm on Slide 42.
Slide 42 from July 2006, this document, R-259
[Page 262]
says: "This is awaiting the approval by the Congress in the legal framework."
There was no clear legal framework. There was only uncertainty. That's why, even in 2008, when Gramercy was still purchasing, signing Contracts and purchasing Bonds, Gramercy's document, which the Tribunal mentioned this morning, that is Exhibit CE-730, its own internal email said "we have been in regular contact with the Government of Perú since we started investing in these claims." In these claims. "And the Government is aware of our investment activities." You simply can look, as an example, at Exhibit R-259, also demonstrated on Page 42. This is an internal Government document, aware of what Gramercy was doing, and specifying that there was no legal framework to pay on these Bonds.
Now, let me briefly note, as I said earlier, Gramercy did not turn over its Bonds to this Tribunal for an extended period of time, nor to the Republic of Perú. It did not file them with its case. It held them back. They have never been authenticated, nor has Gramercy put in an Expert Report that would in any
[Page 263]
way suffice for that.
Even worse, Gramercy hid 282 Purchase Contracts. They did not provide these to you. They did not explain this to you. They didn't do it in Notice of Arbitration 1, 2, 3. They didn't do it this morning. These documents they finally produced during the document production process, and Perú in preparing its Counter-Memorial, expended great efforts hunting in Lima to try to find the Contracts that it could to piece together the puzzle and the reality of what happened when Gramercy signed Purchase Contracts.
And these Purchase Contracts that Gramercy doesn't like to talk about are highly telling. They are telling, number one, as on Slide 45, because they demonstrate that Gramercy paid $33 million. That is a data point that the press that Gramercy repeatedly ginned up, repeatedly said Gramercy refuses to reveal how much it paid for the Bonds. Of course. It interferes with the propaganda campaign, the meringue, the whipped cream, and the 1.8 billion.
ARBITRATOR DRYMER: Which you love.
MR. HAMILTON: The pie?
[Page 264]
ARBITRATOR DRYMER: The pie.
MR. HAMILTON: I'll offer it to any of you. But the other thing that's interesting--
PRESIDENT FERNÁNDEZ ARMESTO: Tomorrow is Saturday. It would be a very appropriate date, if you want to bring us 50 or 60, and because we are quite--but we would certainly like them at the end of the Saturday.
(Laughter.)
MR. HAMILTON: Now, what do these Contracts say, these 282 Contracts? These Contracts that were Purchase Contracts for old pieces of paper. That's what they don't want to talk about. They want to talk about the word "Bonds" in the Treaty because they don't want to talk about this reality, and what is the reality of what these Purchase Contracts said?
Let's just give one example. Contract for the Assignment of Rights, Slide 46. 20 October 2006. This is in the record as CE-339.001. And it says--I'll read it in English for convenience, but the Spanish is key. "The possibility of an effective compensation derived from the assets constitutes an
[Page 265]
expectative right, "derecho expectatitivo."
It's not an absolute right. It's not a clear right. It's not a clear legal certainty. It's a "derecho expectatitivo." The materialization of which is at the account and risk of the assignee, that is Gramercy's risk. It acknowledged it in all these Contracts that it didn't reveal to you. And it goes on.
The assignee, Gramercy, recognizes that notwithstanding the elapsed time it has not been possible to collect the debt that the Peruvian State maintains in its favor, "it has not been possible"
They sign Contracts to buy a claim for an existing dispute, and then they didn't reveal these Contracts to you. And we know why. Yes.
PRESIDENT FERNÁNDEZ ARMESTO: I'm sorry. It took me some time to find the document. Can you repeat your argument? Sorry for that. I am here, it's--
MR. HAMILTON: Of course. Mr. President are you on Document 339.001?
PRESIDENT FERNÁNDEZ ARMESTO: Yes. And I'm
[Page 266]
on Page 8.
MR. HAMILTON: Article 3.2--
PRESIDENT FERNÁNDEZ ARMESTO: It's a notarial document.
MR. HAMILTON: Yes. Article 3.2(vi).
PRESIDENT FERNÁNDEZ ARMESTO: Subclause--"the possibility of effective collection of the compensation derived from the goods." I am just reading to myself.
MR. HAMILTON: In short, Mr. President, the two things we're highlighting is that Gramercy did not magically come into possession of these Bonds. They want to treat this like a contract claim, like you would you go into federal court as Parties do. They took old pieces of paper. The origin doesn't matter because it's a contract claim in a court.
But in a treaty case all of these things matter. And if you look at the underlying Contract, what it says is--it refers to "derecho expectatitivo." "That it will become current at the risk of the assignee, therefore, the assignor will declare that the agreed provision under this Contract is proper or
[Page 267]
adequate and it will be satisfactory, but it also indicate that it has not been possible to collect the debt that the Peruvian State has to itself."
So, it knew at the time that it was buying an expectative right, and that was the status of these instruments, as indicated in all of these Contracts, in all of these binders, which are all now finally in the record. That's the story of purchasing expectative rights by Gramercy at a time of legal uncertainty.
Now, we are going to move along in the interest of time, very quickly.
After Gramercy acquired these Bonds from 2008, when they finished acquiring Bonds, to 2013, July 16, 2013, the uncertainty that was preexisting, the dispute that was preexisting continued. It did not change.
As a matter of fact, there was no legal framework, there were no new laws, there was no resolution of the dispute, and you can see in the timeline on Slide 48, yes, the U.S.-Perú Treaty entered into force before and after there was no
[Page 268]
clarity, there was no legal certainty, there was only an ongoing dispute. Yes, Gramercy made proposals inconsistent with the law. They introduced failed bills. They introduced conciliation proceedings. They made reference to Treaty claims, conciliation efforts that were not viable. In 2011, yes, there was a draft bill. In fact, there were two draft bills contemplated. They failed. They failed.
And so, the bottom line is not only did they sign Contracts that acknowledged the dispute, clearly purchasing the Claim, they continued in uncertainty, which is what they had arrived to.
Mr. Jijón, I'm going to ask very briefly, if I might, Slide 51, the draft bills that unfolded 2006 to 2011.
PRESIDENT FERNÁNDEZ ARMESTO: At some stage, we will have to make a break.
MR. HAMILTON: We will take just a few minutes and we will break.
PRESIDENT FERNÁNDEZ ARMESTO: Very good.
MR. HAMILTON: Three minutes.
MR. JIJÓN: This will take 30 seconds. In a
[Page 269]
word, "uncertainty," just the same as before, no method, nothing was approved, everything was in limbo. Thank you.
MR. HAMILTON: And as a final evidence of that, you can look at yet another internal document of the Ministry of Economy and Finance, Exhibit R-504, I'm on Page 53 of the presentation, once again confirming the lack of a legal framework. As this document says, addressed to then-Vice Minister Luis Miguel Castilla, "there is no legal framework."
Gramercy--yes.
(Interruption.)
ARBITRATOR STERN: Who sent the letter DNEP? I don't remember.
MR. HAMILTON: DNEP is the public debt component agency unit of the Vice Ministry of Hacienda within the Ministry of Economy and Finance. And so the debt office sent a communication to the Vice Minister of Finance, the Vice Minister of Hacienda, Luis Miguel Castilla, confirming, just as the contemporaneous documents in 2006 had confirmed, that there was no "marco legal."
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That's a good place for a break, Mr. President.
PRESIDENT FERNÁNDEZ ARMESTO: Very good.
Let's get a time check.
SECRETARY PLANELLS-VALERO: Thank you, Mr. President. The Respondent has used 1 hour and 18 minutes.
PRESIDENT FERNÁNDEZ ARMESTO: 1 hour and 18 minutes. Very good.
It is now 4:22. Shall we come back at 4:35? 4:35. 4:35.
(Brief recess.)
PRESIDENT FERNÁNDEZ ARMESTO: Very well. We resume the Hearing, and we now give the floor to the Republic of Perú.
MR. HAMILTON: Thank you so much, Mr. President.
We have one final section to discuss with respect to the facts as part of the Republic of Perú's Opening Statement.
We have discussed the origins of the agrarian debt and the dispute over their status. We have
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discussed Gramercy's purchase of these old instruments at a time of great uncertainty. We've discussed the ongoing uncertainty reflected in the lobbying in Perú and the efforts to change the law and resolve the uncertainty. Now, as a final section, we will discuss the Resolution related to the status of the Land Bonds, and there are really three elements here: The Court ruling of July 16, 2013; the various Implementing Decrees; and the Bondholders Process which Perú has established and implemented to put an end to this historical issue.
I'm going directly to Slide 60. I refer you in the record to the Resolution of the Constitutional Tribunal. This is Exhibit RA-288 dated July 16, 2013. Now, we will discuss this in greater detail as the afternoon proceeds, but the critical elements to highlight are that, after all of those years of uncertainty, the Constitutional Tribunal put an end to the legal uncertainty by ruling with respect to the establishment of an Administrative Procedure and parameters for the valuation of the Agrarian Reform Bonds.
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These two critical elements certainly did not exist in the Court ruling of 2001. They were not resolved through multiple efforts to change the law, which Gramercy admits that it personally or directly got involved in and failed. So, it was only the Court ruling that then gave clarity to these issues by establishing the basis for a procedure and parameters for valuation, and that is exactly what occurred over time. The fact that Gramercy started its case--to use a word from one of its own documents--"to the sound of canons," to the sound of canons all focused on 16 July 2013, and now has been running the other way ever since to say, "Actually, no, not 16 July 2013"--now, one of the things that they have highlighted today is attacks on the credibility of the one Court ruling that finally brought the necessary clarity for the legal framework.
(Comments off microphone.)
MR. HAMILTON: Mr. President, I direct your attention to Slide 65. The public sector reaction to the Court ruling of July 16, 2013 was not applause. This Decision was not welcomed as, "Look how great
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this turned out for the State." To the contrary, there were expressions of surprise, there was disagreement, and the Ministry of Economy and Finance presented a Recurso de Reposición. So, the storyline that we hear today, while creative, really doesn't reflect the reality of what the public sector did when this Decision came out, which was to raise questions about it. They didn't like it. The Ministry proposed the Recurso de Reposición; it was rejected. The ruling stayed in place, the legal parameters established stayed in place, and since that time the Ministry has been carrying out its duties.
Now, we are going to very briefly address the efforts to attack the validity of this Court ruling which once was the centerpiece of Gramercy's case; now, not so much, because they have turned their attention elsewhere by necessity, but Mr. Jijón is going to briefly address these issues.
MR. JIJÓN: Thank you.
If you look on Slide 66, we refer to the whiteout red herring. That's because that's what every reference to whiteout is. It's a very colorful,
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picturesque way of trying to make what the Constitutional Tribunal did look bad.
Gramercy has referred to a "forgery." They have used very colorful language, but one thing cannot be forgotten: There is no question whatsoever about the majority Decision in that case. The "whiteout" refers to a dissent, and we have several of the Justices who were on the Court at that time who explain that the use of Liquid Paper was not something crazy or out of the norm. That is in the Transcript of the Subcommission of Constitutional Complaints of Congress, which was investigating this issue, January 9, 2019. We invite the Tribunal to review that at your leisure.
Very important: This case is not about the validity of the Constitutional Tribunal's Decision. There have been several investigations. Perú takes allegations of this sort seriously. It has investigated these allegations in Congress and in a criminal proceeding. More to the point, it has investigated the allegations about the whiteout on the dissent. There is no question as to validity of the
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majority decision.
The Resolution was approved--this is from the minutes of the approval; I won't read them now, but here, the Tribunal will be able to look and see how the Decision was actually made. There were three votes in favor and three votes against, and as a matter of Peruvian law, the President of the Tribunal has the tie-breaking vote.
The judges have subsequently confirmed the validity of the Resolution in testimony, and this goes to another colorful piece of argument that we heard this morning from Gramercy, that there was some vast conspiracy to pressure the Justices. The judges have themselves spoken about that, and they have said, "Never in my life has the Executive established any type of pressure. The Resolution was always going to be the same."
"We would not have accepted a draft."
"I reject absolutely that we have received anything from--that we have received from the Ministry of Economy and Finance a draft. This is absolutely false."
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Just for the record, again, we refer to the Constitutional Complaints Tribunal's Transcript of 9 January in the record as R-1100, and the source--the specific pin cites are at the top of that cite. You will also see a reference to the article reporting that that Commission found that there was nothing to the fraud allegations.
Again, important to note that the 2013 Resolution has been upheld repeatedly. We heard today about the dissent in the July 2019 Resolution, and my colleagues on the other side suggested that this meant that there is still some question as to whether the Constitutional Tribunal made the right decision in 2013. In fact, again, that was a dissent. The majority has, over and over again, confirmed that that Decision was valid, and if we were to say that every time there is a dissent, that calls into question the validity of a decision, I am sure court decisions all over the world would all of a sudden be considered invalid, and maybe quite a few arbitral ones as well.
MR. HAMILTON: Now, Members of the Tribunal, the Court Resolution, far from being an opportunity
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for propaganda and attacks on Perú or a basis for a Treaty claim, that was the cornerstone for the resolution of a dispute that was pending for years and years. It was pending together with great uncertainty during the time that Gramercy showed up to this issue. It was the state all the way until the 16th of July. The 16th of July Decision was the cornerstone for resolution and, subsequently thereto, The Ministry of Economy and Finance adopted a series of Supreme Decrees implementing the Court Decision.
First, there were Decrees in January of 2014. You know, sometimes in the process of governance, institutions have to carry out steps that are not that fascinating. They are granular. They require setting up the basic institutional arrangements for a Bondholder Process: Where will we receive these instruments? Where will we store these instruments? How will we authenticate these instruments? Who will provide the trained Experts who can examine old pieces of paper and make sure that there's not fraud on the State? These require institutional arrangements and a lot of institutional preparation.
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So, in the aftermath of the Court ruling, the Ministry of Economy and Finance with its initial Decrees in January of 2014--those were Decrees 17 and 19--established the Bondholder procedure. At that time, it was already contemplated that there would be further steps required to conclude the implementation as the process went forward, and that's exactly what happened in 2017 as Bondholders made their way through the process. When it became time that people had gone through this authentication process, the Ministry made final preparations for the final stages of actualization and payment. And you see that reflected in the Supreme Decree of Number 34/2017 and Number 242, which is something called a texto único actualizado, a tua, or sometimes a tuo, is a typical form of integrating laws or decrees for clarity.
The exact same thing happened, for example, in, if I recall correctly, a case called Convial v. Perú. That was an ICSID proceeding. So, the concept of "a texto único" is not something new or particular. It's something that is, in fact, common and assures clarity. That is exactly what occurred here. As a
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matter of fact, after that, Gramercy then calculated that it would be able to obtain almost $34 million for its Bonds through this procedure.
And the procedure itself--I am currently on Slide 74. The procedure, as you know, Members of the Tribunal, has four steps: Authentication, registration, actualization, and payment. You can see in Demonstrative 1064 a table prepared by the Ministry of Economy and Finance that, in fact, of the 11,000-plus Bonds received by the Ministry of Economy and Finance--that's more than the totality of the Land Bonds that Gramercy apparently has in its possession somewhere--they have concluded with respect to 88 percent of those Bonds. They have included processes of rejecting certain Bonds that did not satisfy the requirements. That's what authentication is all about, and, as you look at the percentages, looking through this process, what you see is that the Ministry established a valid compensation methodology that you see, through the number of Bonds and their success rate going through this process, that this is a system that is working. It is a system that is
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working.
And one thing that is particularly disappointing is how Gramercy, through its propaganda campaign, has not only sought to damage Perú, but it has intentionally, maliciously interfered, trying to undercut the success of this Bondholder Process.
You know, one of the things that Gramercy said in a communication to Perú in 2016 is it emphasized that its Notice of Arbitration would be a highly public document which will provide grist for the media mill for a long time. "Grist for the media mill." Talk about taking the high mutual objectives of the United States and Perú in this Treaty and reducing it to grist is troubling.
And part of what they have done repeatedly--and you can see all of this in our Aggravation Briefs filed at the start of this proceeding--is to create talking points--"1.8 billion"; "default"--and repeat them over and over and over again. You can simply look--and I'm on Slide 37--at some of the kinds of language that Gramercy and the various websites, Twitter feeds that
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it has been behind, that it has worked--you know, interesting that many of these entities have similar--they change just enough of the graphics to make them look a little bit different. But some of them appear to all be made by the same people, and they use terms like "subjective and discriminatory," "confiscatory formula," "inadmissible errors."
They are trying to bring down that procedure that would pay Peruvians. And why are they doing that? So they can try to help and inflate their own Treaty claim. And, just in case anyone is unclear, Gramercy is the alleged beneficiary of this claim, not Peruvians.
And at the end of the day, the reality is that some of the Gramercy Bondholders could have gotten more through the Peruvian procedure than they got from Gramercy. I'll give you just a couple of examples. I'm on Slide 75. All the citations are there, Mr. President.
But it's two examples, Gramercy Bond Contract Number 11--and you can't get this from the face of these instruments. Gramercy Bond Contract Number 11,
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Gramercy paid $850,000. In the Bondholder Process, that Bondholder could have obtained $2.5 million.
Gramercy Contract Number 82, Gramercy paid $1.8 million. In the Bondholder Process, that Bondholder could have obtained $2.9 million. Difference of $1 million. Difference of $1.6 million.
(Comments off microphone.)
MR. HAMILTON: Yeah. And on top of that, take the two instruments that were put before you today, Mr. President. My counterpart said this Bond is worth nothing more than the paper it is printed on, and what that tells you is that, potentially, Gramercy overpaid, if anything, for that Bond.
If you look back to the Bond contracts and what they paid for it at the time, you look at the other Bond which wasn't mentioned in that example, and that other Bond, the purchase price was $160,000. And you can look at Perú's Quantum Expert's Second Report, Appendix 8. That Bondholder could have obtained twice as much through the Peruvian Bondholder Process. Twice as much. Meanwhile--I'm sorry, but please don't interrupt me right now.
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PRESIDENT FERNÁNDEZ ARMESTO: Since you have stopped, can I just ask you how this process works, or will you be coming to explain to us how it actually works?
MR. HAMILTON: Ms. Menaker is about to discuss these things in great deal. So, I can't allow interruptions, because then I will have difficulties with my partner who is patiently waiting. Thank you.
ARBITRATOR DRYMER: We just learned that she is addressing it in great detail.
MR. HAMILTON: Fortunately the Slides address some of these things as well.
Bottom line, Mr. President, as we discussed in our introduction: This Bondholder Process has been functioning. These Bonds are no basis for the kind of exorbitant returns that Gramercy is seeking from you.
Now, we have concluded our presentation on the facts, origins, purchases, ongoing uncertainty, and resolution, and we now are going to turn from facts to law. Ms. Menaker is going to address jurisdiction, Merits, and compensation.
And, perhaps, if we could ask the Secretary
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to confirm our current time.
SECRETARY PLANELLS-VALERO: Thank you. You have spent 1 hour and 38 minutes.
MR. HAMILTON: Thank you.
PRESIDENT FERNÁNDEZ ARMESTO: I think it is your turn now, Ms. Menaker.
MS. MENAKER: Thank you. Good afternoon, Mr. President, Members of the Tribunal.
So, I'm going to now discuss the legal bases on which Gramercy's claims ought to be dismissed, and I'm going to start in that regard with abuse, because their claim is a quintessential example of an abuse of right or an abuse of process that warrants dismissal. And although this a ground for inadmissibility rather than jurisdiction, I think it makes sense to begin here, because these facts really underlie many of the grounds for the remainder of our objections.
As the Tribunal is aware, and as Gramercy acknowledges, one cannot take advantage of International Investment Arbitration when it has acquired an investment either after dispute has arisen or when the dispute is reasonably foreseeable, and
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several Tribunals have so held. You're familiar with those cases, no doubt. I saw mentioned just two of those, and Philip Morris versus Australia, of course, is one where the Australian government had announced its intention to enact legislation prohibiting--or requiring plain packaging of cigarettes. And notably in that case, Philip Morris had expressed its concern that, if such legislation would be enacted, that that would undermine or that would harm its businesses. And it took several months--in fact, it took over a year and a half--from the time of the announcement until such plain packaging legislation was enacted, and during that time, I think there are two things of note.
One is that in the interim, there was an election, and the Government became a minority government. So, in some respects, it was perhaps less likely that the minority government would have been able to enact such legislation, but nonetheless, the Tribunal said the Government's intention had not changed, and there was still a reasonable prospect that it would act upon its intention.
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And during this interim, Philip Morris reorganized its structure and created an entity in Hong Kong that could take advantage of that Treaty, and that was deemed to be an abuse of process because the enactment of that legislation was reasonably foreseeable. And notwithstanding that it took, like I said, 19 months from the statement until the enactment of the legislation--because the Tribunal recognized that in democratic governments, there are often proposals for legislation--bills come, they go. They don't necessarily pass. There are debates. There may even be court challenges, but that doesn't make it any less foreseeable, because if it did, what that would mean is that an autocratic government that can basically act by fiat overnight, in that case, you wouldn't be able to abuse the system, but you could for a democratic government. And, of course, that cannot be the rule.
And you are all well aware, of course, of the Phoenix Action Tribunal, which held similarly where there were preexisting disputes between Czech companies, civil litigation as well as criminal
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complaints, and thereafter the Claimant had incorporated an entity in Israel to take advantage of bringing Treaty claims based upon those preexisting disputes, and those claims were dismissed as an abuse of process.
And I think here, the claims so clearly fall within that category, and that is because this--Gramercy, when it purchased these Land Bonds, there was already a preexisting dispute. It was a decades-old preexisting dispute, because there is no dispute--or there is no contesting the fact that no payments had been made on these Bonds for decades. Whether or not you call that a default, the fact is that everyone agrees that, on their face, these Bonds became worthless when the Agrarian Bank closed in 1992. Thereafter, there were no payments being made. And as we heard in great detail, from then on, for decades, there were bills. There were court cases. And so, not only was there no payment, but as early as 1996, the Society of Civil Engineers, I believe it was called--or the College of Engineers in Perú, on behalf of Bondholders, brought a case that led to the 2001
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Constitutional Court Decision, of course seeking payments on these Bonds.
So, there was a dispute over what should be paid for these Bonds, and certainly it was not only a case where it was reasonably foreseeable that there would be a dispute over payment of these Bonds, but there was a preexisting dispute as to the payment of the Bonds.
And I'm sorry, I'm going to refer to a document that is confidential now, so if Gramercy insists, we'll ask the United States to leave. I think it is an important document, but we need to do that.
PRESIDENT FERNÁNDEZ ARMESTO: Of course. I'm sorry.
MR. HAMILTON: The Republic of Perú wishes to reiterate that it disagrees with the routine of excluding the United States Government. There have been years of lobbying and sharing of propaganda with the United States Government by Gramercy, and now it insists to kick them out of this hearing repeatedly. We make a record. Thank you.
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(End of open session. Attorneys' Eyes Only information follows.)
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CONFIDENTIAL SESSION
[Redacted]
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[Redacted]
(End of Attorneys' Eyes Only session.)
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OPEN SESSION
MS. MENAKER: And Gramercy admits that it acquired the Bonds--it says, "Well, no, we didn't purchase a claim, because it took us a decade to bring this investment treaty dispute." That is completely irrelevant.
What they are saying is, "No, we wanted an amicable resolution. We wanted to negotiate." But what do you negative other than a claim, other than a dispute? If there is no preexisting dispute, there is nothing to negotiate. So, they purchased--when there was a preexisting dispute, they purchased the claim. Whether they wanted to have a negotiated resolution or whether they were going to end up in court or before the Tribunal, it doesn't matter. They are still purchasing after a dispute has arisen, and what they are purchasing is a claim.
And, in fact, the only reason that they ever had any hope of negotiating a solution is because they had the bludgeoned threat of this investment treaty arbitration claim to hang over the head of Perú and to threaten them that, "If you do not negotiate with us,
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you know that we're going to bring the Treaty claim." And that's exactly what they did from the very first instance.
And so, you can see here, they say that their motive and their investment strategy was to engage in negotiations with the Government, but that's an admission that they bought into a preexisting dispute. What else is there to negotiate, other than to negotiate a resolution of a dispute? And this is throughout their testimony, as well as their own press releases, where they admit that the Government, they say, has refused to negotiate for decades, and that they are purchasing with the hopes of negotiating a resolution of this preexisting dispute.
So, for all of those reasons, this is, like I said, a quintessential case of abuse. It is much more egregious, in our view, than the case in Philip Morris, for instance, when the measure had not even been enacted. There, they just said the dispute was reasonably foreseeable. Here, we don't have to look at reasonable foreseeability. The dispute had already arisen. It had arisen decades ago. It is more like
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Phoenix Action, where you already have the dispute, and then you buy into the dispute, and you are basically purchasing a claim. And that, in essence, is the deep flaw with their claim and the reason why it should be dismissed at the threshold.
Now, there are also other timing issues that are of a jurisdictional nature that flow out of these same facts that I also want to discuss. And, in the same way that you can't purchase a preexisting dispute, the Treaty does not apply retroactively to acts or facts that predate its entry into force. Essentially, it's a general principle of international law of which you're all aware that, of course, a State can't breach an obligation when it doesn't have that obligation yet. And, as I said, it's a general principle of law, but it is stated expressly in the Treaty at Article 10.13, as you can see there.
And this applies as well--it doesn't only apply when you have an alleged breach before the entry into force of the Treaty, but just because you have measures that you were identifying as challengeable that postdate the entry into force of the Treaty, if
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those measures are so inextricably intertwined with those earlier acts or facts that constitute a breach, then the principle of nonretroactivity also applies and bars the claim, and that also is the case here.
In other words, unremediated conduct does not become actionable just because the Treaty enters into force. And you can see this very clearly in the Berkowitz v. Costa Rica Case, where there, the Claimants alleged expropriations, both direct and indirect expropriations, of certain land that Costa Rica had designated as protected. With respect--and the Tribunal found that the vast majority of their claims were failed because those acts or facts existed prior to the entry into force of the Treaty.
So, with respect to the land that had been allegedly directly expropriated, the problem was--is that the State had offered an initial valuation for that land prior to the date of entry into force of the Treaty, and the Claimant had complained about that. So, the fact that the State had not made any final offer of compensation until after entry into force of the Treaty did not matter, because you could not have
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a claim--a breach of a Treaty claim based on expropriation and insufficient compensation when the State had indicated earlier, before the entry into force of the Treaty, that it would intend to pay you less.
Similarly, with respect to the indirect expropriation claim, prior to the entry into force of the Treaty, some acts that had been part of the creeping expropriation had occurred. For instance, there were restrictions on development that were enacted. There were also environmental regulations that were enacted. That restricted the scope of activities on the land, and so the Tribunal said thereto, even if there were subsequent measures post-entry into force, those were inextricably rooted in or connected to those pre-entry-into-force acts and, therefore, they could not be actionable under the Treaty.
The only measure that they were allowed to contest was a Court Decision that postdated the entry into force of the Treaty, but, very notably, they were not able to contest the Court Decision on the grounds
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that the Court had awarded them insufficient compensation for the expropriation, and that was because that is so related to a claim for expropriation that that occurred prior to the entry into force of the Treaty. They could only complain if they had suffered a complete lack of due process, they had been denied access, and such--in that vein.
And the analogy here is, with respect to the 2013 Constitutional Court case, that postdates the entry into force of the Treaty, and yet it is so intertwined and rooted, in fact, with the pre-entry-into-force events that it is not independently actionable as a post-entry-into-force measure. And, as the Claimants themselves have to acknowledge, of course, they can't complain about that lack of due process in that court case because they themselves were not Parties to that court case, and they can't complain about the substance of that court case because, again, that is no different from all of those prior court cases and bills and everything else that Mr. Hamilton and Mr. Jijón discussed that were trying to work out the valuation and the payment for
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these Bonds.
And, again, Claimants themselves recognize that the 2013 Court Decision is inextricably intertwined with the earlier actions. And if you look at their Third Amended Statement of Claim at Paragraph 74, in fact, they explain that the 2013 Constitutional Court Decision stemmed from a request to enforce the 2001 Constitutional Tribunal Decision. So, if you can't challenge the 2001 Constitutional Court Decision and the earlier acts, you can't challenge the later ones, either.
PRESIDENT FERNÁNDEZ ARMESTO: But that would not affect the Supreme Decrees. Your argument would not affect the Supreme Decrees.
MS. MENAKER: They would affect the Supreme Decrees, because Supreme Decrees are implementing Decrees. They are implementing the ruling in the 2013 Constitutional Court Decision. If that is either time-barred or if it is pre-entry-into-force activity, and barred because of that, any kind of implementing legislation or Regulations or Decrees can't be independently actionable, and a host of Tribunals have
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so found, because otherwise, these types of prohibitions, whether it's a prescription period, a statute of limitations, or the nonretroactivity principle, would become meaningless, because one could always find another additional measure, or typically one can always find an additional measure. But when it's so deeply rooted in that earlier conduct, it doesn't become independently actionable.
So then finally the last jurisdictional objection based on timing relates to the three-year prescription period in the Treaty, which, as the jurisprudence establishes, and also the United States agrees with Perú, it is a clear, rigid, inflexible requirement.
And that prescription period is triggered at the first time that the Claimant knows or should have known that it suffered--that there was a breach and that it suffered any damages.
It does not need to know the particular legal exposition of what constitutes its breach. It doesn't have to elaborate that in full elaboration. It needs to know, generally speaking, there has been a breach.
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And in the same vein, it doesn't need to have fully quantified its loss. It simply needs to know that it has suffered a loss.
And here you can see from the time frame that its claims are time-barred, and that is because, even if you accept, as Gramercy has said, that its claim is predicated on the July 13--July 16, excuse me, 2006--I'm all confused. It's the July 16, 2013 Constitutional Court Decision--the last day to challenge that before this Tribunal would have been July 16, 2016. So that is the critical date.
And Gramercy was well aware of that. It filed its Notice of Arbitration just prior to that on June 2, 2016, so just prior to that. The problem, of course, is that it submitted a faulty waiver for GPH.
Now, that waiver, we don't have time to go into all of the arguments. You've seen them briefed. But that waiver did not conform with the express requirements that are in the Treaty. It is very easy to put in a compliant waiver. You just copy and paste the language that is in the Treaty.
They did not do that. They included a
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carve-out. They included a carve-out that was identical to the carve-out that Renco included in its waiver that it submitted in the other case under the same Treaty.
Now, surreptitiously, that Tribunal ruled just--
MR. HAMILTON: Simultaneously.
MS. MENAKER: Simultaneously. It ruled one day prior to this critical date. It ruled on July 15. The Renco Decision came out and said "that waiver is noncompliant. You did not consent to--Perú did not consent to arbitrate with that noncompliant waiver."
And so Gramercy saw that, and what did it do? A few days later, July 18, it refiles its Statement of Claim with the compliant waiver. However, it complied only in form and not in substance. And when you look at everything from Waste Management to the subsequent jurisprudence, it is very clear that it is insufficient to put in a waiver that mimics or mirrors the language in the Treaty while you are simultaneously acting at odds with the language and the waiver.
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And that's what they were doing, because they were engaging in local proceedings that ran afoul of the waiver. So, they recognized this as well, and so then they put in motions to withdraw from those local proceedings, and that was on August 5, 2016, and those motions were granted a few days later, but one can forget about the difference between August 5 or August 10, as far as submission to Arbitration. It does not matter.
Even if you take at face value what Claimants have said, as of August 5, 2016, that was the date as to all--as to when conditions had been met for the formation of an Arbitration Agreement. That date is after the three-year period had expired to challenge any aspect of that July Constitutional Court Decision.
And there can be no doubt that that is the effective critical date and that Gramercy, in fact, did recognize that it had--that there had been an alleged breach and that they had allegedly suffered loss as of that date, and you need only look again at their own materials, where today, for instance, even before this, they said this morning--and I quote--"in
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2013, Perú seized the unique opportunity. They got the Constitutional Court to change the current value framework."
They called the 2013 Constitutional Court Order tainted in their discussions today. This all shows that the crux of their Claim is a challenge to this Decision, as much as they want to reframe it now that they find themselves having filed out of time if they wanted to challenge that.
And again, another thing they said this morning is that beginning in 2013, Perú completely reversed the basic legal framework in which Gramercy had invested in the Bonds. Of course, we disagree with that, but, again, it shows that, according to them, that alleged breach occurred in 2013.
And it didn't occur months after the Decision was issued. It occurred on the very day the Decision was issued because they were very, very closely monitoring this. They were very active in Perú, lobbying the legislature all the time, keeping an eye on the Courts, talking with the Executive. They knew exactly what was going on.
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And so the very day of the Decision, Mr. Koenigsberger writes to Mr. Cerritelli, who was their Head of Sovereign Strategy down in Perú, who was involved in acquiring the Bonds, and says, "where do they come up with this nonsense"? If he's calling it nonsense, he's obviously read the Decision. He knows or he feels it is not favorable for him. There is your alleged breach. There is your knowledge that you've sustained some loss or damage.
And how does Mr. Cerritelli respond on that very same day? He says, "yes, the Decision is different from what we expected." So they understood the contours of the Decision, and they say "we expect that it would represent a significant haircut. We don't know how much, but a significant haircut."
That's your knowledge that you have sustained a loss or damage. Again, you don't need to quantify it at the time. Once you know that you've suffered a loss or damage, that is when the clock starts ticking.
And, again, the next day, they are saying to the press that this will result in a smaller payment than we had expected, and, again, the next day their
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own Expert is before the press saying that they may sue in a foreign court.
Again, looking at their own submissions, what do they say? They say early on, the Government's intentions became apparent on the date of the Decision itself on July 16, 2013. In May, they are nervous that their time for filing the Claim is running out because they have to file by July 13. They say time is running out.
As we get to June, now they say time has run out. We can't wait any longer. And then as if there would be any doubt, on June 2, 2016, they say, "Gramercy first acquired constructive or actual knowledge of Perú's breaches on or after July 16, 2013." There they are saying it themselves. They know when they acquired knowledge. They acquired knowledge the day the Decision was rendered.
Then what do they do? After we make our objections, after they find out that they have to refile because the Renco Decision comes down and they have the faulty waiver, then they backtrack and they say, maybe that wasn't the best use of language. It
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was truthful use of language, but not the best for their case.
And there are other examples. I won't disrupt to put in confidentiality mode, but there is another document that is cited on the top without any description that is another instance showing Gramercy's knowledge that the statute of limitations or the prescription period was running out and that they filed it with that in mind.
Now, what Gramercy has tried to do to get around that is to cherry-pick later-in-time measures, namely the Supreme Decrees, to say that, therefore, they are not time-barred, but, again, that doesn't work because the jurisprudence is very clear that they knew once you know you've suffered loss or damage, you can't rely on a subsequent measure to keep pulling out the statute of limitations because that would deprive it of all meaning.
And all those subsequent Decrees, all they did was implement the Decision about which they're finding fault. And you can see this very clearly on the next slide, and I think this is very telling, that
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this is in December 2013, and they say--so this is after the July 2013 Constitutional Court Decision but before the 2014 Decree, right? And they are saying here, that based on the July 2013 Decision, that they've analyzed their rights under the Treaty, and they have a legal right to payment of more than 1.1 billion.
That's their claim in this very Arbitration. The 2014 Decree did not change their Claim. It's increased because of interest, but that's their Claim. So they're saying--as a result of that 2013 Decision, they're invoking the Treaty. They're saying they're owed $1.1 billion. How can they possibly say now, no, their Claim did not arise until that 2014 Decree came out? It didn't make sense.
And, in fact, when you look at the Philip Morris Decision, that Tribunal also took note of the fact that Philip Morris--they found relevant the fact that Philip Morris had also stated to the Government that the actions they were intending to take, if they would enact legislation, would deprive them of their legal rights.
[Page 308]
And in internal memos, they had noted that they were considering the matter in, quote/unquote, "legal terms," and this showed that their claims really did emanate from those measures and that they had knowledge of that alleged breach and alleged harm at that time.
PRESIDENT FERNÁNDEZ ARMESTO: Does your argument only affect GPH, or do you extend it also to GFM?
MS. MENAKER: For the abuse and just for the prescription period. Yes just for the prescription--
PRESIDENT FERNÁNDEZ ARMESTO: My question comes because, as you state, the problem with the waiver only affects GPH. If I'm not wrong, GFM did make a normal waiver, and the waiver issue did not arise, or at least that is the point Claimants are making.
MS. MENAKER: Yes. No, that's correct. That's correct. So the first two objections, abuse and nonretroactivity, apply to both equally. The prescription period only applies to GPH because they are the ones that put in the faulty waiver.
[Page 309]
GFM, I mean, they are not even an investor, but I'll talk about that later. So they have other problems. I mean, they basically have signed a management agreement.
So, now I'm going to discuss our other jurisdictional arguments, namely the lack of an investment, and I don't think that there is any dispute, at least at one level, that one needs to apply the Vienna Convention on the Law of Treaties, of course, to interpret the Treaty in accordance with its ordinary language in context and in light of its object and purpose.
And this means that one cannot take a simple word, like the word "Bonds," and just say, well, this is a bond, that's a bond, therefore it falls within the meaning of the Treaty. You cannot ignore the context. You cannot ignore the object and purpose when interpreting either the word "Bond" or when interpreting the word "investment" in the Treaty.
And in this regard, I'll just make a few comments about Gramercy's overreliance or reliance, really, on what it has termed "the travaux" because
[Page 310]
that also is improper. That also is improper because the travaux, of course, is a supplementary means of interpretation that should only be looked at when your interpretation, in accordance with Article 31, leads to a result that is ambiguous, unreasonable, or absurd. And, here, our interpretation does no such thing.
So, there's no need to resort to travaux, and the danger with resorting to travaux is that you elevate a party's intention or a party's hope to put something into the Treaty rather than looking at what the Treaty actually provides.
Now, as opposed to that, when you look at a subsequent agreement of the Parties, as Perú does when it points out to the Tribunal areas on which the United States and Perú agree, there, there is no such danger because you're not looking to substitute what might have been included--
(Comments off microphone.)
MS. MENAKER: So, there you're not looking--there is no danger of basically altering what the Parties had agreed on in favor of what might have
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been put there because you're talking about a subsequent agreement, which is why subsequent agreements always shall be taken into account.
Now, putting all that aside, the content of their so-called "travaux" is also--doesn't assist.
First of all, it's not true travaux insofar as they are looking at the writings from one of the State Parties. It's not as if this is exchanged between the Parties. So it's not a record of the negotiations.
When you look at the actual documents there, there is no mention of the Bonds. There is no mention of the so-called "Land Bonds." What you're talking about is the United States coming forward and saying, oh, we have some U.S. Nationals in Perú who have disputes that we'd like you to resolve. Their disputes was that they were living in Perú, they had land, land was expropriated, and they either wanted their land back or they wanted Perú to comply with the Court Decision.
And so in the LeTourneau case, for instance, there it was a U.S. company down in Perú. Its land was expropriated. A road was built on that land.
[Page 312]
They had a court decision from, I believe, 1970 where the Court ordered Perú to pay compensation for the value of the road, and Perú hadn't paid it. So they said, okay, comply with this Court Decision.
That has nothing to do with Land Bonds. No mention of Land Bonds. One cannot read into that that the Parties had any view as to what the Bonds, whether they would be included as investments or not.
In another case, it was a U.S. National down in Perú whose farm had been expropriated and since the 1990s had been seeking to get its farmland back, and they were saying, oh, can't you resolve this issue? Again, no, mention of Bonds at all.
So, when they say it is hard to believe that the Parties could have negotiated this Treaty, knowing about these Bonds and not dealing with them, we should just assume that they were included in the definition of "investment." There is no support for that whatsoever. That's not what the Parties were discussing.
And so the Parties did use a so-called "open-list approach," but that also is not what
[Page 313]
Gramercy claims it to be. They have said they use a negative exceptions. And, yes, there are places in the Treaty where the Parties expressly provide that something is not considered to be an investment.
One cannot conclude from that that if it's not listed there it's automatically an investment because one could never think of all the possible things that someone could come up with. Just like you could never list every type of investment. That's why it's open-ended. It says "includes." So it's an open-ended list of what may be an investment.
The flip side of that, it has to be an open-ended list of some things that may not be investments. You can't think of all of those things in advance, and there is nothing to suggest that that is how the Treaty was drafted, and, in fact, the United States does not agree that that was how the Treaty was drafted.
Now, when you start by looking at the ordinary meaning of the word "Bonds" within the definition of "investment," we would just note that these Bonds, as we've been saying, don't fall within
[Page 314]
the ordinary meaning as ordinarily understood by people to mean bonds or public debt. And the main reason is that a bond is typically considered to be an instrument that is sold in order to raise money.
That's the most like basic level. And here these were not instruments that were sold to raise money. These were more akin to promissory notes. We're taking your land, and we'll owe you the money. And that's what it was. So it's nothing--it doesn't function like an ordinary bond.
But beyond that, the Treaty expressly provides and requires an assessment of the characteristics of an investment. And this is important because you know many Tribunals have looked at the so-called "Salini factors," but not universally, and the Parties would have no reason to expect, necessarily, that every single Tribunal would do that. They wanted to make sure that these characteristics were considered, so they wrote it into their Treaty.
And so those things have to be looked at, and one cannot take anything on that list and say, "just
[Page 315]
because it is listed it is an investment," because that would be ignoring the fact that you have to look at it by the characteristics. And just like a claim to money is listed, there are many things that would fall within the characterization of a claim to money that are not investments.
And Arbitrator Stern mentioned a simple sales contract. That is a quintessential example of something that is a claim to money but that everybody agrees is not a protected investment in investment Treaty Arbitration. In the ICSID travaux, it states that.
So, that's well-known and, yet, yes, it falls within the grammatical terms within that language, but you need to look at it in context.
And so, again, this is emphasized also in the footnote, Footnote 12, where it says some types of debt are more likely than others and some are less likely. It doesn't say some forms are investments and some are not, just they're more likely or less likely, so we could go either way depending on those characteristics.
[Page 316]
And another thing that even though Bonds here are listed as those that are more likely, once again you need to look at the characteristics because the things that are less likely are going to be claims to payment that are immediately due.
And, again, these are not--typical bonds, when you're looking at a bond as an investment, you're either looking at it when it's been issued or even after it's been transferred, but while payments are still being made. And then payments are not immediately due. You're going to be paid over a period of time.
These are Bonds where payments had stopped being made decades ago. According to Gramercy and according to everyone else who was suing in Peruvian Court, the amounts were immediately due. They were past due. That's what they were suing for. The tenor of the Bonds had long since passed. So these were claims to payment that were immediately due.
That's another tick in the box as to why they don't bear the characteristic of a true investment.
I'm going to also go into some confidential
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information before I get to Slide 24.
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OPEN SESSION
PRESIDENT FERNÁNDEZ ARMESTO: On Page 108.
MR. HAMILTON: 108.
MS. MENAKER: Now, on here, if anything, the land that was distributed, that land distribution may have contributed to economic development, but the Land Bonds did not contribute to economic development, the Bonds themselves. Those were just given to the landowners as payment for that land. So, that is not an investment. That's no contribution.
Now, today we heard--and they have said in their pleadings as well--well, we made this influx of $33 million to the Peruvian economy by paying these Bondholders for their Bonds. That's the same amount on average that the Government would have paid had these Bondholders gone through the Bondholder process, because, as we've said, those Bonds, had Gramercy put them into the process they would have gotten 34 million. And you've seen the way it works out, some Bondholders would have gotten more than they were paid, some would have gotten less, but the full amount is approximately the same. So, how is that an influx
[Page 326]
into Perú's economy, a contribution to Perú's economy. They are saying, well, we paid Bondholders, you would have done the same thing. That's not a contribution to the economy.
And, in fact, as Mr. Hamilton went on to discuss at great length, they've done the opposite of contributing to the economy. They have actually taken steps to try to harm Perú's economy by trying to keep them out of the OECD and the like.
So, I am now going to just go to the last slide in this section and just say that the jurisprudence further confirms this conclusion that these are not investments. We've discussed at length how these are different from modern sovereign bonds. But the one thing that I do want to emphasize is that, in redistributing the land, Perú is not borrowing money, and that's, again, the primary function of a sale of Bonds, is you receive money. They were not receiving money that they could then use for other purposes. They didn't get any exchange of money in--in exchange for the land, and they, essentially, just gave the landowners a promissory note.
[Page 327]
So, now, I'll move on to our last jurisdictional objection, which is that they are not investors. I mean, it follows, of course, if you haven't made an investment, you are not an investor. And I would just note in that regard, of course, for an investor, you need to actively make your own contribution at your own risk. You can't rely on third-party contributions from ultimate beneficial owners and Gramercy has no standing to bring claims with respect to the interests of third-party beneficial owners. It is well accepted that international law favors beneficial ownership over nominal ownership and that that is the real party-in-interest, are the beneficial owners.
And as I've shown before here, all--
And I'm sorry, this is confidential again.
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OPEN SESSION
MS. MENAKER: And with that, I will turn to the Merits.
PRESIDENT FERNÁNDEZ ARMESTO: I am advised that it is now 2.5 hours. So, you have now, like, 10 minutes more.
MS. MENAKER: Okay.
MR. HAMILTON: Just one question, Mr. President. We did have significant time allocated to answering questions in the first part, so we may seek a few extra minutes. Thank you. We'll try not.
PRESIDENT FERNÁNDEZ ARMESTO: "Bueno, seguiremos avanzando."
MS. MENAKER: And I apologize. How many more minutes did you say? Did you say 10 altogether?
PRESIDENT FERNÁNDEZ ARMESTO: 10 minutes.
ARBITRATOR DRYMER: That's what he is saying.
MS. MENAKER: All right. I will try not to speak too quickly.
All right. So, on expropriation, it's--we all know--
PRESIDENT FERNÁNDEZ ARMESTO: Let's put the
[Page 332]
cards on the table so that you know. I mean, it should be 10 minutes. That's what they took. If you take five minutes more, I mean, we will not--I will not take away, but, I mean, I think out of fairness to Claimants, you should not take more than 15; at the latest, 20 minutes.
MS. MENAKER: Okay. I will do that.
PRESIDENT FERNÁNDEZ ARMESTO: You concentrate on whatever you think is really important for the Tribunal to know before, and more than that, you cover all the area--I mean, we have read, as you have seen, your submissions.
And so my recommendation to you is take two or three areas where you really think the Tribunal needs some education and devote all your time to that and do it slowly.
MS. MENAKER: Understood. Okay.
So, for expropriation, the one point that I want to make for expropriation is that, for an expropriation claim to prevail, you need to show that you have suffered a deprivation of all or virtually all value. And on that very threshold
[Page 333]
interest--threshold issue, their Claim fails and that's because, even according to their own calculation, they could have taken their Bonds, participated in the Bondholder Process, and obtained $34 million which is more than what they even had paid for the Bonds.
But that is certainly not a case where their so-called "investment" has been deprived of all value. So, on that basis alone, their expropriation claim fails.
And just for the avoidance of any doubt, because Gramercy had mentioned before, well, we could get that 34 million but only under the 2017 Decree. When that formula was adjusted to correct for some things, Perú made it clear that they were entitled to participate in the Bondholder Process even at that time. This is on Slide 123. And said notwithstanding the arbitration, notwithstanding the waiver, you know, let us know if you want to participate in that Bondholder Process. So, that was open to them.
So, the fact that they had that ability, that their Bonds were worth that much is clear that they
[Page 334]
cannot prevail on an expropriation claim.
They've also said, well, you can't take into account these later-in-time events. That is also untrue. If you look at GAMI v. México, for instance. There it was an expropriation claim for--
Do you have a question, Mr. President?
PRESIDENT FERNÁNDEZ ARMESTO: Yes, I do. The 34 million, your point is they arise if we apply the 2017 Supreme Decree?
MS. MENAKER: That's correct.
PRESIDENT FERNÁNDEZ ARMESTO: You do agree, or not, that, if we took the 2014, the first one, that the result would be different?
MS. MENAKER: I think Mr. Hamilton says he wants to answer. Go ahead.
MR. HAMILTON: The 2014 Decree was never applied to any Bondholder and contemplated that there would be further attention to valuation issues before they were ever applied to any Bondholder. So, whatever one thinks about the 2014 Decree with respect to valuation, in fact, it could have had no impact because the Ministry intentionally went through a
[Page 335]
review process prior to finalizing the valuation arrangement and applying it to any Bondholder.
MS. MENAKER: And as far as taking into account these later-in-time events, Tribunals do that--properly do that all the time. And in GAMI v. México, there were five sugar mills that were initially expropriated, and a claim was brought by the subsidiary. The parent company in México, meanwhile, brought a challenge in courts, challenging the expropriation, and through those court proceedings, three of those mills were returned during the pendency of the arbitration. And on that ground, among others, the Tribunal found, well, there is nonexpropriation, you have three of your five mills back and then they are going to value those other two in the court proceedings. So, they took into account later events as well.
And you can see on the last slide in this section other cases where there had been a much greater deprivation of value and no expropriation.
So, then moving on to their Minimum Standard of Treatment claim, of course, you're well aware, I
[Page 336]
believe, of the standard. It is a high one, it accords deference, it is for arbitrary, grossly unfair conduct. And legitimate expectations, contrary to what we heard this morning, is not part of that standard. It is insufficient to find a breach.
Glamis Gold, that was applying that same standard, said so. The United States agrees in its third-party submission. In the Cargill Case also, they said there is no evidence that it's part of customary international law. And as Professor Stern noted this morning, the ICJ very recently--well, not-so recently now, I guess it is 2018, said that just because there are references to legitimate expectations in some arbitral awards that they were not convinced that it was a general principle of international law on which an obligation could be found.
And even in cases where they do apply legitimate expectations as part of fair and equitable treatment, which they ought not to do in a provision such as ours that is guided by the minimum standard of treatment, they do that only when there are very specific assurances made to an investor in order to
[Page 337]
induce an investment. There is nothing of the sort here. Quite the contrary.
There was uncertainty throughout in the legal framework generally and there are no specific assurances. They said this morning there are specific assurances on the face of the Bond, but if you're applying the face of the Bond, it is worthless. So, those are not specific assurances.
And Gramercy has repeatedly acknowledged, as you know, that the Bonds were worthless. It could not have had--on their face, they could not have had any legitimate expectations that they would be paid any more than what they paid--at the very most that, they could be worth any more than what they paid for them because they are going out there and they pay what they say is Fair Market Value. How could they possibly have any expectation that they could be worth so much more?
They argued today that between 2001 to 2013, there was certainty. There was uniformity in the courts. Everyone knew that you used CPI plus interest, and so that's when they thought their Bonds
[Page 338]
were so valuable, that this would be such a great investment, and then they were crushed in 2013. How can they square that with the fact that in 2006, in the midst of this alleged certainty, they bought these things for 33 million? Did they just, like, conduct the biggest fraud on the Peruvian people? If these things were really worth in the range of 1.1 billion at that point in time, given the intervening interest, and they paid 33 million for them because it was such a certain that they were CPI plus interest and that's the way they were going to calculate it? It just doesn't square. It cannot be that there was this certainty there, that everyone knew, and that they were these valuable, valuable things, and that they paid a pence for them and now they want such a huge return.
And again, apologies.
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OPEN SESSION
MS. MENAKER: And then finally, I'm not going to discuss the Bondholder Process itself, you've heard that from my colleagues.
But that process, to the extent that they are challenging that, it is not arbitrary, grossly unfair, or unjust, and you will be hearing from Experts throughout the week, both our Financial Experts as well as Dr. Wühler who says that the process that is in place accords with international standards, and, in fact, exceeds international standards in many respects.
PRESIDENT FERNÁNDEZ ARMESTO: I had one question here.
MS. MENAKER: Yes.
PRESIDENT FERNÁNDEZ ARMESTO: And that is, is it the position of the Republic of Perú that these decrease also conform with the instructions given by the Constitutional Court in their Resolution? Because the Resolution is quite specific in how the valuation is to be performed and how the Supreme Decrees are to be structured and the content of these Supreme
[Page 341]
Decrees. Is it the position of the Republic of Perú that these Supreme Decrees conform with the instructions of the Constitutional Court?
MS. MENAKER: Yes. I mean, and then they there were changes, of course, post-2014 when they found issues with them, and so then they are conforming, but, yes, and there has been, to my knowledge, not a challenge that they have failed to conform in any way.
(Interruption.)
ARBITRATOR DRYMER: I think we'll hear more I suppose, but I believe that is one of Gramercy's arguments, is that they don't conform or at least they go beyond what the Court ordered, I believe.
MR. HAMILTON: To be clear, the Ministry of Economy and Finance and the Republic of Perú have implemented the 16 July 2013 Resolution through the Decrees and establishment of a Bondholder Process that that is working and paying Bondholders in compliance with Peruvian law.
PRESIDENT FERNÁNDEZ ARMESTO: That was not exactly the point, Mr. Hamilton. In compliance with
[Page 342]
Peruvian law or with compliance with the instruction of the Constitutional Court as set forth in this resolution? That was the specific question.
MR. HAMILTON: Those were aligned. As I said, in compliance with carrying out the Decision of the Court, in compliance with the resolution of the Constitutional Tribunal, and in accord, in that sense, with Peruvian law.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you.
MS. MENAKER: Okay. So, moving on to just for the fair and equitable treatment claim--
PRESIDENT FERNÁNDEZ ARMESTO: That was on the Tribunal's time.
MS. MENAKER: Thank you. Okay.
So, on the fair and equitable treatment claim when it comes to there are two aspects, they also have a denial-of-justice claim. So, very briefly on that, they cannot challenge the 2013 Constitutional Court Tribunal's Decision as a denial of justice simply because they were not a party to that Decision. So, you cannot have a denial-of-justice claim in that respect.
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And then so what they have done is in both of their notices of intent, in all four of their Notices of Arbitration, and in their Statement of Claim, their denial of justice claim was focused on that 2013 Decision and we made clear they could not challenge that as a denial of justice, not being a party to it.
So, then in their Reply, for the first time, they are making a claim of denial of justice for the totality of the Bondholder Process insofar as they are saying that they are denied justice because they are denied access to the courts. And that court access can be restricted for legitimate, nondiscriminatory reasons, for a public purpose, and that does not constitute a denial of justice. And you can see here--and, again, this will be discussed throughout the week, the fact that these claims are now being dealt with in this administrative process and the Court's role in the claims is curtailed to certain challenges is not a denial of justice. The administrative procedure is still according due process and the like, and that does not constitute a denial of justice.
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And now, also, ironically they say that, even though they are challenging this, as a denial of justice, they chose to bypass the same system that they are now complaining about. So, you can't really complain that you are denied justice by a system that you've chosen not to bring claims in the Court.
They only brought their seven claims. They didn't bring the other claims, and they've chosen not to participate in the Bondholder administrative proceedings. So, they can't challenge that also as a denial of justice, as they chose not to participate in those claims.
On effective means, they have now sought, because of the problems with denial of justice, to make an effective means argument, arguing that is a lesser standard. They can't do that because they can't import that provision into the Treaty via the MFN Clause. There are several reasons for this.
First, the Treaty itself makes clear that, for the fair and equitable treatment provision, it does not require treatment in addition to or in excess of the minimum standard of treatment under customary
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international law, so insofar as Gramercy is correct--we don't say they are correct, but if they are correct, and effective means is broader than that, they can't bring it in to be part of FET because the Parties have made clear that fair and equitable treatment does not go beyond the minimum standard.
The Parties have also made express in their Treaty the fact that a breach of another provision of another Treaty does not constitute a breach of this Treaty. That's another reason. Third, the Parties have expressly reserved the right to adopt Measures that accord different treatment than that accorded by any other Treaty that has entered into force or was signed prior to this Treaty.
The provision of the "effective means" provision that they are seeking to import is from the Perú-Italy Treaty, which was signed in 1994. It entered into force in 1995, both of which are a decade prior to our Treaty.
So, they simply can't do it, so I won't go into that any further other than to say at the end of the day, it would fail for the same reasons.
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And finally, on national treatment, their only claim for national treatment violation is alleged discriminatory treatment based on the prioritization of cash payments. Here, they can't show national treatment because, again, the Parties have agreed that, for a national treatment claim, you need to show actual treatment, they've been accorded different treatment.
And here, they chose not to participate in the Bondholder Process, so they can't show that they have been accorded any treatment, much less that they have been discriminated against. But, again, what does this do?
All this does is for those people that participate in the Bondholder Process, to the extent that there are lots of people and in any single year you have a lot of Bonds that need to be paid. And Perú, if it didn't have the budget that year to pay them all in cash, it can pay them in a variety of ways including with other Bonds, and it takes the cash that it has and it prioritizes to whom it will pay the cash. And this is cash payments up to $30,000.
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That's all this is.
And what they say is we are going to give priority to elderly people, perfectly legitimate. We are going to give priority to those who hold--are original owners of the Bonds, and then to their heirs, and then their heirs who are old, and then individuals we are going to prioritize over companies, et cetera, and then at the end of the list are the speculative investors that they complain about. But, again, this is priority treatment for payment of cash up to $30,000.
They can't even say they never sought it. They never sought to get cash. They don't know, if they participated, if there would be enough cash to give them the $30,000, and they have also said in their own arguments that they don't even care about getting cash. They are happy to take Bonds.
And, again, I have some--Dr. Wühler will talk about how this accords with international practice anyway.
So, I will just end with saying two brief words on quantum, if that's okay.
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PRESIDENT FERNÁNDEZ ARMESTO: You are five minutes over Claimants', so five minutes is fine.
MS. MENAKER: Okay. Thank you.
So, on quantum, the first point is that Claimants, in making their claims, they ignore the existing legal framework, the context, and the acquisition price, all of this which can't be ignored when there they are calculating damages. As our Quantum Experts explained in their very First Report, what you look at is the Fair Market Value.
If this were an investment, and you are valuing an investment, you take the Fair Market Value of the investment on the date before the challenged Measure and you value it. And here--and then you bring that value forward. And the Fair Market Value is typically what a Willing Buyer and a Willing Seller would pay for something, and you would look at relevant factors, including what you paid for the asset.
What you did with the asset in the interim, if you bought a factory and then you spent 20 years improving the factory, or what you did, if there were
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other transactions, all of those types of things. And the fact that these Bonds--the face value were utterly worthless, that any compensation that would be assigned to them would not be a matter of strict finance or economics, but would depend upon Decisions made by the executive, the legislature, and/or the judiciary to assign a value to these Bonds.
All of that needs to be taken into account. And none of that has been taken into account by Gramercy or its Experts.
So, that is why we also start from the starting point that you need to look at the acquisition price. What did they say the Fair Market Value was when they went in with all of this alleged certainty? $33 million? What happened? They didn't do anything to these. If anything, the price should have gone down because of uncertainty, but if you want to take that away, if you want to say, okay, that is the unlawful measure, you ignore that.
But it is not as if they are contributing to anything. They are not doing anything inherently that should increase the value of this worthless paper. It
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is what it is. It is not like a factory, it's not like a gold mine. It is not like in, you know, some oil in the ground. It is just paper.
So, there's no--here they said you don't look at Fair Market Value for something that has a legally subscribed intrinsic value that you are legally obligated to pay a specific amount.
Again, here, there is nothing intrinsic about this paper that shows you that you are required to pay a specific amount, because when you look at the face of the paper, it is worthless. So, when you do get to valuing the Bonds, what accounts for the huge difference between our Parties' valuations and the Experts, you will hear from them next week. They will go into this in detail.
I thought it would be helpful to just focus on the three main areas because we say, of course, that these are valued at approximately 33 million. They say they are valued at about 1.8 million. The biggest driver, the biggest difference is interest, $1.5 billion, depends on the different interest rates being used by the Parties, and Perú is not using an
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interest rate of like, you know, LIBOR from five years ago when it was zero or negative interest rates or .5 or something like that.
The interest rate that we're using is a one-year Treasury Bill yield over many, many, many years, averaging it out. It comes to 5.2 percent, a pretty healthy interest rate. What is Gramercy using to get a $1.5 billion more is they are using CPI plus, on top of that, an interest rate of 7.22 percent, which comes to an average between 10.5 and 10.9 percent, nearly 11 percent interest. That's $1.5 billion. So, there's a big chunk of the difference.
Second, $91 million of the difference is the fact that they calculate the principal from the date that the Bond was issued rather than the date of the last clipped coupon of the Bond. Okay. And that is it. So, they essentially are inflation protecting these Bonds from the date of issuance in 1969, even though they didn't contain any such protection.
Finally, for the exchange rate, what they are doing, we go back, we say, okay, what is the exchange
[Page 352]
rate. You have to convert this currency that doesn't exist anymore into dollars, so you go back and you do that, and you figure out the exchange rate, and we do that at the date of the issuance. He takes the exchange rate between 1999 to 2018. And why does he pick those dates? He says that's when the Peruvian economy stabilized.
So, he gives the Bondholders the benefit of this window when the economy was stabilized, notwithstanding the fact that Perú was paying on these Bonds in the '70s and the '80s, and it wasn't a stable economy, but they don't worry about that with their exchange rate. They are, you know, cordoned off from that, and that accounts for 40 million.
So, thank you very much for your patience and indulgence and I'll end with that.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you. Thank you very much.
Let us get a time check from the secretary.
SECRETARY PLANELLS-VALERO: The Respondent has used 2 hours and 50 minutes.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. So, with
[Page 353]
that we close. Questions. Sorry. I apologize. Professor Stern has questions. No, no. I did interrupt, so and you did not, so I'm sure you have questions. Please. Sorry for that.
QUESTIONS FROM THE TRIBUNAL
ARBITRATOR STERN: In fact, I have two questions. First, let us go back to Slide 80.
(Interruption.)
ARBITRATOR STERN: On Slide 80, I would like to--that you clarify a little bit what is this test for the foreseeable dispute. I understand you say the dispute existed, but supposing we consider the dispute didn't exist or it was another dispute, I would like to have a general theoretical framework.
So, you mentioned Philip Morris and you cite here at Paragraph 539, speaking about the specific foreseeable dispute, and then you say--you also mention Paragraph 555 to 569, in fact, there are different tests. You might know. You didn't cite it, again, I don't know if it's in the record. I wanted to cite Pac Rim where there is this gray line.
Is it in the record?
[Page 354]
MS. MENAKER: Yes.
ARBITRATOR STERN: Okay. And so, in the--here, you remember, there is this gray area, and the Tribunal said, in the Tribunal's view, the dividing line occurs when the relevant Party can see an actual dispute or can foresee a specific future dispute as a very high probability and not merely a possible controversy. So, that's Pac Rim.
Then we have Tidewater, where the test is just reasonably foreseeable. And, according to you--Slide 80, it would seem that it's a little bit the same in Philip Morris. Well, I'm not so sure because in Paragraph 554, which you do not mention, the Tribunal says the following: "The Tribunal is of the Opinion that a dispute is foreseeable when there is a reasonable prospect that the Measure, which may give rise to a treaty claim, will materialize.
And, again, in 569, if it's reasonably foreseeable, that legislation equivalent to the plain packaging would eventually be enacted and consequently a dispute would arise. And in Paragraph 585, which you do not mention, again, a dispute is foreseeable
[Page 355]
when there is a reasonable prospect that the measure, in fact, may give rise to a treaty claim will materialize."
So, I would be interested to know what is your position, which criteria you would personally adopt, and I know you would argue in this case because they are quite different.
MS. MENAKER: Yes. Thank you. I think in this respect Pac Rim is an outlier, that Tribunals have said that they have imposed a slightly higher standard of a high probability.
ARBITRATOR STERN: Okay. Pardon. Go ahead.
MS. MENAKER: Okay. And that the other Tribunals have rejected that and said that you need, instead, just a reasonable--it needs to be reasonably foreseeable or a reasonable prospect, as you've said, and if my recollection is correct, in the Philip Morris case, when they are talking about a reasonable prospect, I thought it was also in the context of the fact that, after the elections, the Parliament was equally divided and, so you had a minority government and they said, well, it might have been more difficult
[Page 356]
and, perhaps, less likely that they would have been able to get the legislation through, but there was still a reasonable prospect because the Government had not announced that it was abandoning the effort.
In Pac Rim, I believe what had occurred was that they were having problems getting their mining licenses approved, but then there was a period of time when the Government seemed to engage with them.
And they had--and the Government was making comments that were "friendly," for lack of a better term, that were seemingly to engage with them, and it wasn't until after that time period when the Government--the President made a speech that was interpreted as, like, enacting a de facto mining ban, and so they said that they could have still held out hope up until that other announcement that there was a possibility that this would not turn into a dispute, that a--adverse measure would not be adopted, that their licenses would still be considered, and so that's different than in these other cases, but I do think that the standard is more one of a reasonable foreseeability or reasonable prospect and not a high
[Page 357]
probability.
ARBITRATOR STERN: Okay. I mean, in fact, if you read what--I mean, what Philip Morris says, a dispute is foreseeable even when a measure has not been adopted. So, I would think it's a higher test than Pac Rim but, you know, this is a question--
MS. MENAKER: I think I was just looking at it at the converse, because they do say that it could be foreseeable even when the Measure is not adopted. That is precisely what happened in Philip Morris, the legislation is not enacted until after, or I think the day that they file, so that it was not before. But they are saying that notwithstanding that it could still be reasonably foreseeable that it would be enacted. To me, I was calling it a lower standard. I think you were saying it's a higher standard.
ARBITRATOR STERN: But so, finally, you would argue just a reasonable foreseeability of a Measure, not of a dispute? Of a Measure that could lead to a dispute?
MS. MENAKER: Yes, of a Measure that could lead to a dispute, and then separately, of course, if
[Page 358]
the dispute has already arisen, that's a different problem.
ARBITRATOR STERN: That's a different story.
MS. MENAKER: Exactly.
ARBITRATOR STERN: Okay. My other line of question goes to Slide 104 and, in fact, also 117. We will see the two because the questions are a little bit linked.
First, you said: "We spent tens of millions of dollars that we had raised from our clients."
Is it your position that the origin of the fund has an importance on the existence of an investment?
MS. MENAKER: Yes. Now, that's not to say that in some circumstances--
ARBITRATOR STERN: Or maybe I say all the--my concerns, because you might have handled differently.
MS. MENAKER: Okay.
ARBITRATOR STERN: So, again I would understand that it might be more a question for the Claimant, who is Gramercy Emerging Market Fund? Who is [Redacted]? What are their relation? And this
[Page 359]
goes, of course, to Slide 117. We have a few companies.
I would like to know the links between all these, and also in 117, you said: "Our clients are the ultimate beneficiary of Gramercy's Land Bonds."
So I would like to know whether there is a distinction between a legal owner and the beneficial owner, who has the proper, who has the--
MS. BIRKLAND: This question is about confidential documents.
(End of open session. Attorneys' Eyes Only information follows.)
[Page 360]
CONFIDENTIAL SESSION
[Redacted]
[Page 361]
[Redacted]
[Page 362]
[Redacted]
[Page 363]
[Redacted]
(End of Attorneys' Eyes Only session.)
[Page 364]
OPEN SESSION
PRESIDENT FERNÁNDEZ ARMESTO: Further questions?
ARBITRATOR STERN: That's all.
PRESIDENT FERNÁNDEZ ARMESTO: Any further questions?
ARBITRATOR DRYMER: No, not at the moment.
No.
PRESIDENT FERNÁNDEZ ARMESTO: I have no further questions. I'm sure that a lot of--there are a lot of questions, of course, but I'm sure we'll have opportunities to address them in the course of the Hearing.
And I think it is appropriate that we now close the Hearing. We thank our interpreters and court reporters for their effort, and we will then reconvene tomorrow at 9:30.
MR. FRIEDMAN: There is one confidential information that was disclosed prior to the feed being turned off. It came up in response, I think, to an answer by Respondent's counsel. Has the--are you now on recording mode or not?
[Page 365]
SECRETARY PLANELLS-VALERO: The system for editing confidential information that was inadvertently disclosed will be available starting tomorrow morning.
PRESIDENT FERNÁNDEZ ARMESTO: So, let's cut the--can we cut off the--I think we are at the end, and we will now discuss what has happened.
(Whereupon, at 6:34 p.m., the Hearing was adjourned until 9:30 a.m. the following day.)
[Page 366]
CERTIFICATE OF REPORTER
I, Dawn K. Larson, RDR-CRR, Court Reporter, do hereby certify that the foregoing proceedings were stenographically recorded by me and thereafter reduced to typewritten form by computer-assisted transcription under my direction and supervision; and that the foregoing transcript is a true and accurate record of the proceedings.
I further certify that I am neither counsel for, related to, nor employed by any of the parties to this action in this proceeding, nor financially or otherwise interested in the outcome of this litigation.
Signature
Dawn K. Larson
[Page 367]
INTERNATIONAL CENTRE FOR THE SETTLEMENT OF INVESTMENT DISPUTES
-X
In the matter of Arbitration
:
between:
:
:
GRAMERCY FUNDS MANAGEMENT LLC AND
GRAMERCY PERU HOLDINGS LLC,
Claimants,
and
REPUBLIC OF PERÚ,
Respondent.
:
: ICSID Case No.
: UNCT/18/2
:
:
:
-X Volume 2
HEARING ON JURISDICTION, MERITS AND QUANTUM
Saturday, February 8, 2020
The World Bank Group
1225 Connecticut Avenue, N.W.
C Building
Conference Room C1-450
Washington, D.C.
The hearing in the above-entitled matter came on at 9:30 a.m. before:
PROFESSOR JUAN FERNÁNDEZ ARMESTO, President
MR. STEPHEN L. DRYMER, Co-Arbitrator
PROFESSOR BRIGITTE STERN, Co-Arbitrator
In the case of discrepancy, the audio recording in the original language will prevail.
[Page 368]
ALSO PRESENT:
On behalf of ICSID:
MS. MARISA PLANELLS-VALERO
Secretary of the TribunalMS. KRYSTLE M. BAPTISTA
Assistant to the President of the TribunalRealtime Stenographers:
MS. DAWN K. LARSON
Registered Diplomate Reporter (RDR)
Certified Realtime Reporter (CRR)
B&B Reporters
529 14th Street, S.E.
Washington, D.C. 20003
United States of America
[email protected]MR. PAUL PELISSIER
MR. DIONISIO RINALDI
D.R. Esteno
Colombres 566
Buenos Aires 1218ABE
Argentina
(5411) 4957-0083Interpreters:
MS. SILVIA COLLA
MR. DANIEL GIGLIO
MR. CHARLES ROBERTS
[Page 369]
APPEARANCES:
On behalf of the Claimant:
MR. MARK W. FRIEDMAN
MS. INA C. POPOVA
MR. CARL RIEHL
MS. FLORIANE LAVAUD
MS. BERGLIND HALLDORSDOTTIR BIRKLAND
MR. GUILHERME RECENA COSTA
MS. SARAH LEE
MR. DUNCAN PICKARD
MR. JULIO RIVERA RIOS
MS. MARY GRACE MCEVOY
MR. THOMAS G. MCINTYRE
Debevoise & Plimpton, LLP
919 Third Avenue
New York, New York 10022
United States of AmericaMR. LUIS BEDOYA
MR. FRANCISCO CARDENAS PANTOJA
Rodrigo, Elias & Medrano
Av. San Felipe 758
Jesús María
Lima 15072
PerúRepresenting Gramercy Funds Management LLC:
MR. JAMES TAYLOR
MR. JOSHUA M. O'MELIA
MR. NICK PAOLAZZI
MR. THOMAS NORGAARD
[Page 370]
APPEARANCES: (Continued)
On behalf of the Respondent:
AMBASSADOR HUGO DE ZELA
Republic of PerúMR. RICARDO AMPUERO
Republic of PerúMS. MONICA GUERRERO
Republic of PerúMS. GIOVANNA ZANELLI
Republic of Perú
MR. ALBERTO HART
Republic of PerúMR. JONATHAN C. HAMILTON
MS. ANDREA MENAKER
MR. RAFAEL LLANO
MR. FRANCISCO JIJÓN
MR. JONATHAN ULRICH
MR. FRANK PANOPOLOUS
MR. JOHN DALEBROUX
MR. ALEJANDRO MARTINEZ DE HOZWhite & Case LLP
701 Thirteenth Street, NW
Washington, D.C. 20005-3807
United States of America
[Page 371]
For the United States of America:
MS. LISA GROSH
MS. NICOLE THORNTON
MS. MARGARET SEDGEWICK
MR. JOHN DALEY
Attorney-Advisers
Office of International Claims and
Investment Disputes
Office of the Legal Adviser
U.S. Department of State
Suite 203, South Building
2430 E Street, N.W.
Washington, D.C. 20037-2800
United States of America
MS. AMY COLLINS
U.S. Department of Treasury
[Page 372]
CONTENTS
PAGE
WITNESSES:
ROBERT KOENIGSBERGER
ROBERT LANAVA
ROBERT JOANNOU
CONFIDENTIAL PORTIONS:
1. ... 466-472
2. ... 514
3. ... 538-(open session not noted)
4. ... 560-572
5. ... 634-640
6. ... 661-663
7. ... 704-727
8. ... 734-735
9. ... 747-767
10. ... 776
11. ... 780-790
12. ... 828-866
13. ... 875-(open session not noted)
[Page 373]
PROCEEDINGS
PRESIDENT FERNÁNDEZ ARMESTO: Good morning.
This is the second day in the Hearing in arbitration for Gramercy Funds Management LLC and Gramercy Perú Holdings LLC v. the Republic of Perú.
Is there any housekeeping? None.
MR. FRIEDMAN: Not from Claimants' side.
Good morning.
PRESIDENT FERNÁNDEZ ARMESTO: Good morning.
And from Respondent's side.
(Comments off microphone.)
PRESIDENT FERNÁNDEZ ARMESTO: Let me make one point of order from the Tribunal's side. Although this is not strictly an ICSID procedure, we have the formula for the declaration by the Witness, and if this is agreeable by the Parties, we will make Witnesses aware of their duty to say the truth by asking them to make the declaration.
MR. FRIEDMAN: Yes. We agree.
MR. HAMILTON: Yes.
PRESIDENT FERNÁNDEZ ARMESTO: Excellent. So, without further ado, we call Mr. Robert S.
[Page 374]
Koenigsberger.
ROBERT KOENIGSBERGER, CLAIMANTS' WITNESS, CALLED
PRESIDENT FERNÁNDEZ ARMESTO: Good morning, Mr. Koenigsberger.
THE WITNESS: Good morning.
PRESIDENT FERNÁNDEZ ARMESTO: I think you have to press the button.
THE WITNESS: Good morning.
PRESIDENT FERNÁNDEZ ARMESTO: Good morning, Mr. Koenigsberger. Thank you for being here with us and especially for being here with us on a Saturday.
THE WITNESS: Thank you.
PRESIDENT FERNÁNDEZ ARMESTO:
Mr. Koenigsberger, you are here as a witness, and as a witness, you have a duty to say the truth, and you must take an oath. So, can I kindly ask you to stand up.
Can we all stand up, please.
Mr. Koenigsberger, you have your oath formula in front of you. Can you take that, please.
THE WITNESS: Sure thing.
I solemnly declare, upon my honor and
[Page 375]
conscience, that I shall speak the truth, the whole truth, and nothing but the truth.
PRESIDENT FERNÁNDEZ ARMESTO:
Mr. Koenigsberger, I don't know if you have been in an arbitration procedure before. On your left, this is counsel to your company; and on the right side, this is counsel to Perú. There will be some questions from counsel, first from counsel to Claimants and then from counsel to Perú.
You are probably familiar, most questions, especially from counsel from Perú, will be phrased in such a way that you can answer with "yes," "no," or "I don't know" or "I don't recall." Could I kindly ask that you say "yes," "no," or "I don't know" or "I don't recall" on the Transcript, and then you are most welcome to add any clarification that you would like to add.
THE WITNESS: Yes.
PRESIDENT FERNÁNDEZ ARMESTO: Very good.
Who will take the lead?
MR. FRIEDMAN: I will. Thank you, Mr. President.
[Page 376]
DIRECT EXAMINATION
BY MR. FRIEDMAN:
Q. Good morning, Mr. Koenigsberger.
A. Good morning.
Q. You have in front of you, to your left, five documents. Those are the First Witness Statement of Robert S. Koenigsberger dated June 2, 2016, if you could just take a look at that.
And do you recognize that?
A. Yes.
Q. And can you just take a look at the last page. Is that your signature?
A. Yes, it is.
Q. Okay. The next document is the Amended Witness Statement of Robert S. Koenigsberger dated August 5, 2016.
Do you see that one?
A. Yes, I do.
Q. And can you just confirm that that also contains your signature?
A. It does, indeed.
Q. Okay. There are three more, if I could just
[Page 377]
ask you to look at them. They are the Second Amended Witness Statement of you dated July 13, 2018, the Reply Witness Statement of you dated May 21, 2019, and the Rebuttal Witness Statement of you dated November 13, 2019.
If I could ask you to just look at them. Take a look at the back pages of each, and can you just confirm for the Tribunal that these are your Witness Statements.
A. Yes, they are my Witness Statements. The third one has my name, but I don't see the signature on it.
Q. Okay. All right. Do you recall actually having signed that?
A. Yes, I do.
Q. Okay. All right. Do you have any corrections or amendments to make to any of these Witness Statements at this time?
A. I do not.
Q. All right. Are you content for the Tribunal to rely upon that as your evidence in this case?
A. Yes, I am.
[Page 378]
Q. I would now like to ask you about certain allegations that Perú has made in its Rejoinder, and I'm wondering if we can put that on the screen in front of you. In particular, I'm going to start with Paragraph 228.
(Comments off microphone.)
MR. FRIEDMAN: Yes.
BY MR. FRIEDMAN:
Q. 228 can be found on Page 86.
So, we are on Page 86, Paragraph 228, and we've put also on the screen the particular paragraph, if that's helpful, Mr. President.
(Comments off microphone.)
MR. FRIEDMAN: All right. May I proceed?
PRESIDENT FERNÁNDEZ ARMESTO: Yes.
MR. FRIEDMAN: Yes, thank you.
BY MR. FRIEDMAN:
Q. You'll see it in the last sentence there, Perú contends that the record shows that: "The evidence on which Gramercy may have relied"--and it's talking about its diligence during the 2000--"the investment origination phase was minimal, not
[Page 379]
objective, and the result of Gramercy outsourcing its due diligence to self-interested third parties."
Do you see that?
A. I do. Yes, I do.
Q. Do you agree or disagree with that claim?
A. I disagree.
Q. Okay. Can I ask you--there is this charge here that the diligence that you did was minimal.
Can I ask you to just describe for the Tribunal the diligence that Gramercy did in thinking about and then ultimately getting into the Land Bonds investment?
A. Sure. The due diligence that we did on this, I would describe as both a top-down and a bottoms-up due diligence process. The top-down is first on, kind of, the State of Perú at the time, a sovereign analysis, if you will, a credit analysis of Perú, and the notion of, kind of, the ability and willingness for Perú to pay, but also to continue along the process of resolving its claims that were outstanding.
The bottoms-up was really the micro relative to the Bonds themselves, which is understanding that
[Page 380]
the Bonds are valid obligations, that they have to be paid, looking at court rulings at the highest court of the land, looking at local courts, conversations with counsel, multiple trips by the team in order to do due diligence, both on the top-down and the bottoms-up leading up to the investment.
Q. Okay. And how did Gramercy go about carrying out that diligence?
A. You know, it is predominantly a process of primary research, where there is travel to verify that the things that we're learning along the way, discussions with counsel, analysis of cases that had occurred, conversations with Bondholders, conversations with Bondholder associations. We have an ongoing Investment Committee process, so we would typically meet formally once a week or telephonically once a week, and then really our research is an ongoing process.
Q. So, over what period of time?
A. Well, over the entire time of the investment, but as we were acquiring Bonds, there is typically a thesis that is put forward in underwriting, and then
[Page 381]
we continue to ask ourselves or continue to re-underwrite vis-à-vis that thesis, are we finding information along the way that confirms that original thesis.
Q. Okay. There is also the charge here in the paragraph we looked that the Gramercy's diligence was not objective.
Do you agree or disagree with that?
A. I disagree with that.
Q. Okay. And can you maybe explain to us, then, what you think was objective about the work that you were doing.
A. Well, the information that we observed in order to do the research was certainly objective. So, I mentioned before court cases. So, if we are talking about something that came from the Tribunal or something that came from the lower courts, I would consider that to be objective research.
If we are looking at what's the sovereign analytics of Perú, what's the ability and willingness of Perú to pay, I mean, that's all objective sovereign analytics that we were done.
[Page 382]
Q. Umm-hmm. And can you--there is also the charge that you outsourced your diligence to self-interested third parties. Do you agree or disagree with that charge?
A. I disagree with that.
Q. Who led the diligence for Gramercy?
A. So, I appointed a gentleman by the name of David Herzberg to lead that. That is not uncommon for us to interact in dialogue with outside Parties. I mean, even to this day, typically banks or brokers will take us on investment due diligence trips, but at the end of the day, the due diligence are ours and the conclusions we make are ours.
Q. Okay. We won't go to it, but the allegations that Perú makes about this are that you relied on José Cerritelli and ADAEPRA, both of whom may have had financial interests or received commissions when Gramercy purchased Land Bonds, and so that's the idea of self-interestedness.
Does that, in your view, make the diligence self-interested and outsourced to these people?
A. Not at all. We understand the counterparties
[Page 383]
that we deal with and the incentives to the counterparties that they deal with, but we have our own incentives and we have our own due diligence process.
Q. Umm-hmm. What about Mr. Cerritelli? Did you have any concern that he was acting in a self-interested way and not objective?
A. No, I did not. José was someone I had known and worked with since the late 1980s. He's Peruvian. He's an expert on sovereign debt. I worked with him at CR-P in the late '80s. I worked with him again when I started at Gramercy, and we worked on the Russian debt restructuring. I worked with José on the Argentine debt restructuring. I worked with him in multiple organizations and never had that concern about José.
Q. Okay. I want to turn to another allegation that Perú makes. Before we look at that allegation in particular, do you recall David Herzberg having prepared for you a memo in January 2006?
A. Yes, I do.
Q. Okay. If we could just put in front of you
[Page 384]
that memo so that you have it. It is CE-114.
A. Thank you.
Q. Okay. And then I'd like to take you to the allegation, or one of the allegations that Perú makes about this memo, which can be found on Page 88 of the Rejoinder in Paragraph 234. And it says: "The 2006 memorandum is replete with errors. For example, in addition to typos, the paragraph addressing the Constitutional Tribunal rulings is unclear and has factually inaccurate statements, including, for example, several references to a March 15, 2005, Constitutional Court Decision, even though the Constitutional Tribunal did not rule on the Agrarian Reform Bonds on March 15, 2005".
Do you see that?
A. Yes, I do.
MR. HAMILTON: Mr. President, if I could, just a point of order. I just want to understand. Mr. Koenigsberger has already provided a witness statement after Perú's Rejoinder, and so my understanding is that we're going to give him a leash to talk about these issues, but keep in mind that he
[Page 385]
already had submitted a witness statement since our Rejoinder.
MR. FRIEDMAN: May I point out, Mr. President, that the Witness Statement after the Rejoinder was limited to issues of jurisdiction. We were very disciplined about not having any Witness who put in evidence at that stage, put in further evidence on merits because that would have been outside the procedural rules. Our procedural rules here pertaining to this are set forth in our Procedural Order, in which we may ask people about information that has come up since their last opportunity to comment on it. We may ask questions regarding submissions made by the opposing Party since the Witness submitted his or her last statement.
And on the Merits, Mr. Koenigsberger has not had a chance to confront any of the allegations set forth in Perú's Rejoinder about the diligence.
PRESIDENT FERNÁNDEZ ARMESTO: Why don't you continue?
MR. FRIEDMAN: Thank you.
BY MR. FRIEDMAN:
[Page 386]
Q. Mr. Koenigsberger, so, we are looking at this Paragraph 234 where Perú alleges that this 2006 memorandum is replete with errors and draws our attention to this March 15, 2005, date about a Constitutional Tribunal Decision.
Do you agree or disagree that the 2006 memorandum is replete with errors?
A. I disagree.
Q. Okay. And do you see that they point out that there is this date of March 15, 2005, that seems to be wrong.
Do you see that?
A. I do.
Q. Do you agree or disagree that this is talking about a phantom decision of the Constitutional Tribunal?
A. I disagree.
Q. Can you tell us why?
A. Sure. I believe that the March 2005 is the publication date, and the actual issue date was prior to that, I believe, in late 2004, in August.
Q. And why do you believe that?
[Page 387]
A. Because I looked at that myself, and I actually looked at the underlying ruling.
Q. The underlying ruling. What do you mean you looked at underlying ruling?
A. Well, David--you know, when I saw this, I just couldn't believe that that would possibly be the case. I looked at, in particular, this Paragraph Number 17 and saw that it actually exists, and so, when I investigated what's the difference here, it is not uncommon in Latin America to have an issue date and then to have a publication date.
Q. You said Paragraph 17. If I could ask you to look at the memo itself, CE-114, which is Mr. Herzberg's memo on Page 2, and I think we see the paragraph that Perú was quoting kind of midway, halfway down the page, the one that starts the Constitutional--yeah, "the Constitutional Tribunal of March 15, 2005."
Do you see where they quote that? Do you see where that's in there and it describes--that paragraph?
A. Yes, I do.
[Page 388]
Q. At the end of that paragraph, it refers to--it summarizes that Decision, and it says they have the right to--it says that: "The Constitutional Court Decision explicitly names holders of Land Reform Bonds saying that they have the right to go to court to demand payment of their claims, adjusted for inflation, plus the interest mandated by law. The obligation to pay interest is contained in the judicial foundation, Number 17, and is an integral part of the second article of their ruling."
Do you see that?
A. Yes, I do.
Q. Okay. And do you have an understanding about what that is referring to?
A. Yes, I do.
Q. And what is that?
A. This ruling--that the conclusion of this ruling was that Bondholders always had the right to go to local courts.
Q. Okay. But I could ask you to turn to CE-107, which is the--what has been described in these proceedings as the Constitutional Tribunal ruling of
[Page 389]
2004.
(Comments off microphone.)
Q. If you could turn with me to Foundation 17 in this document. That's the one that says: "Consequently, the procedure regulated by Emergency Decree"--
PRESIDENT FERNÁNDEZ ARMESTO: Pages?
MR. FRIEDMAN: I'm sorry. Page--I have a translation. It is Foundation 17, the paragraphs are numbered.
(Overlapping speakers.)
PRESIDENT FERNÁNDEZ ARMESTO: 17. Okay.
BY MR. FRIEDMAN:
Q. And it says--
MR. FRIEDMAN: Yes.
PRESIDENT FERNÁNDEZ ARMESTO: Let me get the document. Sorry for that.
MR. FRIEDMAN: Yes, of course. Sorry.
PRESIDENT FERNÁNDEZ ARMESTO: Document CE-117?
MR. FRIEDMAN: No, 107. Forgive me, Mr. President.
[Page 390]
PRESIDENT FERNÁNDEZ ARMESTO: No, no, no, my mistake. Sorry for that.
(Comments off microphone.)
PRESIDENT FERNÁNDEZ ARMESTO: I'm with you.
MR. FRIEDMAN: Yes, thank you, Mr. President.
BY MR. FRIEDMAN:
Q. So, Paragraph 17, in these proceedings this has been described as the 2004 Constitutional Tribunal Decision, but it seems to have been characterized differently in the memorandum. So, I'm just bringing to you to this Article 17, Foundation 17, which says: "Consequently, the procedure established by Emergency Decree Number 88-2000 for crediting and paying the outstanding debt from the land reform expropriation proceedings must be interpreted as an option, but the Bondholder is free to select instead of going court to demand payment of the updated debt, plus the interest that is applicable under the law in a court judgment that must be enforced."
Do you see that?
A. Yes, I do.
Q. Okay. And how, if at all, does that compare
[Page 391]
with what Mr. Herzberg was describing in his memorandum to you?
A. I think it's the same.
Q. Okay. Thank you.
MR. FRIEDMAN: No further questions.
PRESIDENT FERNÁNDEZ ARMESTO: Excellent. Thank you very much.
Mr. Hamilton, do you have any questions for the Witness?
MR. HAMILTON: Mr. President, for the record, Respondent has provided three binders.
Alejandro, those are for the translators.
We have provided three binders to the Witness and also the same three binders to counsel for Gramercy, and we understand they are going to rely on electronic presentation of any materials that we discuss.
PRESIDENT FERNÁNDEZ ARMESTO: We will try. I hope you have a spare bundle just if the Tribunal is not sufficiently diligent with the electronics.
CROSS-EXAMINATION
BY MR. HAMILTON:
[Page 392]
Q. Mr. Koenigsberger, good morning.
A. Good morning.
Q. I'm Jonathan Hamilton. We met one time before a couple years ago.
A. How are you doing?
Q. How are you?
A. Doing well, thanks.
Q. Good. I have questions for you that will be based upon your four--five Witness Statements that you have provided to this Tribunal, and I understand that you have in front of you copies of your five Witness Statements provided to this Tribunal; is that correct?
A. Yes, I do.
Q. Very good.
Now, Mr. Koenigsberger, you founded Gramercy Asset Management in 1998; is that correct?
A. Yes. I believe I founded Gramercy Advisors in 1998. I don't recall the date for Gramercy Asset Management.
Q. And did you found the Gramercy Asset Management business by yourself?
A. Just for clarification, the Gramercy's Asset
[Page 393]
Management business and the Gramercy all the entities we managed since then?
Q. In 1998, you founded the Gramercy Asset Management business; is that correct?
A. Yes. I founded Gramercy Advisors in 1998.
Q. And you founded Gramercy together with Marc Helie; is that correct?
A. That is correct.
Q. Who is Marc Helie?
A. Mark Helie is an individual that I had worked with at Merrill Lynch in the mid-1990s, and then when I was at Lehman Brothers, he was a client of the bank, and I believe he was at Wasserstein Bros (phonetic).
Q. And he was deeply involved in sovereign debt issues related to Ecuador; is that correct?
A. Gramercy was involved in Ecuador at the time.
Q. He was known as the man who brought Ecuador to its knees; is that correct?
A. I think that was some sensational journalism by one of the magazines.
Q. Okay. And he is no longer affiliated with Gramercy; is that correct?
[Page 394]
A. He is not. No, he is not.
Q. Okay. Now, given that Gramercy has chosen to bring this case under United States-Perú Treaty, of course, Gramercy--it is important to understand what Gramercy is, how you do business, and you've discussed that at some length in your Witness Statements, and you, in particular, had focused on Gramercy's business of investing in distressed emerging market assets; is that correct?
A. Yes, it is.
Q. If you could turn to Tab 1, this is a Gramercy Funds Management brochure.
PRESIDENT FERNÁNDEZ ARMESTO: If you want us to follow, you have to give us a number.
MR. HAMILTON: Give me just a moment. We will get there. Thank you so much. I'm making reference to Exhibit R-540. This is a document titled "Gramercy Funds Management LLC brochure dated March 29, 2018," which will be displayed on the screen, please.
BY MR. HAMILTON:
Q. Okay. Do you see that document?
[Page 395]
A. Yes, I do.
Q. Okay. What is Gramercy Funds Management?
A. Gramercy Funds Management is the registered investment advisor that has investing management responsibility for the various funds and managed accounts that we manage.
Q. What is the relationship between Gramercy Funds Management and the holding of the Peruvian Agrarian Reform Bonds?
A. Gramercy Funds Management is the entity that is responsible for managing the Bonds, be it the holding entity.
Q. Okay. And this is a document that Gramercy has filed with the Securities and Exchange Commission of the United States; is that correct?
A. I don't believe this--I don't understand this to be an SEC document.
Q. Okay.
A. I think it's a firm due diligence memorandum.
Q. Okay. So, as it states in the first couple of lines of this document, this brochure provides information about the qualifications and business
[Page 396]
practices of Gramercy Funds Management LLC, which is an investment advisor registered with the United States Securities and Exchange Commission; is that correct?
A. Yes, it is.
Q. Thank you.
Now, if you turn to Page 3 of this document, you can see in the Table of Contents is indicated a range of issues related to Gramercy's business practices.
Do you see that list on Page 3?
A. Yes, I do.
Q. Thank you.
Now, on Page 4, there's a reference to "assets under management."
So, if I read this correctly, as of January 31, 2018, Gramercy had approximately $6 million of regulatory assets under management; is that correct?
A. I'm sorry. What's the question again?
Q. Mr. Koenigsberger, I'm reading the document in front of you. It says: "As of January 31, 2018,
[Page 397]
Gramercy had approximately $6 billion of regulatory assets under management"; correct?
PRESIDENT FERNÁNDEZ ARMESTO: Yeah. I mean, it's what the brochure says.
MR. HAMILTON: Correct.
PRESIDENT FERNÁNDEZ ARMESTO: Okay.
BY MR. HAMILTON:
Q. Do you agree, Mr. Koenigsberger?
A. I agree that that's what the brochure says.
Q. Thank you. So, moving forward to--
PRESIDENT FERNÁNDEZ ARMESTO: Can I--I know that this is now getting cultural, but if we could avoid reading into the Transcript--and this goes for both because I'm sure that Mr. Friedman will have the same attitude of reading into the Transcript a portion of a document, and then asking the Witness: "Is this what the document says?"
I personally prefer because I think it is faster to ask the Witness: "Can you read this?" and then put the question. I think it's more efficient.
MR. HAMILTON: No problem. Thank you very much.
[Page 398]
BY MR. HAMILTON:
Q. Now, Mr. Koenigsberger, on Page 5, there's a discussion of fees and compensation, and it refers to asset-based compensation and performance-based compensation.
Which type of compensation do the two Gramercy Claimants in this case--are they entitled to with respect to the Peruvian Agrarian Bonds?
A. Give me one second. I'm sorry, can you repeat the question?
Q. Of course. Gramercy has different types of fees and compensation. One is asset-based compensation, which includes a management fee; is that correct?
A. Yes, it is.
Q. Okay. And are there--are the Claimant entities in this case entitled to Management Fees in connection with the Peruvian Agrarian Bonds?
A. Yes, they are.
Q. Okay. And how are those Management Fees calculated?
A. Management Fees are typically calculated on
[Page 399]
the amount of assets that are managed.
Q. Okay. And so, would your management fee be
based on a valuation of the Agrarian Bonds?
A. In part.
Q. Okay. So, under the management fee approach,
the calculation of the valuation of the Bonds, in
turn, determines the management fee to which Gramercy
is paid; is that correct?
A. Yes. That's an externality.
Q. And there's also a reference here to
performance-based compensation, which ranges from
10 percent to 20 percent of annual capital
appreciation; is that correct?
Mr. Koenigsberger, does Gramercy utilize
performance-based compensation in order to make money
off of its business activities?
A. Yes, we do. I was trying to look at document
because you asked me a question relative to the
document, but go ahead and please ask your question.
I'll be happy to answer.
Q. Does Gramercy use performance-based
compensation as well?
[Page 400]
A. Yes, we do.
Q. Okay. And does that typically range from 10
to 20 percent of annual capital appreciation?
A. Yes, it.
Q. Okay. And is performance-based compensation
part of way that the Gramercy entities before this
Tribunal either make money or stand to make money in
connection with the Agrarian Reform Bonds?
A. Yes.
Q. Okay. Now, turning to Page 7 of this
document, there is a reference to Item 7, "types of
clients."
Do you see that on the page?
A. Yes, I do.
Q. Okay. Now, Gramercy has a client base that
includes a range of types of clients, and that
includes, among others, pension plans, for example; is
that correct?
A. Yes, it is.
Q. So, state pension plans are examples of
Gramercy clients; is that correct?
A. That's correct.
[Page 401]
Q. Okay. And that's a range of different types
of pension plans; right?
A. Yes.
Q. Okay. And in addition to that, there are
other types of clients of Gramercy; is that right?
A. Yes, it is.
Q. Okay. And what other types of clients does
Gramercy have?
A. We have U.S. pension funds, universities,
endowments, foundations, individual investors.
Q. Okay. And those individual investors, that
includes, for example, you, your family, your
employees?
A. Yes, it does.
Q. Okay. And so, there's a full range of
different beneficiaries of Gramercy Funds Management
and potentially are--and the Peruvian Agrarian Reform
Bonds; is that correct?
A. Sorry. Could you repeat that?
Q. Sure.
There are a range of potential beneficiaries
in connection with Gramercy Funds Management and the
[Page 402]
Peruvian Agrarian Reform Bonds; is that correct?
A. There is a limited range relative to Gramercy
Funds Management relative to the Bonds. There's
multiple parties that have economic interest.
Q. Multiple parties that have economic interest.
Okay.
Now, Mr. Koenigsberger, are you aware that at
the end of the Hearing yesterday, there was a bit of a
dust-up here where Gramercy representatives were quite
exercised in dealing with World Bank employees in
connection with the confidentiality issue?
A. I am not.
Q. You are not aware of that?
MR. FRIEDMAN: Whoa, whoa, whoa whoa, whoa.
Excuse me.
MR. HAMILTON: Yes.
MR. FRIEDMAN: What--
PRESIDENT FERNÁNDEZ ARMESTO: He's here to
tell us about facts.
MR. HAMILTON: Yes. I'm going to ask a
question about facts.
MR. FRIEDMAN: I don't know what the dust-up
[Page 403]
is.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. What is
your follow-up question?
MR. HAMILTON: Yes. I'm getting there, my
friend. Have no fear.
BY MR. HAMILTON:
Q. So, why is confidentiality such an obsession
of Gramercy in this hearing?
A. I'm sorry. I don't understand the context of
the question.
Q. We'll come back to it.
PRESIDENT FERNÁNDEZ ARMESTO: You'll have to
put the question in an objective way.
Mr. Koenigsberger, is confidentiality of your
procedures and your ways of doing business an
important part of your assets, of your intellectual
assets?
THE WITNESS: I would say there's two things,
which is there's transparency and all sorts of audits
that go with our business, but then there's
confidentiality provisions that we have with our
clients that we have to adhere to.
[Page 404]
BY MR. HAMILTON:
Q. Now, Mr. Koenigsberger, on Page 8, this
brochure refers to "methods of analysis, investment
strategies, and risk of loss."
Do you see that section?
A. Yes, I do.
Q. The third paragraph on this page refers to
"emerging markets distressed; special situations."
Do you see that paragraph?
A. Yes. Give me one moment, please.
Q. Well, before you have to read it, let me just
ask you a question.
Do the Peruvian Agrarian Reform Bonds fall
into the category for Gramercy of emerging markets
distressed, special situations?
A. Can I read the paragraph now?
Q. You can read it out loud.
PRESIDENT FERNÁNDEZ ARMESTO: No, no.
Please, do read the paragraph. When you are
ready, Counsel will put the questions to you.
THE WITNESS: Thank you very much.
MR. HAMILTON: Fair enough.
[Page 405]
PRESIDENT FERNÁNDEZ ARMESTO: Read it at your
leisure.
THE WITNESS: Thank you. Sorry, go ahead.
BY MR. HAMILTON:
Q. We are in R-540, Page 8.
Mr. Koenigsberger, my question was whether
the Peruvian Land Bonds fall into the Gramercy
category of emerging markets distressed.
A. Yes, it does.
Q. Okay. And according to Gramercy's brochure,
Gramercy utilizes proactive distressed investing in
emerging markets, and that includes sovereign-related
investments; is that right?
A. That's correct.
Q. Okay. And according to Gramercy' own
brochure, your strategies typically target "stressed
and distressed and defaulted Bonds, which are
typically large, global eurobond issues governed by
U.S. or U.K. law, underwritten in public capital
markets and generally U.S. dollar-denominated."
Did I read that correctly?
A. Yes, it says typically, but not--
[Page 406]
PRESIDENT FERNÁNDEZ ARMESTO: The Tribunal
can answer that question. Yes, it was an excellent
read.
MR. HAMILTON: Thanks.
THE WITNESS: Can I clarify?
PRESIDENT FERNÁNDEZ ARMESTO: If you want to
add anything--you are welcome to add any
clarification, but up to now, Counsel has just read
what is said in your brochure.
Have you ever seen this brochure before?
THE WITNESS: Yes, I have.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. And, in
general, you agree with the content of the brochure?
THE WITNESS: Generally, I agree with the
content. There are things that aren't--this says
"typically," but it does not say "exclusively."
PRESIDENT FERNÁNDEZ ARMESTO: Yeah. Right.
Mr. Hamilton.
BY MR. HAMILTON:
Q. Why does Gramercy typically focus on
situations that involve U.S. or U.K. law underwritten
in public capital markets and U.S. dollar-dominated?
[Page 407]
A. All things equal, if we have equal risk that
would be in U.S. or U.K. law, we would tend to focus
on that.
Q. Now, you also state here that part of your
business strategy includes trade claim opportunities.
Do you agree with that?
A. Let me go see where that is.
Q. Mr. Koenigsberger--
PRESIDENT FERNÁNDEZ ARMESTO: It's in the
middle of the paragraph.
THE WITNESS: Thank you very much. I'm just
getting--
BY MR. HAMILTON:
Q. It's an open question, as the President has
encouraged. Does Gramercy's business plan include
trade claim opportunities?
A. Mr. Hamilton, I'm trying to be helpful to
you, but you asked me a question relative to the
document, so I'm trying to be very accurate.
Q. I understand, but I frankly am a little
chapped between the President telling me not to read
the document and you wanting to spend a lot of time
[Page 408]
reading the document. It's a simple question.
The simple question is, does Gramercy's
business plan include trade claim opportunities?
A. Yes, we have looked at trade claim
opportunities in the past.
Q. Thank you.
Now, final question about this paragraph: It
states that your "portfolios are hedged, typically
using sovereign credit default swaps"; is that
correct?
A. Yes, it is.
Q. Okay. How does that hedge work and how does
that protect Gramercy?
A. Well, one of the things we have to think
about when we monetize an investment is what would the
underlying Discount Rate be for the underlying
security, and credit default swaps typically are
highly correlated to the Discount Rate or the yield.
So, you can be right about the numerator in
terms of what you get, and you can get more or less,
depending on what the underlying Discount Rate or
risk-free rate for the country may be. So, the
[Page 409]
overlay in a credit default swap is a way to create
that hedge.
Q. Okay. So, that's part of the way that you
manage the risk to Gramercy of investing relating to
emerging markets distressed situations; is that
correct?
A. At times, yes.
Q. Okay. And are there other ways that you try
to protect against the risk associated with distressed
situations like this?
A. Other ways that we look to protect?
Q. Yes.
A. Sure.
Q. What are those other ways?
A. Cash is a--using cash as a hedge is one way
that you are not fully invested at any given time.
Q. Okay. Do you use insurance, for example?
A. We have used insurance in the past.
Q. How do you use insurance for situations like
this?
A. Well, in fact, I look at credit default swaps
as a form of insurance. I actually say to our clients
[Page 410]
that it's portfolio insurance, so it's a credit
default swap, and I look at it as a life insurance for
a portfolio for a given position so that if you have
something like the financial crisis or the Russian
Debt Crisis, whatever it may be, that you have ensured
the portfolio with that insurance.
Q. And are these hedging strategies or insurance
protections applied to the totality of Gramercy Funds
Management portfolio, or are they specifically related
to pieces of the portfolio?
A. It can be both. So, from--and we've
developed our hedging strategy over time, as the
market has evolved over time. So, there can be what
we would call a paired hedge, where it's actually
relative to a specific asset, and then we'll do
analysis to--once we've done paired hedges, put
different shocks at the portfolio and say, what are
the expected outcomes from a scenario analysis?
And if we still feel that there's risk that
we want to mitigate, we'll overlay additional hedges
up at the top.
Q. And this hedging is designed to insulate
[Page 411]
Gramercy from the risk of loss; is that correct?
A. The idea behind a hedging is to ensure or
insulate the underlying portfolio against risks that
we prefer not to bring into the portfolio, or--it's
also a function of what it costs; right? So, if
insurance is cheap, and it's asymmetric, which
oftentimes it has been in emerging markets, you bring
that into the portfolio.
And then we're dynamic about it. Sometimes
the cost of it gets too expensive, and we'll not renew
it, or we'll not renew it in the same nominal amount.
Q. So, with respect to the Peruvian Agrarian
Reform Bonds, did Gramercy employ hedging strategies,
such as credit default swaps or utilize insurance?
A. Yes, we did.
Q. And what were those strategies?
A. In the case of the Land Bonds, we--as
indicated here, we did use credit default swaps. We
felt one of the biggest risks of the underlying
investment, again, was what's the Discount Rate for
Perú going to be when we get those cash flows.
So, credit default swaps are a very eloquent
[Page 412]
way to handle that risk, so we definitely used CDS on
what we would call a paired basis with the Bonds.
But we also, in the case of the Bonds--given
their physical character, we actually insured the
Bonds themselves against loss, fire, theft, whatever
it may be.
Q. Okay. And who was that insurance arranged
with?
A. I believe it was Lloyd's with London, but I
don't recall.
Q. What was the amount of that insurance?
A. I believe it was upwards of $500 million.
Q. $500 million.
And when did you establish that insurance
arrangement?
A. I believe it was in 2014 or '15, but I don't
recall.
Q. 2014 or '15. So from 2006 or 2008 to 2014,
you didn't have any insurance in place?
A. It's easy to explain. No, we didn't. We had
the Bonds at Citibank, and Citibank had insurance.
The Bonds were custodied in Lima at Citibank, and when
[Page 413]
Citi suddenly no longer wanted custody of those Bonds,
it was a huge endeavor to move those Bonds from
Citibank to the next safekeeping location, one that
was fraught with risk.
And that was the first time that we felt--in
fact, there was a time when Citi lost a bond or
destroyed a bond that they or their insurance paid for
it. When we went from outside the building at
Citibank to the new safekeeping location, we felt that
insurance was in order.
Q. Are you aware, Mr. Koenigsberger, that
Gramercy provided a view to the Tribunal yesterday of,
I guess, two actual Land Bonds actually held by
Gramercy?
A. No, I'm not.
Q. Do you know how those Bonds were transported
from Perú?
A. I believe that an employee brought those out.
Q. Okay. And were they declared to Customs as
negotiable instruments with a value of more than
USD 10,000?
A. I don't know.
[Page 414]
Q. Okay. Thank you.
Now, returning to the issue of credit default
swaps and insurance, let me ask one other question.
Did you ever work with a--ever deal with an insurer
called Hermes, Euler Hermes?
A. Sorry. Did we have a--
Q. Are you familiar with a firm called Euler
Hermes?
A. I know something of Hermes.
Q. Not the ties.
There's a company called Euler Hermes. Are
you familiar with it?
A. I'm familiar with an entity Hermes, which I
believe is some sort of export credit.
Q. Correct. Has Gramercy ever done business
that entity?
PRESIDENT FERNÁNDEZ ARMESTO: The entity you
are referring to is--because it does not come out well
in the Transcript--is Hermes. It's H-e-r-m-e-s.
MR. HAMILTON: Correct.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. The
German export insurance agency. Is that the one
[Page 415]
you're referring to, Mr. Hamilton?
MR. HAMILTON: Yes, sir.
PRESIDENT FERNÁNDEZ ARMESTO: So, depending,
it's Hermes, the German export insurance state-owned
agency. That's, I think, Counsel's question.
BY MR. HAMILTON:
Q. My question is, has Gramercy done business
with this entity before?
PRESIDENT FERNÁNDEZ ARMESTO: If you
remember.
THE WITNESS: Not that I recall.
BY MR. HAMILTON:
Q. Okay. And do you know if Gramercy has ever
had contact with that entity before?
A. Not that I recall.
Q. Okay. Let's look at Page 9 of this Gramercy
brochure. There's a section here called "risk of
loss."
Do you see that section?
A. I do.
Q. All right. Now, according to this Gramercy
brochure, there's no assurance that the objectives
[Page 416]
associated with Gramercy's investment strategies will
be met; is that correct? You give your clients no
assurances that your strategies will be achieved; is
that correct?
A. I'm trying to answer the first question.
So, the document says: "There can be no
assurance that the objectives associated with any of
the Gramercy's investment strategies will be met."
Q. Do you agree with that?
A. Yes, I do.
Q. That's what you advise your clients?
A. Yes. We're not in the business of giving
certainty or assurances, so we want people to
understand that there's no assurances that investment
objectives will be met.
Q. Okay. Similarly, you advise your clients
that the type of investments that Gramercy pursues
involve risk of loss, and clients must be prepared to
bear the loss of their entire investment in Gramercy;
is that correct?
A. Investments involve risk of loss, and clients
must be prepared to bear the loss of their entire
[Page 417]
investment, that is correct.
Q. Okay. Does that mean that Gramercy is also
prepared to bear the loss of its entire investment?
A. To the extent that Gramercy has investments,
we take that--typically take the same risk. There can
be no assurance that--on our investments either.
Q. Okay. So if I look to the first bullet here,
here you discuss the risk of loss related to emerging
markets. And so certainly Gramercy is well familiar
that the risk of foreign investment may be greater in
what are referred to as emerging markets.
You agree with that; correct?
A. Yes.
Q. Right. And looking further down, with
respect to "distressed situation risk," now, we
discussed before that the Peruvian Agrarian Bonds were
considered a distressed situation from Gramercy's
perspective, and, of course, investment in distressed
situations expose clients to significant risk.
You agree with that, correct?
A. Let me read the distressed situation risk.
Q. Please.
[Page 418]
And, for the record, we are in document
R-540, Page 9, "Risk of loss, distressed situation
risks."
A. I'm sorry, what's the question?
Q. The question, Mr. Koenigsberger, is if you
agree that investment in distressed situations exposes
a client and Gramercy to significant risk.
A. I think risks are--they are exposed to risk.
It doesn't mean--it doesn't speak of the likelihood,
just the possibility.
Q. Okay. And to the extent you are dealing with
sovereign debt obligations, you would agree that those
investments are subject to even additional risk and
considerations; is that correct?
A. They have--each sovereign and corporate has
its own idiosyncratic risk characteristics. I'm not
sure I would weigh them one way or the other.
Q. Well, does your brochure here weigh them? It
states that, "Moreover, to the extent client accounts
are invested in sovereign debt obligations, those
investments will be subject to additional risks and
considerations."
[Page 419]
Do you agree with that?
A. I agree that it says that.
Q. Okay. Thank you very much.
Now, let's go over to Page 12. The third
bullet refers to non-U.S. securities. Do you see that
on Page 12, Mr. Koenigsberger?
A. Give me one moment, please. Non-U.S.
securities?
Q. Non-U.S. securities.
So my question is, do you consider the
Peruvian Land Bonds to be non-U.S. securities?
A. Let me read this for a moment.
I'm sorry, the question?
Q. The question was, do you consider the
Peruvian Land Bonds to be non-U.S. securities?
A. Yes.
Q. Do you consider a contemporary Global Bond
issued by, for example, the Republic of Perú to be a
non-U.S. security?
A. I think it could be issued in U.S., or in
global form it could be non-U.S.
Q. And do you consider that comparable to the
[Page 420]
bearer Bonds that date back to the 1960, '70s, and
'80s, that are the Peruvian Land Bonds?
A. Comparable, as if you mean that it's a valid
obligation of the State that's owed, yes, I do.
Q. Now, according to your own brochure, there
are significant risks related to non-U.S. securities,
and we can debate which constitutes a non-U.S.
security, but that includes fluctuations in foreign
currencies. That's a risk; right?
A. Yes. It's a risk that could be hedged. We
talked about hedges earlier.
Q. And by hedging, you mean you have methods to
try to avoid loss for your business activities; is
that right?
A. By hedging, I mean to insulate or insure the
portfolio and its positions against losses.
Q. Okay. Now, it also states here that foreign
investments, especially those in emerging markets, can
be more volatile and less liquid than U.S.
investments; is that right?
A. Yes. Of course, volatility isn't loss of
capital. It means the up and down of price, and less
[Page 421]
liquid means that you can't necessarily turn it into
cash as fast as other securities that may be more
liquid.
Q. Okay. So, if you go now to Page 13 here,
there's a bullet called "Risk Management Failures."
Now, according to your brochure, the risk
management techniques employed on behalf of clients
may be incomplete; is that correct?
A. Give me a moment to read it.
Q. Sure. Mr. Koenigsberger?
A. Yes.
Q. My question was, is it correct that clients
and Gramercy may face risk management failures? Is
that correct?
A. Yeah, and I think what that means is that the
underlying risk insurance or strategy that's put
there. Earlier in the paragraph, it talks about some
of the reasons that what may have worked in the past
may not work in the future, and that's what's meant
there.
Q. Okay. Now, if we turn to Tab 2, Tab 2 is in
the record at R-1205.
[Page 422]
This is a Gramercy document dated
September 2012, and it states on its cover "Gramercy
Distressed Opportunity Fund II."
Do you see that document?
A. Yes, I do.
Q. Okay. Now, Gramercy, if I understand it
correctly, establishes funds and goes out and seeks
investors in those funds; is that correct?
A. Yes, it is.
Q. Okay. And so what was the initial fund that
Gramercy established and raised funds in connection
with the Peruvian Land Bonds?
A. I believe the initial vehicle was the
Gramercy Emerging Markets Fund.
Q. Gramercy Emerging Markets Fund. And the
Gramercy Distressed Opportunity Fund II, did that fund
hold the Peruvian Land Bonds, or was this a different
activity?
A. This-as it says here, it's September 2012, so
it's after the financial crisis. It's our second fund
that looked at distressed opportunities in emerging
markets after the financial crisis.
[Page 423]
Q. Okay. So the initial fund that Gramercy set
up to raise money to acquire Peruvian Land Bonds, does
that fund still exist?
A. That fund wasn't set up to acquire Peruvian
Land Bonds. That fund was set up in April 1999 to do
diversified investing in emerging markets, Latin
America, Eastern Europe, Asia, et cetera.
The purpose of Gramercy Emerging Markets Fund
was not to invest in Peruvian Bonds.
Q. So the Peruvian Bonds were just one little
piece of a bigger fund; is that correct?
A. It was one position within the Emerging
Markets Fund.
Q. How many positions were in that fund?
A. Gosh, I would say, on average, maybe 30
different investment themes with multiple lines.
Q. Okay. And if that fund no longer exists,
where do the Peruvian Land Bonds sit today vis-à-vis
your funds?
A. So the Land Bonds exist within Gramercy Perú
Holdings, which has been there since Day 1. So the
Emerging Markets Fund had an interest in the Bonds via
[Page 424]
Gramercy Perú Holdings. The economic interest for
those Bonds and beneficiaries may have changed over
time, but the Bonds have been in the same place the
entire time.
Q. Okay. Now, if you turn to Page 1 of this
document, there's a disclaimer up front, and this
disclaimer appears in various Gramercy documents. If
you look at the second paragraph to the left side.
A. Give me one moment, please.
Q. Sure. It's the paragraph that says: "The
purchase of investments is suitable only for
sophisticated investors."
Did you read that, Mr. Koenigsberger?
A. I'm almost done.
Yes, I've read it.
Q. All right. And it says here that "the
investment's performance may be volatile and investors
may lose all or a substantial portion of their
investment"; is that right?
A. Yes, it does.
Q. That's a disclaimer that Gramercy routinely
makes to its clients; is that right?
[Page 425]
A. These are standard boilerplate disclaimers
that all investment managers made to their clients.
Q. And so you would have made similar
disclaimers in the funds related to the Peruvian Land
Bonds, I take it; correct?
ARBITRATOR DRYMER: There's an error in the
Transcript, which I have an interest in correcting
immediately.
At 10:30:26, it says, "these are standard
boilerplate Drymer." I believe the Witness said
"disclaimers."
MR. HAMILTON: We can agree. Let's make a
change on the Transcript.
You got it?
(Comments off microphone.)
BY MR. HAMILTON:
Q. So, just to correct, these are standard
boilerplate--what does the Spanish tell us? Clauses,
I think you were saying? These are standard
boilerplate clauses; is that right?
A. Disclaimers.
Q. Disclaimers. These are standard boilerplate
[Page 426]
disclaimers.
And so these disclaimers would have been made
to--in connection with the Peruvian Land Bond Fund, as
well; right?
A. I imagine there's similar disclaimers in the
Gramercy Emerging Markets Fund or other vehicles that
may have an economic beneficial interest in one of the
positions in those funds.
Q. Correct. Now, if you turn over to Page 13,
Page 13 refers to investable pipeline in connection
with this fund.
Now, you see here on the left-hand side and
the right-hand side references to "immediate
opportunities" and "approaching opportunities."
And I note here, for example, on "approaching
opportunities," some of which are corporate, some of
which are sovereign, same on the left side, that the
rate of return that you are anticipating and targeting
strategically appears to be in the range of average of
28 percent or, on the upside on the left, up to around
39 percent; is that right?
A. I see that.
[Page 427]
Q. Okay. So, this is a Gramercy document
seeking funds, and you're telling potential investors,
such as state pension funds in the United States, that
they can anticipate or that you are targeting a
potential return of, say, 28 to 40 percent average
with some movement around the edges. Some less, some
more; is that right?
A. I think what Page 13 is doing is it's showing
opportunities that are available immediately, and it's
an investment pipeline. And when you go out to talk
to potential investors, they want to understand what's
the underlying strategy, and when--remember, this is
not the PPM. This is what we would call a pitch doc,
right, so a marketing doc.
So, you're in the room talking to them about
what are the opportunities that are available and can
you unpack those for us, and, of course, we say that
these are the expected returns; possible returns could
be higher, could be lower.
Of course, this isn't the governing document
between us and the underlying fund. There will be a
PPM, a subscription document, that, again, has all the
[Page 428]
standard--not Drymer, but disclaimers that go with the
fund.
Q. Right. So, when you're pitching, promoting,
marketing, say, to an American pension fund or other
potential investors, the kind of ranges that you're
flagging are in the range of averaging 30 to
40 percent; is that right?
A. Absolutely depends on the underlying fund,
the era, the investment strategy, hedged, not hedged.
Of course, this is--I believe--I haven't looked at
this document in some time, but this is just one side.
We spent a lot of time talking about the long side and
the short side.
So, it's a pretty broad question. I think it
just depends on the era and the underlying investment
strategy.
Q. Well, you can agree that this document cites
averages of 28.6 to an average of 39.8 percent. We
can agree on that much; right?
A. Yes.
Q. So, you would not, even as part of marketing
material, promise or anticipate or strategize the
[Page 429]
scenario, for example, of 5500 percent return on any
particular position in a portfolio; is that right?
A. Well, these are average returns. I suspect
that we talked about things that could be below the
average and things that could be above the average,
so--
Q. And that range on this page runs, it looks
like, from, say, 20 percent on the low end to
87.5 percent on the high end; is that right?
A. For this particular set of pipeline, yes.
PRESIDENT FERNÁNDEZ ARMESTO: Let me
understand this. When you're pitching this and saying
39 percent is the average expected return, it means
the average expected return if you collect the
principal, because this is distressed debt.
So, if you don't collect the principal, then
that is not taken into account in this average
expected return, or is it?
THE WITNESS: It depends on what the
underlying investment is. So, the average return
could be a function of where you enter and where you
exit, but also the interim cash flows, the interest
[Page 430]
payments that come your way while you hold it or
interest payments that come your way for past due
interest over the time.
PRESIDENT FERNÁNDEZ ARMESTO: So, that is
net. When you say here "average expected return,"
it's net of default? If I were your client, that
would be my first question to you, and I hope I get a
good answer from--
(Overlapping speakers.)
THE WITNESS: Net of default. It's the
capital we put in.
PRESIDENT FERNÁNDEZ ARMESTO: Yes.
THE WITNESS: The capital we get back and the
interim cash flows that we get, and that can be cash
that you receive or the value of the securities that
you receive in exchange for whatever exchange or new
consideration that you may get for those securities.
PRESIDENT FERNÁNDEZ ARMESTO: Because your
strategy is not to hold to the titles until maturity.
You often just resell the securities whenever you
think it's appropriate.
THE WITNESS: That's right. There's
[Page 431]
additional cash flows in claim that's available for
the purchaser thereafter. So, typically the idea is
funds have a fund life. We're in it for a subset of
that fund life, and our idea in securities such as
these is to identify kind of why they are cheap and
what Gramercy can do to kind of change that element of
cheapness.
It's typically some sort of leading a
consensual ad hoc restructuring process, and then
selling that on into the market and leaving additional
value for other buyers.
PRESIDENT FERNÁNDEZ ARMESTO: So, yours are
always closed-ended funds?
THE WITNESS: Most of them are.
PRESIDENT FERNÁNDEZ ARMESTO: And you
typically go--what?--three, five years? What is
your--what is what you offer to clients?
THE WITNESS: So the original fund that we
did, the Emerging Markets Fund in '99, that was more
of a--investors could come in and out, I think, with
90-day notice or 180-day notice.
After the financial crisis--and this is
[Page 432]
post-financial crisis--they were typically kind of
medium-term credit funds, so similar structures you
see in the market today with private credit where
there's a known start date and a known end date, and
there's no flows of clients in and out.
PRESIDENT FERNÁNDEZ ARMESTO: So, it's a
closed-ended fund with a maturity of?
THE WITNESS: Typically five to seven years.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. And so
your whole strategy is to resell the securities
towards the end, to resell them either to the market
or to another fund. That is your exit strategy.
THE WITNESS: Sometimes you're paid out in a
cash flow within that period.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah, of
course.
THE WITNESS: So, you can monetize the asset
just through the internal cash flows.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you.
Thank you, Mr. Hamilton. Sorry for that.
MR. HAMILTON: Thank you.
BY MR. HAMILTON:
[Page 433]
Q. And when you use the term "monetize" and you
refer in your statements to monetizing your holdings,
what do you mean by that?
A. So monetizing means turning the investment
into cash, and that monetization, as I was just
explaining, could come in the form of selling the
investment, whatever that investment may be, to the
marketplace. It can be receiving cash flows.
Monetization, the actual receiving of cash flows of
interest payments and amortizations and what have you.
Q. And when you use the term
"distressed"--because Gramercy says it's in the
business of distress, what do you mean by "distress"?
A. "Distressed" means something that trades in
the marketplace, or it can be bought below its true
inherent value.
Q. Now, if we turn to Tab 3, Tab 3 is--
PRESIDENT FERNÁNDEZ ARMESTO: Sorry. Because
I had--instinctively, I had thought "distressed" was
there had been a default or there was a risk of
default or there was some insolvency. And for you,
that is not distressed.
[Page 434]
You must explain that to me because I had
misunderstood what you meant by "distressed."
THE WITNESS: Thanks for asking.
So "distressed" starts with something that
trades below its inherent value, and then we have to
understand why does it trade below its inherent value.
And we'll oftentimes talk about some sort of element
of distress.
Say, for example, maybe there's no
organization of creditors, there's no advocacy group,
or whatever it may be. And then our strategy would be
to introduce that catalyst to change the element of
distress.
So, it can be--"distressed" doesn't
necessarily mean default. Oftentimes it does.
"Distressed" can be something t's--today, I think a
lot of distress you see in the marketplace is
dislocation distress, which is there's just
illiquidity in the marketplace. So, the size of the
asset class has become so much bigger than the small
amount of banks that disintermediate.
So, one element of distress might be lack of
[Page 435]
balance sheet, lack of liquidity providers, and it
could be a situation where there's no--there's no
credit issue. There's an underlying exogenous risk
like credit--pardon me--liquidity risk in the
marketplace.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you.
BY MR. HAMILTON:
Q. I'm sure we'll discuss that more.
Let's look at Tab 3. Tab 3 is
Exhibit R-1212. This is an article published by the
Financial Times on January 12, 2013. It has a nice
sketch of you there, Mr. Koenigsberger. And the title
of this article is "Hedge Fund Gentleman Wages
Argentine War."
Do you see that document under Tab 3,
Mr. Koenigsberger?
A. Yes, I do.
Q. Okay. This article says that "Robert
Koenigsberger never intended to get mixed up in a war.
But he has."
What war were they talking about in this
article?
[Page 436]
A. Sure. I haven't read the article in quite
some time.
Q. That's okay.
A. But what I believe they're referring to was
Gramercy owns securities in Argentina. The war was
not our war. The war was versus holdout investors in
Argentina back in 2011, '12, 13, that had gone to the
U.S. District--the U.S. Court in order to get an
injunction that other Bondholders couldn't get paid.
So, the way that we inserted ourselves was we
stood with the Republic and, in fact, went to the
Second Circuit and all the way to the U.S. Supreme
Court, making an argument that whatever issue that the
Republic had with the holdout creditors, that
92 percent of us who had tendered, that we had legal
property and we had the legal right to collect on that
property, and that we felt that this notion that we
couldn't get paid while holdout investors were
battling Argentina didn't make sense. So, again, it
wasn't our war.
Q. So, there, the other side of that was Elliott
Fund, for example?
[Page 437]
A. I believe that was one of the holdout
investors. I can't remember the name of the entity
that aggregated their claims.
Q. You're familiar with the Elliott Fund; right?
A. Yes.
Q. How is Gramercy similar to or different from
Elliott?
A. Well, I think there's a lot of differences.
One, we're a dedicated emerging markets firm. I mean,
all of our investments are in emerging markets.
If I understand Elliott correctly, which I
don't, but I think they tend to invest substantially
outside of emerging markets. They tend to be an
activist equity investor.
I think I read yesterday that they're getting
involved with the Japanese Fund Management that was
involved with the real estate firm. So, they are a
very broad firm. So very different, dedicated
emerging markets versus a much broader strategy.
Q. And, Mr. Koenigsberger, this article states
that some of Gramercy's clients are pension funds
hoping to achieve annualized returns of 7 to
[Page 438]
8 percent.
Does that sound right in terms of the
expectations that a pension fund might expect when
investing in Gramercy?
A. Sorry, where are you referring?
Q. I am on the next page. It's the third page
of that document, penultimate paragraph: "Some of
Gramercy's clients are pension funds hoping to achieve
annualized returns of 7 to 8 percent."
A. Yeah. I think what this refers to is over
the years, we developed kind of a traditional
long-holding emerging market debt business, and those
returns are kind of consistent with those more plain
vanilla strategies.
Q. I see.
Now, if we turn to Tab 4, Tab 4 is
Exhibit R-624. This is an article from the New York
Times dated December 18, 2012, and it's called "Hedge
Fund in Middle of Argentine Debt Battle."
PRESIDENT FERNÁNDEZ ARMESTO: 264?
MR. HAMILTON: 624.
BY MR. HAMILTON:
[Page 439]
Q. Now, the New York Times says, "Gramercy Funds
Management is not exactly a household name in the
investing world."
Do you agree with that?
A. I agree it says that.
Q. Okay. Do you agree with that statement?
A. Well, I think Gramercy is very well-known in
emerging markets. I really don't know what she meant
by that.
Q. Okay. Now, this article refers to Gramercy's
past legal problems coming into focus and refers to
tax problems experienced by clients of Gramercy
advisors. And according to this article and according
to federal and state court filings here in the United
States, Gramercy Advisors arranged deals involving
distressed Brazilian debt that the Internal Revenue
Service later ruled to be sham transactions. Is that
correct?
A. Well, let's talk about this article.
Q. Okay.
A. This clearly wasn't Gretchen's finest
journalism. Just to put it in context, we got a call
[Page 440]
one day--
Q. Let me ask you a question. Who is Gretchen?
A. The author here, Gretchen Morgenson.
Q. Okay. You referred to her by first name.
You're very familiar with journalists in the financial
services world, I guess.
A. I maybe have spoken to her once or twice.
So, it's not Ms. Morgenson's finest bit of journalism.
So, I'd like to provide some context to the
article.
You talked about this--the holdouts and the
previous article about Gramercy being involved. This,
to me, was clearly a hit piece because we had sided
with the Republic of Argentina in the battle against
the holdouts. We were given a call one afternoon
about 3:00p.m. and she said, "I'm going to go to
market with a story that's about your tax involvement
in the past. Do you have any comment?" We said,
"Yeah, we'd love to comment. How about we come down
tomorrow and we talk about it?" She said: "No, I'm
going to print in an hour."
Sorry, what's your question?
[Page 441]
Q. Well, this article--according to this
article, Gramercy investors contended that Gramercy's
investment strategy involved false valuations--false
valuations of worthless instruments--false valuations
of worthless instruments that generated illegitimate
profits to the firm.
Was that an allegation that was made against
Gramercy?
A. If it was, I disagree with it. Our role in
these transactions was to simply source distressed
debt and manage that distressed debt. These clients
were typically clients of BDO, which is a tax firm or
other firms.
We made it very clear to the clients what our
role was. It was simply to source distressed debt,
and we got paid a fee for sourcing distressed debt.
But we were very clear with the clients that we don't
provide tax advice. We don't understand tax. We're
an investment manager.
We had agreements with them that disclosed
everything that was out there in terms of notices from
the IRS and what have you. So, I disagree with that
[Page 442]
notion.
Q. Now, on the next tab, Number 5, this is
Exhibit R-1094. This document relates to the
proceeding of U.S. v. Advisors. That's the United
States Government, the Non-Disputing Party in this
proceeding, and this is a document from 2011 in
connection with federal court proceedings in
Connecticut.
And according to this document, the United
States asserted that it was seeking production of 1300
pages of relevant and withheld documents that Gramercy
sought to withhold on the basis of proprietary or
trade secrets.
Do you recall that dispute, sir?
A. What I recall is--first of all, we're not a
party to whatever the underlying case was. We were
asked to provide documents. We went and looked at the
underlying investment management agreements that had
confidentiality clauses that said "unless compelled by
a court."
Despite that, we went and spoke with the
underlying investors and said there's a subpoena or
[Page 443]
whatever it may be, a document request, and we tried
to negotiate with that client the documents to
provide. And while that process was going underway, I
believe the U.S. just went right into the Connecticut
Court.
Of course, we complied with that, but we had
a provision that says "confidentiality unless the
client agrees or we're compelled by a Court." So,
that's what we did.
Q. Okay. Now, Mr. Koenigsberger--we can take
the screen black.
Mr. Koenigsberger, we talked before about the
types of opportunities that Gramercy typically pursues
with emerging markets distressed debt situations.
Now, you have highlighted in your Witness
Statements your experience with and knowledge of Perú.
And, in particular, you have highlighted that at least
from 2000 onwards, Perú demonstrated economic growth
and tight fiscal policies. You agree with that;
right?
A. That it's in the document? Sorry, what's the
question?
[Page 444]
Q. Do you agree that Perú adopted tight fiscal
policies, at least from the year 2000?
A. Yeah, I believe from the year 2000 this was
an upwardly mobile reform story that included fiscal
constraints and debt management policies, and I think
it was an upwardly mobile story.
Q. Okay. And by 2005, you've emphasized that
Perú was performing well and maintaining fiscal
responsibility.
Do you agree with that?
A. Sorry. Where are you referring to?
Q. I'm asking you a question.
A. As I said before, when we looked at the Bonds
in that era, certainly part of what attracted us to
Perú was this reform story, that Perú was reinserting
itself into the capital markets and improving its
creditworthiness along the way.
Q. Okay. And it wasn't just a story. Perú did,
in fact, become a successful issuer of contemporary
sovereign bonds; is that correct?
A. They issued Bonds; correct.
Q. Correct. And, in particular, in 2005, for
[Page 445]
example, there were at least a few occasions when Perú
successfully issued contemporary Bonds; is that
correct?
A. I don't recall the dates, but I do know they
were issued in the mid-2000s.
Q. Well, you attached them and discussed them in
your Witness Statement and refer to 2005. So, let's
take a look.
A. Okay.
Q. Under Tab 7, this is document CE-8. This is
a Perú Global Bond Prospectus dated January 27, 2005.
Do you see that document?
A. The cover here has got January 19, 2005?
Q. No. This is a supplement to the Prospectus
dated January 19, because, of course, as, you know,
supplements are provided when there are additional
issuances of Bonds.
A. Okay. I'm sorry, what's the question?
Q. Well, do you see here the Prospectus
Supplement of the Republic of Perú?
A. Yes, I do.
Q. Okay. Now, if we go over to Page 3. Page 2,
[Page 446]
you get a nice map of Perú.
Have you spent a lot of time in Perú,
Mr. Koenigsberger?
A. I've spent a fair amount of time in Perú.
Q. Over how many years?
A. I think I did my first trip to Perú in 1988.
Q. Okay. So, if we look over to the next page,
here's the Table of Contents for a Contemporary Global
Bond Prospectus Supplement, and, of course, as is
typical, this document includes a range of different
issues that would be relevant to acquiring these
Bonds.
Do you see that table of contents?
A. I see the Table of Contents, yes.
Q. Okay. Now, let's flip over to page
number--give me a second here--third page, "Summary of
the Offering."
So, this is just a summary section of this
document, but, for example, there's a reference to
"status" that "these Bonds and previously issued Bonds
will constitute a single class of securities for all
purposes."
[Page 447]
Do you see that?
A. Give me a moment.
Q. S-4 is the page. S-4.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. There
are a number of pages. I mean, Mr. Hamilton, this is
a standard prospectus of a sovereign of issuing Bonds
in the United States. He's here to tell us about--I
mean, is there anything specific to our case? Because
I would like to get to our case at some stage.
MR. HAMILTON: Yes. We're getting there.
PRESIDENT FERNÁNDEZ ARMESTO: Is there
anything--let me make a very simple question.
MR. HAMILTON: Sure.
PRESIDENT FERNÁNDEZ ARMESTO: Is there
anything on Gramercy in this Prospectus?
MR. HAMILTON: Gramercy is not mentioned in
the Prospectus.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. That's a
good point.
MR. HAMILTON: But I do have questions
because he attached three of these Bonds and says that
it was Perú's issuance of these Bonds that Gramercy
[Page 448]
relied upon in connection with its decision to acquire
the Land Bonds.
So, he discusses this in his statement.
That's why I would like to ask some questions about
it.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah. Okay.
It's your time.
MR. HAMILTON: It's his due diligence, sir.
He has emphasized these documents.
PRESIDENT FERNÁNDEZ ARMESTO: I think we all
know exactly what this Prospectus will say, and, yeah,
if you want--let's not lose too much time on that
because I think it's a very--but I'm not--it's your
time. I just draw your attention that, to me, it's
not something which looks extremely important.
We are all aware that--and it is undisputed
that the Republic of Perú was a successful issuer of
Bonds, came back to the international market, had a
responsible fiscal policy, is a well-managed sovereign
debtor. I think we all agree.
BY MR. HAMILTON:
Q. By the way, do you agree with that,
[Page 449]
Mr. Koenigsberger?
A. I agree with that.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah. We have
stated that. He has stated that. You all have stated
that. I think Mr. Friedman has stated that.
MR. HAMILTON: Okay. But I will continue
with some questions, if you don't mind.
PRESIDENT FERNÁNDEZ ARMESTO: Of course.
MR. HAMILTON: Sometimes the path is less
clear from that seat than from other seats.
PRESIDENT FERNÁNDEZ ARMESTO: Very good.
MR. HAMILTON: But, again, it's
Mr. Koenigsberger's insistence--
(Overlapping speakers.)
PRESIDENT FERNÁNDEZ ARMESTO: It will be full
of disclaimers, huh?
MR. HAMILTON: That much is clear. There are
no promises from Gramercy. We've got that clear.
PRESIDENT FERNÁNDEZ ARMESTO: And we will
find the same disclaimers--in the prospectus of
Gramercy. We will find them here.
MR. HAMILTON: Of course. Of course.
[Page 450]
Exactly.
PRESIDENT FERNÁNDEZ ARMESTO: That's what
bond lawyers do, is they draft disclaimers and they
put them in.
MR. HAMILTON: Yes, they do. Yes, they do.
Those lawyers do that at times, unless it is 1969 and
they have nothing at all to do with these kinds of
documents and contemporary financial markets. In
which case--
PRESIDENT FERNÁNDEZ ARMESTO: Of course.
Quite different.
BY MR. HAMILTON:
Q. So, Mr. Koenigsberger, you emphasize and you
stated in your earlier comments that you relied
heavily on an understanding of Perú's fiscal
responsibility and, in particular, you cited and
attached three of these Bond prospectuses, including
this one in particular.
Now, this Bond prospectus, for example,
indicates at Page S-6, the use of proceeds of this
document.
So, for example, the use of proceeds from
[Page 451]
this Bond issuance--the net proceeds of the sale of
Bonds here would be used for "general purposes of the
Government, including financial, investment, and
refinancing, repurchase or retirement of domestic and
external indebtedness."
Do you see that?
A. Yes, I do.
Q. So, in 2005, did Gramercy have positions in
contemporary Peruvian Bonds?
A. I don't recall.
Q. Has Gramercy ever held positions in
contemporary Peruvian sovereign bonds?
A. Yes, we have.
Q. Does Gramercy currently have any positions in
contemporary Peruvian sovereign bonds?
A. I'm not sure.
Q. You don't know whether Gramercy has any
positions in--
A. We have--
Q. --Peruvian sovereign bonds?
(Interruption.)
Q. Does Gramercy hold positions in contemporary
[Page 452]
Peruvian sovereign bonds?
A. And my answer was, I can't tell you with
certainty. As I mentioned before, we have three
different investment divisions. We have one that does
public credit, one that does private credit, one that
does special situations.
Q. Excuse me. It's just a simple yes-or-no
question.
PRESIDENT FERNÁNDEZ ARMESTO: He doesn't
know.
THE WITNESS: I'm not the portfolio manager.
MR. HAMILTON: I find that remarkable. I
find it remarkable, Mr. Koenigsberger, that you claim
to have no idea of whether Gramercy has any holdings
in Peruvian sovereign bonds since you spent years in a
propaganda campaign to trash Perú. You have no idea
whether Gramercy holds Peruvian sovereign bonds?
PRESIDENT FERNÁNDEZ ARMESTO: Mr. Hamilton,
this is your question. He's answered. He doesn't
know. Let's go on to the next question. Let's not
get into discussions with the Witness. He doesn't
know. We ask the next Witness--
[Page 453]
MR. HAMILTON: I'll ask a different question.
PRESIDENT FERNÁNDEZ ARMESTO: And if you
want, at the end, if you want that we put a question
to Gramercy whether they have it, we will discuss it,
but he does not know.
BY MR. HAMILTON:
Q. Okay. You don't know whether Gramercy holds
Peruvian sovereign bonds; is that correct? Under
oath, you do not know if Gramercy holds positions in
sovereign bonds of Perú?
A. We do hold Bonds in Perú, the Land Bonds.
That I can confirm.
Q. Okay.
A. You asked me about other Bonds, and I'm
trying to speak the truth, the whole truth, and
nothing but the truth.
Q. Okay.
A. And I'm telling you I don't know.
Q. Okay. And do you know if Gramercy has ever
held contemporary sovereign bonds of Perú, 2005 to the
present?
PRESIDENT FERNÁNDEZ ARMESTO: He has already
[Page 454]
said that, yes.
BY MR. HAMILTON:
Q. Okay. And, is it--
PRESIDENT FERNÁNDEZ ARMESTO: His statement
is to be very clear. His statement is yes, they have
held contemporary Bonds and he does not know if at
this time they hold Bonds.
BY MR. HAMILTON:
Q. Have you ever had meetings with potential
investors in Gramercy funds where you discussed
holdings of contemporary Peruvian sovereign bonds?
A. Not that I recall.
Q. Okay. Now, Mr. Koenigsberger, it is true
that Gramercy considers that receiving contemporary
Peruvian sovereign bonds would be an acceptable
payment method in connection with any resolution of
the Peruvian Land Bonds?
A. I'm sorry. Could you ask that one more time?
Q. Would Gramercy be content to receive
contemporary Peruvian sovereign bonds as a method of
payment in connection with any resolution of the Land
Bonds?
[Page 455]
A. Yes, we would.
Q. And that's because you have confidence in
contemporary Peruvian sovereign bonds?
A. There is all sorts of consideration that we
would consider in exchange for resolution of the Land
Bonds.
Q. But you specifically have indicated in the
past that that would be your preferred method of
payment in connection with the Peruvian Land Bonds;
isn't that correct?
A. A method. We also would be happy with local
security soberanos in Perú, we would be happy turning
these into debt equity certificates where actually
Perú would never pay us, that we would actually have
to go out to a secondary market to find foreign direct
investors to convert these things into foreign direct
investment.
Q. All of those things would give you
confidence?
A. All those things would--resolution would make
us happy, and I don't know what you mean by
"confidence," but to be able to resolve this and get
[Page 456]
consideration that could either be held for a very
long period of time and collected as it performs or
sold onto the market to other Bondholders, or used to
attract Foreign Direct Investment into the country,
yes, that would be satisfactory.
Q. If we go to Page 132 of this document,
there's a section called "Jurisdiction Consent to
Service and Enforceability." Page 132. This is the
wrong page.
At the top it says Page 158. If you look at
the printout, that will make it easier. Top right,
Page 158 of 202.
All right. Now, this document, I think you
might say, is sort of boilerplate of the contemporary
era in providing a method for resolution of disputes
and submission to jurisdiction of any disputes that
would arise in connection with this contemporary bond.
Do you see that?
A. Give me a moment to look at it.
Q. This is pretty basic, sir. My question is,
doesn't the submission to jurisdiction of the
sovereign in this Bond, as with most contemporary
[Page 457]
sovereign bonds, give you greater confidence in your
enforcement options with respect to this instrument?
A. Can I read the--what you've asked me to refer
to?
PRESIDENT FERNÁNDEZ ARMESTO: Very frankly, I
think you can--it's a very boilerplate question that,
if you have jurisdiction to a U.S. court that gives
you more confidence that the Bond will be enforceable.
I think that was basically the question.
MR. HAMILTON: That's the question.
THE WITNESS: It gives us an additional
venue. I don't know how I would rate the confidence,
per se, but definitely gives you an additional place
to go.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah. It is
important in international Bonds that you have access
to U.S. court. It's boilerplate.
BY MR. HAMILTON:
Q. It's boilerplate in contemporary Bonds. But
you even expressed doubt about enforcement under a
contemporary Global Bond with submission to
jurisdiction; is that right?
[Page 458]
You have your doubts about that too; right?
A. I'm sorry. I don't follow.
Q. You expressed doubt about the enforcement
potential against a sovereign even under a
contemporary Bond instrument like this. Is that
correct? I'm just reading the Transcript.
A. Will you take me there, then.
Q. You indicated that you have doubts about the
possibility of enforcement against a sovereign despite
the language of boilerplate language like this?
A. I don't know where you're referring to, and I
don't know if you are--
MR. FRIEDMAN: I don't think he said that is
the problem.
PRESIDENT FERNÁNDEZ ARMESTO: I think the
question is irrelevant. In any case, if you read the
first phrase, you will see a nice disclaimer. Perú is
a foreign sovereign State. And it may be difficult to
obtain judgment in the United States. So, the
submission to U.S. courts starts with a disclaimer
about the possibilities. But, really, he cannot help
us much more with this.
[Page 459]
MR. HAMILTON: Well, again, he's the one who
relied on this--these Bond issuances. He's the one
who put it in his various Witness Statements. He's
the one who has said that he relied on Perú issuing
contemporary Bonds in order to buy these old,
decaying, rat-eaten pieces of paper, in some
instances. So, that's the reason for the question,
Mr. President, but I understand your comment.
BY MR. HAMILTON:
Q. Now, with respect to the Land Bonds, you said
you first became interested in the Land Bonds in 2005;
is that right?
A. That's correct.
Q. And you learned about the Land Bonds from an
emerging markets boutique called "Exotic;" is that
right?
A. Exotix.
Q. Exotix. What is Exotix, Mr. Koenigsberger?
A. Exotix was an emerging market boutique
broker-dealer that researched and sourced and brokered
and made markets in emerging market securities debt.
Q. It sounds exotic. So, these are not
[Page 460]
cookie-cutter scenarios that they bring to your
attention?
A. No. Exotix did the--pardon me, Exotix
covered the gamut of emerging market securities.
Anything from, as you say, global Bonds. I knew the
principal there, Peter Bartlett. As I mentioned
earlier in my testimony, I was highly involved in the
Russian debt restructuring. They provided exceptional
and reliable research on Russia at the time and they
would also talk about relative value of one Bond
versus the other, and that's--I have known Exotix
since 1998.
Q. Okay. And so, they are the ones who brought
the Land Bonds to your attention; right?
A. Yes.
Q. Okay. Now, you've emphasized that you--I
guess from a relatively young age were aware of,
involved in restructuring issues in Latin America.
You had never heard about the Land Bonds before.
That's your testimony to date?
A. That's correct.
Q. Okay. So, you went through all the
[Page 461]
restructurings of the 1990s, the exposure that you
had, that deep experience, and you had never heard of
the Land Bonds; is that correct?
A. When I started in the late 1980s, emerging
economy markets had yet to emerge, and the beginning
of that emergence was the restructuring of bank loans.
So, what I dealt with--and I talk about it in my
testimony at CR-P Associates, was the resolution of
the bank loans, the Brady debt restructuring, in fact
I worked on the first Brady debt restructuring in the
Republic of Costa Rica in '88-'89.
Q. I'm sorry, but I'm not asking for your entire
profile. My question was very simple: Had you heard
of--you have now confirmed you had not heard of the
Land Bonds before 2004?
A. No. I don't recall--
PRESIDENT FERNÁNDEZ ARMESTO: Yeah. Let's go
to the next question.
MR. HAMILTON: Let's keep going.
BY MR. HAMILTON:
Q. Okay. Now, you indicated that when you
learned about the Peruvian Land Bonds, you knew that
[Page 462]
Perú had defaulted on the Land Bonds long before you
learned about them; correct?
A. That's correct.
Q. And you knew that the Land Bonds had been
issued in an outdated and massively devalued currency,
the Soles de Oro; correct?
A. I was aware of that, yes.
Q. And you knew that the face value of the Land
Bonds as denominated in the Soles de Oro was
worthless, even in 2005; correct?
A. Not that it was worthless. We looked at the
research that was provided to me at the time, whether
it was by Mr. Herzberg or others. They referred to,
despite all these things that you are reading, why
there was value, that it was well-established, that
these Bonds had to be paid, and just because of these
two currencies, it didn't mean that Perú didn't have
an obligation to pay them under current value which
compensated for this hyperinflationary period that
they went through.
Q. We'll get there.
MR. HAMILTON: Mr. President, I'm trying to
[Page 463]
keep a good pace and we don't need to get the whole
history every time.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah.
BY MR. HAMILTON:
Q. Let's take a look at Mr. Koenigsberger's
Third Statement at Paragraph 21. Put that up on the
screen, please.
A. Sorry, which one?
Q. Your Third Statement, Paragraph 21.
MR. FRIEDMAN: Do you mean the Second
Amended--the one that is entitled Second Amended
Witness Statement?
MR. HAMILTON: There are a lot of amendments,
but I think it's the Third Witness Statement of
Mr.--Second Amended Witness Statement.
PRESIDENT FERNÁNDEZ ARMESTO: Okay.
MR. HAMILTON: Which was the third try.
Paragraph 21.
PRESIDENT FERNÁNDEZ ARMESTO: Okay.
Unfortunately--
MR. HAMILTON: Yes.
PRESIDENT FERNÁNDEZ ARMESTO: Very good.
[Page 464]
Now, we get into the--but at some stage, we will have
to make a break, because in a quarter of an hour, in
the next quarter of an hour we'll have to make a
break, whenever you say.
MR. HAMILTON: Okay. Okay. Again,
Mr. President, we also agree that relying on some of
the things they've highlighted as their basis for due
diligence and supposed Decision to invest are
completely--not applicable in the way they assert them
to be. That's the reason it was necessary to learn
about their business and learn about these things that
they emphasize so much. Now, turning to this Witness
Statement, Paragraph 21--
MR. FRIEDMAN: I must object. Speeches like
that have no place in the middle of an examination.
PRESIDENT FERNÁNDEZ ARMESTO: Let's go.
BY MR. HAMILTON:
Q. Paragraph 21, the face value of the Land
Bonds as denominated in Soles de Oro was worthless
even in 2005; correct?
PRESIDENT FERNÁNDEZ ARMESTO: Let's move on.
MR. HAMILTON: Okay. Now, we are going to
[Page 465]
briefly go into confidential session.
(End of open session. Attorneys' Eyes Only
information follows.)
[Page 466]
CONFIDENTIAL SESSION
[Redacted]
[Page 467]
[Redacted]
[Page 468]
[Redacted]
[Page 469]
[Redacted]
[Page 470]
[Redacted]
[Page 471]
[Redacted]
[Page 472]
[Redacted]
(End of Attorneys' Eyes Only session.)
[Page 473]
OPEN SESSION
BY MR. HAMILTON:
Q. Tab 9 is Exhibit CE-729. This is a--email
from José Cerritelli to David Herzberg.
Do you see that document? You don't have to
read it. I'm just asking if we're on the same page.
A. I see the document.
Q. Thank you. Now, you have said that while you
were encouraged by Perú's fiscal stability, you wanted
to understand the history and status of the Land
Bonds, in particular; is that right?
A. Yes.
Q. And you wanted to understand why Perú
remained in default on the Land Bonds; is that right?
A. That's correct.
Q. Okay. So, you considered Perú to be in
default at that time; correct?
A. I considered Perú to be in default on the
Land Bonds at that time, correct.
Q. Okay. And you instructed David Herzberg, a
Gramercy employee, to conduct the due diligence; is
that correct?
[Page 474]
A. That's correct.
Q. Okay. Now, are you, Mr. Koenigsberger, one
of these hands-off guys who just delegates everything
and doesn't get involved in what you do, and--I don't
know. On a movie, you would be on a yacht, doing
something other than thinking about these details.
Or, you know, how do you conduct your business, and
what role do you play within your business?
A. Well, as the Chief Investment Officer, I was
responsible for the investment process, the research
process, the trading process, so I sit on top of the
entire platform. So, in a situation like this, I'll
have individuals, research analysts, that go and do
the primary research, bring that back to an Investment
Committee, we talk about that Investment Committee,
and we continue to iterate in terms of ask more
questions and send them down for more due diligence.
So, for the record, I don't have a yacht.
Q. Okay. And you're a hands-on kind of guy,
though?
A. What do you mean by that?
Q. You get deeply involved in the principal
[Page 475]
Projects of Gramercy; is that right?
A. Yes, I do.
Q. Okay. Now, this document, CE-729, CE-729,
the email from Mr. Cerritelli to Mr. Herzberg,
says: "Subject, ADAEPRA notes."
Do you see that document?
A. I see the document.
Q. And this document--this document you
discussed--okay. You discussed Mr. Cerritelli during
the direct examination. Do you recall that?
A. Yes, I do.
Q. Okay. Now, if you turn to page--Tab 10, this
is Document CE-114.
Now, your counsel gave this document to you
on direct. I think everybody in the room knows it by
now. This is the due diligence memorandum to you from
David Herzberg, dated January 24, 2006.
You know this document; correct?
A. Yes, I do.
Q. Okay. And had you ever noticed,
Mr. Koenigsberger, that this memorandum is
substantially lifted from the email called "ADAEPRA
[Page 476]
notes?"
A. I see the similarities, and I imagine what
happened there is David and José were working on this
together and perhaps they drafted the other one
together. I don't know--what David wrote here I think
is accurate, and, as I said before, José, at Exotix at
the time, was helping to facilitate due diligence, and
it wouldn't be unusual for a research analyst at
Exotix to summarize the--what had happened on that
trip.
Q. Okay. And would you consider that shoddy if
they had a meeting with Bondholders and basically
largely cut and paste that, and that became your
principal due diligence memorandum?
A. I don't think that is what happened.
Q. Have there been any internal complaints or
recriminations about the handling of the due diligence
and the Land Bonds within Gramercy over time?
A. Not that I recall.
Q. You've never had a frustrated meeting inside
Gramercy about these Land Bonds?
A. We've never had a frustrated meeting. We've
[Page 477]
been frustrated for the better part of 14 years that
we haven't been able to get resolution.
Q. And have you been fully satisfied with the
level of due diligence undertaken with respect to this
matter?
A. Yeah. As I look at it, 14 years later, I
think they--David did a very fine job on the due
diligence. And, of course, this wasn't all the due
diligence that we did. I spoke to that earlier.
Q. Okay. But are you aware that this is the
only due diligence memorandum that Gramercy has
submitted to this Tribunal?
A. I believe that may be the case.
Q. Okay. And that there is no other due
diligence memorandum that's been produced, despite
document requests.
Are you alert to that?
A. I'm aware of that. As I said before, due
diligence--this was the beginning of a due diligence
process. Most of what we did--remember, these guys
are down in Perú doing research. There is telephone
conversations, there is weekly Investment Committee
[Page 478]
meetings, there is emails.
To this day, we tell our research analysts
don't spend so much time on the memorandum. We can
talk about it. Doing a 17 page Report on every single
thing we do can be laborious. Just go do some initial
work, bring it back to the Committee, and let's talk
about it.
Q. Okay. And there is no other due diligence
memorandum that you're aware of?
A. Not that I'm aware of.
Q. Okay.
PRESIDENT FERNÁNDEZ ARMESTO: Did you engage
counsel, Peruvian counsel, at that stage?
THE WITNESS: I believe we did.
BY MR. HAMILTON:
Q. And are you aware of a memorandum that
Mr. Herzberg requested from your Peruvian counsel a
few months after this due diligence memorandum related
to the purchase mechanism that would be put into place
for acquiring the Bonds?
A. I don't recall, but I'm not surprised that
David would ask that of counsel.
[Page 479]
1 Q. Because they were working on the mechanism
2 under Peruvian law for the transfer of rights related
3 to the Land Bonds; is that correct?
4 A. That could very well be.
5 Q. Okay. Now, this due diligence memorandum, of
6 course, acknowledges that the Peruvian Government
7 serviced the Bonds until 1987, and then afterwards,
8 your memorandum said the Land Bonds had been in
9 default for a period of 18 years.
10 A. Sorry, where you are looking?
11 Q. The Land Bonds had been in default for a
12 period of 18 years.
13 That was your conclusion; correct?
14 A. Do you want to take me to that part of the
15 document in order to confirm it?
16 Q. Sure. First page, "Why now? The Land Reform
17 Bonds have been in default for a period of 18 years;"
18 correct?
19 A. I see that, yes.
20 Q. Okay. Now, turning over to the third page of
21 this document, "potential recovery analysis." Now,
22 you say here that ADAEPRA, that's a Peruvian
[Page 480]
1 Bondholder association, was pursuing a parallel
2 strategy, a transactional solution of negotiating a
3 settlement and a judicial track;" is that correct?
4 A. That's what David wrote in this memorandum.
5 Q. Okay. So, on the next page, there were
6 various calculations related to valuations of Land
7 Bonds.
8 Do you see those valuation tables?
9 A. Yes, I do.
10 Q. Three different valuation methods are
11 presenting here.
12 A. I do see that, yes.
13 Q. Okay. Now, Mr. Koenigsberger, doesn't the
14 existence of different valuation methodologies in your
15 due diligence memorandum suggest that there was a lack
16 of certainty in terms of the then-current value of the
17 Land Bonds?
18 A. There was a lack of certainty, but I think
19 there was the ability to come up with high
20 probabilities of what to expect.
21 Q. Okay.
22 MR. HAMILTON: I'll go about five more
[Page 481]
1 minutes and then take a break, Mr. President?
2 PRESIDENT FERNÁNDEZ ARMESTO: Okay.
3 MR. HAMILTON: Five minutes, approximately.
4 Okay. Now, we can take the break now, actually, and
5 then can I plan some efficiency. Does that sound
6 good?
7 PRESIDENT FERNÁNDEZ ARMESTO: Mr. Hamilton,
8 how long do you have to go?
9 MR. HAMILTON: We don't know yet. It depends
10 how fast Mr. Koenigsberger reads.
11 PRESIDENT FERNÁNDEZ ARMESTO: Oh, no, no, no.
12 That is not fair to Mr. Koenigsberger. Because we
13 have not really got into the thrust of his
14 deposition--of his Witness Statement. I am slightly
15 worried about timing.
16 MR. HAMILTON: We're getting there, sir, and,
17 again, he put in five Witness Statements, many of
18 which repeatedly talk about the issues that we've been
19 talking about so far. So, you might--as you might
20 understand, I have a duty to address the issues.
21 PRESIDENT FERNÁNDEZ ARMESTO: Of course. Of
22 course. No. We should, I mean, we all know when the
[Page 482]
1 really relevant facts took place, and we are--we are
2 looking at 2004 document--no. 2006 document, I mean.
3 There is--if you are going chronologically, which I do
4 not know, I'm still worried that there is still quite
5 some years to cover. So, we must--my point here is we
6 must start the Second Witness before lunch.
7 MR. HAMILTON: Well, sir, I'm going at the
8 pace that is appropriate from Respondent's point of
9 view to manage a Witness who has put in five Witness
10 Statements.
11 PRESIDENT FERNÁNDEZ ARMESTO: Very good.
12 MR. HAMILTON: And maybe reads a little bit
13 slower than--than sometimes, so.
14 PRESIDENT FERNÁNDEZ ARMESTO: Very good.
15 MR. FRIEDMAN: Mr. President, if I just may,
16 I just want to say for the record that there may be a
17 bit of confusion here. We do not believe that the
18 document at Tab 8, which is Respondent's 1095 and was
19 the due diligence checklist was designated as
20 confidential. We believe we produced that on
21 February 8, which was prior to our Confidentiality
22 Order in the case, and I don't think we've designated
[Page 483]
1 that as confidential.
2 PRESIDENT FERNÁNDEZ ARMESTO: Okay. Thank
3 you. It's now 28 past 11:00. We will come back at 45
4 past 11:00.
5 Mr. Koenigsberger, there is some coffee
6 outside and there may be some refreshments. You are
7 most welcome to have a coffee and anything else you
8 would like. Can I please ask you not to speak to any
9 of the counsel to Gramercy?
10 THE WITNESS: You bet. Thank you very much.
11 (Brief recess.)
12 PRESIDENT FERNÁNDEZ ARMESTO: So, we resume
13 the Hearing.
14 Mr. Hamilton, I was just trying to help you.
15 I mean, do the cross-examination the way you want.
16 Please don't misunderstand me. There was nothing--I
17 just was trying to be helpful so that you use your
18 time. But if you think that it is important for your
19 case, do it the way you want. It is your
20 cross-examination, not mine.
21 MR. HAMILTON: Thank you, sir. I understand
22 you have many practical tasks here, and I respect
[Page 484]
1 that. I've also learned the virtue of patience
2 sometimes in life, so there is that too.
3 BY MR. HAMILTON:
4 Q. Mr. Koenigsberger, we're going to resume, and
5 we're going to pass out an exhibit.
6 What exhibit number is it? CE-120. This is
7 one of the--it's a copy. We don't carry around
8 original Land Bonds, but this is a copy of one of the
9 Land Bonds, and I'm also providing you an
10 English-language copy. We'll share with everybody
11 else.
12 PRESIDENT FERNÁNDEZ ARMESTO: Okay. Thank
13 you. So, we must give a number to this. This should
14 be then H-4? H-4.
15 (Comments off microphone.)
16 MR. HAMILTON: Of course. Yes, sir.
17 BY MR. HAMILTON:
18 Q. This is CE-120. It's a copy, it smells a lot
19 better than the old ones.
20 So, Mr. Koenigsberger, we were discussing due
21 diligence undertaken by Gramercy with respect to the
22 Land Bonds.
[Page 485]
1 Could I get a copy of that document, please.
2 I gave mine to the Witness.
3 (Comments off microphone.)
4 Q. So, Mr. Koenigsberger, this is familiar to
5 you, I take it. What agrarian debt--Bonds of the
6 agrarian debt is actually the best translation of
7 this.
8 You're familiar with these instruments?
9 A. Yes, I am.
10 Q. Okay. And this is one of the instruments
11 that Gramercy has provided a copy of in this
12 proceeding. Now, this instrument, on its face, has
13 various language, four elements down below.
14 Do you see that?
15 A. Yes, I do.
16 Q. Okay. Now, we were speaking earlier about a
17 contemporary Peruvian sovereign bond, such as the one
18 that you provided into the record.
19 Do you recall that?
20 A. Yes, I recall the conversation.
21 Q. This kind of document.
22 Now, Mr. Koenigsberger, when you were making
[Page 486]
1 your risk assessment, how did you compare the
2 protections of a contemporary Global Bond with which
3 you were familiar at the time with these old pieces of
4 paper? How did you compare those two as part of your
5 due diligence process?
6 A. Well, as highlighted by the--David's memo, a
7 big part of what we wanted to do was not necessarily
8 compare one versus the other--because this is the one
9 that we invested in--the idea was to look at what the
10 laws were at the time to be able to confirm the
11 validity of the debt.
12 And I'm not really sure where the cutoff is
13 between contemporary and noncontemporary, but what we
14 were able to confirm is that it's a valid obligation
15 of the State, it's transferable to us, and it's due to
16 be paid in current value. That is the type of work
17 that we did looking at, of course, it didn't have the
18 other document that you had, but there was certainly
19 plenty of governing information as it related to the
20 Land Bonds.
21 Q. So, did you consider, Mr. Koenigsberger, that
22 acquiring this paper reflected greater risk than, for
[Page 487]
1 example, acquiring Peruvian Bonds issued in 2005?
2 A. Different risk.
3 Q. Thank you.
4 Now, Mr. Koenigsberger, you mentioned that
5 due diligence was an ongoing process, and that's why
6 you just had the one memorandum. It was an ongoing
7 process, and so let's take a look at the month of
8 April of 2006.
9 Now, in the month of April in 2006, several
10 interesting things happened. Now, first of all,
11 you've indicated that you were aware that in April of
12 2006, on April 12, the United States and Perú signed,
13 but, of course, had not yet ratified the U.S.-Perú
14 Trade Promotion Agreement; is that correct?
15 A. Correct.
16 Q. And you were aware of that at the time.
17 A. We were aware of the free trade agreement.
18 Q. Okay. And you then--promptly after the
19 Treaty was signed, you then established a new entity
20 GPH in the State of Delaware on April 17, 2006; is
21 that correct?
22 A. I believe that could be the date.
[Page 488]
1 Q. And you established that entity five days
2 after the signing of the U.S.-Perú Trade Promotion
3 Agreement; is that right?
4 A. Yeah. I think it was completely unrelated.
5 It was related to preparing for the first acquisition
6 of Bonds.
7 Q. And you were preparing for the first
8 acquisition of Bonds.
9 Now, on the 19th of April 2006, you were
10 aware that President Toledo vetoed a pending Agrarian
11 Reform bill.
12 Are you aware of that?
13 A. Yes. I'm aware of the veto and I'm also
14 aware of the circumstances that he highlighted, the
15 first one being that he was concerned that they might
16 have to pay the debt twice, that, in fact, there was
17 no registry. But looking at the veto, it wasn't about
18 the validity of the debt, whether it was contemporary
19 or not. He was concerned about double-counting in
20 terms of no registry, but he wasn't disputing the
21 validity of the debt, the current value, the notion of
22 CPI. So, to me, as I said, that would have been
[Page 489]
1 confirmation of the thesis, that despite at that
2 moment someone wanted to kick the can to the next
3 administration, that doesn't mean it wasn't currently
4 payable.
5 Q. What "can was being kicked to the next
6 administration," to use your words?
7 A. Well, it seems to me that part of the
8 difficulty for Bondholders over many years is this
9 notion that no government has really wanted to deal
10 with it, and they have just kind of moved it to the
11 next government.
12 So, we go back to April 2006, again, I saw
13 confirmation that this was a valid obligation. It had
14 to be paid. He was worried that it might be paid
15 twice, not at all and confirmed a lot of things that
16 David underwrote.
17 Q. So, in your view, the Toledo Government
18 didn't want to resolve the situation, and they "kicked
19 the can" to the García Government; is that right?
20 A. I think it's quite possible.
21 Q. And so, that April was prior to your first
22 purchase of a bond; is that correct?
[Page 490]
1 A. Yes, it is.
2 Q. Okay. Now. I take it that you are--and I
3 refer your attention to Tab 27. I take it you're
4 aware of the position of the Peruvian Government at
5 that time and over many years with respect to the
6 status of the land bonds. I refer your attention to
7 Exhibit R-259. This document is an officio report of
8 the Ministry of Economy and Finance dated 17
9 July 2006.
10 Do you see that document?
11 A. I see the document.
12 Q. Okay. Now, in the first paragraph it makes a
13 reference to--do you prefer to look at the Spanish or
14 the English?
15 A. I prefer the English.
16 Q. Okay. Are you fluent in Spanish?
17 A. I'm not fluent, but I speak Spanish.
18 Q. That's fair enough.
19 A. I speak it, I don't read it as well.
20 Q. Okay. No problem. Then we'll look at
21 English version for your convenience, and there's a
22 translation included behind the blue page of your
[Page 491]
1 binder.
2 And so, in this document, it refers to an
3 offer to purchase the Agrarian Reform Bonds that the
4 Gramercy investment funds made by a written notice
5 addressed to the association, the ADAEPRA.
6 Do you see that reference?
7 A. Am I going to get an English version?
8 Q. It's behind the blue piece of paper.
9 A. Oh, sorry.
10 ARBITRATOR DRYMER: Mr. Hamilton, my
11 apologies to you, just so that I can follow on the
12 same document you're showing the Witness, is there an
13 English version in the record? If not, I'll work on
14 the Spanish.
15 MR. HAMILTON: No, at the suggestion of their
16 counsel, we are using free translation.
17 ARBITRATOR DRYMER: Fair enough. Thank you.
18 MR. HAMILTON: Yes.
19 THE WITNESS: Is it all right if I look at
20 the document? Can I look at it a moment?
21 BY MR. HAMILTON:
22 Q. Yes, but please--I understand you want to
[Page 492]
1 look at document, but these are really not questions
2 that require reading the entire document.
3 A. All right. Then go ahead and ask your
4 question, and I'll read it if necessary.
5 Q. Okay. So, document refers to a written
6 notice or offer to purchase Agrarian Reform Bonds that
7 Gramercy sent to ADAEPRA. Do you remember Gramercy
8 sending an offer to purchase to Bondholders through
9 ADAEPRA?
10 A. I do remember.
11 Q. Okay. In the second paragraph of this
12 document, the position of the Ministry of Economy and
13 Finance indicated here is as follows:
14 "I would like to inform you that the Peruvian
15 Congress has yet to approve the legal framework that
16 will presumably prescribe how to treat in general all
17 liabilities derived from the land reform process,
18 which, due to its complexity and implications has been
19 the subject of coordinated action between the
20 legislative executive branches."
21 Do you see that?
22 A. I don't. Sorry, where is that in the
[Page 493]
1 English--
2 Q. Second paragraph.
3 A. "I'm writing to you in reference"?
4 Q. "In that regard." The second paragraph
5 begins "in that regard."
6 A. Sorry. "I'm writing with respect."
7 Q. Mr. Koenigsberger, the first paragraph says
8 "I'm writing to you," and the second is "in that
9 regard."
10 (Overlapping speakers.)
11 A. Sorry. I missed this page. "In that
12 regard," yes, I see that.
13 Q. Right. And so, the Peruvian Congress has yet
14 to approve the legal framework.
15 Do you see that?
16 A. Yes, I do.
17 Q. Okay. And that's what you've just confirmed,
18 of course--right?--that there was a pending law, but
19 it was vetoed and did not come into force. Is that
20 right?
21 A. That's correct.
22 Q. So, I have one additional item here. Give me
[Page 494]
1 just a moment.
2 Subparagraph (d). According to this internal
3 document of the Ministry of Economy and Finance, which
4 was signed by Ms. Betty Sotelo Bazán, "with respect to
5 all liabilities arising from the Land Reform Process,
6 the Government's rights and interest may only be
7 determined once the above-mentioned legal framework is
8 in place."
9 Do you see that, Mr. Koenigsberger?
10 A. I do see that here.
11 Q. Okay. And that's consistent with what you've
12 said, which is that there was a pending law, but it,
13 of course, did not come into force in 2006; is that
14 right?
15 A. There was a law put forward by the Congress
16 that did not--that was not enacted.
17 Q. Okay. So--
18 A. But this is a legal framework for how the
19 Ministry intends to resolve it. That's not the only
20 legal framework. This a memorandum of the obligor,
21 the Ministry.
22 Of course, as I mentioned earlier today,
[Page 495]
1 there's two paths. There's the consensual path, which
2 might have gone along the path of what the Congress
3 might pass and how the Ministry might interpret it,
4 but there was always another legal framework, which is
5 Bondholders always had the right to go to local courts
6 to pursue their claims if what was offered here,
7 voluntarily or not, because it wasn't passed, didn't
8 pass.
9 Q. So, do you accept that the status of the Land
10 Bonds before the Ministry of Economy and Finance in
11 2006 was that there was no legal framework for them to
12 pay the Bonds?
13 A. I do not.
14 Q. You don't agree that that was the position of
15 the Ministry? It's on black and white in front of
16 you.
17 A. I believe that that was a position of the
18 Ministry, but I do think there were other mechanisms,
19 other legal frameworks to collect on the Bonds.
20 Q. Okay. So that--that was the position of the
21 Ministry, and it was in that context that Gramercy set
22 about acquiring the Land Bonds.
[Page 496]
1 Now, you mention in your Third Statement that
2 you gave Bondholders three different options: Sell
3 the Land Bonds to Gramercy, contribute the Land Bonds
4 to an investment vehicle, or hold onto the Land Bonds
5 and free ride on Gramercy's efforts to settle the Land
6 Bond debt. Is that right?
7 A. Yes. I think that third option is in
8 exchange for working with us to implement some sort of
9 resolution.
10 Q. Okay. And the Bonds that are presented
11 before this Tribunal, those were Category 1 where
12 Bondholders sold Land Bonds to Gramercy; is that
13 right?
14 A. That's correct.
15 Q. Okay. Were there any Land Bonds that were
16 contributed to an investment vehicle in exchange for
17 certificates?
18 A. No.
19 Q. Does Gramercy or any affiliate of Gramercy
20 hold any Land Bonds other than the Land Bonds before
21 this Tribunal?
22 A. Sorry, repeat that one more time.
[Page 497]
1 Q. Does Gramercy or any affiliate of Gramercy
2 hold any Land Bonds other than the Land Bonds that
3 have been presented to this Tribunal?
4 A. Yes, we do.
5 Ω. How do you hold those Bonds?
6 A. We hold them in physical custody in Lima.
7 Q. How many Bonds do you hold?
8 A. I'm not certain of the number of Bonds.
9 Q. Is it 5? 5,000? 10,000?
10 A. I don't know the number of Bonds.
11 Q. So, apart from what Gramercy has disclosed to
12 this Tribunal, Gramercy holds more Land Bonds; is that
13 correct?
14 A. That's correct.
15 Q. So, what entity controlled by Gramercy holds
16 these additional Land Bonds?
17 A. I'm not certain of the entity that holds it.
18 Q. Okay. And when were those Land Bonds
19 acquired?
20 A. I believe in 2017.
21 Q. So, in 2017 while this Arbitration was
22 pending, Gramercy acquired additional Land Bonds; is
[Page 498]
1 that correct?
2 A. The way that we acquired them--we talked
3 about the three different versions. There was an
4 acquisition where someone wanted to keep interest in
5 it but also have us contribute some cash to them. So,
6 it was like that middle option that we talked about
7 before.
8 Q. So, this would be the contribution of Land
9 Bonds to an investment vehicle; is that correct?
10 A. I'm not sure the mechanism that was used for
11 the acquisition. I don't recall.
12 Q. Okay. So who coordinated those transactions
13 for Gramercy?
14 A. I imagine it would have been through our
15 operations group.
16 Q. Okay. You've emphasized that you're a very
17 hands-on kind of guy and that you personally get
18 involved in these details. You have no awareness
19 who--in the relatively compact team of people that
20 work at Gramercy, who would have been involved in a
21 2017 acquisition of Land Bonds?
22 A. I think you were talking about the closing of
[Page 499]
1 it, so I talked about the operations person.
2 Q. Who in Gramercy was responsible for its 2017
3 acquisition of Peruvian Land Bonds?
4 A. A group of people. Of course, I'm the Chief
5 Investment Officer, and I'm responsible for the
6 investments that we make, but there are other
7 individuals on the investment team, the legal team,
8 and the operations team that would have worked on that
9 as well.
10 Q. Okay. How much did Gramercy pay for this
11 acquisition of Land Bonds in 2017?
12 A. I don't recall.
13 Q. What time of year in 2017 were these Land
14 Bonds acquired?
15 A. I believe it was in the first quarter, but I
16 don't recall the date.
17 Q. The first quarter of 2017.
18 A. I believe so.
19 Q. Okay. And so Gramercy thought that it would
20 be a good investment decision in the first quarter of
21 2017 to acquire additional Peruvian Land Bonds?
22 A. Yes.
[Page 500]
1 Q. Okay. Thank you.
2 Now, the money that was used to buy these
3 additional Land Bonds, did you raise that money from
4 investors here in the U.S.?
5 A. That money came from funds. It was from
6 funds that had U.S. investors.
7 Q. Okay. Now, just to be clear, as Gramercy has
8 indicated here, some of the beneficial interests in
9 the Land Bonds through Gramercy are U.S. interests and
10 a smaller percentage are not U.S. interests; is that
11 correct?
12 A. That's correct.
13 Q. That's correct. Okay.
14 And so these 2017 acquisitions did include
15 U.S. interests and, perhaps, non-U.S. interests?
16 A. The vehicles--the purchasers were U.S.
17 purchasers. When you have all these beneficial
18 owners, I can't recall whether they're all on
19 100 percent U.S. or not because there are investors in
20 the underlying fund vehicles.
21 Q. Mr. Koenigsberger, are the individuals and
22 entities--any of the individuals or entities who have
[Page 501]
1 beneficial interest in the Gramercy Land Bonds
2 Peruvian?
3 MR. FRIEDMAN: Sorry, excuse me. I think
4 this is unclear. There are certain Land Bonds that
5 are the subject of this Arbitration, and--
6 MR. HAMILTON: Excuse me. I'm asking him a
7 question.
8 PRESIDENT FERNÁNDEZ ARMESTO: Wait. Make
9 clear what you are asking for because it was dubious.
10 ARBITRATOR DRYMER: Yes, again, Mr. Hamilton,
11 I was going to hit the button before anyone else, just
12 to ask whether you are asking about the Bonds at issue
13 in this case or the 2017 Bonds.
14 MR. HAMILTON: Please, sir, I'm going to ask
15 about both, I assure you.
16 ARBITRATOR DRYMER: Thank you.
17 MR. HAMILTON: Because we've just learned
18 about Bonds that Gramercy has hidden from this
19 Tribunal--once again things that have been hidden from
20 this Tribunal.
21 BY MR. HAMILTON:
22 Q. Mr. Koenigsberger, the Land Bonds that are
[Page 502]
1 before this Tribunal have beneficial owners. Are any
2 of those beneficial owners Peruvian?
3 A. I don't believe so.
4 Q. You don't believe that any of the beneficial
5 owners, entities, individuals who stand to benefit
6 from a ruling of this Tribunal in connection with the
7 Gramercy Land Bonds--none of them are Peruvian?
8 A. The--what I said is I don't recall if there's
9 any Peruvian investors that are beneficial owners of
10 the Bonds that are part of what we hold here for this
11 Arbitration. The Resolution that we would get would
12 certainly benefit a lot of Peruvians.
13 Q. That's not my question, sir.
14 So, you're not able to confirm here today
15 that there are no Peruvians with beneficial interests
16 in the Gramercy Land Bonds before this Tribunal; is
17 that correct?
18 A. I don't believe so. I don't believe there
19 are Peruvians in our vehicles with beneficial
20 interests.
21 Q. You're not sure.
22 A. I'm not sure.
[Page 503]
1 Q. Thank you.
2 Now, with respect to these other Bonds--we'll
3 call them the new acquisition of Peruvian Land
4 Bonds--did Gramercy acquire those Land Bonds through
5 purchase contracts similar to the purchase contracts
6 with which it acquired the Land Bonds before this
7 Tribunal?
8 A. I don't know.
9 Q. Mr. Koenigsberger, at the time that you
10 acquired those Land Bonds, you were engaged in a
11 high-profile propaganda campaign against the Peruvian
12 state. You're the lead Witness in this proceeding.
13 You've emphasized how you're a hands-on kind of guy,
14 and you have no idea how you acquired--
15 PRESIDENT FERNÁNDEZ ARMESTO: Is that a
16 question? Is that the question?
17 MR. HAMILTON: Yes. I'm repeating the
18 question.
19 PRESIDENT FERNÁNDEZ ARMESTO: He has told you
20 he doesn't know.
21 MR. HAMILTON: I'm expressing uncertainty
22 about how he would not know.
[Page 504]
1 BY MR. HAMILTON:
2 Q. Are you sure that you don't know how Gramercy
3 acquired Bonds?
4 A. I do not know the technical characteristics
5 of how we acquired the Bonds.
6 Q. Did you purchase the Bonds?
7 A. Gramercy purchased the Bonds, I believe.
8 Some vehicle--some entity of Gramercy purchased the
9 Bonds.
10 Q. You're the Chief Investment Officer--that's
11 your title, Chief Investment Officer of Gramercy?
12 A. That's my title.
13 Q. And you're not familiar with these details is
14 your testimony.
15 A. Well, when you sit on top of an asset
16 management firm of $6 billion, you're not in the weeds
17 on the closing of transactions. There's different
18 departments that do different things. So, I certainly
19 understand what's going on with the underwriting of
20 it, but the closing of it--as I said before, there's a
21 legal team that works on that, there's an operations
22 team that works on that.
[Page 505]
1 It is not unusual for me not to be in the
2 weeds on the technicalities of how to close a
3 transaction.
4 Q. So, sometimes you get your hands on and
5 sometimes you take your hands off. Is that what
6 you're saying?
7 A. I don't understand the question.
8 PRESIDENT FERNÁNDEZ ARMESTO: That's not a
9 question.
10 BY MR. HAMILTON:
11 Q. Okay. So, Mr. Koenigsberger, with respect to
12 this acquisition as Chief Investment Officer, how much
13 money was allocated to acquire Peruvian Land Bonds in
14 early 2017?
15 A. I don't recall the number.
16 PRESIDENT FERNÁNDEZ ARMESTO: I think we
17 don't--the exact amount is not--is it $200 million?
18 Is it $10 million? $50 million? Is it as big as the
19 investment we are discussing in this case? Is it much
20 smaller? I mean, you must have some idea of
21 magnitudes.
22 THE WITNESS: Sure. And I apologize. What's
[Page 506]
1 different here, as I mentioned, is we acquired a
2 partial interest in the Bonds, so it's not a full
3 interest. We, in essence, partnered with a previous
4 Bondholder. I believe it was around $50 million.
5 BY MR. HAMILTON:
6 Q. Around $50 million.
7 Now, who was the other party or parties that
8 you transacted with in connection with these Land
9 Bonds in 2017?
10 MR. FRIEDMAN: I think that may be
11 confidential and may have nothing to do with the
12 Arbitration.
13 MR. HAMILTON: Mr. President, my comment is
14 that Gramercy entirely tries to manhandle this
15 Tribunal, not to mention the United States Government,
16 in terms of picking and choosing what it discloses.
17 And there may be serious issues with what they have
18 disclosed to their own investors. So, if you're going
19 to deny the information, we will take note of it, and
20 I'm sure we will talk about it further.
21 BY MR. HAMILTON:
22 Q. It's a simple question. Who did you transact
[Page 507]
1 with? Who did you participate with in connection with
2 acquiring Land Bonds in 2017?
3 MR. FRIEDMAN: Sorry, I raised an objection
4 to that question.
5 PRESIDENT FERNÁNDEZ ARMESTO: You can say
6 it's confidential or you can say the name or you can
7 say whatever you want. I mean, it's up to you to
8 provide the answer.
9 THE WITNESS: I'm happy to answer the
10 question. I believe that would be covered under the
11 Confidentiality Agreement with the purchaser--as the
12 purchaser from the seller.
13 BY MR. HAMILTON:
14 Q. Oak. Is that an entity? An individual? If
15 so, is that Peruvian or non-Peruvian?
16 A. I believe it's non-Peruvian, but I'm not sure
17 of the structure of the seller.
18 Q. Okay. And were the funds that you utilized
19 to acquire Land Bonds in 2017--were those funds
20 provided by Gramercy, or did Gramercy, as per the
21 routine that you've explained earlier today, acquire
22 funds from investors and use that money to acquire
[Page 508]
1 additional Land Bonds?
2 A. That--the proceeds for that came from the
3 funds that Gramercy had raised for diversified funds.
4 There was not a specific raise for the Land Bonds.
5 Q. Okay. And which fund did that relate to in
6 particular? Which Gramercy fund? Gramercy Distressed
7 Opportunity Fund II, for example?
8 A. I believe it's [Redacted]
9 Q. [Redacted]
10 raised funds that were then used to acquire
11 Peruvian Land Bonds in 2017; is that correct?
12 A. The funds that were raised by [Redacted] in
13 part, were used to buy an interest in the Bonds,
14 correct.
15 Q. How many Bonds were acquired for--how many
16 Bonds were acquired?
17 A. I said earlier I'm not sure of the number of
18 Bonds.
19 Q. So you don't know if it was 100 Bonds? 5,000
20 Bonds? 10,000 Bonds?
21 A. I don't know the number of Bonds.
22 Q. Now, Gramercy distressed--let me tell you,
[Page 509]
1 Mr. Koenigsberger, I have one more question at this
2 time.
3 MR. HAMILTON: And, Mr. President, given that
4 this is new information for the Republic of Perú, we
5 may have additional questions.
6 BY MR. HAMILTON:
7 Q. Mr. Koenigsberger, you provided three Witness
8 Statements in this case; correct?
9 A. Correct.
10 Q. All right. And the first one and the second
11 one were in 2016. The third one was in 2018, the
12 fourth one was in 2019, the fifth one was in 2019.
13 A. Let me correct the statement. There is
14 actually five here. So, you said three. There is
15 five, five Witness Statements.
16 Q. Five. That's right. That's right. Five
17 Witness Statements.
18 Three of those Witness Statements have come
19 after 2017. In none of those Witness Statements did
20 you reveal to this Tribunal that Gramercy had acquired
21 additional Land Bonds; is that correct,
22 Mr. Koenigsberger?
[Page 510]
1 A. That's correct.
2 Q. Now, Mr. Koenigsberger, why did you not
3 reveal to the Tribunal that Gramercy had bought
4 additional Land Bonds?
5 A. I don't believe that those Bonds are relevant
6 to this--they are not part of this dispute.
7 Q. And Mr. Koenigsberger, you understand, of
8 course, that this is not a contract dispute.
9 This is a treaty proceeding; correct?
10 A. It's a treaty proceeding, correct.
11 Q. And in a treaty proceeding, one doesn't just
12 take, say, an old bearer Bond, present it to a Court
13 and debate the value. In a treaty proceeding, there
14 are much broader range of facts that are pertinent;
15 correct?
16 PRESIDENT FERNÁNDEZ ARMESTO: I think he's
17 not a legal Expert.
18 (Overlapping speakers.)
19 MR. HAMILTON: I think it's pertinent given
20 that Gramercy includes in their own business summary
21 that treaty claims are part of their business, that an
22 understanding of whether he has a basic understanding
[Page 511]
1 about the difference between a treaty claim and a
2 claim on a contract is pertinent.
3 PRESIDENT FERNÁNDEZ ARMESTO: I'm
4 sure--whether he has or not, it is really not a fact
5 on which he can help us.
6 MR. HAMILTON: It is evident, sir. Thank
7 you.
8 BY MR. HAMILTON:
9 Q. So, Mr. Koenigsberger, you decided not to
10 tell this Tribunal that Gramercy had acquired
11 additional Land Bonds; correct?
12 A. It didn't occur to me. It wasn't the Bonds
13 that are part of this Tribunal.
14 Q. Okay. Let me ask you this: Did you
15 undertake additional due diligence with respect to the
16 acquisition of Land Bonds in 2017?
17 A. Yes, we did.
18 Q. What due diligence did you undertake?
19 A. The validity of the Bonds, the character of
20 the Bonds, we certainly looked at the--there was--talk
21 about--there must have been, you know, five or six
22 different Supreme Decrees that came out with varying
[Page 512]
1 levels of valuations associated with them.
2 Q. Okay. And do you have internal documents or
3 memoranda related to your assessment of Land Bonds in
4 2017 or in connection with that acquisition in 2017?
5 A. I don't know.
6 Q. You don't know?
7 A. I don't know.
8 Q. You said earlier that Gramercy would
9 typically prepare due diligence memoranda before
10 making an acquisition; isn't that correct?
11 A. I don't recall a specific due diligence
12 memorandum on this. Obviously, as I said, this was an
13 ongoing story that we've understood for quite some
14 time. I'm not denying or confirming whether there
15 were. I just don't know.
16 Q. Okay. With respect to the Bonds that
17 Gramercy acquired in 2017, you said that you raised
18 the funds through [Redacted] y
19 [Redacted]; correct?
20 PRESIDENT FERNÁNDEZ ARMESTO: That's what he
21 said.
22 BY MR. HAMILTON:
[Page 513]
1 Q. Okay. And [Redacted]
2 that includes, for example, state pension
3 funds from the U.S.; is that correct?
4 A. Yes, that's correct.
5 Ω. [Redacted]? Yes?
6 A. They're not a state pension fund, but yes.
7 Q. [Redacted]?
8 A. Yes.
9 Q. [Redacted]?
10 A. Correct.
11 Q. What other state pension funds? You
12 personally pitched these pension funds; correct?
13 PRESIDENT FERNÁNDEZ ARMESTO: We should go
14 into confidential mode.
15 (End of open session. Attorneys' Eyes Only
16 information follows.)
[Page 514]
1 CONFIDENTIAL SESSION
2 [Redacted]
3 [Redacted]
4 [Redacted]
5 [Redacted]
6 [Redacted]
7 [Redacted]
8 [Redacted]
9 [Redacted]
10 [Redacted]
11 [Redacted]
12 [Redacted]
13 [Redacted]
14 [Redacted]
15 [Redacted]
16 [Redacted]
17 [Redacted]
18 [Redacted]
19 [Redacted]
20 (End of Attorneys' Eyes Only session.)
[Page 515]
1 OPEN SESSION
2 BY MR. HAMILTON:
3 Q. Again--
4 PRESIDENT FERNÁNDEZ ARMESTO: Please.
5 MR. HAMILTON: Are we out of the confidential
6 session now?
7 PRESIDENT FERNÁNDEZ ARMESTO: Yes.
8 MR. HAMILTON: Okay. We don't know what's
9 going on over on the side here, but Gramercy doesn't
10 get to dictate what is public and nonpublic
11 information. The Tribunal has the authority to
12 regulate that, and it has been very cooperative with
13 Gramercy in that regard. So, if there is any issue to
14 discuss, we will be part of that discussion, please.
15 Now, Mr. Koenigsberger, when you went--
16 MR. FRIEDMAN: Whoa, whoa, whoa. Hold on.
17 We have Confidentiality Orders. It is quite clear and
18 we have discussed this and the Tribunal has ruled on
19 this.
20 MR. HAMILTON: Correct.
21 MR. FRIEDMAN: That client confidences are
22 simply not relevant for the more general public. This
[Page 516]
1 is a very standard, regular thing that happens in
2 every case. There is nothing--really. Please stop
3 making an issue of it.
4 PRESIDENT FERNÁNDEZ ARMESTO: Let's go on
5 with the questions to the Witness.
6 MR. HAMILTON: We will continue to make an
7 issue, sir. Thank you.
8 PRESIDENT FERNÁNDEZ ARMESTO: Please.
9 MR. HAMILTON: Mr. Koenigsberger, when you
10 go--when you go--
11 MR. FRIEDMAN: And we will continue to rely
12 on the Tribunal's rulings.
13 BY MR. HAMILTON:
14 Q. When you go to state pension funds, for
15 example, and other investors, and pitched [Redacted]
16 did you advise them that you were planning to acquire
17 additional Peruvian Land Bonds?
18 A. We raised [Redacted] in, I believe,
19 [Redacted] and I don't believe that we did because I
20 don't think we anticipated at the time.
21 MR. HAMILTON: Please pause our clock, if you
22 can.
[Page 517]
1 Mr. President, we can discuss this openly if
2 you would like. We would be glad to assist. Thank
3 you. Thank you. Thank you.
4 (Comments off microphone.)
5 PRESIDENT FERNÁNDEZ ARMESTO: What the
6 Secretary is informing me about is that apparently
7 some new confidential information, which is the names
8 probably of some of the clients, was disclosed before
9 we went into confidential mode, and that they are
10 asking that at 12:23, which is four minutes ago, we,
11 at a certain time--
12 MR. HAMILTON: Mr. President--
13 PRESIDENT FERNÁNDEZ ARMESTO: No, no, no.
14 Can I finish, please.
15 MR. HAMILTON: Yes, sir.
16 PRESIDENT FERNÁNDEZ ARMESTO: Mr. Hamilton,
17 please let me finish.
18 That we add a cut in the--or that we put in
19 an addition, that we edit some minutes, from the
20 minute 23 to the minute until the confidentiality
21 starts. And that is how much time, one minute, that
22 we edit one minute from there, because the reason
[Page 518]
1 being that the names of certain clients were
2 disclosed. Is that the reason?
3 MR. FRIEDMAN: Yes.
4 MR. HAMILTON: Mr. President, we strongly
5 disagree, and please allow me to comment. The first
6 reason we disagree is because we don't think that
7 managing the confidentiality of this case is something
8 that should be done on the side by Gramercy
9 representatives talking to the Secretary. We are glad
10 to do it in open discussion.
11 Second of all, the information in the
12 entities that I mentioned are in the record of this
13 case. You can find them as my colleagues just have in
14 press announcements. These are all mentioned in the
15 record of this case, and I cite to, among other
16 things, R-573, R-71, R-1012, R-1014, R-1005, all of
17 these documents, none of which of are designated
18 confidential, all which of are discussed in our
19 Briefs, mention the very specific entities which I
20 carefully raised.
21 There is nothing confidential here. So, the
22 reality is their press releases, it's all in the
[Page 519]
1 record of case. I paused--I paused and did not insist
2 for him to name other investors. So, I just want to
3 caution that just because somebody goes, tells the
4 Secretary this is confidential, and we have to cut it
5 off, that obviously does not make it so.
6 So, we would object to blocking that out, and
7 we are trying to be careful. Note that we have
8 scarcely been calling for confidentiality because
9 we've planned to try to avoid wasting your time and
10 his time with confidential session. That's why I ask
11 questions in a careful manner.
12 MR. FRIEDMAN: I'm not familiar exactly what
13 the documents that Mr. Hamilton just referenced.
14 They--yeah. Those are not Gramercy documents. Those
15 are also, as you know, that the exhibits are not part
16 of the ICSID website. They are not part of the public
17 forum information. And it seems to me quite a
18 different thing if a press reports that in general
19 Gramercy has certain client relationships, that's one
20 thing.
21 The questions that are being put now are more
22 specific. They relate to particular investments, and
[Page 520]
1 when you're asking the CIO and the founder of the
2 Company, who is under confidentiality obligations to
3 his clients, to talk about specific investments or
4 funds that those clients are in, that becomes
5 different.
6 And so, I do think that the same principle
7 that the Tribunal has already upheld about
8 confidentiality with respect to client names, because
9 that's an obligation of Gramercy and has no particular
10 relevance otherwise, is fine. Mr. Hamilton can
11 certainly ask about it, but we're just asking that it
12 be done in confidential session or, if he doesn't go
13 into confidential session first, which is now much
14 easier to do than other days. We don't even have
15 visitors in the room, then that we eliminate it.
16 I don't know why this is a hard rule for
17 anybody to follow. The Tribunal was quite clear about
18 the parameters of confidentiality. I just would
19 request that you continue to abide by it rather than
20 try to get around it because you think that it makes a
21 point.
22 MR. HAMILTON: Mr. President, I'm sorry, but
[Page 521]
1 I can refer you here to Exhibit R-1012, for example.
2 This is minutes available, I believe, on the internet
3 of the [Redacted] stating
4 that they have approved an investment in the [Redacted]
5 [Redacted]
6 Now, if Mr. Friedman wants to draw a line,
7 then I understand, I guess, he doesn't want to
8 acknowledge whether, in addition to [Redacted], they also
9 invested in [Redacted] given that we have been given so
10 little information, I admit that we would appreciate
11 greater transparency, but I am literally referring to
12 documents that are in the record and in our Briefs.
13 So, I'm glad for this to be discussed in some
14 other moment, but I'm not very glad to continue to
15 have the testimony interrupted by this issue.
16 MR. FRIEDMAN: Well, the [Redacted] I do not
17 believe has any investment that is at issue in this
18 case. So, yes, I believe that investors in other
19 funds are not relevant, and, therefore, are the kind
20 of thing that should be within confidentiality. And
21 what does it matter--
22 MR. HAMILTON: Mr. President, he's making up
[Page 522]
1 argument in the middle of my testimony, sir. I'm
2 sorry, but it's appropriate. We've just learned
3 explosively that they hid Land Bond acquisitions from
4 us.
5 PRESIDENT FERNÁNDEZ ARMESTO: Gentlemen.
6 Gentlemen.
7 We have two ways to go. Either we leave the
8 situation like it is and we--in whatever time it is,
9 in an hour, we go live, or we have to go through this
10 whole procedure and it will only--we will have to
11 deliberate and see where we stand and take a Decision.
12 We are losing time.
13 Mr. Hamilton, please, let me finish. I pray.
14 Please, let me finish.
15 So, we will be losing time. I would make
16 the--and if you insist, we will do that, and we will
17 have to deliberate. I cannot take a Decision. We
18 have to look at instructions, we have to deliberate.
19 It will just take some time. The information which
20 has been disclosed was the name of some American
21 pension funds, and they, by themselves, have probably
22 a lot of their own disclosure obligations.
[Page 523]
1 My proposal would be that we are more careful
2 towards the future and we are careful, and everyone is
3 careful when confidential information is likely to
4 occur, and that we just move on in the interest of
5 time. That said, if you feel very, very strongly
6 about this, we will--then we have to break. We have
7 to deliberate, and to have to come back.
8 MR. FRIEDMAN: If I may just have a moment.
9 Because it's the client's confidence--
10 PRESIDENT FERNÁNDEZ ARMESTO: Yes, of course.
11 You take instructions if you need. If you need two
12 minutes' break. That's fine. If you want to go
13 outside and give instructions outside, that's fine.
14 We will just remain seated.
15 (Pause.)
16 MR. FRIEDMAN: Mr. President, thank you.
17 I am pleased to report that, once again, your
18 pragmatic solution, I think, is acceptable and makes
19 great sense. However, I would just want to put down a
20 marker that this needs to stop.
21 So, we are prepared to--without waiving
22 confidentiality over client information, we accept
[Page 524]
1 and--we can accept your practical solution in this
2 instance to not make things very technically
3 complicated, but we really must insist that client
4 names--it is very simple. Just don't use client names
5 anymore because that's where the sensitivity arises.
6 So, if we could have the Tribunal's careful
7 reassurance on that, then I think we are fine to
8 proceed.
9 PRESIDENT FERNÁNDEZ ARMESTO: Yes. Let's ask
10 Mr. Hamilton--thank you, Mr. Friedman.
11 Mr. Hamilton, let's be careful with client
12 names, and can I please also--yeah, you must be
13 careful when using client names because otherwise
14 we'll have this instance all the time, and it makes
15 the examination much more slow.
16 So, let's go on.
17 MR. HAMILTON: I just want to say that the
18 Republic of Perú not only has respected the Order of
19 the Tribunal about confidentiality, my questions have
20 respected the Order of the Tribunal. Any allegation
21 to the contrary is pure interference with our
22 cross-examination, in our view. And I leave it at
[Page 525]
1 that.
2 We will continue to be cautious.
3 PRESIDENT FERNÁNDEZ ARMESTO: Please.
4 BY MR. HAMILTON:
5 Ω. There is one--I would be interested to ask
6 one question, but it relates to you. Are you a client
7 of Gramercy?
8 A. I'm an investor in Gramercy vehicles.
9 Q. You are an investor in Gramercy vehicles.
10 Individually? You are a beneficiary?
11 A. Yes, I am.
12 Q. Okay. Now, and that includes in connection
13 with the Peruvian Bonds.
14 A. I'm an investor in [Redacted]
15 Q. In [Redacted] And are you an investor with
16 beneficial interest in PARB, the entity that holds the
17 Land Bonds before this Tribunal, apparently?
18 A. I have a beneficial interest in PARB and the
19 underlying securities below that. I'm not a--I don't
20 own direct equity in PARB, but I have a beneficial
21 interest through funds above PARB.
22 Q. So, you have a personal interest in the
[Page 526]
1 outcome with respect to the Land Bonds before this
2 Tribunal and a personal interest with respect to the
3 new Land Bonds that were acquired in 2017 and are part
4 of the [Redacted] vehicle; correct?
5 A. In the [Redacted] vehicles, we are--as you see in
6 the documents, we co-invest, so we put a--if the
7 client's put in a dollar, we put in a certain amount
8 with that. So, that's where that interest comes from,
9 aligned with our clients.
10 Q. So, the answer is, yes, you do have a
11 personal interest in the outcome.
12 A. As an investor in [Redacted] I have a personal
13 interest. As a member of GFM, I have an interest,
14 yes.
15 Q. Okay. Now--
16 MR. HAMILTON: Mr. President, for the sake of
17 efficiency, I have to say that--as a procedural
18 observation, that the fact that Gramercy, while this
19 case has been pending, has acquired additional Land
20 Bonds we consider to be relevant and material, both to
21 prior document requests and to the issues before this
22 Tribunal.
[Page 527]
1 Respondent is, frankly, amazed to learn in
2 the middle of the Hearing that there are entire other
3 holdings of Land Bonds that we have never heard about.
4 We reserve the right to consider this,
5 request the opportunity to see relevant materials, and
6 comment. And so we may have future questions about
7 this. We consider it highly relevant and material.
8 I am being put in a complex position because
9 this is entirely new information that we have never
10 heard about before, and I have still yet other
11 questions to go.
12 So, I put down that flag.
13 BY MR. HAMILTON:
14 Q. Now, let me ask you a question.
15 ARBITRATOR DRYMER: Pardon me, are you moving
16 off the 2017 Bonds, or are you still on that subject?
17 MR. HAMILTON: I think I'm basically saying
18 we haven't even gotten started with that subject, and
19 we will have to consider with our client a range of
20 different elements, including that we will expect to
21 see all relevant documents, we will expect to
22 understand all relevant documents--
[Page 528]
1 PRESIDENT FERNÁNDEZ ARMESTO: That's fine.
2 MR. HAMILTON: --so on and so forth.
3 PRESIDENT FERNÁNDEZ ARMESTO: Let's finish
4 with the Witness.
5 ARBITRATOR DRYMER: I think that was a yes
6 for the moment.
7 MR. HAMILTON: Yes.
8 ARBITRATOR DRYMER: All right.
9 MR. HAMILTON: It's a "I'm not sure." I'm
10 working on it.
11 ARBITRATOR DRYMER: I understand. So, then I
12 will the Witness this one question on that subject.
13 You've said, in response to a number of
14 questions from Mr. Hamilton regarding the 2017
15 purchase of the Peruvian Agrarian Bonds--you
16 effectively said "I don't know" or "I don't recall."
17 That's fair.
18 In your view, do you think either Mr. Lanava
19 or Mr. Joannou might have answers to those questions?
20 THE WITNESS: Certainly on the settlement
21 questions that Mr. Hamilton asked, I think that
22 Mr. Lanava will indeed.
[Page 529]
1 ARBITRATOR DRYMER: All right. Thank you.
2 BY MR. HAMILTON:
3 Q. Mr. Koenigsberger, you've explained that you
4 chose not to mention Gramercy's acquisition of
5 additional Land Bonds to this Tribunal because you
6 decided it was not relevant.
7 Did you provide information about these Land
8 Bond acquisitions, to, for example, your Quantum
9 Expert, Mr. Edwards?
10 A. I don't know. I don't believe so.
11 Q. So, your Quantum Expert, Mr. Edwards, is not
12 aware that Gramercy made Land Bond acquisitions in
13 2017?
14 A. I don't know.
15 Q. You also mentioned that the money used to
16 acquire Peruvian Land Bonds in 2017 came from various
17 sources/investors in the [Redacted]; is that
18 correct?
19 PRESIDENT FERNÁNDEZ ARMESTO: That is what he
20 said.
21 MR. HAMILTON: Okay.
22 BY MR. HAMILTON:
[Page 530]
1 Q. Now, when you raise funds, for example, you
2 go to investors, you make pitches--they're in the
3 record. You go to a state pension fund or other
4 potential investor, you make a pitch.
5 Did you specifically discuss with them
6 Peruvian Land Bonds as a target acquisition for the
7 [Redacted]?
8 A. I do not think that we did.
9 Q. So, if you went on a pitch to raise money for
10 the [Redacted] you never told those potential
11 investors "we are going to target Peruvian Land
12 Bonds"?
13 A. We wouldn't have known in 2015 what we were
14 going to target. It's a five-year investment period.
15 So, there would have been no reason to talk about a
16 Peruvian Land Bond purchase to the extent that that
17 wasn't contemplated or known at the time, just like
18 the other 50 investments that we've done.
19 Q. So, in [Redacted] when you raised funds for
20 [Redacted] you did not anticipate an acquisition of
21 additional Land Bonds; is that correct?
22 A. The fund's called [Redacted]
[Page 531]
1 [Redacted]
2 Q. Sorry about that.
3 A. The whole idea is opportunities as they
4 become available. That's what we were talking to
5 clients about.
6 We don't know ex ante what's going to come
7 forward in the next five years, so I don't believe
8 that we--as I said before, I don't believe that we
9 were speaking about Peruvian Land Bonds in [Redacted] with
10 investors in [Redacted]
11 Q. And at the time of the acquisition of
12 Peruvian Land Bonds in 2006 to 2008, was that
13 disclosed as part of raising funds for your existing
14 vehicle at that time?
15 A. That vehicle raised its initial capital in
16 1999. So, 2006 to 2008 purchases, I imagine were not
17 discussed.
18 Q. Were not mentioned.
19 So, effectively, when you were using funds,
20 because you used $33 million--Gramercy used
21 $33 million of funds raised from clients to acquire
22 the Land Bonds. In fact, those clients were never
[Page 532]
1 told "now we're going to use $33 million for the Land
2 Bonds"; is that correct?
3 A. The way that investment management agreements
4 work is you don't go and consult with clients on every
5 individual trade that you do. We certainly reported
6 on all the positions in the Fund to clients over time,
7 but we typically--as part of, again, maybe 30 to 50
8 investments you're running at one time, you don't go
9 and talk to all your clients about those 30 to 50
10 investments because we're given full discretion via
11 the investment management agreement to make those
12 investments on behalf of the Fund.
13 Q. So, just to confirm, you're given full
14 discretion, and you make a broad disclaimer with
15 respect to the outcome; is that correct?
16 A. We are given full discretion. And as I said
17 before, we give the typical disclaimers that go with
18 Fund documents, correct.
19 Q. Okay. Now, you would agree, wouldn't you,
20 Mr. Koenigsberger, that the Peruvian State never went
21 to United States pension funds or American workers and
22 marketed Agrarian Land Bonds to them; is that correct?
[Page 533]
1 A. That's probably correct.
2 Q. Okay. And what you're saying is that, in
3 fact, Gramercy did not disclose, before using
4 $33 million of client funds to acquire Land Bonds in
5 2006 to 2008? That was not disclosed to investors in
6 that Fund, such as state pension funds; is that
7 correct?
8 PRESIDENT FERNÁNDEZ ARMESTO: He has already
9 said that, Mr. Hamilton. He has already confirmed
10 that he has a discretionary authorization from his
11 clients and that he takes the decision--that as an
12 investment manager, he takes the decision, and that at
13 the end of the year or quarterly he informs the
14 clients. I mean, he has said that.
15 MR. HAMILTON: Well, Mr. President, if I
16 might--and I'm responding to your comment in question
17 here--for years the Gramercy propaganda campaign has
18 stated publicly and to the United States Government
19 that Perú is trying to harm American workers. So, I
20 think that these are relevant questions.
21 PRESIDENT FERNÁNDEZ ARMESTO: They're
22 absolutely relevant, but he has already answered.
[Page 534]
1 My only point is that the Tribunal is very
2 alert.
3 MR. HAMILTON: Okay. Good.
4 PRESIDENT FERNÁNDEZ ARMESTO: And once you
5 have made one question, I remember it. Believe me. I
6 remember your question. I remember the answer. And I
7 keep it in my mind. You don't have to do the same
8 question twice.
9 MR. HAMILTON: Okay.
10 PRESIDENT FERNÁNDEZ ARMESTO: That was my
11 only point. If you want, you are welcome. I'm trying
12 to give you more time for further questions. It is
13 just to help you.
14 MR. HAMILTON: Okay.
15 BY MR. HAMILTON:
16 Q. Now, you mentioned that--so, we've clarified
17 that you don't go to these investors in these funds.
18 You have discretion. So, they are not necessarily
19 told that you are using their money to acquire
20 Peruvian Land Bonds. So, that's been established, as
21 the President has confirmed.
22 Now, you also mentioned ongoing reporting to
[Page 535]
1 clients about what's been done with their money;
2 right?
3 So, how is that ongoing reporting carried
4 out?
5 A. It can be update calls that we do with
6 clients, like a quarterly update call or ad hoc update
7 calls. There's typically reports that are sent out,
8 the financial statements that are sent out, some sort
9 of summary of Fund activity.
10 Q. Okay. So after you take a position in
11 connection with a potential target, such as Land
12 Bonds, do you timely disclose that to your investors?
13 A. We disclose the material positions of the
14 Fund when we're required to. It all gets picked up in
15 the financial statements at the end of the year.
16 If you're asking me if our clients are aware
17 of the investments in the funds, they are. There is
18 transparency. There's a fund advisory committee. We
19 go through all the positions in the Fund with the
20 advisory committee.
21 Q. So the investors in [Redacted] are aware now
22 that Gramercy has acquired Land Bonds?
[Page 536]
1 A. Yes.
2 Q. And there are written disclosures that have
3 been made to your clients with respect to those
4 acquisitions of additional Land Bonds?
5 A. I imagine that to be the case, at least in
6 the financial statements.
7 Q. And, historically, did Gramercy make written
8 disclosures or updates to its clients in the initial
9 fund--I think you called it the Emerging Markets
10 Fund--with respect to the status of its holdings in
11 the Land Bonds?
12 A. Yes, I'm sure we did that and other positions
13 in the Fund as well.
14 Q. Okay. And so, Mr. Koenigsberger, let's take
15 a look at a document. Let's go to Tab 51 in your
16 binder.
17 A. Okay. One minute.
18 Q. Tab 51 in your binder, which is document
19 R-1047.
20 This document is confidential. We have to
21 black it out.
22 (End of open session. Attorneys' Eyes Only
[Page 537]
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5 BY MR. HAMILTON
6 Q. Mr. Koenigsberger, can you please turn to
7 Tab 64. Tab 64 is Exhibit R-1124.
8 PRESIDENT FERNÁNDEZ ARMESTO: 1124.
9 MR. HAMILTON: Correct.
10 BY MR. HAMILTON:
11 Q. This document is in the record. It's a
12 publication by the National Legal and Policy Center
13 promoting ethics in public life. Do you see that
14 document?
15 A. Yes, I do.
16 Q. And this document is dated--or posted on the
17 internet September 20, 2013. And this article is
18 titled "State Pension Funds and Big Investment Firms:
19 What Could Possibly Go Wrong?"
20 Has the relationship of Gramercy with state
21 pension funds been controversial in any way?
22 A. No.
[Page 546]
1 Q. Okay. Now, if we go to Page 3 of this
2 document, it refers to a due diligence questionnaire
3 of the New Mexico Educational Requirement Board. And
4 according to this document, a due diligence
5 questionnaire submitted to Gramercy asked whether
6 Gramercy had ever been subject of any regulatory
7 action or warning, and the Gramercy response was
8 "neither Gramercy nor any of its staff has ever been
9 subject to any regulatory action or warning."
10 Is that correct, that Gramercy, nor any of
11 its staff, have never been subject to any regulatory
12 action or warning?
13 A. Yes, it is.
14 Q. That's correct.
15 Okay. Now, you don't consider that Gramercy,
16 either in the U.S. or elsewhere, has been subject to
17 any sort of regulatory action; is that correct?
18 A. I don't believe so.
19 Q. And that includes, for example, with respect
20 to the Brazilian equivalent of the Securities and
21 Exchange Commission; is that correct?
22 A. I believe what that was about was that was an
[Page 547]
1 inquiry. That was an inquiry from the Brazilians as
2 it related to one of the entities we had in Brazil
3 that was collecting on nonperforming loans and
4 returning capital to the U.S.
5 Q. Okay.
6 MR. HAMILTON: Now, let me check the time,
7 Mr. President. It is 1:00 p.m. We've had an
8 intervention of information that changed the path of
9 the testimony.
10 So, the question that I have is, number one,
11 how long do you want to go until we break for lunch
12 under the circumstances, because we will not finish
13 before lunch.
14 PRESIDENT FERNÁNDEZ ARMESTO: We will finish
15 with the Witness before lunch. We must. We must.
16 MR. HAMILTON: Okay. Give me just a moment
17 to reorganize.
18 PRESIDENT FERNÁNDEZ ARMESTO: I normally
19 never have lunch before 3:00, so you have a lot of
20 time.
21 MR. HAMILTON: Okay. Give me 60 seconds to
22 parse, given that we've had a bit of a surprising
[Page 548]
1 detour.
2 (Pause.)
3 BY MR. HAMILTON:
4 Q. Mr. Koenigsberger, you would agree that the
5 Land Bonds that are directly a part of the claim
6 before this Tribunal include approximately 9600-plus
7 Land Bonds that had been presented to this Tribunal;
8 correct?
9 A. Correct.
10 Q. Now, those Land Bonds were initially not
11 provided to this Tribunal; correct?
12 A. I believe copies of the Land Bonds were
13 provided to the Tribunal.
14 Q. Well, are you aware that your initial Request
15 for Arbitration did not include copies of the Land
16 Bonds?
17 A. I'm not aware.
18 Q. Okay. And so at this time, what is before
19 the Tribunal are copies of Land Bonds, but obviously
20 not the original Land Bonds that you have in a secret
21 undisclosed location in Lima; correct?
22 A. Sorry. What's the question?
[Page 549]
1 Q. The Tribunal does not have before it the
2 actual original Land Bonds which are at an undisclosed
3 location in Lima; correct?
4 A. As I mentioned before, transportation of the
5 actual Bonds would be pretty risky and unwarranted, so
6 that's why I thought copies would be sufficient.
7 As the Republic knows, we've offered multiple
8 times to actually--nothing would make us happier than
9 to be able to give the Bonds to Perú and get receipt
10 for it so that we don't have to pay for custody, but
11 the Tribunal has copies as of today.
12 Q. Okay. And, Mr. Koenigsberger, you chose not
13 to provide your Bonds to the Peruvian State as part of
14 the duly established Bondholder procedure; correct?
15 A. We did, because if we were to produce it for
16 verification, we were giving up all of our rights and
17 agreeing to the conditions of that tender.
18 Q. So, you have not tendered them for
19 authentication, but you have provided a document, and
20 it's at Tab 34. And this is a report from Deloitte.
21 It's in the record as CE-224A.
22 Now, this document, sir--if you can turn to
[Page 550]
1 Page 4 of this document. Now, what this document
2 states is that Deloitte confirms that it has
3 photographed the Land Bonds of Gramercy, but Deloitte
4 has not undertaken an authentication process; is that
5 correct?
6 A. I'd have to read the document to look at
7 that.
8 Q. And this document goes on to say on Page 7
9 that in any event, this advisor, Deloitte, does not
10 express any certification attestation or opinion of
11 any kind, other than as explicitly set forth herein.
12 So you did not obtain an expert report
13 authenticating the original Land Bonds in a system
14 that would comport with the methodology utilized under
15 Peruvian law; is that correct?
16 A. We went through the steps that were necessary
17 in order to authenticate and transfer the Bonds back
18 in the '06 to '08 period. If you recall the
19 memorandum, the due diligence memorandum, the very
20 first item on that was authentication.
21 I notice on the back of the Bond that's
22 provided here that one of the things that we learned
[Page 551]
1 is that it had to be duly endorsed to Gramercy Perú
2 Holdings. That's been done here.
3 So, we did everything we were supposed to do
4 to legally transfer title to Gramercy Perú Holdings.
5 Q. Okay. That was your own purchase process.
6 If we go to the very next tab, Tab 35, Exhibit R-649.
7 A. Sorry, which one?
8 Q. Let me ask you one other question. Excuse me
9 one moment.
10 Isn't it the case that your purchase of
11 Peruvian Land Bonds through a purchase contract was
12 intended to establish a valid transfer, and did that
13 include attestation of authenticity?
14 A. I believe that there was authentication,
15 there was review by local counsel, there was the
16 notaries. So, again, all the steps that we were
17 advised by the Experts in Perú on transferability--
18 because, again, transferability is permitted under
19 Peruvian law--that we followed those steps.
20 Q. Okay. Tab 35, sir.
21 Tab 35 is Exhibit R-649. This is an expert
22 graphotechnical report by the National Police of Perú
[Page 552]
1 that is in the record as an example of the
2 authentication process undertaken as part of the
3 Peruvian Bondholder proceeding managed by the Ministry
4 of Economy and Finance.
5 Just to confirm, you have not obtained any
6 type of authentication document like this; is that
7 correct?
8 A. I don't believe so.
9 Q. Okay. Thank you.
10 Now, let's go next to Tab 39. Now, this is
11 Exhibit R-1145 from July 8, 2016, and it refers to
12 Gramercy and emphasizes Gramercy is the lone fund that
13 amassed Peruvian Land Bonds.
14 And you've emphasized that many times. Why
15 do you think Gramercy is the only fund that chose to
16 amass Peruvian Land Bonds, Mr. Koenigsberger?
17 A. Well, I think Gramercy specifically focuses
18 on sovereign distressed, defaulted securities. There
19 were certainly large institutions in Perú that we were
20 aware of, as well, that also amassed large positions.
21 I believe one bank has a position that's nearly the
22 size of ours. So, this is--specifically what we--a
[Page 553]
1 main strategy of our firm was to do sovereign
2 investing.
3 Q. So, I'll put aside whether that bank holds
4 Bonds because it opportunistically or speculatively
5 sought them. I think they are differently positioned
6 from Gramercy, but we won't go there.
7 Now, this article also emphasized Gramercy
8 would not disclose publicly how much it paid for each
9 Bond.
10 Why did Gramercy withhold the information for
11 so long about how much it paid for the Bonds?
12 A. That we wouldn't tell a reporter what we paid
13 for the Bonds? That's confidential information. Most
14 reporters wouldn't even ask it.
15 Q. Well, you also withheld the purchase
16 contracts from this Tribunal. You mentioned purchase
17 contracts in your Witness Statements but did not
18 produce them until late into this proceeding.
19 Why did you choose not to provide the
20 purchase contracts to this Tribunal?
21 A. I believe that we provided everything that
22 the Tribunal has asked us to provide.
[Page 554]
1 MR. FRIEDMAN: And we've provided all the
2 purchase contracts. They're in the record.
3 PRESIDENT FERNÁNDEZ ARMESTO: Yeah. I mean,
4 in any case, this is--
5 MR. FRIEDMAN: And they were provided to Perú
6 in 2011.
7 MR. HAMILTON: You're far out of line right
8 now. I'm sorry.
9 PRESIDENT FERNÁNDEZ ARMESTO: Okay. Let's go
10 on. I don't think he is responsible for the document
11 production. It is a question for Counsel.
12 MR. HAMILTON: The reason, sir, that I
13 consider it relevant, if I might, is that
14 Mr. Koenigsberger has provided five Witness
15 Statements, including his first three Witness
16 Statements, which are evolving documents with changes.
17 He has emphasized his personal investment.
18 He has emphasized his personal responsibility. And
19 those statements are the ones that did not disclose
20 the purchase contracts but explained that they
21 purchased the Bonds, as well as the other issues we've
22 been discussing. That's why I consider it relevant to
[Page 555]
1 ask this Witness, because he is the Witness through
2 which Gramercy introduced or did not introduce these
3 various documents.
4 BY MR. HAMILTON:
5 Q. Now, Tab 40, if I might, Mr. Koenigsberger.
6 Tab 40 is a document. It's an email from José
7 Cerritelli.
8 PRESIDENT FERNÁNDEZ ARMESTO: We need
9 reference.
10 MR. HAMILTON: Oh, yes. CE-731.
11 PRESIDENT FERNÁNDEZ ARMESTO: Thank you.
12 BY MR. HAMILTON:
13 Q. All right. This is an internal Gramercy
14 email from May 23, 2008. And what you see in this
15 email is it includes an email within the chain copied
16 to you.
17 Do you see that on the first page there, sir?
18 A. Yeah, in the lower part, yes, I do.
19 Q. Okay. And it says--José Cerritelli says, "I
20 prepared this for your call today at 10:00 a.m. with
21 Hermès."
22 Do you see that?
[Page 556]
1 A. Yes. This is Hermès, a fund of fund, I
2 believe, a French fund of fund that has nothing to do
3 with the Germany export credit agency that we talked
4 about before.
5 Q. That's okay. But can you tell me who was
6 Hermès? You're saying it's a French fund.
7 A. It was a French fund. I believe it was a
8 French--Paris-based fund that was a fund of fund that
9 had invested in the Gramercy Emerging Markets Fund.
10 Q. Okay. And so--
11 (Comments off microphone.)
12 PRESIDENT FERNÁNDEZ ARMESTO: The fund also
13 produces some very nice clothes, which Professor Stern
14 is one of the best clients of, of the shop they have
15 in Avenue Montaigne.
16 BY MR. HAMILTON:
17 Q. So, Mr. Koenigsberger, this would have been
18 an update to a client of Gramercy in the Emerging
19 Markets Fund with respect to the status of the
20 Agrarian Bonds; is that correct? Mr. Koenigsberger?
21 A. I'm reading what it is, so just give me one
22 moment.
[Page 557]
1 Q. Ah, okay.
2 A. Okay. I'm sorry. What's the question--
3 Q. These were notes to be used for an update to
4 a client of the Gramercy Emerging Market Fund
5 regarding the status of the Agrarian Land Bonds
6 situation; is that right?
7 A. That's correct.
8 Q. So, at this time, Gramercy was continuing to
9 acquire Peruvian Land Bonds--correct?--because you
10 were continuing to acquire them into the middle of
11 2008; is that correct?
12 A. Yeah, I think we were substantially complete
13 at this point.
14 Q. Okay.
15 Okay. Now, under Item 10, this is Page 4 of
16 the document--Item 10, sourcing cost and pass-through
17 certificate prices.
18 A. Okay.
19 Q. And it says small blocks can often be found
20 at relatively low prices in the range of 20 percent of
21 the claims' current face value, particularly on those
22 blocks that require fairly large amounts of legal work
[Page 558]
1 to bring the documentation supporting these claims up
2 to date; is that correct?
3 A. That's what it says, yes.
4 Q. Okay. So, this would have been an example of
5 updating a client of Gramercy about the status of
6 acquiring these claims; is that correct?
7 A. Correct.
8 Q. Okay. And as you see under Item 12, steps
9 towards the restructuring, of course, this is the
10 restructuring that Gramercy hoped would occur but had
11 not yet occurred at that time; is that correct?
12 A. I'm sorry. What's the question?
13 Q. This refers steps towards the restructuring
14 but obviously there was no clarity as that time as to
15 whether there would be a restructuring as of May 2008;
16 is that correct?
17 A. There was no clarity, but shortly after we
18 actually did present a restructuring proposal to the
19 Government.
20 Q. And that never went forward; is that correct?
21 A. That's correct.
22 Q. Okay. So, as of May 2008, while you were in
[Page 559]
the process of acquiring the Bonds, that was your contemporaneous update to a client.
MR. HAMILTON: Now, the President of the Tribunal asked a question about the certain documents, and I will take a moment for a confidential question here, if I might. I'll wait for the magic red light to come on.
(End of open session. Attorneys' Eyes Only information follows.)
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(End of Attorneys' Eyes Only session.)
[Page 573]
OPEN SESSION
BY MR. HAMILTON:
Q. Now, Mr. Koenigsberger, we were in discussion about anticipating the 2013 court ruling, and you indicated that your optimism increased because of what you have thought that ruling was going to be.
Now, who is Carlos Anderson?
A. Carlos Anderson is a Peruvian individual.
Q. And what is his relationship with Gramercy now and in the past?
A. I don't believe that Carlos has any relationship with us today. In the past, he has worked with us on various projects, one being a Private Equity Fund that we were considering, some private lending funds that we've done, and he has also advised us on Land Bonds.
Q. And he was at least for a period of time an employee of Gramercy; correct?
A. Yeah. For a short period of time, we were trying to launch a private equity fund for Latin America, and I believe in that period of time he was an employee.
[Page 574]
Q. Okay. And he continues to be involved with Land Bond issues on the ground in Perú; is that correct?
A. I don't know.
Q. You don't know.
And who is Mario Seoane?
A. Mario Seoane, I believe, was counsel to the engineers. He was a lawyer for us, and I understand one of the most, I guess, seasoned and utmost Experts on Land Bonds in Perú.
Q. Okay. So, Mario Seoane, is he currently Gramercy's lawyer?
A. I don't know for certain.
Q. In the past, he has been Gramercy's lawyer?
A. Yes, he has.
Q. For an extended period of time?
A. Yes.
Q. Okay. Now, I want to take your attention to the 16 July 2016 court ruling. Well, I'm not going to go straight to the ruling itself. I have a broader question.
PRESIDENT FERNÁNDEZ ARMESTO: Okay.
[Page 575]
BY MR. HAMILTON:
Q. Now, Mr. Koenigsberger, you're aware that when Gramercy first filed its case, it indicated to the Peruvian State that it had to file by a certain deadline due to prescription or statute of limitation-type issues related to the July 16, 2013, court ruling.
Were you aware of that at the time?
A. Was I aware of the court ruling? Yes.
Q. Yes. Okay.
No. Are you aware that when you filed this Treaty claim before the Tribunal, Gramercy represented to the Peruvian State that it needed to file in advance of the three-year anniversary the July 16 court ruling?
Were you aware of that?
A. I'm not aware of that.
Q. You didn't know that.
A. I don't know that.
Q. Now, Mr. Koenigsberger, in your--you've put in, of course, multiple versions of your initial Witness Statement. You initially emphasized the dire
[Page 576]
consequences of the July 16 court ruling, but in later Witness Statements, you said you really weren't sure whether the court ruling was bad or good; is that correct?
A. We had no idea what to make of the July 2013 ruling. There was more unknowns than knowns.
Q. Okay. So, let me take you to Tab 72. Tab 72 indicates Gramercy's statements to Perú and to its forthcoming Tribunal contemporaneously in 2016 regarding the July 2000--the July 16, 2013, ruling.
(Comments off microphone.)
MR. HAMILTON: It's not an R document. It's their actual pleadings. So, let's go to Claimants' Notice of Arbitration and Statement of Claim dated June 2, 2016. Paragraph--we are going to put it on the screen, Paragraph 233.
PRESIDENT FERNÁNDEZ ARMESTO: Why don't you go on with the question, whatever it is.
BY MR. HAMILTON:
Q. Yes. So, Gramercy stated in its Notice of Arbitration and Statement of Claim that Gramercy first acquired constructive or actual knowledge of Perú's
[Page 577]
breaches on or after July 16, 2013.
Do you remember that?
A. Do I remember making this statement?
Q. Well, that's what Gramercy said to the world.
PRESIDENT FERNÁNDEZ ARMESTO: But the question is what--he's here as a witness.
MR. HAMILTON: Yes.
PRESIDENT FERNÁNDEZ ARMESTO: And what is the question to the Witness? I mean, he's here to explain to us the facts.
MR. HAMILTON: That's right.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. So, and that is a statement which was in the submissions of counsel to Gramercy. What is the question to the Witness?
BY MR. HAMILTON:
Q. I'll go to the heart of it.
Mr. Koenigsberger, are you aware that Gramercy changed its position regarding the 2013--July 16, 2013, Court Order before this Tribunal? It first said that that was the date on which it had acquired constructive or actual knowledge of breaches.
[Page 578]
It later said, no, it wasn't until later.
Were you aware that Gramercy made that switch during this case?
MR. FRIEDMAN: I object. He's really a witness of fact. Also, it says on or after. At the time that pleading was filed, as you know, that that was to say so, no matter what, we are in compliance.
MR. HAMILTON: I'm sorry. I'm sorry.
(Overlapping speakers.)
MR. FRIEDMAN: When it was later filed, we clarified when the date became irrelevant.
PRESIDENT FERNÁNDEZ ARMESTO: Please.
Mr. Hamilton, we are all old hands, and we know why you are making that question, and it is not really--not a question which their Witness can answer.
MR. HAMILTON: Well, this is the-
PRESIDENT FERNÁNDEZ ARMESTO: Let me finish, please. Mr. Hamilton.
MR. HAMILTON: Yes, sir.
PRESIDENT FERNÁNDEZ ARMESTO: It's "el mundo del revés." We know why you are making the question and he can--the Tribunal was perfectly aware of the
[Page 579]
fact. I mean, it has been--you brought it up in your initial presentation. It has been discussed. We know exactly what has happened. He cannot help us. And we are aware of the fact.
MR. HAMILTON: Thank you. I do have a specific question, Mr. President. And the reason that I raise this question is because his testimony actually changed over the course of his Witness Statement.
So, let's go to Tab 75, Mr. Koenigsberger.
PRESIDENT FERNÁNDEZ ARMESTO: Very good.
BY MR. HAMILTON:
Q. Tab 75 is Exhibit CE-546. This is an email from José Cerritelli to you, Robert Koenigsberger.
Do you see that document?
A. I do. It seems as if he has forwarded me a document that he'd sent to others.
Q. Well, it says "Bob:" You're Bob; right?
A. No. See, it says "to Bob Joannou."
Q. Oh, to Bob Joannou. I see. He's sending you a message that was otherwise sent to Bob Joannou.
A. That's what appears to be the case.
[Page 580]
Q. Did they call you Robert in the Company?
A. R.K., Robert. I'm definitely not a Bob. We have a lot of Bobs, Roberts.
Q. Okay. Fair enough.
A. You'll meet a couple of them today.
Q. Okay. So, I have a question regarding the penultimate paragraph of this email that was forwarded to you. It said: "We are discussing the above issues with the President of the Tribunal, Oscar Urviola."
Do you see that?
PRESIDENT FERNÁNDEZ ARMESTO: At the end of the email?
MR. HAMILTON: Well, at the end of the email, Mr. President, there's an extra email.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah. Yeah.
MR. HAMILTON: So, this is on Page 2--Page 2 in the middle of the page. It says: "However."
PRESIDENT FERNÁNDEZ ARMESTO: Yeah.
BY MR. HAMILTON:
Q. It says here, "José advises, we are discussing the above issues with the President of the Tribunal, Oscar Urviola." Do you see that?
[Page 581]
A. I do.
Q. So, where is Gramercy or Gramercy representatives engaged in discussions with Peruvian judges during the course of ongoing litigation that led to or followed the July 16, 2013 ruling?
A. I don't believe that Gramercy individuals were directly speaking to members of the Court. You had mentioned Mario Seoane before, who was our counsel and counsel to other Bondholders. In fact, he was counsel to the Party in the case which was the engineers.
Q. So he, in fact, simultaneously was counsel to those Parties and counsel to Gramercy; is that right?
A. I believe that to be the case.
Q. Okay. So, now do you believe that in Perú it is unusual for Parties to meet with judges?
A. I believe it's a bit different than the United States, that there's some ex parte that--communications that go on. I'm not sure exactly what that means, but I think it is different than here.
Q. Okay. And given that this email says "we are
[Page 582]
discussing issues with the President of the Tribunal, Oscar Urviola," do you agree that Gramercy or Gramercy representatives engaged with discussions with Peruvian judges on the Tribunal, Constitutional Tribunal?
A. I think when he says "we," I think he means Bondholders, in general. Again, we were coalesced with Bondholders, and, you know, I think counsel for the Bondholders could very well have been doing it on behalf--again, Mario was part of the case.
Q. So, he was your lawyer at the same time.
A. I don't believe--
Q. And you were part--
A. I believe that Mario represented many Bondholders in Perú, in fact, I believe that Mario wrote a book on the secret--the secret Bonds of Perú. He is the Expert in Perú on this for 30, 40 years.
Q. Okay. I'm going to distribute a document. It's not in the binder, but just for your reference, this is a document, R-467. Constitutional Tribunal visitor registry. Thank you.
PRESIDENT FERNÁNDEZ ARMESTO: What is this?
MR. HAMILTON: Constitutional Tribunal
[Page 583]
visitor registry from 2013. It is in the file as Exhibit R-467.
MR. FRIEDMAN: Object.
PRESIDENT FERNÁNDEZ ARMESTO: Sorry?
MR. FRIEDMAN: I just object. I mean, this goes--we have a--supposed to limit the scope of cross to issues that the Witness has testified about.
PRESIDENT FERNÁNDEZ ARMESTO: What do you want to ask the Witness? I mean, I would be surprised--
(Overlapping speakers.)
BY MR. HAMILTON:
MR. HAMILTON: Mr. Koenigsberger, were you aware--
PRESIDENT FERNÁNDEZ ARMESTO: Can I finish?
MR. HAMILTON: Yes. Oh, sorry.
PRESIDENT FERNÁNDEZ ARMESTO: I would be surprised if he has ever had access.
Have you ever been to the Constitutional Court of Perú?
THE WITNESS: I have not. I have not.
PRESIDENT FERNÁNDEZ ARMESTO: He has never
[Page 584]
been there.
Have you ever seen the record of visitors to the Constitutional Court of--
THE WITNESS: No, I have not.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. If you are going to prove or want to make an allegation that some lawyer for Claimant visited the Constitutional Court or someone visited the Constitutional Court, Mr. Koenigsberger is not--is not the person who can confirm that.
MR. HAMILTON: He's the closest we have to someone on Gramercy that we could ask, so I will simply ask.
PRESIDENT FERNÁNDEZ ARMESTO: Ask him.
BY MR. HAMILTON:
Q. Were you aware that Mr. Seoane, who was Gramercy's lawyer, made multiple visits to the Constitutional Tribunal in 2013?
MR. FRIEDMAN: Objection.
PRESIDENT FERNÁNDEZ ARMESTO: No. That's the proper question.
MR. FRIEDMAN: The characterization that he
[Page 585]
was Gramercy's lawyer. Mr. Koenigsberger has testified that he was lawyer to the Bondholders in the case.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. Okay. Let's--why don't you repeat the question, just with the name, without saying exactly who he is. And let's get--if he knows. Let's start asking him whether he knows him.
MR. HAMILTON: Yes.
BY MR. HAMILTON:
Q. Do you know Mario Seoane?
A. I think I may have met him one time.
Q. Okay. Were you aware that Mr. Seoane visited the Constitutional Tribunal multiple times during 2013?
A. I can't say that, specifically. I'm looking at the document here. I can see--
PRESIDENT FERNÁNDEZ ARMESTO: No, no, no. It's just--either you know or you don't.
THE WITNESS: I wasn't aware.
PRESIDENT FERNÁNDEZ ARMESTO: You were not aware. He never told you that he was visiting the
[Page 586]
Supreme Court, the Constitutional Court.
THE WITNESS: Again, the information that I would get would be typically through José and David and others that were on the ground. This is one of--again, remember, this is one of 30 to 50 investments that we were managing. So, I'm not in the weeds on every detail.
BY MR. HAMILTON:
Q. Now, Mr. Koenigsberger, let me ask a question.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah. Of course.
ARBITRATOR DRYMER: Mr. Hamilton, are you moving off this topic of--
MR. HAMILTON: Yes.
ARBITRATOR DRYMER: All right. Before you do, this is a question for you, not the Witness. So, that I understand, are you--is the suggestion that these visits took place before--may have taken place before or after the issuance of the July 2013--
MR. HAMILTON: Both.
ARBITRATOR DRYMER: Both. Order. All right.
[Page 587]
Thank you.
BY MR. HAMILTON:
Q. Mr. Koenigsberger, is it your view that the Peruvian legal framework, as it stands today, provides a sufficient framework for satisfactory resolution related to the Peruvian Land Bonds?
A. Sorry, could you repeat that?
Q. Is it your view that the existing Peruvian legal framework, under the Supreme Decrees, the last one--the Supreme Decrees related to the Peruvian Bondholder Process is a feasible framework for resolving the Land Bonds?
A. I think it's premature. As the Court ruled in April of 2014, when ABDA went to appeal the July 2013. The Court said that it was premature, that Bondholders couldn't be prejudiced, and that the Court itself in April 2014 said we have to wait for the calculations. And my read of that is that Bondholders are asked at the appropriate time when they know what is being offered by the Ministry, the opportunity to go back to the Tribunal, but the Tribunal made it very clear to me that the last word hasn't been said.
[Page 588]
Q. And is it your view that after the Supreme Decree of August 2017--you're familiar with the Supreme Decree of August 2017; correct?
A. Sorry, the--I thought you meant from the Court. The Supreme--
Q. No. I'm moving forward in the interest of time.
A. Sorry.
Q. The Supreme Decree of August 2017 with the "texto único actualizado," is it your position that that was a sufficient legal framework for resolution of the Peruvian Land Bonds?
A. It's not. I believe that all the Supreme Decrees that follow the July 2013 are just part of the same scam coverup, what have you, and, again, I'll go back to the April 2014. I think the Tribunal made it very clear that we have to wait and see what the Government provides. I mean, look how many times the Government has issued Supreme Decrees.
If Supreme Decrees were supreme, then the January of '14 would have stood on its own. But we were right. The final word wasn't known. I think
[Page 589]
there has been at least five or six Supreme Decrees since, so I don't believe--I don't agree.
Q. Well, let's take a look at your Third Statement, which is your Second Amended Statement, at Paragraph 60. And we will put that up on the screen, please. Do you have it? Paragraph 60, please.
Now, Mr. Koenigsberger, you wrote in your Witness Declaration in April that, as of April 2014, "there was nothing that prevented the development of a fair and efficient administrative process, one which could resolve the Land Reform Bond situation amicably and in a way that pays the Bondholders substantially what they are due while enhancing Perú's standing in the international community." You are quoting your own letter, actually. Next page.
A. I see it.
Q. Next page, guys.
Okay. "There is nothing that prevents." Do you see that? Thank you.
So, that was your contemporaneous statement to the Ministry of Economy and Finance about the state of affairs at that time. In other words, what I'm
[Page 590]
asking you is, do you still agree with that? That the legal framework, as it stands right now, is a sufficient basis upon which, in your view, a resolution of the Land Bonds could be achieved?
A. Yeah. I think in one of three ways. One, I think that the Ministry could offer another Decree and figure out how to come up with something that looks like current value under CPI with--there is an infinite number of ways to do that. They picked a finite number so far.
I mentioned the--we talk about a legal framework, I still think there's a legal framework that the TC said, you know, we have to wait and see what's being offered here, so I think that is still open. And, of course, the local courts, you know, what rights do we have under the local courts that we had back in 2006 to 2008 when we bought the Bonds.
Q. Your view is that in the existing regime following August 2017 Supreme Decree, there is sufficient room to resolve the Land Bonds in a reasonable manner; is that right?
A. Look, I think if there is goodwill on the
[Page 591]
part of the Republic of Perú, there is definitely a way to resolve the differences.
Q. Now, one other element, just to confirm my understanding, you also agree and you undertook yourself a verification process, so there's no dispute that a reasonable authentication process would be necessary in relation to old physical Bonds. You, of course, prefer such process to go as quickly as possible, but you agree that some kind of authentication process is necessary; correct?
A. Well, I'm glad you use the word "reasonable," because a reasonable authentication process would be you can submit your Bonds for authentication, and then you can take them out of that authentication process. What we were told when we were invited to authenticate our Bonds is tender your Bonds and give up all your rights relative to those Bonds. So, I wouldn't call that a reasonable authentication process.
Q. You're aware that Perú has authenticated more Bonds than the number of Bonds Gramercy holds; correct?
A. I'm aware of the fact they have authenticated
[Page 592]
Bonds. I'm not sure of the exact number.
Q. And you also agree that receiving contemporary sovereign Bonds is one form of payment that is acceptable to Gramercy; correct? We talked about that earlier.
PRESIDENT FERNÁNDEZ ARMESTO: We talked about it. You specifically asked, and I made a note that he said yes.
MR. HAMILTON: Okay.
MR. FRIEDMAN: Mr. President--
MR. HAMILTON: So--
PRESIDENT FERNÁNDEZ ARMESTO: We will have to break. I know.
MR. FRIEDMAN: Yeah, I think it is getting to be a little unfair.
PRESIDENT FERNÁNDEZ ARMESTO: I know. I know. I know. We will--at 2:00, we will break.
BY MR. HAMILTON:
Q. Okay. So, Mr. Koenigsberger, basically what that leaves is a number. In other words, if the legal framework after the last Decree could be a sufficient basis for a Resolution and there can be a need for a
[Page 593]
reasonable authentication process, and payment with Peruvian Bonds, contemporary Bonds would be sufficient, that basically leaves us with a valuation issue.
That's what I think Gramercy has been after all along here, and you're alert that Gramercy has taken a position in this case that it could obtain approximately almost $34 million through the Peruvian Bondholder procedure if it had participated.
Are you aware of that number?
A. The number has moved around quite a bit over time, but I'm aware of that number.
Q. Okay. And so, do you consider $34 million a reasonable recovery for Bonds that you initially acquired for $33 million?
A. I do not.
Q. Okay. Now, you have requested from this Tribunal an amount that exceeds 5,500 percent more than the amount that was paid for those Bonds through purchase Contracts. What in your view would be a reasonable number?
A. I think a reasonable number is to determine
[Page 594]
what the current value of the Bonds is as of the current date. Again, we're talking about--it is equivalent not paying your credit card for four years, so, of course, the numbers are large, I understand that, but there is a process that Gramercy went under for a very long period of time to try and get a consensual outcome where we were more than happy to give up some of our full legal rights, that's what happens in a restructuring, some sort of quid pro quo.
But now that we are, unfortunately, here, this is a notion of what are we entitled to. And, unfortunately, we are here talking about what we are entitled to instead of what we could have achieved in good faith, and, you know, I feel good about the fact for the better part of 14 years, that's all we have done, is try to resolve this in good faith. I wish I could say that for Perú.
Q. Well, Mr. Koenigsberger, in other words, you once told me Gramercy has a number.
What is your number?
PRESIDENT FERNÁNDEZ ARMESTO: I mean, we are getting very close to some sort of settlement
[Page 595]
discussions. Is that--I'm slightly worried about where we are going to.
MR. HAMILTON: Have no fear, sir. We are going to lunch very soon.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. Hopefully.
(Comments off microphone.)
PRESIDENT FERNÁNDEZ ARMESTO: You say whatever you want.
MR. FRIEDMAN: Yes, and I will object.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah, it is slightly--it is not a factual question. It is really a discussion of a settlement, what is--if you ask him what is a reasonable number to you, which I think was the question, no? The question was--what is your number?
BY MR. HAMILTON:
Q. Well, the question of what is your number derives from a discussion that was held at a meeting that was unfortunately not a without prejudice meeting in September of 2017, where we reviewed the exact same issues that I just reviewed with Mr. Koenigsberger
[Page 596]
now. That was the basis. It's your choice. What's your number? If you say you're unable to answer here, I'll respect that.
A. I'm happy to discuss a number in regards to--
PRESIDENT FERNÁNDEZ ARMESTO: I have some--I would rather prefer that you do not answer, because--I think it is not proper for you to answer that at this stage. You have made a claim. We will look at your claim, and we will look at your defenses, and we encourage you, like always, and the Republic, of course, to find a settlement. Nothing would make this Tribunal more content than that there is a settlement, but I don't think that we should be aware of a number given by you.
MR. HAMILTON: Just to confirm, there is no settlement discussion happening here. Perú is bound by the applicable legal framework, and that binds its conduct.
PRESIDENT FERNÁNDEZ ARMESTO: I'm sure.
MR. HAMILTON: That has always bound its conduct, and that binds any discussions. So, any discussions with Bondholders of any type are bound by
[Page 597]
applicable law and not written on a napkin.
PRESIDENT FERNÁNDEZ ARMESTO: Of course.
MR. HAMILTON: So, that is the reality.
PRESIDENT FERNÁNDEZ ARMESTO: Very good. It is now 2:00, and I said that at 2:00 we would have to break.
Do you have many more questions, Mr. Hamilton?
MR. HAMILTON: Not many more. I will try to conclude immediately after the break, but I will get organized because the process was a little different than anticipated for various reasons.
PRESIDENT FERNÁNDEZ ARMESTO: Very good.
MR. HAMILTON: Thank you.
PRESIDENT FERNÁNDEZ ARMESTO: Do you have a lot of redirect?
MR. FRIEDMAN: Yes. I have some redirect. It was a long cross-examination, so I do have some redirect.
PRESIDENT FERNÁNDEZ ARMESTO: Very good.
We are off the record.
(Comments off microphone.)
[Page 598]
PRESIDENT FERNÁNDEZ ARMESTO: We will be back at punctually at 3:00 p.m.
(Whereupon, at 2:01 p.m., the Hearing was adjourned until 3:00 p.m., the same day.)
[Page 599]
AFTERNOON SESSION
PRESIDENT FERNÁNDEZ ARMESTO: We resume the Hearing and we continue with the examination of Mr. Koenigsberger.
Mr. Hamilton, do you have any other questions for the Witness?
MR. HAMILTON: Yes, sir.
PRESIDENT FERNÁNDEZ ARMESTO: Very good. Let us--before you put that question, let us try to organize the afternoon.
It is now 3:00. We should not go on further than 6:30, 7:00 at the utmost. 6:30 should be our limit. Afterwards we start--you know, the theory of the potato sacks, that three arbitrators become three potato sacks sitting here and appearing to be listening. But there is--well, except for Professor Stern, who is, of course, not. She is an Hermes potato sack.
No, but there is an element you cannot absorb any more information, and it becomes meaningless. So, 6:30, 7:00, a little bit more, but not much more than 6:30 is what is feasible, because we had originally
[Page 600]
scheduled until 6:00. So, half an hour additional time, but we don't have more time than that.
So, yeah, let's try to be efficient in the use of time.
Very good, Mr. Hamilton.
MR. HAMILTON: Thank you, Mr. President, Members of the Tribunal, my counterparts as well.
BY MR. HAMILTON:
Q. Mr. Koenigsberger, I have some additional questions for you. And thank you again for your patience and participation with this process.
A. Sure thing.
Q. Gramercy has a group of Land Bonds that are--form the basis for its Claim before this Tribunal correct? These are the 9500, 9600 Land Bonds that are the subject of this Treaty claim; correct? That's one group. We will call it Tranche 1.
A. That's correct.
Q. Okay. And then as you mentioned earlier today, Gramercy has other Land Bonds that it acquired in early 2017; is that correct?
[Page 601]
MR. FRIEDMAN: Objection. That isn't quite what he testified.
PRESIDENT FERNÁNDEZ ARMESTO: Do you have other Land Bonds? Let's make a general question. You do have another tranche of Land Bonds, and let's call them Tranche 2 of Land Bonds. Okay.
Mr. Hamilton, we now have Tranche 1 and Tranche 2. What is the question for the Witness?
MR. HAMILTON: Well, Tranche 2, Mr. Koenigsberger testified they acquired in early 2017.
PRESIDENT FERNÁNDEZ ARMESTO: Yes.
MR. HAMILTON: That was my question.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah.
MR. HAMILTON: I mean, that's what we were discussing.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah. I think he said--I seem to remember it was in the first quarter of 2017, and he also said "I don't know exactly how much they are valued, but it's approximately 50 million U.S. Dollars."
MR. HAMILTON: Thank you. He has done our
[Page 602]
work for us.
PRESIDENT FERNÁNDEZ ARMESTO: Any other question?
MR. HAMILTON: Well, that's my question.
BY MR. HAMILTON
Q. Are there any other Land Bonds? There is Tranche 1. There is Tranche 2. Are there any other Land Bonds that we have not had the opportunity to discuss yet that Gramercy or its affiliates control or own or have purchased?
A. No.
Q. So there is only Tranche 1 that is the basis for the Claims before this Tribunal, and Tranche 2 that was acquired around early 2017; correct?
A. Sometime in 2017, correct.
Q. Sometime in 2017.
Now, are the Land Bonds that Gramercy acquired in 2017 submitted to the local Bondholder proceeding?
A. No, they are not. I do not believe so.
Q. They are not submitted to the local Bondholder proceeding.
[Page 603]
A. I do not believe so.
Q. And they are not part of this Treaty proceeding, we've confirmed.
PRESIDENT FERNÁNDEZ ARMESTO: Yes. They are not part of this Treaty proceeding.
BY MR. HAMILTON:
Q. So, are they part of any court proceeding?
A. I can't tell you for certainty whether they came with court proceedings already in place or not. I don't recall.
Q. We're in a strange situation because half the room knows the truth and the other half of the room has just learned about this for the first time today. This Tranche 2, Mr. Koenigsberger, they are not in the local Bondholder proceeding, they are not in Treaty proceeding. Are they in local court proceedings?
PRESIDENT FERNÁNDEZ ARMESTO: The answer is he does not know whether they came or not with a local court proceeding. I mean, the Witness has answered. Mr. Hamilton, you may like or not his answers, but it is his answer.
[Page 604]
BY MR. HAMILTON:
Q. You don't know whether they are in the local court proceeding?
A. I do not know.
Q. Then what do you intend to do with these other Land Bonds? If they are not in this Treaty proceeding, they are not in the local Bondholder proceeding, what do you intend to do with these Bonds?
A. As I said before, I believe when the Tribunal ruled on the appeal in 2015, they said that the last word wasn't out, that they were still waiting for--that it was premature and that there was enough calculations that still had to be done, and that Bondholders can be prejudiced by what the Supreme Decrees might do, so we'll wait and see what plays out in that situation.
Q. So, Gramercy spent--you mentioned a figure of $50 million with no plan of what it might do with these Bonds.
A. We'd like to be able to--what we've tried to do with all our Bonds, which is to be able to sit down with the Republic of Perú and have a consensual
[Page 605]
resolution.
Q. And you don't know how many Bonds are part of Tranche 2?
A. I don't know how many Bonds are part of Tranche 2.
Q. So, the bottom line is you bought Bonds, and you don't know what you're going to do with them; is that correct?
A. At this moment, there is--I don't know with certainty what we are going to do with those Bonds.
Q. Do you have the intention of bringing other Treaty-based claims, for example?
MR. FRIEDMAN: Objection.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah.
BY MR. HAMILTON:
Q. Now, Mr. Koenigsberger, you mentioned that the Tranche 2 Bonds were purchased in 2017. I'm going to show you one document here. This will be Exhibit R-173.
PRESIDENT FERNÁNDEZ ARMESTO: 173.
MR. HAMILTON: Correct.
PRESIDENT FERNÁNDEZ ARMESTO: Very good.
[Page 606]
BY MR. HAMILTON:
Q. Mr. Koenigsberger, R-173 is a press statement issued, as usual, through PR News Wire on April 24, 2017, by the Peruvian American Bondholders for Justice, which, as we have established, was established in 2015.
And this document says: "Mobile billboards in Washington, D.C. haunt Perú over Agrarian Land Bond default," and you see a picture here of a billboard in front of the United States Congress, and this document says: "Perú defaults. Rating agencies ignore it. American workers pay the bill."
Do you see that picture?
A. Yes. I was trying to find the previous--sorry, it's in the title.
Q. Yeah. You see the picture; right?
A. I see the picture.
Q. Okay. This was April of 2017. So, at or around the time of this billboard, Gramercy was purchasing additional Land Bonds; is that correct?
A. Somewhere in that time period.
Q. Okay. Okay. So, just to confirm, that time
[Page 607]
period when Gramercy was acquiring--Tranche 2, the additional Land Bonds, that was after the 2013 and subsequent Court rulings and after certain Supreme Decrees; correct?
A. It was after the Court ruling of 2013 and after which Decrees?
Q. Well, you're not giving a precise date when you acquired these Bonds.
A. So after some Supreme Decrees. I believe there were Supreme Decrees after.
Q. Okay. So after the Court rulings, after Supreme Decrees, Gramercy bought more Land Bonds; correct?
A. Gramercy bought what we're now calling Tranche 2 somewhere in 2017.
Q. Did Gramercy buy Tranche 2 Bonds after February 28, 2017?
A. I don't recall the date. Again, I testified that it was sometime in early 2017. I don't recall the date.
Q. Okay.
MR. HAMILTON: Mr. President, the Republic of
[Page 608]
Perú has no further questions at this time. We do, however, have a procedural observation, which we can save for the end of the testimony. Thank you.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you. Thank you, Mr. Hamilton.
And we now give the floor to Mr. Friedman.
MR. FRIEDMAN: Thank you very much.
REDIRECT EXAMINATION
BY MR. FRIEDMAN:
Q. Good afternoon, Mr. Koenigsberger.
A. Good afternoon.
Q. I want to take your mind back to the origins of Gramercy's investment into the Land Bonds that are at issue in this Arbitration.
A. Okay.
Q. I want you to cast your mind back to what we talked about, questions that you were asked this morning by Mr. Hamilton. Okay?
A. Yes.
Q. Now, you remember that you were asked some questions about what was on your mind and how--you told me during our direct examination that you took
[Page 609]
both a top-down and bottom-up approach to underwriting the investment; is that right?
A. That's correct.
Q. So you were asked some questions by Mr. Hamilton about Peruvian Global Bond issuances in the 2005 range. Do you remember that?
A. Yes, I do.
Q. Without taking you to the details of the prospectuses or language in there, can you just tell us how that and other information about what was going on in Perú influenced your thinking about why this Land Bonds investment was a good idea?
A. Related to the global Bonds?
Q. Yeah.
A. What the significance of the global Bonds was?
Q. Sure.
A. The significance of the global Bonds was that Perú re-access the capital markets, and I had said in my Witness Statements that I was there in the very beginning when Fujimori came in, and the whole objective was how does this country move from out of
[Page 610]
default, not only with banks and Bondholders, but with the IMF and the World Bank and what have you, and what's the reward for that--the reward for that, and what's the motivation as oftentimes for the countries to re-access the capital markets.
And so that's an observation that--along the path that they now have access to the capital markets, which not only is about creditworthiness, but also the ability to raise additional funds in the capital markets.
Q. And what did that signal to you, if anything, that was relevant to the acquisition of the Land Bonds?
A. To me, it was confirmation of the top-down thesis that this was an upwardly mobile credit. It was a reform story that was being--one of the rewards of that reform story was going from default on bank loans as late as 1997 to re-accessing the capital markets in the 2000s.
Q. Okay. And how did the method that you used to conduct diligence in Perú compare with methods you used in other investment circumstances?
[Page 611]
A. Very similar. I mean, we did similar investments--Land Bond investments in other countries in emerging markets, Nicaragua being one of those, Bulgaria being one of those, as well as the Russian Federation.
So, the same idea, which is top down on credit analysis for the country. Is there--is there a reform story in place? Is there an upwardly mobile story in place? And then also where did the underlying instruments--and bottoms up, as I talked about before, is kind of the idiosyncratic nature of the underlying investment.
Q. In terms of some of those other situations you've been in, you were asked some questions and taken to an article about Argentina. Remember being asked questions about the article by Gretchen Morgenson about Argentina?
A. Yes, I do.
Q. And can you tell us what was your approach in the Argentina situation?
A. Well, we've had multiple successes in Argentina working consensual with Republic of
[Page 612]
Argentina on the resolution of claims that seemed otherwise unable to be resolved.
So, one example, as of 2005, Argentina had only resolved with 76 percent of their creditors.
Gramercy led, conceived, and anchored a reverse inquiry, getting Bondholders on the same page to give Argentina certainty of execution, despite the fact that Argentina was saying that they would never pay any of the other Bondholders. We were able to do that.
I see here--we're at CIADI. We certainly helped resolve several CIADI claims in Argentina in 2013. We resolved the only five that were outstanding, so we owned five of those, and we coalesced with the other two.
Again, reverse inquiry process where consensually we worked with the Ministry of Finance in Argentina to settle the claims.
Q. Okay. And you also were taken to an article before that said that you were involved in the war about Argentina. What did you understand that to be?
A. I understood it to be that, unfortunately,
[Page 613]
this gentleman has been pulled into somebody else's war, and that war was a holdout battle in Argentina between those that didn't participate in--once we were successful with the 2010 exchange, there was still 8 percent that was outstanding, the holdouts.
And so the war that I described before was between the holdouts and the Republic of Argentina. We and other Bondholders, unfortunately, got drawn into it is because the 92 percent who had participated in the exchange were at risk of not being paid, even though we had legally and lawfully gone through an exchange with Argentina.
Q. Right. And how, if at all, did the approach that you took there compared to the holdouts relate to the approach that you wanted to take with Perú?
A. It's very different. I mean--sorry, could you repeat the question?
Q. How did the approach that you took there of brokering a solution reflect, if at all, on the approach you were looking to take with Perú?
A. Sorry. Very similar, which is the idea, which is understand why this transaction isn't
[Page 614]
happening, understand the element of distress, and introduce a catalyst to change the element of distress.
And in the case of Argentina, we felt that it was a lack of advocacy and lack of representation and lack of certainty, and we felt that oftentimes obligors won't move forward with the transaction, not because they're unwilling, because they can't figure out how to do it.
And so in Argentina, we did a reverse inquiry in 2009 to resolve that $12 billion worth of debt.
Q. What is a reverse inquiry?
A. Sorry. So, reverse inquiry was we went out and got $12 billion of Bondholders to pre-commit, via a memorandum of understanding, with a bank. We brought an outside bank in to--what I mean by reverse inquiry is most transactions that happen in the capital markets, the country goes to bank, bank goes to market. A reverse inquiry is market goes to bank, bank goes to country.
So, in the case of Argentina, we use a reverse inquiry. I mentioned earlier today--
[Page 615]
(Interruption.)
A. I'm sorry.
So, what I mean by "reverse inquiry" is the typical transaction is a country or an issuer will hire a bank, and then the bank will go to the market.
A reverse inquiry is just the opposite, which is the market will go to the bank at signal, or sometimes on a firm basis, commit to a certain transaction to the extent that the bank--pardon me, that the country wants to move forward on it.
Q. Okay. All right. And so what did you think the path was to resolution with Perú after you bought into the Land Bonds?
A. We always thought that the route would be a consensual transaction, very similar to what we had done in Argentina. In fact, that was the--I believe it was in 2009 at exactly the same time we were doing this in Argentina that we actually did make a reverse inquiry proposal to the Republic of Perú.
I think we made at least three overtures via intermediaries to try and resolve on a reverse inquiry basis.
[Page 616]
Q. Okay. Now, do you remember Mr. Hamilton asked you a few questions about Mr. Herzberg's memo?
Do you remember that?
A. Yes, I do.
Q. Okay. If you could turn to that, it's Tab 10 in the binder that's in front of you, and it's CE-114.
A. Okay. I have it.
Q. Do you see it? Okay.
Now, the Herzberg memo--and he took you--in particular, he pointed out that on Page 5, I guess, of the memo, there are different valuations shown in there.
Do you remember being asked those questions about that?
A. I remember confirming some tables were on here.
Q. Yes. And he asked you about whether the fact that different valuations appeared on this page indicated a lack of certainty, and I think you said a lack of certainty but high probability of what to expect.
Do you remember giving that testimony?
[Page 617]
A. I do.
Q. Can you explain to us what you meant by that? What do you mean a "high probability of what to expect"?
A. Well, looking at information at the time and seeing the different--the highest probability was that all three of these are current value. They are with interest and CPI. So, that's high probability of those three notions.
The difference may be the ADAEPRA one, which was the way that the market looked at it and the way that the market transacted, so I would say that's probably the highest probability. And then looking at the PPKs with the asterisk, I believe the middle one was some--shall we call it alternative method for calculating CPI? And I believe the other one was PPK speculating on what Bondholders might take in a consensual deal.
Q. And who is he? Who is PPK?
A. Sorry, PPK at that time was Perú's Prime Minister. More recently he was the President of Perú from 2016 forward.
[Page 618]
Q. Okay. And when you said that you meant that there was a high--you thought there was a high probability of what to expect, what did you mean by that?
A. Again, at the highest level, what's to be expected and what is being confirmed is that Bondholders are entitled to current value with CPI and interest, and that's--as I go through the David Herzberg memo and he goes through how he concludes that, it is both in terms of what's happened at the highest courts, what's happened at the lowest courts, and the due diligence that he did with the Bondholder associations and what have you.
Q. Okay. Do you have your Reply Witness Statement in front of you, the one dated May 21, 2019?
A. Give me one minute. I do.
Q. Okay. I'd like to ask you to turn to Page 1, Paragraph 2.
Do you see that?
A. Yes, I do.
Q. Yes. You testified that you decided to invest in the Land Bonds. "We did expect the Land
[Page 619]
Bonds had genuine value to be calculated using CPI plus interest."
Do you see that?
A. Yes, I do.
Q. You explain, then, that your diligence had revealed what we consider to be very firm qualitative and quantitative bases for that expectation.
Can you describe how it is that you had those firm bases and, yet, you saw these different range of values representative in the Herzberg memo?
A. Sure. I think the expectation comes from the legal entitlement, first, verification of where that legal entitlement comes from, which we talked about the TC 2001, and then also kind of understanding and factoring in or triaging what these other factors may be.
So, the middle PPK one is merely, again, him not disputing whether it's owed, him not disputing whether it's current value, him not disputing whether it's interest. It's him just saying, "perhaps we should use a CPI that's different than the official CPI."
[Page 620]
Q. Umm-hmm.
A. And then the other one--again, both of these are the obligor. The third one--or the second PPK is simply the obligor speculating that if they came forward with some sort of consensual offer, that that's what they would get. Unfortunately, we will never know.
Q. You mentioned legal entitlement as a part of it. How did you underwrite the legal entitlement?
A. Sure. David and José spent quite a bit of time looking at the laws, the governing laws at the time. David writes about it in the memo here. Talks about what I consider to be the most--the highest law, which is the TC in 2001 confirming that one must be paid in current value, not nominal value.
Q. Umm-hmm.
A. But then seeing the same application in the local courts. Of course, we did quite a bit of due diligence with local counsel. We would never do this on our own. We would spend a lot of time and money with local counsel understanding the governance around the instruments.
[Page 621]
Q. Okay. I'd like to take you--you were shown also Tab 40, which is CE-731.
This is Mr. Cerritelli's May 23, 2008 email.
Do you remember seeing this and being asked questions about it by Mr. Hamilton?
A. From earlier today, yes.
Q. Okay. And in here, he took you to part of this--can I take you to paragraph--I think he took you to Paragraph 11, Timetable for Execution of our Restructuring Strategy.
Do you see that?
A. I do.
Q. Okay. You've "been in regular contact with the Government of Perú since we started investing in these claims, and the Government is aware of our investment activities."
Can you just describe to us why you were trying to be in touch with the Government even from this time?
A. Of course. And our goal all along was to try and catalyze a consensual resolution, and we felt that if could provide a service by aggregating Bondholders
[Page 622]
toward--all that was outstanding at this time was how are these Bonds going to be paid. With all due respect, I've dealt with a lot of Finance Ministers who have never been through debt restructurings.
Q. Yeah.
A. So, we thought that the reason we would reach out is to say, hey, look, we've done this before. It's not as complicated as it seems. Perhaps we could use some sort of reverse inquiry, what have you. This is consistent with the underwriting, which is we hope and expect to get a consensual resolution.
Q. It says, then, in the next paragraph that haven't presented a formal proposal yet, but "our strategy calls for continuing to source in Perú to build a large enough position that the Government can use as an anchor block to negotiate a restructuring solution."
Can you explain what that means, what the thinking is there about being able to accumulate an anchor block to be able to develop a solution?
A. Sure. As I was explaining earlier, one of the very typical kind of factors, or what I call
[Page 623]
element of distress as to why an obligor may not move forward, is you're typically dealing with an interim decision-maker. So, in this case, perhaps a Finance Minister, what have you.
And they tend to be very political and careful, and in order for them to advocate to go upstairs to the president to do a transaction, we think it's really important that they have certainty of execution.
So, the best way to give them certainty of execution is to have a large enough critical mass of Bondholders that gives that person confidence that if they stick their neck out politically and advocate for settlement, that they'll be successful with that settlement.
Q. And we saw that in this Paragraph 11 also, it refers to the paragraph we looked at before, that this language "since we started investing in these claims."
Do you see that?
A. In Paragraph 11?
Q. Yep.
A. Sorry. Yes.
[Page 624]
Q. What were the claims that you had in mind? I mean, how did you think of that word at that time?
A. Bonds. That we invested in the underlying Bonds.
Q. Okay. And with the anchor group, what did you--what did you think of as being--why did you think that it was realistic that the Government would want to come and talk to you after you had accumulated this anchor position?
A. Well, I guess one would be experience elsewhere, experience in Perú. I mean, seeing Perú's behavior in the past when they had a critical mass of banks that were willing to move forward with the transaction that they did.
And, elsewhere, we talked about Argentina a moment ago, but this notion of if you have certainty of execution, perhaps they'll change what seemed to be a position of unwillingness to move forward.
Q. And how were you going to solve the certainty of execution problem?
A. The way that you solve that is kind of by going first. That's the whole notion of the reverse
[Page 625]
inquiry, which is to try and organize and discuss with as many Bondholders as possible what resolution can look like and then get them all organized, either formally or informally, around that solution, so that the obligor would be more willing to move forward because it's been de-risked for them.
Q. Yeah, but why would they want to? Why would the Government of Perú want to settle this debt? What's in it for them?
A. Creditworthiness, continuation, the end of the era of default for Perú, to get better ratings than they might have had otherwise, to attract Foreign Direct Investment into the country.
And one thing is for certain--I've been doing this 32 years--I can tell you in each one of these debt restructurings that we've been involved in, it's virtuous in nature. That when they resolve a liability that's outstanding, that there is a benefit that comes to them for doing that.
Q. Okay. Now, you were asked some questions about the Gramercy model. You were shown some Gramercy-level documents that talked about assumption
[Page 626]
of risk.
Do you remember looking at those with Mr. Hamilton?
A. Yes, I do.
Q. I have a simple question for you. Do you believe that Gramercy assumed risk by investing in the Land Bonds?
A. We do, indeed.
Q. Okay. You were also asked questions about whether other parties have economic interests in the Land Bonds. I think you said they do.
Whose investment do you think you are managing? Is this Gramercy's investment?
A. Predominantly, the investment is for the underlying investors and funds that have economic interest in the Bonds.
Q. So, in light of that, can I take you, please, to your Witness Statement, which is--sorry, your Rebuttal Witness Statement, please.
(Comments off microphone.)
MR. FRIEDMAN: No, I think it is actually the one dated November 13, 2019.
[Page 627]
BY MR. FRIEDMAN:
Q. Okay.
A. I have it.
Q. Okay. If you could turn to Page 9, Paragraph 24, please.
A. I see it.
Q. Okay. The fact that--you say that "the fact that other entities have a beneficial interest in the economic performance of Gramercy's investment in Land Bonds does not change the fact that Gramercy actually owns and controls that investment."
Do you see that?
A. I do.
Q. Okay. Well, can you explain that to us, please? What's your understanding of why Gramercy owns and controls?
A. Well, Gramercy is the only entity that owns and controls. The beneficial owners above don't have title. They don't have management. They can't move the Bonds. They can't extinguish the Bonds. They can't swap the Bonds. They can't insure the Bonds. All they can do is get a beneficial interest.
[Page 628]
So, it's Gramercy, through the investment manager GFM, is the only one that can make all the decisions relative to the Bonds, and it's a Gramercy vehicle that owns the Bonds and has the title, and, therefore, it's the only owner and the only one that can make ownership decisions, if you will.
Q. Okay. And what--how is it possible that Gramercy is the only one that can make those management decisions about the investment in the Land Bonds?
A. That governance typically comes through an investment management agreement, whereby, as we talked before, we raise capital for pools of vehicles, pools of capital. Those investors have an economic interest in the Fund, and part of the establishment of the Fund is an investment management agreement that gives sole management of the underlying vehicle to Gramercy.
Q. Okay. Now, immediately--you were asked some questions, then, about the July 16, 2013, CT Decision.
Do you remember that?
A. Yes.
Q. Okay. And I think you were asked some
[Page 629]
questions about kind of what the state of your mind was at that point about what was going on about what effect it might have had on your investment.
Do you remember being asked some questions? You were shown some pieces of paper.
A. Yes, I do.
Q. Yeah. What did you understand at that point in time? I think it would be helpful for the Tribunal just to hear like your state of mind, Gramercy's state of mind--
A. Sure.
Q. --in the period immediately after July 16, 2013, when you found out about this Constitutional Tribunal Decision.
A. I guess I'd have to discuss our state of mind prior to it.
Q. Okay.
A. So the state of mind prior to it was, it was undeniable that in 2001 that Bondholders had a right to current value with CPI and interest, and that our understanding of what 2011 was limited to was a simple enforcement of a previous ruling.
[Page 630]
So, that was our state of mind, in terms of what was expected, and simply enforcement of a previous Court ruling.
Q. Umm-hmm.
A. What was different is it was, perhaps, different than what we expected that came out of it, but we still didn't really know what to expect. So, as I--
Q. What do you mean by that? How can it be different, but you didn't know what to expect?
A. Well, what we expected going into it was enforcement of current value with CPI plus interest. What came out of it was dollarization with all sorts of unknowns, and, as I said earlier today, there were more, I think, unknowns than knowns, so it wasn't clear what it meant at the time.
Q. Umm-hmm. What do you need to get that further clarity about it?
A. All sorts of factors in terms of exchange rates, parity exchange rates, interest rates, coupon rates, also away from that, how that might compare to what you're able to do in the local courts because,
[Page 631]
still, you know, 2001, it's very clear that we have the right to look at all these voluntary things that come forward, but we also have a right to legal proceedings within Perú.
Q. Did you have any sense of what the value difference was at that point, if any, between what you had thought prior to July 16, 2013, and afterwards?
A. No, we did not.
Q. Okay. And you then subsequently, of course, received the decision--the Supreme Decrees, and they came out in January 2014.
Do you remember those?
A. Yes.
Q. Okay. And how long did it take you even once they came out to analyze what the economic consequences were?
A. Weeks, if not at least a month.
Q. Umm-hmm.
A. At first when we saw it, we actually thought that, well, we suspected that dollarization that they were coming up with was substantially the same as kind of current value with CPI.
[Page 632]
Q. Can you explain that? What do you mean at first you thought it was what they came out with was the same as CPI?
A. So, one of my colleagues, when he first looked at the Supreme Decrees in 2014, said I believe that the way that they are calculating this is consistent with what we were expecting vis-à-vis current value with CPI.
Q. Umm-hmm. And what happened after--what steps did you take after that to further sort of dig into the formulas and the numbers?
A. I believe we took it to an outside accounting firm to interpret it and objectively calculate for it.
Q. Umm-hmm. And what was the conclusion--
MR. HAMILTON: Mr. President, I didn't ask these details, but I'm being patient, given the length of the cross-examination. Thank you.
BY MR. FRIEDMAN:
Q. What was the conclusion of that analysis?
A. The conclusion of that analysis is that the value was substantially lower than we had expected prior to the Supreme Decrees.
[Page 633]
Q. Now, you were asked some questions, then, about the valuation and the changes in valuation over time; right?
A. Yes, I was.
Q. Okay. And I think we probably need to go back into confidential session now because I would like to show you again this document that was handed out, which was representative of Appendix 5 to the Quantum Expert Number 2.
(End of open session. Attorneys' Eyes Only information follows.)
[Page 634]
CONFIDENTIAL SESSION
[Redacted]
[Page 635]
[Redacted]
[Page 636]
[Redacted]
[Page 637]
[Redacted]
[Page 638]
[Redacted]
[Page 479]
1 Q. Because they were working on the mechanism
2 under Peruvian law for the transfer of rights related
3 to the Land Bonds; is that correct?
4 A. That could very well be.
5 Q. Okay. Now, this due diligence memorandum, of
6 course, acknowledges that the Peruvian Government
7 serviced the Bonds until 1987, and then afterwards,
8 your memorandum said the Land Bonds had been in
9 default for a period of 18 years.
10 A. Sorry, where you are looking?
11 Q. The Land Bonds had been in default for a
12 period of 18 years.
13 That was your conclusion; correct?
14 A. Do you want to take me to that part of the
15 document in order to confirm it?
16 Q. Sure. First page, "Why now? The Land Reform
17 Bonds have been in default for a period of 18 years;"
18 correct?
19 A. I see that, yes.
20 Q. Okay. Now, turning over to the third page of
21 this document, "potential recovery analysis." Now,
22 you say here that ADAEPRA, that's a Peruvian
[Page 480]
1 Bondholder association, was pursuing a parallel
2 strategy, a transactional solution of negotiating a
3 settlement and a judicial track;" is that correct?
4 A. That's what David wrote in this memorandum.
5 Q. Okay. So, on the next page, there were
6 various calculations related to valuations of Land
7 Bonds.
8 Do you see those valuation tables?
9 A. Yes, I do.
10 Q. Three different valuation methods are
11 presenting here.
12 A. I do see that, yes.
13 Q. Okay. Now, Mr. Koenigsberger, doesn't the
14 existence of different valuation methodologies in your
15 due diligence memorandum suggest that there was a lack
16 of certainty in terms of the then-current value of the
17 Land Bonds?
18 A. There was a lack of certainty, but I think
19 there was the ability to come up with high
20 probabilities of what to expect.
21 Q. Okay.
22 MR. HAMILTON: I'll go about five more
[Page 481]
1 minutes and then take a break, Mr. President?
2 PRESIDENT FERNÁNDEZ ARMESTO: Okay.
3 MR. HAMILTON: Five minutes, approximately.
4 Okay. Now, we can take the break now, actually, and
5 then can I plan some efficiency. Does that sound
6 good?
7 PRESIDENT FERNÁNDEZ ARMESTO: Mr. Hamilton,
8 how long do you have to go?
9 MR. HAMILTON: We don't know yet. It depends
10 how fast Mr. Koenigsberger reads.
11 PRESIDENT FERNÁNDEZ ARMESTO: Oh, no, no, no.
12 That is not fair to Mr. Koenigsberger. Because we
13 have not really got into the thrust of his
14 deposition--of his Witness Statement. I am slightly
15 worried about timing.
16 MR. HAMILTON: We're getting there, sir, and,
17 again, he put in five Witness Statements, many of
18 which repeatedly talk about the issues that we've been
19 talking about so far. So, you might--as you might
20 understand, I have a duty to address the issues.
21 PRESIDENT FERNÁNDEZ ARMESTO: Of course. Of
22 course. No. We should, I mean, we all know when the
[Page 482]
1 really relevant facts took place, and we are--we are
2 looking at 2004 document--no. 2006 document, I mean.
3 There is--if you are going chronologically, which I do
4 not know, I'm still worried that there is still quite
5 some years to cover. So, we must--my point here is we
6 must start the Second Witness before lunch.
7 MR. HAMILTON: Well, sir, I'm going at the
8 pace that is appropriate from Respondent's point of
9 view to manage a Witness who has put in five Witness
10 Statements.
11 PRESIDENT FERNÁNDEZ ARMESTO: Very good.
12 MR. HAMILTON: And maybe reads a little bit
13 slower than--than sometimes, so.
14 PRESIDENT FERNÁNDEZ ARMESTO: Very good.
15 MR. FRIEDMAN: Mr. President, if I just may,
16 I just want to say for the record that there may be a
17 bit of confusion here. We do not believe that the
18 document at Tab 8, which is Respondent's 1095 and was
19 the due diligence checklist was designated as
20 confidential. We believe we produced that on
21 February 8, which was prior to our Confidentiality
22 Order in the case, and I don't think we've designated
[Page 483]
1 that as confidential.
2 PRESIDENT FERNÁNDEZ ARMESTO: Okay. Thank
3 you. It's now 28 past 11:00. We will come back at 45
4 past 11:00.
5 Mr. Koenigsberger, there is some coffee
6 outside and there may be some refreshments. You are
7 most welcome to have a coffee and anything else you
8 would like. Can I please ask you not to speak to any
9 of the counsel to Gramercy?
10 THE WITNESS: You bet. Thank you very much.
11 (Brief recess.)
12 PRESIDENT FERNÁNDEZ ARMESTO: So, we resume
13 the Hearing.
14 Mr. Hamilton, I was just trying to help you.
15 I mean, do the cross-examination the way you want.
16 Please don't misunderstand me. There was nothing--I
17 just was trying to be helpful so that you use your
18 time. But if you think that it is important for your
19 case, do it the way you want. It is your
20 cross-examination, not mine.
21 MR. HAMILTON: Thank you, sir. I understand
22 you have many practical tasks here, and I respect
[Page 484]
1 that. I've also learned the virtue of patience
2 sometimes in life, so there is that too.
3 BY MR. HAMILTON:
4 Q. Mr. Koenigsberger, we're going to resume, and
5 we're going to pass out an exhibit.
6 What exhibit number is it? CE-120. This is
7 one of the--it's a copy. We don't carry around
8 original Land Bonds, but this is a copy of one of the
9 Land Bonds, and I'm also providing you an
10 English-language copy. We'll share with everybody
11 else.
12 PRESIDENT FERNÁNDEZ ARMESTO: Okay. Thank
13 you. So, we must give a number to this. This should
14 be then H-4? H-4.
15 (Comments off microphone.)
16 MR. HAMILTON: Of course. Yes, sir.
17 BY MR. HAMILTON:
18 Q. This is CE-120. It's a copy, it smells a lot
19 better than the old ones.
20 So, Mr. Koenigsberger, we were discussing due
21 diligence undertaken by Gramercy with respect to the
22 Land Bonds.
[Page 485]
1 Could I get a copy of that document, please.
2 I gave mine to the Witness.
3 (Comments off microphone.)
4 Q. So, Mr. Koenigsberger, this is familiar to
5 you, I take it. What agrarian debt--Bonds of the
6 agrarian debt is actually the best translation of
7 this.
8 You're familiar with these instruments?
9 A. Yes, I am.
10 Q. Okay. And this is one of the instruments
11 that Gramercy has provided a copy of in this
12 proceeding. Now, this instrument, on its face, has
13 various language, four elements down below.
14 Do you see that?
15 A. Yes, I do.
16 Q. Okay. Now, we were speaking earlier about a
17 contemporary Peruvian sovereign bond, such as the one
18 that you provided into the record.
19 Do you recall that?
20 A. Yes, I recall the conversation.
21 Q. This kind of document.
22 Now, Mr. Koenigsberger, when you were making
[Page 486]
1 your risk assessment, how did you compare the
2 protections of a contemporary Global Bond with which
3 you were familiar at the time with these old pieces of
4 paper? How did you compare those two as part of your
5 due diligence process?
6 A. Well, as highlighted by the--David's memo, a
7 big part of what we wanted to do was not necessarily
8 compare one versus the other--because this is the one
9 that we invested in--the idea was to look at what the
10 laws were at the time to be able to confirm the
11 validity of the debt.
12 And I'm not really sure where the cutoff is
13 between contemporary and noncontemporary, but what we
14 were able to confirm is that it's a valid obligation
15 of the State, it's transferable to us, and it's due to
16 be paid in current value. That is the type of work
17 that we did looking at, of course, it didn't have the
18 other document that you had, but there was certainly
19 plenty of governing information as it related to the
20 Land Bonds.
21 Q. So, did you consider, Mr. Koenigsberger, that
22 acquiring this paper reflected greater risk than, for
[Page 487]
1 example, acquiring Peruvian Bonds issued in 2005?
2 A. Different risk.
3 Q. Thank you.
4 Now, Mr. Koenigsberger, you mentioned that
5 due diligence was an ongoing process, and that's why
6 you just had the one memorandum. It was an ongoing
7 process, and so let's take a look at the month of
8 April of 2006.
9 Now, in the month of April in 2006, several
10 interesting things happened. Now, first of all,
11 you've indicated that you were aware that in
12 2006, on April 12, the United States and Perú signed,
13 but, of course, had not yet ratified the U.S.-Perú
14 Trade Promotion Agreement; is that correct?
15 A. Correct.
16 And you were aware of that at the time.
17 Q. We were aware of the free trade agreement.
18 A. Okay. And you then--promptly after the
19 treaty was signed, you then established a new entity
20 GPR in the State of Delaware on April 17, 2006; is
21 that correct?
22 A. I believe that could be the date.
[Page 488]
1 Q. And you established that entity five days
2 after the signing of the U.S.-Perú Trade Promotion
3 Agreement; is that right?
4 A. Yeah. I think it was completely unrelated.
5 It was related to preparing for the first acquisition
6 of Bonds.
7 Q. And you were preparing for the first
8 acquisition of Bonds.
9 Now, on the 19th of April 2006, you were
10 aware that President Toledo vetoed a pending Agrarian
11 Reform bill.
12 Are you aware of that?
13 A. Yes. I'm aware of the veto and I'm also
14 aware of the circumstances that he highlighted, the
15 first one being that he was concerned that they might
16 have to pay the debt twice, that, in fact, there was
17 no registry. But looking at the veto, it wasn't about
18 the validity of the debt, whether it was contemporary
19 or not. He was concerned about double-counting in
20 terms of no registry, but he wasn't disputing the
21 validity of the debt, the current value, the notion of
22 CPI. So, to me, as I said, that would have been
[Page 489]
1 confirmation of the thesis, that despite that
2 moment someone wanted to kick the can to the next
3 administration, that doesn't mean it wasn't currently
4 payable.
5 Q. What "can was being kicked to the next
6 administration," to use your words?
7 A. Well, it seems to me that part of the
8 difficulty for Bondholders over many years is this
9 notion that no government has really wanted to deal
10 with it, and they have just kind of moved it to the
11 next government.
12 So, we go back to April 2006, again, I saw
13 confirmation that this was a valid obligation. It had
14 to be paid. He was worried that it might be paid
15 twice, not at all and confirmed a lot of things that
16 we did underwrite.
17 Q. So, in your view, the Toledo Government
18 didn't want to resolve the situation, and they "kicked
19 the can" to the Garcia Government; is that right?
20 A. I think it's quite possible.
21 Q. And so, that April was prior to your first
22 purchase of a bond; is that correct?
[Page 490]
1 A. Yes, it is.
2 Q. Okay. Now. I take it that you are--and I
3 refer your attention to Tab 27. I take it you're
4 aware of the position of the Peruvian Government at
5 that time and over many years with respect to the
6 status of the Land Bonds. I refer your attention to
7 Exhibit R-29. This document is an official report of
8 the Ministry of Economy and Finance dated 17
9 July 2006.
10 Do you see the document.
11 A. I see the document.
12 Q. Okay. Now, in the first paragraph it makes a
13 reference to--do you prefer to look at the Spanish or
14 the English?
15 A. I prefer the English.
16 Q. Okay. Are you fluent in Spanish?
17 A. I'm not fluent, but I speak Spanish.
18 Q. That's fair enough.
19 A. I speak it, I don't read it as well.
20 Q. Okay. No problem. Then we'll look at
21 English version for your convenience, and there's a
22 translation included behind the blue page of your
[Page 491]
1 binder.
2 And so, in this document, it refers to an
3 offer to purchase the Agrarian Reform Bonds that the
4 Gramercy investment funds made by a written notice
5 addressed to the association, the ADAEPRA.
6 Do you see that reference?
7 A. Am I going to get an English version?
8 Q. It's behind the blue piece of paper.
9 A. Oh, sorry.
10 ARBITRATOR DRYMER: Mr. Hamilton, my
11 apologies to you, just so that I can follow on the
12 same document you're showing the Witness, is there an
13 English version in the record? If not, I'll work on
14 the Spanish.
15 MR. HAMILTON: No, at the suggestion of their
16 counsel, we are using free translation.
17 ARBITRATOR DRYMER: Fair enough. Thank you.
18 MR. HAMILTON: Yes.
19 THE WITNESS: Is it all right if I look at
20 the document? Can I look at it a moment?
21 BY MR. HAMILTON:
22 Q. Yes, but please--I understand you want to
[Page 492]
1 look at document, but these are really not questions
2 that require reading the entire document.
3 A. All right. Then go ahead and ask your
4 question, and I'll read it if necessary.
5 Q. Okay. So, document refers to a written
6 notice or offer to purchase Agrarian Reform Bonds that
7 Gramercy sent to ADAEPRA. Do you remember Gramercy
8 sending an offer to purchase to Bondholders through
9 ADAEPRA?
10 A. I do remember.
11 Q. Okay. In the second paragraph of this
12 document, the position of the Ministry of Economy and
13 Finance indicated here is as follows:
14 "I would like to inform you that the Peruvian
15 Congress has yet to approve the legal framework that
16 will presumably prescribe how to treat in general all
17 liabilities derived from the land reform process,
18 which, due to its complexity and implications has been
19 the subject of coordinated action between the
20 legislative executive branches."
21 Do you see that?
22 A. I don't. Sorry, where is that in the
[Page 493]
1 English--
2 Q. Second paragraph.
3 A. "I'm writing to you in reference"?
4 Q. "In that regard." The second paragraph
5 begins "in that regard."
6 A. Sorry. "I'm writing with respect."
7 Q. Mr. Koenigsberger, the first paragraph says
8 "I'm writing to you," and the second is "in that
9 regard."
10 (Overlapping speakers.)
11 A. Sorry. I missed this page. "In that
12 regard," yes, I see that.
13 Q. Right. And so, the Peruvian Congress has yet
14 to approve the legal framework.
15 Do you see that?
16 A. Yes, I do.
17 Q. Okay. And that's what you've just confirmed,
18 of course--right?--that there was a pending law, but
19 it was vetoed and did not come into force. Is that
20 right?
21 A. That's correct.
22 Q. So, I have one additional item here. Give me
[Page 494]
1 just a moment.
2 Subparagraph (d). According to this internal
3 document of the Ministry of Economy and Finance, which
4 was signed by Ms. Betty Sotelo Bazán, "with respect to
5 all liabilities arising from the Land Reform Process,
6 the Government's rights and interest may only be
7 determined once the above-mentioned legal framework is
8 in place."
9 Do you see that, Mr. Koenigsberger?
10 A. I do see that here.
11 Q. Okay. And that's consistent with what you've
12 said, which is that there was a pending law, but it,
13 of course, did not come into force in 2006; is that
14 right?
15 A. There was a law put forward by the Congress
16 that did not--that was not enacted.
17 Q. Okay. So--
18 A. But this is a legal framework for how the
19 Ministry intends to resolve it. That's not the only
20 legal framework. This a memorandum of the obligor,
21 the Ministry.
22 Of course, as I mentioned earlier today,
[Page 495]
1 there's two paths. There's the consensual path, which
2 might have gone along the path of what the Congress
3 might pass and how the Ministry might interpret it,
4 but there was always another legal framework, which is
5 Bondholders always had the right to go to local courts
6 to pursue their claims if what was offered here,
7 voluntarily or not, because it wasn't passed, didn't
8 pass.
9 Q. So, do you accept that the status of the Land
10 Bonds before the Ministry of Economy and Finance in
11 2006 was that there was no legal framework for them to
12 pay the Bonds?
13 A. I do not.
14 Q. You don't agree that that was the position of
15 the Ministry? It's on black and white in front of
16 you.
17 A. I believe that that was a position of the
18 Ministry, but I do think there were other mechanisms,
19 other legal frameworks to collect on the Bonds.
20 Q. Okay. So that--that was the position of the
21 Ministry, and it was in that context that Gramercy set
22 about acquiring the Land Bonds.
[Page 496]
1 Now, you mention in your Third Statement that
2 you gave Bondholders three different options: Sell
3 the Land Bonds to Gramercy, contribute the Land Bonds
4 to an investment vehicle, or hold onto the Land Bonds
5 and free ride on Gramercy's efforts to settle the Land
6 Bond debt. Is that right?
7 A. Yes. I think that third option is in
8 exchange for working with us to implement some sort of
9 resolution.
10 Q. Okay. And the Bonds that are presented
11 before this Tribunal, those were Category 1 where
12 Bondholders sold Land Bonds to Gramercy; is that
13 right?
14 A. That's correct.
15 Q. Okay. Were there any Land Bonds that were
16 contributed to an investment vehicle in exchange for
17 certificates?
18 A. No.
19 Q. Does Gramercy or any affiliate of Gramercy
20 hold any Land Bonds other than the Land Bonds before
21 this Tribunal?
22 A. Sorry, repeat that one more time.
[Page 497]
1 Q. Does Gramercy or any affiliate of Gramercy
2 hold any Land Bonds other than the Land Bonds that
3 have been presented to this Tribunal?
4 A. Yes, we do.
5 Ω. How do you hold those Bonds?
6 A. We hold them in physical custody in Lima.
7 Q. How many Bonds do you hold?
8 A. I'm not certain of the number of Bonds.
9 Q. Is it 5? 5,000? 10,000?
10 A. I don't know the number of Bonds.
11 Q. So, apart from what Gramercy has disclosed to
12 this Tribunal, Gramercy holds more Land Bonds; is that
13 correct?
14 A. That's correct.
15 Q. So, what entity controlled by Gramercy holds
16 these additional Land Bonds?
17 A. I'm not certain of the entity that holds it.
18 Q. Okay. And when were those Land Bonds
19 acquired?
20 A. I believe in 2017.
21 Q. So, in 2017 while this Arbitration was
22 pending, Gramercy acquired additional Land Bonds; is
[Page 498]
1 that correct?
2 A. The way that we acquired them--we talked
3 about the three different versions. There was an
4 acquisition where someone wanted to keep interest in
5 it but also have us contribute some cash to them. So,
6 it was like that middle option that we talked about
7 before.
8 Q. So, this would be the contribution of Land
9 Bonds to an investment vehicle; is that correct?
10 A. I'm not sure the mechanism that was used for
11 the acquisition. I don't recall.
12 Q. Okay. So who coordinated those transactions
13 for Gramercy?
14 A. I imagine it would have been through our
15 operations group.
16 Q. Okay. You've emphasized that you're a very
17 hands-on kind of guy and that you personally get
18 involved in these details. You have no awareness
19 who--in the relatively compact team of people that
20 work at Gramercy, who would have been involved in a
21 2017 acquisition of Land Bonds?
22 A. I think you were talking about the closing of
[Page 499]
1 it, so I talked about the operations person.
2 Q. Who in Gramercy was responsible for its 2017
3 acquisition of Peruvian Land Bonds?
4 A. A group of people. Of course, I'm the Chief
5 Investment Officer, and I'm responsible for the
6 investments that we make, but there are other
7 individuals on the investment team, the legal team,
8 and the operations team that would have worked on that
9 as well.
10 Q. Okay. How much did Gramercy pay for this
11 acquisition of Land Bonds in 2017?
12 A. I don't recall.
13 Q. What time of year in 2017 were these Land
14 Bonds acquired?
15 A. I believe it was in the first quarter, but I
16 don't recall the date.
17 Q. The first quarter of 2017.
18 A. I believe so.
19 Q. Okay. And so Gramercy thought that it would
20 be a good investment decision in the first quarter of
21 2017 to acquire additional Peruvian Land Bonds?
22 A. Yes.
[Page 500]
1 Q. Okay. Thank you.
2 Now, the money that was used to buy these
3 additional Land Bonds, did you raise that money from
4 investors here in the U.S.?
5 A. That money came from funds. It was from
6 funds that had U.S. investors.
7 Q. Okay. Now, just to be clear, as Gramercy has
8 indicated here, some of the beneficial interests in
9 the Land Bonds through Gramercy are U.S. interests and
10 a smaller percentage are not U.S. interests; is that
11 correct?
12 A. That's correct.
13 Q. That's correct. Okay.
14 And so these 2017 acquisitions did include
15 U.S. interests and, perhaps, non-U.S. interests?
16 A. The vehicles--the purchasers were U.S.
17 purchasers. When you have all these beneficial
18 owners, I can't recall whether they're all on
19 100 percent U.S. or not because there are investors in
20 the underlying fund vehicles.
21 Q. Mr. Koenigsberger, are the individuals and
22 entities--any of the individuals or entities who have
[Page 501]
1 beneficial interest in the Gramercy Land Bonds
2 Peruvian?
3 MR. FRIEDMAN: Sorry, excuse me. I think
4 this is unclear. There are certain Land Bonds that
5 are the subject of this Arbitration, and--
6 MR. HAMILTON: Excuse me. I'm asking him a
7 question.
8 PRESIDENT FERNÁNDEZ ARMESTO: Wait. Make
9 clear what you are asking for because it was dubious.
10 ARBITRATOR DRYMER: Yes, again, Mr. Hamilton,
11 I was going to hit the button before anyone else, just
12 to ask whether you are asking about the Bonds at issue
13 in this case or the 2017 Bonds.
14 MR. HAMILTON: Please, sir, I'm going to ask
15 about both, I assure you.
16 ARBITRATOR DRYMER: Thank you.
17 MR. HAMILTON: Because we've just learned
18 about Bonds that Gramercy has hidden from this
19 Tribunal--once again things that have been hidden from
20 this Tribunal.
21 BY MR. HAMILTON:
22 Q. Mr. Koenigsberger, the Land Bonds that are
[Page 502]
1 before this Tribunal have beneficial owners. Are any
2 of those beneficial owners Peruvian?
3 A. I don't believe so.
4 Q. You don't believe that any of the beneficial
5 owners, entities, individuals who stand to benefit
6 from a ruling of this Tribunal in connection with the
7 Gramercy Land Bonds--none of them are Peruvian?
8 A. The--what I said is I don't recall if there's
9 any Peruvian investors that are beneficial owners of
10 the Bonds that are part of what we hold here for this
11 Arbitration. The Resolution that we would get would
12 certainly benefit a lot of Peruvians.
13 Q. That's not my question, sir.
14 So, you're not able to confirm here today
15 that there are no Peruvians with beneficial interests
16 in the Gramercy Land Bonds before this Tribunal; is
17 that correct?
18 A. I don't believe so. I don't believe there
19 are Peruvians in our vehicles with beneficial
20 interests.
21 Q. You're not sure.
22 A. I'm not sure.
[Page 503]
1 Q. Thank you.
2 Now, with respect to these other Bonds--we'll
3 call them the new acquisition of Peruvian Land
4 Bonds--did Gramercy acquire those Land Bonds through
5 purchase contracts similar to the purchase contracts
6 with which it acquired the Land Bonds before this
7 Tribunal?
8 A. I don't know.
9 Q. Mr. Koenigsberger, at the time that you
10 acquired those Land Bonds, you were engaged in a
11 high-profile propaganda campaign against the Peruvian
12 state. You're the lead Witness in this proceeding.
13 You've emphasized how you're a hands-on kind of guy,
14 and you have no idea how you acquired--
15 PRESIDENT FERNÁNDEZ ARMESTO: Is that a
16 question? Is that the question?
17 MR. HAMILTON: Yes. I'm repeating the
18 question.
19 PRESIDENT FERNÁNDEZ ARMESTO: He has told you
20 he doesn't know.
21 MR. HAMILTON: I'm expressing uncertainty
22 about how he would not know.
[Page 504]
1 BY MR. HAMILTON:
2 Q. Are you sure that you don't know how Gramercy
3 acquired Bonds?
4 A. I do not know the technical characteristics
5 of how we acquired the Bonds.
6 Q. Did you purchase the Bonds?
7 A. Gramercy purchased the Bonds, I believe.
8 Some vehicle--some entity of Gramercy purchased the
9 Bonds.
10 Q. You're the Chief Investment Officer--that's
11 your title, Chief Investment Officer of Gramercy?
12 A. That's my title.
13 Q. And you're not familiar with these details is
14 your testimony.
15 A. Well, when you sit on top of an asset
16 management firm of $6 billion, you're not in the weeds
17 on the closing of transactions. There's different
18 departments that do different things. So, I certainly
19 understand what's going on with the underwriting of
20 it, but the closing of it--as I said before, there's a
21 legal team that works on that, there's an operations
22 team that works on that.
[Page 505]
1 It is not unusual for me not to be in the
2 weeds on the technicalities of how to close a
3 transaction.
4 Q. So, sometimes you get your hands on and
5 sometimes you take your hands off. Is that what
6 you're saying?
7 A. I don't understand the question.
8 PRESIDENT FERNÁNDEZ ARMESTO: That's not a
9 question.
10 BY MR. HAMILTON:
11 Q. Okay. So, Mr. Koenigsberger, with respect to
12 this acquisition as Chief Investment Officer, how much
13 money was allocated to acquire Peruvian Land Bonds in
14 early 2017?
15 A. I don't recall the number.
16 PRESIDENT FERNÁNDEZ ARMESTO: I think we
17 don't--the exact amount is not--is it $200 million?
18 Is it $10 million? $50 million? Is it as big as the
19 investment we are discussing in this case? Is it much
20 smaller? I mean, you must have some idea of
21 magnitudes.
22 THE WITNESS: Sure. And I apologize. What's
[Page 506]
1 different here, as I mentioned, is we acquired a
2 partial interest in the Bonds, so it's not a full
3 interest. We, in essence, partnered with a previous
4 Bondholder. I believe it was around $50 million.
5 BY MR. HAMILTON:
6 Q. Around $50 million.
7 Now, who was the other party or parties that
8 you transacted with in connection with these Land
9 Bonds in 2017?
10 MR. FRIEDMAN: I think that may be
11 confidential and may have nothing to do with the
12 Arbitration.
13 MR. HAMILTON: Mr. President, my comment is
14 that Gramercy entirely tries to manhandle this
15 Tribunal, not to mention the United States Government,
16 in terms of picking and choosing what it discloses.
17 And there may be serious issues with what they have
18 disclosed to their own investors. So, if you're going
19 to deny the information, we will take note of it, and
20 I'm sure we will talk about it further.
21 BY MR. HAMILTON:
22 Q. It's a simple question. Who did you transact
[Page 507]
1 with? Who did you participate with in connection with
2 acquiring Land Bonds in 2017?
3 MR. FRIEDMAN: Sorry, I raised an objection
4 to that question.
5 PRESIDENT FERNÁNDEZ ARMESTO: You can say
6 it's confidential or you can say the name or you can
7 say whatever you want. I mean, it's up to you to
8 provide the answer.
9 THE WITNESS: I'm happy to answer the
10 question. I believe that would be covered under the
11 Confidentiality Agreement with the purchaser--as the
12 purchaser from the seller.
13 BY MR. HAMILTON:
14 Q. Oak. Is that an entity? An individual? If
15 so, is that Peruvian or non-Peruvian?
16 A. I believe it's non-Peruvian, but I'm not sure
17 of the structure of the seller.
18 Q. Okay. And were the funds that you utilized
19 to acquire Land Bonds in 2017--were those funds
20 provided by Gramercy, or did Gramercy, as per the
21 routine that you've explained earlier today, acquire
22 funds from investors and use that money to acquire
[Page 508]
1 additional Land Bonds?
2 A. That--the proceeds for that came from the
3 funds that Gramercy had raised for diversified funds.
4 There was not a specific raise for the Land Bonds.
5 Q. Okay. And which fund did that relate to in
6 particular? Which Gramercy fund? Gramercy Distressed
7 Opportunity Fund II, for example?
8 A. I believe it's [Redacted]
9 Q. [Redacted]
10 raised funds that were then used to acquire
11 Peruvian Land Bonds in 2017; is that correct?
12 A. The funds that were raised by [Redacted] in
13 part, were used to buy an interest in the Bonds,
14 correct.
15 Q. How many Bonds were acquired for--how many
16 Bonds were acquired?
17 A. I said earlier I'm not sure of the number of
18 Bonds.
19 Q. So you don't know if it was 100 Bonds? 5,000
20 Bonds? 10,000 Bonds?
21 A. I don't know the number of Bonds.
22 Q. Now, Gramercy distressed--let me tell you,
[Page 509]
1 Mr. Koenigsberger, I have one more question at this
2 time.
3 MR. HAMILTON: And, Mr. President, given that
4 this is new information for the Republic of Perú, we
5 may have additional questions.
6 BY MR. HAMILTON:
7 Q. Mr. Koenigsberger, you provided three Witness
8 Statements in this case; correct?
9 A. Correct.
10 Q. All right. And the first one and the second
11 one were in 2016. The third one was in 2018, the
12 fourth one was in 2019, the fifth one was in 2019.
13 A. Let me correct the statement. There is
14 actually five here. So, you said three. There is
15 five, five Witness Statements.
16 Q. Five. That's right. That's right. Five
17 Witness Statements.
18 Three of those Witness Statements have come
19 after 2017. In none of those Witness Statements did
20 you reveal to this Tribunal that Gramercy had acquired
21 additional Land Bonds; is that correct,
22 Mr. Koenigsberger?
[Page 510]
1 A. That's correct.
2 Q. Now, Mr. Koenigsberger, why did you not
3 reveal to the Tribunal that Gramercy had bought
4 additional Land Bonds?
5 A. I don't believe that those Bonds are relevant
6 to this--they are not part of this dispute.
7 Q. And Mr. Koenigsberger, you understand, of
8 course, that this is not a contract dispute.
9 This is a treaty proceeding; correct?
10 A. It's a treaty proceeding, correct.
11 Q. And in a treaty proceeding, one doesn't just
12 take, say, an old bearer Bond, present it to a Court
13 and debate the value. In a treaty proceeding, there
14 are much broader range of facts that are pertinent;
15 correct?
16 PRESIDENT FERNÁNDEZ ARMESTO: I think he's
17 not a legal Expert.
18 (Overlapping speakers.)
19 MR. HAMILTON: I think it's pertinent given
20 that Gramercy includes in their own business summary
21 that treaty claims are part of their business, that an
22 understanding of whether he has a basic understanding
[Page 511]
1 about the difference between a treaty claim and a
2 claim on a contract is pertinent.
3 PRESIDENT FERNÁNDEZ ARMESTO: I'm
4 sure--whether he has or not, it is really not a fact
5 on which he can help us.
6 MR. HAMILTON: It is evident, sir. Thank
7 you.
8 BY MR. HAMILTON:
9 Q. So, Mr. Koenigsberger, you decided not to
10 tell this Tribunal that Gramercy had acquired
11 additional Land Bonds; correct?
12 A. It didn't occur to me. It wasn't the Bonds
13 that are part of this Tribunal.
14 Q. Okay. Let me ask you this: Did you
15 undertake additional due diligence with respect to the
16 acquisition of Land Bonds in 2017?
17 A. Yes, we did.
18 Q. What due diligence did you undertake?
19 A. The validity of the Bonds, the character of
20 the Bonds, we certainly looked at the--there was--talk
21 about--there must have been, you know, five or six
22 different Supreme Decrees that came out with varying
[Page 512]
1 levels of valuations associated with them.
2 Q. Okay. And do you have internal documents or
3 memoranda related to your assessment of Land Bonds in
4 2017 or in connection with that acquisition in 2017?
5 A. I don't know.
6 Q. You don't know?
7 A. I don't know.
8 Q. You said earlier that Gramercy would
9 typically prepare due diligence memoranda before
10 making an acquisition; isn't that correct?
11 A. I don't recall a specific due diligence
12 memorandum on this. Obviously, as I said, this was an
13 ongoing story that we've understood for quite some
14 time. I'm not denying or confirming whether there
15 were. I just don't know.
16 Q. Okay. With respect to the Bonds that
17 Gramercy acquired in 2017, you said that you raised
18 the funds through [Redacted] y
19 [Redacted]; correct?
20 PRESIDENT FERNÁNDEZ ARMESTO: That's what he
21 said.
22 BY MR. HAMILTON:
[Page 513]
1 Q. Okay. And [Redacted]
2 that includes, for example, state pension
3 funds from the U.S.; is that correct?
4 A. Yes, that's correct.
5 Ω. [Redacted]? Yes?
6 A. They're not a state pension fund, but yes.
7 Q. [Redacted]?
8 A. Yes.
9 Q. [Redacted]?
10 A. Correct.
11 Q. What other state pension funds? You
12 personally pitched these pension funds; correct?
13 PRESIDENT FERNÁNDEZ ARMESTO: We should go
14 into confidential mode.
15 (End of open session. Attorneys' Eyes Only
16 information follows.)
[Page 514]
CONFIDENTIAL SESSION
[Redacted]
(End of Attorneys' Eyes Only session.)
[Page 515]
1 OPEN SESSION
2 BY MR. HAMILTON:
3 Q. Again--
4 PRESIDENT FERNÁNDEZ ARMESTO: Please.
5 MR. HAMILTON: Are we out of the confidential
6 session now?
7 PRESIDENT FERNÁNDEZ ARMESTO: Yes.
8 MR. HAMILTON: Okay. We don't know what's
9 going on over on the side here, but Gramercy doesn't
10 get to dictate what is public and nonpublic
11 information. The Tribunal has the authority to
12 regulate that, and it has been very cooperative with
13 Gramercy in that regard. So, if there is any issue to
14 discuss, we will be part of that discussion, please.
15 Now, Mr. Koenigsberger, when you went--
16 MR. FRIEDMAN: Whoa, whoa, whoa. Hold on.
17 We have Confidentiality Orders. It is quite clear and
18 we have discussed this and the Tribunal has ruled on
19 this.
20 MR. HAMILTON: Correct.
21 MR. FRIEDMAN: That client confidences are
22 simply not relevant for the more general public. This
[Page 516]
1 is a very standard, regular thing that happens in
2 every case. There is nothing--really. Please stop
3 making an issue of it.
4 PRESIDENT FERNÁNDEZ ARMESTO: Let's go on
5 with the questions to the Witness.
6 MR. HAMILTON: We will continue to make an
7 issue, sir. Thank you.
8 PRESIDENT FERNÁNDEZ ARMESTO: Please.
9 MR. HAMILTON: Mr. Koenigsberger, when you
10 go--when you go--
11 MR. FRIEDMAN: And we will continue to rely
12 on the Tribunal's rulings.
13 BY MR. HAMILTON:
14 Q. When you go to state pension funds, for
15 example, and other investors, and pitched [Redacted]
16 did you advise them that you were planning to acquire
17 additional Peruvian Land Bonds?
18 A. We raised [Redacted] in, I believe,
19 [Redacted] and I don't believe that we did because I
20 don't think we anticipated at the time.
21 MR. HAMILTON: Please pause our clock, if you
22 can.
[Page 517]
1 Mr. President, we can discuss this openly if
2 you would like. We would be glad to assist. Thank
3 you. Thank you. Thank you.
4 (Comments off microphone.)
5 PRESIDENT FERNÁNDEZ ARMESTO: What the
6 Secretary is informing me about is that apparently
7 some new confidential information, which is the names
8 probably of some of the clients, was disclosed before
9 we went into confidential mode, and that they are
10 asking that at 12:23, which is four minutes ago, we,
11 at a certain time--
12 MR. HAMILTON: Mr. President--
13 PRESIDENT FERNÁNDEZ ARMESTO: No, no, no.
14 Can I finish, please.
15 MR. HAMILTON: Yes, sir.
16 PRESIDENT FERNÁNDEZ ARMESTO: Mr. Hamilton,
17 please let me finish.
18 That we add a cut in the--or that we put in
19 an addition, that we edit some minutes, from the
20 minute 23 to the minute until the confidentiality
21 starts. And that is how much time, one minute, that
22 we edit one minute from there, because the reason
[Page 518]
1 being that the names of certain clients were
2 disclosed. Is that the reason?
3 MR. FRIEDMAN: Yes.
4 MR. HAMILTON: Mr. President, we strongly
5 disagree, and please allow me to comment. The first
6 reason we disagree is because we don't think that
7 managing the confidentiality of this case is something
8 that should be done on the side by Gramercy
9 representatives talking to the Secretary. We are glad
10 to do it in open discussion.
11 Second of all, the information in the
12 entities that I mentioned are in the record of this
13 case. You can find them as my colleagues just have in
14 press announcements. These are all mentioned in the
15 record of this case, and I cite to, among other
16 things, R-573, R-71, R-1012, R-1014, R-1005, all of
17 these documents, none of which of are designated
18 confidential, all which of are discussed in our
19 Briefs, mention the very specific entities which I
20 carefully raised.
21 There is nothing confidential here. So, the
22 reality is their press releases, it's all in the
[Page 519]
1 record of case. I paused--I paused and did not insist
2 for him to name other investors. So, I just want to
3 caution that just because somebody goes, tells the
4 Secretary this is confidential, and we have to cut it
5 off, that obviously does not make it so.
6 So, we would object to blocking that out, and
7 we are trying to be careful. Note that we have
8 scarcely been calling for confidentiality because
9 we've planned to try to avoid wasting your time and
10 his time with confidential session. That's why I ask
11 questions in a careful manner.
12 MR. FRIEDMAN: I'm not familiar exactly what
13 the documents that Mr. Hamilton just referenced.
14 They--yeah. Those are not Gramercy documents. Those
15 are also, as you know, that the exhibits are not part
16 of the ICSID website. They are not part of the public
17 forum information. And it seems to me quite a
18 different thing if a press reports that in general
19 Gramercy has certain client relationships, that's one
20 thing.
21 The questions that are being put now are more
22 specific. They relate to particular investments, and
[Page 520]
1 when you're asking the CIO and the founder of the
2 Company, who is under confidentiality obligations to
3 his clients, to talk about specific investments or
4 funds that those clients are in, that becomes
5 different.
6 And so, I do think that the same principle
7 that the Tribunal has already upheld about
8 confidentiality with respect to client names, because
9 that's an obligation of Gramercy and has no particular
10 relevance otherwise, is fine. Mr. Hamilton can
11 certainly ask about it, but we're just asking that it
12 be done in confidential session or, if he doesn't go
13 into confidential session first, which is now much
14 easier to do than other days. We don't even have
15 visitors in the room, then that we eliminate it.
16 I don't know why this is a hard rule for
17 anybody to follow. The Tribunal was quite clear about
18 the parameters of confidentiality. I just would
19 request that you continue to abide by it rather than
20 try to get around it because you think that it makes a
21 point.
22 MR. HAMILTON: Mr. President, I'm sorry, but
[Page 521]
1 I can refer you here to Exhibit R-1012, for example.
2 This is minutes available, I believe, on the internet
3 of the [Redacted] stating
4 that they have approved an investment in the [Redacted]
5 [Redacted]
6 Now, if Mr. Friedman wants to draw a line,
7 then I understand, I guess, he doesn't want to
8 acknowledge whether, in addition to [Redacted], they also
9 invested in [Redacted] given that we have been given so
10 little information, I admit that we would appreciate
11 greater transparency, but I am literally referring to
12 documents that are in the record and in our Briefs.
13 So, I'm glad for this to be discussed in some
14 other moment, but I'm not very glad to continue to
15 have the testimony interrupted by this issue.
16 MR. FRIEDMAN: Well, the [Redacted] I do not
17 believe has any investment that is at issue in this
18 case. So, yes, I believe that investors in other
19 funds are not relevant, and, therefore, are the kind
20 of thing that should be within confidentiality. And
21 what does it matter--
22 MR. HAMILTON: Mr. President, he's making up
[Page 522]
1 argument in the middle of my testimony, sir. I'm
2 sorry, but it's appropriate. We've just learned
3 explosively that they hid Land Bond acquisitions from
4 us.
5 PRESIDENT FERNÁNDEZ ARMESTO: Gentlemen.
6 Gentlemen.
7 We have two ways to go. Either we leave the
8 situation like it is and we--in whatever time it is,
9 in an hour, we go live, or we have to go through this
10 whole procedure and it will only--we will have to
11 deliberate and see where we stand and take a Decision.
12 We are losing time.
13 Mr. Hamilton, please, let me finish. I pray.
14 Please, let me finish.
15 So, we will be losing time. I would make
16 the--and if you insist, we will do that, and we will
17 have to deliberate. I cannot take a Decision. We
18 have to look at instructions, we have to deliberate.
19 It will just take some time. The information which
20 has been disclosed was the name of some American
21 pension funds, and they, by themselves, have probably
22 a lot of their own disclosure obligations.
[Page 523]
1 My proposal would be that we are more careful
2 towards the future and we are careful, and everyone is
3 careful when confidential information is likely to
4 occur, and that we just move on in the interest of
5 time. That said, if you feel very, very strongly
6 about this, we will--then we have to break. We have
7 to deliberate, and to have to come back.
8 MR. FRIEDMAN: If I may just have a moment.
9 Because it's the client's confidence--
10 PRESIDENT FERNÁNDEZ ARMESTO: Yes, of course.
11 You take instructions if you need. If you need two
12 minutes' break. That's fine. If you want to go
13 outside and give instructions outside, that's fine.
14 We will just remain seated.
15 (Pause.)
16 MR. FRIEDMAN: Mr. President, thank you.
17 I am pleased to report that, once again, your
18 pragmatic solution, I think, is acceptable and makes
19 great sense. However, I would just want to put down a
20 marker that this needs to stop.
21 So, we are prepared to--without waiving
22 confidentiality over client information, we accept
[Page 524]
1 and--we can accept your practical solution in this
2 instance to not make things very technically
3 complicated, but we really must insist that client
4 names--it is very simple. Just don't use client names
5 anymore because that's where the sensitivity arises.
6 So, if we could have the Tribunal's careful
7 reassurance on that, then I think we are fine to
8 proceed.
9 PRESIDENT FERNÁNDEZ ARMESTO: Yes. Let's ask
10 Mr. Hamilton--thank you, Mr. Friedman.
11 Mr. Hamilton, let's be careful with client
12 names, and can I please also--yeah, you must be
13 careful when using client names because otherwise
14 we'll have this instance all the time, and it makes
15 the examination much more slow.
16 So, let's go on.
17 MR. HAMILTON: I just want to say that the
18 Republic of Perú not only has respected the Order of
19 the Tribunal about confidentiality, my questions have
20 respected the Order of the Tribunal. Any allegation
21 to the contrary is pure interference with our
22 cross-examination, in our view. And I leave it at
[Page 525]
1 that.
2 We will continue to be cautious.
3 PRESIDENT FERNÁNDEZ ARMESTO: Please.
4 BY MR. HAMILTON:
5 Ω. There is one--I would be interested to ask
6 one question, but it relates to you. Are you a client
7 of Gramercy?
8 A. I'm an investor in Gramercy vehicles.
9 Q. You are an investor in Gramercy vehicles.
10 Individually? You are a beneficiary?
11 A. Yes, I am.
12 Q. Okay. Now, and that includes in connection
13 with the Peruvian Bonds.
14 A. I'm an investor in [Redacted]
15 Q. In [Redacted] And are you an investor with
16 beneficial interest in PARB, the entity that holds the
17 Land Bonds before this Tribunal, apparently?
18 A. I have a beneficial interest in PARB and the
19 underlying securities below that. I'm not a--I don't
20 own direct equity in PARB, but I have a beneficial
21 interest through funds above PARB.
22 Q. So, you have a personal interest in the
[Page 526]
1 outcome with respect to the Land Bonds before this
2 Tribunal and a personal interest with respect to the
3 new Land Bonds that were acquired in 2017 and are part
4 of the [Redacted] vehicle; correct?
5 A. In the [Redacted] vehicles, we are--as you see in
6 the documents, we co-invest, so we put a--if the
7 client's put in a dollar, we put in a certain amount
8 with that. So, that's where that interest comes from,
9 aligned with our clients.
10 Q. So, the answer is, yes, you do have a
11 personal interest in the outcome.
12 A. As an investor in [Redacted] I have a personal
13 interest. As a member of GFM, I have an interest,
14 yes.
15 Q. Okay. Now--
16 MR. HAMILTON: Mr. President, for the sake of
17 efficiency, I have to say that--as a procedural
18 observation, that the fact that Gramercy, while this
19 case has been pending, has acquired additional Land
20 Bonds we consider to be relevant and material, both to
21 prior document requests and to the issues before this
22 Tribunal.
[Page 527]
1 Respondent is, frankly, amazed to learn in
2 the middle of the Hearing that there are entire other
3 holdings of Land Bonds that we have never heard about.
4 We reserve the right to consider this,
5 request the opportunity to see relevant materials, and
6 comment. And so we may have future questions about
7 this. We consider it highly relevant and material.
8 I am being put in a complex position because
9 this is entirely new information that we have never
10 heard about before, and I have still yet other
11 questions to go.
12 So, I put down that flag.
13 BY MR. HAMILTON:
14 Q. Now, let me ask you a question.
15 ARBITRATOR DRYMER: Pardon me, are you moving
16 off the 2017 Bonds, or are you still on that subject?
17 MR. HAMILTON: I think I'm basically saying
18 we haven't even gotten started with that subject, and
19 we will have to consider with our client a range of
20 different elements, including that we will expect to
21 see all relevant documents, we will expect to
22 understand all relevant documents--
[Page 528]
1 PRESIDENT FERNÁNDEZ ARMESTO: That's fine.
2 MR. HAMILTON: --so on and so forth.
3 PRESIDENT FERNÁNDEZ ARMESTO: Let's finish
4 with the Witness.
5 ARBITRATOR DRYMER: I think that was a yes
6 for the moment.
7 MR. HAMILTON: Yes.
8 ARBITRATOR DRYMER: All right.
9 MR. HAMILTON: It's a "I'm not sure." I'm
10 working on it.
11 ARBITRATOR DRYMER: I understand. So, then I
12 will the Witness this one question on that subject.
13 You've said, in response to a number of
14 questions from Mr. Hamilton regarding the 2017
15 purchase of the Peruvian Agrarian Bonds--you
16 effectively said "I don't know" or "I don't recall."
17 That's fair.
18 In your view, do you think either Mr. Lanava
19 or Mr. Joannou might have answers to those questions?
20 THE WITNESS: Certainly on the settlement
21 questions that Mr. Hamilton asked, I think that
22 Mr. Lanava will indeed.
[Page 529]
1 ARBITRATOR DRYMER: All right. Thank you.
2 BY MR. HAMILTON:
3 Q. Mr. Koenigsberger, you've explained that you
4 chose not to mention Gramercy's acquisition of
5 additional Land Bonds to this Tribunal because you
6 decided it was not relevant.
7 Did you provide information about these Land
8 Bond acquisitions, to, for example, your Quantum
9 Expert, Mr. Edwards?
10 A. I don't know. I don't believe so.
11 Q. So, your Quantum Expert, Mr. Edwards, is not
12 aware that Gramercy made Land Bond acquisitions in
13 2017?
14 A. I don't know.
15 Q. You also mentioned that the money used to
16 acquire Peruvian Land Bonds in 2017 came from various
17 sources/investors in the [Redacted]; is that
18 correct?
19 PRESIDENT FERNÁNDEZ ARMESTO: That is what he
20 said.
21 MR. HAMILTON: Okay.
22 BY MR. HAMILTON:
[Page 530]
1 Q. Now, when you raise funds, for example, you
2 go to investors, you make pitches--they're in the
3 record. You go to a state pension fund or other
4 potential investor, you make a pitch.
5 Did you specifically discuss with them
6 Peruvian Land Bonds as a target acquisition for the
7 [Redacted]?
8 A. I do not think that we did.
9 Q. So, if you went on a pitch to raise money for
10 the [Redacted] you never told those potential
11 investors "we are going to target Peruvian Land
12 Bonds"?
13 A. We wouldn't have known in 2015 what we were
14 going to target. It's a five-year investment period.
15 So, there would have been no reason to talk about a
16 Peruvian Land Bond purchase to the extent that that
17 wasn't contemplated or known at the time, just like
18 the other 50 investments that we've done.
19 Q. So, in [Redacted] when you raised funds for
20 [Redacted] you did not anticipate an acquisition of
21 additional Land Bonds; is that correct?
22 A. The fund's called [Redacted]
[Page 531]
1 [Redacted]
2 Q. Sorry about that.
3 A. The whole idea is opportunities as they
4 become available. That's what we were talking to
5 clients about.
6 We don't know ex ante what's going to come
7 forward in the next five years, so I don't believe
8 that we--as I said before, I don't believe that we
9 were speaking about Peruvian Land Bonds in [Redacted] with
10 investors in [Redacted]
11 Q. And at the time of the acquisition of
12 Peruvian Land Bonds in 2006 to 2008, was that
13 disclosed as part of raising funds for your existing
14 vehicle at that time?
15 A. That vehicle raised its initial capital in
16 1999. So, 2006 to 2008 purchases, I imagine were not
17 discussed.
18 Q. Were not mentioned.
19 So, effectively, when you were using funds,
20 because you used $33 million--Gramercy used
21 $33 million of funds raised from clients to acquire
22 the Land Bonds. In fact, those clients were never
[Page 532]
1 told "now we're going to use $33 million for the Land
2 Bonds"; is that correct?
3 A. The way that investment management agreements
4 work is you don't go and consult with clients on every
5 individual trade that you do. We certainly reported
6 on all the positions in the Fund to clients over time,
7 but we typically--as part of, again, maybe 30 to 50
8 investments you're running at one time, you don't go
9 and talk to all your clients about those 30 to 50
10 investments because we're given full discretion via
11 the investment management agreement to make those
12 investments on behalf of the Fund.
13 Q. So, just to confirm, you're given full
14 discretion, and you make a broad disclaimer with
15 respect to the outcome; is that correct?
16 A. We are given full discretion. And as I said
17 before, we give the typical disclaimers that go with
18 Fund documents, correct.
19 Q. Okay. Now, you would agree, wouldn't you,
20 Mr. Koenigsberger, that the Peruvian State never went
21 to United States pension funds or American workers and
22 marketed Agrarian Land Bonds to them; is that correct?
[Page 533]
1 A. That's probably correct.
2 Q. Okay. And what you're saying is that, in
3 fact, Gramercy did not disclose, before using
4 $33 million of client funds to acquire Land Bonds in
5 2006 to 2008? That was not disclosed to investors in
6 that Fund, such as state pension funds; is that
7 correct?
8 PRESIDENT FERNÁNDEZ ARMESTO: He has already
9 said that, Mr. Hamilton. He has already confirmed
10 that he has a discretionary authorization from his
11 clients and that he takes the decision--that as an
12 investment manager, he takes the decision, and that at
13 the end of the year or quarterly he informs the
14 clients. I mean, he has said that.
15 MR. HAMILTON: Well, Mr. President, if I
16 might--and I'm responding to your comment in question
17 here--for years the Gramercy propaganda campaign has
18 stated publicly and to the United States Government
19 that Perú is trying to harm American workers. So, I
20 think that these are relevant questions.
21 PRESIDENT FERNÁNDEZ ARMESTO: They're
22 absolutely relevant, but he has already answered.
[Page 534]
1 My only point is that the Tribunal is very
2 alert.
3 MR. HAMILTON: Okay. Good.
4 PRESIDENT FERNÁNDEZ ARMESTO: And once you
5 have made one question, I remember it. Believe me. I
6 remember your question. I remember the answer. And I
7 keep it in my mind. You don't have to do the same
8 question twice.
9 MR. HAMILTON: Okay.
10 PRESIDENT FERNÁNDEZ ARMESTO: That was my
11 only point. If you want, you are welcome. I'm trying
12 to give you more time for further questions. It is
13 just to help you.
14 MR. HAMILTON: Okay.
15 BY MR. HAMILTON:
16 Q. Now, you mentioned that--so, we've clarified
17 that you don't go to these investors in these funds.
18 You have discretion. So, they are not necessarily
19 told that you are using their money to acquire
20 Peruvian Land Bonds. So, that's been established, as
21 the President has confirmed.
22 Now, you also mentioned ongoing reporting to
[Page 535]
1 clients about what's been done with their money;
2 right?
3 So, how is that ongoing reporting carried
4 out?
5 A. It can be update calls that we do with
6 clients, like a quarterly update call or ad hoc update
7 calls. There's typically reports that are sent out,
8 the financial statements that are sent out, some sort
9 of summary of Fund activity.
10 Q. Okay. So after you take a position in
11 connection with a potential target, such as Land
12 Bonds, do you timely disclose that to your investors?
13 A. We disclose the material positions of the
14 Fund when we're required to. It all gets picked up in
15 the financial statements at the end of the year.
16 If you're asking me if our clients are aware
17 of the investments in the funds, they are. There is
18 transparency. There's a fund advisory committee. We
19 go through all the positions in the Fund with the
20 advisory committee.
21 Q. So the investors in [Redacted] are aware now
22 that Gramercy has acquired Land Bonds?
[Page 536]
1 A. Yes.
2 Q. And there are written disclosures that have
3 been made to your clients with respect to those
4 acquisitions of additional Land Bonds?
5 A. I imagine that to be the case, at least in
6 the financial statements.
7 Q. And, historically, did Gramercy make written
8 disclosures or updates to its clients in the initial
9 fund--I think you called it the Emerging Markets
10 Fund--with respect to the status of its holdings in
11 the Land Bonds?
12 A. Yes, I'm sure we did that and other positions
13 in the Fund as well.
14 Q. Okay. And so, Mr. Koenigsberger, let's take
15 a look at a document. Let's go to Tab 51 in your
16 binder.
17 A. Okay. One minute.
18 Q. Tab 51 in your binder, which is document
19 R-1047.
20 This document is confidential. We have to
21 black it out.
22 (End of open session. Attorneys' Eyes Only
[Page 537]
1 information follows.)
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[Page 538]
CONFIDENTIAL SESSION
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3
4
5 BY MR. HAMILTON
6 Q. Mr. Koenigsberger, can you please turn to
7 Tab 64. Tab 64 is Exhibit R-1124.
8 PRESIDENT FERNÁNDEZ ARMESTO: 1124.
9 MR. HAMILTON: Correct.
10 BY MR. HAMILTON:
11 Q. This document is in the record. It's a
12 publication by the National Legal and Policy Center
13 promoting ethics in public life. Do you see that
14 document?
15 A. Yes, I do.
16 Q. And this document is dated--or posted on the
17 internet September 20, 2013. And this article is
18 titled "State Pension Funds and Big Investment Firms:
19 What Could Possibly Go Wrong?"
20 Has the relationship of Gramercy with state
21 pension funds been controversial in any way?
22 A. No.
[Page 546]
1 Q. Okay. Now, if we go to Page 3 of this
2 document, it refers to a due diligence questionnaire
3 of the New Mexico Educational Requirement Board. And
4 according to this document, a due diligence
5 questionnaire submitted to Gramercy asked whether
6 Gramercy had ever been subject of any regulatory
7 action or warning, and the Gramercy response was
8 "neither Gramercy nor any of its staff has ever been
9 subject to any regulatory action or warning."
10 Is that correct, that Gramercy, nor any of
11 its staff, have never been subject to any regulatory
12 action or warning?
13 A. Yes, it is.
14 Q. That's correct.
15 Okay. Now, you don't consider that Gramercy,
16 either in the U.S. or elsewhere, has been subject to
17 any sort of regulatory action; is that correct?
18 A. I don't believe so.
19 Q. And that includes, for example, with respect
20 to the Brazilian equivalent of the Securities and
21 Exchange Commission; is that correct?
22 A. I believe what that was about was that was an
[Page 547]
1 inquiry. That was an inquiry from the Brazilians as
2 it related to one of the entities we had in Brazil
3 that was collecting on nonperforming loans and
4 returning capital to the U.S.
5 Q. Okay.
6 MR. HAMILTON: Now, let me check the time,
7 Mr. President. It is 1:00 p.m. We've had an
8 intervention of information that changed the path of
9 the testimony.
10 So, the question that I have is, number one,
11 how long do you want to go until we break for lunch
12 under the circumstances, because we will not finish
13 before lunch.
14 PRESIDENT FERNÁNDEZ ARMESTO: We will finish
15 with the Witness before lunch. We must. We must.
16 MR. HAMILTON: Okay. Give me just a moment
17 to reorganize.
18 PRESIDENT FERNÁNDEZ ARMESTO: I normally
19 never have lunch before 3:00, so you have a lot of
20 time.
21 MR. HAMILTON: Okay. Give me 60 seconds to
22 parse, given that we've had a bit of a surprising
[Page 548]
1 detour.
2 (Pause.)
3 BY MR. HAMILTON:
4 Q. Mr. Koenigsberger, you would agree that the
5 Land Bonds that are directly a part of the claim
6 before this Tribunal include approximately 9600-plus
7 Land Bonds that had been presented to this Tribunal;
8 correct?
9 A. Correct.
10 Q. Now, those Land Bonds were initially not
11 provided to this Tribunal; correct?
12 A. I believe copies of the Land Bonds were
13 provided to the Tribunal.
14 Q. Well, are you aware that your initial Request
15 for Arbitration did not include copies of the Land
16 Bonds?
17 A. I'm not aware.
18 Q. Okay. And so at this time, what is before
19 the Tribunal are copies of Land Bonds, but obviously
20 not the original Land Bonds that you have in a secret
21 undisclosed location in Lima; correct?
22 A. Sorry. What's the question?
[Page 549]
1 Q. The Tribunal does not have before it the
2 actual original Land Bonds which are at an undisclosed
3 location in Lima; correct?
4 A. As I mentioned before, transportation of the
5 actual Bonds would be pretty risky and unwarranted, so
6 that's why I thought copies would be sufficient.
7 As the Republic knows, we've offered multiple
8 times to actually--nothing would make us happier than
9 to be able to give the Bonds to Perú and get receipt
10 for it so that we don't have to pay for custody, but
11 the Tribunal has copies as of today.
12 Q. Okay. And, Mr. Koenigsberger, you chose not
13 to provide your Bonds to the Peruvian State as part of
14 the duly established Bondholder procedure; correct?
15 A. We did, because if we were to produce it for
16 verification, we were giving up all of our rights and
17 agreeing to the conditions of that tender.
18 Q. So, you have not tendered them for
19 authentication, but you have provided a document, and
20 it's at Tab 34. And this is a report from Deloitte.
21 It's in the record as CE-224A.
22 Now, this document, sir--if you can turn to
[Page 550]
1 Page 4 of this document. Now, what this document
2 states is that Deloitte confirms that it has
3 photographed the Land Bonds of Gramercy, but Deloitte
4 has not undertaken an authentication process; is that
5 correct?
6 A. I'd have to read the document to look at
7 that.
8 Q. And this document goes on to say on Page 7
9 that in any event, this advisor, Deloitte, does not
10 express any certification attestation or opinion of
11 any kind, other than as explicitly set forth herein.
12 So you did not obtain an expert report
13 authenticating the original Land Bonds in a system
14 that would comport with the methodology utilized under
15 Peruvian law; is that correct?
16 A. We went through the steps that were necessary
17 in order to authenticate and transfer the Bonds back
18 in the '06 to '08 period. If you recall the
19 memorandum, the due diligence memorandum, the very
20 first item on that was authentication.
21 I notice on the back of the Bond that's
22 provided here that one of the things that we learned
[Page 551]
1 is that it had to be duly endorsed to Gramercy Perú
2 Holdings. That's been done here.
3 So, we did everything we were supposed to do
4 to legally transfer title to Gramercy Perú Holdings.
5 Q. Okay. That was your own purchase process.
6 If we go to the very next tab, Tab 35, Exhibit R-649.
7 A. Sorry, which one?
8 Q. Let me ask you one other question. Excuse me
9 one moment.
10 Isn't it the case that your purchase of
11 Peruvian Land Bonds through a purchase contract was
12 intended to establish a valid transfer, and did that
13 include attestation of authenticity?
14 A. I believe that there was authentication,
15 there was review by local counsel, there was the
16 notaries. So, again, all the steps that we were
17 advised by the Experts in Perú on transferability--
18 because, again, transferability is permitted under
19 Peruvian law--that we followed those steps.
20 Q. Okay. Tab 35, sir.
21 Tab 35 is Exhibit R-649. This is an expert
22 graphotechnical report by the National Police of Perú
[Page 552]
1 that is in the record as an example of the
2 authentication process undertaken as part of the
3 Peruvian Bondholder proceeding managed by the Ministry
4 of Economy and Finance.
5 Just to confirm, you have not obtained any
6 type of authentication document like this; is that
7 correct?
8 A. I don't believe so.
9 Q. Okay. Thank you.
10 Now, let's go next to Tab 39. Now, this is
11 Exhibit R-1145 from July 8, 2016, and it refers to
12 Gramercy and emphasizes Gramercy is the lone fund that
13 amassed Peruvian Land Bonds.
14 And you've emphasized that many times. Why
15 do you think Gramercy is the only fund that chose to
16 amass Peruvian Land Bonds, Mr. Koenigsberger?
17 A. Well, I think Gramercy specifically focuses
18 on sovereign distressed, defaulted securities. There
19 were certainly large institutions in Perú that we were
20 aware of, as well, that also amassed large positions.
21 I believe one bank has a position that's nearly the
22 size of ours. So, this is--specifically what we--a
[Page 553]
1 main strategy of our firm was to do sovereign
2 investing.
3 Q. So, I'll put aside whether that bank holds
4 Bonds because it opportunistically or speculatively
5 sought them. I think they are differently positioned
6 from Gramercy, but we won't go there.
7 Now, this article also emphasized Gramercy
8 would not disclose publicly how much it paid for each
9 Bond.
10 Why did Gramercy withhold the information for
11 so long about how much it paid for the Bonds?
12 A. That we wouldn't tell a reporter what we paid
13 for the Bonds? That's confidential information. Most
14 reporters wouldn't even ask it.
15 Q. Well, you also withheld the purchase
16 contracts from this Tribunal. You mentioned purchase
17 contracts in your Witness Statements but did not
18 produce them until late into this proceeding.
19 Why did you choose not to provide the
20 purchase contracts to this Tribunal?
21 A. I believe that we provided everything that
22 the Tribunal has asked us to provide.
[Page 554]
1 MR. FRIEDMAN: And we've provided all the
2 purchase contracts. They're in the record.
3 PRESIDENT FERNÁNDEZ ARMESTO: Yeah. I mean,
4 in any case, this is--
5 MR. FRIEDMAN: And they were provided to Perú
6 in 2011.
7 MR. HAMILTON: You're far out of line right
8 now. I'm sorry.
9 PRESIDENT FERNÁNDEZ ARMESTO: Okay. Let's go
10 on. I don't think he is responsible for the document
11 production. It is a question for Counsel.
12 MR. HAMILTON: The reason, sir, that I
13 consider it relevant, if I might, is that
14 Mr. Koenigsberger has provided five Witness
15 Statements, including his first three Witness
16 Statements, which are evolving documents with changes.
17 He has emphasized his personal investment.
18 He has emphasized his personal responsibility. And
19 those statements are the ones that did not disclose
20 the purchase contracts but explained that they
21 purchased the Bonds, as well as the other issues we've
22 been discussing. That's why I consider it relevant to
[Page 555]
1 ask this Witness, because he is the Witness through
2 which Gramercy introduced or did not introduce these
3 various documents.
4 BY MR. HAMILTON:
5 Q. Now, Tab 40, if I might, Mr. Koenigsberger.
6 Tab 40 is a document. It's an email from José
7 Cerritelli.
8 PRESIDENT FERNÁNDEZ ARMESTO: We need
9 reference.
10 MR. HAMILTON: Oh, yes. CE-731.
11 PRESIDENT FERNÁNDEZ ARMESTO: Thank you.
12 BY MR. HAMILTON:
13 Q. All right. This is an internal Gramercy
14 email from May 23, 2008. And what you see in this
15 email is it includes an email within the chain copied
16 to you.
17 Do you see that on the first page there, sir?
18 A. Yeah, in the lower part, yes, I do.
19 Q. Okay. And it says--José Cerritelli says, "I
20 prepared this for your call today at 10:00 a.m. with
21 Hermès."
22 Do you see that?
[Page 556]
1 A. Yes. This is Hermès, a fund of fund, I
2 believe, a French fund of fund that has nothing to do
3 with the Germany export credit agency that we talked
4 about before.
5 Q. That's okay. But can you tell me who was
6 Hermès? You're saying it's a French fund.
7 A. It was a French fund. I believe it was a
8 French--Paris-based fund that was a fund of fund that
9 had invested in the Gramercy Emerging Markets Fund.
10 Q. Okay. And so--
11 (Comments off microphone.)
12 PRESIDENT FERNÁNDEZ ARMESTO: The fund also
13 produces some very nice clothes, which Professor Stern
14 is one of the best clients of, of the shop they have
15 in Avenue Montaigne.
16 BY MR. HAMILTON:
17 Q. So, Mr. Koenigsberger, this would have been
18 an update to a client of Gramercy in the Emerging
19 Markets Fund with respect to the status of the
20 Agrarian Bonds; is that correct? Mr. Koenigsberger?
21 A. I'm reading what it is, so just give me one
22 moment.
[Page 557]
1 Q. Ah, okay.
2 A. Okay. I'm sorry. What's the question--
3 Q. These were notes to be used for an update to
4 a client of the Gramercy Emerging Market Fund
5 regarding the status of the Agrarian Land Bonds
6 situation; is that right?
7 A. That's correct.
8 Q. So, at this time, Gramercy was continuing to
9 acquire Peruvian Land Bonds--correct?--because you
10 were continuing to acquire them into the middle of
11 2008; is that correct?
12 A. Yeah, I think we were substantially complete
13 at this point.
14 Q. Okay.
15 Okay. Now, under Item 10, this is Page 4 of
16 the document--Item 10, sourcing cost and pass-through
17 certificate prices.
18 A. Okay.
19 Q. And it says small blocks can often be found
20 at relatively low prices in the range of 20 percent of
21 the claims' current face value, particularly on those
22 blocks that require fairly large amounts of legal work
[Page 558]
1 to bring the documentation supporting these claims up
2 to date; is that correct?
3 A. That's what it says, yes.
4 Q. Okay. So, this would have been an example of
5 updating a client of Gramercy about the status of
6 acquiring these claims; is that correct?
7 A. Correct.
8 Q. Okay. And as you see under Item 12, steps
9 towards the restructuring, of course, this is the
10 restructuring that Gramercy hoped would occur but had
11 not yet occurred at that time; is that correct?
12 A. I'm sorry. What's the question?
13 Q. This refers steps towards the restructuring
14 but obviously there was no clarity as that time as to
15 whether there would be a restructuring as of May 2008;
16 is that correct?
17 A. There was no clarity, but shortly after we
18 actually did present a restructuring proposal to the
19 Government.
20 Q. And that never went forward; is that correct?
21 A. That's correct.
22 Q. Okay. So, as of May 2008, while you were in
[Page 559]
the process of acquiring the Bonds, that was your contemporaneous update to a client.
MR. HAMILTON: Now, the President of the Tribunal asked a question about the certain documents, and I will take a moment for a confidential question here, if I might. I'll wait for the magic red light to come on.
(End of open session. Attorneys' Eyes Only information follows.)
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(End of Attorneys' Eyes Only session.)
[Page 573]
BY MR. HAMILTON:
Q. Now, Mr. Koenigsberger, we were in discussion about anticipating the 2013 court ruling, and you indicated that your optimism increased because of what you have thought that ruling was going to be.
Now, who is Carlos Anderson?
A. Carlos Anderson is a Peruvian individual.
Q. And what is his relationship with Gramercy now and in the past?
A. I don't believe that Carlos has any relationship with us today. In the past, he has worked with us on various projects, one being a Private Equity Fund that we were considering, some private lending funds that we've done, and he has also advised us on Land Bonds.
Q. And he was at least for a period of time an employee of Gramercy; correct?
A. Yeah. For a short period of time, we were trying to launch a private equity fund for Latin America, and I believe in that period of time he was an employee.
[Page 574]
Q. Okay. And he continues to be involved with Land Bond issues on the ground in Perú; is that correct?
A. I don't know.
Q. You don't know.
And who is Mario Seoane?
A. Mario Seoane, I believe, was counsel to the engineers. He was a lawyer for us, and I understand one of the most, I guess, seasoned and utmost Experts on Land Bonds in Perú.
Q. Okay. So, Mario Seoane, is he currently Gramercy's lawyer?
A. I don't know for certain.
Q. In the past, he has been Gramercy's lawyer?
A. Yes, he has.
Q. For an extended period of time?
A. Yes.
Q. Okay. Now, I want to take your attention to the 16 July 2016 court ruling. Well, I'm not going to go straight to the ruling itself. I have a broader question.
PRESIDENT FERNÁNDEZ ARMESTO: Okay.
[Page 575]
BY MR. HAMILTON:
Q. Now, Mr. Koenigsberger, you're aware that when Gramercy first filed its case, it indicated to the Peruvian State that it had to file by a certain deadline due to prescription or statute of limitation-type issues related to the July 16, 2013, court ruling.
Were you aware of that at the time?
A. Was I aware of the court ruling? Yes.
Q. Yes. Okay.
No. Are you aware that when you filed this Treaty claim before the Tribunal, Gramercy represented to the Peruvian State that it needed to file in advance of the three-year anniversary the July 16 court ruling?
Were you aware of that?
A. I'm not aware of that.
Q. You didn't know that.
A. I don't know that.
Q. Now, Mr. Koenigsberger, in your--you've put in, of course, multiple versions of your initial Witness Statement. You initially emphasized the dire
[Page 576]
consequences of the July 16 court ruling, but in later Witness Statements, you said you really weren't sure whether the court ruling was bad or good; is that correct?
A. We had no idea what to make of the July 2013 ruling. There was more unknowns than knowns.
Q. Okay. So, let me take you to Tab 72. Tab 72 indicates Gramercy's statements to Perú and to its forthcoming Tribunal contemporaneously in 2016 regarding the July 2000--the July 16, 2013, ruling.
(Comments off microphone.)
MR. HAMILTON: It's not an R document. It's their actual pleadings. So, let's go to Claimants' Notice of Arbitration and Statement of Claim dated June 2, 2016. Paragraph--we are going to put it on the screen, Paragraph 233.
PRESIDENT FERNÁNDEZ ARMESTO: Why don't you go on with the question, whatever it is.
BY MR. HAMILTON:
Q. Yes. So, Gramercy stated in its Notice of Arbitration and Statement of Claim that Gramercy first acquired constructive or actual knowledge of Perú's
[Page 577]
breaches on or after July 16, 2013.
Do you remember that?
A. Do I remember making this statement?
Q. Well, that's what Gramercy said to the world.
PRESIDENT FERNÁNDEZ ARMESTO: But the question is what--he's here as a witness.
MR. HAMILTON: Yes.
PRESIDENT FERNÁNDEZ ARMESTO: And what is the question to the Witness? I mean, he's here to explain to us the facts.
MR. HAMILTON: That's right.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. So, and that is a statement which was in the submissions of counsel to Gramercy. What is the question to the Witness?
BY MR. HAMILTON:
Q. I'll go to the heart of it.
Mr. Koenigsberger, are you aware that Gramercy changed its position regarding the 2013--July 16, 2013, Court Order before this Tribunal? It first said that that was the date on which it had acquired constructive or actual knowledge of breaches.
[Page 578]
It later said, no, it wasn't until later.
Were you aware that Gramercy made that switch during this case?
MR. FRIEDMAN: I object. He's really a witness of fact. Also, it says on or after. At the time that pleading was filed, as you know, that that was to say so, no matter what, we are in compliance.
MR. HAMILTON: I'm sorry. I'm sorry.
(Overlapping speakers.)
MR. FRIEDMAN: When it was later filed, we clarified when the date became irrelevant.
PRESIDENT FERNÁNDEZ ARMESTO: Please.
Mr. Hamilton, we are all old hands, and we know why you are making that question, and it is not really--not a question which their Witness can answer.
MR. HAMILTON: Well, this is the--
PRESIDENT FERNÁNDEZ ARMESTO: Let me finish, please. Mr. Hamilton.
MR. HAMILTON: Yes, sir.
PRESIDENT FERNÁNDEZ ARMESTO: It's "el mundo del revés." We know why you are making the question and he can--the Tribunal was perfectly aware of the
[Page 579]
fact. I mean, it has been--you brought it up in your initial presentation. It has been discussed. We know exactly what has happened. He cannot help us. And we are aware of the fact.
MR. HAMILTON: Thank you. I do have a specific question, Mr. President. And the reason that I raise this question is because his testimony actually changed over the course of his Witness Statement.
So, let's go to Tab 75, Mr. Koenigsberger.
PRESIDENT FERNÁNDEZ ARMESTO: Very good.
BY MR. HAMILTON:
Q. Tab 75 is Exhibit CE-546. This is an email from José Cerritelli to you, Robert Koenigsberger.
Do you see that document?
A. I do. It seems as if he has forwarded me a document that he'd sent to others.
Q. Well, it says "Bob:" You're Bob; right?
A. No. See, it says "to Bob Joannou."
Q. Oh, to Bob Joannou. I see. He's sending you a message that was otherwise sent to Bob Joannou.
A. That's what appears to be the case.
[Page 580]
Q. Did they call you Robert in the Company?
A. R.K., Robert. I'm definitely not a Bob. We have a lot of Bobs, Roberts.
Q. Okay. Fair enough.
A. You'll meet a couple of them today.
Q. Okay. So, I have a question regarding the penultimate paragraph of this email that was forwarded to you. It said: "We are discussing the above issues with the President of the Tribunal, Oscar Urviola."
Do you see that?
PRESIDENT FERNÁNDEZ ARMESTO: At the end of the email?
MR. HAMILTON: Well, at the end of the email, Mr. President, there's an extra email.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah. Yeah.
MR. HAMILTON: So, this is on Page 2--Page 2 in the middle of the page. It says: "However."
PRESIDENT FERNÁNDEZ ARMESTO: Yeah.
BY MR. HAMILTON:
Q. It says here, "José advises, we are discussing the above issues with the President of the Tribunal, Oscar Urviola." Do you see that?
[Page 581]
A. I do.
Q. So, where is Gramercy or Gramercy representatives engaged in discussions with Peruvian judges during the course of ongoing litigation that led to or followed the July 16, 2013 ruling?
A. I don't believe that Gramercy individuals were directly speaking to members of the Court. You had mentioned Mario Seoane before, who was our counsel and counsel to other Bondholders. In fact, he was counsel to the Party in the case which was the engineers.
Q. So he, in fact, simultaneously was counsel to those Parties and counsel to Gramercy; is that right?
A. I believe that to be the case.
Q. Okay. So, now do you believe that in Perú it is unusual for Parties to meet with judges?
A. I believe it's a bit different than the United States, that there's some ex parte that--communications that go on. I'm not sure exactly what that means, but I think it is different than here.
Q. Okay. And given that this email says "we are
[Page 582]
discussing issues with the President of the Tribunal, Oscar Urviola," do you agree that Gramercy or Gramercy representatives engaged with discussions with Peruvian judges on the Tribunal, Constitutional Tribunal?
A. I think when he says "we," I think he means Bondholders, in general. Again, we were coalesced with Bondholders, and, you know, I think counsel for the Bondholders could very well have been doing it on behalf--again, Mario was part of the case.
Q. So, he was your lawyer at the same time.
A. I don't believe--
Q. And you were part--
A. I believe that Mario represented many Bondholders in Perú, in fact, I believe that Mario wrote a book on the secret--the secret Bonds of Perú. He is the Expert in Perú on this for 30, 40 years.
Q. Okay. I'm going to distribute a document. It's not in the binder, but just for your reference, this is a document, R-467. Constitutional Tribunal visitor registry. Thank you.
PRESIDENT FERNÁNDEZ ARMESTO: What is this?
MR. HAMILTON: Constitutional Tribunal
[Page 583]
visitor registry from 2013. It is in the file as Exhibit R-467.
MR. FRIEDMAN: Object.
PRESIDENT FERNÁNDEZ ARMESTO: Sorry?
MR. FRIEDMAN: I just object. I mean, this goes--we have a--supposed to limit the scope of cross to issues that the Witness has testified about.
PRESIDENT FERNÁNDEZ ARMESTO: What do you want to ask the Witness? I mean, I would be surprised--
(Overlapping speakers.)
BY MR. HAMILTON:
MR. HAMILTON: Mr. Koenigsberger, were you aware--
PRESIDENT FERNÁNDEZ ARMESTO: Can I finish?
MR. HAMILTON: Yes. Oh, sorry.
PRESIDENT FERNÁNDEZ ARMESTO: I would be surprised if he has ever had access.
Have you ever been to the Constitutional Court of Perú?
THE WITNESS: I have not. I have not.
PRESIDENT FERNÁNDEZ ARMESTO: He has never
[Page 584]
been there.
Have you ever seen the record of visitors to the Constitutional Court of--
THE WITNESS: No, I have not.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. If you are going to prove or want to make an allegation that some lawyer for Claimant visited the Constitutional Court or someone visited the Constitutional Court, Mr. Koenigsberger is not--is not the person who can confirm that.
MR. HAMILTON: He's the closest we have to someone on Gramercy that we could ask, so I will simply ask.
PRESIDENT FERNÁNDEZ ARMESTO: Ask him.
BY MR. HAMILTON:
Q. Were you aware that Mr. Seoane, who was Gramercy's lawyer, made multiple visits to the Constitutional Tribunal in 2013?
MR. FRIEDMAN: Objection.
PRESIDENT FERNÁNDEZ ARMESTO: No. That's the proper question.
MR. FRIEDMAN: The characterization that he
[Page 585]
was Gramercy's lawyer. Mr. Koenigsberger has testified that he was lawyer to the Bondholders in the case.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. Okay. Let's--why don't you repeat the question, just with the name, without saying exactly who he is. And let's get--if he knows. Let's start asking him whether he knows him.
MR. HAMILTON: Yes.
BY MR. HAMILTON:
Q. Do you know Mario Seoane?
A. I think I may have met him one time.
Q. Okay. Were you aware that Mr. Seoane visited the Constitutional Tribunal multiple times during 2013?
A. I can't say that, specifically. I'm looking at the document here. I can see--
PRESIDENT FERNÁNDEZ ARMESTO: No, no, no. It's just--either you know or you don't.
THE WITNESS: I wasn't aware.
PRESIDENT FERNÁNDEZ ARMESTO: You were not aware. He never told you that he was visiting the
[Page 586]
Supreme Court, the Constitutional Court.
THE WITNESS: Again, the information that I would get would be typically through José and David and others that were on the ground. This is one of--again, remember, this is one of 30 to 50 investments that we were managing. So, I'm not in the weeds on every detail.
BY MR. HAMILTON:
Q. Now, Mr. Koenigsberger, let me ask a question.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah. Of course.
ARBITRATOR DRYMER: Mr. Hamilton, are you moving off this topic of--
MR. HAMILTON: Yes.
ARBITRATOR DRYMER: All right. Before you do, this is a question for you, not the Witness. So, that I understand, are you--is the suggestion that these visits took place before--may have taken place before or after the issuance of the July 2013--
MR. HAMILTON: Both.
ARBITRATOR DRYMER: Both. Order. All right.
[Page 587]
Thank you.
BY MR. HAMILTON:
Q. Mr. Koenigsberger, is it your view that the Peruvian legal framework, as it stands today, provides a sufficient framework for satisfactory resolution related to the Peruvian Land Bonds?
A. Sorry, could you repeat that?
Q. Is it your view that the existing Peruvian legal framework, under the Supreme Decrees, the last one--the Supreme Decrees related to the Peruvian Bondholder Process is a feasible framework for resolving the Land Bonds?
A. I think it's premature. As the Court ruled in April of 2014, when ABDA went to appeal the July 2013. The Court said that it was premature, that Bondholders couldn't be prejudiced, and that the Court itself in April 2014 said we have to wait for the calculations. And my read of that is that Bondholders are asked at the appropriate time when they know what is being offered by the Ministry, the opportunity to go back to the Tribunal, but the Tribunal made it very clear to me that the last word hasn't been said.
[Page 588]
Q. And is it your view that after the Supreme Decree of August 2017--you're familiar with the Supreme Decree of August 2017; correct?
A. Sorry, the--I thought you meant from the Court. The Supreme--
Q. No. I'm moving forward in the interest of time.
A. Sorry.
Q. The Supreme Decree of August 2017 with the "texto único actualizado," is it your position that that was a sufficient legal framework for resolution of the Peruvian Land Bonds?
A. It's not. I believe that all the Supreme Decrees that follow the July 2013 are just part of the same scam coverup, what have you, and, again, I'll go back to the April 2014. I think the Tribunal made it very clear that we have to wait and see what the Government provides. I mean, look how many times the Government has issued Supreme Decrees.
If Supreme Decrees were supreme, then the January of '14 would have stood on its own. But we were right. The final word wasn't known. I think
[Page 589]
there has been at least five or six Supreme Decrees since, so I don't believe--I don't agree.
Q. Well, let's take a look at your Third Statement, which is your Second Amended Statement, at Paragraph 60. And we will put that up on the screen, please. Do you have it? Paragraph 60, please.
Now, Mr. Koenigsberger, you wrote in your Witness Declaration in April that, as of April 2014, "there was nothing that prevented the development of a fair and efficient administrative process, one which could resolve the Land Reform Bond situation amicably and in a way that pays the Bondholders substantially what they are due while enhancing Perú's standing in the international community." You are quoting your own letter, actually. Next page.
A. I see it.
Q. Next page, guys.
Okay. "There is nothing that prevents." Do you see that? Thank you.
So, that was your contemporaneous statement to the Ministry of Economy and Finance about the state of affairs at that time. In other words, what I'm
[Page 590]
asking you is, do you still agree with that? That the legal framework, as it stands right now, is a sufficient basis upon which, in your view, a resolution of the Land Bonds could be achieved?
A. Yeah. I think in one of three ways. One, I think that the Ministry could offer another Decree and figure out how to come up with something that looks like current value under CPI with--there is an infinite number of ways to do that. They picked a finite number so far.
I mentioned the--we talk about a legal framework, I still think there's a legal framework that the TC said, you know, we have to wait and see what's being offered here, so I think that is still open. And, of course, the local courts, you know, what rights do we have under the local courts that we had back in 2006 to 2008 when we bought the Bonds.
Q. Your view is that in the existing regime following August 2017 Supreme Decree, there is sufficient room to resolve the Land Bonds in a reasonable manner; is that right?
A. Look, I think if there is goodwill on the
[Page 591]
part of the Republic of Perú, there is definitely a way to resolve the differences.
Q. Now, one other element, just to confirm my understanding, you also agree and you undertook yourself a verification process, so there's no dispute that a reasonable authentication process would be necessary in relation to old physical Bonds. You, of course, prefer such process to go as quickly as possible, but you agree that some kind of authentication process is necessary; correct?
A. Well, I'm glad you use the word "reasonable," because a reasonable authentication process would be you can submit your Bonds for authentication, and then you can take them out of that authentication process. What we were told when we were invited to authenticate our Bonds is tender your Bonds and give up all your rights relative to those Bonds. So, I wouldn't call that a reasonable authentication process.
Q. You're aware that Perú has authenticated more Bonds than the number of Bonds Gramercy holds; correct?
A. I'm aware of the fact they have authenticated
[Page 592]
Bonds. I'm not sure of the exact number.
Q. And you also agree that receiving contemporary sovereign Bonds is one form of payment that is acceptable to Gramercy; correct? We talked about that earlier.
PRESIDENT FERNÁNDEZ ARMESTO: We talked about it. You specifically asked, and I made a note that he said yes.
MR. HAMILTON: Okay.
MR. FRIEDMAN: Mr. President--
MR. HAMILTON: So--
PRESIDENT FERNÁNDEZ ARMESTO: We will have to break. I know.
MR. FRIEDMAN: Yeah, I think it is getting to be a little unfair.
PRESIDENT FERNÁNDEZ ARMESTO: I know. I know. We will--at 2:00, we will break.
BY MR. HAMILTON:
Q. Okay. So, Mr. Koenigsberger, basically what that leaves is a number. In other words, if the legal framework after the last Decree could be a sufficient basis for a Resolution and there can be a need for a
[Page 593]
reasonable authentication process, and payment with Peruvian Bonds, contemporary Bonds would be sufficient, that basically leaves us with a valuation issue.
That's what I think Gramercy has been after all along here, and you're alert that Gramercy has taken a position in this case that it could obtain approximately almost $34 million through the Peruvian Bondholder procedure if it had participated.
Are you aware of that number?
A. The number has moved around quite a bit over time, but I'm aware of that number.
Q. Okay. And so, do you consider $34 million a reasonable recovery for Bonds that you initially acquired for $33 million?
A. I do not.
Q. Okay. Now, you have requested from this Tribunal an amount that exceeds 5,500 percent more than the amount that was paid for those Bonds through purchase Contracts. What in your view would be a reasonable number?
A. I think a reasonable number is to determine
[Page 594]
what the current value of the Bonds is as of the current date. Again, we're talking about--it is equivalent not paying your credit card for four years, so, of course, the numbers are large, I understand that, but there is a process that Gramercy went under for a very long period of time to try and get a consensual outcome where we were more than happy to give up some of our full legal rights, that's what happens in a restructuring, some sort of quid pro quo.
But now that we are, unfortunately, here, this is a notion of what are we entitled to. And, unfortunately, we are here talking about what we are entitled to instead of what we could have achieved in good faith, and, you know, I feel good about the fact for the better part of 14 years, that's all we have done, is try to resolve this in good faith. I wish I could say that for Perú.
Q. Well, Mr. Koenigsberger, in other words, you once told me Gramercy has a number.
What is your number?
PRESIDENT FERNÁNDEZ ARMESTO: I mean, we are getting very close to some sort of settlement
[Page 595]
discussions. Is that--I'm slightly worried about where we are going to.
MR. HAMILTON: Have no fear, sir. We are going to lunch very soon.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. Hopefully.
(Comments off microphone.)
PRESIDENT FERNÁNDEZ ARMESTO: You say whatever you want.
MR. FRIEDMAN: Yes, and I will object.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah, it is slightly--it is not a factual question. It is really a discussion of a settlement, what is--if you ask him what is a reasonable number to you, which I think was the question, no? The question was--what is your number?
BY MR. HAMILTON:
Q. Well, the question of what is your number derives from a discussion that was held at a meeting that was unfortunately not a without prejudice meeting in September of 2017, where we reviewed the exact same issues that I just reviewed with Mr. Koenigsberger
[Page 596]
now. That was the basis. It's your choice. What's your number? If you say you're unable to answer here, I'll respect that.
A. I'm happy to discuss a number in regards to--
PRESIDENT FERNÁNDEZ ARMESTO: I have some--I would rather prefer that you do not answer, because--I think it is not proper for you to answer that at this stage. You have made a claim. We will look at your claim, and we will look at your defenses, and we encourage you, like always, and the Republic, of course, to find a settlement. Nothing would make this Tribunal more content than that there is a settlement, but I don't think that we should be aware of a number given by you.
MR. HAMILTON: Just to confirm, there is no settlement discussion happening here. Perú is bound by the applicable legal framework, and that binds its conduct.
PRESIDENT FERNÁNDEZ ARMESTO: I'm sure.
MR. HAMILTON: That has always bound its conduct, and that binds any discussions. So, any discussions with Bondholders of any type are bound by
[Page 597]
applicable law and not written on a napkin.
PRESIDENT FERNÁNDEZ ARMESTO: Of course.
MR. HAMILTON: So, that is the reality.
PRESIDENT FERNÁNDEZ ARMESTO: Very good. It is now 2:00, and I said that at 2:00 we would have to break.
Do you have many more questions, Mr. Hamilton?
MR. HAMILTON: Not many more. I will try to conclude immediately after the break, but I will get organized because the process was a little different than anticipated for various reasons.
PRESIDENT FERNÁNDEZ ARMESTO: Very good.
MR. HAMILTON: Thank you.
PRESIDENT FERNÁNDEZ ARMESTO: Do you have a lot of redirect?
MR. FRIEDMAN: Yes. I have some redirect. It was a long cross-examination, so I do have some redirect.
PRESIDENT FERNÁNDEZ ARMESTO: Very good.
We are off the record.
(Comments off microphone.)
[Page 598]
PRESIDENT FERNÁNDEZ ARMESTO: We will be back at punctually at 3:00 p.m.
(Whereupon, at 2:01 p.m., the Hearing was adjourned until 3:00 p.m., the same day.)
[Page 599]
PRESIDENT FERNÁNDEZ ARMESTO: We resume the Hearing and we continue with the examination of Mr. Koenigsberger.
Mr. Hamilton, do you have any other questions for the Witness?
MR. HAMILTON: Yes, sir.
PRESIDENT FERNÁNDEZ ARMESTO: Very good. Let us--before you put that question, let us try to organize the afternoon.
It is now 3:00. We should not go on further than 6:30, 7:00 at the utmost. 6:30 should be our limit. Afterwards we start--you know, the theory of the potato sacks, that three arbitrators become three potato sacks sitting here and appearing to be listening. But there is--well, except for Professor Stern, who is, of course, not. She is an Hermes potato sack.
No, but there is an element you cannot absorb any more information, and it becomes meaningless. So, 6:30, 7:00, a little bit more, but not much more than 6:30 is what is feasible, because we had originally
[Page 600]
scheduled until 6:00. So, half an hour additional time, but we don't have more time than that.
So, yeah, let's try to be efficient in the use of time.
Very good, Mr. Hamilton.
MR. HAMILTON: Thank you, Mr. President, Members of the Tribunal, my counterparts as well.
BY MR. HAMILTON:
Q. Mr. Koenigsberger, I have some additional questions for you. And thank you again for your patience and participation with this process.
A. Sure thing.
Q. Gramercy has a group of Land Bonds that are--form the basis for its Claim before this Tribunal correct? These are the 9500, 9600 Land Bonds that are the subject of this Treaty claim; correct? That's one group. We will call it Tranche 1.
A. That's correct.
Q. Okay. And then as you mentioned earlier today, Gramercy has other Land Bonds that it acquired in early 2017; is that correct?
[Page 601]
MR. FRIEDMAN: Objection. That isn't quite what he testified.
PRESIDENT FERNÁNDEZ ARMESTO: Do you have other Land Bonds? Let's make a general question. You do have another tranche of Land Bonds, and let's call them Tranche 2 of Land Bonds. Okay.
Mr. Hamilton, we now have Tranche 1 and Tranche 2. What is the question for the Witness?
MR. HAMILTON: Well, Tranche 2, Mr. Koenigsberger testified they acquired in early 2017.
PRESIDENT FERNÁNDEZ ARMESTO: Yes.
MR. HAMILTON: That was my question.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah.
MR. HAMILTON: I mean, that's what we were discussing.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah. I think he said--I seem to remember it was in the first quarter of 2017, and he also said "I don't know exactly how much they are valued, but it's approximately 50 million U.S. Dollars."
MR. HAMILTON: Thank you. He has done our
[Page 602]
work for us.
PRESIDENT FERNÁNDEZ ARMESTO: Any other question?
MR. HAMILTON: Well, that's my question.
BY MR. HAMILTON
Q. Are there any other Land Bonds? There is Tranche 1. There is Tranche 2. Are there any other Land Bonds that we have not had the opportunity to discuss yet that Gramercy or its affiliates control or own or have purchased?
A. No.
Q. So there is only Tranche 1 that is the basis for the Claims before this Tribunal, and Tranche 2 that was acquired around early 2017; correct?
A. Sometime in 2017, correct.
Q. Sometime in 2017.
Now, are the Land Bonds that Gramercy acquired in 2017 submitted to the local Bondholder proceeding?
A. No, they are not. I do not believe so.
Q. They are not submitted to the local Bondholder proceeding.
[Page 603]
A. I do not believe so.
Q. And they are not part of this Treaty proceeding, we've confirmed.
PRESIDENT FERNÁNDEZ ARMESTO: Yes. They are not part of this Treaty proceeding.
BY MR. HAMILTON:
Q. So, are they part of any court proceeding?
A. I can't tell you for certainty whether they came with court proceedings already in place or not. I don't recall.
Q. We're in a strange situation because half the room knows the truth and the other half of the room has just learned about this for the first time today. This Tranche 2, Mr. Koenigsberger, they are not in the local Bondholder proceeding, they are not in Treaty proceeding. Are they in local court proceedings?
PRESIDENT FERNÁNDEZ ARMESTO: The answer is he does not know whether they came or not with a local court proceeding. I mean, the Witness has answered. Mr. Hamilton, you may like or not his answers, but it is his answer.
[Page 604]
BY MR. HAMILTON:
Q. You don't know whether they are in the local court proceeding?
A. I do not know.
Q. Then what do you intend to do with these other Land Bonds? If they are not in this Treaty proceeding, they are not in the local Bondholder proceeding, what do you intend to do with these Bonds?
A. As I said before, I believe when the Tribunal ruled on the appeal in 2015, they said that the last word wasn't out, that they were still waiting for--that it was premature and that there was enough calculations that still had to be done, and that Bondholders can be prejudiced by what the Supreme Decrees might do, so we'll wait and see what plays out in that situation.
Q. So, Gramercy spent--you mentioned a figure of $50 million with no plan of what it might do with these Bonds.
A. We'd like to be able to--what we've tried to do with all our Bonds, which is to be able to sit down with the Republic of Perú and have a consensual
[Page 605]
resolution.
Q. And you don't know how many Bonds are part of Tranche 2?
A. I don't know how many Bonds are part of Tranche 2.
Q. So, the bottom line is you bought Bonds, and you don't know what you're going to do with them; is that correct?
A. At this moment, there is--I don't know with certainty what we are going to do with those Bonds.
Q. Do you have the intention of bringing other Treaty-based claims, for example?
MR. FRIEDMAN: Objection.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah.
BY MR. HAMILTON:
Q. Now, Mr. Koenigsberger, you mentioned that the Tranche 2 Bonds were purchased in 2017. I'm going to show you one document here. This will be Exhibit R-173.
PRESIDENT FERNÁNDEZ ARMESTO: 173.
MR. HAMILTON: Correct.
PRESIDENT FERNÁNDEZ ARMESTO: Very good.
[Page 606]
BY MR. HAMILTON:
Q. Mr. Koenigsberger, R-173 is a press statement issued, as usual, through PR News Wire on April 24, 2017, by the Peruvian American Bondholders for Justice, which, as we have established, was established in 2015.
And this document says: "Mobile billboards in Washington, D.C. haunt Perú over Agrarian Land Bond default," and you see a picture here of a billboard in front of the United States Congress, and this document says: "Perú defaults. Rating agencies ignore it. American workers pay the bill."
Do you see that picture?
A. Yes. I was trying to find the previous--sorry, it's in the title.
Q. Yeah. You see the picture; right?
A. I see the picture.
Q. Okay. This was April of 2017. So, at or around the time of this billboard, Gramercy was purchasing additional Land Bonds; is that correct?
A. Somewhere in that time period.
Q. Okay. Okay. So, just to confirm, that time
[Page 607]
period when Gramercy was acquiring--Tranche 2, the additional Land Bonds, that was after the 2013 and subsequent Court rulings and after certain Supreme Decrees; correct?
A. It was after the Court ruling of 2013 and after which Decrees?
Q. Well, you're not giving a precise date when you acquired these Bonds.
A. So after some Supreme Decrees. I believe there were Supreme Decrees after.
Q. Okay. So after the Court rulings, after Supreme Decrees, Gramercy bought more Land Bonds; correct?
A. Gramercy bought what we're now calling Tranche 2 somewhere in 2017.
Q. Did Gramercy buy Tranche 2 Bonds after February 28, 2017?
A. I don't recall the date. Again, I testified that it was sometime in early 2017. I don't recall the date.
Q. Okay.
MR. HAMILTON: Mr. President, the Republic of
[Page 608]
Perú has no further questions at this time. We do, however, have a procedural observation, which we can save for the end of the testimony. Thank you.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you. Thank you, Mr. Hamilton.
And we now give the floor to Mr. Friedman.
MR. FRIEDMAN: Thank you very much.
BY MR. FRIEDMAN:
Q. Good afternoon, Mr. Koenigsberger.
A. Good afternoon.
Q. I want to take your mind back to the origins of Gramercy's investment into the Land Bonds that are at issue in this Arbitration.
A. Okay.
Q. I want you to cast your mind back to what we talked about, questions that you were asked this morning by Mr. Hamilton. Okay?
A. Yes.
Q. Now, you remember that you were asked some questions about what was on your mind and how--you told me during our direct examination that you took
[Page 609]
both a top-down and bottom-up approach to underwriting the investment; is that right?
A. That's correct.
Q. So you were asked some questions by Mr. Hamilton about Peruvian Global Bond issuances in the 2005 range. Do you remember that?
A. Yes, I do.
Q. Without taking you to the details of the prospectuses or language in there, can you just tell us how that and other information about what was going on in Perú influenced your thinking about why this Land Bonds investment was a good idea?
A. Related to the global Bonds?
Q. Yeah.
A. What the significance of the global Bonds was?
Q. Sure.
A. The significance of the global Bonds was that Perú re-access the capital markets, and I had said in my Witness Statements that I was there in the very beginning when Fujimori came in, and the whole objective was how does this country move from out of
[Page 610]
default, not only with banks and Bondholders, but with the IMF and the World Bank and what have you, and what's the reward for that--the reward for that, and what's the motivation as oftentimes for the countries to re-access the capital markets.
And so that's an observation that--along the path that they now have access to the capital markets, which not only is about creditworthiness, but also the ability to raise additional funds in the capital markets.
Q. And what did that signal to you, if anything, that was relevant to the acquisition of the Land Bonds?
A. To me, it was confirmation of the top-down thesis that this was an upwardly mobile credit. It was a reform story that was being--one of the rewards of that reform story was going from default on bank loans as late as 1997 to re-accessing the capital markets in the 2000s.
Q. Okay. And how did the method that you used to conduct diligence in Perú compare with methods you used in other investment circumstances?
[Page 611]
A. Very similar. I mean, we did similar investments--Land Bond investments in other countries in emerging markets, Nicaragua being one of those, Bulgaria being one of those, as well as the Russian Federation.
So, the same idea, which is top down on credit analysis for the country. Is there--is there a reform story in place? Is there an upwardly mobile story in place? And then also where did the underlying instruments--and bottoms up, as I talked about before, is kind of the idiosyncratic nature of the underlying investment.
Q. In terms of some of those other situations you've been in, you were asked some questions and taken to an article about Argentina. Remember being asked questions about the article by Gretchen Morgenson about Argentina?
A. Yes, I do.
Q. And can you tell us what was your approach in the Argentina situation?
A. Well, we've had multiple successes in Argentina working consensual with Republic of
[Page 612]
Argentina on the resolution of claims that seemed otherwise unable to be resolved.
So, one example, as of 2005, Argentina had only resolved with 76 percent of their creditors.
Gramercy led, conceived, and anchored a reverse inquiry, getting Bondholders on the same page to give Argentina certainty of execution, despite the fact that Argentina was saying that they would never pay any of the other Bondholders. We were able to do that.
I see here--we're at CIADI. We certainly helped resolve several CIADI claims in Argentina in 2013. We resolved the only five that were outstanding, so we owned five of those, and we coalesced with the other two.
Again, reverse inquiry process where consensually we worked with the Ministry of Finance in Argentina to settle the claims.
Q. Okay. And you also were taken to an article before that said that you were involved in the war about Argentina. What did you understand that to be?
A. I understood it to be that, unfortunately,
[Page 613]
this gentleman has been pulled into somebody else's war, and that war was a holdout battle in Argentina between those that didn't participate in--once we were successful with the 2010 exchange, there was still 8 percent that was outstanding, the holdouts.
And so the war that I described before was between the holdouts and the Republic of Argentina. We and other Bondholders, unfortunately, got drawn into it is because the 92 percent who had participated in the exchange were at risk of not being paid, even though we had legally and lawfully gone through an exchange with Argentina.
Q. Right. And how, if at all, did the approach that you took there compared to the holdouts relate to the approach that you wanted to take with Perú?
A. It's very different. I mean--sorry, could you repeat the question?
Q. How did the approach that you took there of brokering a solution reflect, if at all, on the approach you were looking to take with Perú?
A. Sorry. Very similar, which is the idea, which is understand why this transaction isn't
[Page 614]
happening, understand the element of distress, and introduce a catalyst to change the element of distress.
And in the case of Argentina, we felt that it was a lack of advocacy and lack of representation and lack of certainty, and we felt that oftentimes obligors won't move forward with the transaction, not because they're unwilling, because they can't figure out how to do it.
And so in Argentina, we did a reverse inquiry in 2009 to resolve that $12 billion worth of debt.
Q. What is a reverse inquiry?
A. Sorry. So, reverse inquiry was we went out and got $12 billion of Bondholders to pre-commit, via a memorandum of understanding, with a bank. We brought an outside bank in to--what I mean by reverse inquiry is most transactions that happen in the capital markets, the country goes to bank, bank goes to market. A reverse inquiry is market goes to bank, bank goes to country.
So, in the case of Argentina, we use a reverse inquiry. I mentioned earlier today--
[Page 615]
(Interruption.)
A. I'm sorry.
So, what I mean by "reverse inquiry" is the typical transaction is a country or an issuer will hire a bank, and then the bank will go to the market.
A reverse inquiry is just the opposite, which is the market will go to the bank at signal, or sometimes on a firm basis, commit to a certain transaction to the extent that the bank--pardon me, that the country wants to move forward on it.
Q. Okay. All right. And so what did you think the path was to resolution with Perú after you bought into the Land Bonds?
A. We always thought that the route would be a consensual transaction, very similar to what we had done in Argentina. In fact, that was the--I believe it was in 2009 at exactly the same time we were doing this in Argentina that we actually did make a reverse inquiry proposal to the Republic of Perú.
I think we made at least three overtures via intermediaries to try and resolve on a reverse inquiry basis.
[Page 616]
Q. Okay. Now, do you remember Mr. Hamilton asked you a few questions about Mr. Herzberg's memo?
Do you remember that?
A. Yes, I do.
Q. Okay. If you could turn to that, it's Tab 10 in the binder that's in front of you, and it's CE-114.
A. Okay. I have it.
Q. Do you see it? Okay.
Now, the Herzberg memo--and he took you--in particular, he pointed out that on Page 5, I guess, of the memo, there are different valuations shown in there.
Do you remember being asked those questions about that?
A. I remember confirming some tables were on here.
Q. Yes. And he asked you about whether the fact that different valuations appeared on this page indicated a lack of certainty, and I think you said a lack of certainty but high probability of what to expect.
Do you remember giving that testimony?
[Page 617]
A. I do.
Q. Can you explain to us what you meant by that? What do you mean a "high probability of what to expect"?
A. Well, looking at information at the time and seeing the different--the highest probability was that all three of these are current value. They are with interest and CPI. So, that's high probability of those three notions.
The difference may be the ADAEPRA one, which was the way that the market looked at it and the way that the market transacted, so I would say that's probably the highest probability. And then looking at the PPKs with the asterisk, I believe the middle one was some--shall we call it alternative method for calculating CPI? And I believe the other one was PPK speculating on what Bondholders might take in a consensual deal.
Q. And who is he? Who is PPK?
A. Sorry, PPK at that time was Perú's Prime Minister. More recently he was the President of Perú from 2016 forward.
[Page 618]
Q. Okay. And when you said that you meant that there was a high--you thought there was a high probability of what to expect, what did you mean by that?
A. Again, at the highest level, what's to be expected and what is being confirmed is that Bondholders are entitled to current value with CPI and interest, and that's--as I go through the David Herzberg memo and he goes through how he concludes that, it is both in terms of what's happened at the highest courts, what's happened at the lowest courts, and the due diligence that he did with the Bondholder associations and what have you.
Q. Okay. Do you have your Reply Witness Statement in front of you, the one dated May 21, 2019?
A. Give me one minute. I do.
Q. Okay. I'd like to ask you to turn to Page 1, Paragraph 2.
Do you see that?
A. Yes, I do.
Q. Yes. You testified that you decided to invest in the Land Bonds. "We did expect the Land
[Page 619]
Bonds had genuine value to be calculated using CPI plus interest."
Do you see that?
A. Yes, I do.
Q. You explain, then, that your diligence had revealed what we consider to be very firm qualitative and quantitative bases for that expectation.
Can you describe how it is that you had those firm bases and, yet, you saw these different range of values representative in the Herzberg memo?
A. Sure. I think the expectation comes from the legal entitlement, first, verification of where that legal entitlement comes from, which we talked about the TC 2001, and then also kind of understanding and factoring in or triaging what these other factors may be.
So, the middle PPK one is merely, again, him not disputing whether it's owed, him not disputing whether it's current value, him not disputing whether it's interest. It's him just saying, "perhaps we should use a CPI that's different than the official CPI."
[Page 620]
Q. Umm-hmm.
A. And then the other one--again, both of these are the obligor. The third one--or the second PPK is simply the obligor speculating that if they came forward with some sort of consensual offer, that that's what they would get. Unfortunately, we will never know.
Q. You mentioned legal entitlement as a part of it. How did you underwrite the legal entitlement?
A. Sure. David and José spent quite a bit of time looking at the laws, the governing laws at the time. David writes about it in the memo here. Talks about what I consider to be the most--the highest law, which is the TC in 2001 confirming that one must be paid in current value, not nominal value.
Q. Umm-hmm.
A. But then seeing the same application in the local courts. Of course, we did quite a bit of due diligence with local counsel. We would never do this on our own. We would spend a lot of time and money with local counsel understanding the governance around the instruments.
[Page 621]
Q. Okay. I'd like to take you--you were shown also Tab 40, which is CE-731.
This is Mr. Cerritelli's May 23, 2008 email.
Do you remember seeing this and being asked questions about it by Mr. Hamilton?
A. From earlier today, yes.
Q. Okay. And in here, he took you to part of this--can I take you to paragraph--I think he took you to Paragraph 11, Timetable for Execution of our Restructuring Strategy.
Do you see that?
A. I do.
Q. Okay. You've "been in regular contact with the Government of Perú since we started investing in these claims, and the Government is aware of our investment activities."
Can you just describe to us why you were trying to be in touch with the Government even from this time?
A. Of course. And our goal all along was to try and catalyze a consensual resolution, and we felt that if could provide a service by aggregating Bondholders
[Page 622]
toward--all that was outstanding at this time was how are these Bonds going to be paid. With all due respect, I've dealt with a lot of Finance Ministers who have never been through debt restructurings.
Q. Yeah.
A. So, we thought that the reason we would reach out is to say, hey, look, we've done this before. It's not as complicated as it seems. Perhaps we could use some sort of reverse inquiry, what have you. This is consistent with the underwriting, which is we hope and expect to get a consensual resolution.
Q. It says, then, in the next paragraph that haven't presented a formal proposal yet, but "our strategy calls for continuing to source in Perú to build a large enough position that the Government can use as an anchor block to negotiate a restructuring solution."
Can you explain what that means, what the thinking is there about being able to accumulate an anchor block to be able to develop a solution?
A. Sure. As I was explaining earlier, one of the very typical kind of factors, or what I call
[Page 623]
element of distress as to why an obligor may not move forward, is you're typically dealing with an interim decision-maker. So, in this case, perhaps a Finance Minister, what have you.
And they tend to be very political and careful, and in order for them to advocate to go upstairs to the president to do a transaction, we think it's really important that they have certainty of execution.
So, the best way to give them certainty of execution is to have a large enough critical mass of Bondholders that gives that person confidence that if they stick their neck out politically and advocate for settlement, that they'll be successful with that settlement.
Q. And we saw that in this Paragraph 11 also, it refers to the paragraph we looked at before, that this language "since we started investing in these claims."
Do you see that?
A. In Paragraph 11?
Q. Yep.
A. Sorry. Yes.
[Page 624]
Q. What were the claims that you had in mind? I mean, how did you think of that word at that time?
A. Bonds. That we invested in the underlying Bonds.
Q. Okay. And with the anchor group, what did you--what did you think of as being--why did you think that it was realistic that the Government would want to come and talk to you after you had accumulated this anchor position?
A. Well, I guess one would be experience elsewhere, experience in Perú. I mean, seeing Perú's behavior in the past when they had a critical mass of banks that were willing to move forward with the transaction that they did.
And, elsewhere, we talked about Argentina a moment ago, but this notion of if you have certainty of execution, perhaps they'll change what seemed to be a position of unwillingness to move forward.
Q. And how were you going to solve the certainty of execution problem?
A. The way that you solve that is kind of by going first. That's the whole notion of the reverse
[Page 625]
inquiry, which is to try and organize and discuss with as many Bondholders as possible what resolution can look like and then get them all organized, either formally or informally, around that solution, so that the obligor would be more willing to move forward because it's been de-risked for them.
Q. Yeah, but why would they want to? Why would the Government of Perú want to settle this debt? What's in it for them?
A. Creditworthiness, continuation, the end of the era of default for Perú, to get better ratings than they might have had otherwise, to attract Foreign Direct Investment into the country.
And one thing is for certain--I've been doing this 32 years--I can tell you in each one of these debt restructurings that we've been involved in, it's virtuous in nature. That when they resolve a liability that's outstanding, that there is a benefit that comes to them for doing that.
Q. Okay. Now, you were asked some questions about the Gramercy model. You were shown some Gramercy-level documents that talked about assumption
[Page 626]
of risk.
Do you remember looking at those with Mr. Hamilton?
A. Yes, I do.
Q. I have a simple question for you. Do you believe that Gramercy assumed risk by investing in the Land Bonds?
A. We do, indeed.
Q. Okay. You were also asked questions about whether other parties have economic interests in the Land Bonds. I think you said they do.
Whose investment do you think you are managing? Is this Gramercy's investment?
A. Predominantly, the investment is for the underlying investors and funds that have economic interest in the Bonds.
Q. So, in light of that, can I take you, please, to your Witness Statement, which is--sorry, your Rebuttal Witness Statement, please.
(Comments off microphone.)
MR. FRIEDMAN: No, I think it is actually the one dated November 13, 2019.
[Page 627]
BY MR. FRIEDMAN:
Q. Okay.
A. I have it.
Q. Okay. If you could turn to Page 9, Paragraph 24, please.
A. I see it.
Q. Okay. The fact that--you say that "the fact that other entities have a beneficial interest in the economic performance of Gramercy's investment in Land Bonds does not change the fact that Gramercy actually owns and controls that investment."
Do you see that?
A. I do.
Q. Okay. Well, can you explain that to us, please? What's your understanding of why Gramercy owns and controls?
A. Well, Gramercy is the only entity that owns and controls. The beneficial owners above don't have title. They don't have management. They can't move the Bonds. They can't extinguish the Bonds. They can't swap the Bonds. They can't insure the Bonds. All they can do is get a beneficial interest.
[Page 628]
So, it's Gramercy, through the investment manager GFM, is the only one that can make all the decisions relative to the Bonds, and it's a Gramercy vehicle that owns the Bonds and has the title, and, therefore, it's the only owner and the only one that can make ownership decisions, if you will.
Q. Okay. And what--how is it possible that Gramercy is the only one that can make those management decisions about the investment in the Land Bonds?
A. That governance typically comes through an investment management agreement, whereby, as we talked before, we raise capital for pools of vehicles, pools of capital. Those investors have an economic interest in the Fund, and part of the establishment of the Fund is an investment management agreement that gives sole management of the underlying vehicle to Gramercy.
Q. Okay. Now, immediately--you were asked some questions, then, about the July 16, 2013, CT Decision.
Do you remember that?
A. Yes.
Q. Okay. And I think you were asked some
[Page 629]
questions about kind of what the state of your mind was at that point about what was going on about what effect it might have had on your investment.
Do you remember being asked some questions? You were shown some pieces of paper.
A. Yes, I do.
Q. Yeah. What did you understand at that point in time? I think it would be helpful for the Tribunal just to hear like your state of mind, Gramercy's state of mind--
A. Sure.
Q. --in the period immediately after July 16, 2013, when you found out about this Constitutional Tribunal Decision.
A. I guess I'd have to discuss our state of mind prior to it.
Q. Okay.
A. So the state of mind prior to it was, it was undeniable that in 2001 that Bondholders had a right to current value with CPI and interest, and that our understanding of what 2011 was limited to was a simple enforcement of a previous ruling.
[Page 630]
So, that was our state of mind, in terms of what was expected, and simply enforcement of a previous Court ruling.
Q. Umm-hmm.
A. What was different is it was, perhaps, different than what we expected that came out of it, but we still didn't really know what to expect. So, as I--
Q. What do you mean by that? How can it be different, but you didn't know what to expect?
A. Well, what we expected going into it was enforcement of current value with CPI plus interest. What came out of it was dollarization with all sorts of unknowns, and, as I said earlier today, there were more, I think, unknowns than knowns, so it wasn't clear what it meant at the time.
Q. Umm-hmm. What do you need to get that further clarity about it?
A. All sorts of factors in terms of exchange rates, parity exchange rates, interest rates, coupon rates, also away from that, how that might compare to what you're able to do in the local courts because,
[Page 631]
still, you know, 2001, it's very clear that we have the right to look at all these voluntary things that come forward, but we also have a right to legal proceedings within Perú.
Q. Did you have any sense of what the value difference was at that point, if any, between what you had thought prior to July 16, 2013, and afterwards?
A. No, we did not.
Q. Okay. And you then subsequently, of course, received the decision--the Supreme Decrees, and they came out in January 2014.
Do you remember those?
A. Yes.
Q. Okay. And how long did it take you even once they came out to analyze what the economic consequences were?
A. Weeks, if not at least a month.
Q. Umm-hmm.
A. At first when we saw it, we actually thought that, well, we suspected that dollarization that they were coming up with was substantially the same as kind of current value with CPI.
[Page 632]
Q. Can you explain that? What do you mean at first you thought it was what they came out with was the same as CPI?
A. So, one of my colleagues, when he first looked at the Supreme Decrees in 2014, said I believe that the way that they are calculating this is consistent with what we were expecting vis-à-vis current value with CPI.
Q. Umm-hmm. And what happened after--what steps did you take after that to further sort of dig into the formulas and the numbers?
A. I believe we took it to an outside accounting firm to interpret it and objectively calculate for it.
Q. Umm-hmm. And what was the conclusion--
MR. HAMILTON: Mr. President, I didn't ask these details, but I'm being patient, given the length of the cross-examination. Thank you.
BY MR. FRIEDMAN:
Q. What was the conclusion of that analysis?
A. The conclusion of that analysis is that the value was substantially lower than we had expected prior to the Supreme Decrees.
[Page 633]
Q. Now, you were asked some questions, then, about the valuation and the changes in valuation over time; right?
A. Yes, I was.
Q. Okay. And I think we probably need to go back into confidential session now because I would like to show you again this document that was handed out, which was representative of Appendix 5 to the Quantum Expert Number 2.
(End of open session. Attorneys' Eyes Only information follows.)
[Page 634]
[Redacted]
[Page 635]
[Redacted]
[Page 636]
[Redacted]
[Page 637]
[Redacted]
[Page 638]
[Redacted]
[Page 639]
[Redacted]
[Page 640]
(End of Attorneys' Eyes Only session.)
[Redacted]
[Page 641]
OPEN SESSION
THE WITNESS: We approached them to ask them how to interpret it. We were asking for clarification because it still wasn't clear to us, and so we figured that, if there is something forward, that it should be simple enough to just tell us what it is. And, again, if I go back to debt restructurings I've been involved in before, typically the obligor tells you and clarifies what it is that they're offering you before they ask you to consider it, and if you don't understand it, you ask for clarification.
BY MR. FRIEDMAN:
Q. Okay. And why when--
MR. HAMILTON: I persist with my objection, Mr. President, because all we've done is open a wormhole with a document that should never have been presented and then continue to meander further down this path. I consider it prejudicial. We had no time to ask about this period of time in detail specifically because of the surprise explosive announcement that they were buying other Bonds at this time.
[Page 642]
It is prejudicial for them now to be able to put new direct testimony or summaries that we did not raise during the cross-examination. There are a lot of issues that might be raised from this time period, and we had insufficient time due to the new information that came out for the first time today. I object.
Thank you.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you. What is your question? What was your question because with the interruption, I really don't know what you were asking.
MR. FRIEDMAN: Yes, I think we have to go back and look.
BY MR. FRIEDMAN:
Q. So, the question was, what steps did you take--
PRESIDENT FERNÁNDEZ ARMESTO: Why don't you tell me--
MR. FRIEDMAN: Yes.
PRESIDENT FERNÁNDEZ ARMESTO: --and I ask the Witness in an as objective manner as possible. What
[Page 643]
do you want to know from the Witness? What is the information which we need from him?
MR. FRIEDMAN: Well, I want to know at this period--he's already testified about some things. I would like to know at this period what steps they were trying to try to understand the potential value that the February 2017 Supreme Decree provided.
PRESIDENT FERNÁNDEZ ARMESTO: Which steps?
MR. FRIEDMAN: Let me put it a different way, if I may.
BY MR. FRIEDMAN:
Q. Mr. Koenigsberger, during this period, at--immediately after the February 2017 Decree, what was Gramercy's understanding about what was going on and what value might be offered?
A. Our understanding was that they were issuing a new Decree relative to the one that had been issued back in 2017. It was kind of the first Decree or Official Communication of the new PPK Administration, and we quite simply were just trying to figure out what it was that was being offered to us, and, again, to clarify what that number was and how to get to it.
[Page 644]
Q. Let me ask you, during this period, did you have any reasons for optimism that Perú might be ready to actually sit down and have a conversation and try to work on a Resolution?
MR. HAMILTON: I persist in my objection, Mr. President. We continue to go further down a path that we had no opportunity on cross-examination to ask, and he is simply doing what he wants, Mr. President. I'm sorry.
PRESIDENT FERNÁNDEZ ARMESTO: We have discussed the Supreme Decree. We have discussed these are some follow-up questions. I'm worried about the time, but let's finish this line of questions and then let's move on. So, let me--because I was not aware of it. Let me ask the questions, and so that maybe it is easier.
So, there was this new PPK administration. They brought up this new Decree. It had new formula. And so, you wrote to them to ask for clarification.
What came out of that? Did you get an answer? Did you--what came out of that?
THE WITNESS: What we were trying to figure
[Page 645]
out is this new Administration, Finance Minister for the new Administration had said, despite the earlier Decree, it is time for us to lift the rug and no longer keep this under the rug. So, we simply asked for clarification and never got clarification. We just got--being told "submit your Bonds to the process."
PRESIDENT FERNÁNDEZ ARMESTO: Okay. So, you never got a clarification, and you then did not submit the Bonds to the certificate?
THE WITNESS: And I don't see how one can submit to a process when you don't know what to expect from that process.
PRESIDENT FERNÁNDEZ ARMESTO: Very good. Is there any further redirect?
MR. FRIEDMAN: Yes.
BY MR. FRIEDMAN:
Q. And you mentioned PPK; right? So, during this period, did you directly or indirectly have any contact with PPK about this issue?
MR. HAMILTON: Mr. President, I object in as strongly as terms possible. He is far afield. This
[Page 646]
is highly prejudicial to Respondent.
(Overlapping speakers.)
MR. HAMILTON: I'm sorry. It is far out of line, Mr. President. I apologize.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah. I don't think I was interested--I was not aware the 2017 Decree was from a new Administration. But evidently the PPK--or President Kuczynski never, to give the proper name to him, never was mentioned in the cross-examination. So, I think this--we should not bring this up.
MR. FRIEDMAN: Mr. President, if I may--Mr. Hamilton had great latitude to basically take a deposition about some additional Bond purchases, and I think they occur in a particular time period when there's a particular sort of sequence of events that happens, and we're not allowed to--it doesn't seem balanced. We're not allowed to ask questions.
PRESIDENT FERNÁNDEZ ARMESTO: The question which counsel is going to put to you, I think, is the following: The additional purchase of Tranche 2, was it somehow related to a new optimism once the new
[Page 647]
Kuczynski Administration had come into power?
THE WITNESS: Yes, it was.
PRESIDENT FERNÁNDEZ ARMESTO: Was that your question?
MR. FRIEDMAN: Thank you. You did a great job with that question, I really appreciate it, Mr. President.
MR. HAMILTON: Mr. President, I'm sorry. But I'm sorry, Mr. President, but for Claimant to claim some kind of procedural victimhood about not being able to do what they want, they have hid from this Tribunal the existence of other Land Bonds. They have intentionally and knowingly excluded it.
Mr. Koenigsberger has excluded it from three Witness Statements.
The entire other side of the room has been in knowledge of this and not disclosed it to us until we happen to stumble upon it today. And so, this entire situation is grossly prejudicial to the Sovereign. We will be coming back procedurally on this issue, but to continue to give latitude where they are the ones who hid information is inappropriate and highly
[Page 648]
prejudicial and I must object. Thank you for your patience.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah, I will hear your arguments about that and whatever procedural steps you want us to take. But that is not the question. The question is, you put the question, it came out, and what--that there is a second tranche, and what I think counsel to Claimant was trying to put into context is that this purchase took place when a new Administration had come into power.
MR. FRIEDMAN: Yes.
BY MR. FRIEDMAN:
Q. And I think, Mr. Koenigsberger, if we could continue, you explained--I think in response to the President's question--that there was sort of newfound optimism. Can you tell us a little bit about what--why there was a newfound optimism at that time?
A. Sure. I mean, the most obvious recollection was PPK's incoming Finance Minister. I believe it was Mr. Thorne. Despite all the rulings and all--
PRESIDENT FERNÁNDEZ ARMESTO: Mr. Thorne.
THE WITNESS: Thorne.
[Page 649]
MR. HAMILTON: Mr. President, I must object. I apologize, Mr. President, but this entire testimony is coming out now specifically because they hid it from their Witness Declarations.
(Overlapping speakers.)
MR. FRIEDMAN: I absolutely resent that.
PRESIDENT FERNÁNDEZ ARMESTO: No. No. No.
MR. HAMILTON: I apologize.
PRESIDENT FERNÁNDEZ ARMESTO: I know, Mr. Hamilton, but I have already taken a Decision. You hit upon a new idea, which was not in his Witness Statement. Mr. Koenigsberger deposed on that. You made all the questions you wanted to on this issue, and now there is a redirect and there are a few questions putting into some context this additional purchase of Bonds. In my opinion, this is proper, and can I kindly ask you to please do not interrupt any more, and let's go on and let's finalize. Please. Because otherwise we will not finalize with Mr. Koenigsberger. You will have to stay with us until tomorrow. Please, Mr. Hamilton. It is a Decision. You may like it or not, but it's my
[Page 650]
Decision, and please, now finalize it.
MR. FRIEDMAN: Yes.
BY MR. FRIEDMAN:
Q. So, can you please describe to us just what this period of optimism was and what the basis was for it?
A. Yes. As I was saying before, the signal that we heard loud and clear from the Finance Minister, I believe his name was Alfredo Thorne, at the time said, despite all the rulings that we've talked about, the TC 2016 and Supreme Decrees, that the problem had a solution and that it was time for Perú to quit sweeping this under the rug, pull the rug up and solve the problem. That was a big signal.
Q. Okay. And what steps did you take then during this period to try to follow up on that?
A. Of course we tried to engage with the Republic in conversations that would lead to a consensual resolution. Again, I have a Finance Minister saying, I want to solve the problem, and we have creditors who are saying, we want to solve the problem, and we know how to do this, so let's meet and
[Page 651]
let's figure out how to solve this problem.
Q. We saw before in the memo that Mr. Hamilton had brought you to back from 2008. You remember we looked at that, and it talked about aggregating a position to be able to anchor a settlement?
A. Yes.
Q. Yet did that factor at all into this additional Bond purchase in 2017?
A. Indeed.
Q. Can you explain?
A. The idea is that the larger the critical mass, the higher probability of being able to convince the obligor that they would be successful in moving ahead.
Q. Now, there were some questions that Mr. Hamilton put to you towards the end of the cross-examination. He asked you some questions about whether you believe the existing legal framework is sufficient to resolve this matter.
Do you remember being asked questions along those lines by Mr. Hamilton?
A. Yes, I do.
[Page 652]
Q. Okay. And at the same time, in one of your answers, you called the existing process, I think, "a scam." Do you remember giving that testimony?
A. Yes, I do.
Q. Can you explain to us what you meant by that when you said that what's--what the process is, what it offers right now is a scam?
A. Well, it's how we got to where we are, and then what its valued at, but more importantly, what I was referring to is there's been so much discussion about a ruling from 2013 and follow-up Supreme Decrees, without a discussion about the irregularities around that 2013 Order from the Court. The fact that there is criminal charges in Perú, vis-à-vis the doctoring of the document.
It seems really strange to me that the obligor would continue to create a process that was done with forgery and then continue to tell us to go back to that process. There seems to be a circular in place.
Q. Okay. I want to ask you about in your Rebuttal Witness Statement, which is dated
[Page 653]
November 13, 2019. So, it's dated November 2019; right?
A. Okay.
Q. And on Page 18, Paragraph 48.
A. Yes.
Q. You say at the end: "No matter how difficult the problem, always found a solution." And then at the very end you say you "still hope Perú will do the right thing and work with its creditors to fairly resolve this last remaining obligation."
I mean, Mr. Koenigsberger, how can it be that, after everything that you've seen, that you--well, first, let me ask, is this still your view, that you still hope that there will be a solution?
A. Yes, it is.
Q. Well, how can you think that in light of everything that you've seen and all the difficulty that has occurred until now?
PRESIDENT FERNÁNDEZ ARMESTO: Mr. Hamilton was very close to proposing a solution, so maybe we are almost there.
MR. HAMILTON: Mr. President--Mr. President,
[Page 654]
I'm sorry. I know we are having some lightheartedness, but there was no such discussion here, just to be clear. Thank you.
PRESIDENT FERNÁNDEZ ARMESTO: I know. I know. It was lighthearted comment.
MR. HAMILTON: I appreciate it.
PRESIDENT FERNÁNDEZ ARMESTO: When you were asking him to give a number.
MR. HAMILTON: We are still far afield, and I'm sitting mute about it because I understand that you don't want to hear the objections, and I'm respecting that. Please. Objection stands.
PRESIDENT FERNÁNDEZ ARMESTO: I give you--I'll give you the floor to make any further questions you want. Please.
BY MR. FRIEDMAN:
Q. Yes. So, the question is how can you still--based on all your experience and everything that has happened in this case, how you can you still hope that there will be this solution?
A. Well, it's clear to me that the problem is still outstanding that, despite this fabulous
[Page 655]
Bondholder Process that was established in Perú, I think somewhere around 8 percent, have--only 8 percent have even entered it, and even less have been resolved. So, still 92 percent of the Land Bond debt is still outstanding and it's my hope we could sit down and figure out a way to consensually resolve that. It's been my hope all along.
And that is not just based upon my experience in Perú, but it is based on my experience in other countries, where I mentioned in Argentina in 2009, they had passed a law that said, we will never pay a penny, "un centavo." And they paid. They rescinded that law after having sat down with Bondholders and negotiated a consent to restructuring. So, we have experience and that's what led to the expectations and the hope that I still have today.
Q. And is it--do you have any understanding about whether the existing legal framework in Perú would allow such a discussion to take place?
A. You know, my understanding from hearing it even here today is that Perú is bound by the laws that have been passed.
[Page 656]
Q. And in the case--you mentioned that, in the case of Perú, that you have--well, you mentioned that in other cases you've solved through consensual negotiations with other--with obligors where there were problems. What steps were you able take and how do you think they might apply to this situation?
A. Again, I think if there can be certainty of execution, and there can be a meeting of the minds, it is absolutely possible that there could be resolution.
Q. Okay. And if that doesn't happen, do you still believe you have your legal rights?
A. Well, I believe that those rights were stripped from us.
Q. Okay.
MR. FRIEDMAN: Thank you. No further questions.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you. Mr. Hamilton, do you have any further questions? I promised to give you the floor. Put any question you want.
MR. HAMILTON: Mr. President, thank you. I appreciate that you face difficult circumstances in
[Page 657]
managing testimony at all times and certainly with some of the types of issues that have arisen today, and we are doing our utmost to respect that under the circumstances.
The Republic of Perú, indeed, has many questions arising from the surprise testimony here about another tranche of Land Bonds. It would, of course, be prejudicial to try to formulate those questions right now. And so, I will be brief, but, of course, must reserve future requests for relief, given the circumstances.
RECROSS-EXAMINATION
BY MR. HAMILTON:
Q. Mr. Koenigsberger, if I understand the testimony you were led to a few minutes ago, you were suggesting or it was being suggested that you acquired Bonds, you purchased Land Bonds in 2017 because of optimism related to the Kuczynski Administration; is that correct?
A. Yes, that's correct.
Q. Okay. And the Kuczynski Administration took office on July 28, 2016; correct?
[Page 658]
A. I believe so.
Q. Because they transitioned on the national Independence Day; correct?
A. Typically, unless there is other issues.
Q. Okay. So, you may have noticed that Gramercy has complained that, in August of 2016, President Kuczynski made comments in the press stating that he did not consider that Perú owed Gramercy anything, because by that time Gramercy had started a Treaty proceeding.
Do you recall that?
A. Well, I recall him saying that he thought that he didn't--that he didn't have to pay anything. I don't think it was because there was a Treaty.
Q. You had just filed a Treaty proceeding. There's an ample written record of Perú stating in the Treaty proceeding that it doesn't owe you anything in this context.
A. You asked me what Pedro Pablo Kuczynski said I believe in August of 2018. And I don't--
Q. '16?
A. '16, excuse me. And I don't recall it being
[Page 659]
related to the Treaty. It was just him saying that I don't think that they deserve anything. I think it was zero.
Q. Well, you agree that Gramercy chose not to recover through the local Bondholder procedure; correct?
A. We chose not to enter into a procedure that was very uncertain what it was that we would get out of it, if we would ever get out of it, whether we would be the last ones to get anything out of it.
Q. I'm sorry, but it's a yes-or-no question. Gramercy chose not to participate in the local Bondholder proceeding for whatever reason?
PRESIDENT FERNÁNDEZ ARMESTO: Yeah. If it is a yes-or-no question, we know it, they--that Gramercy decided not to participate. Yeah.
BY MR. HAMILTON:
Q. And Gramercy had already made that Decision by the time that President Kuczynski had come into office and announced that to the world; correct?
A. The process that was then available, but the early Supreme Decrees from PPK, we thought perhaps we
[Page 660]
would be able to participate.
Q. Okay.
MR. HAMILTON: Mr. President, we reserve all rights. You'll be hearing further from us. Thank you.
PRESIDENT FERNÁNDEZ ARMESTO: Mr. Drymer, any question for the Witness, for Mr. Koenigsberger?
ARBITRATOR DRYMER: Maybe just one, and I'm afraid I'm going to refer to a document that was confidential.
QUESTIONS FROM THE TRIBUNAL
ARBITRATOR DRYMER: So, red light, please, but it will be brief.
(End of open session. Attorneys' Eyes Only information follows.)
[Page 661]
CONFIDENTIAL SESSION
[Redacted]
[Page 662]
[Redacted]
[Page 663]
[Redacted]
(End of Attorneys' Eyes Only session.)
(Brief recess.)
[Page 664]
OPEN SESSION
ROBERT LAVANA, CLAIMANTS' WITNESS, CALLED
MS. LAUVAD: Thank you.
PRESIDENT FERNÁNDEZ ARMESTO: We are ready to start, but we must first say, good afternoon, Mr. Lanava. Thank you very much for being here with us.
You are here as a Witness. As a Witness, you have a duty to say the truth, and I will kindly ask you that you take your oath. You have it in front of you.
Can you please stand up? Can we all stand up, and can you please, you have the formula in front of you.
THE WITNESS: Witness Declaration.
I solemnly declare, upon my honor and conscience, that I shall speak the truth, the whole truth, and nothing but the truth.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you. Thank you very much, Mr. Lanava.
On your left, you have counsel to the investor, to Gramercy. You have on the right counsel
[Page 665]
to the Republic of Perú. There will be some questions to you. Can I kindly ask you--most questions can be answered with a "yes", "no" or "I don't know." Can I kindly ask you that you first say "yes", "no," or "I don't know, "I don't remember," and then you are welcome to add any clarification you want.
THE WITNESS: Okay. I'll do my best.
PRESIDENT FERNÁNDEZ ARMESTO: I'm sure it will go very smoothly.
Please.
MS. LAVAUD: Thank you, Mr. President.
DIRECT EXAMINATION
BY MS. LAVAUD:
Q. Good afternoon, Mr. Lanava.
A. Good afternoon.
Q. I believe you have two documents in front of you. The first one is titled Witness Statement of Robert Lanava dated May 21, 2019, and I believe there's your signature at the end; is that right?
A. It actually doesn't have my signature on it, but it has my signature block.
Q. You recognize that document as being your
[Page 666]
Witness Statement.
A. I do.
Q. Thank you.
(Comments off microphone.)
BY MS. LAVAUD:
Q. And then the second document is entitled "Reply Witness Statement of Robert Lanava" and is dated November 13, 2019.
Do you see that?
A. I do.
Q. Do you have any corrections or amendments to make to those Witness Statements?
A. No, I don't.
Q. Are you content for the Tribunal to rely on those statements for purposes of this Arbitration?
A. I am.
Q. Thank you, Mr. Lanava.
MS. LAVAUD: I have no further questions.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you. Thank you also for being brief.
Who is--please.
MR. ULRICH: Good afternoon, Mr. President,
[Page 667]
Members of the Tribunal. Mr. Lanava, good afternoon.
THE WITNESS: Good afternoon.
MR. ULRICH: I'm Jonathan Ulrich. Thank you for being here.
CROSS-EXAMINATION
BY MR. ULRICH:
Q. You have in front of you your two Witness Statements; yes?
A. That's correct.
Q. We're going to hand out a binder with a few other documents. We'll be taking a look at both. We will pull up images of the document on the screen. We'll blow up the part that we're focusing on, so look at the binder, look at the screen, whatever works best for you. All right?
A. Sure.
Q. All right. Let's start, Mr. Lanava, with a few quick questions on your background.
Now, your professional experience is in investment operations; right?
A. That's correct.
Q. And you have a Bachelor of Arts degree in
[Page 668]
economics from St. Anselm College?
A. That is correct.
Q. You don't have a business degree; right?
A. You mean an M.B.A.?
Q. Right. No M.B.A.?
A. I do not.
Q. And you do not have a law degree?
A. No, I do not.
Q. You're not here as an expert of any kind; right? You're here as a fact witness?
A. I believe that's correct.
Q. Mr. Lanava, you're the Chief Compliance Officer for Gramercy Management--Funds Management, LLC; yes?
A. That's correct. I currently am.
Q. And you've referred to Gramercy Funds Management as "GFM"; right?
A. That's correct.
Q. GFM is just one of many Gramercy entities; right?
A. Gramercy Funds Management is our SEC-registered investment advisor.
[Page 669]
Q. But there are a number of other Gramercy entities in addition to GFM that you have described as the Gramercy family of companies; right?
A. There are other affiliated Gramercy entities.
Q. And some members of that Gramercy family are U.S. entities; correct?
A. That's correct.
Q. And some members of that Gramercy family are non-U.S. entities; correct?
A. Could you be more specific in which entities you're referring to?
Q. Well, I'm just speaking generally about the Gramercy family, which you refer to, very generally, as a family in your Statement.
So, of those entities that affiliate themselves with Gramercy, the Gramercy family companies, we have some that are in the U.S., we have some that are out of the U.S., including in the Cayman Islands; correct?
A. There are some Gramercy funds that were in the Cayman Islands, incorporated in the Cayman Islands.
[Page 670]
Q. Gramercy Perú Holdings, LLC, you call "GPH," also part of the Gramercy family; right?
A. GPH is an affiliate, correct.
Q. And GFM and GPH are the two Claimants in this Arbitration; right?
A. I believe that is correct.
Q. Okay. We're going to get into their respective roles. I think everyone here would like some clarity on that, but first, let's talk a little bit about the Bonds. Okay?
Now, the other side of the room tends to call them Land Bonds, this side of the room tends to call them Agrarian Reform Bonds. When I talk to you today about the Bonds, it's Bonds with a capital B. All right?
A. Meaning either Land Bonds or Agrarian Land Bonds, or Land Bonds and Agrarian Reform Bonds.
Q. That's it.
A. So Bonds are Bonds. They're the same thing. They are the Bonds that GPH purchased and then has direct ownership and title to.
Q. There you go.
[Page 671]
A. Gotcha.
Q. Your involvement with the Bonds dates back to sometime in 2006; correct?
A. That's correct. I first got involved after Gramercy had decided to make an investment sometime around February or March when I got involved of 2006.
Q. And you were involved in designing a process to acquire the Bonds; right?
A. I was involved in a process to help create a custody and what I would call "acquisition of the Bonds" once they were acquired.
Q. The Bonds presented what you have described as logistical challenges; right?
A. That's correct.
Q. So, for example, the Bonds are physical paper documents; yes?
A. That's right.
Q. The Bonds are old paper documents dating back several decades; right?
A. That is correct.
Q. They were held by a number of different individuals; right?
[Page 672]
A. I believe so, yes.
Q. And some Bonds had clipped coupons, some had unclipped coupons; right?
A. That is correct.
Q. All right. Now, one of the challenges you've said was how to authenticate these old pieces of paper; right?
A. I believe so. Can you refer back to my Witness Statement on what paragraph that was?
Q. Well, it appears in several paragraphs in your First Witness Statement, but if I can just ask you, do you recall generally that one of the challenges you faced was how to authenticate the Bonds; right?
A. Well, I wasn't part of that authentication process. Again, my involvement in the acquisition of the Land Bonds was from an operational perspective in Connecticut with establishing a bank account for GPH, establishing a custody account with Citibank for GPH, but I didn't have any sort of role in authenticating the Land Bonds directly from any sellers.
Q. Okay. Well, setting aside involvement,
[Page 673]
direct or indirect, in authentication, authentication is part of the process that you describe in your Witness Statement; yes?
A. Okay.
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.
A. Correct.
Q. Gramercy hired a Peruvian law firm, Estudio Muñiz, you've said, to help validate the Bonds in these purchase transactions; right?
A. Correct. Estudio Muñiz was our local Peruvian counsel.
Q. And that firm came up with an extensive list of requirements for each transaction; correct?
A. That's right.
Q. Your statements don't mention what's on this extensive list of requirements, do they?
[Page 674]
A. No, they do not.
Q. Okay. Well, let's take a look at how Gramercy internally describes some of these requirements. All right?
If you could please turn in your binder to the first tab.
MR. ULRICH: This is Exhibit R-1095, Mr. President.
This is the document, we addressed it earlier today. It has "confidential" in the footer, but counsel for Gramercy represented that it's not actually subject to the confidentiality restrictions. So we will stay in open session.
BY MR. ULRICH:
Q. All right. Mr. Lanava, if you look at the first paragraph here--well, let's look at the title. This is a "Checklist of Items to Consider in our Due Diligence"; right?
A. That's what the title says, yes.
Q. The first paragraph on this list, the first item is authentication; correct?
A. Correct.
[Page 675]
MR. ULRICH: Mr. President, in the interest of time, and given your instruction earlier, I'm not going to read documents into the record.
BY MR. ULRICH:
Q. But, Mr. Lanava, if you want to take a quick look at this authentication paragraph, and then I'll ask a question.
A. Just the first paragraph?
Q. Just the first paragraph about the first sentence there, authentication. You can see that?
A. I'll be honest with you, if I can make a statement. I'm blind in my right eye completely, so I do have a hard time seeing half of you guys over here, and I certainly can't read that. So, I'm going to take my time and spend it closely reading this.
Q. Absolutely.
A. Thank you very much. I'll be doing this quite a bit today.
PRESIDENT FERNÁNDEZ ARMESTO: We are sorry for that.
THE WITNESS: No worries.
MR. ULRICH: If it might be easier, then, for
[Page 676]
me to read, perhaps, to facilitate the process?
PRESIDENT FERNÁNDEZ ARMESTO: Mr. Ulrich is proposing that he read it to you. Would that be helpful?
THE WITNESS: If I can follow along, that would be great.
BY MR. ULRICH:
Q. Okay. In this first paragraph under heading Authentication, the document says: "We need to have the best procedure in place to make sure we purchase claims that are authentic, which the Government will recognize as valid and authentic and that will get paid."
A. I see that.
Q. Okay. So, Gramercy wanted to make sure that it bought authentic claims; right?
A. Correct.
Q. And had to be sure they were authentic so that they could recover at some point down the road. That was the plan; yes?
A. That would make sense.
Q. Okay. The second item on this diligence
[Page 677]
checklist is "sales documentation." And we see here the Gramercy checklist reads: "When we buy claims, we need to make sure the seller is legitimate, that the sales agreement transfers all the rights of ownership of the claims. This will involve having a lawyer draft a purchase agreement that covers all the bases under Peruvian law and to have the strongest documentation to register the sale."
Okay?
A. Yeah. I mean, as I said earlier, I wasn't involved in any of this process. You know, I can see by the bottom of this document that it was probably drafted pre my involvement in this Land Bond acquisition, so maybe this was something that was drafted by David Herzberg, one of our employees, or maybe by José Cerritelli.
I don't know. I wasn't involved in this document, so to speak to it would be, you know, very difficult.
Q. Okay. Sure. Well, this makes reference to getting the strongest documentation to buy claims. So why don't we flip away from this document, turn to
[Page 678]
Tab 2, please. Let's get a sense of what the documentation is here that Gramercy was assessing. Okay?
ARBITRATOR DRYMER: May I ask just a quick question, Mr. Lanava?
You say in your Witness Statement that Estudio Muñiz computed a diligence checklist, which I received. Is this the checklist that you received?
THE WITNESS: No, it is not.
ARBITRATOR DRYMER: Okay. Thank you.
BY MR. ULRICH:
Q. Okay. Mr. Lanava, Tab 2. This is Exhibit CE-114, Gramercy Memorandum of January 2006.
If you'd turn to the second page, please.
Under the heading of "Transferability," we see the Gramercy memo reads: "The process cocess of transferring title and Bonds is a bit complex. In order for transferability to occur, there must be an exchange of three documents. One, the physical Bonds; two, the property title; three, the sentencia judicial."
I don't speak Spanish, but hopefully you'll accept my pronunciation.
[Page 679]
A. I don't either.
Q. Perfect. Perfect.
So, these were the three documents: Physical Bond, property title, and the sentencia that were required for each acquisition; right?
A. According to this document, but, again, I didn't draft this document.
Q. Okay. Well, we're just digging here to get a little more detail that was omitted from your Witness Statement, because your Statement does refer to the acquisition process ocess and the diligence checklist that Peruvian counsel was providing. Okay?
A. Sure. I'm happy to explain what that checklist referred to. As I stated, I wasn't involved in any of the due diligence process to--regarding the acquisition of the Land Bonds, you know.
My involvement started after there was a decision by Gramercy to make the investment. And, as an operations person, my role was to set up bank accounts and brokerage accounts and wire money once my senior investment professionals authorized a transfer. So, my role was very limited in scope. It
[Page 680]
had nothing to do with the due diligence or the investment process or the legal process in order to acquire those Land Bonds.
So, again, I didn't draft this memo. It was, again, done before my involvement, and as an operations person, I wasn't on the Investment Committee, so I wouldn't have been privy to any of the information on what information they used to draft the memo or make a decision to invest in the Land Bonds.
Q. Understood.
If we could take a look at just a little bit lower in the page here under "transferability." At the paragraph at the bottom of the page, first sentence reads "as buyer of the Bonds, we would need to first review the physical Bonds"; right?
A. That's what it says, correct.
Q. Further down in that paragraph, "upon satisfaction that all three documents are authentic, we'd enter into a relatively straightforward contract"; right?
A. I see that.
Q. Okay. So Gramercy was required to review the
[Page 681]
documents, including the physical Bonds; right?
A. When you say "Gramercy," I don't know if it was our counsel, if it was David, if it was José, if it was Robert. I really don't know.
Q. Okay. Well, some member of the Gramercy family or someone affiliated with them in Perú was involved in this acquisition process; yes?
PRESIDENT FERNÁNDEZ ARMESTO: The family were the companies, not the employees.
MR. ULRICH: Mr. President, you may say that in some companies people consider themselves members of the family, but I won't speak to Gramercy in particular.
THE WITNESS: No comment.
BY MR. ULRICH:
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,
[Page 682]
the sentencia. It required physical review, and it required satisfaction that all of those documents were authentic; right?
A. Correct. And then I believe that Estudio Muñiz did that on behalf of Gramercy when bonds were acquired. And, again, from my perspective, when we were ready to acquire a package of Bonds, I would get approval from Robert Koenigsberger, and there was a memo from Estudio Muñiz to Mr. Koenigsberger that documented certain items, which I would refer to as a checklist, that then Robert had the authority, or he gave me the authority, to then wire the funds.
Again, I didn't make any decisions about if the documents were authentic or if Estudio Muñiz actually validated and authenticated the Bonds under Peruvian law. I believe that's what they did, but, again, I had no role in that.
Q. Understood, Mr. Lanava. And you are actually anticipating some of my questions, so maybe it might make sense here if, as we indicated earlier, I'll ask questions, and if you can try to limit yourself to "yes," "no," and we can probably get through these
[Page 683]
issues pretty quickly. All right?
A. I'll do my best.
Q. Okay. Thanks.
So you said in your Statement you just mentioned for each Bond acquisition Gramercy assembled what you called a document package; right?
A. That's right.
Q. So, within that package it included these three documents: The Bond, the property title, the sentencia judicial; right?
A. There could have been other documents as well. I don't have the Bond--
Q. The sales contract, for example. Those three, sales contract, maybe some other documents?
A. I believe there was the assignment of rights. There were some testimonies. There was the Bond itself. There was the--I believe there was the Notary that stamped the back of the Bonds in GPH's name.
But I haven't looked at those documents for a long time. It was over 14 years ago. So, there could have been other documents as well.
Q. Okay. But local counsel, Estudio Muñiz, they
[Page 684]
looked at those documents at the time of the acquisition; right? They pulled together these packages and reviewed them; correct?
A. I believe they reviewed the packages. They helped with the documentation, with the transfer of the Bonds from the seller to GPHΗ. And then, again, they authenticated and verified that the Bonds were valid under Peruvian law. That's what I know.
Q. And they prepared a diligence checklist, you said, and they sent those checklists along, and you were among the recipients of the diligence checklist; right?
A. I received a memo, and, again, when I refer to a checklist, it wasn't a physical checklist that was one, two, three, four. It was really--what I referred to in my Witness Statement was a package of documents that Estudio Muñiz, as Peruvian counsel, reviewed and that they validated and authenticated that the seller had the right to sell, GPH had the right to buy, and that the documents that would authenticate or validate that transfer were part of that checklist, that package.
[Page 685]
Again, I got that checklist/package as part of my approval from Robert to then release the funds from GPH to acquire the Bonds.
Q. Okay. And you received that package and that checklist for each Bond transaction; right?
A. I believe that's correct. I mean, there were a lot of Bond packages, and it was 14 years ago, so to say that I received every single one, I would say yes, but I didn't count. I didn't go back and look at every single Bond package, but I believe that we did that for every package that we bought.
Q. Okay. Let's please turn to your First Witness Statement. I'm guessing it's the larger of the spiral-bound volumes I have there. I'm at Page 3, Paragraph 10 in your First Statement.
A. Okay.
Q. Here you're describing steps taken by Gramercy colleagues. You've mentioned them in your testimony here today as well, Dave Herzberg and José Cerritelli. And in the final three lines of Paragraph 10, you state that they "in collaboration with Estudio Muñiz took all the steps necessary to
[Page 686]
validate the Land Bonds and prepare the necessary documentation to acquire them."
That's what you've reaffirmed here today; right?
A. That is correct.
Q. Okay. So, then, if you turn to the next page of your Witness Statement in Paragraph 12, you say here, last sentence in Paragraph 12: "Based on all their efforts, we firmly believe and have never had any reason to doubt that all of the Land Bonds that Gramercy acquired are valid and authentic."
Do you see that?
A. I do.
Q. And that's your testimony?
A. Correct.
Q. Okay. But Gramercy unilaterally withdrew over 100 Bonds from this case; right?
A. You know, it's my understanding that in reviewing Mr. Koenigsberger's Witness Statement, that there were some Bonds that were either coupon only or they were unclipped coupons, and that in an effort to make the authentication process easier, that we remove
[Page 687]
them just so that we wouldn't have a difficult time authenticating them.
So, I don't know how many it was. But I believe that we had over 9600 Bonds, and I believe we turned over 21,000 pages of documents related to the Bond packages, but I don't know how many Bonds were pulled out of the package of the Bonds, but I believe there was still over 9600.
Q. Okay. So Gramercy removed those Bonds in order to head off a dispute over authenticity; right?
A. I don't know.
Q. Okay. Some of the discrepancies that they found in these Bonds, you just mentioned, as an example, where there was--you said as an example, where there were coupons only. So, that means that there was no Bond Certificate; right?
A. Again, I remember reading that in Mr. Koenigsberger's Witness Statement, but I wasn't part of the process of pulling out specific Bonds and why those specific Bonds were pulled out and what they didn't have or they did have. So, I really apologize that I can't answer that question.
[Page 688]
Q. Okay. Let's turn to another document. Okay? Tab 3 in the binder before you. This is correspondence C-12. It's a Gramercy letter dated April 13, 2018. This is what we've been discussing, Mr. Lanava, where Gramercy wrote to the Tribunal and said that it was going to remove some Bonds.
And if we look at the third paragraph on this page, it says: "After"--
PRESIDENT FERNÁNDEZ ARMESTO: This is C-12.
MR. ULRICH: C-12.
PRESIDENT FERNÁNDEZ ARMESTO: Sorry.
BY MR. ULRICH:
Q. So, it reads: "After careful assessment of the Land Bonds, Gramercy has removed a small number of Bonds containing minor discrepancies." Right?
A. I see that.
Q. Okay. So April 2018, the date of this letter, that's 10 years after Gramercy's last acquisition of Bonds in 2008; right?
A. I believe the last purchase was June of 2008.
Q. Okay. So, this is long after Gramercy supposedly authenticated all the Bonds at the time of
[Page 689]
acquisition; right?
A. It would be.
Q. And now this example of Bonds missing coupons, the physical Bond itself, the certificate, that was one of the key documents required for authentication; right?
A. I believe we wanted to make sure that we had valid documents and valid Bonds.
Q. Okay. So with this later assessment some 10 years later, Gramercy removed from the case all Bonds where it was missing this Bond Certificate; right?
A. Again, you know, my involvement in this--I'm sorry--was between June of 2006--or, I guess, February of 2006 and June of 2008.
Q. I understand what you're saying, Mr. Lanava-- (Overlapping speakers.)
A. --role in this proceeding for some time, so what I said earlier was that there were some Bonds that were removed based on my review of Mr. Koenigsberger's Witness Statement. But I don't know why they were removed or if they were difficult to authenticate or if they were impossible to
[Page 690]
authenticate. So, I really don't know why.
Q. Okay. We're going to move on from this topic shortly, but you did represent expressly in your Statement, Mr. Lanava, that all the Bonds were valid and authentic. You do have that statement in your Witness Statement; correct?
A. I do.
Q. Okay.
A. But, again, I can't say for certain whether those Bonds that were removed were not authentic or if it would have just been more difficult for the Tribunal or for this particular proceeding to authenticate those.
So, I really don't want to mix that all the Bonds were authentic with the fact that some Bonds were pulled out for reasons that I don't know why, but I can't say that it was because they weren't authentic.
Q. Okay. So, when you say in your statement that you firmly believe that all the Bonds are valid and authentic, you're saying now you can't actually speak to that issue. Is that it?
[Page 691]
A. No, no. When I said that, and I say that, I believe that all the Bonds are valid and authentic. There were certain Bonds that you state that were removed, but I don't know why they were removed.
Q. Okay. You know what these Bond certificates look like; right? You've had some exposure to them with the document packages over time?
A. I have seen the photocopies that we provided to the Tribunal.
Q. Okay. Let's take a look, please, at what's behind Tab 5 in your binder.
MR. ULRICH: This is part of Exhibit CE-224-A, Mr. President. It would be exceedingly difficult for you to find it right now because it's one of thousands of documents--document images.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. But you will put it on the screen?
MR. ULRICH: We will put it on the screen, yes.
BY MR. ULRICH:
Q. Sorry, just a moment while we pull that one
[Page 692]
up.
This is what Gramercy submitted for Bond Number 023679 from Bond Package Number 76. So, it's part of the inventory of photos of Bonds that they submitted.
Okay. Mr. Lanava, we all in the room know what these Bond Certificates look like. That's not a Bond Certificate; right?
A. It looks like the Bond coupons, but no Certificate.
Q. Okay. It looks kind of like a computer printout of some kind, right, with the coupons detached and below further in the image?
PRESIDENT FERNÁNDEZ ARMESTO: Wait. I cannot read--
(Comments off microphone.)
PRESIDENT FERNÁNDEZ ARMESTO: I just say that I cannot read it at this distance. These are the coupons. These are evidently--
(Comments off microphone.)
PRESIDENT FERNÁNDEZ ARMESTO: And can we get that big? Yeah, thank you.
[Page 693]
MR. ULRICH: So, this is what we have where the Bond Certificate is supposed to be, Mr. President, for this particular Bond.
BY MR. ULRICH:
Q. Now, based on what Gramercy has told us--
ARBITRATOR DRYMER: I'm sorry to be pedantic. Even if not at the moment, perhaps you could just give me the page number and the PDF that we can have at least to look at later as well. It doesn't need to be while you're conducting your examination, Counsel. I'm happy if your friends give it to me after.
PRESIDENT FERNÁNDEZ ARMESTO: And what is the question now to the Witness?
THE WITNESS: Thank you. It was uncertain.
MR. ULRICH: Sure. To clarify where this document is in the record, it's part of the compilation of images submitted at CE-224--I believe it's CE-224A, Appendix B. And if you look at the bottom of the page, there's a Bates Number that reads GMCY-0004634.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. So what is the question for the Witness?
[Page 694]
BY MR. ULRICH:
Q. Well, the question is, that's not a Bond Certificate, is it?
A. Well, again, I wasn't part of the document process that Gramercy went through in order to provide all this information to the Tribunal, so I wasn't part of pulling these documents together, so I don't know what this is.
Q. Okay. Well, Gramercy has told us this is a Bond Certificate from February 1972.
PRESIDENT FERNÁNDEZ ARMESTO: Do you speak Spanish?
THE WITNESS: I do not speak Spanish.
PRESIDENT FERNÁNDEZ ARMESTO: To be fair to you, this is a judicial document signed by a judge and the secretary of the court which orders the endorsement of certain Bonds, and there are some numbers and classes and monies, so that you know what you are looking at.
THE WITNESS: Thank you very much. I've never seen this document before.
BY MR. ULRICH:
[Page 695]
Q. If we look in the middle of the page, Mr. Lanava--I don't speak Spanish, you're not a Spanish speaker--it looks to me like it is dated 1 September of 2006.
Would you agree with me on that?
A. Yes.
Q. Okay. And Gramercy has told us that this Bond is dated February 1972. So, this document is not that Bond. It can't be; right?
A. Again, Counsel, I didn't produce this document, so I really can't speak to it.
Q. Okay. Gramercy hasn't removed this one from the case, has it?
A. I don't know.
Q. Okay. I think we can move on.
Let's turn to Tab 9, please. This is Exhibit R-372, Tab 9 of your binder.
A. Umm-hmm.
PRESIDENT FERNÁNDEZ ARMESTO: 3?
MR. ULRICH: R-372, Mr. President.
PRESIDENT FERNÁNDEZ ARMESTO: 372. Thank you.
[Page 696]
BY MR. ULRICH:
0. This is from Perú's Ministry of Finance website. We see at the top a picture of Forensic Experts from the national police who authenticate each Bond submitted into Perú's Bondholders Process.
Okay?
A. I have no idea if that's correct or not.
Q. Okay. Well, do you know--Gramercy didn't hire these guys to authenticate the Bonds, did it?
A. I don't know.
Q. Okay. Gramercy didn't hire any Forensic Experts to authenticate the Bonds, did it?
A. I don't know.
Q. At some point, Gramercy did hire Deloitte; right?
A. To do what?
Q. To look at the Bonds; right?
A. We did engage Deloitte at some point.
Q. And Gramercy has relied on Deloitte's work as evidence of its bond holdings in this proceeding; right?
A. Can you point to that document, please?
[Page 697]
PRESIDENT FERNÁNDEZ ARMESTO: Well, I think this is undisputed. You have presented a certificate or a report from Deloitte from which we took this--the photographs were made by Deloitte, and it has a certain declaration in it. Let's not say more.
Are you aware of that?
THE WITNESS: I believe I am, but I would like to see the Doc. before I comment on it.
PRESIDENT FERNÁNDEZ ARMESTO: Of course.
BY MR. ULRICH:
Q. Okay. Let's take a quick look. It is Tab 4 in your binder. This Exhibit CE-224A.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah.
BY MR. ULRICH:
Q. This is the Deloitte Report, along with the inventory of the Bonds. Now, I just want to draw your attention, Mr. Lanava, to Page 7. And we see under the big header here, "Use limitations and disclaimers"; right?
A. Correct.
Q. Okay. And I'll just read here quickly. It reads: "In connection with this Report, the advisor
[Page 698]
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 Bonds."
Do you see that?
A. I do.
Q. Okay. So, Deloitte didn't authenticate the Bonds either; right?
A. I don't believe we asked them to do that in this Report.
Q. Okay. It wasn't within the scope of what you hired them to do.
A. I believe we hired them, and I can read it "to take copies of"--"digitally capture the very images of the Bonds set forth in the inventory schedules," but I did--I have reviewed this, and I don't believe we asked Deloitte to authenticate the Bonds at all, and, as I stated earlier, it is my belief that Estudio Muñiz, through their process in GPH acquiring the Land Bonds, authenticated and
[Page 699]
validated the Bonds under Peruvian law. That is to my knowledge.
Q. Okay. So, we see here consistent, it sounds like, with the scope of what Gramercy hired Deloitte to do. They are--expressly disclaimed any certification as to authenticity of the Bonds; right? They didn't do it?
A. They weren't asked.
Q. There you go.
Okay. So, then at the end of the day, as far as authentication goes, we are only left with whatever Gramercy says it did; right?
A. I believe we're--I'm not a lawyer, so what I can say is that we've relied on the Estudio Muñiz, who is our Peruvian counsel, who created a document checklist of what I explained earlier, of validly taking assignment from the seller to GPH and that those Bonds were then notarized over to Gramercy Perú Holdings. That's what I know, Mr. Ulrich.
Q. Okay. Thank you, Mr. Lanava.
So, with the totality of that process, then, we are left with whatever Gramercy has provided, which
[Page 700]
includes documents dated September 2006, which are supposedly bond certificates of February of 1972?
A. I mean, it's all my understanding that Gramercy has asked Perú on several occasions to take in our Bonds and do a verification and a reconciliation, and that we haven't--they haven't taken us up on that. And I believe in some of my preparation that the documents that were presented in the case were deemed to be authentic, unless objected. And I believe that the Tribunal, under Procedural Order 1, stated that.
So, again, I'm not a lawyer, and I was an investment professional, but under Peruvian law, according to our counsel, the Bonds were authentic and validated and assigned to GPH. That's what I know.
Q. Okay. Before we move on, you've referred a few times to these document packages assembled at the time of Bond acquisition; right?
A. Right, I do.
Q. You got these packages, you saw the due diligence checklists.
A. Was that a question?
[Page 701]
Q. I just want to confirm, with these document packages, Gramercy kept those in its files; right?
A. Gramercy had electronic copies of those documents.
Q. Okay. And they were assembled and packaged at the time of each acquisition; right?
A. That's right, and what would happen is once they were completed and approved and Mr. Koenigsberger had approved the transfer, Estudio Muñiz, along with David Herzberg, would then coordinate to transfer the original documents and bonds to Citibank Lima, our custodian.
Q. And the documents in this packages, they show all the documents of these transaction, like the transfer date and the seller and the purchase price; right?
A. I believe that would be part of the document package.
Q. Okay. And you can't get all that information just by looking at a bond certificate; right?
A. I believe that the transfer of assignment of rights probably has different language, but, again,
[Page 702]
I'm not a lawyer, so I can't state for a fact that you can't get that on the Bond package--or the Bond, but I'm assuming that the entire Bond package would be able to help you take assignment of the Bond. And, again, it was a bond package, and the Bond itself was the document that was notarized over to GPH. I think that was the only change on the Bond itself.
Q. Okay. So, these document packages that Gramercy had in its files that were organized by each transaction, Gramercy didn't put those into the record of this proceeding until May 2019; right?--three years into the case?
A. Again, I wasn't part of the document production process, so I can't comment on that.
Q. Okay. Well, I did want to ask you those authentication questions, Mr. Lanava, because you had that express representation in your statement that at all of the Bonds were valid and authentic. But for now I want to move into some other areas that, perhaps, you're more comfortable with. And let's talk about the Gramercy corporate structure; okay?
A. Okay.
[Page 703]
Q. After the first round of briefing in this case, Gramercy submitted dozens of documents regarding the structure used to acquire and hold the Bonds; right?
A. Correct.
Q. And to sell interests in the Bonds to third parties; right?
A. It was economic interest or beneficial ownership in the economics of the underlying Bonds.
Q. Okay. We're going to get into all that, but I just, as a preliminary matter, wanted to cover Gramercy asked that all these documents receive a confidentiality designation; right?
A. I'm not sure if they did or not.
Q. Okay. Well, they did, and that designation prevents us from addressing them in open session, so let's please cut the feed.
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[Page 728]
OPEN SESSION
MR. ULRICH: All right. With that I think we can go to the green light, Open Session.
BY MR. ULRICH:
MR. ULRICH: I'd like to direct you, Mr. Lanava, to Tab Number 12 in your binder. This is Exhibit CE-454. This is GPH's April 2006 Operating Agreement. Not confidential. It is actually one--I think the only corporate document that Gramercy submitted with its Statement of Claim. Okay, so--
A. Do I need to answer that question?
Q. No. Here is my question. Looking at this Agreement, 17 April 2006, that's the date that GPH established; right?
A. That's correct.
Q. And the Operating Agreement, that's a foundational document that sets out how GPH is to be operated, managed, things of that nature; right?
A. I believe so.
Q. Okay. If we turn to Page 2, please. I'm looking at Article 2. And, in particular, Article 2.2, heading "Capital." And we see in 2.2(b)
[Page 729]
that "the Company's profits and losses shall be allocated to the members in accordance with their respective membership interests;" right?
A. I can see that.
Q. Okay. And Article 2.3, just below it, "tax allocation," it says basically the same thing, but it specifies that for each fiscal year of the Company, items of income gain, loss, deduction or credit, they are to be allocated for income tax purposes among the members; right?
A. I can see that, but I'm not an accountant and I stated earlier that I'm not a lawyer. So, I didn't draft this document, so anything that I would be giving you in regards to this document would be speculation.
Q. Okay. At the time of this Agreement--this is 2006--GEMF was the sole member--right?--the 100 percent owner of GPH? It is actually--your instincts are good. It's the last page of the Agreement there, Page 9, specifies "membership interests?"
A. So, that's correct. And, as we said earlier,
[Page 730]
that GEMF owned 100 percent of GPH.
Q. Okay. So, any profits or losses of GPH repassed directly to GEMF as its sole member, its 100 percent owner; right?
A. Again, I'm not an accountant, but I assume so.
Q. Okay. So, at the end of the day, GPH doesn't stand to gain or lose any money by holding the Bonds. Any profits or losses are going to be passed directly on to its owner, GEMF; right?
A. I can't answer that question.
Q. I was planning to show GPH's 2011 Amended Operating Agreement, but maybe in the interest of time, we can just quickly confirm a few points together. Okay?
A. Okay.
Q. The Amended Agreement that was concluded as part of some of the changes over time that Gramercy made to its structure; right? It is something you covered in your Witness Statement.
A. You're referring to Tab 14?
Q. Tab 13 is the Amended Agreement.
[Page 731]
A. Oh, I'm sorry. Sorry, you're right. The one-eye issue.
Q. And this also was covered in the structure chart. So, under these different changes to the structure over time, GEMF was removed from the structure as the sole owner of GPH. And at some point, Perú Agrarian Reform Bond Company, you refer to as "PARB," became the sole member, sole owner of GPH; right?
A. That's right. I believe that was in 2007, PARB was established and inserted as an intermediate holding Company, which wholly owned GPH. And GEMF wholly owned PARB.
Q. And under the amended Agreement, the terms remain the same. Any profits or losses were going to be passed directly from GPH to its owner, and as of 2011 until today, that's PARB; right?
A. Again--
MS. LAVAUD: Excuse me. For the record, it says "allocated," I believe, not "passed on," as you just said. Paragraph 2.2(b).
MR. ULRICH: Thank you for the clarification.
[Page 732]
Let's take a look at the document. I was trying to save some time here.
BY MR. ULRICH:
Q. But Tab 13, Article 2. This is the Amended and Restated Agreement from 2011?
A. Umm-hmm.
Q. Is that Page 3? Okay.
Page 3, Article 2.2, "Capital." We see same language as under the original Agreement, the "Company's profits and losses shall be allocated to the member;" right?
A. I see that.
Q. Okay. And then just underneath it, 2.3, on tax allocation, same thing, hasn't changed.
A. I didn't compare them, but I'll take your word for it.
Q. Okay. Thank you for doing that.
So, in fact, for accounting purposes, maybe you know this, Gramercy reports the assets of GPH on the balance sheets of PARB; right?
A. I'm not sure. Again, I'm not an accountant. My involvement was--yeah. Was related.
[Page 733]
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[Page 736]
OPEN SESSION
PRESIDENT FERNÁNDEZ ARMESTO: You were asking what would happen if the monetization happens. So, let's assume that the Bonds are actually monetized. What would happen to the Funds?
THE WITNESS: I mean, I would be speculating, but I would think that, after 14 years, that the investors that have a beneficial interest in the underlying economics of the Land Bonds would want to have that, those monies distributed.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah. No, no. The question is how would the corporate flow occur?
MR. ULRICH: If I may, Mr. President, just to take it a piece at a time.
PRESIDENT FERNÁNDEZ ARMESTO: I was trying to speed up.
MR. ULRICH: I do appreciate that.
PRESIDENT FERNÁNDEZ ARMESTO: But, Mr. Ulrich, do it your way.
BY MR. ULRICH:
Q. But just to be sure we don't miss any steps, because it is important to clarify for the record what
[Page 737]
is going on here. If Gramercy were to monetize the Bonds with--as the first step, any proceeds would be passed--allocated under the terms of the Agreement, GPH to its sole member PARB; right? As 100 percent owner. It goes to PARB.
MS. LAVAUD: Excuse me, Mr. Ulrich, "distribution" is different than "allocation." There's another provision in the Operating Agreement that refers to "distribution." So, if you'd like to ask the Witness about that, you may do so, but you should point to the right provision.
PRESIDENT FERNÁNDEZ ARMESTO: Let's make it very simple question. This is not for you. This is for counsel. An important point here is whether there is a--in companies, normally there is no automatic allocation of profits to your Shareholder. There is a corporate Resolution and sometimes you allocate and sometimes you don't. You pay a dividend, or you retain.
And I think that the important question here is whether--or the one Mr. Ulrich was trying to cover was whether there is an automatic system that all
[Page 738]
funds automatically, all profits automatically must go 100 percent to the parent without any possibility that they are retained at the level of the subsidiary.
That was, I think, the thrust of your question.
And maybe we leave this for redirect, but up to now, I have understood that these are special type of--"special purpose vehicles," where profits necessarily flow 100 percent from the subsidiary to the parent. That's where I stand to now as to my understanding of the corporate structure.
Mr. Ulrich, is that--that is where we stand?
MR. ULRICH: That is where we stand, and I think we can move on.
PRESIDENT FERNÁNDEZ ARMESTO: Move on. If it is wrong, please show it to us in the redirect.
MS. LAVAUD: I will. Thank you, Mr. President.
BY MR. ULRICH:
Q. Let's move to GFM, the other Claimants. Okay?
GFM doesn't hold title to any of the Bonds; right?
[Page 739]
A. No.
PRESIDENT FERNÁNDEZ ARMESTO: Evidently no. Evidently no. Because all the Bonds are in the name of--you have said so, but let's double-check. You are right. Let's double-check that.
Is any Bond in the name of GFM?
THE WITNESS: No. So, Gramercy Perú Holdings has title, direct title to all the Bonds, and Gramercy Funds Management has its investment manager--controls GPH. So, it has all the rights, titles, the authority to manage GPH, but GPH owns the Bonds.
MR. ULRICH: Thank you, Mr. President, and I am just trying to confirm for clarity of the record, while we have Mr. Lanava here, some of these points, taking into account, among other things, the fact that, for years in this arbitration, Gramercy said GPH holds, GFM controls, look no further.
And it was not until the second round of submissions that we received documents and were able to start commenting on these issues in any way. The documents were incomplete. A lot of them were redacted, and so we're doing our best to piece
[Page 740]
together the puzzle here.
PRESIDENT FERNÁNDEZ ARMESTO: I know.
MR. ULRICH: And if it's becoming clear for you, then we are moving in the right direction.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah. But it was a good question from you, because there could--there could be some exception to the general principle. So, we have now that--clarify that absolutely all Bonds are held through this structure, and that the only role of GFM is to manage GPH.
THE WITNESS: What I would say is that in--when it was originally--when GPH was originally set up, Gramercy Investment Advisors, which was an affiliate and was the investment manager, and over time as the Gramercy corporate structure, the management company corporate structure changed, GIA assigned its Investment Management Agreement to GFM, and that's how GFM became the investment manager, so later on, after our initial purchase in 2006, then we said earlier that GFM was established in 2009.
PRESIDENT FERNÁNDEZ ARMESTO: And GFM is the entity which is supervised by the SEC? At the SEC.
[Page 741]
THE WITNESS: Yes, sir. So, Gramercy Funds Management is our registered investment advisor, and we first became a registered investment advisor back in 2000 with Gramercy Advisors. So, we take great pride in having transparency and oversight for our investors.
MR. ULRICH: May I proceed, Mr. President?
PRESIDENT FERNÁNDEZ ARMESTO: Yes, of course.
MR. ULRICH: Thank you.
BY MR. ULRICH:
Q. Okay. Picking up with the GFM, Mr. Lanava, that was inserted--substituted into this structure in 2011; right? I just--to clarify the timing. Around the time of this 2011 Amended Operating Agreement, this is when GFM assumed its role in the structure controlling GPH, yes?
A. I believe the date was in December of 2011. I'm not 100 percent sure, but there was an assignment and an assumption Agreement between GIA and GFM that assigned the Investment Management Agreement to GFM.
Q. You referred earlier in testimony to a "symbiotic relationship," you called it, between GFM
[Page 742]
and GPH. Let's take a look at the Amended Operating Agreement. This is Tab 13, Exhibit CE-165.
Turn to Page 3, please. Article 3, Management and Control. It specifies here in 3.1, "Management Authority, Gramercy Funds Management LLC, the Sole Manager, acting in its capacity as Sole Manager, has the exclusive power to."
A. I'm sorry. Can you please repeat that tab?
Q. Sure.
A. I'm in the wrong tab. I do. I'm sorry.
Q. No problem at all. We're in Tab 13.
A. That's the one-eye issue. Sorry.
Q. No problem. We also--if it's any easier, it is on the screen there with the particular paragraph.
A. I can't see that.
Q. Understood.
A. Okay. Sorry.
Q. I'm on Page 3 of Tab 13. This is Exhibit CE-165. Article 3, "Management Authority" and it says: "Gramercy Funds Management LLC, the Sole Manager, acting in its capacity as Sole Manager, has the exclusive power to."
[Page 743]
And then there's a list of things that it has the power to do; right?
A. Correct.
Q. So, you said "symbiotic" earlier, but, essentially, GFM has sole control over GPH and does--GFM controls GPH?
A. GFM controls GPH, and what I was referring to is that GPH owns the Bonds and GFM controls GPH, that's what I was referring to.
Q. Okay. And I think we've adequately covered that GFM receives--is allocated no profits or losses from GPΗ. How about Page 4, though. Article 3.3. It is titled "Liability for Certain Acts."
And in the second sentence it says, "that to the fullest extent permitted by law, the Sole Manager or any agent of the Sole Manager shall not be liable to the Company or the member for any mistake of fact or judgment, or for the doing of any Act, or the failure to do any Act in conducting the business operations and affairs of the Company that may cause or result in any loss or damage to the Company or its member."
[Page 744]
So, what this provision does is it shields GFM from liability in its management of GPH; right?
A. Again, I'm not a lawyer.
Q. If we look further down in that paragraph, last sentence, is almost identically worded. It reiterates, again, "to the fullest extent permitted by law, neither Sole Manager or any agent of the Sole Manager shall be liable to the Company." Same point?
A. Okay. Again, not a lawyer.
Q. Okay. Thank you.
Okay. Mr. Lanava, in addition to the Operating Agreement, GFM entered into Investment Management Agreements with various Gramercy entities; right?
A. I believe so.
Q. Okay. Did that include an Investment Management Agreement between GPH and GFM?
A. I'm not certain.
Q. Okay. Neither are we, because it doesn't look like Gramercy has produced that document.
A. But it wouldn't be unusual for there just to be an Operating Agreement which clearly gives GFM
[Page 745]
control over GPHΗ.
ARBITRATOR DRYMER: Excuse me, remind me, did you ask that question of the previous Witness? I don't recall that you did. I mean, you might have got an answer from the CEO. In any event.
MR. ULRICH: I do not believe that we did.
PRESIDENT FERNÁNDEZ ARMESTO: I am now lost. There is an Operating Agreement, and then there are Investment Management Agreements, you said.
What is the difference between an Operating Agreement and Investment Management Agreement?
THE WITNESS: I will speculate, again, because I wouldn't have drafted either one of those documents, but I believe the Operating Agreement is the controlling document for the Company and is binding, and there is an IMA that designates an investment manager that also would--again, I'm speculating--outline certain rights and authorities for that investment manager to do on behalf of the Company, but, again, I believe that the Operating Agreement is the controlling document.
And I don't know if there is an IMA between
[Page 746]
GFM and GPH. I don't believe there is, but, again, I can't confirm that. But I believe that the Operating Agreement clearly states that GFM has the authority to do what is necessary on behalf of the Company.
PRESIDENT FERNÁNDEZ ARMESTO: Very good.
THE WITNESS: Thank you.
BY MR. ULRICH:
Q. Okay. Let's move along. And we are going to head back into confidential territory.
(End of open session. Attorneys' Eyes Only information follows.)
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[Page 768]
OPEN SESSION
BY MR. ULRICH:
Q. Just to be clear, we've gotten into the details of the corporate structure. We've talked about these beneficial owners. These entities and individuals up the structure, these beneficial holders, they have this economic exposure to the Bonds because they invested in Gramercy; right?
A. The investors subscribed to the Gramercy Emerging Markets Fund, which then equitized GPH and then purchased the Land Bonds. So, they have an economic interest in the Land Bonds, correct.
Q. Okay. But Perú didn't sell them Bonds.
A. I'm sorry?
Q. Perú didn't sell these individuals and entities Bonds.
A. You know, I don't know how they obtained them. It is my understanding that Perú expropriated land, but I'm no expert on that. So it's my understanding that they did acquire--the sellers acquired the Bonds, and my role, as Head of Ops back in 2006, was to help acquire those Land Bonds for GPH.
[Page 769]
Q. So, just with respect to the Gramercy structure, we're talking about these thousands of entities and individuals that now have an interest in the Bonds. They have that interest because they invested in Gramercy; correct? This is a structure set up by Gramercy. They invested in Gramercy. That's how these beneficial owners have an interest in the Bonds.
A. That's correct. But the fact that GPH owns the Bonds and GFM controls GPH is really--you know, at heart, the fact that there's an economic interest or structure above, you know, that doesn't change anything. GPH owns the Bonds and GFM controls the entity.
Q. Thank you, Mr. Lanava.
MR. ULRICH: Mr. President, no further questions.
PRESIDENT FERNÁNDEZ ARMESTO: Very good. Thank you, Mr. Ulrich.
Let's go to redirect.
MS. LAVAUD: Thank you, Mr. President, and I will be very brief.
[Page 770]
PRESIDENT FERNÁNDEZ ARMESTO: Take the time you need.
MS. LAVAUD: Thank you.
REDIRECT EXAMINATION
BY MS. LAVAUD:
Q. Mr. Lanava, you were taken to the Operating Agreement earlier between GPH and GFM.
Do you remember that?
A. I do.
MS. LAUVAD: And for the record, that is CE-165.
ARBITRATOR DRYMER: That's the Amended Agreement; right?
MS. LAVAUD: Yes, absolutely. Amended and Restated, yes.
PRESIDENT FERNÁNDEZ ARMESTO: CE-165.
BY MS. LAUVAD:
Q. Dated December 31, 2011. And that's Tab 13 in your binder.
THE WITNESS: I have it.
(Comments off microphone.)
BY MS. LAVAUD:
[Page 771]
Q. Do you have it?
MS. LAVAUD: Can you release the monitor so we can put the slide up? Great. Thank you very much.
BY MS. LAVAUD:
Q. You were asked questions in this document, what would happen if any money were to be received by GPH.
Do you remember that?
A. I do.
Q. And you said, I believe, that it would be distributed.
Do you remember that?
A. I do.
Q. And I'd like to point your attention to Paragraph 8 of this Amended and Restated Operating Agreement, Article 8, and that's on Page 5.
A. Okay.
Q. Do you see that it says "the Company may make distributions to the member from time to time in such a manner as the Sole Manager shall determine"?
A. I see that.
Q. Is that consistent with your understanding,
[Page 772]
Mr. Lanava?
A. It is.
Q. Now, you were also asked questions about the interest that GFM has, and do you remember that by Mr. Ulrich?
A. I do.
Q. And what kind of interest does GFM--for example, does it have any carried interest?
A. It could. It could have a carried interest if there was performance on the underlying securities, which would then obviously be towards GFM.
Q. Thank you.
MS. LAVAUD: I have no further questions. Thank you, Mr. President.
PRESIDENT FERNÁNDEZ ARMESTO: Is there any follow-up question from you, Mr. Ulrich?
MR. ULRICH: Sure, just a very quick follow-up based on that line of questioning.
RECROSS-EXAMINATION
BY MR. ULRICH:
Q. So, GFM earns a management fee; right?
A. I'm sorry. Could you say that again?
[Page 773]
Q. So, GFM--we're setting aside the question of beneficial ownership and who has what percentage. As the manager--investment manager of GPH, GFM earns a management fee; right?
A. It's common that GFM would earn a management fee from its investment vehicles.
Q. Okay. And it earns also, you just testified, a performance-based fee, a carried interest; right?
A. It can.
Q. Okay. So essentially GFM has exposure to all upside. It makes money if the investment performs well or not, and then if the investment performs well, it makes even more money; right?
A. Possibly.
ARBITRATOR DRYMER: You said it can have a carried interest. Do you know whether it does have a carried interest?
THE WITNESS: I don't know. Again, that's an accounting question. I apologize. I'm definitely not an accountant.
BY MR. ULRICH:
Q. Let me ask one question on that then.
[Page 774]
Gramercy has produced a number of Investment Management Agreements--GFM Investment Management Agreements. Are you aware of the fact that Gramercy has redacted any fee provisions in any of those agreements so that Perú and the Tribunal cannot see what this carried interest is and the management fee in this case?
A. No. I think I stated earlier that I wasn't involved in any of the document production in this Arbitration panel, so I didn't see what went out. I didn't look at any documentation that was produced. So, I apologize, I can't answer that question.
PRESIDENT FERNÁNDEZ ARMESTO: Because your fee structure depends--is different for each fund--you do not apply the same fee structure for all investors. Each investor negotiates and has a separate fee structure for the services provided by Gramercy. Is that so?
THE WITNESS: That is correct. In some cases, a separately managed account can negotiate its own fees, and in some cases in regards to a Gramercy Fund, it will have a different fee structure. So
[Page 775]
you're correct, Mr. President.
(End of open session. Attorneys' Eyes Only information follows.)
[Page 776]
CONFIDENTIAL SESSION
[Redacted]
(End of Attorneys' Eyes Only session.)
[Page 777]
OPEN SESSION
PRESIDENT FERNÁNDEZ ARMESTO: So coming back to my question, significant investors tend to have lower fee structures than smaller investors, as a general rule.
THE WITNESS: Without speculating, and without knowing exactly what the fee structures are for this particular vehicle and for all of our clients, that could be the case, in general.
PRESIDENT FERNÁNDEZ ARMESTO: Very good.
ARBITRATOR DRYMER: No, nothing for me. Counsel have covered all the questions I would otherwise ask. Thank you.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you. Thank you very much for being here on a Saturday, on a Saturday afternoon, and helping us to understand the complexities of your business. Thank you very much.
THE WITNESS: Thank you for your time.
(Witness steps down.)
PRESIDENT FERNÁNDEZ ARMESTO: Very good. So we are now off the record.
(Brief recess.)
[Page 778]
ROBERT JOANNOU, CLAIMANTS' WITNESS, CALLED
PRESIDENT FERNÁNDEZ ARMESTO: Good afternoon. We had some discussion about the correct pronunciation of your name.
What would it be?
THE WITNESS: Joannou (pronouncing).
PRESIDENT FERNÁNDEZ ARMESTO: Thank you. Mr. Joannou, thank you very much for being here with us. Thank you very much for having waited. We are slightly behind schedule, and we apologize--
THE WITNESS: No problem at all.
(Comments off microphone.)
PRESIDENT FERNÁNDEZ ARMESTO: You must leave it on, Mr. Joannou. That's perfect.
Mr. Joannou, you are here as a Witness, and the first thing we have to do is we have to take your oath of saying the truth.
So, can I kindly ask you, can you stand up, please. You have the formula for the oath in front of you. Can you please take your oath.
THE WITNESS: I solemnly declare, upon my honor and my conscience, that I shall speak the truth,
[Page 779]
the whole truth, and nothing but the truth.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you. You have counsel on both sides. They will put some questions to you. Especially counsel for the Republic of Perú will put the questions in a form that you can answer with a "yes" or "no" or "I don't know."
I kindly ask you that you first state for the record, so that it's clear, what your position is, "yes," "no," or "I don't know," and then add whatever clarification you would like.
THE WITNESS: Understood.
PRESIDENT FERNÁNDEZ ARMESTO: Very good. Closed session, please.
(End of open session. Attorneys' Eyes Only information follows.)
[Page 780]
CONFIDENTIAL SESSION
[Redacted]
[Page 781]
[Redacted]
[Page 782]
[Redacted]
[Page 783]
[Redacted]
[Page 784]
[Redacted]
[Page 785]
[Redacted]
[Page 786]
[Redacted]
[Page 787]
[Redacted]
[Page 788]
[Redacted]
[Page 789]
[Redacted]
[Page 790]
[Redacted]
(End of Attorneys' Eyes Only session.)
[Page 791]
OPEN SESSION
BY MR. JIJÓN:
Q. Mr. Joannou--sorry, I apologize. I also have a hard-to-pronounce last name, with a J.
A. No problem.
Q. Can you repeat that just one more time for me?
A. Joannou (pronouncing).
Q. Joannou. Thank you.
A. No problem.
Q. Mr. Joannou, you are Gramercy Funds Management's Chief Financial Officer; correct?
A. I am.
Q. You joined Gramercy in 2007.
A. I did.
Q. At that time, it was Gramercy Advisors.
A. It was.
Q. And at what point did you transition to Gramercy Funds Management?
A. This is my best guess: 2012, maybe.
Q. Thank you.
You became CFO of Gramercy Funds Management
[Page 792]
in 2015; correct?
A. Correct.
Q. And you have worked on the Land Bond Initiative at Gramercy since when?
A. So I would say it's a bit complicated. I worked on the management company side of the business from 2007 to 2010. I assisted on the year-end audits starting in 2009 and then took a very, very active role from 2010 forward, which obviously included work on the Land Bond project.
Q. Thank you.
Now, in preparing this statement, you say you've reviewed various documents to refresh your memory; is that correct?
A. Correct.
Q. And those are the documents that are cited in your statement?
A. Yes.
Q. Did you review any documents that were not cited in your Statement?
A. Some of the other Witness documents, I reviewed those.
[Page 793]
Q. Thank you.
Do you speak Spanish?
A. I do not.
Q. Thank you very much.
Let's talk very quickly about Gramercy's expenses.
A. Yes.
Q. You were not involved in GPH's acquisition of the Land Bonds; correct?
A. Correct.
Q. And that was in 2006, 2006 through 2008?
A. I believe that's correct. I wasn't involved with that, but I believe that's correct.
Q. So, during your time in the management company starting in 2007, you were not involved in the acquisitions between 2007 and 2008?
A. I wouldn't be involved anyway on the support side. The investment team worked on it, but it's correct to say I was not involved in the acquisition.
Q. Thank you.
And you have verified that Gramercy paid $33 million for those Land Bonds.
[Page 794]
A. Correct.
Q. And in your statement, you say that in order to confirm that, you've reviewed various Bond packages?
A. Correct. Can you show me where?
Q. Absolutely. It is Paragraph 7 in your Statement. It's on Page 2.
A. Yeah.
Q. If you look a little further down, you say--you are citing there to a document CE-711, Schedule of Bond Purchases.
That is Tab 1 in your binder, if you want to take a look.
A. Yes. Yes. I'm familiar with that document.
Q. This document, for the record, is titled "Perú Agrarian Reform Bond Acquisition Costs," CE-711 in the record.
Now, Mr. Joannou, this document is not dated; correct?
A. It is not.
Q. Did you prepare this document?
A. I did not prepare that document.
[Page 795]
Q. This is the internal--internal record that you reviewed.
A. Yes.
Q. Do you know when this was prepared?
A. I don't know.
Q. Do you know who prepared it?
A. I do not.
Q. Do you know on the basis of what it was prepared?
A. The basis it was prepared on were internal accounting systems, a system called Advent Geneva that had the purchases.
Q. And just to be clear, right now we're not talking about the Land Bond purchases. Right now we're talking about other acquisition costs. If you look, there's a first block that says Muniz Ramírez Pérez-legal.
A. So my tab one is the schedule.
Q. Sorry. I'm looking at the wrong document. Sorry, 711--I guess, since you're there, 711 is the Schedule of Bond Purchases, just to correct the record. This is what happens when one moves so
[Page 796]
quickly.
If we move now to Schedule 7--or to Tab 2.
A. Yes.
Q. That is Exhibit CE-712. That is the document, Perú Agrarian Reform Bond Acquisition Costs; correct?
A. That's correct.
Q. And just to reconfirm, did you prepare this document?
A. I may have prepared this document. I don't recall if I did. I know I reviewed it.
Q. And on the basis of what did you prepare this document, if you prepared this document?
A. Yeah. So, this document was created using accounting records as well. Advent Axys is the accounting system that we used that we book all the expenses in.
So we had--in particular, the top half where you have the legal expenses, that came directly from Advent Axys. The acquisition costs were sourced from--where you have "José Cerritelli" down to "ADAEPRA," that came from other supporting schedules
[Page 797]
that we were able to source. And then finally the bottom expenses, the other expenses, I'm very familiar with. They are also booked in our accounting--it's Advent Geneva, an updated system, but they're directly out of that. Those I'm very, very comfortable with as well.
Q. Thank you.
You did not attach any of those documents to your Report; correct?
A. I did not.
Q. And what is the date of this Report, this document?
A. I couldn't say. I don't recall.
Q. Was it prepared for the Arbitration?
A. This particular document, I believe it was. I believe I prepared it. I sourced a few different sources to kind of aggregate all the information into one file.
Q. Now, just looking very quickly at this, the first category that you referred to, Muniz Ramírez Pérez, that refers to legal costs incurred by Gramercy?
[Page 798]
A. Yes.
Q. And those are costs that occurred between 2006 and 2009.
A. Correct.
Q. Was Gramercy still acquiring Bonds in 2009?
A. I wouldn't--I don't think so, but I wouldn't be the right person to ask. I wasn't involved in the acquisition. It doesn't mean we wouldn't have costs though.
Q. The second category says "estimated Bond acquisition costs."
A. Yes.
Q. It refers first to Mr. José Cerritelli. Do you know who Mr. Cerritelli is?
A. I do.
Q. Cerritelli was Gramercy's man in Perú. He was the man on the ground.
A. He was--at least from my knowledge, he was, yeah.
Q. And this was at a time when he was not a part of Gramercy?
A. I believe he was affiliated with Gramercy
[Page 799]
Q. going back--predating me, but that's a question that I would ask Robert. He had the relationship with José early.
Q. And Gramercy paid him approximately $422,000.
A. Yes.
Q. And there is no indication of what years these payments were in?
A. There is not.
Q. This was his commission for sourcing Bonds?
A. I'd be speculating. I think so, but I don't know for sure. I wasn't part of paying José at that time. I wasn't involved in that.
Q. There is also a reference to Carlos Roca. Do you know who that is?
A. I do not.
Q. There is also a reference to ADAEPRA. Do you know who that is?
A. I'm familiar with the name. I don't know exactly what service they provided for Gramercy.
Q. It's a bondholder organization. Does that sound right?
A. It could be, yeah.
[Page 800]
Q. Do you have an underlying document that shows why Gramercy was paying ADAEPRA?
A. I do not.
Q. Where did you get that number?
A. Again, from--there was a sourcing schedule that just had these fees, and I simply summed them up.
Q. Thank you.
This also refers to other expenses, insurance premiums, security, and custody?
A. Yes.
Q. These are not--I put it to you--the transaction costs that you mentioned in Paragraph 2 of your Report. In Paragraph 2, you mention a $2.2 million figure?
A. Paragraph 2 is my position.
Q. Sorry. It's the bottom of Paragraph 7.
A. Okay.
Q. You reference a cost of 2.244872.
Do you see that?
A. That's correct, yeah.
Q. That is the number that you get if you add the legal and the estimated Bond acquisition cost
[Page 801]
categories; correct?
A. That is correct.
Q. So, this 3.111 is additional.
A. Correct.
Q. And the first category there is insurance premiums.
A. Yes.
Q. And were these the insurance premiums that you discussed--was this before the insurance policy that you were discussing on your direct?
A. It was.
Q. Thank you.
And that amounts to $1.58 million; correct?
A. Yes.
Q. And this was incurred during the acquisition?
A. The insurance premiums?
Q. Yes.
A. No. They have all occurred from 2016 forward. I was moving our Bonds out of our Citi custody account in Lima to another location, and then insuring them thereafter on an annual basis.
Q. So, it's fair to say that this document
[Page 802]
includes more than acquisition costs?
A. Yes, it is.
Q. Your Statement--sorry, one more question on insurance.
Just to understand, has Gramercy ever had a claim under the insurance policy?
A. We have not.
Q. Has there ever been a subrogation under the insurance policy?
A. I don't exactly know what subrogation is, so you'd have to tell me.
Q. Okay. Let's move on.
Your Statement also refers to additional costs, a wide variety of out-of-pocket costs. I'm in Paragraph 8 on Page 3.
A. Yep.
Q. This includes Peruvian counsel.
A. Correct.
Q. Do you know that that Peruvian counsel included Mario Seoane?
A. Yes.
Q. Did it include any other Peruvian counsel?
[Page 803]
A. Estudio Rodrigo.
Q. And Estudio Rodrigo, just to be clear, was that engaged for the purpose of this dispute or previously?
A. I don't engage counsel, so I don't know.
Q. And it also, I understand, includes international counsel for this proceeding.
A. Yeah. I would assume so, yes. But, again, I don't engage counsel.
Q. Do you know how much these amounts are?
A. No, not offhand, I don't.
Q. It also references Experts here. Do you know the identity of the Experts?
A. I know quite a few of them. I don't know if I could rattle off all of them, but Experts would include Deloitte, for example, other Valuation Experts, things like that for certain.
Q. Professor Coffee, for instance?
A. Yes, I'm aware of him as well.
Q. Professor Porzecanski?
A. Doesn't ring a bell. I don't know that one.
Q. Does this include money spent on lobbyists?
[Page 804]
A. Not in Experts, no.
Q. Not Experts, but out-of-pocket costs?
A. Out-of-pocket costs would be more--when I think of out-of-pocket costs would be travel, particularly to and from for Gramercy employees to Perú and things like that. I don't know that it was meaning out-of-pocket costs to mean Experts or anything like that.
Q. It was an additional cost.
A. An additional cost?
Q. This paragraph says Gramercy has incurred and continues to incur significant additional costs.
A. Additional costs, I would agree. You were asking specifically about out-of-pocket costs. But if you mean additional costs, I would say yes. There was a wide range of expenses at Gramercy's pace.
Q. And that includes lobbyists.
A. It does.
Q. It continues to include lobbyists.
A. I believe it does.
Q. Thank you.
Let's move on. In your Statement, you
[Page 805]
discuss the valuation of Land Bonds; that's correct?
A. Correct.
Q. And you said that you weren't involved in the acquisition of Land Bonds, but you understand how they were valued at that time.
A. Correct.
Q. You say that during the initial acquisition period, Gramercy valued the Land Bonds at cost.
A. Are you in a specific section in my statement?
Q. You can look at Paragraph 6, for instance.
A. Okay. Okay.
Q. It says "initial acquisition period."
Just to confirm, that means 2006 to 2008?
A. I think that's a fair statement, yes.
Q. Did Gramercy at that time value the Land Bonds differently in any other documents?
A. Differently, meaning year to year on the Financial Statements?
Q. No, "differently" meaning not at cost.
A. It valued at cost, like at true cost in 2006.
Q. Yes. Did it have a separate valuation of the
[Page 806]
Land Bonds?
A. In 2006?
Q. Yes.
A. No.
Q. What about in 2007?
A. So 2007, the valuation I referred to would be the valuation in the financial statements. That's the valuation.
Q. And is that at cost?
A. It's not at cost. It is what we call like a cost, plus a mark-to-market. So you have--basically there's a note in the financial statement that refers to a broker quote. That was the last price that Gramercy purchased.
So, the cost of the last purchase was marked--it implied the mark for the entire portfolio. So it was marked to the cost of the last purchase, but I think more accurately I would call that a mark-to-market.
Q. You're aware of a Bondholder group's calculation method for determining the value of Land Bonds?
[Page 807]
A. I'm not.
Q. You're not?
Can you please refer to Paragraph 5 of your Statement. It says: "I understand that we were able to purchase the Land Bonds at a substantial discount to a Peruvian Bondholder group's calculation of their value."
A. Okay. So you're talking about our purchase Bonds, not--
Q. Correct.
A. There's no contemporaneous mark with Gramercy, is what I wanted to be clear about.
Q. What I'm asking is, you're aware that a Bondholder group calculated value of Land Bonds.
A. On our purchase, yes.
Q. Yes.
And Gramercy did not value the Bonds at that time, according to the Bondholder group's calculation of their value.
A. No. We--Gramercy will mark its position based on accounting standards because we report out under GAAP.
[Page 808]
Q. And the Land Bonds, those are illiquid positions; correct?
A. They are.
Q. In fact, you would say they are highly illiquid.
A. I would say they are very illiquid, yes.
Q. Highly illiquid?
A. I would say they're highly illiquid because they were liquid.
Q. And highly illiquid assets, you agree, are hard to value?
A. I would agree that Level 3 assets are not hard to value. They just require judgment and modeling. It's certainly easier to value a Level 1 or a Level 2 because inputs are readily available. But it's harder to value. I wouldn't say it's hard. You build a model.
Q. Just to confirm, for the record again, would you or would you not say that they are hard to value?
A. I would say they are--when you say about building a model, it's not hard to build a model. There's just judgment involved in creating a Valuation
[Page 809]
Model.
Q. So, yes, they are hard to value.
A. I would say they're more difficult to value than Level 1 or Level 2 securities because of the lack of significant unobservable input.
Q. Can you please turn to Paragraph 9 of your Statement.
Second sentence says: "When assets are either hard to value or will require restructuring, until we make progress toward monetizing the position, the acquisition costs and our estimate of Fair Market Value will tend to track one another closely."
What I would like to know is does this describe the Gramercy Land Bonds?
A. Only to the extent that when you purchased them, you keep them at cost. This paragraph is meant to say the reason you track closely the cost is because as you're acquiring an illiquid position, you typically--it's very, very common to keep them close to cost while you build a position ahead of building out a formal model. Building a model in and of itself is not hard.
[Page 810]
Q. Building a model is not hard. You didn't do that in 2006, however.
A. We did not in 2006.
Q. You didn't do that in 2008 either?
A. In 2008, there was no model built. Rather, an independent Valuation Expert was used to price the portfolio, and then Gramercy took a discount off of that independent valuation agent's price.
Q. That independent valuation, that's not in the record?
A. It's not.
Q. Let's talk about that model from 2009, please. This was a model in 2009 that you built to calculate the value of your positions in the Land Bonds; correct?
A. We did.
Q. And that was for the purpose of the financial statements?
A. It was part--we don't ever just do something for the financial statements. What we were doing was building a model to come up with the Fair Market Value. That Fair Market Value was then used in the
[Page 811]
Financial Statements.
Q. The amounts reported on the financial statements, in other words, are an indication of what Gramercy believed the value of the Land Bonds was.
A. The Fair Market Value in the financial statements is meant to represent what--at a point in time, at 12/31 of that year end, of 2009, it's a reference point of what we could exchange that for at that exact point in time in an ordinary transaction and an arm's-length transaction, not a fire sale.
Q. Okay. And the model that you developed used CPI to update the principal amount?
A. That's correct.
Q. And interest?
A. Accounted for interest, yes.
Q. And that interest was simple interest in 2009?
A. It was.
Q. And in 2011, you changed the model.
A. We did.
Q. And you added--you made the interest compounded; correct?
[Page 812]
A. We did.
Q. And the compounded interest rate was the rate on the face of the Bonds?
A. Yes.
Q. And, again, you didn't attach that model to your Statement either?
A. We did not.
Q. Have you changed the model since then?
A. We have.
Q. And you mentioned earlier, I believe, that your model is not the same as Professor Edwards' model.
A. That's correct.
Q. Because he uses a real return--Rate of Return in Perú rather than the stated interest rate.
A. That's correct.
Q. Okay. Just one quick question going back to something I might have skipped. When you added the compound interest, were you compounding annually?
A. We were compounding monthly.
Q. Compounding monthly?
A. Yes.
[Page 813]
PRESIDENT FERNÁNDEZ ARMESTO: So, you used 5 percent compounded monthly?
THE WITNESS: No. I'm sorry. I should correct that. We were compounding annually but updating monthly, yeah. Sorry.
BY MR. JIJÓN:
Q. Thank you.
Now, one of the things that you mention in your Statement is that you saw progress through the efforts to monetize and add value to the Land Bond positions.
Do you remember that?
A. Can you just point me to where?
Q. Sure. Look at Paragraph 17, last line.
A. Yeah, I see it. Yep.
Q. Okay. And so I understand this to mean that you or someone on your team was tracking developments in Perú.
A. Correct.
Q. And you would take observable inputs and adjust the model accordingly.
A. We would.
[Page 814]
Q. And would you agree that Gramercy had the right to go to Peruvian Court?
A. That's outside of my expertise.
Q. Did you, in observing the developments during this period, see anything that suggested that Gramercy had gained the right or lost the right to go to Peruvian Courts?
A. I wouldn't want to speculate on--I'm not a lawyer. I don't know.
Q. Just to be clear, I'm not asking you if it actually happened. I'm just asking if you remember seeing something of that nature.
A. I do know that there were Gramercy Bond positions. The Pomalca case is one that comes to mind where Gramercy did go through the Peruvian lower courts, but I'm--
Q. I'm not asking if Gramercy went to Court. I'm just saying, was there a change--do you remember seeing a change in Gramercy's right to go to Court to make good on any legal rights it might have had?
A. I don't know anything about rights to go to Court. I don't recall seeing anything about that, but
[Page 815]
it wouldn't be weird for me not to have that information.
Q. You did see other signs of what you call progress; right?
A. We did.
Q. And one of those is the 2011 debate in Congress?
A. Yes.
Q. And this was a bill that was being debated in Congress on how to pay the Land Bonds; correct?
A. Correct.
Q. And you would say this was a significant development.
A. I would.
Q. And the reason it was a significant development was it made it more likely that you were going to be able to monetize your position in the Land Bonds.
A. It showed a willingness, first off, to use compounding of interest. It was contemporaneous with our valuation work, so it showed that both sides, the Peruvians and the Bondholders, had worked together to
[Page 816]
come up with a methodology to pay the Bonds that included compounding of interest. And it did seem like a positive result that it got through Congress, although it never got executed by the President.
But the other thing I would say about 2011 was the associate--College of Engineers, the Association of Engineers, petitioning the TC--and we knew that at the end of the 2011, going into 2012--that was also a positive sign for us.
Q. Thank you.
Let's try to stick to my question. I haven't asked about the College of Engineers yet.
You mentioned that the bill was never executed. The bill never became law; correct?
A. Correct.
Q. And, nevertheless, you saw that as a positive indicator.
A. We did, based on the fact that the two sides had essentially come to terms at least, although it never became law in terms of--with CPI plus compounding of interest.
Q. In your Statement, you refer to it as a
[Page 817]
consensus?
A. Yes.
Q. Okay. And just to be clear, this was a positive result that led you to increase your valuation?
A. It was one of the results.
Q. One of the--
A. Yes.
Q. Thank you.
Now, have you read the draft bill?
A. I have not.
Q. It is cited in your Statement. Can we go to Paragraph 21?
A. Okay.
Q. You'll see the first bolded citation is document CE-160.
A. Yes.
Q. Now, earlier you told us that you had reviewed the documents that were cited in your Statement?
A. Yeah.
Q. Just I want to make sure. Did you review
[Page 818]
this document?
A. I reviewed everything in my Witness Statement. I'm assuming that the bill itself was much larger. I'm not sure if that's the entirety of the bill.
Q. Well, you're getting ahead of me. Let's look at that.
It's Tab 3 in the binder. This--I am going to show you first the part that is before the blue sheet, and for the record, this is CE-160T. 160T. It is a translation.
Mr. Joannou, the translation is important, again, because you do not speak Spanish; correct?
A. Correct.
Q. Okay. And I'm just looking at this, and I think you are undoubtedly right. This is only three double-sided pieces of paper. This is not the complete bill.
A. I take your word for it, yes.
Q. But you did read this.
A. I read what was in my Statement.
Q. And this refers on Page 10 to comments by
[Page 819]
Gramercy Advisors.
Do you see that?
A. I do.
Q. And Gramercy Advisors had commented at the time that it was important to issue new Bonds; correct?
A. It appears so. I wouldn't have written that statement, but it appears if that's accurate, then yes.
Q. And right underneath at 11, it refers to attorney Mario Seoane, whom you've confirmed today was Gramercy's lawyer. Mr. Seoane "points out the importance of its approval"--that's the bill's approval--"which will grant Bondholders the possibility of claiming payment from the State"; correct?
A. Yes.
Q. So Mr. Seoane was saying it is necessary for the Bondholders to be able to claim payment.
A. It's his words. This was not my words. I don't know.
Q. Now, if you go down to the next page, there
[Page 820]
is a summary, and the fourth part of the summary--this is the summary of the bill in Congress. The fourth point refers to "legal mechanisms must be issued for the purpose of supplementing the obligations assumed by the Peruvian Government."
MS. LAVAUD: Mr. President, excuse me. I just wanted to just correct one thing.
The document says that Mr. Seoane pointed out the importance of its approval. It didn't point out that it was necessary, as Mr. Jijón mischaracterized. Thank you.
MR. JIJÓN: The text speaks for itself.
PRESIDENT FERNÁNDEZ ARMESTO: What is the question? Let's try to get--
MR. JIJÓN: I think we're looking at a lot of different things. And if you look at Paragraph 4, you will also see similar language. I won't read it again.
BY MR. JIJÓN:
Q. The question is, did you know about these comments, about the importance of the bill, the necessity of the bill, at the time that this was going
[Page 821]
through Congress?
A. I certainly did not. But it wouldn't be odd for me not to know. The asset managers who were responsible for this position would assist the valuation team in coming up with a valuation. So, some of the inputs we would receive, and some of the progress updates, in particular, would have come from the asset managers, not from me. So, I would not be as in the weeds on the specifics like this.
Q. In the weeds.
So, just to be clear, this was not a document--you were not reviewing this document itself. It was the fact of the bill, not the content of the bill that you were relying on.
A. Me personally?
Q. Yes.
A. So I'm part of a valuation team, not the only person on the valuation team.
Q. Okay.
A. So, presumably Robert, Jose Cerritelli, one of those gentlemen would have known about this, but I can't speak for them. I don't know.
[Page 822]
Q. Just to be clear, Gramercy relied on this bill to increase its valuation; correct?
A. One part of it, yes. There were other factors.
Q. And I presume that you have not read the translation--sorry, the Spanish version?
PRESIDENT FERNÁNDEZ ARMESTO: He doesn't speak Spanish.
MR. JIJÓN: I am not going to take him to it.
BY MR. JIJÓN:
Q. Would it surprise you, or did you have any knowledge, that the original language version in parts that are not included in the translation says what the objective of that law was?
A. Can you repeat that?
Q. Sorry.
PRESIDENT FERNÁNDEZ ARMESTO: Do you know anything about other parts of the law which have not been translated from Spanish into English?
THE WITNESS: No.
PRESIDENT FERNÁNDEZ ARMESTO: No.
BY MR. JIJÓN:
[Page 823]
Q. And the--so you don't know that that law said that it was--that it had the purpose of making possible the compliance with the obligations.
PRESIDENT FERNÁNDEZ ARMESTO: He doesn't know. He does not know.
MR. JIJÓN: He does not know.
PRESIDENT FERNÁNDEZ ARMESTO: I think his statement is that he read the English translation and relied on his colleagues.
BY MR. JIJÓN:
Q. Did anyone at Gramercy know?
A. I wouldn't know.
Q. You wouldn't know.
A. No.
Q. There was no discussion in Gramercy about the fact that this law was necessary to make possible the compliance with the State's pending obligations.
A. So, the only significance, in my perspective, for this law is the fact that compounding was included in the calculation to update the value of the Bonds. That is the most significant thing that I took out of that Congressional--the draft Congressional bill.
[Page 824]
Q. That, and the fact that there was a consensus, you said.
A. A consensus in terms of compounding and how to update the value of the Bonds and come to a formal mechanism to update the value.
Q. And you say there's a consensus, but would it surprise you to know that there's another document that you've cited in your Statement that shows that there was not a consensus?
A. Can you take me to it?
Q. Absolutely.
Let's turn to Tab 4. This is document CE-162, Debate Journal. You have provided Pages 1 and 61 in translation.
Do you see that?
A. Now, in my Statement we're at, or are we in yours?
Q. No. This is Tab 4 of the big binder.
A. Yep.
Q. I believe yours does not have tabs.
A. Okay.
Q. Are you there?
[Page 825]
A. I am.
Q. Okay.
MR. JIJÓN: And for the record, we are looking at CE-162T.
PRESIDENT FERNÁNDEZ ARMESTO: Okay.
BY MR. JIJÓN:
Q. It is titled "Debate Journal"?
A. Yeah.
Q. Okay. And there is Page 1 and Page 61; correct?
A. Yes.
Q. So, 59 pages of this are missing.
A. That's correct.
Q. At least. At least 59 pages are missing.
A. I would agree.
Q. So, you don't really know what is happening in those 59 pages.
A. I do not.
Q. So, it's possible that there is evidence in those 59 pages of a lack of consensus.
A. It is entirely possible. When I say consensus, though, it was a consensus around the
[Page 826]
calculation of updating the value of the Bonds. That was what was most critical to me in terms of coming up with the valuation in 2009.
ARBITRATOR DRYMER: Just quickly on that point, you said what was particularly relevant to you was the compounding--compounded interest feature.
THE WITNESS: Correct.
ARBITRATOR DRYMER: Not the reference to CPI?
THE WITNESS: No, both. CPI plus the compounding of interest. The fact that--Gramercy had always been using CPI since we started updating.
ARBITRATOR DRYMER: Right.
THE WITNESS: But the consensus around the methodology of updating the value of the Bonds to have compounding of interest and CPI both in that same document was very, very powerful for us.
In 2011, that was the first year that we included the compounding of interest in our valuation. It was one of the inputs that we used that year for the operation.
BY MR. JIJÓN:
Q. Thank you.
[Page 827]
In the interest of time, I'm going to move on, but you, again, know that this did not become law.
A. I do.
Q. The idea--and you would agree--is that the Congress or the Government was kicking the can down the road.
A. I can't speak for the Government. I don't know what they were doing.
Q. Did anyone in Gramercy know what they were doing?
A. I have--I certainly don't.
Ω. So, nobody at Gramercy could say that.
A. Knew what the Government was doing? I don't know.
Q. Thank you very much.
MR. JIJÓN: For this part, confidentiality.
(End of open session. Attorneys' Eyes Only information follows.)
[Page 828]
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(End of Attorneys' Eyes Only session.)
[Page 867]
OPEN SESSION
MR. JIJÓN: Not at all.
PRESIDENT FERNÁNDEZ ARMESTO: Very good.
BY MR. JIJÓN:
Q. Mr. Joannou, I appreciate your patience tonight. I have one final area that I wanted to cover with you.
We referred earlier to "an initial acquisition period."
Do you remember that?
A. We did.
Ω. And was there a subsequent acquisition period?
A. No.
Q. You're not aware of Gramercy purchasing Land Bonds other than the ones in this case?
MS. LAVAUD: Objection. I will raise the same objection that I raised earlier: Not within the scope of this Witness Statement.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah, but--
(Comments off microphone.)
PRESIDENT FERNÁNDEZ ARMESTO: I think it is
[Page 868]
reasonable that you put these questions.
Maybe let me explain this to Mr. Koenigsberger, disclose that there had been a second tranche of Land Bonds which had been purchased in 2017 in the first quarter, and he did not remember a number of details, and I'm sure that counsel will now ask whether you know these details.
MR. JIJÓN: Thank you. Thank you, Mr. President for clarifying that.
BY MR. JIJÓN:
Q. Just in light of what the President has said, would you like to correct your answer about knowing whether Gramercy acquired other Land Bonds?
A. I'm sorry? Say that again.
Q. Would you like to correct your prior answer?
A. What was my prior answer?
Q. You said you did not know that Gramercy had acquired other Land Bonds.
A. I was being specific to this position that we're talking about today, and I was being specific to purchases after 2009 to build this position, for what I was reporting on.
[Page 869]
Q. I'm not sure where you got that. That wasn't my question.
But, to clarify, are you aware that Gramercy acquired Land Bonds in 2017?
A. Yes.
Q. What the President referred to as a second tranche?
A. Yes.
Q. Yes. Do you know when in 2017 Gramercy acquired those Land Bonds?
A. I would say--it's a guesstimate. Maybe Q2.
Q. Q2?
A. Yeah.
Q. Month, more or less?
A. I'm going to guess June.
Q. July?
A. Okay. I was going to say June.
Q. Okay. June? July?
A. Yeah.
Q. And as Gramercy's CFO, were you involved in the Investment Committee?
A. No.
[Page 870]
Q. Were you involved in looking at the Bond values?
A. Valuation?
Q. Yes.
A. Yes.
Q. Do you know how much Gramercy paid for those Bonds in 2017?
A. It's actually a complicated answer. Cash out--it's my best guess here. Cash out maybe $6 million or $7 million.
Q. You said it's complicated. Can you explain a little what you mean by that?
A. Yeah, because there's a tail if there's monetization.
Q. How does that work?
A. There has to be an event that occurs where we're able to sell the assets, redeem the assets, what have you, but monetize them.
Q. So, the seller still has an interest?
A. Correct.
Q. Okay. And Mr. Koenigsberger was involved in that transaction?
[Page 871]
A. Yes, for sure.
Q. And he would know how much the Bonds were acquired for?
A. He may not know how much the Bonds were acquired for, but he would have obviously approved the transaction.
Q. And do you know how many Land Bonds were acquired at the time?
A. I don't.
Q. Do you know who the seller was?
A. I don't.
Q. Was the seller an individual or a company?
A. I'm not entirely sure. I'd be guessing.
Q. Okay. Do you know if the seller was American?
A. I do not.
Q. Do you know if the seller was Peruvian?
A. Again, I don't.
Q. Okay. Were those--was that second tranche valued at cost?
A. It was valued at cost initially and then mark, mark-to-market.
[Page 872]
Q. And so, what were those initial valuations?
A. The initial valuation was, again, somewhere cost at like 5 million or $6 million is what I remember the cost being.
Q. For what year was that?
A. '17.
Q. And in '18?
A. There was a mark-to-market in '18 to 55 million. That's my best guess on an estimate. It is probably pretty close.
Q. When was the last time you talked to anybody about those Bonds?
A. Outside of Gramercy?
Q. Outside of this room today.
A. I mean, we talk internal about the Bonds. We're going through year-end audits right now, so they are part of our year-end audit.
Q. Did you talk about those Bonds yesterday?
A. No.
Q. Have you heard anybody mention those Land Bonds in the last week?
A. Certainly members of my staff because we are
[Page 873]
working on the valuations, but I don't recall specific references outside of my staff, no.
Q. Is Tranche 2 considered an illiquid position?
A. Yes.
Q. Is the value of those Land Bonds indicated on the PARBCO Financial Statements?
A. No.
Q. On another's Financial Statements?
A. Yes.
Q. Whose Financial Statements?
A. It is held by a few different accounts.
(End of open session. Attorneys' Eyes Only information follows.)
[Page 874]
CONFIDENTIAL SESSION
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PRESIDENT FERNÁNDEZ ARMESTO: Thank you very much for your patience, for coming on a Saturday and working until these hours.
THE WITNESS: No problem.
PRESIDENT FERNÁNDEZ ARMESTO: And thank you for your answers. You can stay with us, or you can leave, as you wish.
THE WITNESS: Thank you.
(Witness steps down.)
PRESIDENT FERNÁNDEZ ARMESTO: Now, I expect on Monday a huge chocolate box for our Interpreter and--or we can have meringue pies for our--we are off the record.
(Comments off microphone.)
PRESIDENT FERNÁNDEZ ARMESTO: We will start Monday, not tomorrow, at 9:30.
(Whereupon, at 8:36 p.m., the Hearing was adjourned until 9:30 a.m., on February 10, 2019.)
[Page 886]
CERTIFICATE OF REPORTER
I, Dawn K. Larson, RDR-CRR, Court Reporter, do hereby certify that the foregoing proceedings were stenographically recorded by me and thereafter reduced to typewritten form by computer-assisted transcription under my direction and supervision; and that the foregoing transcript is a true and accurate record of the proceedings.
I further certify that I am neither counsel for, related to, nor employed by any of the parties to this action in this proceeding, nor financially or otherwise interested in the outcome of this litigation.
Signature
Dawn K. Larson
[Page 887]
INTERNATIONAL CENTRE FOR THE SETTLEMENT OF INVESTMENT
DISPUTES
-X
| In the matter of Arbitration between: |
: | |
| GRAMERCY FUNDS MANAGEMENT LLC AND GRAMERCY PERU HOLDINGS LLC, |
: : : |
|
| Claimants, | : | ICSID Case No. UNCT/18/2 |
| and | : | |
| REPUBLIC OF PERÚ, | : | |
| Respondent. | : |
-X Volume 3
HEARING ON JURISDICTION, MERITS AND QUANTUM
Monday, February 10, 2020
The World Bank Group
1225 Connecticut Avenue, N.W.
C Building
Conference Room C1-450
Washington, D.C.
The hearing in the above-entitled matter came on at 9:30 a.m. before:
PROFESSOR JUAN FERNÁNDEZ ARMESTO, President
MR. STEPHEN L. DRYMER, Co-Arbitrator
PROFESSOR BRIGITTE STERN, Co-Arbitrator
In the case of discrepancy, the audio recording in the original language will prevail.
[Page 888]
ALSO PRESENT:
On behalf of ICSID:
MS. MARISA PLANELLS-VALERO
Secretary of the Tribunal
MS. KRYSTLE M. BAPTISTA
Assistant to the President of the Tribunal
Realtime Stenographers:
MS. DAWN K. LARSON
Registered Diplomate Reporter (RDR)
Certified Realtime Reporter (CRR)
B&B Reporters
529 14th Street, S.E.
Washington, D.C. 20003
United States of America
[email protected]
MR. PAUL PELISSIER
MR. DIONISIO RINALDI
D.R. Esteno
Colombres 566
Buenos Aires 1218ABE
Argentina
(5411) 4957-0083
Interpreters:
MS. SILVIA COLLA
MR. DANIEL GIGLIO
MR. CHARLES ROBERTS
[Page 889]
APPEARANCES:
On behalf of the Claimant:
MR. MARK W. FRIEDMAN
MS. INA C. POPOVA
MR. CARL RIEHL
MS. FLORIANE LAVAUD
MS. BERGLIND HALLDORSDOTTIR BIRKLAND
MR. GUILHERME RECENA COSTA
MS. SARAH LEE
MR. DUNCAN PICKARD
MR. JULIO RIVERA RIOS
MS. MARY GRACE MCEVOY
MR. THOMAS G. MCINTYRE
Debevoise & Plimpton, LLP
919 Third Avenue
New York, New York 10022
United States of America
MR. LUIS BEDOYA
MR. FRANCISCO CARDENAS PANTOJA
Rodrigo, Elias & Medrano
Av. San Felipe 758
Jesús María
Lima 15072
Perú
Representing Gramercy Funds Management LLC:
MR. JAMES TAYLOR
MR. JOSHUA M. O'MELIA
MR. NICK PAOLAZZI
MR. THOMAS NORGAARD
[Page 890]
APPEARANCES: (Continued)
On behalf of the Respondent:
AMBASSADOR HUGO DE ZELA
Republic of Perú
MR. RICARDO AMPUERO
Republic of Perú
MS. MONICA GUERRERO
Republic of Perú
MS. GIOVANNA ZANELLI
Republic of Perú
MR. ALBERTO HART
Republic of Perú
MR. JONATHAN C. HAMILTON
MS. ANDREA MENAKER
MR. RAFAEL LLANO
MR. FRANCISCO JIJÓN
MR. JONATHAN ULRICH
MR. FRANK PANOPOLOUS
MR. JOHN DALEBROUX
MR. ALEJANDRO MARTINEZ DE HOZ
White & Case LLP
701 Thirteenth Street, NW
Washington, D.C. 20005-3807
United States of America
[Page 891]
For the United States of America:
MS. LISA GROSH
MS. NICOLE THORNTON
MS. MARGARET SEDGEWICK
MR. JOHN DALEY
Attorney-Advisers
Office of International Claims and
Investment Disputes
Office of the Legal Adviser
U.S. Department of State
Suite 203, South Building
2430 E Street, N.W.
Washington, D.C. 20037-2800
United States of America
MS. AMY COLLINS
U.S. Department of Treasury
[Page 892]
CONTENTS
PAGE
WITNESSES:
BETTY ARMIDA SOTELO BAZÁN
Direct examination by Mr. Jijón... .896
Cross-examination by Mr. Friedman... ..903
Questions from the Tribunal... .1057
CARLOS HERRERA PERRET (via videoconference)
Direct examination by Mr. Hamilton... .1076
Cross-examination by Ms. Popova... ..1082
Redirect examination by Mr. Hamilton... ...1132
LUIS MIGUEL CASTILLA RUBIO (via videoconference)
Direct examination by Mr. Hamilton... ..1148
[Page 893]
P R O C E E D I N G S
PRESIDENT FERNÁNDEZ ARMESTO: Good morning, everyone.
We are beginning the Hearing, the third day of this Hearing, in arbitration between Gramercy Funds Management LLC and Gramercy Perú Holdings LLC v. the Republic of Perú.
First, I would like to ask the Parties if there is any point of order that you'd like to raise at this time.
MR. FRIEDMAN: No, we are ready to proceed. Thank you.
PRESIDENT FERNÁNDEZ ARMESTO: And Mr. Hamilton?
MR. HAMILTON: The same.
PRESIDENT FERNÁNDEZ ARMESTO: Excellent.
So, we will call the Vice Minister, Betty Armida Sotelo Bazán.
BETTY ARMIDA SOTELO BAZÁN,
RESPONDENT'S WITNESS, CALLED
PRESIDENT FERNÁNDEZ ARMESTO: Good morning, Vice Minister. How are you?
[Page 894]
THE INTERPRETER: No microphone.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you very much for being here.
Thank you, Vice Minister, for being here with us. You are here as a witness, and as a witness, you have the duty to state the truth. So, I'm going to ask you to please stand, and we will take your declaration to speak the truth. You have the statement to your right, please. It's in Spanish on the other side.
THE WITNESS: I solemnly declare, upon my honor and conscience, that I shall speak the truth, the whole truth, and nothing but the truth.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you very much, Vice Minister.
To your left, you have the counsel for Claimants of the Gramercy Group, and to your right, you have counsel for the Republic of Perú. They are going to ask you a number of questions. First, you will be asked questions by the Republic of Perú, and then you will be asked questions by the Claimants.
So, I will ask you two things. Most of the
[Page 895]
questions, Vice Minister, shall be formulated in such a way that you can answer "yes," "no," or "I have no personal knowledge" or "I do not know." So, I would ask you please--I know it's contrary to the natural form of speaking, but for clarity of the Transcript, I would ask you to please first state your position, "yes," "no," or "I have no personal knowledge of it." And we would then be delighted to hear any other further clarification from you.
THE WITNESS: I would just like to note at this time I am not Vice Minister, Mr. President.
PRESIDENT FERNÁNDEZ ARMESTO: Fine. Thank you very much. But this is like the priesthood--it leaves you with certain a character, so if it's okay with you, I will continue calling you "Vice Minister."
Counsel for the Republic of Perú has the floor.
MR. HAMILTON: Mr. Jijón is going to handle the examination.
PRESIDENT FERNÁNDEZ ARMESTO: Very well.
MR. JIJÓN: Good morning, Mr. President.
[Page 896]
Members of the Tribunal.
DIRECT EXAMINATION
BY MR. JIJÓN:
Q. Good morning, Ms. Sotelo.
A. Good morning.
Q. Ms. Sotelo, you have before you a binder that has two documents. Could you please confirm that these are your Statements?
A. Yes, indeed, they are my Statements.
Q. Thank you very much.
Ms. Sotelo, could you very briefly summarize your experience in the Ministry of Economy?
A. Well, I have been working in the Ministry of Economy for a bit over 40 years. I have had my entire career in that institution, and most of the time, about 80 percent of the time, I have been in charge of the office that handles the public debt.
I've held several positions in that office, and then I have occupied other positions up until the time I made this Statement. I was Vice Minister of Treasury, even though today I am in charge of an office that handles investments at the Ministry of
[Page 897]
Economy and Finance.
PRESIDENT FERNÁNDEZ ARMESTO: Do you prefer that you be called "Vice Ministro" or "Vice Ministra," because in Spanish, as you know, I would like to fall into line with whatever you prefer.
THE WITNESS: It is the same to me, sir, as you wish.
PRESIDENT FERNÁNDEZ ARMESTO: I generally say Vice Ministro, la Vice Ministro, but if you prefer la Vice Ministra, I'd like to fall into line with whatever you prefer.
THE WITNESS: Whatever comes out easiest for you, sir.
PRESIDENT FERNÁNDEZ ARMESTO: No problem.
MR. JIJÓN: Thank you very much.
BY MR. JIJÓN:
Q. Ms. Sotelo, could you please explain to us how the public debt is managed at the Ministry?
A. The public debt is one of the relevant components in managing economic policy and public finances, and the Government of Perú has been acting in a very responsible manner in handling its fiscal
[Page 898]
accounts and, therefore, in handling the public debt, and in that context, the obligation in respect of the Agrarian foreign bonds represent a minimal part of it.
Q. How does the Agrarian debt compare?
A. The Agrarian debt compared to--now, you're saying compared to other Bonds or all of the debt of the Peruvian State?
Q. Well, in your Statement, you refer to the "public debt" and the "Agrarian debt." How do they compare?
A. The Agrarian debt, compared to the Bonds that the State in modern times has placed, is a physical instrument. It is not registered in the stock market, it is not an electronic instrument. It was placed directly to pay for the expropriation of the lands. It was not auctioned in the New York market. It is not governed by the laws of New York. It is a domestic debt, and the legal regime that underlies it has to do with internal debt. It's Peruvian legislation. There is no secondary market, and those are the differences, as compared to the
[Page 899]
modern sovereign bonds that are issued by the Peruvian State.
Q. Thank you very much.
And in your Statement, you also refer to the history of the Agrarian debt. Could you please tell us what happened to the Agrarian Bonds after they were delivered?
A. Well, there have been many decades of uncertainty since the Agrarian Bonds were issued, in the 1980s, as a result of the international financial crisis that affected not only Perú, but the region. There were two changes in currency. The Agrarian foreign bonds were paid, in part, and the other part that was not paid was reduced by the nine zeroes that had been struck from the currency with the currency change, and for several decades there was uncertainty as to how to proceed with respect to the nominal--finally, in the 2000s, the 2001 to 2013, the way in which those Bonds would be valued was changed.
(Interruption.)
Q. Sorry for the interruption, Ms. Sotelo. So, you just told us, and in your Statement
[Page 900]
as well, you referred to the Resolution of this period of uncertainty that you mentioned. Could you tell us, what happened after 2013?
A. After the Resolution of the Constitutional Tribunal, in the process of enforcing its judgment, the Peruvian State issued the legal rules, the Supreme Decrees, to regulate the administrative procedure with respect to the valuation, registration, and payment of the Agrarian Reform Bonds.
Q. And what is the current situation?
A. At this time, the stage when the Bondholders could come in to request the confirmation of the veracity of the Bonds--about 2,000 Bonds have entered into that process--and according to the last cut at early January, approximately 191 Bonds were paid for about 4.5 million soles. This administrative process is continuing, and it has been organized pursuant to the order of the Court.
Q. Thank you very much. One last question.
PRESIDENT FERNÁNDEZ ARMESTO: When you speak of Bonds, are you referring to the coupon or the
[Page 901]
totality of the Bond? You're familiar with the Bonds.
THE WITNESS: Yes, of course.
PRESIDENT FERNÁNDEZ ARMESTO: And you know that they have coupons.
THE WITNESS: Yes.
PRESIDENT FERNÁNDEZ ARMESTO: So, when you say 191, are those 191 coupons, or the coupons that correspond to 121 overall Bonds?
THE WITNESS: It's 191 of the overall Bond.
BY MR. JIJÓN:
Q. Ms. Sotelo, why has the State not paid Gramercy what it is claiming?
A. The Peruvian State, in all of its Administrative Acts, bases itself on the principle of legitimacy, let us say the principle of legality, and it cannot act as a matter of its own will or because claims are put to it by the different Bondholders or creditors.
As in the case of Gramercy, the State has to act on the basis of what the law or what the order, in this case, of the Constitutional Court tells it,
[Page 902]
and Gramercy has not entered into the administrative process, and, therefore, it cannot be paid under any other model or in any other form of valuation beyond what is set out in the regulated administrative procedure.
Q. Thank you very much.
PRESIDENT FERNÁNDEZ ARMESTO: So, I understand properly, Vice Minister, that having concluded the process without further legal change, it would no longer be a possible to collect on the Bonds?
THE WITNESS: It is the Constitutional Court that establishes the terms, the five years for stepping into the administrative procedure. That is what has been set out by the Court. I'm not an attorney, Mr. President. I don't know what the next changes or terms would be. I don't know if a new pronouncement is required from the Court. That, I don't know, but this first provision of the Constitutional Court, what it first ordered, has been carried out and concluded.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you very
[Page 903]
much.
With that, we give the floor to counsel for Claimant.
MR. HAMILTON: Excuse me, there is still a sound coming from that side of the room, where maybe somebody's earphones are at an elevated volume. And I don't know if it's possible to reduce the volume a little bit because it's a little bit distracting. Thank you.
PRESIDENT FERNÁNDEZ ARMESTO: To be very frank, I don't hear much. Maybe I'm slightly deaf.
(Comments off microphone.)
PRESIDENT FERNÁNDEZ ARMESTO: Very good. I give the floor to counsel for the Claimant.
MR. FRIEDMAN: Thank you very much, Mr. President.
CROSS-EXAMINATION
BY MR. FRIEDMAN:
Q. Good morning, Ms. Sotelo.
My name is Mark Friedman. I'll be asking you some questions today on behalf of the Claimant, Gramercy.
[Page 904]
Am I right that when Perú issued the Land Bonds, it guaranteed without reservation that it would pay them?
A. According to the legal framework, what was established by the Agrarian Reform Law, as well as the Supreme Decrees that allowed for or that authorized the issuance of the Bonds, in effect, the mere fact that the sovereign would say that it is issuing it, such an obligation, they imply that it's going to pay them. There is no explicit word that says, "I guarantee in one or another manner to proceed to payment."
Q. The law that--the Decree-Law 17716, are you familiar with that, the law that authorized the issuance of the Land Bonds?
A. Yes. The law that regulates the whole process of the Agrarian Reform. I don't remember the exact number of that law, but if you're referring to the law that regulates the entire Agrarian Reform process, yes.
Q. And am I right that that law said that the Bonds would be guaranteed by the State without
[Page 905]
reservations whatsoever?
A. Well, I think that's the language that was used at that time, but the guarantee--well, the mere word of the sovereign is a sufficient guarantee in all issuance of debt.
Q. Right. And the Land Bonds, you would agree with me, are public debt of Perú; correct?
A. It has been internal domestic public debt. It is still registered as internal public debt in the accounting of the debt.
Q. Right. Now, in March 2001, the Constitutional Tribunal of Perú held that Perú had to pay the Land Bonds at current value; is that right?
A. That is what the Judgment or the ruling of the Constitutional Court says, that it should be paid under the current value principle.
Q. And am I right that all State institutions had to comply with that ruling?
A. The Judgments of the Constitutional Court are abided by and must be abided by by all, and if the Peruvian State and, in particular, The Ministry of Economy, did not apply the updating set
[Page 906]
out-therein, it is because the formula wasn't established.
PRESIDENT FERNÁNDEZ ARMESTO: The first part of the question is sufficient. That is what you were asked. And if you stick within what the counsel asked you, it will be much more efficient. It is most efficient if we do it in this manner, with which I believe the answer was the first part of what you answered.
MR. FRIEDMAN: Thank you, Mr. President.
BY MR. FRIEDMAN:
Q. So, just to be clear, the Ministry of Economy and Finance, along with all other institutions in Perú, had to comply with the 2001 sentence of the Constitutional Tribunal correct?
A. It had to abide by it, but it wasn't clear just what the methodology would be in connection with that ruling by the Court. It didn't indicate the way in which the valuation would take place or how the current value principle would be applied.
Q. Now, am I right that interpreting that obligation to carry out the updating fell principally
[Page 907]
on the Ministry of Economy and Finance?
A. The registry of the public debt for the Agrarian Reform Bonds are in the accounting of the debt, and, in effect, it is the Ministry of Economy and Finance that has to do the updating, but there was no legal formula to establish how the Bonds of the Agrarian Reform would be brought up to current value.
Q. There was no--as you call it--legal framework because the Ministry of Economy and Finance didn't create one; right?
A. It has to be issued with a provision of the rank of a law or statute, and there was no such legal framework until 2013, which is when the Court set out the formula and the methodology for the updating.
Q. Well, there was--am I right that there actually was at least one--let me start again. Forgive me.
Within Perú's legal framework, am I right that there was always at least one method of updating and getting paid on the Bonds?
PRESIDENT FERNÁNDEZ ARMESTO: I don't think
[Page 908]
the question is clear.
BY MR. FRIEDMAN:
Q. Let me--am I right that Bondholders could always go to Peruvian Court to get updating and payment on the Bonds?
A. For the controllership of the debt, the only way to update what was 10 cents of a sol to pay, well, another legal norm was required to say how to do the updating. So, what the Bondholders could do is, they could go to the Courts--to Peruvian justice system--to ask for a process of valuing, and then the Peruvian State would pay as per the order of the judge.
Q. So, within the Peruvian legal framework, the option of going to courts was available to Bondholders; correct?
A. They have always had the right to go to the Courts, sir.
Q. And the Courts in Perú applied the current value principle in updating the Land Bond debt; right?
A. The judges have applied different criteria.
[Page 909]
There is not a single way that has been used by the judges, not a single--there has not been a single procedure.
Q. But the judges applied the current value principle and updated the debt; correct?
A. I have not seen specific rulings by the judges. The only thing I am familiar with is by reference that they did order that they be updated and paid.
Q. So, if you haven't seen specific rulings, you don't actually know what the basis was of those courts updating the debt; correct?
A. No, I am not familiar with precisely what the judges have done.
Q. Okay. Now, do you remember that in June of 2009, Gramercy wrote to the Ministry of Economy and Finance with a proposal for a debt swap?
A. Yes. Yes, I do recall that you wrote such a communication.
Q. And in that communication, Gramercy proposed to swap the Land Bonds for new Bonds, as well as creating productive investment in Perú as a part of
[Page 910]
the exchange; correct?
MR. JIJÓN: Mr. President, it might be worthwhile showing the document that is being referred to.
PRESIDENT FERNÁNDEZ ARMESTO: To help the Witness. Remember, it might not be possible to remember something from 2009.
MR. FRIEDMAN: Yes. We're happy, of course, to show the documents.
PRESIDENT FERNÁNDEZ ARMESTO: Vice Minister, they are going to show you the document.
Can we have the reference?
MR. FRIEDMAN: Yes. Let's pass out books. Yes, and for you the reference to the 2009 proposal is--
PRESIDENT FERNÁNDEZ ARMESTO: Okay. Let us do two things, can your colleague stay--would you mind taking a seat close?
I don't think it will bother you to have an attorney seated by you to help you out, Vice Minister?
MR. JIJÓN: Mr. President, are you
[Page 911]
suggesting one of Perú's lawyers?
PRESIDENT FERNÁNDEZ ARMESTO: Perú or someone who could help her because if the poor Vice Minister has to be looking for documents in all of those binders, we are going to waste a lot of time.
It is already on the screen. That's helpful.
Vice Minister, you see that there is a screen in front of you.
THE WITNESS: Yes.
PRESIDENT FERNÁNDEZ ARMESTO: They are going to put the document up there.
THE WITNESS: Yes.
PRESIDENT FERNÁNDEZ ARMESTO: And then the attorney will help you find it in hard copy in case you want to see it in hard copy. Is that all right?
THE WITNESS: Yes, sir.
PRESIDENT FERNÁNDEZ ARMESTO: So, I don't know if you could enlarge this so that we can read it?
MR. FRIEDMAN: Yes. So, let me start.
Do you have your--
[Page 912]
MR. JIJÓN: Mr. President, just a moment, Mr. President, until my colleague gets there.
MR. FRIEDMAN: I was going to take her to her Witness Statement first, which we can do while we're getting set up.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. Absolutely.
BY MR. FRIEDMAN:
Q. Ms. Sotelo, if you could look at your First Witness Statement, please. And turn, please, to Page 5, Paragraph 27. And there, do you see that you testify about this Bond swap proposal from Gramercy; right?
A. Yes, that is right, sir.
Q. All right. Now, if you will look at your first bundle, Binder 1, Tab 30, which is Document R-261?
MR. JIJÓN: To confirm, that's Binder 1, Document 30, Tab 30.
MR. FRIEDMAN: Yes.
MR. JIJÓN: Thank you.
THE WITNESS: It's correct.
[Page 913]
BY MR. FRIEDMAN:
Q. Okay. And you recognize that the proposal that Gramercy made in 2009 to do a bond swap with a reinvestment in Perú component; is that right?
A. That is what the document says, yes, sir.
Q. Okay. And then if you could turn with me to Page 12 of the presentation, it describes--do you see on the "Benefits of the Exchange for the Country"?
A. That's what it says here on the slide.
Q. Okay. Now, if you could turn to Tab 31 in the binder, I think we'll see the Ministry's treatment of this issue. That is Document R-62.
A. Excuse me, I don't know what R-62 means.
Q. So, we have two--at least two ways of referring to documents in this case. One is by the tab references in the binder that you have, and the other is by exhibit numbers that I don't think you need to be particularly concerned with, but they are common references for the lawyers and the Tribunal.
A. Correct.
Q. You see that document. Okay.
A. I do.
[Page 914]
Q. Yes.
And this is the Ministry's internal preparation of a response to Gramercy's proposal; correct?
A. That is right, sir.
Q. Okay. And in Paragraph 3, it says: "It must be specified that, in accordance with the legal framework in effect, adjustment of the value of the Land Reform Bonds is only possible via the judiciary, and that once there's a judgment that establishes the updated value of the Bonds that acquires the status of res judicata, the State is complying with making payment for that amount."
Do you see that?
A. I do.
Q. Okay. So, would you agree with me that, in accordance with the legal framework of Perú, Gramercy was free to go to court and have the updating done by the Court? Correct?
A. It had to go to the courts, and this is the right that all Bondholders had, to claim whatever they deem they have as a right.
[Page 915]
Q. Right. So, there was a legal framework for paying the updated value of the Bonds, even prior to 2013; correct?
A. As I indicated, I am not a lawyer, and I'm not able to say whether the fact that there is a legal way of asking for rights so that Claims may be staked by citizens and citizens can go to the Courts, well, I don't know if that means there is an existing legal framework.
I don't have the ability to accept that assertion made by you. Everyone has the right to go to the Court, such--or the judiciary, rather, to claim whatever they deem is the right. The Court will decide whether that right is recognized or not.
Now, to assert that there is a legal framework to update, well, that entails saying that the Court is going to accept everything that the Bondholders put to it. I am not a lawyer and I don't think that assertion is correct, but, again, I'm not a lawyer and I cannot say that that assertion is correct.
Q. I appreciate that you're not a lawyer, but
[Page 916]
you were working at the Ministry during a time when Bondholders were routinely suing and getting judgments against the Ministry for updated payment of the Land Reform debt; right?
A. Yes, that's right, but what I'm saying is that I don't dare say that going to the judiciary is a legal framework to update the Bonds. What I am questioning is whether it is correct to state it that way. I know that everyone has the right to go to the judiciary, not only in connection with Land Reform Bonds, but because any legal or natural person can go to the courts when they feel that their rights have been violated.
Q. Are courts not a part of the legal framework of Perú?
A. That's the portion of this thing that I cannot assert because I'm not a lawyer. I know that there's a judiciary, the judiciary is independent, and it administers justice in Perú.
PRESIDENT FERNÁNDEZ ARMESTO: That is quite clear.
MR. FRIEDMAN: Yes, I agree.
[Page 917]
BY MR. FRIEDMAN:
Q. Now, am I right that by 2011, there were more than 230 judicial proceedings against the Ministry relating to updating the Land Bond debts?
A. I do not have any information in connection with the number of judicial proceedings that had been brought under the Land Reform Bonds.
Q. Okay. Maybe we could turn to Binder 2, Tab 48. And I'll be looking at Document R-298. Just for some context, this is the internal draft of a bill by the Ministry of Economy and Finance that was never presented to Congress.
Vice Minister Sotelo, do you recognize this document?
A. Yes. This is a document from the DGETP.
Q. Okay. If you could turn with me to Paragraph 15--well, in Paragraph 14, right before it, it says: "According to the current legal framework, the value of these Bonds may only be recognized and updated by resorting to the Courts."
And then if we look at Paragraph 15, it says: "There are more than 230 court proceedings
[Page 918]
initiated against the Government demanding updated payment of these Bonds. In addition, there are 17 court proceedings at the Enforcement of Judgment stage, in two of which the Executive Branch has been making payments for the updated value of the Land Reform Bonds applying the CPI."
Do you see that?
A. I do see that.
Q. That was accurate at the time; right?
A. Presumably, yes, because that's what they've written.
Q. Now, the Ministry is responsible for the responsible management of its public debt; correct?
A. That's right.
Q. And Gramercy wrote a proposal to the Ministry saying, "Perhaps we could sit down and discuss alternatives that could even provide benefits to Perú," and am I right that the Ministry's response was essentially, "Go sue us"?
A. You are saying that saying in a very straight manner as if we had said, "Go to the judiciary and sue us." The answer was along the
[Page 919]
lines of this language here: The Peruvian State makes its Decisions on the basis of the principle of legality. For the registration of the public debt and for the accounting of the public debt, there was no obligation beyond of that cent of a sol that is now included in the accounting of the debt.
So, from the legal framework and the management of the public debt, it was not viable to sit down or accept any scheduling program with Gramercy because, for the accounting of the debt, that obligation did not exist. First, we needed to have a ruling from the Constitutional Tribunal or a law to state provisions for the updating.
Now, the only way for those obligations to be paid, we told them, was whatever it is that the courts would rule.
Q. The Ministry, we saw, was working on a draft law; correct?
A. That is what the report states.
Q. In the context of doing that work, there was nothing in Peruvian law that prevented the Ministry from meeting and discussing with Bondholders a
[Page 920]
solution that might be acceptable to everybody; right?
A. Well, the thing is that that issue did not have to do with a meeting with the shareholders. It had to do with a legal provision that had to state, first, how a debt was to be updated, a debt that had been extinguished. This is very different from a situation in the '90s, where the Peruvian State, on the basis of the face value of the debt and other obligations, met with the creditors to renegotiate the nominal value of the debt.
I talked about the Land Bonds, and the face value was 1 cent. Now, the updating--the updating is only based on a law that states how the updating is going to take place.
MR. FRIEDMAN: Mr. President, with respect, I don't think there was an answer to my question.
BY MR. FRIEDMAN:
Q. My question, Vice Minister, was: There was nothing in Peruvian law that prevented the Ministry from meeting and discussing with Bondholders a solution that might be acceptable to everybody; is
[Page 921]
that correct?
There was no legal bar to the Minister or the Vice Minister or other people within the Ministry, in the context of preparing the draft bill, even, that might create the whole legal framework you're describing from sitting down and discussing with the Bondholders a common solution; correct?
MR. JIJÓN: Mr. President, the question has been answered.
PRESIDENT FERNÁNDEZ ARMESTO: Well, I think the question was quite innocuous. Well, nothing in the legal framework of Perú prevents a Bondholder to meet with the Government and discuss. That's my assumption.
I don't know the legislation of Perú very well, but I don't think there is any impediment for this.
THE WITNESS: There is no impediment to discuss. The law does not prevent you from discussing, but what were we going to talk about? Because what we needed was a law that mandated the updating formula.
[Page 922]
BY MR. FRIEDMAN:
Q. Which the Ministry was drafting; correct?
A. Yes, it was drafting it.
Q. Okay. In 2010, Gramercy submitted conciliation proceeding requests--right?--to the Ministry?
A. There were some of them, yes.
Q. And as part of these proceedings, Gramercy provided Perú with the assignment contracts and Bond package contracts that it had entered into with Bondholders when it acquired its Land Bonds; correct?
A. Yes, sir.
Q. So, since 2010, the Ministry of Economy and Finance has had all of those Bond contracts in its possession; correct?
A. Well, some. All of the ones that were submitted by Gramercy in a formal manner to the Ministry.
Q. Okay. Would you agree that in--well, you attached those as Annexes 30 to 59 of your First Witness Statement; right?
A. Yes. I don't remember the annex numbers,
[Page 923]
but I did attach those to my First Witness Statement.
Q. And they were quite extensive; correct?
A. That's right.
Q. So, the minute--it's fair to say that, prior to July 2013, the Ministry of Economy and Finance had not fulfilled its obligation to find a way to update the Land Bond debt consistent with the Constitutional Tribunal's 2001 Decision; correct?
A. The Decision by the Tribunal was not complete. It didn't say how the updating was to be done. That is why the Ministry was not able to establish the administrative procedure. It did so in 2013, though.
Q. Yes. And so, am I right--just to understand this, am I right that the Ministry--the Ministry of Economy and Finance was responsible for the operations of the Agrarian Bank, the original paying agent for the Bonds; correct?
A. I didn't really understand your question. Could you please clarify it for me?
Q. Yes. You know that the original paying agent on the Bonds were the Agrarian Bank; right?
[Page 924]
A. Yes. It was called in the past the Bank for Agricultural Development.
Q. Okay. Am I right that the Ministry of Economy and Finance was responsible for allocating funds that the bank was supposed to use to pay the Bondholders? Correct?
A. Indeed. That was its obligation, to transfer the resources, the financial resources, to the bank, and at all times it conducted the transfers for the money to be paid to the Bondholders.
Q. The Agrarian Bank was dissolved in 1992; correct?
A. I don't remember the exact date, but it was in the '90s when structural reforms took place. And when there was a policy for fiscal balance implemented by Perú, one of the measures was to dissolve the development banks.
Q. And within the Peruvian legal system, the Ministry of Economy and Finance was still responsible for funding the budget to pay that debt; correct?
A. At the time, the obligations related to the Bonds was equal to 1 cent of nuevos soles. So, we
[Page 925]
never had the will to not pay. So, to pay 1 cent to thousands of Bondholders, how are you going to distribute that? 1 cent is 1 cent. How were you going to distribute this amongst all of the Bondholders that were still waiting for their payment, or pending payment?
Q. I think you missed my question. My question was about institutional responsibility.
Am I right that the Ministry of Economy and Finance was the institution responsible for finding a budget to pay the Land Bonds debt?
PRESIDENT FERNÁNDEZ ARMESTO: I think she has answered it. The answer is: The whole Agrarian Bond was 1 cent, and it was impossible to pay 1 cent--to distribute the 1 cent among the thousands of Bondholders. It became impossible to pay them. That's, I think, the position of the Witness.
BY MR. FRIEDMAN:
Q. Okay. Now, you said that the Ministry was happy to pay except for that. So, you noted--am I right that--you already acknowledged, I think, before that the current value principle applied to the
[Page 926]
Ministry of Economy and Finance, as well as to all other institutions, since 2001; right?
A. I have not said that it's applied since 2001. What I said: That the Constitutional Court in the 2001 Decision declared that the Land Bonds were going to be updated using the current value principle. It clarified the methodology in 2013 and other variables as well.
Q. But the current value principle, I think you acknowledged, applied generally, including to the Ministry, even prior to 2013; correct?
A. I didn't really understand your question. Where does it say that the Ministry applied the current value principle? The accounting at nominal value started when the new currency came in, the new sol, and it went to 1 cent, and it is 1 cent what it owes for the Land Reform Bonds. So, the Ministry has never applied the current value principle. There was no legal framework to apply the current value principle until 2013.
Q. So, from 2001 until 2013, did you understand that the Land Bond debt had to be paid according to
[Page 927]
current value, or not?
A. It had to be paid once the mechanism was established, the variables, the how to do the update, and that didn't take place until 2013.
Q. But did you accept the principle that applied to the Ministry of Economy and Finance was the current value principle, even if the details of that had not been worked out?
MR. JIJÓN: Mr. President, the Witness has already answered the question.
THE WITNESS: Again, what the Constitutional Court says is unquestionable. It's a ruling that is unquestionable. In 2001, it says that the current value principle has to be applied, but then, in 2013, it says how. And the MEF, after getting the how, in good faith, it has implemented the whole procedure. And now we are at the stage where we are paying the Land Bonds--well, the ones that have been included in the administrative process.
ARBITRATOR DRYMER: Excuse me, but just to clarify--and hopefully shorten this--I understood, Señora, your testimony earlier to be
[Page 928]
uncontroversially that as a State Ministry, the MEF was bound by the 2001 Constitutional Court ruling; correct?
THE WITNESS: Yes, sir. What I've said is that all of the public center entities or agencies--and, I understand, also private persons--have the duty to abide by the ruling of the Constitutional Tribunal. In 2001, the Court said the current value principle has to be applied. Okay; it has to be applied. But how was it going to be applied? The how only came about in 2013.
ARBITRATOR DRYMER: I understand. Thank you.
PRESIDENT FERNÁNDEZ ARMESTO: Could this have been resolved with a law? Not with a Supreme Decree, but with a law? I understand that between 2001 and 2013, a law was missing.
THE WITNESS: Yes. Yes, sir. A law was necessary.
PRESIDENT FERNÁNDEZ ARMESTO: And there was no law?
THE WITNESS: No, there was no law.
[Page 929]
PRESIDENT FERNÁNDEZ ARMESTO: There were some attempts--we've seen that--but the Parliament never passed a law?
THE WITNESS: That's right, sir.
PRESIDENT FERNÁNDEZ ARMESTO: Yes. There were some drafts, but the law was never passed.
THE WITNESS: That's right, sir.
PRESIDENT FERNÁNDEZ ARMESTO: And, in 2013, the CT issued a Decision to enforce its initial Decision?
THE WITNESS: Yes, that's right, and the Court said the MEF, through the DGETP, has to approve this procedure. No law is necessary, but we need now a Supreme Decree, and this is what the Constitutional Court said.
BY MR. FRIEDMAN:
Q. Yes. Can you tell me, then, during this period between 2001 and 2013, why was the Ministry of Economy and Finance arguing in Peruvian courts that these Bonds remain subject to the nominal value principle rather than current value?
MR. JIJÓN: Mr. President, what portion of
[Page 930]
the Statement is he making reference to?
PRESIDENT FERNÁNDEZ ARMESTO: It is a legitimate question. We're going to see whether the Vice Minister knows or does not know this, but it is a legitimate question.
You may wish to repeat the question.
MR. FRIEDMAN: Yes.
BY MR. FRIEDMAN:
Q. Are you aware that, between 2001 and 2013, and even subsequently, lawyers on behalf of the Ministry of Economy and Finance have argued in Bondholder lawsuits in Peruvian court that the debt only has to be paid at nominal value?
A. I would understand that this has to do with the principle of legality. Again, in Perú, no one is going to act in a manner different from what the law provides. There was no law that established the manner in which the Land Reform debt was to be updated.
So, in abiding by the existing laws, well, at the time there was no legal framework that indicated how the updating was going to be done, and
[Page 931]
in 2013, the Constitutional Court in its ruling said that all of the court cases have to apply this mechanism of updating put forth by the Court.
Q. That did not answer my question.
My question was: Were you aware that, between 2001 and 2013, and even subsequently, that lawyers on behalf of the Ministry of Economy and Finance have argued in Peruvian Court that the Bonds only need to be paid at nominal value?
A. I think that my answer does answer your question. The lawyers of the Ministry of Economy and Finance, the lawyers of the Ministry of Agriculture, and also the Ministry of the Economy that were involved in the court cases answered on the basis of the existing law. There was no existing law that indicated how the debt had to be updated. I think they have fulfilled their duty.
PRESIDENT FERNÁNDEZ ARMESTO: Lawyers always hold extreme positions.
MR. FRIEDMAN: Okay.
BY MR. FRIEDMAN:
Q. So, am I right that the 2013 Constitutional
[Page 932]
Tribunal was highly critical of the Ministry's treatment of the Land Bond debt since 2001?
A. Yes. It made a number of comments, but you are saying that they were critical, but it also recognized that it didn't set the "how," and that is why they were going to indicate the mechanism. The Court recognized that it had not finished regulating the valuation process for the Bonds.
Q. Am I right that they called the Ministry's conduct during the period 2001 to 2013 "manifestly unconstitutional"?
MR. JIJÓN: Mr. President, could you please indicate to us, where are you reading?
PRESIDENT FERNÁNDEZ ARMESTO: Okay. Let's go step by step.
Ma'am, do you remember this, or would you like for us to have you shown a document? Would you like to see the Decision of 2013 by the Constitutional Court?
THE WITNESS: I don't remember it, Mr. President, the exact language, but I remember that there was some criticism. But it also
[Page 933]
recognized that not all of the mechanisms had been put forth, and that is why it felt it had the obligation to establish that mechanism.
BY MR. FRIEDMAN:
Ω. But it also considered that it had been the Ministry's responsibility to come up with those mechanisms in the meantime; correct?
A. I would like to see exactly where that is stated. That is beyond the general reading that I've done. I have not memorized the language.
Q. Okay. Why don't we move on to something else, then, that you were personally involved in, which is the hiring of Professor Seminario?
Do you remember in 2011 that you were involved in hiring Professor Seminario?
A. Yes, sir.
Q. And he was hired under the authority of Emergency Decree Number 012-2011, dated March 31, 2011; correct?
A. Would you please tell me where in my Statement I indicated that part of the Emergency Decree?
[Page 934]
PRESIDENT FERNÁNDEZ ARMESTO: Is it important that it is under the "decreto de urgencia"?
MR. FRIEDMAN: It is, if you'll bear with me for just a moment.
Do you have Minister Castilla's Witness Statement? Is that in the binder?
MR. JIJÓN: Excuse me, Mr. Friedman. Did you just say to look in Minister Castilla's Witness Statement, or in hers?
MR. FRIEDMAN: Correct. Correct, Minister Castilla's Witness Statement.
MR. JIJÓN: And where is this in her Statement?
PRESIDENT FERNÁNDEZ ARMESTO: What did Minister Castilla say?
BY MR. FRIEDMAN:
Q. At Paragraph 17 of his First Witness Statement, Minister Castilla describes the background of this, and he says: "On March 31, 2011, the President issued Emergency Decree Number 012/2011, ordering extraordinary measures to strengthen the Fiscal Stabilization Fund and generate greater public
[Page 935]
savings."
Do you see that?
PRESIDENT FERNÁNDEZ ARMESTO: This is the Statement presented by Minister Castilla.
Minister Castilla was the Minister when you were the Vice Minister?
THE WITNESS: No, sir.
PRESIDENT FERNÁNDEZ ARMESTO: So, you were not in office at the same time?
THE WITNESS: Yes, we were in office at the same time, but when he was the Minister--I don't remember the period, but as Vice Minister of Finance, I was general director, and when--I think that when he became Minister, I was Executive Director. I don't recall the specific time.
PRESIDENT FERNÁNDEZ ARMESTO: But you reported to him; right?
THE WITNESS: Yes, I reported to him.
PRESIDENT FERNÁNDEZ ARMESTO: And you know him; right?
THE WITNESS: Yes.
PRESIDENT FERNÁNDEZ ARMESTO: And you have
[Page 936]
worked with him; right?
THE WITNESS: Yes.
PRESIDENT FERNÁNDEZ ARMESTO: And so, the Minister is telling us that on March 31, the President issued an Emergency Decree with this number, and that is the one that allowed to hire Professor Seminario. Does it sound right to you?
THE WITNESS: The Decree, the law Decree--
PRESIDENT FERNÁNDEZ ARMESTO: Well, this was an Emergency Decree.
THE WITNESS: Even though I did not include it in my statement, I have seen it, and indeed, this is a rule that establishes how to regulate the fund, and one of the last Articles includes a legal framework to be able to hire Expert counsel, practitioners, legal practitioners and administrative practitioners or financial practitioners who could recommend a strategy to the Peruvian State in connection with the contingent liability. And, yes, that was used as a background for the hiring of Mr. Seminario.
BY MR. FRIEDMAN:
[Page 937]
Q. All right. So, that background was to generate greater public savings, to increase the State's capacity to respond to emergencies or a global recession; correct?
PRESIDENT FERNÁNDEZ ARMESTO: That's what--let's move on.
BY MR. FRIEDMAN:
Q. Okay. Then--you then, are the one who actually engaged Mr. Seminario; correct?
A. The Company, the office that I directed, hired Mr. Seminario, and the working team within the Office was the one that coordinated by providing him information that he may have requested.
Q. Okay. And you personally signed his consulting Contract; correct? In your official capacity, of course.
A. Yes.
Q. And let's look at his Contract, which is Tab 44 in Book 2. And--sorry. Document R-549.
ARBITRATOR DRYMER: Señora, do you have that document in front of you? Perhaps--yes. Is that a yes? Thank you.
[Page 938]
(Comments off microphone.)
PRESIDENT FERNÁNDEZ ARMESTO: What is the importance of this document?
BY MR. FRIEDMAN:
Q. Yes. I'd like to look at Clause 2, which describes the purpose of the Contract. So, he was hired to perform an analysis of the methodology proposed by the Commission created by Supreme Decree Number 148/2001 for updating the Bonds, and to verify, if applicable, the conclusions issued with respect to the methodology in accordance with the valuation principle established by the Constitutional Court and the Judgment dated March 15, 2001, and with fiscal sustainability.
PRESIDENT FERNÁNDEZ ARMESTO: That is what it says, yes.
MR. FRIEDMAN: Okay. Good.
PRESIDENT FERNÁNDEZ ARMESTO: What is the question?
BY MR. FRIEDMAN:
Q. And so, is that what you expected Professor Seminario to do?
[Page 939]
A. You have not read 2.2 that continues after what you mentioned, where it says "and, if needed" to suggest also other options for the updating of the land debt that should be coherent with the Decision by the Tribunal and also fiscal sustainability.
That is what we were looking for. That is for him to analyze the proposal of the--presented by the Commission created under 048 and also based on the knowledge and, if necessary, and if there was any question or--any question regarding the recommendation by the Commission, he had to present another option.
Q. What did you mean by "fiscal sustainability?"
A. The ability the Peruvian State had to pay, given all of the obligations vis-à-vis the population.
Q. So, you expected Professor Seminario to study that question, namely the State's ability to pay?
A. I think that the Experts in the economic area understand what fiscal sustainability is, and I
[Page 940]
am not here to define what it is, and what Professor Seminario could or could not do or examine or posit as part of this fiscal sustainability.
Q. Sorry. Did you or did you not expect Professor Seminario to study the question of what level of debt would be fiscally sustainable for the State of Perú?
A. We had requested what is stated in the Contract, and I have already read it.
Q. But it does say in the Contract that you wanted him to look at the question of complying with the Land Bond judgment of 2001 and consider fiscal sustainability. So, what was he supposed to do to analyze fiscal sustainability?
A. I am going to indicate what the Constitutional Tribunal indicated in 2013 when they analyzed the proposal presented by the Commission under Supreme Decree 248/2001. The Constitution Tribunal included some comments.
PRESIDENT FERNÁNDEZ ARMESTO: No, I think that what the attorney is asking you is whether you were expecting Professor Seminario to estimate the
[Page 941]
total impact for the budget of paying the land debt and also to put this in context given the total, the fiscal obligations Perú had, and to analyze whether by applying the formula that he had developed, the result was such that the fiscal sustainability principle was not guaranteed. Were you expecting him to carry out macroeconomic estimates based on the proposal?
THE WITNESS: No, it was not up to that macroeconomic level. No, that was not our expectation.
PRESIDENT FERNÁNDEZ ARMESTO: Well then, the question is whether you're asking him to take into account fiscal sustainability, and he develops just a formula, a financial formula, the result of that formula may be that the total is not sustainable from the fiscal point of view for Perú, and that's why he had it.
THE WITNESS: Well, but as part of the comments, that's what he indicated.
PRESIDENT FERNÁNDEZ ARMESTO: What did he indicate?
[Page 942]
THE WITNESS: He indicated that the formula, the one that he was recommending was the one to be applied to obligations that had been due during hyperinflation periods.
PRESIDENT FERNÁNDEZ ARMESTO: Yes, but did he study whether the impact of his formula was going to guarantee fiscal sustainability? Fiscal sustainability means that the State has the ability to pay; correct? Just to understand this in lay terms, that means that it can pay.
THE WITNESS: Yes, that it can pay.
PRESIDENT FERNÁNDEZ ARMESTO: So, that means that the State will not go bankrupt.
THE WITNESS: Correct.
PRESIDENT FERNÁNDEZ ARMESTO: So, I don't know whether Professor Seminario included an estimate, calculation as to see the global impact of his formula.
THE WITNESS: No. Because there was no database on the number of Bondholders that had outstanding payments.
BY MR. FRIEDMAN:
[Page 943]
Q. Did you provide Professor Seminario--you meaning the Ministry, of course--did the Ministry provide Professor Seminario with information about what level of debt would be fiscally sustainable?
A. He was given the information on the Land Reform Law, also the Bonds that were issued, the statistics on the Peruvian debt are public. They are on the website. I don't even think that he requested that information. Any person has free access to all of the information on the debt.
Q. Was the reference to fiscal sustainability in his Contract simply a way of asking him to find a--updating formula that required the State to pay less money?
A. That was not the intent. That is not the implicit or explicit intent.
Q. But what else could it mean if you didn't actually ask him to study the fiscal--level of fiscal sustainability?
A. The President of the Tribunal just indicated it, that the State would not end up with a huge debt that would have an impact on the other obligations
[Page 944]
that the State has with the rest of the population.
0. Right. But we need to know what level that then is sustainable, don't we?
A. I already said it. I don't know how to answer this again.
Q. Let me ask this question. Now--
(Comments off the microphone.)
MR. FRIEDMAN: Yes, I'm told that there was a--there was something in the translation that didn't come through to the English. Immense and "impagable."
MS. POPOVA: "Impagable."
PRESIDENT FERNÁNDEZ ARMESTO: "Impagable."
MS. POPOVA: The word "impagable" was not included in the Transcript and apparently was not translated.
PRESIDENT FERNÁNDEZ ARMESTO: The Vice Minister said that it was something that was impossible to pay--that is to say, something that would have an impact on the other citizens of the Peruvian nation.
BY MR. FRIEDMAN:
[Page 945]
Q. Now, the Contract says that Professor Seminario was compensated with 33,333 soles for his consultancy services. Was that--were those the only payments made to Professor Seminario?
A. Yes, sir.
PRESIDENT FERNÁNDEZ ARMESTO: Do you recall? Do you know?
THE WITNESS: Well, I have reviewed, I reviewed the amount of the Contract. So, I assume that you are asking me without lying or trying to make up the value. I assume that this is good-faith information that you are giving me, the exact amount of the Contract, that is that you were paid--that he was paid what the Contract says.
PRESIDENT FERNÁNDEZ ARMESTO: So, he was paid what the Contract says?
THE WITNESS: Yes, what the Contract said.
BY MR. FRIEDMAN:
Q. And no other payments than what is in the Contract; correct?
A. No.
PRESIDENT FERNÁNDEZ ARMESTO: That is what
[Page 946]
she just said.
THE WITNESS: No.
BY MR. FRIEDMAN:
Q. Perfect. And Professor Seminario completed his work in 18 days, am I correct?
A. I don't recall. I don't recall exactly the number of days for him to conclude, I think that the Contract provided for 45 days.
Q. Right. And according to the Contract that we have, he was retained on April 13, 2011, and then he submitted his final Report on May 1, 2011.
Does that sound about right?
PRESIDENT FERNÁNDEZ ARMESTO: If you recall.
THE WITNESS: It doesn't say April 13. I don't remember the date. I think it was April 18, but the Contract does provide for 45 days.
PRESIDENT FERNÁNDEZ ARMESTO: About 45 days.
BY MR. FRIEDMAN:
Q. Then, am I right that very shortly after that, on May 9, the Ministry incorporated Professor Seminario's formula into that draft law that we looked at earlier?
[Page 947]
A. I don't recall that detail, but if that's what you say, it may have been that way. I don't recall.
Q. Okay. We could look at Tab 48, which I think is in the second volume. You may have that.
We looked at this document before. It's the draft law.
PRESIDENT FERNÁNDEZ ARMESTO: And it is--
MR. FRIEDMAN: Yes. It is Document R-298.
BY MR. FRIEDMAN:
MR. FRIEDMAN: And if we look at Page--well, after--I think the easiest way to do it is after Paragraph 22, and before Paragraph 23 you see a formula expressed. Do you know whether that's Professor Seminario--we believe that it is.
Do you know whether that is Professor Seminario's formula?
A. I cannot assert that 100 percent. I have not compared that, but by looking at the formula, it would seem to be the same formula as recommended by Professor Seminario.
Q. Now, the Ministry of Economy and Finance, I
[Page 948]
assume, has economists working there; correct?
A. Yes, sir.
Q. Okay. And did any of the Ministry of Economy and Finance's own economists review--
PRESIDENT FERNÁNDEZ ARMESTO: You are an economist; right, Vice Minister?
THE WITNESS: Yes.
BY MR. FRIEDMAN:
Q. Yes. Did anybody in the Ministry of Economy and Finance critically review Professor Seminario's work?
A. I would say no, because we had hired an Expert to conduct this macroeconomic econometric study or--with the heavy burden of statistics, and even though we may have economists, they do not all have specific expertise, and no one within the Ministry questioned the formula. And we had hired him to get--to see what his Opinion was and also to accept what he had concluded in his document.
Q. Okay. And did you meet with and speak with Professor Seminario as well or just receive his written Report?
[Page 949]
A. I personally do not recall meeting with Professor Seminario.
Q. Okay. Now, if we could take a look at the Report that he provided. It's at Tab 47 in the binder, and it's Document R-297 or CE-751.
And he calculated--do you recognize that Report, Vice Minister?
A. Yes, sir.
Q. Okay. And in that Report, Professor Seminario calculated some aggregate numbers of what the different updating methods might cost; correct?
A. Yes. There is an exercise based on the total authorization of the 15 billion Bonds.
Q. Right. So, his calculations were based on 15 billion soles de oro face value; correct?
A. Soles.
Q. Correct?
A. Soles oro, sí.
Q. Yes.
A. Yes.
Q. And so, he was valuing the entire original principal that had been authorized by law; correct?
[Page 950]
A. Yes. He was using that as a reference.
Q. Okay. In fact, of course, many Bondholders had redeemed many of the coupons over the years; correct?
A. Yes. Some have redeemed.
Q. And the total outstanding principal amount of the Land Bonds must be less than 15 billion soles de oro; correct?
A. Based on the accounting of the bill, 1 cent.
PRESIDENT FERNÁNDEZ ARMESTO: No. This is just a question. That is, if 15 billion were issued with 15 billion principal, you can only have right now in the market a lower amount; correct?
THE WITNESS: Yes.
(Comments off microphone.)
BY MR. FRIEDMAN:
Q. At this time in 2011, did the Ministry of Economy and Finance have an estimate of what the outstanding principal was in soles de oro of the Land Bonds?
A. I didn't understand your question fully. Would you please repeat it?
[Page 951]
Q. Yes. In 2011, did the Ministry of Economy and Finance have an estimate of the total outstanding amount of the principal of the Land Bond debt?
A. No. Only what was in the accounting that is equivalent to 1 cent of the sol.
PRESIDENT FERNÁNDEZ ARMESTO: So, what you are saying is there was no record. There must be a record with the Bank for the Agrarian Development. Wasn't there a record of what had already been paid?
THE WITNESS: But when that Bank ceased to exist, all of the documents, well, we need to go and look tirelessly for all of those documents to rebuild the story.
BY MR. FRIEDMAN:
Q. You're familiar with what's been called sometimes the "148 Commission?" Am I correct?
A. No, sir.
Q. Do you remember that in 2004, the Ministry set up a Commission to try to study updating the value of the Land Bonds?
Do you remember that?
A. We were just talking about that Commission a
[Page 952]
couple of minutes ago, the one resulting from Supreme Decree 148.
Q. Correct. That's why I think at least we call it sometimes the "148 Commission" because it was authorized by Decree 148. Okay.
And that Commission was established in 2004; correct?
A. I don't recall the date of the issuance of that Decree. I think I need to look at the exhibit.
(Comments off microphone.)
BY MR. FRIEDMAN:
Q. Maybe we could turn to Tab 24 in the first binder. Yes, R-257.
I'll take you there in a minute, but do you recall that one of the Projects that that Commission undertook was trying to estimate the total outstanding amount of principal for the Land Bonds?
A. Yes. That was their mandate.
Q. Okay. And that Commission included two representatives from the Ministry of Economy and Finance, two representatives from the Ministry of Agriculture, and a representative from ADAEPRA, a
[Page 953]
bondholder group; correct?
A. Yes, those were the members.
Q. And they did their work very diligently; correct?
A. I cannot qualify the way they did their work. I only know that they did their work.
Q. Okay. They came up with some estimates of the outstanding principal of the Land Bond debt; correct?
A. They did their exercises and, based on some simulation, I understand they reach the conclusions that are part of their document.
Q. Okay. If you could turn with me to--I think it is Page 7, although I don't see page numbers on the copy that I have. Page 7 on the PDF. Yes.
(Comments off the microphone.)
Q. Yeah. There's a section of the Report. Don't put that up on the screen yet. I want to walk through the text, please, that gets to that.
There's a section of cost benefit analysis on Page 6, and there's a subsection approximating the value of the Land Reform debt. And do you see that
[Page 954]
on this page they try to make some estimates about the total outstanding principal amount of the debt.
So, what they say, that the DGCP originally actually issued 14.557 million soles de oro, and then 1.272 million soles de oro was canceled, which left a net placement of 13.285 million soles de oro.
And then in the next paragraph, they described some other DGCP information, saying that the DGCP had paid 16,000,000,397 soles de oro, which was comprised of 10.763 million corresponding to the amortization of principal and the rest in interest, leaving a net outstanding amount of principal of 2.521 billion soles de oro.
Do you see that?
A. Yes, I am reading it.
Q. Okay. And then they take another approach, which is looking at the number of Bonds that had not been personally taken into custody by people at the Bank of the Nation; correct?
A. Yes.
Q. Now, according--and then in the table that appears, they publish that 2.5 billion outstanding
[Page 955]
face value that were issued under Decree-Law 17718, and they add to it some other Bonds that were issued under another law to come up with a total under that approach; correct?
A. It is what the Report says.
Q. Okay. Now, this information, this data about how much had been paid down already came from the DGCP; correct?
A. That is what the Report indicates. In effect, they should have officially reported the sum of economic Resources that they had transferred to the Agrarian Development Bank and, thus, the--reflecting the amount as debt paid.
Q. And so, I take it from your answer before, that the Ministry of Economy and Finance has not made any other calculation about the total outstanding principal of the Land Bonds debt; correct?
A. No, sir. It is just what I said before, which is how much appears in the accounting of the debt.
PRESIDENT FERNÁNDEZ ARMESTO: So, about one sixth is outstanding. So, if I understand,
[Page 956]
13 billion soles de oro were issued and it appears that it is more or less between 1,800, 1,600 with margin of error, about 3 billion. So, it would be that, about one sixth. Does that sound reasonable to you? Do these figures sound reasonable to you, or do you think that they reflect any error?
THE WITNESS: No, I'm not able to either say that it's reasonable or to say that there's a mistake. If they wrote that, they must have the documents that support it. I cannot speak either in favor or against.
PRESIDENT FERNÁNDEZ ARMESTO: For the national accounting it is 1 cent.
THE WITNESS: 1 cent.
PRESIDENT FERNÁNDEZ ARMESTO: It says Agrarian debt, "1 cent."
THE WITNESS: It is in the items "other" of the internal debt, and when you go in, put in the key, the Code, in the system, Agrarian Reform Bonds, 1 cent.
PRESIDENT FERNÁNDEZ ARMESTO: And there's no number of Bonds, just a line item.
[Page 957]
THE WITNESS: Yes, a line item.
PRESIDENT FERNÁNDEZ ARMESTO: Excellent. Thank you.
BY MR. FRIEDMAN:
Ω. I'm about to turn to another topic, but I'm conscious of the time. We've been going for an hour and a half, and I'm in your hands.
PRESIDENT FERNÁNDEZ ARMESTO: Vice Minister, would you like to have some coffee?
THE WITNESS: Excuse me?
PRESIDENT FERNÁNDEZ ARMESTO: Would you like to have a cup of coffee?
THE WITNESS: I think so. I would be grateful for a short rest.
PRESIDENT FERNÁNDEZ ARMESTO: Yes. I think you might need one. Let us do as follows: It is 11:05, so we will be back at 11:20.
Vice Minister, there is coffee outside.
THE WITNESS: Thank you very much.
PRESIDENT FERNÁNDEZ ARMESTO: There is yogurt, fruit. I will ask you to please not speak of anything related to this matter with counsel for the
[Page 958]
Republic of Perú.
THE WITNESS: Don't worry about it.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you very much.
(Brief recess.)
PRESIDENT FERNÁNDEZ ARMESTO: We now resume the Hearing, and we give the floor to counsel for Gramercy.
MR. FRIEDMAN: Thank you.
BY MR. FRIEDMAN:
Q. So, now, Vice Minister, am I correct that you were essentially away from the Land Bond issues for a period from May 2013?
A. In effect, as of May of 2013, I took on other responsibilities. Nonetheless, my Statement and the annexes that I've submitted have been from the time when I was Vice Minister of Treasury, and, as such, it is clear that the organizational structure--from the organizational structure of the Ministry that the Office on Public Debt belongs to or corresponds to--well, it comes directly under the Vice Ministry of Treasury. So, I have reviewed the
[Page 959]
1 official records that are in the archives, and it's 2 on that basis that I have stated what I have in my 3 Statement. 4 Q. Okay. But from May 2013 to June 2016, you 5 were focused on other responsibilities and not on 6 matters of public debt, including the Land Bond debt; 7 correct? 8 A. Yes. I had other positions. 9 Q. Did you have any personal involvement in 10 meeting with or advocating to the Constitutional 11 Tribunal in or around July 2013 with respect to the 12 Land Bond debt? 13 PRESIDENT FERNÁNDEZ ARMESTO: It has been 14 translated as "passion." Did you have a passion with 15 the Constitutional Court. And I'm sure-- 16 MR. FRIEDMAN: That is a more interesting 17 question, but not relevant and not fair, I agree. 18 PRESIDENT FERNÁNDEZ ARMESTO: Did you have 19 any meeting with or did you meet with members of the 20 Constitutional Court at the time around July of 2013? 21 Mr. Friedman, July 2013 was the date. 22 MR. FRIEDMAN: Yes. Yes.
[Page 960]
1 PRESIDENT FERNÁNDEZ ARMESTO: Did you have 2 any meeting or phone call? 3 THE WITNESS: No, with no official of the 4 Constitutional Court. 5 BY MR. FRIEDMAN: 6 Q. And did you assist in the preparations for 7 or consult with any of your colleagues in the 8 Ministry about a meeting with the Constitutional 9 Court around July 2013? 10 A. No, sir. 11 Q. Okay. And did you have any personal 12 involvement in creating the January 2014 Supreme 13 Decrees? 14 A. No direct participation because I was in 15 charge at that time of other functions, but, as I 16 said sometime ago, my account in my Statement answers 17 to my review of the document so as to be able to tell 18 you what happened at that stage. 19 Q. Okay. So, you're aware that in 20 January 2014, the Ministry published two Supreme 21 Decrees that had updating formulas for the Land 22 Bonds; correct?
[Page 961]
1 A. Yes, sir. 2 Q. And the Constitutional Tribunal had given 3 the Ministry six months to develop those formulas; 4 correct? 5 A. Yes, sir. 6 Q. And those Decrees embodied the work of 7 Professor Seminario as the valuation formula; 8 correct? 9 A. Indeed. What is in Mr. Seminario's document 10 did appear in those Decrees. 11 Q. Okay. Now, you returned to the--well, you 12 left the responsibilities you were doing at the World 13 Bank Group in June 20--with respect to the World Bank 14 at June 2016. And am I right that by that time there 15 were already a number of complaints about the 16 January 2014 Decrees on the basis that they were 17 providing value that was much too low? 18 A. I understand that precisely because of the 19 different interpretations that one might have of the 20 variables contained in the Supreme Decrees 17 and 19 21 that an additional consultation was put to 22 Mr. Seminario because apparently the formulas of his
[Page 962]
1 analysis were not properly carried over to the 2 conclusion. And then they contracted another 3 international expert, Mr. Lapuerta, and with the 4 opinion of both Experts, they processed the 5 Decree 034, which indicated what had--took into 6 account what Seminario had said. 7 Q. So, this would be--progress more smoothly if 8 we can just focus on answering the questions. So, 9 I'd be grateful for that. 10 Am I right that by mid-2006, many people 11 were complaining that the formulas would produce 12 value that was much too low--2016. 13 A. I don't know how many complaints. And at 14 any rate, I learned about that by reference, but 15 basically what I understand is that there were 16 different interpretations of the existing formula, 17 and so the consultation was put to Mr. Seminario, as 18 I'm saying. 19 Q. Yes. But the complaints--the complaints 20 were that the formula was producing values that 21 couldn't be right; correct? 22 A. That is likely. I have no personal
[Page 963]
1 knowledge of that, sir. 2 Q. Okay. Am I right that the formulas that the 3 MEF published in January 2014 were essentially 4 providing nominalistic values? 5 A. I wouldn't dare to say that because I don't 6 have the calculations that were made to be able to 7 say that they were yielding very low values. What I 8 do know is that there were different interpretations 9 as to how they were applied or where the data came 10 from in order to apply the full formula, and that is 11 why we got into this review with Mr. Seminario. 12 Q. The Ministry itself recognized that the 13 values were much too low; is that correct? 14 A. In what document does the Ministry recognize 15 that they were too low? 16 Q. Well, if you could turn with me to Tab 123, 17 which is in Volume 3 and, forgive me, is CE-589. 18 This was a document produced by Perú in this 19 arbitration. Are you familiar with this document? 20 A. This is the database that I have been 21 handling in connection with all these proceedings for 22 administrative updating.
[Page 964]
1 Q. Right. So, what it appears to be is 2 attempting to estimate the updated value of the Land 3 Reform Bonds; right? 4 A. Of the Bonds that had been included in the 5 authentication process. That's the exercise that 6 this relates to. 7 Q. Umm-hmm. And there are 280--if you turn to 8 the bottom columns, there are 282 Bonds that are 9 being analyzed here; correct? 10 A. That is what the table states. 11 PRESIDENT FERNÁNDEZ ARMESTO: Excuse me, 12 Vice Minister. This was prepared by the Ministry; 13 right, Vice Minister? I don't know if you know. 14 THE WITNESS: Well, I couldn't really tell 15 because it's not signed. It doesn't have any seal 16 from the Ministry, but I have seen similar databases, 17 so I can presume that, perhaps, that's one of the 18 tables that has been taken from the database. 19 PRESIDENT FERNÁNDEZ ARMESTO: Please go 20 ahead, sir. 21 MR. FRIEDMAN: Thank you. 22 BY MR. FRIEDMAN:
[Page 965]
1 Q. On the right column, it says "valor 2 actualizado," which is updated value, and two 3 columns. One seems to be--the first column there 4 seems to be under the original 2014 Supreme Decrees, 5 and then there's an--under 2016, "DS Precisado." 6 Do you see that? 7 A. I do. 8 Q. Okay. And then we see the face value, to 9 the left column, well, kind of in the number of the 10 page, "valor nominal del bono soles oro," where you 11 can see the face amount of the soles oro. 12 A. Yes. 13 Q. And in " saldo original," there is "Saldo 14 Total of the Bonds in soles oro," which is the total 15 face amount; correct? So, if you go to the bottom of 16 the page, the tab. 17 THE INTERPRETER: There was no answer to the 18 question. 19 BY MR. FRIEDMAN: 20 Q. Well, if we go to the bottom of the page, 21 you can see that there's an updating on about 22 14.7 million soles oro of face value under the two
[Page 966]
1 methods; correct? 2 A. Well, I cannot dare to say whether this is 3 correct or not because I have not worked directly on 4 this table. You are reading the total amount and 5 nominal value for these soles oro, and you are making 6 reference to this 14,657 in soles oro. You make a 7 reference to that amount, correct. 8 Q. Right? So, you see that. That's a total 9 face--according to this document, it seems to be the 10 total face amount of soles de oro, and the value 11 under the original Supreme Decrees that was to be 12 accorded to that was about 47,000 soles nuevos; 13 correct? 14 A. That appears to be what the table states. 15 Q. Okay. And under the updated, the precisions 16 that are in the last column, the value for those same 17 Bonds would be 2.8 million soles nuevos; correct? 18 A. That is what the table states. 19 Q. So, it seems from this that the analysis 20 within the MEF were based on the MEF's data would 21 have showed that there was a very serious problem 22 with the original Decrees.
[Page 967]
1 Would you agree with that? 2 A. It seems to indicate that it seems to be 3 part of the analysis that they conducted when they 4 noticed that the formula was not correctly stated, 5 according to the conclusions of the Report by 6 Mr. Seminario. 7 Q. And it's a pretty big error, would you agree 8 with me? 9 A. I cannot qualify the nature of the error. 10 It is an error simply. 11 Q. Well, if it's 2.8 million Nuevos Soles that 12 is supposed to be paid in its yielding values of only 13 47,000 Nuevo Soles, that's-- 14 PRESIDENT FERNÁNDEZ ARMESTO: What is the 15 yielding value? 16 MR. FRIEDMAN: Their updating formula. 17 (Comments off microphone.) 18 MR. FRIEDMAN: Sorry. 19 PRESIDENT FERNÁNDEZ ARMESTO: I have a 20 question. 21 MR. FRIEDMAN: Yes. 22 PRESIDENT FERNÁNDEZ ARMESTO: Ma'am, just a
[Page 968]
1 question, excuse me. What is the difference between 2 the updated value, according to Supreme Decree 3 19/2014 and updated value 2016 and that it says 4 clarified?--if you know; right? 5 THE WITNESS: Mr. President, I can only 6 answer with what I presume. What I presume out of 7 this is that the updated value of the Decree 19 is 8 the formula, and the clarified value is--what they 9 are trying to say, okay, if we're correct, according 10 to the formula, the correcting formula by 11 Mr. Seminario, these would be the results. Probably 12 this is what led to Supreme Decree 0034. 13 PRESIDENT FERNÁNDEZ ARMESTO: Of 2014 or 14 2016? 15 THE WITNESS: 2017. 2017. 34 is 2017. 16 PRESIDENT FERNÁNDEZ ARMESTO: Okay. I 17 understand that. If we eliminate this error, the 18 correct amount would be 2.878858 soles. 19 THE WITNESS: According to this, apparently 20 that is the figure, yes. 21 PRESIDENT FERNÁNDEZ ARMESTO: So, this would 22 mean that Land Bonds that historically had had
[Page 969]
1 410,652,338 nominal value in soles, those would be 2 converted to 2.878858 Nuevos Soles. Well, whatever 3 soles are called now. 4 THE WITNESS: Yes, Nuevos Soles, 5 Mr. President. 6 PRESIDENT FERNÁNDEZ ARMESTO: Yes, Nuevos 7 Soles then. That is what the table says. 8 THE WITNESS: That table seems to indicate 9 that. 10 PRESIDENT FERNÁNDEZ ARMESTO: Thank you very 11 much. 12 BY MR. FRIEDMAN: 13 Q. Now, my question to you is, this seems like 14 a rather substantial error. Would you agree with 15 that? 16 A. Again, I'm not going to qualify the error. 17 This is just an error. 18 Q. But the order of magnitude, you would agree 19 with me, is quite large between the January 2014 20 implied values and the ones under this new method? 21 PRESIDENT FERNÁNDEZ ARMESTO: I think the 22 Vice Minister has--
[Page 970]
1 MR. FRIEDMAN: Okay. 2 PRESIDENT FERNÁNDEZ ARMESTO: --the mistake 3 is the mistake, and the Vice Minister has said that 4 the right column is the correct one and that the left 5 column was a mistake. 6 BY MR. FRIEDMAN: 7 Q. Now, during this time, mid-2016, am I right 8 that the Ministry continued to defend the Bondholder 9 process and encourage Bondholders to sign up to it, 10 despite recognizing this flaw in the valuation 11 formula? 12 A. What the Ministry did at all times and what 13 it does, in particular, in connection with these 14 proceedings is to act in good faith. It's always 15 acted in good faith. It is implementing the 16 administrative process that the Constitutional 17 Tribunal has indicated, and if there are errors that 18 need to be cured because there are better ways to 19 clarify the formula so that people don't interpret it 20 as A, B, or C, well, that is what has happened, and 21 it is Supreme Decrees up until 242. 22 Q. But am I right that at this time the
[Page 971]
1 Ministry was continuing to defend the Bondholder 2 process and encourage Bondholders to submit to it? 3 ARBITRATOR DRYMER: To be clear, 4 Mr. Friedman, the time frame you're looking at is at 5 the date of the document. 6 MR. FRIEDMAN: Which is June 2016. 7 ARBITRATOR DRYMER: Well, let me ask you a 8 question on that. It says "dot dot el," 20 9 February 2016 actualized or updated June 2016. 10 Do you have a date for this document itself, 11 not of the calculations that it is reflecting? 12 MR. FRIEDMAN: It is Respondent's document 13 that was produced. 14 ARBITRATOR DRYMER: Yes. Well, I was asking 15 you if-- 16 (Overlapping speakers.) 17 MR. FRIEDMAN: Yeah. No. I have assumed 18 that since it's actualization up through June of 19 2016-- 20 ARBITRATOR DRYMER: Right. 21 MR. FRIEDMAN: --but uses data from earlier, 22 I think we have been--
[Page 972]
1 ARBITRATOR DRYMER: Okay. 2 MR. FRIEDMAN: --assuming that it was 3 reasonably--you know, the most current data at the 4 time. 5 PRESIDENT FERNÁNDEZ ARMESTO: Madam, just to 6 understand this better because there were two Supreme 7 Decrees in 2014. This document is dated 2016. When 8 the error was corrected, it was corrected in the 9 Decrees that were issued in 2017; is that correct? 10 THE WITNESS: Yes. 11 PRESIDENT FERNÁNDEZ ARMESTO: Perfect. 12 Thank you. 13 BY MR. FRIEDMAN: 14 Q. Now, it was during this period in June 2017 15 that the Ministry further consulted with 16 Professor Seminario; correct? 17 A. Yes. I don't remember the month exactly, 18 but a consultation, a formal consultation was put to 19 Mr. Seminario for him to review his Report, and he 20 concluded that, indeed, some of the data was not 21 transcribed correctly in his analysis and the 22 conclusion, and then he told us where the
[Page 973]
1 clarifications were in connection with this Report. 2 Q. And was that the first time that the 3 Ministry had consulted with Professor Seminario about 4 this subject since his work in 2011? 5 A. I don't have personal knowledge of that. 6 What I can tell you, sir, is that the consultation 7 was done formally in writing, and that's what 8 happened then. 9 Q. Okay. But you're not aware of any contacts 10 between the Ministry and Professor Seminario between 11 his work in 2011 and this period in the middle of 12 2016 with respect to the Land Bonds; correct? 13 A. I don't know if there have been 14 coordinations in that regard. 15 Q. Okay. And that's also when Mr. Lapuerta 16 analyzed the formula; correct? 17 A. Precisely. When they realized all these 18 details, they asked Mr. Seminario to review his 19 Report, and for further certainty, they asked the 20 Opinion of an international expert, Mr. Carlos 21 Lapuerta. I think that's his name and last name, if 22 I'm not mistaken.
[Page 974]
1 Q. Mr. Seminario had provided corrections to 2 his formula; correct? 3 A. That's right. 4 Q. Okay. And that led to the development of 5 the February 2017 Supreme Decrees; right? 6 A. 034, yes. Supreme Decree 034. 7 Q. Okay. Now, am I right that, at the time 8 that the Ministry had first issued the Supreme Decree 9 in 2014, they had not contemplated changing the 10 valuation formula; is that correct? 11 A. I don't really understand your question. 12 What exactly are you asking? 13 Q. These changes to the formula that you were 14 making in 2017 were not anticipated at the time of 15 2014; correct? 16 (Overlapping interpretation.) 17 MR. FRIEDMAN: Okay. 18 PRESIDENT FERNÁNDEZ ARMESTO: I think you 19 have to clarify. Mr. Friedman, I have difficulties 20 understanding it. 21 BY MR. FRIEDMAN: 22 Q. One moment.
[Page 975]
1 ARBITRATOR DRYMER: And maybe distinguish 2 between the two 2014, please. 3 MR. FRIEDMAN: Okay. 4 THE WITNESS: Mr. President, if you'll allow 5 me. 6 PRESIDENT FERNÁNDEZ ARMESTO: Yes, of 7 course. 8 THE WITNESS: Let's see if I understand what 9 counsel is asking. Normally, when documents and 10 legal norms are issued, you don't anticipate changes 11 to the future, so you're not anticipating what's 12 going to happen in the future. What it was 13 anticipated in 2014 is that the payment mechanism was 14 lacking, and that was anticipated and regulated in 15 034, but the Peruvian State and the MEF, as a 16 prestigious institution, cannot anticipate that the 17 formula is going to be corrected. That cannot 18 happen. 19 BY MR. FRIEDMAN: 20 Q. Right. So, if you can turn to your Second 21 Witness Statement, please, at Paragraph 12. At the 22 end of that paragraph, it says that the original
[Page 976]
1 Supreme Decree from 2014 anticipated there would be a 2 future Supreme Decree regulating the final steps of 3 the administrative process. But really it was just 4 the methods of payment, not changes to the valuation 5 formula; correct? 6 A. Indeed. I said that there was no way for 7 one to anticipate changes in the valuation formula, 8 but if along the way you notice that there are things 9 to be improved, things to be corrected, well, it is 10 always possible to go one step ahead and to make the 11 changes that one considers are going to improve the 12 whole administrative process system. 13 Q. Okay. I want to now look at the 14 February 2017 Supreme Decree and the justifications 15 for it. And that is in our books at Volume 5, I 16 think; right?--Tab 155, Document 698, R-698. R-698. 17 (Comments off microphone.) 18 MR. FRIEDMAN: It's the Statement of Reasons 19 for the supreme decree. 20 Q. Now, the Statement of Reasons is prepared 21 because Peruvian Administrative Law requires the 22 Ministry to act within certain parameters; correct?
[Page 977]
1 A. Again, I'd like to state that I am not a 2 lawyer by profession, so I don't know exactly where 3 this is provided for, but because of general uses and 4 customs, I know that all laws have a Statement of 5 Reasons that precede them. 6 Q. Yes. Very good. If you could turn to 7 Page 2 of this document, there's a cost-benefit 8 analysis. And it says the bill has the aim of 9 standardizing compliance with an obligation of the 10 Peruvian State for those persons who are expropriated 11 of their lands, delivering payment to them for the 12 Agrarian Reform Bonds. 13 And then it says: "In this sense, there is 14 no additional cost that the Agrarian Reform Bonds 15 would represent that their updated value, which would 16 be addressed based on payment alternatives that are 17 agreeable to the fiscal balance of the nation." 18 Do you see that? 19 A. I do. 20 Q. So, I'm just puzzled by this because the 21 Ministry is changing the formula in a way that could 22 provide 30 times more value than its original set of
[Page 978]
1 calculations, and, yet, its cost-benefit analysis 2 says that there is no additional cost. 3 Am I right that that's the situation? 4 A. The Statement of Reasons says what it says 5 there. And in connection with this cost-benefit 6 analysis, well, you have to go by the literal value 7 of it. There is no additional cost and then--and it 8 talks about that would represent at their outdated 9 value. It is not talking about statistical value. 10 It says, well, the figure will be that coming out of 11 the update. We don't know how many of the ones that 12 have come into the Ministry to process, how many of 13 them are going to want to get to the payment stage. 14 We could not set a number to that. We could not set 15 an amount to that, so, basically, what it is saying 16 here that the Cost is whatever it's going to be after 17 the updating process ends and the payment stage 18 begins. 19 Q. And so, I suppose you could have used 20 exactly the same logic, no matter what the formula 21 was; right? 22 A. Sir, perhaps. Well, perhaps we could have
[Page 979]
1 gotten 100,000 ways of abiding by the law. The 2 language is the language of the Statement of Purpose, 3 and, you know, decisions made by the State are made 4 by the State. 5 PRESIDENT FERNÁNDEZ ARMESTO: So, State 6 practice didn't ask you to do a quantitative analysis 7 of the cost of the matter? 8 THE WITNESS: Of course not. There are 9 many, many Supreme Decrees that have two or three 10 paragraphs that relate to cost-benefit analysis. 11 PRESIDENT FERNÁNDEZ ARMESTO: This a global 12 movement; right? I think in the next few years 13 you're going to have to do a very accurate 14 calculation, because there is a custom now of asking 15 for very precise calculations. 16 BY MR. FRIEDMAN: 17 Q. Am I right that in none of the Supreme 18 Decrees has the Ministry has indicated what the cost 19 to the nation would be of this Bondholder Process? 20 Correct? 21 A. Not even in the Technical Reports that the 22 Supreme Decree relies on, the one that you have in
[Page 980]
1 your possession, well, it didn't say how much it was 2 going to cost if we didn't know how many of those 3 Bonds were going to come to the final payment stage. 4 PRESIDENT FERNÁNDEZ ARMESTO: Do you recall 5 that we saw in one of the Reports by one of these 6 Commissions that there was something that said that 7 one-sixth of the historical ones were there. There 8 were 13 billion, but then only a few remain, but 9 wasn't there someone in your department doing some 10 projections? 11 For example, if we had 1,000 nominal value 12 Bonds, the Cost will be X. 2,000, X; 3,000, 4,000. 13 You didn't ask anyone to conduct an approximate 14 calculation of the Cost that these Decrees would 15 entail for the Republic? 16 THE WITNESS: It would be difficult to do, 17 and it would not have been productive to do it at the 18 time, because we needed to do the Supreme Decrees and 19 abide by them. We didn't know how many coupons would 20 be in circulation. We didn't know the date of the 21 nonpayment to recognize the obligation. Many Bonds 22 have as the latest date of payment 1985 or '87, so
[Page 981]
1 there were many assumptions that one had to take into 2 account to conduct this exercise. So, to abide by 3 the procedure mandated by the Constitutional Court, 4 well, we didn't really have to know exactly how much 5 these obligations were going to cost. 6 PRESIDENT FERNÁNDEZ ARMESTO: I understand, 7 ma'am, but an approximate estimation--why didn't you 8 do an approximate estimation of--well, was this going 9 to cost 2 billion, 3 billion new soles? 10 THE WITNESS: I have no personal knowledge 11 of that, Mr. President. Perhaps an exercise was 12 conducted--I don't have any idea--but in the files 13 that I've reviewed, there is no formal document that 14 you can use to say, okay, a quantitative analysis has 15 been taken into account on the basis of a number of 16 variables. 17 PRESIDENT FERNÁNDEZ ARMESTO: And Professor 18 Seminario did not do that, either? 19 THE WITNESS: He did not. 20 BY MR. FRIEDMAN: 21 Q. But we did see that, in Professor 22 Seminario's original Report, he had quantified the
[Page 982]
1 amounts based on 15 billion soles de oro, the total 2 authorized amount, and we saw that the Ministry 3 itself did calculations on the Bonds then in the 4 Bondholder process as of mid-2006. So, surely it 5 would have been possible to at least analyze the 6 financial or monetary impact of the change that was 7 being proposed by the February 2017 Decrees in some 8 ways; correct? 9 PRESIDENT FERNÁNDEZ ARMESTO: I think the 10 Minister has--the Vice Minister has answered that 11 she's not aware. 12 MR. FRIEDMAN: She has no personal 13 knowledge. 14 PRESIDENT FERNÁNDEZ ARMESTO: Ma'am, you 15 told me that you were not aware that that calculation 16 was conducted. 17 THE WITNESS: I don't have personal 18 knowledge of that, Mr. President. 19 BY MR. FRIEDMAN: 20 Q. Okay. Are you aware that the Ministry of 21 Justice criticized this Draft Supreme Decree based on 22 this particular description of the cost-benefit
[Page 983]
1 analysis? 2 A. Those comments usually take place during the 3 approval process that takes place. When a Supreme 4 Decree is to be approved, well, it has to be reviewed 5 by the Council of Ministers. At that stage, all the 6 Ministries, according to their purviews, make 7 comments. Now, if the doubts are not cured that the 8 Ministries have, then it doesn't go further. 9 So, the Ministry cured these doubts, and it 10 went to the approval of the Ministers, and it went to 11 the President to be signed. 12 PRESIDENT FERNÁNDEZ ARMESTO: You were the 13 Vice Minister at the time; right? 14 THE WITNESS: I was not. 15 PRESIDENT FERNÁNDEZ ARMESTO: In 2017? 16 THE WITNESS: No, I wasn't there. 17 PRESIDENT FERNÁNDEZ ARMESTO: That's what is 18 in the file. 19 THE WITNESS: Oh, okay. You've seen it in 20 the file. 21 And this is what usually happens in the 22 approval processes for Supreme Decrees.
[Page 984]
1 PRESIDENT FERNÁNDEZ ARMESTO: Now, to 2 understand this better, the file went to the 3 Committee of Ministers and then to the Council of 4 Ministers; right? 5 THE WITNESS: Yes. 6 PRESIDENT FERNÁNDEZ ARMESTO: Now, no 7 calculation of the economic impact was conducted 8 there? 9 THE WITNESS: It was not. 10 BY MR. FRIEDMAN: 11 Q. I'd like to look at Minister of Justice's 12 comments. They are in Tab 149, which is 13 Exhibit R-698--sorry, Tab 155, R-698, and that is 14 found in Volume 5. Volume 5, Tab 155. 15 No. Sorry. 16 Forgive me. Let me start again. It is 17 Tab 149, which is in Binder 4, so we need Binder 4, 18 and it is document R-690. 19 PRESIDENT FERNÁNDEZ ARMESTO: 690. 20 BY MR. FRIEDMAN: 21 Q. If you are there with me, can you see a 22 matrix on the third page of the document, and it
[Page 985]
1 indicates the sector making the observation is the 2 Justice Ministry, and then if you go Page 6 of the 3 PDF, it talks about the Statement of Reasons, and it 4 says: "With respect to the Statement of Reasons, it 5 is observed that under the heading 'cost-benefit 6 analysis,' indication is made there is no cost 7 additional to that which the Agrarian Reform Bonds 8 represent that updated value, despite the fact that 9 the administrative procedure for the determination of 10 payment method is being implemented. In this sense, 11 the scope, implications, and consequence of the 12 proposed change were not analyzed, this being the net 13 positive effects, benefits, cost of implementing the 14 proposal, and opportunity cost." 15 Do you see those comments from the Justice 16 Ministry? 17 A. I haven't been able to follow you when you 18 were reading, but if you allow me just one second. 19 Q. Of course. They are also on the screen, if 20 it's of assistance to you. 21 And then--so that was--those were the 22 Justice Ministry's comments, saying that you haven't
[Page 986]
1 really explained the cost of this, including the cost 2 of the change; and the next column, I think, is the 3 Ministry of Economy and Finance's answer to that, 4 which says: "In objective terms, the cost of the 5 procedure"-- 6 PRESIDENT FERNÁNDEZ ARMESTO: Let's not get 7 it--let's give the Vice Minister the opportunity to 8 read it, and then to answer questions. 9 MR. FRIEDMAN: Oh, of course. Forgive me, 10 Mr. President. 11 THE WITNESS: I am reading what I see on the 12 screen. 13 PRESIDENT FERNÁNDEZ ARMESTO: You don't have 14 it on paper? 15 THE WITNESS: No, I couldn't find it. Well, 16 what I see on the screen-- 17 PRESIDENT FERNÁNDEZ ARMESTO: This is 18 Document--let me tell you where it is. It is 19 important for you to find it--Document 690, and this 20 is--and here you have the matrix, and then you have 21 the observation and the clarification of that 22 observation. So, we go to Page 6, I think you said.
[Page 987]
1 And on top it says: "In connection with the 2 Statement of Reasons." And to the right you have the 3 answer. So, you can look at it, and then the 4 attorney will ask you questions. 5 BY MR. FRIEDMAN: 6 Q. Their observation is factually correct, of 7 course, that the economic consequences of the 8 proposed changes were not analyzed, and there is no 9 description of the positive effects or the cost? 10 PRESIDENT FERNÁNDEZ ARMESTO: Wait for her 11 to read it. 12 MR. FRIEDMAN: Yes, of course. 13 THE WITNESS: I don't understand what the 14 question is. 15 PRESIDENT FERNÁNDEZ ARMESTO: So, now we 16 have the question. What is the question, counsel? 17 You can now put the question to the Witness. 18 MR. FRIEDMAN: Thank you very much. 19 BY MR. FRIEDMAN: 20 Q. So, what the Justice Ministry has observed 21 is that there is no description of the Actual Cost of 22 the proposed change, no analysis of that, including
[Page 988]
1 the positive effects of implementing the proposal and 2 the opportunity costs. And that's factually 3 accurate; correct? 4 I mean, the Supreme Decree doesn't contain 5 that kind of analysis; right? 6 A. The record includes the documents that you 7 are familiar with that have been presented, and 8 clearly the Statement of Reasons is reflected in this 9 text, and this is what we usually do with the 10 Statement of Reasons. There are several ways to do 11 it, and there is no analysis, no analysis of costs, 12 in the Report that was presented, but these were 13 simulations, and this is not something that can be 14 sent when this is attached to the Supreme Decree, but 15 there is a Technical Report that indicates why there 16 will be an adjustment in the regulation. 17 Q. The Ministry of Economy and Finance's 18 response to the Justice Ministry's comment is in the 19 right column, and I understand that to say that, in 20 objective terms, the Cost of the procedure for 21 determining payment method of the Agrarian Reform 22 Bonds constitutes the Cost incurred by the country to
[Page 989]
1 service this obligation. 2 PRESIDENT FERNÁNDEZ ARMESTO: I don't think 3 we are getting much further. The Vice Minister has 4 said that there was no projection of the Cost, that 5 she has not seen any, that in the file which was 6 submitted first to the Council of Vice Ministers and 7 then to the Council of Ministers, that there was no 8 projection of the impact; the Ministry of Justice 9 made the comment, and it was answered in that form by 10 the Ministry of Finance. 11 I think that is what we--that's the take of 12 this. 13 BY MR. FRIEDMAN: 14 Q. So, let me then ask this question, based on 15 that, because this is exactly what I was building up 16 to, which is that: Am I right, then, that as of 17 February 2017, the Ministry of Economy and Finance 18 had no estimate of the-- 19 PRESIDENT FERNÁNDEZ ARMESTO: We have gone 20 through this a couple of times, Mr. Friedman. She 21 has said that it is not in the file, and she does not 22 remember having seen in any file a calculation.
[Page 990]
1 MR. FRIEDMAN: Okay. 2 PRESIDENT FERNÁNDEZ ARMESTO: Okay? I mean, 3 that's the Witness Statement. 4 BY MR. FRIEDMAN: 5 Q. The Ministry then published 6 Professor Seminario's two clarifications in its 7 February 2017 Supreme Decree; correct? 8 A. So, that was in Supreme Decree 034, and also 9 the payment procedure that was reflected also in that 10 Decree. 11 Q. And one of those corrections was that, in 12 his formula for the Parity Exchange Rate, U.S. CPI 13 was supposed to be expressed in soles de oro; 14 correct? 15 A. Well, it was reflected what Mr. Seminario 16 included as part of the clarification that was also 17 ratified with Mr. Lapuerta's Report. 18 Q. Yes. Did anybody at the Ministry of Economy 19 and Finance make an independent review of the 20 proposed corrections or clarifications before 21 publishing the Supreme Decree? 22 A. I do not know, sir, but what I saw in the
[Page 991]
1 file is that, based on those two Reports, the 2 Technical Report and the legal report were issued, 3 and the Supreme Decree follows its path to approval. 4 Q. So, the technical basis for the change to 5 the formula were Mr. Lapuerta and Mr. Seminario's 6 corrections; right? 7 A. I would say so. 8 Q. One of those corrections was that U.S. CPI 9 should be expressed in soles de oro; correct? 10 A. That is established, and that is what 11 Mr. Seminario established in his additional document. 12 Q. Okay. Now, you're an economist; correct? 13 A. But I am not going to discuss the 14 mathematical formula. To that end, we hired an 15 Expert. 16 Q. I understand. But U.S. CPI is just a 17 number. It's not expressed in a currency; correct? 18 A. I am not going to be able to discuss what 19 the Expert said. I would have to be qualified as an 20 Expert to be able to discuss what he said in his 21 Report. 22 Q. Was there anybody within the Ministry of
[Page 992]
1 Economy and Finance who was such an Expert and 2 actually reviewed what Professor Seminario had 3 proposed as the corrections? 4 A. I do not know, sir. This is not part of the 5 documents in the official file, that there was 6 another opinion by a different Expert. 7 Q. Okay. And were you aware of any other 8 analysis being made within the Ministry of Economy 9 and Finance besides simply taking the corrections 10 that Professor Seminario-- 11 PRESIDENT FERNÁNDEZ ARMESTO: I think she 12 has answered. There is--in the official file, there 13 is no other calculation. 14 BY MR. FRIEDMAN: 15 Q. Okay. And then you're aware--there was a 16 second correction also relating to some terms in 17 calculating the real exchange rate; right? 18 There were these two corrections; am I 19 right? 20 A. If you're referring to the corrections under 21 Decree 034, both corrections come from the Reports 22 provided by Mr. Carlos Lapuerta and Professor
[Page 993]
1 Seminario. 2 Q. Okay. Now, I don't know if you are aware of 3 this: Are you aware of Professor Edwards' Report in 4 this Arbitration? 5 A. No, sir. 6 Q. Okay. Are you aware that--well, then you 7 wouldn't be aware, but let me point out to you that 8 what he has indicated is that there were six--he came 9 up with six different potential interpretations of 10 these clarifications, with value for Gramercy's Bonds 11 implied by them of between USD 5.5 million to as much 12 as USD 2.6 billion. 13 Were you aware that he had calculated this 14 enormous range of potential value deriving from those 15 clarifications? 16 A. I am not aware of that document that you are 17 referring to, and I am not aware of the estimates. 18 Q. Okay. So, as far as you know from looking 19 at the official file, as I understand it, that 20 nobody--there are no other technical or economic 21 analyses about the implications-- 22 PRESIDENT FERNÁNDEZ ARMESTO: Mr. Friedman,
[Page 994]
1 it is the third time you asked the question. 2 MR. FRIEDMAN: Oh, okay. 3 PRESIDENT FERNÁNDEZ ARMESTO: I'm sorry for 4 that. It is just in the interest of time. I mean, 5 there isn't. 6 BY MR. FRIEDMAN: 7 Q. After this Supreme Decree, am I right that 8 Gramercy wrote several times to Perú seeking 9 clarification of what this February 2017 Supreme 10 Decree meant? 11 A. I have not reviewed those documents, and I 12 am not in a position to make a comment on that. 13 Q. Okay. Let me show you just one of them. 14 And if you have no comment on it, that's fine. 15 It is Tab 211 in the binders, which is in 16 Volume 5, and it is Document R-161. This is a 17 document dated March 8, 2017 from Gustavo Ferrero at 18 Gramercy to Ricardo Ampuero at the Ministry of 19 Economy and Finance with respect to Supreme Decree 20 Number 034. 21 PRESIDENT FERNÁNDEZ ARMESTO: Have you seen 22 this document, Vice Minister?
[Page 995]
1 THE WITNESS: No. This is the first time I 2 see it. 3 PRESIDENT FERNÁNDEZ ARMESTO: She has not 4 seen the letter? 5 MR. FRIEDMAN: Yeah. 6 PRESIDENT FERNÁNDEZ ARMESTO: I think--do 7 you want her to read the whole letter? 8 MR. FRIEDMAN: No, no. I mean, I didn't 9 know whether she had seen it or not prior to today. 10 It is part of the record in the case. So, if she 11 hasn't seen the letter-- 12 BY MR. FRIEDMAN: 13 Q. So, were you--you then said that you were 14 not aware of letters like this from Gramercy seeking 15 clarification of simply what the Ministry had 16 intended by its clarifications; correct? 17 A. No, I have not seen this letter, and I have 18 not seen other letters that you may have referred to 19 in connection with the formula. 20 Q. Okay. So, I assume you can also not tell 21 us, then, why the Ministry never responded to these 22 requests for clarification; is that right?
[Page 996]
1 A. Yes, indeed. I do not know. 2 MR. HAMILTON: Point of order. 3 MR. FRIEDMAN: Yes? 4 MR. HAMILTON: It is factually inaccurate. 5 PRESIDENT FERNÁNDEZ ARMESTO: Sorry? 6 MR. FRIEDMAN: What is? 7 PRESIDENT FERNÁNDEZ ARMESTO: What is 8 factually inaccurate? 9 MR. HAMILTON: The allegation that there was 10 never a response to Gramercy' letter submitted in 11 this Arbitration to an official responsible for the 12 dispute. The allegation that there was no response 13 is inaccurate. And this is not addressed to 14 Ms. Sotelo. 15 BY MR. FRIEDMAN: 16 Q. Okay. Let's then--in any event, at this 17 time the Ministry realized that it, again, had a 18 problem with the valuation formulas in the Supreme 19 Decrees; correct? 20 A. I do not understand when you're referring 21 to. 22 Q. In the middle of 2017; is that right?
[Page 997]
1 A. I understand that, throughout those months 2 in 2017, there were opinions as to the interpretation 3 and how the data could be collected, the data that 4 was included in the formula of Decree 034, and then 5 Decree 242 was issued to specify the origin of some 6 figures, in particular the Central Bank of the 7 Reserve--that is the entity that executes the 8 monetary policy in the country--and also, to avoid 9 interpretations, they also specified that those will 10 be data issued by the Central Bank of the Reserve. 11 Q. Okay. Now, obviously the Ministry issued 12 another Supreme Decree in August 2017, which again 13 changed the valuation formula; correct? 14 A. A new Supreme Decree was issued to specify 15 some of the aspects in the formula and to avoid 16 interpretations as to sources of information and 17 where several of those variables came from. 18 Q. Right. And so, the Ministry recognized that 19 the February 2017 Decree could be subject to many 20 different interpretations; correct? 21 A. What I'm telling you is that Supreme 22 Decree 242 was issued to improve, and if that means
[Page 998]
1 to acknowledge or recognize that there are no 2 misinterpretations, yes, so as to avoid various 3 interpretations and so that only one interpretation 4 is the one used to process the data. 5 Q. And in that August 2017 Decree, one of the 6 changes that the Ministry made was to change the 7 Parity--the calculation of the Parity Exchange Rate 8 and, essentially, abandon the method of calculating 9 that that Professor Seminario had proposed; correct? 10 A. Yes. They used the methodology that is used 11 by the Central Bank of the Reserve--that is to say, 12 by indicating that the Parity Exchange Rate will be 13 the one used--will be the one issued by the Central 14 Bank. Then they are adopting the issuing of the 15 issuing entity in Perú. 16 PRESIDENT FERNÁNDEZ ARMESTO: I apologize 17 for my ignorance, Madam Vice Minister, but the 18 Central Bank is called the Central Bank of Reserve of 19 Perú, so that is, I understand, an official bank, the 20 central--the official Central Bank of Perú; correct? 21 THE WITNESS: Yes. 22 PRESIDENT FERNÁNDEZ ARMESTO: And that is
[Page 999]
1 the one that issues the rate; correct? 2 THE WITNESS: Yes. 3 PRESIDENT FERNÁNDEZ ARMESTO: So, this 4 Central Bank, does it publish or does it historically 5 publish an official exchange rate and a Parity 6 Exchange Rate? And if I go onto their website, do I 7 see Parity Exchange Rates that are historical? 8 THE WITNESS: I cannot speak about this. I 9 have not personally seen their website, but they do 10 officially publish this. 11 PRESIDENT FERNÁNDEZ ARMESTO: So, you are 12 talking about the Parity Exchange Rate, not the 13 official one? 14 THE WITNESS: Yes, I am talking about the 15 Parity Exchange Rate. 16 PRESIDENT FERNÁNDEZ ARMESTO: So, there is 17 an Official Exchange Rate and there is also an 18 official Parity Exchange Rate. 19 THE WITNESS: There is an exchange rate, 20 Parity Exchange Rate, that is published by the 21 Central Bank of the Reserve. 22 MR. FRIEDMAN: We will go to that in more
[Page 1000]
1 detail in just a few minutes, Mr. President. 2 PRESIDENT FERNÁNDEZ ARMESTO: Thank you very 3 much. Sorry for that. I was just curious. 4 BY MR. FRIEDMAN: 5 Q. Now, Vice Minister Sotelo, in your Witness 6 Statement, you provide what you say are the 7 supporting documents for each of the Supreme Decrees 8 including the August 2017 Supreme Decree; correct? 9 A. Yes, sir. 10 Q. Okay. And if you turn to Tab 162 of your 11 binder, which is document R-359, this is what you 12 describe as being the support for the August 2017 13 Supreme Decree; correct? 14 A. Yes, sir. 15 Q. And this is what you present as the--what 16 you call "extensive documentation regarding the legal 17 and technical support for the Supreme Decree"; 18 correct? 19 A. These are the documents supporting the 20 Supreme Decree issuance based on the procedures 21 usually implemented by MEF when dealing with the 22 Council of Ministers--to present this to the Council
[Page 1001]
1 of Ministers. 2 Q. I see. One of these five documents is 3 obviously the Supreme Decree itself, so that's not a 4 technical analysis supporting the new Supreme Decree; 5 correct? 6 PRESIDENT FERNÁNDEZ ARMESTO: I mean, there 7 are--it says what it says. There are two 8 informes--there are two reports, a statement of 9 reasons, and an aide-memoire. 10 THE WITNESS: Let me clarify something, 11 Mr. President. 12 PRESIDENT FERNÁNDEZ ARMESTO: Please, go 13 ahead. 14 THE WITNESS: When one reviews a file based 15 on past facts, we see the Supreme Decree that was 16 issued based on the documents that have supported 17 this approval process. So, when I attach to my 18 statement this, I am sending the two Reports that, 19 during the approval process, supported this and also 20 the Supreme Decree that was the end result of that 21 step, and that's the reason why it is one of the five 22 documents.
[Page 1002]
1 ARBITRATOR DRYMER: I don't believe any 2 criticism was intended in that regard. That document 3 should be included in this index, unless I'm wrong. 4 BY MR. FRIEDMAN: 5 Q. No. But I'm trying to get in to the 6 analysis behind it, and so why don't we look at one 7 of the documents that is referenced on there, which 8 is the Statement of Reasons. And you can find that 9 in your bundle at Tab 160, R-684. 10 And in the middle of this page, there is, 11 again, a cost-benefit analysis. And you would agree 12 with me that it's very similar and maybe even 13 identical to the cost-benefit analyses of the prior 14 Supreme Decrees on this subject; right? 15 A. In--where it indicates under the reasons 16 that there is no additional cost, clearly it is the 17 same argument that is used in the previous Supreme 18 Decrees. 19 Q. So, again, still no calculations or economic 20 analyses by the Ministry with respect to the Agrarian 21 Reform Bonds debt; correct? 22 A. As I just mentioned a couple minutes before,
[Page 1003]
1 no simulation can be implemented since we were 2 unaware of the number of Bonds, the type, the 3 expiration, when they were redeemed, when they were 4 no longer redeemed, and since this is a proceeding, 5 we needed to be--we needed to speed up the approval 6 of this. 7 Q. All right. Okay. So, no publication of any 8 data or figures because no simulations had been 9 conducted by the Ministry at that time? 10 PRESIDENT FERNÁNDEZ ARMESTO: Yes. Yes. 11 Mr. Friedman, yes. 12 MR. FRIEDMAN: Perfect. 13 BY MR. FRIEDMAN: 14 Q. Then, if we look up above at the Statement 15 of Reasons, it says: "On another note, given the 16 development of update methodology"--is the fourth 17 paragraph--"on another note, given the development of 18 the update methodology established in Annex 1 of the 19 Regulation"-- 20 PRESIDENT FERNÁNDEZ ARMESTO: Let's not read 21 it into the record. 22 MR. FRIEDMAN: Okay.
[Page 1004]
1 PRESIDENT FERNÁNDEZ ARMESTO: Vice Minister, 2 please read Statement of Reasons, Paragraph 4 and 5 3 to you, and then the counsel will be asking you 4 questions. 5 BY MR. FRIEDMAN: 6 Q. Okay. And so, what we see there is that it 7 "has been deemed pertinent to specify the source from 8 which this data is obtained as the Central Reserve 9 Bank." 10 Do you see that? 11 A. Yes, indeed. 12 Q. So, in these records that we have here, can 13 we find any analysis of why the Ministry was changing 14 the Valuation Approach of the Parity Exchange Rate 15 and abandoning Professor Seminario and, instead, 16 moving to the Central Bank? 17 A. What is--the Technical Reports indicate to 18 resort to an official source that presents the data 19 to avoid interpretations in its implementation. 20 Q. Okay. If we turn to the next tab, which is 21 161, there is also an aide-memoire, and this is 22 document R-685.
[Page 1005]
1 This is also, obviously, part of the 2 supporting file for the August 2017 Supreme Decree 3 and in Item 5, it says: "It has been considered 4 appropriate to make clarifications in the updating 5 methodology." 6 And the second bullet point says: "The 7 Parity Exchange Rate shall be obtained from the 8 Central Bank instead of that calculated by the MEF." 9 And so, that was the Decision at that time, 10 to support the August 2017 Decree; right? 11 A. It is stated there, it is to resort to an 12 official source such as the Central Reserve Bank. 13 Q. Okay. Now, I'd like, if I could, to turn to 14 the communications with the Central Bank regarding 15 that. Can you please turn to Tab 213, in your 16 bundle, which is document R-1072. And there's a 17 particular page number in there, file name. 18 I'm looking at the file, ROP034625. 19 PRESIDENT FERNÁNDEZ ARMESTO: Wait. I don't 20 have it. Okay. 21 (Comments off microphone.) 22 MR. FRIEDMAN: Do you have it,
[Page 1006]
1 Mr. President? 2 I'm going to be turning to Page ROP034610. 3 I need to start at a different page. Forgive me. 4 Yes, I need to start at Page ROP034625, 625. 5 Vice Minister, there are small numbers. I'm 6 just trying to help her navigate in the book. There 7 are small numbers down at the bottom right-hand 8 corner of the pages. Okay. 9 Can we provide you with a hard copy? Oh, on 10 the screen. 11 BY MR. FRIEDMAN: 12 Q. Okay. So--so, the document is R-1072. This 13 is the PDF folder name-- 14 MR. HAMILTON: Excuse me, could I get a copy 15 of what was handed to the President? 16 MR. FRIEDMAN: It's in your binder. 17 PRESIDENT FERNÁNDEZ ARMESTO: I will just 18 follow you here. 19 MR. FRIEDMAN: So, Mr. President-- 20 PRESIDENT FERNÁNDEZ ARMESTO: We have some 21 problems in getting the right page. In the-- 22 ARBITRATOR DRYMER: We both seem not to have
[Page 1007]
1 it among the list of separate PDFs in the-- 2 MR. FRIEDMAN: It may help that there are, 3 within our 1072, there are file names. The file 4 names sound similar to the page names. The file 5 name, in which you will find this document, is 6 ROP034625. 7 ARBITRATOR DRYMER: Yeah, we don't have it. 8 ARBITRATOR STERN: We have 46--we have 4649 9 and we have 4674, but nothing in between. 10 MR. FRIEDMAN: Oh, forgive me. 11 ARBITRATOR STERN: We're missing inside the 12 document. 13 MR. FRIEDMAN: 34572 is the file name. 14 PRESIDENT FERNÁNDEZ ARMESTO: 572. 15 MR. FRIEDMAN: And then once you are in 16 that, we are looking for Page 34625. 17 ARBITRATOR DRYMER: Thank you, sir. 18 ARBITRATOR STERN: That's not what is here. 19 (Comments off microphone.) 20 PRESIDENT FERNÁNDEZ ARMESTO: Very good. 21 What is this whole file? 22 ARBITRATOR DRYMER: And thank you for your
[Page 1008]
1 patience, Madam Vice Minister. 2 MR. FRIEDMAN: Yes, Perú submitted, as an 3 exhibit, its entire production of documents. 4 PRESIDENT FERNÁNDEZ ARMESTO: Okay. 5 BY MR. FRIEDMAN: 6 Q. Okay. So, this is a letter from Minister of 7 Economy and Finance, Alfredo Thorne, to the President 8 of the Central Bank dated June 2, 2017. And in it, 9 in the first paragraph, Minister Thorne requests that 10 the Central Bank publish a data series of Parity 11 Exchange Rate for the period starting in 1969. 12 Do you see that? 13 A. Yes, that's what it says in the letter. 14 Q. Okay. So, the Ministry requested the bank 15 to publish a Parity Exchange Rate. 16 Am I right that prior to that time, the 17 Bank--the Central Bank had not published any kind of 18 Parity Exchange Rate? 19 A. That I don't know. I don't know whether 20 they had or had not done that before. 21 Q. Okay. The Central Bank then wrote back, 22 which you can find if you scroll up a little in this
[Page 1009]
1 same file to Page ROP034610. And this the 16th of 2 June 2017 response. 3 And on the second page, they present data 4 series. In Item 1, including in D, the real exchange 5 rate indexed to 1969. And then further down they 6 calculate the--they provide some--they don't have as 7 a data series a Parity Exchange Rate. 8 Are you familiar with parity exchange rates, 9 or is that not part of your expertise? 10 A. No, it's not part of my expertise. 11 Q. All right. In Item 2, they say: "To 12 calculate the Parity Exchange Rate, it is subject to 13 the base period chosen"; correct? 14 A. That is what this sheet of paper from the 15 Central Bank says. 16 Q. All right. And we saw in the letter from 17 Minister Thorne that the Ministry had specified 1969 18 as the anchor year for the Parity Exchange Rate. So, 19 that was a decision by the Ministry, not by the 20 Central Bank; correct? 21 A. It is what the letter indicates. 22 Q. And from your review of the files supporting
[Page 1010]
1 this Decree, am I right that we won't find any 2 discussion of why 1969 is the right year to anchor a 3 Parity Exchange Rate, even though there just been a 4 coup shortly before that and the exchange rate with 5 the U.S. dollar was fixed at the time and there had 6 already been inflationary pressure in Perú, why you 7 would anchor a Parity Exchange Rate to a single month 8 in 1969. There is just no description or analysis of 9 the thinking behind that decision in any of materials 10 you reviewed about this Supreme Decree, August 2017; 11 correct? 12 A. It is not in the record for the process of 13 adopting Supreme Decree 242. I do not know whether 14 there is an analysis about why they set the index for 15 the real exchange rate of November of 1969. I can 16 assume that they are referring to the year in which 17 the Agrarian Reform Bonds were issued, but it's just 18 what occurs to me. I don't actually have personal 19 knowledge of that. 20 Q. Okay. And, of course, you already described 21 that you don't--well, that's fine. 22 On the next page in the document, the
[Page 1011]
1 Central Bank provides the statistical series for what 2 they call the real exchange rate between Peruvian 3 sole and U.S. dollar. 4 And this is the data, am I right, that you 5 could find on the Central Bank's website, that is a 6 publication--even today, a publication of a series of 7 data for what is called the real exchange rate from 8 1950 to 2017, but the Central Bank's website does not 9 publish anything called a Parity Exchange Rate; is 10 that correct? 11 A. I do not know, sir. 12 Q. Okay. And am I right that in the 13 August 2017 Supreme Decree makes use of this data 14 series that the Central Bank presented in calculating 15 the Parity Exchange Rate for the Land Reform Bonds? 16 A. What it uses is the formula which is in the 17 methodological note from the Central Bank, not the 18 data. The formula. 19 Q. Well, the formula says that you would use 20 the data series as part of it. Right? So, if you 21 look at the formula in the middle of the prior page, 22 it says: "This ITCRB is this real bilateral exchange
[Page 1012]
1 rate," which is what this data series is; right? 2 PRESIDENT FERNÁNDEZ ARMESTO: You must 3 repeat it. 4 BY MR. FRIEDMAN: 5 Q. Yes. I mean, the formula incorporates this 6 very information, doesn't it? 7 PRESIDENT FERNÁNDEZ ARMESTO: Yeah. 8 THE WITNESS: That is the formula that the 9 Central Bank states as the base of the calculation, 10 and this is the formula that they use in Supreme 11 Decree 242. 12 BY MR. FRIEDMAN: 13 Q. Yes. And that formula relies on, as one of 14 its inputs, this data series about the--what's called 15 the real exchange rate; right? 16 A. I don't have personal knowledge of that. 17 Q. Okay. But if you'll bear with me on the 18 data table itself, the third column is IPC Lima 19 Metropolitana. 20 PRESIDENT FERNÁNDEZ ARMESTO: Yes. 21 BY MR. FRIEDMAN: 22 Q. So, that is Metropolitan Lima CPI; correct?
[Page 1013]
1 A. That is what the table says. 2 Q. And isn't it true then that Supreme Decrees 3 from August 2017 continue to use the Peruvian CPI as 4 part of the updating methodology? 5 A. What Supreme Decree 242 of August 2017 uses 6 is the formula that is in the methodological note 7 presented by the Central Bank. Now, if that formula 8 includes those variables, well, I can't question 9 that. But that is what is in the formula. 10 Q. Is it the Ministry's position that during 11 periods of hyperinflation, the consumer-- 12 PRESIDENT FERNÁNDEZ ARMESTO: Let's 13 get--well, let's see. The formula says: "Parity 14 Exchange Rate of January '69," and then it uses a 15 data series, the most important one is the ITCRB base 16 1969. It seems that this is the same that appears in 17 the historical series. The historical series ends at 18 something that they call Index of Real Exchange Rate, 19 TUA. 20 It seems that that's the same that appears 21 here; correct? 22 THE WITNESS: It appears that it is that
[Page 1014]
1 index. 2 PRESIDENT FERNÁNDEZ ARMESTO: And the TCN is 3 the nominal exchange rate, sale of Peruvian currency 4 with the dollar. So, that appears to be the real 5 exchange rate, and the one below appears to be the 6 one taking into account the differences in inflation 7 as between the two countries. 8 ITCRB was in the methodological note from 9 the Central Bank in terms of how that formula is. 10 PRESIDENT FERNÁNDEZ ARMESTO: Correct. And 11 it is calculated for each month in the series. 12 THE WITNESS: In the series, yes. 13 PRESIDENT FERNÁNDEZ ARMESTO: So, if I want 14 to apply the formula, I understand that what I need 15 to do for any month is take the TCNT, which is one at 16 the end, which is the average exchange rate per sale, 17 and I divide it by the column to the right, which is 18 the index of the bilateral exchange rate. 19 Is that it? The thing is, I'm really 20 getting lost. 21 THE WITNESS: Well, that is mathematics. 22 And one would have to test the numbers. I have not
[Page 1015]
1 engaged in this exercise. 2 PRESIDENT FERNÁNDEZ ARMESTO: Well, then we 3 will ask Mr. Kaczmarek and Professor Edwards to 4 explain it to us. 5 THE WITNESS: Yes. 6 BY MR. FRIEDMAN: 7 Q. Yes. If you turn to tab briefly--we are 8 going to stick with this document, but can you turn 9 briefly to Tab 189, which is R-381. Maybe we can 10 just put on the screen-- 11 PRESIDENT FERNÁNDEZ ARMESTO: Yeah, put it 12 on the screen for now. 13 BY MR. FRIEDMAN: 14 Q. --for now? You don't need to flip--keep 15 your screens at this document. But this is from a 16 page that you produced along with your Witness 17 Statement from the Ministry of Economy and Finance's 18 website describing how Bondholders are supposed to 19 understand the method for realizing, actualizing, the 20 Bonds and the variables that go into it. And the 21 third of them is this real bilateral exchange rate 22 with the link to the Central Bank.
[Page 1016]
1 Have you ever looked at that link? Have you 2 ever actually gone on and clicked through and looked 3 at that link? 4 A. No. 5 Q. Would it surprise you to learn that it was 6 exactly the same data series that we see in the 7 document that is in front of us? 8 A. Probably, but I have not gone into the 9 database. 10 Q. Okay. And I trust you have not. 11 So, the question I wanted to ask was a more 12 general one because it was important in a lot of the 13 thinking that had gone on for years, including in 14 Mr. Seminario's Report. And that is does the 15 Ministry believe that during periods of 16 hyperinflation, the Consumer Price Index becomes 17 disconnected from economic reality? 18 A. At this stage, now that the Constitutional 19 Tribunal has issued a ruling, what the Ministry 20 believes is no longer relevant. The Constitutional 21 Court itself indicates that using the CPI, including 22 the adjusted CPI, is not in keeping with the reality
[Page 1017]
1 during times of hyperinflation. 2 Q. And that was the Ministry's position for 3 many years; correct? 4 A. As I say, at this point, having heard and 5 read the position of the Constitutional Tribunal, the 6 position of the Ministry of Economy and Finances is 7 no longer relevant. 8 Q. But we saw back in that Commission created 9 under Emergency Decree 148, back in the early 2000s, 10 the proposal that came out of that Commission was for 11 an adjusted CPI to correct for this supposed 12 imbalance; correct? 13 A. And the Constitutional Tribunal in 2013 14 indicates that the adjusted CPI--well, that, its 15 application is not correct in times of 16 hyperinflation. 17 Q. Right. And so, the Ministry though--my 18 point is that the Ministry of Economy and Finance has 19 been making this point for many years about CPI, that 20 it becomes disconnected during times of 21 hyperinflation; correct? 22 A. Let me reiterate. At this stage of reality,
[Page 1018]
1 as an Administrative Procedure on the basis of what 2 the Constitutional Tribunal has ruled, the position 3 of Ministry of Economy and Finances is not relevant. 4 Q. Okay. 5 PRESIDENT FERNÁNDEZ ARMESTO: But go on to 6 the next question, which I know is coming. 7 BY MR. FRIEDMAN: 8 Q. Now, my question to you is, did the 9 Ministry--did the Ministry at the time of 10 promulgating any of these Supreme Decrees or of 11 making any potential submissions to the 12 Constitutional Tribunal or in any of its analyses 13 actually consider the way that CPI updating is used 14 and the fact that, if done correctly, you don't use 15 CPI data from the period of hyperinflation? 16 A. Your question was so long, I didn't really 17 understand it. 18 PRESIDENT FERNÁNDEZ ARMESTO: It was a bit 19 long, and with the interpretation, it becomes 20 impossible. 21 MR. FRIEDMAN: I understand. May I break 22 that down?
[Page 1019]
1 PRESIDENT FERNÁNDEZ ARMESTO: Let's go here 2 and look here. 3 MR. FRIEDMAN: May I break that down? 4 BY MR. FRIEDMAN: 5 Q. So, in this case, we have a report from 6 Professor Edwards, that I know you don't have the 7 benefit of, but one of the points that he makes in 8 his Report about CPI updating is that when you update 9 just using the CPI, you take CPI data from the period 10 of original Bond issuance, so back prior to any 11 hyperinflation, and then you take CPI data from well 12 after the fact, from the time of updating, and so you 13 skip over any CPI data from the time of 14 hyperinflation. 15 I'm just wondering whether anybody at the 16 Ministry ever considered that aspect of CPI updating? 17 MR. JIJÓN: Mr. President, first of all, it 18 continues to be a very complicated question. 19 Second, we've allowed this to go on for a 20 long time, far afield from the scope of her 21 statement. 22 Third, the Witness has made it very clear
[Page 1020]
1 that she has not reviewed Professor Edwards' Report. 2 PRESIDENT FERNÁNDEZ ARMESTO: I don't know 3 if she can--she's here as a fact witness. This is 4 really something for Mr. Kaczmarek, to ask him. 5 MR. FRIEDMAN: No, no. That was a factual 6 question about--my question was literally about 7 whether the economists at the Ministry of Economy and 8 Finance had ever actually studied that issue, about 9 the proper way of conducting CPI update. 10 MR. JIJÓN: We would ask that Mr. Friedman 11 please indicate where in Ms. Sotelo's Statement there 12 is any reference to this matter? 13 MR. FRIEDMAN: She has offered, as the 14 Witness, describing the basis for the August 2017 15 Supreme Decree, and it's still using-- 16 PRESIDENT FERNÁNDEZ ARMESTO: Why don't you 17 go to the next question? I'm not sure that the 18 question is really relevant. If we see that it is 19 relevant, we'll come back. But I don't know where 20 you are going to. All right. I thought I knew where 21 you were going to, but now I'm confused. 22 BY MR. FRIEDMAN:
[Page 1021]
1 Q. Did the Ministry, at the time of publishing 2 the August 2017 Supreme Decree, consider what effect 3 incorporating Peruvian CPI would have in its updating 4 formula? 5 PRESIDENT FERNÁNDEZ ARMESTO: I mean--are 6 you going to the following point, which let me put a 7 question to the Witness which comes--excuse me. 8 Question: We've seen here that the calculation of 9 parity, of the Parity Exchange Rate does take into 10 account the series of CPI, CPI Lima. 11 THE WITNESS: Yes, it is included in the 12 formula. 13 PRESIDENT FERNÁNDEZ ARMESTO: And so, the 14 question--I think the question that the--that counsel 15 wants to ask you is the following: Aren't we letting 16 the devil in through the backdoor? In other words, 17 you say we don't want to have a revaluation applying 18 CPI, but when we look at Exchange Rate, the Parity 19 Exchange Rate with--using this methodology, then 20 we're incorporating Metropolitan Lima CPI, which is 21 precisely the CPI which in times of hyperinflation 22 would not or should not give a fair result.
[Page 1022]
1 THE WITNESS: This would imply a discussion 2 involving much more mathematical knowledge. The only 3 thing I can tell you is that, yes, it includes the 4 CPI, but precisely the parity CPI, this does the 5 relevant cleaning up when comparing with the Exchange 6 Rate--the CPI currency with which it's being 7 compared. That's why it's called "parity CPI." 8 Beyond what is described in the formula, the 9 Constitutional Court itself, I reiterate, we base 10 ourselves on what the Constitutional Tribunal says. 11 And it says just apply the Exchange Rate CPI Perú 12 with no adjustment, with no mathematical cleaning up. 13 That is what the Constitutional Tribunal 14 itself has said would be the best way for updating 15 the Agrarian Reform Bonds. But if the Tribunal 16 itself, it does say that the Parity Exchange Rate 17 must be used. 18 BY MR. FRIEDMAN: 19 Q. And the updating process, according to the 20 Supreme Decree for clipped coupon Bonds, updates from 21 the time of the last coupon; right? 22 A. That is what the administrative procedure
[Page 1023]
1 indicates. 2 Q. And there were people who stopped--there 3 were obviously some number of people who stopped 4 redeeming their coupons during the periods of bad 5 inflation; correct? 6 A. That I don't know. I know that not all of 7 them have redeemed, in part, but they have in part at 8 what time they stopped doing, so that I don't know. 9 I have not conducted such a detailed research, and 10 that's not up to me of each Bond. 11 Q. Okay. So, I understand not of each Bond, 12 but I mean, it's certainly in general, am I right, 13 that there are many, many Bonds where coupons had 14 been clipped? 15 PRESIDENT FERNÁNDEZ ARMESTO: I mean, you 16 could not collect without clipping a coupon. 17 MR. FRIEDMAN: Exactly. There are some that 18 are totally unclipped-- 19 PRESIDENT FERNÁNDEZ ARMESTO: Because they 20 never went for the first clipping. 21 MR. FRIEDMAN: Exactly. 22 PRESIDENT FERNÁNDEZ ARMESTO: Most of them
[Page 1024]
1 seem to be clipped to some extent or another. 2 MR. FRIEDMAN: Exactly. 3 PRESIDENT FERNÁNDEZ ARMESTO: But she 4 doesn't know, I don't think she really can help us. 5 BY MR. FRIEDMAN: 6 Q. Okay. So, am I right that the Ministry 7 has--to the best of your knowledge, the Ministry has 8 made no analysis of the impact of using CPI in this 9 way, that it is now using it, has on value for 10 clipped coupon Bonds during periods of 11 hyperinflation? 12 A. I cannot say yes or no. I've--don't know. 13 I've not done the analysis. What I present in my 14 statement is the procedure for approving the legal 15 provisions that govern the procedure, and in the 16 current situation as of the time of my Statement 17 about the payment procedure. 18 Q. I understand. If you could turn with me now 19 a few pages later in the same electronic file that 20 we're looking at, to page--on the bottom, it is 74 21 of 77 in the PDF, but at the bottom right of Page, it 22 is ROP034645.
[Page 1025]
1 ARBITRATOR DRYMER: 74 of 77 is easier here 2 at this end. 3 MR. FRIEDMAN: Yeah. 4 ARBITRATOR DRYMER: Thank you. 5 MR. FRIEDMAN: Which one? 6 ARBITRATOR DRYMER: 74 of 77. 7 PRESIDENT FERNÁNDEZ ARMESTO: Okay. 8 THE WITNESS: Could you explain? 9 BY MR. FRIEDMAN: 10 Q. We're in the same tab. 11 (Comments off microphone.) 12 Q. Forgive me. This is Tab 205--213, sorry, 13 Tab 213. And the page, once you're there, it's 14 towards the--it's four pages from the end in the 15 physical book. And it's ROP034645. Exactly. 16 So, this is an analysis, as far as we can 17 tell, comparing the February Supreme Decree-- 18 PRESIDENT FERNÁNDEZ ARMESTO: So, let's get 19 this clear. This is a document which was disclosed 20 by the Republic of Perú. 21 MR. FRIEDMAN: Correct. 22 PRESIDENT FERNÁNDEZ ARMESTO: Okay.
[Page 1026]
1 MR. FRIEDMAN: It's part of the same file, 2 electronic file. 3 PRESIDENT FERNÁNDEZ ARMESTO: Okay. 4 MR. FRIEDMAN: With the other documents 5 we've been looking at. So-- 6 PRESIDENT FERNÁNDEZ ARMESTO: Fine. Let's 7 ask first the Minister, this is a document that has 8 been produced by the Republic of Perú in the document 9 disclosure process in this Arbitration, so it is a 10 document that comes from the Republic of Perú. 11 So, first question, have you ever seen this 12 document or this type of document? 13 THE WITNESS: It's not anything that I 14 Annexed to my Statement. 15 PRESIDENT FERNÁNDEZ ARMESTO: So, you are 16 not familiar with it? 17 THE WITNESS: No, I've not reviewed it 18 before. 19 PRESIDENT FERNÁNDEZ ARMESTO: Fine. Then 20 let's see if you can help us out, and if you see that 21 you can't, well, you will tell us. 22 Please, what is the question?
[Page 1027]
1 MR. FRIEDMAN: Yes. 2 BY MR. FRIEDMAN: 3 Q. So, this document appears to compare 4 updating methods and results under Supreme Decree 5 from February 2017 to what it says is TUA, July 2017, 6 and TUA, we've heard reference to, is the 7 unified--the collected Supreme Decree-- 8 PRESIDENT FERNÁNDEZ ARMESTO: "Unificado." 9 MR. FRIEDMAN: The "unificado" that was 10 published in--eventually published the next month in 11 August 2017; correct? In any event, we see in the 12 second cell that there's an estimate of total debt. 13 Do you see that? 14 And there's a figure here of 8,461 billion 15 soles de oro. Now, my question to you is, is that 16 the number that the MEF has been using internally 17 about the total outstanding face value in soles de 18 oro of the Agrarian Reform Land Bonds? 19 A. I believe that I indicated in response to 20 previous questions that the official figure is what 21 is kept in the accounting, and the accounting shows 1 22 cent of a sole. This detail, of course, has been
[Page 1028]
1 worked on in the office, but I am not familiar with 2 it. 3 PRESIDENT FERNÁNDEZ ARMESTO: Significantly 4 more than what was calculated, based on the Report of 5 the Commission. This gives us about twice as much. 6 THE WITNESS: Yes. 7 BY MR. FRIEDMAN: 8 Q. More than three times. This is 2.5 billion 9 and this is 5 billion. 10 So, to the best-- 11 A. But, once again, they are talking about 12 assumptions. One has to know where have they 13 estimated what is the assumption, what is the 14 calculation. That is why engaging in an exercise on 15 assumptions, if it's not clarified, what estimates 16 are being made, well, for me the only thing that is 17 tangible and real is what is reflected in the 18 accounting, and the accounting reflects 1 cent of a 19 sole. 20 Q. So, to the right of that, those soles, we 21 see the value of the total debt under the 22 February 2017 Decree and under the TUA, and we see a
[Page 1029]
1 lower value for the TUA. 2 Do you see that? It was 911 million new 3 soles, and it's now 817 new soles. 4 Do you see that? 5 A. That's what it says on the table. 6 Q. Okay. And if we look to the right side, we 7 see the variations that have been calculated, and we 8 see a net reduction in value of about 10 percent, 9 which has two pieces: A 32 percent reduction because 10 of the change in the Parity Exchange Rate, and a 11 22 percent increase from changing the actualization 12 date from 2013 to the time of payment; correct? 13 A. I cannot tell you whether this is correct or 14 not. I'm looking at the figures, and that's what it 15 says there. 16 Q. Well, so--and the correction, the second 17 correction, which was about the updating date, that 18 is that the updating would run not until 2013 but 19 until the end of the period when people were to be 20 paid. That just made sense to do; right? Because 21 2013 was an arbitrary date; right? 22 A. Arbitrary for what? I don't understand.
[Page 1030]
1 Q. Wasn't this the kind of economic analysis 2 about the change in method that really should be 3 disclosed in a cost-benefit analysis section of a 4 Supreme Decree showing the--there were studies about 5 the economic impact; correct? 6 A. I don't have knowledge of this document, and 7 to the extent that this document doesn't have a 8 signature or an authorization, and I don't know what 9 the assumptions are included here, I cannot make any 10 additional comment in this regard. There are too 11 many assumptions that, for starters, are very 12 different from the other chart that the President had 13 put to us before. 14 PRESIDENT FERNÁNDEZ ARMESTO: It 15 appears--and we don't know. We're going to have to 16 see the source of this document, who prepared it and 17 who took responsibility for it. But it appears to 18 say that there are 8 billion historical soles oro. 19 This, under the methodology of 2013 or '14, well, the 20 State has to pay 910 million soles, and under 2017 21 less, 816 million soles. Is that your understanding 22 or am I completely lost here?
[Page 1031]
1 THE WITNESS: This is what the chart appears 2 to say. 3 PRESIDENT FERNÁNDEZ ARMESTO: Okay. 4 116 million nuevo soles, 2 dollars, what's the 5 exchange rate? 6 THE WITNESS: 3.4, approximately. 7 PRESIDENT FERNÁNDEZ ARMESTO: So 8 $300 million? 9 THE WITNESS: Yes, around that, sir. 10 MR. FRIEDMAN: We calculated it at, by 2017, 11 USD 250 million. 12 PRESIDENT FERNÁNDEZ ARMESTO: Okay. 13 BY MR. FRIEDMAN: 14 Q. But if we go to the next cell down, it's the 15 estimate of the debt presented in the Bondholder 16 process. And it says "BN 316 cases." So, this is 17 July 2017. I assume that that sounds right to you, 18 that there were about 316 cases already submitted to 19 the Bondholder process at that point; right? 20 A. I have no personal knowledge of that. 21 PRESIDENT FERNÁNDEZ ARMESTO: 322; right? 22 MR. FRIEDMAN: I don't know, sir, what the
[Page 1032]
1 date is. It was July 2017. 2 PRESIDENT FERNÁNDEZ ARMESTO: Ma'am, you 3 provide a number of how many Bonds had been submitted 4 at the beginning, do you remember that? 5 THE WITNESS: What I recall is that early in 6 January this year we had-- 7 PRESIDENT FERNÁNDEZ ARMESTO: Exactly. 8 THE WITNESS: 414 or 440. 9 PRESIDENT FERNÁNDEZ ARMESTO: Okay. 440. 10 So, could that figure match up this date? 11 What is the date of this document? 12 THE WITNESS: 19 June 2017. 13 BY MR. FRIEDMAN: 14 Q. Exactly. Again, we see that for all the 15 cases, the 316 cases at that time in the Bondholder 16 process, the net amounts anticipated to be paid to 17 all those Bondholders declines and becomes 35,614,961 18 Nuevos Soles, which is about USD 11 million; correct? 19 A. That's your calculation. I cannot assert 20 that. I'm not doing the calculations myself 21 directly. 22 Q. Vice Minister Sotelo, who was actually
[Page 1033]
1 responsible for preparing the August 2017 Supreme 2 Decree? 3 A. The DGETP. 4 Q. And that is the same group that is 5 administering the Bondholder process; correct? 6 A. Yes. It's the same general Directorate. 7 Q. Yes. And they are responsible for 8 considering what the fiscal impact is of changes to 9 the Decree, or total amount of payments made to 10 Bondholders; correct? 11 A. It is responsible for implementing the 12 procedure approved, and if there are some that have 13 come to a payment stage, it has to pay the 14 Bondholders that are within this process. 15 Q. Now, am I right that the total face value of 16 soles de oro that has been submitted to the 17 Bondholder process is 205 million soles? 18 A. I don't have that registered as a function 19 of the nominal value of soles oro. I remember about 20 414 cases and 12,000 Bonds. That's the number of 21 Bonds that I remember. I don't have in the Reports 22 what the equivalent was for that amount of Bonds.
[Page 1034]
1 Q. Okay. Maybe I could help you with that. If 2 we turn to Tab 196, which is R-1062. You may 3 recognize this as one of the schedules that you 4 prepared. 5 A. What is your question, sir? 6 Q. There's spreadsheets here, and if you turn 7 to six pages in, there's a column called "Monto Total 8 soles oro." It's the second column from the right. 9 We see down at the bottom the total figure--so, this 10 is the total in soles oro, as I understand it, that 11 the total figure in the process is 220,055,084 soles 12 oro. 13 Do you see that? 14 A. I do. 15 Q. Okay. So, if the estimate that we saw in 16 the prior document, that the total outstanding debt 17 to be updated is 8.461 billion, then am I right that 18 less than 3 percent of outstanding principal has 19 actually been submitted to this Bondholder process? 20 PRESIDENT FERNÁNDEZ ARMESTO: If you do the 21 maths, it is--it looks approximate, but you will have 22 to represent that to the Witness.
[Page 1035]
1 BY MR. FRIEDMAN: 2 Q. Yes. Well, I represent to you that there is 3 that math, that math holds, and subject, of course, 4 to checking. 5 Would it be right to conclude that the 6 Bondholder process has actually attracted only a very 7 small percentage of outstanding Agrarian Reform 8 Bonds? 9 A. It would be important to define first what 10 those 8 billion soles oro are that you're taking as a 11 reference and to get to this percentage. I assume 12 that in that figure you have the Bonds that have not 13 been delivered to the Bondholders, and that they are 14 under the custody of the Banco de la Nación. So, 15 those are never going to come in into the 16 administrative process. 17 PRESIDENT FERNÁNDEZ ARMESTO: Excuse me. I 18 don't know about that. That's the first time that I 19 hear about that. There are Bonds that are deposited 20 in the Banco de la Nación? 21 THE WITNESS: Yes, under the custody of the 22 Banco de la Nación.
[Page 1036]
1 PRESIDENT FERNÁNDEZ ARMESTO: What does that 2 mean, Vice Minister? 3 THE WITNESS: They were never delivered or 4 they were never picked up by the individuals that had 5 those pieces of land. 6 PRESIDENT FERNÁNDEZ ARMESTO: They are 7 nominal; right? 8 THE WITNESS: Yeah. 9 PRESIDENT FERNÁNDEZ ARMESTO: They are all 10 nominal? 11 THE WITNESS: Yes, they are all nominal. 12 PRESIDENT FERNÁNDEZ ARMESTO: Okay. They 13 are all nominal. And some people left those at the 14 bank, and they never picked them up? 15 THE WITNESS: That's right. They never 16 picked them up. 17 PRESIDENT FERNÁNDEZ ARMESTO: So, those 18 8 billion, we have to know what they are, what they 19 comprise. 20 THE WITNESS: They don't ring a bell. 21 PRESIDENT FERNÁNDEZ ARMESTO: Excuse me, you 22 think that the--really think that the Banco de la
[Page 1037]
1 Nación would know how many Bonds it has? 2 THE WITNESS: Yes, I saw something that he 3 showed me that it said Bonds under the custody of the 4 Banco de la Nación, it is more than 1 billion. 5 PRESIDENT FERNÁNDEZ ARMESTO: That is why 6 I'm asking. 7 THE WITNESS: What's inside this 8 figure, 8 billion? If I don't know what the 8 9 billion entails, I cannot do this simple arithmetical 10 calculation. So, when it says here total amount of 11 soles oro, if I understand correctly, it says 12 Format A. 13 This is what we need to authenticate to make 14 sure that--whether it is an original Bond and it's 15 not forged, well, my understanding is that when they 16 go to the Banco de la Nación, the information they 17 take is not the nominal value of the title but the 18 principal of the debt. I don't know if this has to 19 do with the principal of the debt or the nominal 20 value of the coupon that has all the interest. 21 PRESIDENT FERNÁNDEZ ARMESTO: The difference 22 is very small because the interest was based on the
[Page 1038]
1 nominal value. 2 THE WITNESS: So, it is 4, 5 percent is 3 de minimis, really. 4 PRESIDENT FERNÁNDEZ ARMESTO: So, the 5 difference between the principal and the principal 6 plus interest is a very small difference. 7 THE WITNESS: I wouldn't dare say that this 8 is a mathematically correct calculation because I 9 don't know under which this calculation was made and 10 how and what I'm comparing this against. 11 (Overlapping interpretation and speakers.) 12 PRESIDENT FERNÁNDEZ ARMESTO: About the 13 information we have regarding the total amounts--the 14 total amounts which were authorized were 15 billion. 15 That there is a law, but then there is a gross amount 16 which was issued, a net amount which was issued, then 17 there seemed to be some Bonds which are deposited 18 with the Central Bank and then there are various 19 estimates of how many Bonds are outstanding. 20 I think it would be important that we get a 21 better understanding exactly of how many Bonds is the 22 best estimate are still to be paid.
[Page 1039]
1 BY MR. FRIEDMAN: 2 Q. Okay. Has the MEF--Vice Minister Sotelo-- 3 PRESIDENT FERNÁNDEZ ARMESTO: Let me ask you 4 one question. How long do you have to go. We'll get 5 a time check. 6 MR. FRIEDMAN: Yes. 7 PRESIDENT FERNÁNDEZ ARMESTO: First, I will 8 get a time check from the Secretary. 9 SECRETARY PLANELLS-VALERO: Claimants have 10 spent-- 11 (Interruption.) 12 SECRETARY PLANELLS-VALERO: 2 hours and 36 13 minutes. 14 PRESIDENT FERNÁNDEZ ARMESTO: Today or in 15 total? 16 SECRETARY PLANELLS-VALERO: Today, with this 17 cross-examination. 18 PRESIDENT FERNÁNDEZ ARMESTO: Okay. Do you 19 have the-- 20 SECRETARY PLANELLS-VALERO: In total, they 21 have left 12 hours and 44 minutes. 22 MR. FRIEDMAN: Okay. May I propose,
[Page 1040]
1 respectfully, that we break now, and that I will 2 endeavor to cut this down and be no more than 3 probably 10 minutes with Ms. Sotelo when we come 4 back. But it would help to achieve that, if we can 5 break. 6 PRESIDENT FERNÁNDEZ ARMESTO: I'm sure you 7 have quite some redirect for Ms. Sotelo. I have some 8 questions to her. So, I don't think it is possible 9 to do it before lunch. 10 MR. HAMILTON: We're a little unclear how 11 it's possible that we've been going for four hours 12 and only two hours and 36 minutes have been allocated 13 to Claimant. 14 (Comments off microphone.) 15 PRESIDENT FERNÁNDEZ ARMESTO: It is now 16 1:16, so we are going to return at 2:20. Vice 17 Minister, there is food out. 18 (Whereupon, at 1:17 p.m., the Hearing was 19 adjourned until 2:20 p.m., the same day.) 20 21 22
[Page 1041]
1 AFTERNOON SESSION 2 PRESIDENT FERNÁNDEZ ARMESTO: We are going 3 to resume the Hearing. 4 We are going to give the floor to Claimant 5 to continue Claimant's cross-examination. 6 BY MR. FRIEDMAN: 7 Q. Good afternoon. 8 I'd like to ask you now about the progress 9 of the Bondholder Process, and I would like to go to 10 some spreadsheets that you attached to your 11 September 13, 2019 Second Witness Statement, which 12 are in Tab 196 of the binder. They are Document 13 R-1062. 14 It may be easier to follow along on the 15 screen. 16 PRESIDENT FERNÁNDEZ ARMESTO: Okay. 17 MR. FRIEDMAN: I mean, if you have the 18 electronic versions, you can follow along, but it's a 19 spreadsheet with tabs, and so for Vice Minister 20 Sotelo, it may be easier to follow along on the 21 screen. 22 (Comments off microphone.)
[Page 1042]
1 BY MR. FRIEDMAN: 2 Q. I just want to go to Form A. 3 Now, these are spreadsheets that you 4 submitted with your Witness Statement; correct? 5 A. That's right, sir. 6 Q. Okay. And in Form A, Form A represents the 7 Bonds that have essentially been submitted to the 8 process; is that right? 9 A. Yes, indeed. 10 Q. Okay. So, we're now in the Form A tab at 11 the bottom. And I assume this data is current as of 12 August 2019; is that right? 13 A. Yes, indeed. 14 Q. And what we learn from this is that there 15 were a total of 433 cases submitted with 12,902 16 Bonds, with a soles de oro face value of 17 237 billion--I'm sorry, 237 million face value; 18 right? 19 And then, below that, it takes out some. It 20 says 12 cases have been withdrawn; 10 actually are 21 Bonds under a different law, so they are outside of 22 this program, and two cases were duplicates. So, we
[Page 1043]
1 get down to a net number--well, and then there's some 2 more taken out because of that other law, and so we 3 get down to a net number in the process of 11,708 4 Bonds and 220 million face value of soles de oro. 5 Is that how we should understand these 6 figures? 7 A. Yes, indeed. The date, that cutoff date 8 that was--the system, those are the Bonds that had 9 been submitted to the administrative process. 10 Q. Right. And the numbers are not materially 11 different today; right? 12 A. Well, a small number must have been 13 included. Well, Format A has to do with recognizing 14 the legitimacy of the Bond, and I think that is, in 15 general terms, the totality of the ones that have 16 been included in the system. 17 Q. Okay. And then the next tab, "Pericia,' 18 those are the ones for which an Expert Report has 19 been received authenticating Bonds; correct? 20 A. Yes. 21 Q. Okay. And if we go down to the bottom, we 22 see that 11,551 Bonds have been authenticated; is
[Page 1044]
1 that right? 2 A. 11,551 Bonds, yes. 3 Q. And those have been authenticated; correct? 4 A. Yes. 5 Q. Okay. When I do the math on that, that 6 suggests to me that 98.65 percent of the Bonds in the 7 process have been authenticated. Does that number 8 sound about right to you? 9 A. If I am not mistaken, 98 percent has to do 10 with the comparison in connection with all the Bonds 11 that enter the system. But if you look at the Net 12 Value, I think it's 99 percent and then some. 13 Q. Okay. So, what we have now of authentic 14 Bonds in the system is 11,551 Bonds with a soles de 15 oro face value of about 205 million; correct? 16 A. That's correct, sir. 17 Q. Okay. You told us--in your direct 18 testimony, you told us some information, kind of a 19 further progress update as of end of January, I 20 think; right? Was that the information you gave us? 21 You said there were 191 Bonds that had been paid, and 22 the total value was 4.5 million soles de oro.
[Page 1045]
1 Was that end of January 2020? 2 PRESIDENT FERNÁNDEZ ARMESTO: Could not have 3 been soles de oro. It must have been Nuevo Sol. 4 MR. FRIEDMAN: Nuevo Sol. Thank you. 5 THE WITNESS: That's information that I 6 gathered during the first week of January, but I'd 7 say 10 January. 8 BY MR. FRIEDMAN: 9 Q. 10 January. And the Bondholder process has 10 now closed; correct? 11 A. I'm sorry, sir, ask your question again. 12 There was an overlap. 13 Q. The Bondholder process has now closed for 14 new registrations; correct? 15 A. Yes. If I'm not mistaken, the process ended 16 January 19 to enter the system, but those that are 17 within the administrative process, they are still 18 being valued, recorded, paid, and authenticated. 19 Q. Okay. So, as of the beginning of January, 20 then, or early in January, 191 Bonds had been paid 21 out of the total population of authentic Bonds of 22 11,551, which, again, just doing the math, that means
[Page 1046]
1 that, after five years of this process running, only 2 1.7 percent of the Bonds submitted to it have been 3 paid; is that correct? 4 A. That's not correct. It's not correct to do 5 that mathematical comparison. I'm sure the 6 calculation, mathematically speaking, is correct, the 7 one made by you, but not all of those that were 8 recognized as an authenticated document have moved on 9 to the next stage. But all of those that requested 10 registration have been updated, and not all of those 11 that have been updated have requested payment. 12 So, no simple comparison can be drawn in 13 connection with the ones that have been paid and 14 those that have started the document authentication 15 stage. So, this is voluntary, and the Bondholders, 16 whatever they want to do to move to the next stage, 17 well, that's voluntary as well. 18 Q. So, it's your experience that people are 19 dropping out of the process in between stages; is 20 that right? 21 A. I wouldn't say that they are dropping out. 22 They are not moving on to the next stage. A lot of
[Page 1047]
1 speculation can be drawn from this. Perhaps one of 2 the reasons is the outcome of this Arbitration, and 3 that's why they are wanting to wait. 4 Q. Well, hold on. Why would anybody not--first 5 step is authentication, and then you have to fill out 6 another form and register the Bonds; right? 7 A. That's right, to be able to be recognized as 8 the legitimate holder of those Bonds and to start the 9 valuation stage. 10 Q. And why would anybody not do that? Why 11 would anybody--once they are in the process, they 12 have waived all their rights do anything else, why 13 would they not then go forward with registration? 14 A. I do not know the considerations that each 15 individual has to make a decision. 16 Q. So, you believe that this process may 17 actually--if people don't go all the way through the 18 process, then their Bonds will never be paid through 19 this process; correct? It stands to reason. 20 A. Well, indeed, if you don't get up to the 21 last stage, we cannot value the Bonds, and one may 22 understand that the intention to continue with the
[Page 1048]
1 process is not there. 2 Q. Which means that this process may not even 3 resolve the claims of all the Bondholders who are in 4 the process; is that right? 5 A. I cannot call into question the process. 6 The Bondholders are the ones who make a decision. We 7 are acting in good faith, and we are implementing the 8 process that the Constitutional Tribunal has asked us 9 to implement. 10 Q. Let me ask you this: How many Bondholders 11 have now been paid? You told us the number of Bonds, 12 but how many Bondholders have been paid? 13 A. I don't recall exactly. I remember that 14 there have been about 22 cases. This does not mean 15 22 individuals; these are 22 cases. If I remember 16 correctly, 22 cases have received payment, for 17 4.6 million, approximately. 18 Q. 22 cases? So, 22 Bondholder have now been 19 paid after five years? 20 PRESIDENT FERNÁNDEZ ARMESTO: 22 cases. 21 MR. FRIEDMAN: Yes. 22 BY MR. FRIEDMAN:
[Page 1049]
1 Q. And that means 22 Bondholders; right? Does 2 that mean 22 Bondholders? 3 A. 22 files, sir. Not necessarily Bondholders. 4 PRESIDENT FERNÁNDEZ ARMESTO: A bond may 5 belong to a number of bondholders; is that right? 6 THE WITNESS: Yes. 7 PRESIDENT FERNÁNDEZ ARMESTO: A bond can 8 belong to various bondholders. 9 BY MR. FRIEDMAN: 10 Q. Oh. Okay. So, 22 cases have been solved. 11 Total value paid so far is 4.5 million soles, which 12 is about USD 1.36 million; correct? 13 A. Yes. 14 Q. So, in August 31, 2019, you said 152 Bonds 15 have been paid according to the data that you 16 provided there, and now it's 191. So, about 40 Bonds 17 have been paid in four months. So, it's taken 18 four months to pay 40 Bonds. Does that sound about 19 the right pace? 20 A. I need to look at each of the cases, but it 21 does not refer to the pace of the administrative 22 part, and behind each case there must be additional
[Page 1050]
1 documents that are requested and also additional 2 Powers of Attorney. I'm not completely aware, but it 3 is not always the responsibility of the office 4 processing this. This is also related to the 5 Response by the Bondholder whenever there is a 6 specific request for something. 7 Q. Yes. I understand. I'm just trying to get 8 some sense of the pace. I mean, if you just do math 9 of 10 Bonds per month, with the number of Bonds left, 10 it's, like, over 100 years to get through this 11 process, which, of course, is crazy. 12 Do you have any sense, does the Ministry 13 have any sense, of when it will actually have paid 14 all the Bondholders through this process? 15 A. There is no way to take 100 years, because 16 the mandate of the Tribunal is that this has to 17 conclude in two years after the authentication. How 18 did you get to 100 years? 19 PRESIDENT FERNÁNDEZ ARMESTO: 10 Bonds a 20 month. The explanation is--your question is how do 21 you get to 100? Well, 10 Bonds a month. 22 THE WITNESS: Well, but you need to go
[Page 1051]
1 beyond month. Each case is specific. Some months, 2 we may process many more. 3 BY MR. FRIEDMAN: 4 Q. We've seen in this case--and I know you have 5 seen in this case--some testimony of some individual 6 Bondholders who were paid--for example, Ms. L, we're 7 referring to her as, after four years was paid 222 8 soles, or about $67, for 15 Bonds. And we've seen 9 another one, Mr. S, a Bondholder who was in the 10 process for three years and eight months, and he got 11 791 soles, around $240, for his 10 Bonds. 12 You're familiar with outcomes like those, 13 where people, after going through years of this 14 process and jumping over all the hurdles at each 15 stage, are ending up with very, very small values; 16 correct? 17 A. Those are two cases that I attached to my 18 Statement. At the end--at the end of the day what I 19 can tell you is that the principle of legality, that 20 it is with the Peruvian State, with the Ministry, and 21 we cannot act in a way beyond what is provided for in 22 the administrative processes, provided for under the
[Page 1052]
1 Supreme Decrees. These individuals have questioned 2 the value, have also tried to take the value of the 3 Bond to the current value, but the MEF cannot act 4 based on the request of each Bondholder, based on 5 their own judgments. MEF will continue to apply the 6 legality principle and will continue to follow the 7 rule, the Regulations, and we have no other way of 8 doing this updating. And whatever has been paid is 9 dependent on the time, and, for example, I think it 10 was 15 coupons that were no longer paid in '87, and 11 they were updated as stated--and that is the 12 amount--whatever amount you have. 13 PRESIDENT FERNÁNDEZ ARMESTO: A question, 14 Vice Minister. What is the formula applied to this 15 Bondholder? Is that the one of '14 or '17? 16 THE WITNESS: Only the last formula that is 17 in the text, updated text, that was approved by 18 Decree 242. 19 PRESIDENT FERNÁNDEZ ARMESTO: So, no 20 Bondholder has received--up to '17, no Bondholder had 21 been paid? 22 THE WITNESS: No, sir. The other formulas
[Page 1053]
1 were not applied to any Bondholder before the one 2 provided for under 242. 3 BY MR. FRIEDMAN: 4 Q. I understand you say you're paying according 5 to the legal rules that you have. But those are the 6 legal rules that the Ministry itself established in 7 the Supreme Decrees; correct? 8 A. Yes, indeed. It is the Regulatory Framework 9 used by the Administration to recognize and pay the 10 debt. There is no other way. It cannot act in any 11 other way. The principle of legality has to be 12 followed and also to take into account the last 13 Decree, that is the Decree 242, that has the process 14 in force. 15 Q. But, Vice Minister Sotelo, we have seen 16 already that the Ministry itself changed the formula 17 at least three times--at least four times, actually. 18 It has changed the formula for updating the Bonds, 19 and each time the changes that it made had 20 potentially significant consequences for value, and 21 each time the Ministry said that those changes were 22 within the parameters given by the Constitutional
[Page 1054]
1 Tribunal. 2 So, you would agree with me that, within the 3 scope of the regulatory discretion that the Ministry 4 has and that the mandate it's been given by the 5 Constitutional Tribunal, that it has considerable 6 range to determine exactly how these formulas will 7 work; correct? 8 A. The Ministry has made progress with the 9 adjustments in Supreme Decrees, and the intent is 10 always to apply legality--the principle of legality, 11 good faith, and also trying to avoid any erroneous 12 interpretation, trying to obtain data from the wrong 13 sources. So, they were always guided by the 14 principle of good faith. 15 So, once that is established, I cannot give 16 you my own comment. I will follow the facts and what 17 the Supreme Decrees establish. 18 Q. In acting in good faith, has the Ministry 19 made any analysis of whether what it's doing is fair 20 and achieves the balance that the Constitutional 21 Tribunal ordered in July 2019--sorry, in July 2013? 22 A. I think that we have visited the same issue
[Page 1055]
1 time and again. 2 And this is not about being fair or unfair. 3 This is about applying a procedure based on the 4 Decision by the Constitutional Tribunal. 5 Q. And has the Ministry made any study of 6 whether or not it is actually achieving--in the 7 specific formulas that it has chosen to implement, 8 the 2013 Constitutional Tribunal mandate, that it's 9 actually achieved the balance between trying to pay 10 Bondholder's current value and making sure that the 11 budget isn't broken and essential services are not 12 lost? 13 MR. JIJÓN: Objection. 14 Mr. President, I think that we are going 15 around in circles. 16 PRESIDENT FERNÁNDEZ ARMESTO: No, I think 17 that it is a valid question. 18 Do you recall whether the CT determined in 19 their resolution that they needed to find 20 proportionality between paying the Bondholders and 21 the other needs of the State? And that's the reason 22 why they propose whatever formula they proposed. And
[Page 1056]
1 then we saw that the formula has been changing and we 2 also saw or it could be that the various formula are 3 not offering the same level of payment to the 4 Bondholders. You would recall that we saw a table 5 that would seem to indicate that, if the Decree of 6 '14 was going to be applied, the payment was going to 7 be higher than if the Decree of '17 was going to be 8 applied. 9 So, the results were different based on one 10 estimation or the other. And the question by counsel 11 is whether there is any projection, scenario, 12 conducted by the Ministry to see the impact of all of 13 these payments incurred vis-à-vis the other budgetary 14 obligations to be met by Perú? 15 THE WITNESS: Not that I know of, 16 Mr. President. Based on what I reviewed and I 17 presented with my Statement, the approval processes 18 for the Supreme Decrees, and that's where we have the 19 Reports underlying those--supporting those Decrees. 20 Now, whether there was any further analysis 21 I do not know. 22 PRESIDENT FERNÁNDEZ ARMESTO: And how about
[Page 1057]
1 the Report? They do not address the subject matter; 2 right? 3 THE WITNESS: No. They do not get to that 4 level of detail. 5 MR. FRIEDMAN: No further questions. Thank 6 you. 7 PRESIDENT FERNÁNDEZ ARMESTO: Mr. Jijón, do 8 you have any questions? 9 Did you need five minutes? Would you like 10 to have five minutes? 11 MR. JIJÓN: No, thank you, Mr. President. 12 We have no further questions. 13 PRESIDENT FERNÁNDEZ ARMESTO: Fantastic. 14 Madam? 15 (Comments off microphone.) 16 ARBITRATOR DRYMER: Thank you, 17 Mr. President. As I'm looking through my notes, I'd 18 be happy if you were to begin. I know I have a few 19 questions on a theme that we've discussed, and I 20 would much prefer they came from you, sir. 21 PRESIDENT FERNÁNDEZ ARMESTO: Thank you. 22 QUESTIONS FROM THE TRIBUNAL
[Page 1058]
1 PRESIDENT FERNÁNDEZ ARMESTO: Vice Minister, 2 may I ask counsel to give you the Resolution of 2013 3 by the CT. I don't know if someone can help us find 4 it. 5 (Comments off microphone.) 6 PRESIDENT FERNÁNDEZ ARMESTO: I would like 7 to review, to examine with you, what the 8 Constitutional Tribunal said to see if I understood 9 it properly because there are several elements that 10 are important to see interpretation by the Ministry 11 when they received this Resolution. I think that it 12 would be a good idea to look at Paragraph 24. 13 Are you familiar with this? Have you read 14 it recently? Have you read these Resolutions 15 recently or would you like to reread it? I am going 16 to ask you some questions. I am going to tell you 17 what I think the CT intended to say, and you are 18 going to tell me whether this is in agreement with 19 what the Ministry understood, and this is the 20 exercise I would like to do with you. 21 THE WITNESS: Agreed. 22 PRESIDENT FERNÁNDEZ ARMESTO: So, I am going
[Page 1059]
1 to let you know what I understand. 2 Paragraph 23, we have the two current value 3 principles that are not applicable for the reasons 4 stated here by the CT, and these are the principals, 5 the Consumer Price Index and the adjusted CPI, and 6 that was also asked by counsel. And that was the 7 interpretation by the Ministry that they--that is 8 that neither the CPI nor the adjusted the CPI were 9 the proper formula to revalue the debt? 10 THE WITNESS: Yes, that's what it is. 11 PRESIDENT FERNÁNDEZ ARMESTO: Phenomenal. 12 Now, let's look at 24. This is the formula to be 13 applied by the Tribunal. And then--and that is to 14 convert the debt into foreign currency. 15 THE WITNESS: Yes. 16 PRESIDENT FERNÁNDEZ ARMESTO: So, here it 17 says that "this formula updates the obligation by 18 converting the debt to U.S. dollars using the Parity 19 Exchange Rate in between, parentheses, principal 20 since the official price of the dollar did not 21 express the Market Value." 22 So, clearly it says here that they need to
[Page 1060]
1 use a Parity Exchange Rate. 2 THE WITNESS: Correct. 3 PRESIDENT FERNÁNDEZ ARMESTO: And it adds 4 this formula, allows for the value of the Bonds to be 5 preserved for the economic agents and is the natural 6 form in which they try to shelter their assets in a 7 strong currency during times of crisis. However, it 8 is different with regard to the interest and its 9 treatment, a circumstance that must be analyzed by 10 weighing the conflict in constitutional rights and 11 values concerning the Resolution of this request. 12 So, they need to determine the interest rate 13 applied because it cannot be the same whenever the 14 debt is in soles or dollars, so there must be 15 adjustments regarding the interest rate? 16 THE WITNESS: Yes. 17 PRESIDENT FERNÁNDEZ ARMESTO: So, 25 is the 18 key paragraph. States: "Of the methods presented, 19 this Tribunal finds it appropriate to opt for an 20 update in criterion that implies conversion of the 21 unpaid principal into United States dollars." 22 So, here my first question to you is,
[Page 1061]
1 "unpaid principal," what are we referring to? What 2 is the CT referring to? How would you define the 3 unpaid principal? 4 THE WITNESS: Each of the coupons from the 5 land reform had principal plus interest, so here we 6 see that out of those Bonds that have not been 7 collected, the only addition would be for the unpaid 8 principal, that's what it means, unpaid principal. 9 PRESIDENT FERNÁNDEZ ARMESTO: So, it is the 10 unpaid principal. So, we add all of the coupons, but 11 only unpaid principal? 12 THE WITNESS: Yes. 13 PRESIDENT FERNÁNDEZ ARMESTO: Do you agree 14 with me, Vice Minister, that interest, actual 15 interest, was not 5 percent, rather, 16 zero-point-something percent because 5 percent was 17 estimated based on 25 or 20 years, over 20 or 18 25 years. 19 Do you agree on the methodology? The 20 methodology of Bonds, if I understood it correctly, 21 was that if the nominal value of the Bonds was 1,000, 22 and the interest rate was 5 percent, that became
[Page 1062]
1 1,050. So, it was 5 percent over the principal. And 2 this principal then--or the interest added to 1,050 3 were divided into 20 or 25 annual payments or yearly 4 payments? 5 THE WITNESS: I have not done that exercise, 6 but I have some doubt about it because in all of the 7 financial estimates, we usually use an yearly 8 interest rate. I do not know. 9 PRESIDENT FERNÁNDEZ ARMESTO: This is what 10 the Expert for the Republic of Perú stated, and he 11 said that the interest rate is 0.10 percent. And if 12 you look at the Bond, it seems it is that way. So, 13 10,000 soles and every--each coupon. 14 THE WITNESS: Another Expert have to go over 15 this, but here it says on any coupon, 5 percent 16 annually, so that means yearly, but not at the end 17 of 25 years, after 30 years that is not the 18 mathematical calculation of the Cost of money. The 19 Cost of money is determined by the interest rate that 20 is calculated annually--that is to say, 5 percent 21 annual interest rate. 22 PRESIDENT FERNÁNDEZ ARMESTO: At any rate,
[Page 1063]
1 we will discuss this with the Experts, because I also 2 have some doubts now. 3 Now, your interpretation of the Order by the 4 C.T., is that were you would be adding the 5 amortization installments, that is 400 soles per 6 coupon? 7 THE WITNESS: Yes. All of the coupons that 8 have not been redeemed, so we add up 400 soles and 9 that yields the unpaid debt. 10 PRESIDENT FERNÁNDEZ ARMESTO: Very well. 11 And here, we need to take this to the date when--for 12 the first nonpayment of such Bond, that is, we need 13 to take the date that is a year before the last Bond 14 that is still here in existence. 15 THE WITNESS: I don't think the 16 interpretation of a "year earlier" is correct. 17 PRESIDENT FERNÁNDEZ ARMESTO: Is it within 18 the same year? 19 THE WITNESS: So, we need to look at when 20 the last coupon was redeemed, and if I look, if I see 21 that I have not paid the--the next coupon has not 22 been paid, well that is the date when we start
[Page 1064]
1 counting that that has not been paid and the 2 following. 3 PRESIDENT FERNÁNDEZ ARMESTO: So, that would 4 be November 28, 1995? That is the last coupon that 5 has not been clipped. 6 THE WITNESS: Yes. That was the expiry 7 date, and that generated the unpaid debt on the 8 principal of these Bonds. 9 PRESIDENT FERNÁNDEZ ARMESTO: So, in this 10 case we need to add up all of the principal amounts, 11 and as of November 28, 1985-- 12 THE INTERPRETER: Interpreter corrects 13 herself, it is 1985. 14 PRESIDENT FERNÁNDEZ ARMESTO: --we need to 15 convert that to the Parity Exchange Rate on that 16 date. 17 THE WITNESS: Yes, with the formula 18 established. 19 PRESIDENT FERNÁNDEZ ARMESTO: So, your 20 interpretation is that on November 28, 1985, the 21 addition of all of the outstanding principal out of 22 the 13 coupons we have here needs to be updated by
[Page 1065]
1 applying the Parity Exchange Rate. On that date for 2 soles oros to dollar. 3 THE WITNESS: Let me be specific. Because 4 of some daily problems with exchange--with the Parity 5 Exchange Rate, I think that the formula is looking 6 into the month. 7 PRESIDENT FERNÁNDEZ ARMESTO: Yes. That 8 makes sense. This is the way that the formula is 9 usually done. That will be the one applied in 10 November 1985. 11 THE WITNESS: Yes. That is reasonable. 12 PRESIDENT FERNÁNDEZ ARMESTO: And then it 13 says plus the interest rate of the U.S. Treasury 14 Bonds. So, the C.T. is telling you that you need to 15 convert that into U.S. dollars. So, we have 4,200 16 soles oro, nominal value that will be converted by 17 applying the Parity Exchange Rate, and I get to $184. 18 So, I get to a U.S. dollar-dominated amount. 19 Do we agree, Vice Minister? 20 THE WITNESS: Let's say it's an X amount. 21 Well, it is not just a simple exchange rate. It's 22 the parity.
[Page 1066]
1 PRESIDENT FERNÁNDEZ ARMESTO: Yes, but the 2 Parity Exchange Rate converts soles into U.S. 3 dollars. 4 THE WITNESS: Yes. 5 PRESIDENT FERNÁNDEZ ARMESTO: And it is not 6 the Official Exchange Rate, it may be higher or 7 lower, and that will yield a U.S. dollar-dominated 8 figure. Then I have that dollar figure that will be 9 a figure for 1985, and now the C.T. tells me, you 10 need to add interest to that. So, here I have 11 several questions. 12 The first one is, the first one says plus 13 the interest rate of United States Treasury Bonds. 14 These were some Bonds, 20-year Bonds. 15 What kind of Bond do you think is the one to 16 be applied? 17 THE WITNESS: In the formula under the 18 Decree, it is a one-year expiry for these U.S. 19 Treasury Bonds. 20 PRESIDENT FERNÁNDEZ ARMESTO: And do you 21 think that this is more reasonable than a 10-year 22 Bond or a Bond of the same duration as this Bond?
[Page 1067]
1 THE WITNESS: Let me--I don't want to share 2 my own personal Opinion. I am going back to what the 3 administrative process says. 4 PRESIDENT FERNÁNDEZ ARMESTO: And let's say 5 that it is interest in a Bond for a year, 10-year of 6 the U.S. Treasury, and they start to be accrued, as 7 we said, on November 28, 1985, up to the date of 8 payment. 9 So, we need to accrue interest up to the 10 effective payment date; correct? 11 THE WITNESS: Until the debt is brought to 12 current value and when it is determined how much it 13 is worth in Nuevos Soles. 14 PRESIDENT FERNÁNDEZ ARMESTO: And then from 15 there, depending what type of interest accrues? 16 THE WITNESS: No, interest is no longer 17 contemplated as far as I understand it. 18 PRESIDENT FERNÁNDEZ ARMESTO: So, the Decree 19 brings interest two days prior to the issuance of the 20 ruling on updating, and then the payment is to happen 21 within no longer than 30 days. Great then. 22 So, we are going to--well, I'd like to now
[Page 1068]
1 ask you to take a look at the justification that the 2 Constitutional Court provides. And I would like to 3 then take you to what the Constitutional Court orders 4 regarding the system for updating. 5 So, the Constitutional Tribunal first sets a 6 five-year period. It is not here, because then there 7 are several clarifications of this ruling, and I 8 don't want to waste too much time on that right now, 9 but it sets forth five-year period for the 10 Bondholders to register; is that correct? 11 THE WITNESS: It is in this Resolution. 12 PRESIDENT FERNÁNDEZ ARMESTO: I think that 13 they then go back to it. So, let's look at the time 14 periods. First, there is a six-month period for the 15 Ministry to issue a Supreme Decree, to regulate the 16 procedure through a Supreme Decree. 17 THE WITNESS: Fine, six months. 18 PRESIDENT FERNÁNDEZ ARMESTO: Then the 19 Constitutional Tribunal says that there is a period 20 of five years for the Bondholders to register. 21 THE WITNESS: Yes, that's right. 22 PRESIDENT FERNÁNDEZ ARMESTO: Then there is
[Page 1069]
1 a period for them to register and for the debt to be 2 quantified and for it to be paid. 3 THE WITNESS: It is registered, it is 4 quantified, and it is paid. Those are the three 5 stages. 6 PRESIDENT FERNÁNDEZ ARMESTO: Correct, but 7 for registration and quantification it is two years. 8 THE WITNESS: Two years. 9 PRESIDENT FERNÁNDEZ ARMESTO: And then let's 10 go to the payment, which is what I wanted to examine 11 with you. In terms of form of payment, I understand 12 that one must pay--and correct me if I've 13 misunderstood--one must pay in money, in a maximum 14 period of eight years, unless the Bondholder accepts 15 some other formula, which may be, being a given 16 public debt or real property. 17 THE WITNESS: Yes, in effect. That is 18 correct. So, the choice, what was important, for me, 19 was that the choice depends on the Bondholder. 20 PRESIDENT FERNÁNDEZ ARMESTO: The 21 Bondholder. Very well. 22 Then, what the Constitutional Tribunal says
[Page 1070]
1 is--and excuse me for asking you, but the Decrees 2 also establish that it is the Bondholder who has the 3 choice? 4 THE WITNESS: The Regulation sets out the 5 options among which the Bondholder can choose, and if 6 they wanted--91 that had been paid, the 4 million 7 plus soles, if I'm not mistaken, most have chosen 8 other Bonds that are freely negotiable in the market, 9 that are issued by the sovereign. So, the money in 10 cash must have been about 3.5 million, have been paid 11 by other securities, and the difference, 12 1 million-some has been in cash. 13 PRESIDENT FERNÁNDEZ ARMESTO: Thank you very 14 much. 15 And so, afterwards, at the end, before it 16 says has ruled, or has resolved, before the operative 17 part, there is a paragraph that says in considering 18 criteria of equity when establishing the timeline for 19 payments, the State may bear in mind the criteria for 20 privatization that include natural persons over 21 legal, juridical persons and within that category, 22 the original Bondholders and, among these, those who
[Page 1071]
1 are over 65 years of age, which I'm grateful for 2 since I am over 65. I am in favor of any measure 3 that favors older persons. Quite welcome. 4 Then the Decrees add an additional category 5 about which I wanted to ask you, Vice Minister. 6 Which is persons or entities who have 7 purchased the Bonds for speculative purposes. We can 8 look for that, but that is practically exactly what 9 the Decree says. So, my first question for you. 10 This has not been stated by the Constitutional 11 Tribunal. The Constitutional Tribunal does not speak 12 of investors with speculative aims. 13 THE WITNESS: Only the--the one that you're 14 speaking of speaks of priority for the original 15 Bondholders and that is all. 16 PRESIDENT FERNÁNDEZ ARMESTO: Yes, but among 17 the non-originals, it doesn't distinguish a category 18 of investors who have invested for speculative 19 purposes. So, what I wanted to ask you is, first, 20 why was this category introduced and, second, how 21 is--how does one define an investor with speculative 22 aims?
[Page 1072]
1 THE WITNESS: Well, I cannot give you an 2 explanation beyond what is in the documents there 3 because, as I said, I've reviewed the record. I made 4 a copy, and I sent it to this Tribunal. But I was 5 not there when that provision was designed, so as to 6 know what the reasoning was, what the considerations 7 were for having included that variable. 8 PRESIDENT FERNÁNDEZ ARMESTO: I was asking 9 how is that defined. It's not a term that one sees 10 much in legislation, "investor with speculative 11 aims," so I would like to know how you would define 12 it? How would you distinguish an--speculative 13 investor from another investor who is not a 14 speculative investor? 15 THE WITNESS: I might make a mistake if I 16 were to offer a definition, and so I would rather not 17 provide a definition of that sort, Mr. President. 18 PRESIDENT FERNÁNDEZ ARMESTO: And do you 19 believe that Gramercy, who is here, would fit within 20 the definition of "speculative investor?" 21 THE WITNESS: I would also reserve my 22 Opinion on that, if I may.
[Page 1073]
1 PRESIDENT FERNÁNDEZ ARMESTO: Of course. 2 Any additional questions? 3 ARBITRATOR DRYMER: No. Thank you, sir. 4 ARBITRATOR STERN: No. 5 PRESIDENT FERNÁNDEZ ARMESTO: Is there any 6 follow-up question? 7 MR. FRIEDMAN: No, thank you. 8 PRESIDENT FERNÁNDEZ ARMESTO: Mr. Jijón? 9 MR. JIJÓN: No, thank you very much, 10 Mr. President. 11 PRESIDENT FERNÁNDEZ ARMESTO: Vice Minister, 12 you've come from Lima to help us out. 13 THE WITNESS: That has been my intention. 14 PRESIDENT FERNÁNDEZ ARMESTO: Well, we thank 15 you so much for the effort. The truth is, you've 16 helped us a great deal. We thank you for your 17 patience and for your assistance, and may you have a 18 safe journey home. 19 THE WITNESS: Thank you very much. 20 PRESIDENT FERNÁNDEZ ARMESTO: We will now 21 break. 10 minutes? No, we have to put up the video. 22 The video. We will break for--it is now 8 past 3:00.
[Page 1074]
1 Shall we say 20 past 3:00. Madam Secretary, 20 past 2 3:00. 20 past 3:00. 3 (Brief recess.) 4 CARLOS HERRERA, RESPONDENT'S WITNESS, CALLED 5 (via videoconference) 6 PRESIDENT FERNÁNDEZ ARMESTO: We resume the 7 Hearing, and we do so to take the statement from 8 Carlos Alberto Herrera Perret. 9 Mr. Carlos Herrera, can you hear me in Lima? 10 Mr. Herrera? Can you hear us? 11 THE WITNESS: Yes. 12 (Comments off microphone.) 13 PRESIDENT FERNÁNDEZ ARMESTO: Good 14 afternoon, Carlos Alberto Herrera. 15 (Comments off the record.) 16 THE WITNESS: Good afternoon. 17 PRESIDENT FERNÁNDEZ ARMESTO: How are you? 18 Good afternoon. Let's see if we are able to 19 establish a phone line that is good, and if we're 20 capable of conducting this examination. Very good 21 afternoon to you in Lima. Thank you very much for 22 being here as a witness. The first thing we need to
[Page 1075]
1 do as a witness, well, you know that you have to tell 2 the truth, and what we need to do is to take the 3 declaration from you. I'm going to ask that you 4 stand. And do you have the declaration before you? 5 THE WITNESS: Yes, I do. 6 PRESIDENT FERNÁNDEZ ARMESTO: If you could 7 please read it out. 8 THE WITNESS: I solemnly declare, upon my 9 honor and conscience, that I shall speak the truth, 10 the whole truth, and nothing but the truth. 11 PRESIDENT FERNÁNDEZ ARMESTO: Very well. 12 Thank you very much. 13 Mr. Herrera, we are continuing to have sound 14 problems, so we will see if they get any better with 15 time. 16 First, Mr. Jijón, who is to my left, will 17 put some questions to you on behalf of the Republic 18 of Perú, and then Ms. Popova will put a series of 19 questions to you on behalf of Gramercy, who are the 20 Claimants. 21 Now, the questions will be posed in such a 22 way to allow you to answer "yes," "no," or "I don't
[Page 1076]
1 know," and please begin any answer with "yes," "no," 2 or "I don't know." And then you could add anything 3 you wish. Agreed? 4 THE WITNESS: Of course. Thank you very 5 much. 6 PRESIDENT FERNÁNDEZ ARMESTO: Counsel for 7 Claimant has the floor--I'm sorry, Respondent has the 8 floor. Mr. Hamilton is going to ask you a few 9 questions. 10 MR. HAMILTON: Mr. President, Members of the 11 Tribunal, Mr. Herrera, good afternoon. 12 DIRECT EXAMINATION 13 BY MR. HAMILTON: 14 Q. Good afternoon, Mr. Herrera. 15 A. Good afternoon, Dr. Hamilton. 16 Q. Thank you. My understanding is that you 17 submitted a Witness Statement to the Tribunal. I do 18 have a few questions in connection with that 19 Statement. At the outset, could you please summarize 20 your professional background? 21 PRESIDENT FERNÁNDEZ ARMESTO: I am so sorry, 22 sir, but we cannot hear you. Unfortunately,
[Page 1077]
1 technology is failing us, and it is not working. 2 THE WITNESS: Now, there's a lot of 3 background noise. 4 PRESIDENT FERNÁNDEZ ARMESTO: The only thing 5 we hear is background noise. Your voice is quite 6 distorted here, and we cannot hear you well. Let us 7 see whether we're able to solve this issue. 8 MR. HAMILTON: Mr. Herrera, just one moment, 9 please. 10 (Pause.) 11 PRESIDENT FERNÁNDEZ ARMESTO: I'm going to 12 give the floor to Mr. Hamilton. He's going to ask 13 you a few questions. 14 MR. HAMILTON: It is important for the other 15 individuals in the room not to speak so we can 16 interact with the Witness. 17 THE WITNESS: There's a lot of noise. 18 BY MR. HAMILTON: 19 Q. Mr. Herrera, can you hear me? 20 A. I can hear you. 21 PRESIDENT FERNÁNDEZ ARMESTO: Let us try, 22 and if we see that this is not working, then we can
[Page 1078]
1 try something else. 2 Mr. Hamilton, you have the floor. 3 MR. HAMILTON: Very well. 4 BY MR. HAMILTON: 5 Q. I think it's important to have everyone 6 sitting down, and we are going to try to have 7 Mr. Herrera speak with the phone in his hand. If the 8 technician could please be sitting down as well in 9 one of the chairs, I think it is going to be better. 10 Mr. Marchesa, perhaps the technician can sit 11 on the chair instead of being on top of the Witness. 12 Can you hear me? 13 MR. MARCHESA: We can hear you, but 14 sometimes there is a very upsetting noise. 15 MR. HAMILTON: I hope I am not the one 16 upsetting things. 17 BY MR. HAMILTON: 18 Q. Mr. Herrera, how are you? 19 A. Hello? 20 Q. Mr. Herrera? 21 A. Mr. Hamilton, yes. 22 Q. Yes, this is Mr. Hamilton.
[Page 1079]
1 A. Okay. Good afternoon, Mr. Hamilton. 2 Q. Good afternoon. How are you? 3 A. I am fine, but I'm trying to overcome all 4 these technical issues. 5 Q. All right. Let's try. 6 Mr. Herrera, I have a few questions related 7 to your testimony to the Tribunal. Could you please 8 summarize your professional background, if you 9 please? 10 A. Thank you very much. 11 In connection with my professional 12 background, it is basically related to investment 13 policy in Perú. For more than 40 years, I worked in 14 different positions at the National Commission for 15 Investments and Foreign Technology, this until 2002. 16 Thereupon, I worked for the Agency for the 17 Promotion of Private Investment called PROINVERSIÓN, 18 this until 2017. During that time, I served as the 19 President of the Commission that was in charge of 20 negotiating investment agreements. Specifically, I 21 led the negotiation team in connection with the 22 investment chapter of the agreement in the
[Page 1080]
1 negotiations we held with the U.S. for the Trade 2 Agreement, and also in connection with other free 3 trade agreements. 4 And now, starting in mid-2017, I work in the 5 private sector. I am a consultant, and I work 6 independently. 7 Q. Thank you very much, Mr. Herrera. 8 Sir, what was the purpose of the negotiation 9 of the Treaty between the U.S. and Perú? 10 A. The Treaty with the United States had the 11 purpose of consolidating our good relations, our good 12 trade relations, with the U.S. with a view to 13 consolidating trade and investment opening. Now, in 14 connection with investments, we were seeking to 15 ensure a stable and foreseeable environment that 16 would allow us to attract the necessary investment 17 flows for economic growth and further development of 18 the country. 19 Q. Thank you very much, Mr. Herrera. 20 In your Witness Statement, you make 21 reference to the definition of the word "investment" 22 in the Treaty between Perú and the United States.
[Page 1081]
1 What is your understanding of the definition of the 2 word "investment"?--this on the basis of your 3 experience as a negotiator of the investment chapter 4 of the Treaty? 5 A. After the negotiations, the Agreement 6 provides for a definition of "investment," which is 7 broad, based on the concept of the assets, whereby in 8 each case, the analysis as to whether each investment 9 has the characteristics of an investment--that's the 10 important part--and where all of the relevant facts 11 need to be taken into account. The definition of 12 "investment" includes a list of elements that may be 13 considered an investment. 14 However, the fact that a specific type is 15 included in that list does not imply that a specific 16 case is considered an investment. There is a need to 17 analyze whether the characteristics of an investment 18 are met and all of the relevant facts need to be 19 weighed in. 20 Q. Thank you very much, Mr. Herrera. 21 In your Witness Statement, you refer to the 22 Land Bonds. What was the role of the Land Reform
[Page 1082]
1 within the context of the negotiations for the 2 investment chapter of this Treaty? 3 A. The Land Bonds, as the topic was not 4 discussed at the negotiation table. 5 Q. Thank you very much, Mr. Herrera. 6 MR. HAMILTON: Mr. President, I have no 7 further questions for now. Thank you. 8 PRESIDENT FERNÁNDEZ ARMESTO: Very well. 9 Thank you, Mr. Hamilton. 10 Ms. Popova, will be asking you some 11 questions on behalf of Gramercy. 12 MS. POPOVA: Thank you, Mr. President. 13 CROSS-EXAMINATION 14 BY MS. POPOVA: 15 Q. Good afternoon, Mr. Herrera. 16 A. Good afternoon. 17 Q. I appreciate your time and patience. As you 18 know, we are in the hands of technology this 19 afternoon. Therefore, I will be asking you for 20 further patience and cooperation to move forward as 21 efficiently as possible, if you agree. 22 A. Of course.
[Page 1083]
1 Q. Very well. You told us, Mr. Herrera, that 2 you spent most of your professional life--that is, 3 40 years--as an official of the Peruvian Government; 4 is this correct? 5 A. Yes, indeed. 6 Q. And you have always worked in the area of 7 economy and finance for the Republic of Perú; is that 8 correct? 9 A. Yes, that is correct. 10 Q. And you told us that you started in 1976; is 11 that true? 12 A. 1973, I think. 13 Q. Very well. But immediately after 14 graduation; correct? 15 A. Yes. I was finishing my studies. 16 Q. And you told us about your position with 17 PROINVERSIÓN, and my question is: Was PROINVERSIÓN 18 the body in charge of promoting investments in Perú? 19 A. Yes, but--yes, PROINVERSIÓN was created as 20 the entity to promote private investment. 21 Q. And you also represented PROINVERSIÓN before 22 the special Commission in charge of representing the
[Page 1084]
1 Peruvian State in international investment disputes; 2 correct? 3 A. Yes. For some time, I represented 4 PROINVERSIÓN in this Commission. 5 Q. And this was about 10 years; right? 6 A. It could be. I do not recall accurately. 7 That was from the beginning--from the creation of the 8 Commission up to 2013. 9 Q. Very well. 10 I read in the Annex to your Witness 11 Statement that it was up to 2015. 12 Do you think that is correct? 13 A. It could be. I do not recall exactly. 14 Q. But you understand that you are here as a 15 fact witness to refer about your recollection of what 16 happened during the negotiations of the Free Trade 17 Agreement with the U.S. is that correct? 18 A. Yes, indeed. 19 Q. When you started to work at MEF, Perú had a 20 military Government; is that correct? 21 A. In the '70s, the answer is yes. 22 Q. And one of the greatest legacies of this
[Page 1085]
1 Government was the Agrarian Reform; correct? 2 A. You're referring to the facts of this 3 Government, yes. 4 Q. And that was an important moment in the 5 history of Perú, wasn't it? 6 A. Yes. It was an important moment. 7 Q. The Government thought that this reform was 8 important for the socioeconomic development of the 9 Republic; is that right? 10 I understand that that was the intent of 11 this Government, and they thought that these reforms 12 would help social justice on the field. 13 A. Yes. I understand that that was part of the 14 political discourse at that time. 15 Q. And it would also help create a broad 16 market; correct? 17 A. That is not very clear. 18 Q. Very well. At any rate, the Government was 19 able to pay this reform with the Bonds of the 20 Agrarian Reform debt? 21 A. Well, yes, the Government paid specifically 22 with the funds from the debt.
[Page 1086]
1 Q. So, I will be referring to these Bonds as 2 the Land Bonds, do you agree? 3 A. Yes. 4 Q. Now, foreigners were not excluded from the 5 Agrarian Reform; right? 6 MR. HAMILTON: I have an objection. The 7 Statement had to do with the negotiation of the 8 Treaty, does not refer to the history of the Agrarian 9 Reform, and I am asking indication as to where he 10 refers to that in his statement. 11 PRESIDENT FERNÁNDEZ ARMESTO: Mr. Hamilton, 12 you perfectly know where Ms. Popova is going to end, 13 and I know where she's going to end. 14 So, please go ahead. 15 MS. POPOVA: In paragraph--if you don't 16 recall, Mr. Hamilton, Paragraph 33 refers to this. 17 PRESIDENT FERNÁNDEZ ARMESTO: Yes, it is 18 directly related to the negotiation. 19 BY MS. POPOVA: 20 Q. Mr. Herrera, I was asking you, if, based on 21 your understanding--and if you don't recall, please 22 let me know--whether, based on your understanding,
[Page 1087]
1 foreigners were not excluded from this expropriation 2 in Agrarian Reform process? 3 A. As far as I understand, they were not 4 excluded. 5 Q. And the foreign owners could also receive 6 Agrarian or Land Bonds; correct? 7 A. I understand that that was the case. The 8 truth is that I was never close to that process. 9 Q. That's okay. 10 Do you recall that at some point those Land 11 Bonds were declared freely transferable? 12 A. Yes. I understand that they were declared 13 transferable. 14 Q. And do you know if, when they were declared 15 fairly transferable, whether it was possible to 16 transfer to foreigners? 17 MR. HAMILTON: I apologize, Mr. President, 18 but this is far from his Statement. His Statement 19 has nothing to do with the fact-- 20 PRESIDENT FERNÁNDEZ ARMESTO: Let her turn 21 around. Clearly, I think I do not want to predict 22 what Ms. Popova is going to ask, but I think I follow
[Page 1088]
1 the line. Please, I'm begging you not to interrupt 2 constantly; otherwise, we're not going to make any 3 progress. 4 Ms. Popova, please go ahead. 5 MS. POPOVA: Thank you, Mr. President. 6 BY MS. POPOVA: 7 Q. Mr. Herrera, I don't know if you had the 8 opportunity to answer my question. 9 A. Would you please repeat your question? 10 Q. Yes, I will be repeating it for you. 11 My question was whether you recall when the 12 Bonds were declared freely transferable, whether you 13 recall if they could also be transferred to 14 foreigners. 15 A. Honestly, I don't recall. I do not recall 16 if there were limitations or not. 17 Q. So, you're not aware of any limitation to 18 that end. 19 A. As I just mentioned, I was not close to the 20 Party--to the process, rather, that was a process 21 that had nothing to do with the office where I was 22 working at this point in time.
[Page 1089]
1 Q. Understood. Since you are referring to the 2 setup of the Land Bonds at Paragraph 33, I just 3 wanted to give you an opportunity to establish what 4 you knew and didn't know before I started with my 5 questions for you. 6 Is that okay? 7 A. Yes. 8 Q. Thank you. 9 In 2002, Mr. Herrera, do you recall that the 10 U.S. established a system of trade preferences that 11 could be used by Andean countries, among them Perú? 12 A. Yes, I do know that there was a system of 13 trade preferences. 14 Q. And to be able to profit from this system or 15 benefit from this system, the U.S. Government had to 16 be satisfied that Perú was implementing measures to 17 solve some expropriation disputes with U.S. citizens. 18 Is that correct? 19 A. Yes, I understand that that was one of the 20 requirements. 21 Q. And the Government of Perú had committed to 22 solving some of these disputes as a condition to be
[Page 1090]
1 able to benefit from these trade preferential 2 treatment? 3 A. Would you please repeat? 4 Q. Yes. 5 The Peruvian Government had committed to 6 solving some of these disputes as a condition to be 7 able to benefit from these trade preferences granted 8 by the U.S.; is that correct? 9 A. Yes, it is. 10 Q. And these disputes, the ones that we are 11 mentioning, also included disputes with North 12 American citizens that had been expropriated as a 13 result of the land reform? 14 A. That, I'm not aware of. 15 Q. You're not aware of. Very well. 16 So, I am going to show you now a document. 17 You will find it at Tab 33, and this is 18 Document CE-456. 19 Are you there? 20 A. Yes, I do have that document. I'm looking 21 at it. 22 Q. I don't know if you have seen this document,
[Page 1091]
1 so I am going to ask you whether you have already 2 seen the document before today. 3 A. To be honest, I haven't seen it. 4 Q. That's fine. This is a document that we 5 submitted, that Gramercy submitted, in May last year, 6 and this is one of the documents cited, and I am 7 going to represent to you that this is a document of 8 the Embassy of the United States in Perú, and we can 9 see on the first page that it is dated June 1, 2006. 10 A. That's correct. 11 Q. I am going to ask you to look at page--the 12 page that shows Claimant K, Paragraph 11. 13 A. Paragraph 11. 14 Q. Can you read English? 15 A. Yes, I am examining it. 16 Q. Can you please see that at the bottom of the 17 page, it says: "Claimant K was issued compensation 18 bonds which have since become worthless as a result 19 of hyperinflation, (in Spanish). According to 20 Claimant K, in about 1970, Perú's military Government 21 expropriated his farm as part of a general Land 22 Reform Act that expropriated farms over
[Page 1092]
1 250 hectares." 2 Mr. Herrera, can you hear me? 3 A. Yes. 4 Q. Very well. 5 If you look at the last page of the 6 document, you are going to see the last names and the 7 names of Claimant K. If you look at the last page, 8 you are going to see that there we see "Claimant K, 9 Dr. Jaime Muro Crousillat," U.S. citizen, and then if 10 you can look at the page above that, in the other 11 page you will see Claimant T. Do you see? And now 12 we are going to see Claimant G at Paragraph 7. 13 A. Yes. 14 Q. Here you see that: "Claimant G began 15 developing 60,000 hectares, but a military Government 16 expropriated the land in the 1960s." (in Spanish) 17 A. Agreed. 18 Q. I don't know if this helps you recall 19 whether any of these expropriation disputes had 20 anything to do with the Agrarian Reform, with the 21 land reform? 22 A. Based on my understanding of the document,
[Page 1093]
1 in connection with Claimant G, that is the case of 2 Mr. LeTourneau, and that is an outstanding issue that 3 had nothing to do with the Land Reform Bonds because 4 that was related to a road that was impacted. I do 5 recall that a rule was enacted with an agreement 6 after the Decision to pay $10 million, I think, for a 7 road; therefore, that is not related to the Land 8 Reform. 9 Q. You were referring to Claimant G, Ray 10 LeTourneau. Now you are telling me that the 11 expropriation suffered by Mr. LeTourneau had nothing 12 to do with the Land Reform? I don't know if I 13 understood you correctly. 14 A. What I am telling you is that I recall that 15 when the negotiations were underway for the U.S. 16 Treaty, some cases were outstanding, and the U.S. 17 authorities requested information about them, and one 18 of them was LeTourneau's case, which I recall was due 19 to a road, and there was a need to compensate and 20 determine the cost of that road. And I recall that 21 the Government back then hired some experts to value 22 the road and the investor was compensated because of
[Page 1094]
1 the road. 2 Q. Yes. We will get there. But before that, I 3 have a very specific question for you. In addition 4 to the road and what happened afterwards, do you 5 agree with me that Mr. Ray LeTourneau was 6 expropriated as part of the Land Reform? 7 Do we agree? 8 A. I do believe that there was a plot of land 9 that was expropriated and for which he was 10 compensated, and during the negotiations of the 11 Agreement, the value of the road was still 12 outstanding. 13 Q. Thank you. 14 Do you know--do you recall that LeTourneau 15 had asked the U.S. Government for help to solve this 16 dispute? 17 A. What I recall is that this, together with 18 other cases, were cases in which a solution was 19 requested. 20 Q. And you know that Mr. LeTourneau had 21 requested the U.S. Government to withdraw the trade 22 benefits to Perú because Perú had not solved this
[Page 1095]
1 dispute? 2 A. As I just mentioned, I knew that there was a 3 group of cases. 4 Q. As you just mentioned, when you started to 5 negotiate the Agreement with the U.S., this dispute 6 was not completely solved. Do we agree? Can we 7 agree on that? 8 A. It was not solved. It was--I think it was 9 solved in 2004. 10 Q. Yes. Or the negotiations started in about 11 May 2004; is that correct? 12 A. Yes, I think so. 13 Q. And this dispute with LeTourneau had not 14 been solved completely? 15 A. No. It was not--it had not been solved. 16 Q. And you--briefly before this, you mentioned 17 that this and other disputes were topics addressed or 18 discussed in the negotiations with the U.S. 19 Government; correct? 20 A. No. Those topics were not addressed at the 21 negotiating table, but we did know that the Peruvian 22 Government was trying to solve outstanding issues.
[Page 1096]
1 Q. Mr. Herrera, do you recall that this was 2 addressed at the investment table in the sense that 3 there were outstanding disputes with U.S. citizens? 4 A. The topic was never discussed because we 5 couldn't negotiate or solve those issues during the 6 negotiations. 7 Q. So, if I understood you correctly, the topic 8 was discussed, and you, on behalf of the negotiators 9 or Perú or Government of Perú, said that you could 10 not solve it? 11 A. No, I don't think that we have understood 12 each other. What I told you is that it was not 13 proper to discuss that topic at the negotiating table 14 for the Agreement. The negotiation had to do with 15 the elements under the investment chapter as well as 16 the nonconforming measures. 17 ARBITRATOR DRYMER: Counsel, excuse me. For 18 my benefit, maybe in the course--perhaps you could 19 ask him to explain Paragraph 14 in his Statement. 20 MS. POPOVA: Yes, that's where I was going. 21 BY MS. POPOVA: 22 Q. Mr. Herrera, at Paragraph 14 of your
[Page 1097]
1 Statement--I think you have it there--you explain 2 that, before the negotiations, there were certain 3 legal disputes pending in Perú that involved U.S. 4 citizens, and then you say that the resolution of 5 these disputes was not a precondition for negotiation 6 of the Treaty, and then you add, "Perú also 7 explained"--and this is the point--"in the course of 8 the negotiations that the matters were being 9 addressed in a binding form." So, what I wanted to 10 note, Mr. Herrera, is that this issue was mentioned 11 during negotiation of the Treaty. 12 Do you agree? 13 A. Yes, there were discussions--no, there were 14 no discussions. 15 Q. The U.S. negotiators had indicated that, for 16 example, investment treaties were a very sensitive 17 issue for the United States precisely because these 18 pending disputes were there, these disputes were 19 still pending. Would you agree? 20 A. Yes. The U.S. negotiators indicated to us 21 that the investment agreements were a very sensitive 22 issue.
[Page 1098]
1 Q. Yes, and that they were especially 2 concerned--that the U.S. investors were particularly 3 concerned about the situation of these disputes and 4 others with Perú; correct? 5 A. I don't recall that they had tied one to the 6 other. 7 Q. Well, the United States, Mr. Herrera, did 8 not begin the negotiations with Perú until Perú had 9 resolved some disputes with U.S. investors, and until 10 it had taken measures to resolve others. 11 Would you agree with that? 12 A. Yes, indeed. 13 Q. And during the negotiations the U.S. 14 representatives, in various forums, continued to 15 raise these matters with their Peruvian counterparts; 16 correct? 17 A. As I say, we never discussed any of the 18 cases that were pending. 19 Q. The last meeting of the investment 20 roundtable took place in December of 2005; correct? 21 A. Yes, December. 22 Q. And at that time, the investment chapter was
[Page 1099]
1 almost concluded; correct? 2 A. Yes, that is right. 3 Q. But at this time, in December 2005, you 4 recall that the dispute with LeTourneau was not 5 resolved in a definitive manner? 6 A. I don't know when the matter with LeTourneau 7 was resolved. What I can tell you is that I did not 8 attend the last round of negotiation. At the 9 previous round, we concluded the technical 10 discussions with the U.S. and we initialed the text, 11 and the only thing still outstanding was this matter 12 of agreement on investment, if I'm not mistaken. 13 Q. Would you agree with me that the Treaty was 14 signed on April 11, 2006? 15 A. Yes. 16 Q. That that sounds reasonable? 17 A. Yes. 18 Q. Do you know when LeTourneau accepted a 19 Compromise Agreement with the Peruvian Government? 20 A. I think it was in early 2006. 21 Q. If I tell you that it was in late March 22 2006, does that sound right to you?
[Page 1100]
1 A. It could be. I don't remember exactly, but 2 I do remember it was 2006. 3 Q. It was a short time before the Treaty was 4 signed; correct? 5 A. If the date is what you say, then yes. 6 Q. Thank you. 7 Very well. Let us now talk about what was 8 also happening during the negotiation sessions. Do 9 you recall, Mr. Herrera, that in March 2001, the 10 Constitutional Tribunal of Perú handed down a 11 judgment related to the Agrarian Bonds? 12 A. Yes. A judgment on a mechanism--on a 13 payment mechanism. 14 MR. HAMILTON: He doesn't testify about any 15 of these issues about the Land Bonds in his 16 declaration. 17 MS. POPOVA: I'm sorry, Mr. Hamilton. Are 18 you objecting to my question or to his answer? 19 Because I've told you now, I think, three times that 20 he does mention the Land Bonds in Paragraph 33 of his 21 Witness Statement. 22 MR. HAMILTON: I want to be clear,
[Page 1101]
1 Mr. President: I object to her questions, and I 2 object in general to the approach of trying to abuse 3 this Witness by asking him things that are plainly 4 outside the scope of his testimony. 5 He doesn't discuss the history of the Land 6 Bonds, court decisions related to the Land Bonds. He 7 discusses a very specific issue, which is whether the 8 Land Bonds were discussed in the negotiation of the 9 investment chapter of this Treaty, and it is not open 10 game to try to get random comments out of context and 11 abuse this Witness. I object. 12 ARBITRATOR DRYMER: If I may, he also says 13 that the Parties did not have the Land Bonds in 14 mind--I don't know what that means--not just that 15 they didn't discuss them explicitly. 16 MS. POPOVA: Mr. Drymer, thank you. And 17 my-- 18 ARBITRATOR DRYMER: I'm just commenting. 19 PRESIDENT FERNÁNDEZ ARMESTO: Can I take 20 back the discussion? 21 So, what would you like to ask from the 22 Witness?
[Page 1102]
1 MS. POPOVA: My only question is whether he 2 remembered a Decision of the Constitutional Tribunal, 3 and he answered that he did. 4 PRESIDENT FERNÁNDEZ ARMESTO: Okay. Where 5 does that--I mean-- 6 MS. POPOVA: Can I ask my next question? 7 PRESIDENT FERNÁNDEZ ARMESTO: Because here, 8 I don't really see how the Witness can help us much 9 further. What is your line of questions? What would 10 you like him--where are you aiming at? 11 MS. POPOVA: If I can ask the next three 12 questions, I think it will be clear where I'm aiming 13 at, Mr. President. 14 PRESIDENT FERNÁNDEZ ARMESTO: Okay. 15 MR. HAMILTON: Mr. President, I want to make 16 sure the Witness understands my objection, that the 17 Witness understands that I am, once again, raising an 18 objection because my colleague from the other Party 19 is posing questions related to Agrarian Reform Bond 20 issues that are far afield from the Statement by 21 Mr. Herrera, who has a particular focus on the 22 conversations and whether or not the Agrarian Reform
[Page 1103]
1 Bonds were addressed in negotiating the investment 2 chapter. 3 In his Statement, he does not get into the 4 history of the Agrarian Reform Bonds, and it is not 5 appropriate to continue with this line of questions. 6 PRESIDENT FERNÁNDEZ ARMESTO: Mr. Hamilton, 7 I have heard what you say. We are going to put 8 questions to the Witness on matters that he has 9 direct personal experience and on which he can help 10 us. And evidently, on the Agrarian Reform Bond, that 11 is quite far from his responsibilities in the 12 Government of Peru. 13 Now, since Ms. Popova knows that, let us see 14 where she wants to go, what you want to ask the 15 Witness, and how the Witness might be able to help 16 us. 17 MS. POPOVA: Thank you. As Mr. Herrera 18 explains in Paragraphs 33 and 34 of his Statement, he 19 is talking about what he had in mind in 2004 and what 20 he did not have in mind in 2004, and so, that's what 21 I'm aiming at, Mr. President. 22 PRESIDENT FERNÁNDEZ ARMESTO: Very well.
[Page 1104]
1 BY MS. POPOVA: 2 Q. Now, Mr. Herrera, do you recall that in 3 August of 2003, a few months before the negotiations 4 began, the Supreme Court of Justice of Perú also 5 handed down a Judgment related to the Agrarian Bonds? 6 MR. HAMILTON: I repeat my objection. 7 THE WITNESS: I don't recall. 8 PRESIDENT FERNÁNDEZ ARMESTO: Just a moment, 9 please. 10 Let me conduct the debate, please. 11 Mr. Hamilton, I beg you, please. I have 12 your objection in mind. Now let me apply it. Let me 13 see where we're headed and if it makes sense for us 14 to head down this line of questions, but please allow 15 me to conduct the proceeding. I am well aware of 16 your concern. But, for now, let us continue. 17 BY MS. POPOVA: 18 Q. The Judgment of 2003, August 2003, does that 19 sound familiar to you? 20 A. The truth of the matter is that it does not. 21 Q. Well, now let us turn to February of 2004, 22 also a few months before negotiations with the United
[Page 1105]
1 States began. 2 Do you recall that, in February of 2004, a 3 Special Commission that included participation of 4 members of the Ministry of Economy and Finance 5 proposed a bill related to the Agrarian Bonds? 6 PRESIDENT FERNÁNDEZ ARMESTO: Does that 7 sound familiar to you, Mr. Herrera? 8 THE WITNESS: No. The truth is that it is 9 not a matter that I dealt with directly. 10 BY MS. POPOVA: 11 Q. I understand this, but perhaps it might have 12 been a matter of public knowledge, and that's why I 13 wanted to know whether you had heard about this 14 matter or not. And if you had never heard about it, 15 then you can certainly answer that. 16 A. The truth is, I don't recall. 17 Q. So, you did not know that the Ministry of 18 Economy and Finance had proposed a bill that 19 anticipated issuing updated Bonds, Agrarian Reform 20 Bonds, or Bonds that would be updates of the Agrarian 21 Reform Bonds? 22 A. I suppose that the Ministry of Economy had
[Page 1106]
1 to have done so. But the truth is that I don't have 2 any recollection of what it did or any of the 3 characteristics. 4 Q. Very well. Thank you. 5 Now, do you recall that in August of 2004, 6 which would be during the negotiations of the Treaty, 7 do you recall that Constitutional Tribunal handed 8 down another Judgment related to the Agrarian Bonds? 9 A. I recall that there was a Judgment of the 10 Constitutional Tribunal. I don't remember exactly 11 when it was. 12 Q. But do you recall whether that was in 2004? 13 A. It may be. I'm not sure. 14 Q. Thank you. 15 Now, having seen this context, let's move on 16 to the negotiations. 17 You headed up the negotiating team for Perú 18 for the investment chapter of the Treaty; correct? 19 A. Yes, I was heading up that effort. 20 Q. Now, this might sound obvious to you, but a 21 negotiation is typically a back-and-forth of 22 priorities; correct?
[Page 1107]
1 A. That is right. 2 Q. And in the context of this negotiation, the 3 Parties can yield on some points in order to get 4 other points that they consider more important; 5 correct? 6 A. Yes. 7 Q. But after all of this back and forth and 8 exchanges, at the end of the process, a text is 9 produced that is signed, and it represents the 10 Agreement between the two Contracting Parties; 11 correct? 12 A. That is right. 13 Q. And you mentioned earlier that the Treaty 14 sought to ensure, I think you said, for a stable and 15 foreseeable climate for investment in Perú; correct? 16 A. Yes. 17 Q. And, from what I understand, you have 18 devoted the larger part of your career to this 19 objective; right? 20 A. Yes. I have been involved in this process. 21 Q. One way of obtaining this objective was to 22 have a broad notion of investments and investors who
[Page 1108]
1 would be encompassed by this Treaty; correct? 2 A. Yes. The result of the negotiation was 3 that. 4 Q. And it might also seem obvious to you, but 5 one of the objectives of this Treaty was for the 6 investors to be able to take note of the text and, 7 based on their reading of the text, make investments 8 in Perú; correct? 9 A. The text set out protections for investors 10 with very high standards. I believe up until 11 now--and this applies to a specific ambit over time 12 and it applies to a broad concept of investment where 13 what matters is determining the characteristics of 14 the investment. 15 Q. Do you recall my question, Mr. Herrera? 16 A. Yes. 17 Q. So, would you agree with me that when 18 investors decide--when they make these decisions as 19 to whether or not to invest in Perú, they take note 20 of the text of the Agreement reached by the Parties; 21 correct? 22 A. I think that the text of the Agreement has
[Page 1109]
1 to be read in its entirety, that is correct. 2 Q. And the investors who are not involved in 3 the negotiation process and the back and forth cannot 4 know what was discussed, what was not discussed, what 5 was mentioned, what was yielded. What they can know 6 is, well, they can read the text in an--in full, in 7 an integrated manner as you said; correct? 8 A. Yes, indeed. And the text has to be 9 analyzed in full, in an integral manner. 10 Q. And in doing so, the specific limits of this 11 broad coverage are included in the text; correct? 12 A. The coverage is defined in the text. 13 Q. Yes, and it's subject to specific limits 14 that are in the text of the Treaty; correct? 15 A. Not necessarily. 16 Q. Could you look at Paragraph 17 of your 17 Statement please? 18 A. 17. Yes. 19 Q. You say here that: "In other words, the 20 investment chapter was intended to cover a variety of 21 areas but would be subject to specific limits in the 22 text."
[Page 1110]
1 Do you see that? 2 A. That is what was sought. 3 Q. Now, if you could turn to Page 34 please, 4 which is the last paragraph of your Statement. 5 A. Yes. 6 Q. The first sentence here says that: "Neither 7 Perú nor the United States consider that the Agrarian 8 Reform Bonds would be covered by the Treaty." 9 Do you see that? 10 A. Yes. 11 Q. And at the end of this paragraph, you add: 12 "The Agrarian Reform Bonds simply are not the type of 13 instrument that the Contracting Parties had in mind 14 when negotiating Treaty provisions." 15 Do you see that? 16 A. Yes. 17 Q. Now, when you speak of the Contracting 18 Parties, to be more precise, you speak of the 19 negotiators who were negotiating at the group that 20 was negotiating the chapter on investment? 21 A. Yes, clearly. 22 Q. Well, let me ask you, there were 12 or 14
[Page 1111]
1 different negotiating groups for the different 2 chapters of the Treaty; correct? 3 A. That is right. 4 Q. And 13 rounds of negotiation of these 5 chapters; correct? 6 A. That is right. 7 Q. And when you speak of what the Contracting 8 Parties considered or what they had in mind, you're 9 talking about the subjective understanding of these 10 negotiators in each of these negotiating groups; is 11 that correct? 12 A. I'm referring to the investment negotiating 13 group. 14 Q. Only investment? 15 A. Yes. 16 Q. You do not participate in the other 17 negotiations; correct? 18 A. There were different negotiating groups. We 19 did coordinate internally. 20 Q. Yes, of course. But now here, in this 21 paragraph, you speak of Perú but you also speak of 22 the United States. So, you are claiming to describe
[Page 1112]
1 the understanding of the negotiators, at the 2 investment negotiating group, including the U.S. 3 negotiators. 4 A. It's what I perceived. 5 Q. Now, the reason you think this is, which you 6 also say in Paragraph 34: "Neither Contracting Party 7 ever mentioned the Agrarian Reform Bonds during the 8 negotiations"; correct? 9 A. Yes, in part, because of that. 10 Q. You say, in part, it's because of that. 11 This is the only thing you say in Paragraph 34; 12 correct? 13 A. Well, this is a concrete fact that the 14 matter was never discussed at the negotiating table. 15 Q. The matter was never discussed at the 16 negotiating table as per your recollection. 17 A. That is right. 18 Q. And you also say that there is no reference 19 to the issue in the minutes of the 13 rounds of 20 negotiations; is that right? 21 A. Yes, there is no such reference. 22 Q. Now, when you speak of the minutes of the
[Page 1113]
1 rounds of negotiations, I suppose you are referring 2 to the minutes prepared that you attached to your 3 Statement? 4 A. Yes. 5 Q. And the MINCETUR is the Ministry of Foreign 6 Trade and Tourism of Perú; correct? 7 A. Yes. 8 Q. And so, these minutes of the negotiations 9 are internal documents that have been prepared by 10 Perú; correct? 11 A. Yes, indeed. 12 Q. They were not reviewed or drafted by the 13 United States; correct? 14 A. It is correct. There was no signed minutes. 15 Q. Very well. And according to you, nothing in 16 these minutes of negotiation expressly states that 17 the Agrarian Reform Bonds would be covered. They are 18 simply not mentioned; correct? 19 A. They are not mentioned. 20 Q. And if they weren't mentioned, it was not 21 mentioned either that they had been excluded from the 22 Treaty; correct?
[Page 1114]
1 A. Well, let's see. There was clearly no need 2 to exclude the specific assets, just as there was no 3 understanding that the list of assets that are part 4 of the definition of an investment--because I 5 speak--excuse me. The U.S. negotiators repeated time 6 and again--or they went time and again to analyzing 7 that in each case one should analyze whether a given 8 activity had the characteristics of an investment. 9 One had to analyze all of the relevant facts. That 10 is something that they repeated constantly because, 11 well, what they would mention is that one had to be 12 sufficiently broad so as to cover future investment. 13 So, one had to undertake a case-by-case analysis. 14 Q. We agree, Mr. Herrera. And excuse me, what 15 was explained--what you've explained in your previous 16 comments and, no doubt, Mr. Hamilton, if he thinks 17 that further clarification would be useful, he will 18 ask you. 19 But my specific question is based on this 20 Paragraph 34 of your Statement. What you are doing 21 is drawing an inference regarding the subjective 22 state of mind of two sovereign countries, Perú and
[Page 1115]
1 the United States, based on the silence of the 2 minutes that were drawn up by Perú; correct? 3 A. Not just that. If one looks at the result 4 and the process of whole negotiation also. 5 Q. Thank you for that clarification. 6 How many investment treaties have you 7 negotiated, Mr. Herrera? 8 A. With United States, Japan, Korea, with 9 México, and I have--also I was involved in the 10 negotiations of the TPP and also in negotiations with 11 Chile. 12 Q. So, several. We could agree on that. 13 A. Yes. 14 Q. Now, I know you're not an attorney, but, as 15 you understand it, the coverage of the investment 16 treaties that you've negotiated is that determined 17 based on what was mentioned in the negotiations 18 before coming up with the text? 19 A. I'm sorry, could you repeat the question? 20 Q. Yes. Well, we can move on. 21 Let us turn to your Witness Statement. 22 What struck me in your Statement,
[Page 1116]
1 Mr. Herrera, is that you don't mention a single time 2 the Report by Peter Allgeier, Ambassador Allgeier, 3 who, in due course, was Deputy U.S. Trade 4 Representative with responsibility for these 5 negotiations. And I simply wanted to ask you whether 6 you've reviewed this Report that was submitted before 7 your Witness Statement--or before preparing your 8 Witness Statement? 9 A. Yes, I reviewed it. 10 Q. But did it not occur to you to mention in 11 your Statement whether or not you agreed with 12 Ambassador Allgeier? 13 A. I believe that Ambassador Allgeier makes 14 reference to policies and procedures under which the 15 United States negotiates. I don't think the purpose 16 was to discuss those matters. 17 Q. But you have read it--reviewed it; correct? 18 A. Yes. 19 Q. So, you would agree with the Ambassador that 20 this Treaty was negotiated using a negative list; 21 correct? 22 A. Yes, indeed.
[Page 1117]
1 Q. And what this means is that the Treaty 2 obligations apply horizontally in all sections of the 3 economy except where it is expressly stipulated that 4 there is a reservation? 5 A. Yes. 6 Q. Excuse me, Mr. Herrera, I don't know if 7 you're looking at your phone or not, but please, if 8 you could leave your phone aside? 9 A. Well, I was looking at some issue with the 10 connection, but we can continue. 11 You were saying--well, you were asking me 12 whether I agree with Ambassador Allgeier in the sense 13 that the Treaty had been negotiated with a negative 14 list view. 15 Q. Yes. And I think you said yes, but what I 16 wanted to ask you, Mr. Herrera-- 17 I don't know if you are receiving messages 18 via your phone. So, as not to distract ourselves, 19 could you please put the phone aside? 20 A. Yes, the battery was running low. That was 21 the issue. 22 Q. Oh, okay. Fine. Thank you.
[Page 1118]
1 So, this idea of a negative list is the 2 opposite of the idea of a positive list; is that 3 right? 4 Do we agree? 5 A. Yes. 6 Q. A positive list is a list that specifically 7 enumerates the things that are covered; correct? 8 A. Correct. 9 Q. Now, a negative list, the other kind of 10 list, allows the Parties to have a broad coverage of 11 things and to carve out issues that are sensitive or 12 important for one of the Parties, and according to 13 this principle, the things expressly excluded are 14 included in list; is that correct? 15 A. Yes. 16 Q. In this Treaty, we have some examples of 17 this principle; right? 18 A. Yes. 19 Q. According to your understanding, 20 Mr. Herrera, is there exclusion of this type for Land 21 Reform Bonds or for Land Reform? 22 A. No.
[Page 1119]
Q. Could you look at the definition of "investment" with me? In the Treaty, as you know, it is Article 1028.
A. The Treaty. Where is it?
Q. It's at 37, at the end of your binder.
PRESIDENT FERNÁNDEZ ARMESTO: You are not going to ask the Witness to interpret this; right?
MS. POPOVA: No, no, sir. No.
PRESIDENT FERNÁNDEZ ARMESTO: He is a fact witness, so any interpretation by him is irrelevant.
MS. POPOVA: Yes.
BY MS. POPOVA:
Q. I'm going to ask you to please look at the different types of investment and the list that we can find there.
Have you found it, sir?
A. Yes.
Q. You agree with me that this list is for illustration purposes only. It is not limiting?
A. Yes, it's a reference.
Q. Okay. It's a reference. I see.
So, a piece of property doesn't have to be
[Page 1120]
mentioned specifically in the Treaty to be covered; is that right?
A. That's right.
Q. Because what matters is that, in the specific case, we have to predict the characteristic of an investment.
A. Okay.
Q. Let us look for an example.
PRESIDENT FERNÁNDEZ ARMESTO: I'm not sure the Witness is going to be able to help us a lot with the interpretation of the Agreement. He was the negotiator of the Agreement, but its interpretation, well, it's interpretation. I am a bit concerned that we are getting into this arena that is different. He can tell us about how the Treaty was negotiated and discussed. How the Treaty is interpreted is a legal issue, and it's an issue for the Tribunal.
MS. POPOVA: Mr. President, I'm completely in agreement with you. My question had to do with the fact that he testified that this list is for illustration purposes only, and this at Page 21 of his Statement.
[Page 1121]
BY MS. POPOVA:
Q. I wanted to ask you to go to Footnote 17 in Spanish, and 13 in English. You see here that it says here that "the loans given by one party to the other party are not considered investments."
Do you see that?
A. Yes. Yes. This is Footnote 17. Yes. Right.
Q. Let us see why the Treaty includes this footnote. This explicit exclusion was included after a lot of negotiations between the U.S. and Perú; correct?
A. Yes. This was discussed in a number of rounds.
Q. This, because the coverage of the public debt was a very sensitive issue for Perú; correct?
A. What I know is that it was considered that these loans have their own mechanisms for dispute resolution. Basically that's what it is.
Q. And what I asked you is that the reason why this point of coverage of the public debt was negotiated was because this was a sensitive issue for
[Page 1122]
Perú; correct?
A. The issue of the public debt is an issue that was, yes, sensitive for Perú, and, in particular, it was sensitive because Perú was to come back to the international markets after many years, and we were in the process of restructuring things and there was a lot of concern by the MEF as to how dispute resolution mechanisms in the Treaty were going to impact the country in those negotiation processes in connection with the restructuring of the debt.
Q. Right. And that concern can be seen in the fact that this issue of the public debt, as you explained, was raised at the outset of the negotiations; right?
A. That's right--also. Excuse me. We do have to take into account two things in this connection.
Q. I'm not sure I understood you.
A. Let us recall that the negotiations started between the U.S. and three Andean countries.
Q. Yes, sir. Right.
A. The first thing that we had to do was to
[Page 1123]
consolidate a position, to have a single position. The position of Colombia was much more radical than Perú's position.
Q. Thank you. That is why this issue was negotiated from the very first negotiation round until Round 8. Does this sound right to you?
A. Perhaps, yes.
Q. I say this because, in your Statement, you mention at least nine negotiation rounds where this issue was discussed.
Do you think that's correct?
A. Yes. There were a number of negotiation rounds.
Q. I wanted to ask you something else. If you look at Paragraph 29, you explain here that the Andean countries anticipated in the seventh round of negotiation that they were going to be granted their proposal to exclude from the definition "State debt." I'm sure your Spanish is much better than mine, but it seemed to me that the contrary was the case, that the Andean countries were going to grant a proposal to exclude the external debt to obtain an
[Page 1124]
annex on public debt. You mentioned this also here later on.
Do you think that's correct?
A. Let's see. The thing is that in the case of Perú, it was clear to us already that it was relevant to include the idea of public debt in the notion of investment. However, we were concerned with another issue, the bilateral debt. We wanted to carve this out. We wanted to have two different dispute resolution mechanisms that were different. If we're thinking, on the other hand, of the issuance of Global Bonds and the need for restructuring, we needed the annex--I think it was 10F--where we needed to evidence our concerns.
Q. There was this idea of exchange packages; is that correct?
A. Yes.
Q. And these packages are included in the minutes, and they describe the points that the Andean countries were ready to concede, on the one hand, and the other--and, on the other hand, what they wanted to get.
[Page 1125]
A. Yes.
Q. As you explained at the seventh or eighth round, Perú had already accepted that the public debt was going to be included, with the exception that we talked about before in connection with the footnote, the bilateral debt, which had to do with the loans of the Contracting Parties?
A. Yes, indeed. Also, Annex 10F indicated the application of a dispute resolution mechanism in the case of a debt.
Q. Okay. I'm going to ask you, sir, to look at the minutes of the eighth negotiation round that you attached to your Statement, and it is to be found at 23 in your binder, and it's CE-436.
Could you please look at Page 13?
A. Yes.
Q. I have it here. "Treatment of the public debt." Here, it says: "On the other hand, according to the negotiations maintained with the DGETP, Perú declined to insist on a list that enunciates all the items in connection with the operations that we covered under the definition of "debt restructuring."
[Page 1126]
And this is Annex F; right?
A. Yes.
Q. And then if we go to the next negotiation round, what happened? Let's see. It's CE-438. And this is behind tab--and it should be behind Tab 25 of your binder.
A. Okay. Very well.
Q. And as you explained in your Witness Statement, also at Paragraph 30, at the time of the ninth round of negotiations, it's at Page 26 of the document, where it says "treatment of the public debt."
A. Yes, I see it.
Q. Here it says, "thus, the proposal submitted by the U.S. meets the guidelines proposed by the DGETP of the MEF."
Do you see that?
A. Yes, I do.
Q. And this DGETP is the one in charge of the internal public debt; right?
A. I don't know.
Q. Well, of the public debt, in general, let's
[Page 1127]
assume.
A. I suppose so.
Q. So, at the beginning of negotiations, we had the U.S. that wanted to include the whole of the public debt and the Andean countries wanted to exclude all of the public debt. At the end of negotiations, this position evolved, and the whole of the public debt was included except for the bilateral debt. This was included in the footnote. And the other forms of public debt were regulated via the Annex, 10F.
Is that correct?
A. Yes. Well, Annex 10F, what it does is that it implements the dispute resolution mechanism. That's all it does. We can reread it, if you'd like.
Q. Let us go to your Statement at Paragraph 33.
A. Yes.
Q. Here, again, you say that the understanding in connection with the notion of debt, including Bonds as an investment, was not to obtain financing in international markets.
Do you see that?
[Page 1128]
A. Yes.
Q. Well, let me ask you--I'm sorry, it was aimed at obtaining financing in international markets.
THE INTERPRETER: The interpreter corrected himself.
BY MS. POPOVA:
Q. So, this is--these are the understanding of the negotiators of the group in Perú?
A. That was the understanding that we had with the conversations we held with the MEF.
Q. You negotiators had conversations with the MEF. That's what you said?
A. Yes, with the Ministry of Economy and Finance.
Q. Do you think that the only kind of public debt that was covered by the Treaty was these instruments that you have indicated were instruments aimed at obtaining financing in international markets?
A. That was our intention, but the important thing is that in accordance with the definition of
[Page 1129]
"investment" for each one of these cases, one must analyze the specific characteristics of each case and also the relevant facts.
Q. Yes, that is clear to me, Mr. Herrera.
You agree with me--well, let's see. Let us try to be more specific.
In your Statement, you mention the Global Bonds of Perú, Perú's Global Bonds; right?
A. Yes, that's right.
Q. In your understanding, these Global Bonds were covered in the definition of "investment" under the Treaty; correct?
A. Yes. We understand that they have the characteristics of an investment.
Q. You also mention the Brady Bonds in your Statement. Would these Bonds also be covered in the definition of "investment" under the Treaty?
A. Well, in connection with the Brady Bonds, a restructuring took place. New Bonds were issued.
Q. Yes, and you explained that it is because of this restructuring that Perú wanted to include Annex 10F; correct?
[Page 1130]
A. Indeed.
Q. My question, do you think that the Brady Bonds and that restructuring process would be covered under the Treaty?
A. The new Bonds issued are included in the Treaty.
Q. Would the Brady Bonds be covered under the Treaty as well?
A. The Brady Bonds were replaced.
(Comments off microphone.)
Q. And that's the reason why, in your understanding, they would not be covered under the Treaty?
A. What we are covering is the Global Bonds that were issued.
Q. You mentioned that they were exchanged. Well, you said that there was a swap of Brady Bonds and Global Bonds?
A. Yes.
Q. Now, let's go back in time. The Brady Bonds were born of the Brady Plan; is that correct?
A. Yes.
[Page 1131]
Q. According to this plan, Perú took the bank loans that it had and it converted those into Brady Bonds, so-called; correct?
A. That's my understanding. That's how it was.
Q. In 2002, as you mentioned, the Brady Bonds were swapped for other Bonds; correct?
A. That is correct.
Q. This kind of a swap and restructuring is beneficial for the economy of Perú and for the development of the country; correct?
A. Yes.
Q. Now, the Global Bonds, Perú's Global Bonds and Perú's Brady Bonds are not mentioned nominatively in the Treaty. They are not mentioned in Annex 10F, and they are not mentioned in the negotiation notes either; correct?
A. They are not mentioned, no.
Q. But you'd agree with me that, in spite of the fact that they are not specifically mentioned, they are still covered; correct?
A. Yes. My understanding is that they are covered.
[Page 1132]
Q. Thank you, Mr. Herrera. I do not have further questions for you. Thank you very much for your patience, and thank you very much for your assistance.
A. Thank you, ma'am.
PRESIDENT FERNÁNDEZ ARMESTO: Mr. Hamilton, any questions in redirect?
REDIRECT EXAMINATION
BY MR. HAMILTON:
Q. Mr. Herrera, I have a few questions in redirect.
First, counsel for Claimant asked a few questions in connection with Annex 10F of the investment chapter. And you mentioned that that Annex clarifies the way in which the dispute resolution mechanism is to be applied. That's all it does.
What does that mean?
A. Let's see. Yes. We were seeking, via this Annex--was to build trust in the Peruvian authorities that no problems were going to be had with Bond issuance processes that had started the debt
[Page 1133]
restructuring systems. Consequently--well, let's see. What kind of questions--or, rather, what kind of problems could arise?
The problem would appear is an investor felt it was impaired in a restructuring process, for example, and the investor sought to bring a claim against the Peruvian State. What we were seeking was to leave things as clear as possible.
The first thing that it is stated there is that the Parties recognize that the purchase of the debt issued by one of the Parties entails a commercial risk--that is to say, the commercial risk exists. There can always exist the possibility of a debt not being paid. That risk exists. The investor that purchases securities must understood that.
So, then further on it says "no Award may be issued for Claimant--for a claim under such and such Article in connection with a noncompliance with the payment of a debt by one Party, unless the Claimant proves that that breach constitute an expropriation that was not compensated for purposes of Article 10.7, or any other violation of Section A."
[Page 1134]
So, first, no claim could be brought for the nonpayment of a debt, just like that. Evidence had to be given that the Agreements had been violated.
The second thing is that no claim in connection with the debt restructuring process by a Party different from the United States, well, this is in connection with Section A if the restructuring was negotiated at the time of the submission, or it becomes a negotiated one after the submission, unless it violates the Most-Favored-Nation Clause and the Equitable Treatment Clause.
So, this is the last point that we were able to incorporate here to this Annex. The term is extended, the term that a--investor has to wait until it can stake a claim. It is extended to 270 days. Why? Because we didn't want a claim to be brought while the restructuring of the debt was being negotiated.
That's the reason for my comment, that this Article was to prevent any sort of cases related to the dispute settlement concept under the law.
Q. And you mentioned your point of view as the
[Page 1135]
main negotiator for Perú of the chapter on investment and the scope of the application of Chapter 10F in connection with public debt.
What do we have on public debt as reflected on this Annex?
A. Mr. Hamilton, I wasn't able to hear your question.
Q. Yes, Mr. Herrera. Thank you very much. You referred several times to the scope of coverage under 10F and the idea of public debt at the time of negotiation of the Treaty.
What was your understanding, as the main negotiator, of this Treaty chapter?
A. As I mentioned before, the concern with the coordination of the MEF had to do with the issuance of Global Bonds, as part of a policy that the country had initiated, had implemented again after many years.
Q. Okay. And Mr. Herrera, you referred several times to the definition of "investment" under the Treaty, in particular, the requirement to see the characteristics, the relevant characteristics. So,
[Page 1136]
if there is a paper, a sheet of paper that is some sort of Bond, what do you suggest to be able to determine whether it is an investment or not under the Treaty?
PRESIDENT FERNÁNDEZ ARMESTO: You are also dangerously approaching the request for an interpretation to the Witness. Mr. Hamilton can tell us what he negotiated rather than the proper interpretation of the Treaty. I am willing to see what he answers, but how about not continuing down this path.
MR. HAMILTON: I understand the comment, Mr. President, and as we listened to questions that were not very relevant by the other Party, I believe--Mr. Herrera--
THE WITNESS: If you allow me, Mr. Hamilton, just a brief comment in connection with your question.
And I will answer that question along the same lines I answered the counsel for the other party. In every case we need to analyze the characteristics of the alleged investment, and we
[Page 1137]
also need to analyze all of the relevant facts. I would like to underscore that there was a concern among the U.S. representatives for this topic because it was not expected to have the Treaty be in use on a speculative or in a manner--in an undue manner.
I recall that at some point the counsel that was part of the U.S. negotiating team mentioned the example of the summer home of a company manager that could not be considered an investment. So, it is not the fact that there is just an asset, but we do need to analyze all of the characteristics and relevant factors.
BY MR. HAMILTON:
Q. Thank you very much, Mr. Herrera.
And you had several--you were asked several questions about various disputes before ICSID and other types that was addressed--they were addressed by the U.S. and Perú prior to the signing of the Free Trade Agreement among both countries, and you said the following: "I do not recall any relationship between--among those topics," and that was your comment in connection with the relevance or
[Page 1138]
irrelevance of these topics to the--for the negotiation or interpretation of the Agreement.
What do you suggest, that you don't recall any relationship among the topic?
MS. POPOVA: Just a correction. I never asked or I never intended to ask him about ICSID disputes. I see it on the Transcript, Mr. Hamilton saying that I had asked him several questions on ICSID Cases, and I don't think that that is proper.
PRESIDENT FERNÁNDEZ ARMESTO: I don't think he asked about that.
MR. HAMILTON: I apologize. First of all, after seeing that the questions are so much beyond his Statement, but I also see the reference to several fora, and if you don't understand that there are references to investment disputes, we do not agree on the facts. There is a reference to several fora.
PRESIDENT FERNÁNDEZ ARMESTO: Please, ask your question to the Witness and we conclude.
BY MR. HAMILTON:
Q. Mr. Herrera, you were asked several
[Page 1139]
questions about disputes among the U.S. and Perú, and while Perú was negotiating this Treaty. You mentioned that you do not recall linking the topics.
What does this suggest?
A. As I explained to Ms. Popova, first of all, we never discussed any of the outstanding cases. At the negotiating table, the U.S. delegation never discussed any specific case. And I understand that they also knew that the investment table was not the right forum to address these pending issues.
Second, the existence of those pending issues--and that was my reference--the existence of those pending issues or cases did not guide the discussion on any of the basic elements of the Agreement, not even the dispute settlement mechanism.
PRESIDENT FERNÁNDEZ ARMESTO: Very well.
Any other question?
BY MR. HAMILTON:
Q. Final question, Mr. Herrera, you were also asked in connection with Mr. Allgeier.
What was the role of Mr. Allgeier at those meetings that you attended for the negotiation of the
[Page 1140]
investment chapter?
A. As far as I recall, Mr. Allgeier did not attend any of the investment rounds.
Q. Thank you very much, Mr. Herrera.
MR. HAMILTON: I have no further questions.
PRESIDENT FERNÁNDEZ ARMESTO: Great.
Mr. Herrera, thank you very much for being with us, even over the phone in Lima. We really thank you for your effort, and we hereby conclude your examination.
THE WITNESS: I thank the Tribunal for allowing me to cooperate from Lima. As you know, this is due to a treatment I am receiving.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you very much. We wish you the very best for your health and recovery. Thank you, Mr. Carlos.
(Witness steps down.)
PRESIDENT FERNÁNDEZ ARMESTO: Now, we can close the Transcript.
(Brief recess.)
PRESIDENT FERNÁNDEZ ARMESTO: So, we resume. Thank you for waiting. Thank you.
So, we will resume the Hearing, and we will
[Page 1141]
do the following: We will start with the examination of Minister Castilla because I want to, first of all, start with him and give him an explanation of why we are running late and explain to him. We will then break for the cross-examination, and we will have the cross-examination of Minister Castilla tomorrow at 9:00 a.m. Washington time.
And as regards the future of our procedure, there are two elements in this week which, to us, are fundamental. One is that we need a full morning on Friday with Mr. Kaczmarek and Mrs. Kunsman. That is fundamental, and we need the same time on Wednesday with Professor Edwards. So, we will not go now into details, but you must now--and we can speak once we are finished with the Minister. We will have to--we will need a morning with Professor Edwards and we need a morning with Mr. Kaczmarek without any time pressure, because these are areas in which we have to get a very precise, exact view.
There are issues which the Tribunal does not cover well, which is the question of exchange rate and different types of exchange rates, and we need
[Page 1142]
time to understand and to discuss. So, that is fundamental.
The other Experts are less important. They are Legal Experts, and we will, of course, hear them, but we must limit our time so that we leave sufficient time for the Quantum Experts.
Very good. With that, we start the examination of Minister Castilla.
LUIS MIGUEL CASTILLA RUBIO, RESPONDENT'S WITNESS, CALLED (via videoconference)
PRESIDENT FERNÁNDEZ ARMESTO: Minister? Minister, can you hear me?
THE WITNESS: Yes, I hear you. Good afternoon.
PRESIDENT FERNÁNDEZ ARMESTO: How are you, Minister? Very good afternoon.
First of all, I'd like to apologize, because you have been waiting for a long time, and this is always unpleasant. I say it's like going to the dentist and, at the same time, having to wait until it's your turn.
The reason is that the examination of a
[Page 1143]
person on the team that has worked with you, the Vice Minister, Vice Minister Sotelo, took much longer than we had anticipated, and, therefore, the day has become extremely complicated.
I don't know what time it is in Lima. Here it is now 6:10 p.m. Is it the same time in Lima as well?
THE WITNESS: (No interpretation.)
THE INTERPRETER: It was inaudible for the interpreter.
PRESIDENT FERNÁNDEZ ARMESTO: In addition, what should work technically well is not working technically well, sir, so unfortunately the communication is not easy between Washington and Lima.
So, we are going to do the following: Now, you know that first, there's a direct examination in which the attorneys for the Republic of Perú put questions to you. We are going to do that this evening, now. Then we need to take a break in your examination, and we will continue tomorrow morning at 9:00 a.m., if you agree, and I understand it's the
[Page 1144]
same time here as it is in Lima. So, that's the plan. I hope the technology works, and that we can hear you well and that we can make progress.
Minister, you are here as a witness, and as a witness, you have the duty to tell the truth. So, the first thing we need to do is to take your Statement, your declaration. So, I would ask that you please stand.
Excuse me, Mr. President.
Minister, please, if you would.
THE WITNESS: I solemnly declare, upon my honor and conscience, that I will speak the truth, the whole truth, and nothing but the truth.
PRESIDENT FERNÁNDEZ ARMESTO: Very well. Thank you, Minister.
The truth is that the technical aspect of our communication is poor. I hope that you can hear us better than we can hear you, with which we give the floor to the Claimant for the direct examination.
MR. HAMILTON: One procedural question, Mr. President, please. Perhaps I did not understand the plan so well, but it was my understanding that
[Page 1145]
the Tribunal would like to begin with Mr. Castilla tomorrow.
PRESIDENT FERNÁNDEZ ARMESTO: Now.
MR. HAMILTON: Including the cross?
PRESIDENT FERNÁNDEZ ARMESTO: No. We would leave the cross for tomorrow.
MR. HAMILTON: So, we are going to spend about 10 minutes right now, and then he would be sequestered?
PRESIDENT FERNÁNDEZ ARMESTO: Well, the sequestration would not be all that important. He is in Lima. It's not such an issue that you can't call him tonight. He has been sequestered throughout the Hearing. I think that he'll be delighted to not receive any phone call from the lawyers; right? It's better not to receive phone calls from the lawyers.
Let me explain a procedural rule to you. If you begin your examination this evening, then the lawyers cannot speak with you during your examination; therefore, they will not be able to call you at any time tonight. But I think the Minister would prefer that he not receive any calls tonight.
[Page 1146]
MR. HAMILTON: No, I just want to confirm that the Minister understands what's happening.
So, Minister Castilla, what the Tribunal is asking is that right now, we are going to take your direct testimony, and then we're going to stop for today. And we're going to begin tomorrow at what time?
PRESIDENT FERNÁNDEZ ARMESTO: I would propose at 9:00 a.m.
MR. HAMILTON: 9:00 a.m. tomorrow morning for the questions from my colleague of the other Party.
So, having stated these procedural aspects, I would ask if you're available tomorrow at 9:00 a.m., and also, Mr. Friedman, if you could tell us approximately how long you plan to take?
How long is the testimony going to last tomorrow?
MR. FRIEDMAN: Yes. As I mentioned earlier, right now I'm anticipating about two hours, but it depends to some extent on the answers, and, of course, we have translation. So, I would say the
[Page 1147]
morning.
MR. HAMILTON: Okay. Minister Castilla, the idea is that we are going to take your direct testimony this evening and then continue with the questions from my colleague tomorrow beginning at 9:00 a.m., and that would probably last two to three hours, something like that.
So, I simply want to confirm that you understand this plan of the Tribunal.
THE WITNESS: I have changed my--so, to the extent possible, I think that we could start tomorrow, tomorrow morning.
PRESIDENT FERNÁNDEZ ARMESTO: So, I'm very, very sorry for this change in the agenda, Minister. I think that these are issues that sometimes take place because it is hard to predict how long a testimony will last, and Vice Minister Sotelo's testimony was quite long. We are not going to finish today. We have interpreters here--stenographers as well--and we started at 9:30 in the morning, so we have a certain time limit. So, this is what I call the potato-sack phenomenon. At the end, the Tribunal
[Page 1148]
becomes just three sacks of potatoes, and they cannot absorb any more information.
So, I am very, very sorry for this. I know this may be an inconvenience. I think by midday tomorrow, I'm sure we would have finished, but I just wanted to ask you a favor. I understand that you are a gentleman that has a very busy agenda, but tomorrow from 9:00 to 12:00, I'm going to ask you to please be with us.
THE WITNESS: It will be a pleasure, Mr. President.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you very much, Mr. Minister.
But today we are going to try to move forward, and perhaps we can end by 11:00 instead of 12:00 tomorrow.
I'm going to give the floor to counsel for Perú, and counsel for Perú is going to ask you a few questions, Mr. Minister.
MR. HAMILTON: Thank you very much, Mr. President, Members of the Tribunal.
DIRECT EXAMINATION
[Page 1149]
BY MR. HAMILTON:
Q. Minister Castilla, good afternoon.
A. Good afternoon.
Q. Minister, you submitted two Witness Statements in this case, one in 2018 and the other in 2019, and my understanding is that you have copies of that Statement on the table in front of you.
A. That's correct.
Q. Very well. In your Witness Statements, you make reference to your professional background. Could you please tell the Distinguished Members of the Tribunal what your professional background is?
A. Thank you. I studied economy in the McGill University in Canada. I graduated in economy. I also have a Ph.D. in economy in Johns Hopkins University.
I have had over 20 years' experience in the World Bank. I also worked in the Development Bank for Latin America, and now I have a position at the IADB.
For seven years I have worked in the public sector in Perú. I had several positions in the MEF
[Page 1150]
between '09 and 2014. I was the Chief of Staff for about two years; then I was the Vice Minister of the Treasury; and then I was the Minister, and this until 2014. Then I had the honor of representing my country to the White House.
And I have conducted academic activities as well, and I have also held other academic positions during my professional career.
Q. Thank you very much, Minister.
MR. HAMILTON: Mr. President, I'm not sure you can hear the Minister well.
PRESIDENT FERNÁNDEZ ARMESTO: We are making an effort. We are being quite unsuccessful when it comes to technical matters today.
MR. HAMILTON: His direct is going to be 12 to 15 minutes. Do you understand him?
PRESIDENT FERNÁNDEZ ARMESTO: I understand him, but the quality of the sound is not very good.
THE INTERPRETER: The interpreter confesses that he has a very, very hard time to understand.
SPANISH STENOGRAPHER: Mr. President, I am not understanding.
[Page 1151]
PRESIDENT FERNÁNDEZ ARMESTO: You understand nothing?
SPANISH STENOGRAPHER: Well, I can understand a little bit, but--
PRESIDENT FERNÁNDEZ ARMESTO: This is the World Bank, Mr. Minister. My apologies, but sometimes it happens that things are not perfect from a technical viewpoint. Let me discuss with the Secretary.
The sound, truth be told, is very bad quality-wise.
PRESIDENT FERNÁNDEZ ARMESTO: Unfortunately, I don't think we can do much else. It appears that the problem is that the signal that we're getting from Perú is not good. I don't know.
MR. HAMILTON: Mr. President, so perhaps we are not going to use extra time for his direct, and perhaps we can fix the technical matters tonight and start tomorrow morning.
PRESIDENT FERNÁNDEZ ARMESTO: Mr. Minister, you have worked a lot for multilateral banks? And this is a little bit of a mess in here right now
[Page 1152]
sound-wise.
THE WITNESS: Yes, correct.
PRESIDENT FERNÁNDEZ ARMESTO: You know that these banks are quite bureaucratic. Things usually work really well, but sometimes things go askew.
There is a bad fairy that comes over, and we don't know what happens, but--the connection had been good in the past, but the connection today, well, has not been good. And we have here a stenographer that is taking down your Statement, and the stenographer says that he is unable to transcribe your Statement in a reasonable manner because he fails to understand you.
Truth be told, it is difficult to understand you. So, what Mr. Hamilton is proposing--Mr. Hamilton represents the Republic of Perú, of course--he is saying that we should break the examination now and we can resume tomorrow, and hopefully we're going to have a line of communication that is going to enable us to hear you better. We hear you very, very poorly, truth be told. So, that's what we're going to do.
I am profoundly sorry, Mr. Minister. I know
[Page 1153]
that you've been waiting there all afternoon. I am sure this is quite disheartening, but Philip II said something the same when he lost the Armada. He said, "I have sent my ships to fight against the elements," and we are fighting against the elements here. The elements here are technical in nature, but unfortunately, we're going to have to interrupt this examination, and you're going to have to come back tomorrow and be with us tomorrow.
THE WITNESS: Of course, Mr. President. Not a problem. I confirm that I'll be here tomorrow, and I hope the technical issues will be resolved. And I hope things are resolved.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you very much, Mr. Minister. As you know, your Statement is quite important. Thank you very much for your effort and for your patience. And we are going to talk tomorrow at 9:00 a.m. Lima time and Washington time.
THE WITNESS: Thank you, sir. Perfect.
Good afternoon.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you.
(Witness steps down.)
[Page 1154]
PRESIDENT FERNÁNDEZ ARMESTO: So, we have finalized with the Minister, and we will start tomorrow. I apologize on behalf of ICSID that this has been such a disaster, but it happens. It's not the first time that these type of things just don't work. You remember when we started on the first day, I said, "Hopefully the technology works."
(Comments off microphone.)
PRESIDENT FERNÁNDEZ ARMESTO: So, the point I just wanted to do, we must be more efficient in using the time. I understand that Minister Castilla is very important. But, then, you must bear in mind that what to ask is very important of the two Quantum Experts. We must leave sufficient time for them and that all the other Experts are Experts whose Expert Reports we have read, which are legal, basically, except for--I think for Ambassador Allgeier. They are legal analyses.
We understand that is our method. That is something which we understand. We are happy to hear the summary of their position, but not much--we are perfectly capable of analyzing the valid and the less
[Page 1155]
valid points of the Experts' cross-examination.
We all know that cross-examination of Legal Experts does not really lead to much more in-depth study or understanding of their Reports, so you must be very conscious of the time, and we must--on Wednesday, we must start with Professor Edwards, and we must devote the morning of Wednesday to Professor Edwards, and we must devote the morning of Friday to Professor Kaczmarek.
And I would kindly ask that you we start with the Quantum Experts in the morning when we are all fresh because you have seen how complex it is, and there are a couple of technical issues which really require a fresh mind, and it would not be good to have them at the end of the day.
Yes.
MR. HAMILTON: I was just going to say that that leaves us five people, between us and Sebastian. So, I wanted to get an idea how we might plan to allocate ourselves tomorrow. We have the Minister by videoconference. We had programmed Mr. Castillo by videoconference for tomorrow morning, but obviously
[Page 1156]
that will be shifted. And then there's a few other people. So, I just want to make sure, for everybody's humanity and benefit, that we have some idea. So, it sounds like we will begin at 9:00 instead of 9:30 tomorrow.
PRESIDENT FERNÁNDEZ ARMESTO: I would propose that.
MR. HAMILTON: We will begin with the Minister, and then we anticipate finishing with him by noon. We would, then, go ahead and start with the Gramercy Experts, hopefully before lunch. That would be Mr. Allgeier. I hope I'm pronouncing it correctly. Thank you.
And, then, in the afternoon we've got basically two Peruvian Legal Experts as well as Mr. Olivares-Caminal. So, I'm just trying to review and anticipate the day.
Obviously, after Minister Castilla, it will be our turn to ask questions, and so we will try to organize ourselves tonight to get as much accomplished as we can tomorrow to be ready for Mr. Edwards on Wednesday morning. But effectively,
[Page 1157]
it looks like we would be starting with the first of four Experts around noon tomorrow, and try to advance with as many of them as possible by the end of the day. And I guess that means that maybe one of them would get bumped until after Mr. Edwards given that you wish to start on the morning of Wednesday.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah, because the Thursday looks--if we have the Wednesday morning devoted to Professor Edwards, we may--we can have, then, two or three Experts in the afternoon, maybe one of the Experts which was for Tuesday, we could put him on Wednesday, and then Thursday looks with three Experts: García-Godos, Wühler, Guidotti, looks a day where we could have four, four Experts: Two in the morning and two in the afternoon. So, we could maybe move one Expert to Thursday and have four Experts on Thursday and tomorrow have Castilla and three Experts--two Experts, and then have Edwards and three Experts then or two Experts on Wednesday, something like that.
MR. HAMILTON: Given the number of people that we will be crossing after you finish with
[Page 1158]
Minister Castilla, can you give me 20 seconds to consult and, perhaps, make a suggestion?
PRESIDENT FERNÁNDEZ ARMESTO: Can I make an even better suggestion?
MR. HAMILTON: Yes, please.
PRESIDENT FERNÁNDEZ ARMESTO: Why don't you come together? It also depends on the traveling plans of Experts. I mean, let's try not to--if someone is traveling back on Wednesday, let's try to hear him on Tuesday; and if he's traveling back on Thursday, then we have a bit more leeway. I mean, let's try to--I mean, we have already destroyed a day in the life of Minister Castilla. Let's try not to destroy too many other days just out of respect for people.
MR. HAMILTON: Okay. Let's talk in a few minutes.
(Comments off microphone.)
PRESIDENT FERNÁNDEZ ARMESTO: Why don't you confer--
MR. HAMILTON: I'll confer--
PRESIDENT FERNÁNDEZ ARMESTO: --tomorrow in
[Page 1159]
the morning? Tomorrow in the morning.
MR. HAMILTON: That's fine.
PRESIDENT FERNÁNDEZ ARMESTO: Is that okay?
MR. HAMILTON: Sure.
PRESIDENT FERNÁNDEZ ARMESTO: Very good.
So, it's--we really have to get the technology working because--I mean, do you think we can restore it in that office because the thought of moving to the other office, I don't know if it's close by or not.
SECRETARY PLANELLS-VALERO: Yeah. I need to speak to the technicians.
PRESIDENT FERNÁNDEZ ARMESTO: Because if Minister Castilla is to go to a different office and all the lawyers are to go to a different office, we would have to tell him tonight. We cannot tell him tomorrow in the morning.
MR. FRIEDMAN: We did check and make sure that the rooms are available from 9:00 a.m. or before that at Estudio Rodriguez tomorrow. I don't know whether it was a problem with the technology at the Ministry's office. I do know that we have had
[Page 1160]
videoconferences in our offices here with the Estudio Rodriguez and it has worked fine, I mean. But we just offer it. We are not trying to push. We don't want to make him uncomfortable, but it's available.
(Comments off microphone.)
MR. FRIEDMAN: Yes, with the work of Secretariat. I suspect it was a technology problem of some kind at the source in Perú. And so, I'm just suggesting maybe we could use some different technology that may match up better with what's here, but it's an offer. Not insisting.
In any event, the other Witness who will testify by video tomorrow, Professor Castillo, will be doing that from Estudio Rodriguez' offices any way. He was never going to go to the Ministry.
PRESIDENT FERNÁNDEZ ARMESTO: In any case, let's do the following. Let's meet tomorrow at quarter to 9:00, so punctually at 9:00 we start with the Minister. Let's not have him waiting any longer.
Is that okay with you? Mr. Friedman? At quarter to 9:00.
MR. FRIEDMAN: Yes, as long as the bank is
[Page 1161]
open. Is the bank open?
SECRETARY PLANELLS-VALERO: Yes, the bank is open.
PRESIDENT FERNÁNDEZ ARMESTO: Quarter to 9:00. And so, quarter to 9:00, you tell us, and, please you now liaise with the Parties to be sure that whatever technology at whichever place is working, and you please liaise, and so at quarter to 9:00, we meet, you tell us which technology is working, and punctually at 9:00, wherever he is, we start with the Minister. Fair enough. Thank you very much. It has been a long day.
Not as fruitful as that we all had hoped, but that's the way it is.
(Whereupon, at 6:31 p.m., the Hearing was adjourned until 8:45 a.m. the following day.)
[Page 1162]
CERTIFICATE OF REPORTER
I, Dawn Κ. Larson, RDR-CRR, Court Reporter, do hereby certify that the foregoing proceedings were stenographically recorded by me and thereafter reduced to typewritten form by computer-assisted transcription under my direction and supervision; and that the foregoing transcript is a true and accurate record of the proceedings.
I further certify that I am neither counsel for, related to, nor employed by any of the parties to this action in this proceeding, nor financially or otherwise interested in the outcome of this litigation.
Signature
Dawn K. Larson
[Page 1163]
INTERNATIONAL CENTRE FOR THE SETTLEMENT OF INVESTMENT DISPUTES
-X
| In the matter of Arbitration between: | : | |
| : | ||
| GRAMERCY FUNDS MANAGEMENT LLC AND GRAMERCY PERU HOLDINGS LLC, | : | |
| : | ||
| Claimants, | : | ICSID Case No. UNCT/18/2 |
| and | : | |
| REPUBLIC OF PERÚ, | : | |
| Respondent. | : |
-X Volume 4
HEARING ON JURISDICTION, MERITS AND QUANTUM
Tuesday, February 11, 2020
The World Bank Group
1225 Connecticut Avenue, N.W.
C Building
Conference Room C1-450
Washington, D.C.
The hearing in the above-entitled matter came on at 9:00 a.m. before:
PROFESSOR JUAN FERNÁNDEZ ARMESTO, President
MR. STEPHEN L. DRYMER, Co-Arbitrator
PROFESSOR BRIGITTE STERN, Co-Arbitrator
In the case of discrepancy, the audio recording in the original language will prevail.
[Page 1164]
ALSO PRESENT:
On behalf of ICSID:
MS. MARISA PLANELLS-VALERO
Secretary of the Tribunal
MS. KRYSTLE M. BAPTISTA
Assistant to the President of the Tribunal
Realtime Stenographers:
MS. DAWN K. LARSON
Registered Diplomate Reporter (RDR)
Certified Realtime Reporter (CRR)
B&B Reporters
529 14th Street, S.E.
Washington, D.C. 20003
United States of America
[email protected]
MR. PAUL PELISSIER
MR. DIONISIO RINALDI
D.R. Esteno
Colombres 566
Buenos Aires 1218ABE
Argentina
(5411) 4957-0083
Interpreters:
MS. SILVIA COLLA
MR. DANIEL GIGLIO
MR. CHARLES ROBERTS
[Page 1165]
APPEARANCES:
On behalf of the Claimant:
MR. MARK W. FRIEDMAN
MS. INA C. POPOVA
MR. CARL RIEHL
MS. FLORIANE LAVAUD
MS. BERGLIND HALLDORSDOTTIR BIRKLAND
MR. GUILHERME RECENA COSTA
MS. SARAH LEE
MR. DUNCAN PICKARD
MR. JULIO RIVERA RIOS
MS. MARY GRACE MCEVOY
MR. THOMAS G. MCINTYRE
Debevoise & Plimpton, LLP
919 Third Avenue
New York, New York 10022
United States of America
MR. LUIS BEDOYA
MR. FRANCISCO CARDENAS PANTOJA
Rodrigo, Elias & Medrano
Av. San Felipe 758
Jesús María
Lima 15072
Perú
Representing Gramercy Funds Management LLC:
MR. JAMES TAYLOR
MR. JOSHUA M. O'MELIA
MR. NICK PAOLAZZI
MR. THOMAS NORGAARD
[Page 1166]
APPEARANCES: (Continued)
On behalf of the Respondent:
AMBASSADOR HUGO DE ZELA
Republic of Perú
MR. RICARDO AMPUERO
Republic of Perú
MS. MONICA GUERRERO
Republic of Perú
MS. GIOVANNA ZANELLI
Republic of Perú
MR. ALBERTO HART
Republic of Perú
MR. JONATHAN C. HAMILTON
MS. ANDREA MENAKER
MR. RAFAEL LLANO
MR. FRANCISCO JIJÓN
MR. JONATHAN ULRICH
MR. FRANK PANOPOULOS
MR. JOHN DALEBROUX
MR. ALEJANDRO MARTINEZ DE HOZ
White & Case LLP
701 Thirteenth Street, NW
Washington, D.C. 20005-3807
United States of America
[Page 1167]
For the United States of America:
MS. LISA GROSH
MS. NICOLE THORNTON
MS. MARGARET SEDGEWICK
MR. JOHN DALEY
Attorney-Advisers
Office of International Claims and
Investment Disputes
Office of the Legal Adviser
U.S. Department of State
Suite 203, South Building
2430 E Street, N.W.
Washington, D.C. 20037-2800
United States of America
MS. AMY COLLINS
U.S. Department of Treasury
[Page 1168]
CONTENTS
PAGE
WITNESSES:
LUIS MIGUEL CASTILLA RUBIO (resumed)
(via videoconference)
Direct examination by Mr. Hamilton. ... 1169
Cross-examination by Mr. Friedman. ... 1182
AMBASSADOR PETER ALLGEIER
Direct examination by Ms. Popova. ... 1316
Direct presentation. ... 1317
Cross-examination by Mr. Ulrich. ... 1331
Redirect examination by Ms. Popova. ... 1379
MARIO CASTILLO FREYRE
(via videoconference)
Direct examination by Ms. Popova. ... 1387
Direct presentation. ... 1388
Cross-examination by Mr. Jijón.. ... 1406
Redirect examination by Ms. Popova. ... 1464
RODRIGO OLIVARES-CAMINAL
Direct examination by Mr. Friedman. ... 1477
Direct presentation. ... 1478
Cross-examination by Mr. Panopoulos. ... 1497
[Page 1169]
PROCEEDINGS
PRESIDENT FERNÁNDEZ ARMESTO: Good morning to all of you on this fourth day of this Arbitration between Gramercy Funds Management LLC and Gramercy Perú Holdings LLC v. Republic of Perú.
LUIS MIGUEL CASTILLA RUBIO, RESPONDENT'S WITNESS, CALLED (resumed via videoconference)
PRESIDENT FERNÁNDEZ ARMESTO: Here we have Minister Castilla.
Minister, can you hear me?
THE WITNESS: Good morning, Mr. President.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you very much for the effort to be with us here today.
Without further ado, I am going to--
Mr. Minister, you are under oath, and you continue to be under oath, and I am going to give the floor to the Republic of Perú.
MR. HAMILTON: Thank you very much, Mr. President, Members of the Tribunal.
DIRECT EXAMINATION (resumed)
BY MR. HAMILTON:
Q. Minister Castilla, good morning.
[Page 1170]
A. Good morning.
Q. Minister, we are going to start again, new day, to make sure that the Tribunal can hear what you said yesterday in connection with your professional background.
Would you please sum up your professional background?
A. Yes. I am an economist. I trained in Canada and the U.S. I have a bachelor's degree in economy--in economics in Canada, and I have a master's degree from Johns Hopkins.
I have almost 20 years of experience in multilateral banking. I worked at the World Bank and the Inter-American Development Bank at the same time. I have been in the public sector for seven years, and five years were with the Ministry of Economy and Finance in different positions. That includes the Council of Advisors, Vice Ministers of Finance, and I was also appointed Ambassador of Perú to the U.S. in 2016.
To this professional activity, I should also add academic activity at MIT and other universities
[Page 1279]
1 that this is part of the ultimate Resolution of a
2 legal framework in order to address a legitimate
3 claim, which was a claim on the part of the Agrarian
4 Bondholders. It was a mechanism for compensation in
5 respect of a historical event in the history of Perú
6 that happened 50 years ago.
7 BY MR. FRIEDMAN:
8 Q. So, there was an analysis made. Is that your
9 testimony?
10 PRESIDENT FERNÁNDEZ ARMESTO: The Minister is
11 saying that there were projections.
12 MR. FRIEDMAN: Yes. And none of those have
13 been provided.
14 PRESIDENT FERNÁNDEZ ARMESTO: At least not
15 for the Minister.
16 MR. FRIEDMAN: Yes, I understand.
17 BY MR. FRIEDMAN:
18 Q. But there were written projections?
19 MR. HAMILTON: Objection.
20 BY MR. FRIEDMAN:
21 Q. Were the projections in writing?
22 PRESIDENT FERNÁNDEZ ARMESTO: Projections can
[Page 1280]
1 only be in writing. You cannot make mathematical
2 projections--
3 MR. FRIEDMAN: I agree.
4 PRESIDENT FERNÁNDEZ ARMESTO: --in the air,
5 Mr. Friedman. It's totally impossible.
6 MR. HAMILTON: Mr. President--
7 MR. FRIEDMAN: In--
8 MR. HAMILTON: Sorry, my turn.
9 Objection. He is simply planting this
10 comment. You've been given extensive internal files.
11 The Minister has gone for hours answering vague
12 questions with words you're trying to slice like a
13 razor. He's answered in good faith. And asking the
14 same question over and over again is not something the
15 State was allowed to do with your lead witness. I
16 believe we've gone too far.
17 PRESIDENT FERNÁNDEZ ARMESTO: Let's move on.
18 MR. FRIEDMAN: Yes.
19 BY MR. FRIEDMAN:
20 Q. So, in making those projections, was the
21 Ministry aware of the work of the Commission that had
22 been authorized under Supreme Decree 148 of 2001 that
[Page 1281]
1 was specifically charged with estimating the amount of
2 the outstanding principal of the Land Bonds?
3 PRESIDENT FERNÁNDEZ ARMESTO: The question in
4 reasonable terms: Were you aware that a Commission
5 in--2004? 2005? 2004.
6 NEW SPEAKER: The Report is from 2004, but
7 the Commission is from--
8 PRESIDENT FERNÁNDEZ ARMESTO: Yes. There was
9 a commission, which in 2004, before you came into
10 office, had performed some calculations regarding the
11 number of Bonds with respect to which payment might be
12 outstanding.
13 THE WITNESS: I recall that 2004 Commission
14 because that was the one that generated the Decision,
15 that backed the Decision of the Minister. I was his
16 Vice Minister in 2011 to hire Expert Reports and
17 Experts to provide an updating of the values.
18 So, I do recall that Commission, given that
19 that was the basis for the Minister to seek the
20 contracting of Experts and then to be able to present
21 a proposed law, which was never subsequently adopted.
22 PRESIDENT FERNÁNDEZ ARMESTO: I understand
[Page 1282]
1 that of this detail, while the Report had a
2 calculation of Bonds in respect to which payment was
3 outstanding, that you don't recall.
4 THE WITNESS: I want to be very specific
5 here, Mr. President. In effect, there was a
6 Commission in 2004. I was not at the Ministry, but I
7 came to learn of this 2004 Commission because, in
8 2011, the Minister at the time asked that that file be
9 searched for so as to then commission more
10 contemporary studies that would present a series of
11 methodologies which were then used to support the
12 proposed law that was put to the Council of Ministers
13 and that was not approved in 2011.
14 So, yes, I am aware of that, but in my role
15 as Vice Minister and for the purposes that I've just
16 explained at that time.
17 BY MR. FRIEDMAN:
18 Q. And I think the President's question was,
19 were you aware of the fact that that Report also
20 contained an estimate of the outstanding principal
21 amount of the Land Bonds?
22 A. You're asking me something--I'm sorry.
[Page 1283]
1 PRESIDENT FERNÁNDEZ ARMESTO: Yes, the
2 question is, do you recall--let me explain to you. We
3 have seen that Report. We saw it with Vice Minister
4 Sotelo, and that Report, at some place hidden in it,
5 has a table with projections of how many Bonds could
6 be--with respect to which how many Bonds payment could
7 be outstanding.
8 So, the only question is, do you or do you
9 not recall that that Report includes a projection? We
10 have the advantage of having seen the Report
11 yesterday, and we already know that it does include
12 that information. So, the counsel is asking you
13 whether or not you remember this detail.
14 THE WITNESS: I'll be absolutely sincere,
15 Mr. President. I do not recall having read that
16 Report. It was produced five years before I came into
17 the Ministry, and the only knowledge I had of it is
18 when it was used as support for an updating of indices
19 for valuation that was done in 2011.
20 PRESIDENT FERNÁNDEZ ARMESTO: I would have
21 been surprised had you remembered.
22 THE WITNESS: I cannot--I did not know
[Page 1284]
1 about--this document was produced in 2004. I learned
2 of it in 2011, nine years ago.
3 PRESIDENT FERNÁNDEZ ARMESTO: I would have
4 been very surprised had you said that you remembered
5 it.
6 So, let's continue. I'm not sure what the
7 purpose of the question is. What is the purpose? He
8 does not remember, as is logical. It is--he was a
9 Minister, and this was a document four years before
10 his time.
11 MR. FRIEDMAN: Yes. He's the only Witness
12 from the Ministry from this time, so we need to find
13 out whether he--how they estimated these analyses or
14 created these analyses that we've never seen.
15 MR. HAMILTON: He's not the only Witness from
16 this time, Mr. President.
17 MR. FRIEDMAN: Ms. Sotello was not working
18 for--
19 PRESIDENT FERNÁNDEZ ARMESTO: So, let's move
20 on. At some stage, we are three hours into his
21 Statement.
22 MR. FRIEDMAN: Yes.
[Page 1285]
1 PRESIDENT FERNÁNDEZ ARMESTO: We must start
2 to think about it.
3 MR. FRIEDMAN: Yes, I have been. The answers
4 have been extremely long enough and not responsive to
5 the question, in fairness.
6 MR. HAMILTON: Objection. If we're going to
7 start Oral Argument, I have many comments.
8 PRESIDENT FERNÁNDEZ ARMESTO: Let us put the
9 last questions to the Minister, and let's come slowly
10 to an end.
11 BY MR. FRIEDMAN:
12 Q. Now, as part of creating the January 2014
13 Supreme Decrees, the Ministry was required to prepare
14 a cost-benefit analysis; correct?
15 A. Correct.
16 Q. Okay. And I'd like to take a look at the
17 cost-benefit analysis for the Supreme Decrees, which
18 can be found in the books at Tab 92, which is in
19 Volume 4, at R-989.
20 A. Okay. I have Tab 92 in front of me.
21 Q. We're looking at the cost-benefit analysis
22 section.
[Page 1286]
1 A. Yes.
2 Q. All right. It's only, I guess, two sentences
3 long, so I'm looking at the second sentence. It says
4 that there is no cost in addition to the cost
5 represented by the Agrarian debt Bonds at their
6 updated value.
7 Now, isn't that, though, kind of the
8 substantial cost?
9 A. Let's see. Let me give you an answer to your
10 question. The very nature of the Regulation of the
11 Supreme Decree was precisely to identify what the
12 valuation was going to be so as to be able to come up
13 with a cost. That was precisely the objective, in
14 part, of that Supreme Decree.
15 So, I would say that the result of applying
16 that Supreme Decree was aimed precisely at identifying
17 the cost because there was no valuation formula, and
18 then all of a sudden there was. So, being able to
19 anticipate what the cost was going to be in a
20 Statement of Grounds is a somewhat partial view, if
21 you leave aside that the objective of the Decree was
22 to come up with a valuation of these Agrarian Reform
[Page 1287]
1 Bonds.
2 So, what it says there is precisely the
3 objective of the Decree, which is to come up with a
4 valuation of these Bonds.
5 Q. Yes, but you've now told us that you did, in
6 the Ministry, have analyses from these
7 times--projections--from these times, and those
8 projections presumably would have allowed you to
9 explain what the cost implications would be of doing
10 it one way versus another, of making certain choices
11 for using one certain level of Treasury Bonds versus
12 different kinds of Treasury Bonds and so on. A
13 thoughtful analysis of what the Cost would be. But
14 none of that is in here.
15 MR. HAMILTON: Objection, Mr. President.
16 There's a broad record of internal documents from the
17 Ministry. He has already explained that there was a
18 process with respect to the implementation of this
19 Decision. That was a gradual process where they would
20 go through a process and see how many people tendered
21 in.
22 We are going in circles, and we know what's
[Page 1288]
1 going on here, and it's not appropriate.
2 PRESIDENT FERNÁNDEZ ARMESTO: I think that
3 the question, which I also asked your Vice Minister,
4 is here there is no quantified costs. In the
5 cost-benefit analysis in Perú, it seems that it is not
6 necessary to come up with a precise quantification of
7 the budgetary impact, that it is sufficient to have a
8 generic formulation, such as this.
9 THE WITNESS: Are you asking me this,
10 Mr. President?
11 PRESIDENT FERNÁNDEZ ARMESTO: Yes. This
12 is--can you confirm this for me? I asked the Vice
13 Minister the same thing, and that's, in essence, what
14 she told me.
15 THE WITNESS: Well, I think it is all going
16 to depend on what it is that is being regulated, not
17 whether or not there is an investment project that has
18 a record that has details of specific costs.
19 Evidently, that implies a budgetary outlay or
20 a line item, and one can come up with a much more
21 precise cost-benefit analysis. In this specific case,
22 when the purpose of this Regulation is to have a
[Page 1289]
1 valuation of these obligations of the State, there
2 would be nothing more than this.
3 I don't know what the Vice Minister has said.
4 There is no reason why I should. She has extensive
5 experience, has worked in the Ministry of Economy and
6 Finance for many years, so I don't know if this is or
7 is not the norm for a cost-benefit analysis.
8 But I reiterate, it is going to depend on the
9 purpose of the Regulation that we're discussing. One
10 cannot make a general statement that all cost-benefit
11 analyses will be the same. It will depend on the
12 subject matter covered by the Supreme Decree.
13 BY MR. FRIEDMAN:
14 Q. If I could ask you to look at Tab 24 in the
15 Binder 1. Keep this document open, but look at Tab 24
16 in your binder, which is R-257. And this is the
17 Report we were talking about a few minutes ago of that
18 148 Commission.
19 MR. HAMILTON: Mr. President, the Witness has
20 already commented with respect to his knowledge or
21 lack of knowledge of the Commission, which, by the
22 way, is only called "148 Commission." That's a little
[Page 1290]
1 buzzword they are trying to use here. He has already
2 commented about this, and even the President has
3 already commented with respect to his familiarity or
4 no with something that predated his arrival to the
5 Ministry by years.
6 PRESIDENT FERNÁNDEZ ARMESTO: I don't know if
7 this will help us a lot more.
8 MR. FRIEDMAN: Well, Mr. President--
9 PRESIDENT FERNÁNDEZ ARMESTO: Okay.
10 MR. FRIEDMAN: If I could just proceed with
11 the cross-examination--I do think we would get through
12 this much more quickly if I could proceed to ask the
13 questions, and the Minister could answer those
14 questions. I'm sure we will get through it.
15 PRESIDENT FERNÁNDEZ ARMESTO: Let's make an
16 effort.
17 MR. FRIEDMAN: Yes.
18 BY MR. FRIEDMAN:
19 Q. If you see in this document, there is--after
20 the first page is a cover letter and then some
21 descriptions, and then there's an explanation of
22 reasons, and then there's a section called
[Page 1291]
1 cost-benefit analysis. It runs for five pages, and it
2 seems to be a very thoughtful treatment of the issue,
3 trying to take account of the debt stock and the
4 different methods--potential methods of approaching it
5 and their economic consequences.
6 So my question to you, Minister Castilla, is
7 do you know why the Ministry didn't undertake a
8 similar thoughtful analysis when it published the
9 January 2014 Supreme Decrees, especially in light of
10 the fact that you now say that there were projections
11 or analyses of potential impact?
12 A. If I may review this, please, for a moment.
13 As I indicated to the President, everything
14 will depend on the purpose of the Supreme Decree and
15 what is the context of the Supreme Decree. The 2014
16 one was to carry out a mandate from the Constitutional
17 Tribunal. Therefore, it was what it was. There was
18 no way to avoid or get around that, much less was it
19 the intent--one had to completely carry out, fully
20 carry out what was being ordered by the Constitutional
21 Tribunal.
22 That is very different from a proposal that
[Page 1292]
1 originates in the Executive Branch and that must be
2 accompanied by a cost-benefit analysis. So, I believe
3 that the provision must be seen in its proper
4 dimension.
5 It is the first time I see this document,
6 and, as I said to the President, depending on the
7 Supreme Decree, the cost-benefit analysis will vary.
8 I am not an attorney. I presume that if I am being
9 required to carry out a judgment by the highest level
10 court, it is what it is. There is no space for
11 bringing any claim. It is what it is, particularly if
12 the objective of that Decree is to come up with a
13 valuation of those Bonds.
14 So, to show a cost-benefit analysis of an
15 issue that is similar or the same, but in absolutely
16 different context, well, for me, there is no reason to
17 set forth a valuation or to provide an explanation as
18 to why the Statement of Grounds is so lengthy or
19 extensive in this case and so short or concise in the
20 other one, as you are indicating.
21 In this case, there was a Judgment, which
22 unlike that of 2001, generated the need for the 2004
[Page 1293]
1 Report. In that case, only the current value
2 principle thesis was mentioned generically. In
3 contrast, in 2013, the Judgment was clear with respect
4 to criteria for valuation, criteria for having an
5 Administrative Procedure.
6 Therefore, it's the same issue, but I believe
7 that the history explains the context and why it is
8 that there were different cost-benefit analyses,
9 depending on when these provisions were issued in
10 response to requirements by the Constitutional
11 Tribunal.
12 Q. But, Minister Castilla, in January of 2014
13 and coming up with those Supreme Decrees, you would
14 agree, of course, that the specific variables that the
15 Ministry chose could have very meaningful economic
16 consequences. So, the Parity Exchange Rate, the rate
17 of the Treasury Bonds chosen, those could produce
18 massively different outcomes; right?
19 As an economist, surely you have to agree
20 with that.
21 A. Yes. But one would have to know with
22 certainty what is the universe to which it's going to
[Page 1294]
1 be applied, as I said earlier. So, I'm not going to
2 speculate about the impact right here and now, but I
3 do reiterate what I said earlier. There was a major
4 impact. This was carrying out a Judgment, and it was
5 the technical personnel who proposed this.
6 I did not write this cost-benefit analysis,
7 sir. It was forwarded to me, and I had the Reports
8 from the technical area and from the legal area.
9 It was one more of many Decrees that I would
10 sign on a daily basis on any number of issues.
11 Q. So, but you agree with me that--well, there
12 is obviously no treatment of those issues in here.
13 Can we look at the other part of this
14 cost-benefit analysis? It says: "There's no cost in
15 addition to the cost represented by the Agrarian debt
16 Bonds at their updated value." You've already said
17 what you said about that. And then it says: "Which
18 will be paid based on payment alternatives that shall
19 take into account the fiscal stability of the nation
20 and the parameters of the current multi-annual
21 macroeconomic framework."
22 And am I right that what you're referring to
[Page 1295]
1 there is that the ultimate fiscal impact of this can
2 be managed by being able to spread out the payments
3 over time, maybe refinance them with other Bond
4 issuances, and that sort of thing; correct?
5 A. Well, all responsibilities and obligations of
6 the Ministry of Economy--well, it includes dealing
7 with this and other similar responsibilities.
8 Q. I am talking about specific language here.
9 May I proceed?
10 The specific language here that "there will
11 be no cost in addition to the cost of paying the
12 Bonds, which will be paid based on payment
13 alternatives that shall take into account the fiscal
14 stability of the nation." That language indicates
15 that you can manage--
16 (Interruption.)
17 MR. HAMILTON: He could not hear the question
18 because the Witness has been speaking. We're talking
19 about Tab 24 regarding the 2004 Report.
20 And now what is the document that we're
21 talking about because it's been several hours.
22 BY MR. FRIEDMAN:
[Page 1296]
1 Q. Tab 92, the Statement of Reasons for the
2 January 2014 Supreme Decree.
3 A. Counselor, I have the document. Could you
4 please rephrase your question or repeat it, please.
5 Q. We're looking at the cost-benefit analysis in
6 this Statement of Reasons, and we looked at the first
7 half of it, that there is no cost in addition to the
8 cost of actually paying the Bonds at their updated
9 value. And then it says, "which will be paid based on
10 payment alternatives which shall take into account the
11 fiscal stability of the nation and the parameters of
12 the current multi-annual macroeconomic framework."
13 So my question to you was, what this
14 cost-benefit analysis is indicating is that we will be
15 able to manage the fiscal impact of having to pay the
16 Land Bonds by being able to spread out those payments
17 over time or pay them with Bonds or in some other
18 means; correct?
19 A. At the Ministry and at the DGETP, we have the
20 ability to manage because of our creditworthiness and
21 our fiscal management of things, well, we can face
22 those kinds of obligations that are borne of this Rule
[Page 1297]
1 in this particular case. There are criteria, and one
2 cannot read this in isolation from the Judgment where
3 the Prime Minister said.
4 If you're asking if we have the ability to
5 face this, and the country was not going to go
6 bankrupt, the answer is yes, but I would like for you
7 to be more precise and for you to tell me where you
8 are getting at, Counselor.
9 Q. You remember we looked at the Constitutional
10 Tribunal Decision's balancing principle before, where
11 you were balancing fiscal sustainability on the one
12 hand and paying the Land Bondholders what they were
13 owed. And what this is saying is that we can preserve
14 the fiscal side of the balance by being able to spread
15 out the payments; correct?
16 A. I am not going to answer to something that is
17 mere speculation. What I'm telling you is that Perú
18 has handled its public treasury in a responsible
19 manner. So, Perú could address the payments in this
20 case and in any other case where payments were
21 required.
22 In connection with this, given the time that
[Page 1298]
1 has lapsed, and, of course, I don't know the status of
2 the proceedings right now, but I don't know if this is
3 creating pressure or tension for the Government that
4 isn't measured. I don't think so, but I cannot
5 speculate--I'm not going to speculate in connection
6 with this.
7 Clearly, Perú is an investment-grade country
8 and is the one that has the lowest country risk in
9 Latin America, well, we could say, yes, we could
10 address this responsibly and in accordance with the
11 criteria set forth by the CT.
12 Q. And am I right that Perú could have paid,
13 without damaging its fiscal stability, based on
14 CPI-updating of the Bonds?
15 A. No. I don't think that Perú cannot pay
16 anything without a legal framework that supports that.
17 In Perú, provisions need to be explicit and they need
18 to authorize payment. When I'm talking about
19 provisions, I'm talking about legal norms, and the CT
20 rulings have the rank of a law.
21 Q. I'm going to ask you to turn to Tab 208 in
22 the bundle, which--
[Page 1299]
1 PRESIDENT FERNÁNDEZ ARMESTO: How long do you
2 have to go?
3 BY MR. FRIEDMAN:
4 Q. It depends on how long the answers are, but
5 10 to 15 minutes? Yeah.
6 PRESIDENT FERNÁNDEZ ARMESTO: We must find an
7 end to the examination, because it's--we are going
8 since 9:00 a.m.
9 MR. FRIEDMAN: I understand.
10 BY MR. FRIEDMAN:
11 Q. This is CE-21. This is a Moody's Investors
12 Service Report from 18 December 2015. And I don't
13 need to read it out, but on the first page there's a
14 summary that describes--and it's about this Land Bond
15 situation, and in the second header it describes a
16 CPI-based methodology for updating the value of the
17 Bonds that could bring their value to 5.1 billion and
18 looks at the dollar-based methodology of being around
19 500 million U.S.
20 And then if you go over to the third page,
21 which has Item 5, what would be the effect on the BDAs
22 of Perú's fiscal accounts, and the last paragraph they
[Page 1300]
1 say that "under a worst-case scenario, using the
2 CPI-based methodology, the liability would represent
3 less than 2.6 percent of GDP, spread out over a number
4 of years, the payments would not materially affect the
5 sovereign's fiscal dynamics or its creditworthiness.
6 Under all scenarios, in addition to cash payments, the
7 Government could also exchange the BDAs for market
8 instruments."
9 Now, Minister, am I correct that Moody's is
10 one of the rating services that Perú pays to rate its
11 sovereign debt?
12 THE INTERPRETER: Sir, can you please repeat
13 the question?
14 MR. FRIEDMAN: Yes.
15 BY MR. FRIEDMAN:
16 Q. Am I correct that Moody's is one of the
17 rating agencies that Perú pays to rate Perú's
18 sovereign debt?
19 A. I understand that it's one of the three
20 serious ones. We have Moody's, we have
21 Standard & Poor's and we have Fitch. There are other
22 agencies that are, well, fly-by-nights if you will,
[Page 1301]
1 and they are used to damage the reputation by serious
2 Governments, but these are the three important credit
3 rating agencies at the international level.
4 Q. And you consider them to be highly credible;
5 correct?
6 PRESIDENT FERNÁNDEZ ARMESTO: Yeah.
7 BY MR. FRIEDMAN:
8 Q. Now, I think you said before that you--
9 THE INTERPRETER: No answer.
10 (Comments off the microphone.)
11 A. In some cases they have not been quite
12 accurate in connection with, for example, predicting
13 the Asian crisis, but they have to do with rating the
14 countries for investments and for international
15 markets.
16 BY MR. FRIEDMAN:
17 Q. Okay. And Perú has continued to rely on them
18 along with the other ratings?
19 (Overlapping speakers.)
20 PRESIDENT FERNÁNDEZ ARMESTO: We can assume
21 that Moody's is responsible.
22 MR. FRIEDMAN: Okay.
[Page 1302]
1 BY MR. FRIEDMAN:
2 Q. You said before, Minister, that you were not
3 aware of the current progress of the Government's
4 efforts to pay on the Land Bonds through the procedure
5 that was created while you were at the Ministry?
6 A. Let's see. Please recall that these Decrees
7 were issued in January, then there were clarifications
8 that took place a couple of months later, and I left
9 the MEF in 2014. So, up until 14 September 2014,
10 5.5 years ago, that's where my knowledge ends.
11 Q. Okay. So, you--and at that time, of course,
12 no Bondholders had been paid through the process;
13 correct?
14 A. I don't have knowledge. I know about the
15 Ministry, but only up until 14 September 2014.
16 PRESIDENT FERNÁNDEZ ARMESTO: We all know.
17 MR. FRIEDMAN: Yes. Okay.
18 BY MR. FRIEDMAN:
19 Q. And am I right that--well, so, up until the
20 time you left the Ministry, at least, no analysis, no
21 further analysis had been made, I trust, about whether
22 or not the program that had been developed achieved
[Page 1303]
1 the balance that the Constitutional Tribunal
2 prescribed; correct?
3 A. Let's see. You are talking about external
4 analyses that had different impacts and different
5 implications in connection with the Decision by the
6 CT. I don't know about that. I don't know if there
7 were or there weren't. I left in 2014. This is a
8 2015 Report, so this is over four years ago, and I
9 don't know if there has been updates, there have been
10 updates by Moody's or by other agencies. I don't know
11 that. I left the MEF five years ago. 5.5 years ago.
12 PRESIDENT FERNÁNDEZ ARMESTO: Let's go. All
13 these foundations do not lead us very far.
14 MR. FRIEDMAN: Let me just ask one more
15 question. We have heard about the current progress of
16 this, that after five years the formula has been
17 changed three times.
18 MR. HAMILTON: Objection, this is outside the
19 scope of his Witness Statement.
20 PRESIDENT FERNÁNDEZ ARMESTO: Wait. Wait.
21 Wait.
22 MR. FRIEDMAN: I will have a question that is
[Page 1304]
1 relevant.
2 BY MR. FRIEDMAN:
3 Q. 22 cases have been resolved, Bondholders have
4 been paid a total of 4.5 million soles de oro in the
5 aggregate, only about 1 million soles de oro in cash,
6 and only 1.7 percent of those Bondholders who been
7 through the process have done so. These are just the
8 statistics.
9 My question to you, Minister, is, is that the
10 kind of result that you expected back in January of
11 2014 when you were trying to, in good faith, implement
12 the Constitutional Tribunal's Decision?
13 MR. HAMILTON: Objection, Mr. President. Far
14 outside the scope. He has already made it clear that
15 he is not familiar with the details of what happened
16 with the Bondholder Process after he left the
17 Ministry. The comments were a long, vague string of
18 biased information.
19 PRESIDENT FERNÁNDEZ ARMESTO: "Porque el y
20 con esta terminados," and we must now finish because
21 otherwise we can go on interminably. Last question,
22 Minister, and that's the good news for you.
[Page 1305]
1 We've heard that you implemented this process
2 in good faith with the Supreme Decree that you
3 presented to the President. The net result is that in
4 2020, this year, the Vice Minister told us that the
5 success has been quite poor. Very few Bonds were
6 submitted. There were about 15 or 20 Bondholders that
7 have effectively been paid, and about a million
8 dollars has been paid and most of this amount had to
9 do with debt swaps.
10 Are you disappointed somewhat that the
11 procedure that you implemented resulted in something
12 so small, something so paltry? Do you have any
13 explanation of why this has happened in that way?
14 THE WITNESS: Your answer has to do not with
15 facts but with a value judgment. So, I stand from the
16 fact that the Peruvian State has the obligation to
17 meet all the obligations that it has before it,
18 whether it be the Land Bonds or any other debt.
19 In this case it was impossible to address
20 that historical fact of compensating the people
21 subject to the expropriation because there was no
22 legal framework. Then, in 2013, the criteria were set
[Page 1306]
1 out to value the Bonds and to provide a payment
2 system. Evidently, more than the value I would have
3 wanted that a large number of Bondholders would have
4 benefited from the administrative process.
5 What you were telling me, well, it is
6 disappointing. But that doesn't detract from the fact
7 that we always acted in good faith and we always try
8 to enforce a judgment from the highest court of the
9 land.
10 The perfect is the enemy of the good,
11 Mr. President, and I think that in this case we are
12 trying to identify responsibilities and such. My
13 conscience is clear. I sleep at night with a clear
14 conscience in connection with this issue.
15 I would evidently have wanted a more generous
16 or better system, but I do not question the fact that
17 we acted in good faith, that there was a procedure and
18 a legal framework, and, well, I don't have details in
19 connection with the results that you explained, but,
20 personally speaking, I would have wanted this to be a
21 bit better, that the figures could have been a bit
22 better.
[Page 1307]
1 This personally. This is my value judgment,
2 more as a citizen then as a former official.
3 PRESIDENT FERNÁNDEZ ARMESTO: Thank you very
4 much. We must close the cross-examination.
5 MR. FRIEDMAN: Gentlemen. Thank you.
6 PRESIDENT FERNÁNDEZ ARMESTO: Is there any
7 redirect?
8 Minister, we are about to finish. Counsel
9 for Perú is deliberating whether they want to ask you
10 any further questions. After that, we will finish.
11 MR. HAMILTON: Thank you very much,
12 Mr. President. First and foremost, thank you very
13 much, Mr. Minister Castilla.
14 Mr. President, I would like to state for the
15 record that we are not very happy with the way in
16 which counsel for Claimant posed his questions.
17 However, we consider that the written Transcript is
18 clear, although things were taken out of context, the
19 Minister has made his comments quite clear, especially
20 when answering the last question by the President,
21 and, because of the foregoing, we don't have any
22 questions at this time.
[Page 1308]
1 PRESIDENT FERNÁNDEZ ARMESTO: Thank you, sir.
2 Professor Stern? Mr. Drymer.
3 ARBITRATOR DRYMER: No, thank you.
4 PRESIDENT FERNÁNDEZ ARMESTO: Minister, we
5 thank you very much for the effort you've made both
6 yesterday and today, thank you for your cooperation
7 with the Tribunal, and without further ado, we release
8 you. You can go back to your duties. Thank you for
9 your patience, for your cooperation and for
10 your--willing to work with the Tribunal.
11 THE WITNESS: Thank you. It was a pleasure
12 to be before this honorable Tribunal. Thank you, sir.
13 (Witness steps down.)
14 PRESIDENT FERNÁNDEZ ARMESTO: Very well.
15 Madam Secretary, we are going to stop the feed. It is
16 10 to 1:00. Can we just now devote five minutes to
17 organizing the schedule for the rest of the week, so
18 that we now must really change the pace of movement
19 and really be more dynamic in how we examine the
20 Experts. So, Mr. Friedman, have you reached an
21 Agreement and can you tell us how we will now proceed?
22 MR. FRIEDMAN: I think we will proceed with
[Page 1309]
1 the next Witness; right? Which is Ambassador
2 Allgeier.
3 PRESIDENT FERNÁNDEZ ARMESTO: He's an Expert,
4 to the best of my knowledge.
5 MR. FRIEDMAN: Yes, that's correct. We are
6 moving into the Experts, and then we have--and the
7 schedule is then Professor Castillo.
8 PRESIDENT FERNÁNDEZ ARMESTO: Today. My
9 question is: Who are we going to see today?
10 MR. FRIEDMAN: Well, these are actually
11 questions for the Respondent's counsel, because it is
12 principally cross-examination. Ambassador Allgeier,
13 these are Claimants' Witnesses who are coming up, the
14 short Opening Presentations, but it is really a
15 question of the length of the cross.
16 PRESIDENT FERNÁNDEZ ARMESTO: What is your
17 expectation? What is the plan you have agreed upon?
18 Which Experts shall we examine when?
19 MR. HAMILTON: Mr. President, thank you for
20 the question, and thank you to my colleague.
21 Respondent is prepared to proceed with the
22 cross-examination of Gramercy's Experts in the Order
[Page 1310]
1 indicated in the existing procedural schedule. There
2 are, technically, four people between this moment and
3 when Mr. Edwards is indicated on the list.
4 Obviously, the Tribunal has requested that we
5 start tomorrow with Mr. Edwards, and so what we're
6 prepared to do is move forward. It would be our aim
7 to accomplish at least three of these four today.
8 PRESIDENT FERNÁNDEZ ARMESTO: Okay.
9 MR. HAMILTON: And we will make every effort.
10 Hopefully we can air out the room a little bit before
11 we resume. It is kind of stuffy, and we'll come in,
12 we will try to tighten up over lunch and see if we can
13 get through the next three. And then we can start
14 with Mr. Edwards in the morning and then pick up the
15 pace and continue from there.
16 PRESIDENT FERNÁNDEZ ARMESTO: Okay.
17 MR. FRIEDMAN: If I may offer one other
18 proposal, that we took very much to heart the
19 President's comments yesterday about ensuring that we
20 have time, adequate time for the Experts that you were
21 most interested in hearing from. As a consequence, we
22 would be prepared to not cross-examine Professor
[Page 1311]
1 Guidotti.
2 And so, of course, without prejudice to our
3 ability to argue about the contents of his Report, and
4 that is in no way an admission of the veracity of
5 anything that he says. But on that basis, we could,
6 recognizing the Tribunal's interest, make that a
7 priority. So, we offer that.
8 PRESIDENT FERNÁNDEZ ARMESTO: Is
9 Professor Guidotti with us?
10 MR. HAMILTON: Professor Guidotti is here,
11 ready, willing and able. The Costs have been
12 expended. He has already been here and waiting his
13 turn. So, perhaps we could simply use common sense in
14 managing the length of time allocated, and we will be
15 doing the same with Gramercy's Experts as well.
16 PRESIDENT FERNÁNDEZ ARMESTO: Yeah. I think
17 we have to do the following. Professor Guidotti has
18 been here with us. It is out of respect to him. We
19 should give him the opportunity to summarize.
20 And I think that basically what we will do
21 with all the Experts--because it's a question of
22 time--is we will have them present their case, and
[Page 1312]
1 there will not be much time for cross-examination,
2 neither by you nor by--because by the time they have
3 presented, make their direct examination, and
4 presentation, there will not be too much time, neither
5 for Claimant nor for Respondent to subject these
6 Experts to extensive cross-examination.
7 MR. FRIEDMAN: Okay. Then, we will preserve
8 our right to cross-examine Professor Guidotti.
9 PRESIDENT FERNÁNDEZ ARMESTO: Of course. It
10 must be very brief.
11 MR. FRIEDMAN: I understand.
12 PRESIDENT FERNÁNDEZ ARMESTO: What is not
13 possible is to go in cross through their
14 presentations. You can. If you feel that there is
15 something blatantly wrong with one of their
16 presentations, you will have the post-hearing briefs
17 to bring up the argument, and we are perfectly able
18 without the cross-examination to judge whether your
19 criticism is well-based or not.
20 So, I don't think that there is much--there
21 is a risk for the position of any of the Parties if
22 you do not have a very extensive opportunity of
[Page 1313]
1 cross-examining. So, the thing is we will have to
2 time--we have to--I will have to cut you because we
3 have to finish at reasonable times. We cannot finish
4 every day at 8:00. This is just impossible.
5 And we must--so, we must manage our time
6 well, and we will do that. And I think we will have a
7 very fair hearing and both Parties will have full
8 opportunities to present their case. Lunch.
9 MR. HAMILTON: We cut preparations for one
10 Expert, for instance, by a third last night. Not you,
11 Mr. Edwards, but we cut some by, you know,
12 significantly. We are going to use common--we are
13 going to try to use common sense. Some more, some
14 less.
15 PRESIDENT FERNÁNDEZ ARMESTO: I will cut you
16 if I see that you are--that we are not doing it, I
17 will just draw your attention. It is my duty to
18 guillotine.
19 (Comments off the microphone.)
20 PRESIDENT FERNÁNDEZ ARMESTO: Because we have
21 to finish and we need to leave time for those, because
22 my worry, as you know, is that--that happens in
[Page 1314]
1 hearings, that, if we leave too much time to the
2 beginning, we end up a--very important issues at the
3 end where you have no time. And this is something for
4 which, for me, is an anathema.
5 MR. FRIEDMAN: Right.
6 PRESIDENT FERNÁNDEZ ARMESTO: That is why I
7 prefer to cut you now, but leave time for issues I
8 know will come up and are important.
9 MR. FRIEDMAN: Yes. Yes. So, we've now
10 finished, obviously, with the Fact Witnesses, and so
11 there is--that is--the record needs to be made. We
12 are now moving on to Experts, and some of those are
13 even questions of law. So, I think we all accept and
14 understand and want to make it life--the life easier
15 for the Tribunal.
16 PRESIDENT FERNÁNDEZ ARMESTO: Thank you.
17 2:00 p.m.
18 (Whereupon, at 12:56 p.m., the Hearing was
19 adjourned until 2:00 p.m., the same day.)
[Page 1315]
1 AFTERNOON SESSION
2 PRESIDENT FERNÁNDEZ ARMESTO: Are we ready?
3 (Comments off microphone.)
4 PRESIDENT FERNÁNDEZ ARMESTO: We resume the
5 Hearing, and we do so in order to welcome Ambassador
6 Peter Allgeier.
7 PETER ALLGEIER, CLAIMANTS' WITNESS, CALLED
8 PRESIDENT FERNÁNDEZ ARMESTO: Ambassador,
9 thank you very much for being here with us. You are
10 here, you have been called, as an Expert, and as an
11 Expert, the first thing you have to do is to take your
12 oath as an Expert.
13 Can I kindly ask you to stand up and to take
14 your oath?
15 THE WITNESS: I solemnly declare, upon my
16 honor and conscience, that my statement will be in
17 accordance with my sincere belief.
18 PRESIDENT FERNÁNDEZ ARMESTO: Thank you.
19 Thank you very much, Ambassador.
20 I think without further ado, I'll give the
21 floor to Ms. Popova, who will organize the direct
22 examination.
[Page 1316]
1 MS. POPOVA: Thank you, Mr. President.
2 DIRECT EXAMINATION
3 BY MS. POPOVA:
4 Q. Good afternoon, Ambassador Allgeier.
5 A. Good afternoon.
6 Q. Do you see you have two Reports in front of
7 you?
8 A. Yes.
9 Q. Could you confirm for the Tribunal that those
10 are the two Reports you submitted in this proceeding,
11 please.
12 A. Yes, they are.
13 Q. And can you see on the last page of each of
14 those documents, they bear your signature?
15 A. Yes.
16 Q. Are you content for the Tribunal to rely on
17 them as your testimony in this proceeding?
18 A. Yes, I am.
19 Q. Thank you.
20 I believe you prepared some remarks that
21 you'd like to share with the Tribunal?
22 A. Yes, that's correct.
[Page 1317]
1 Q. Please proceed.
2 A. Thank you.
3 DIRECT PRESENTATION
4 THE WITNESS: First of all, thank you,
5 Mr. President and Members of the Tribunal, for the
6 opportunity to present on certain issues regarding the
7 negotiations of the Trade Promotion Agreement between
8 the United States and Perú.
9 For nearly 30 years I had the privilege to
10 serve as a trade negotiator at the Office of the U.S.
11 Trade Representative, and specifically as the
12 Senate-confirmed Deputy USTR for all negotiations with
13 the western hemisphere at the time of the negotiations
14 of the U.S.-Perú Trade Promotion Agreement.
15 I've participated personally in negotiations
16 of investment chapters with Poland, Hungary,
17 Czechoslovakia, Chile, and in the Free Trade Area of
18 the Americas, which involved all 33 countries in the
19 western hemisphere. And I supervised directly the
20 negotiations with Colombia, Perú, Uruguay, and Central
21 American countries in the Dominican Republic when we
22 negotiated a Free Trade Agreement with them.
[Page 1318]
1 In the case of the Perú negotiations, I was
2 responsible for ensuring that the results of the
3 negotiations met U.S. negotiating objectives as
4 specified in the 2004 Model Bilateral Investment
5 Treaty and to meet the political and legal
6 requirements for Congressional approval. Throughout
7 the Perú negotiations, the chief U.S. negotiator,
8 Assistant U.S. Trade Representative Regina Vargo, met
9 with me at length before and after each negotiating
10 round to identify issues in the negotiations and to
11 devise the U.S. responses to remaining issues.
12 I wish to share with the Tribunal my views on
13 our purposes in negotiating this Agreement and to
14 explain why I believe that the Agreement we negotiated
15 is consistent with coverage of investments such as the
16 Agrarian Reform Bonds. I also wish to respond to some
17 assertions made on Friday that do not correspond to
18 the conduct of the negotiations or to my experience
19 supervising these negotiations.
20 As I explained in my Expert Reports, I
21 disagree with the contention by Perú that these Bonds
22 somehow are not covered by the Agreement. The
[Page 1319]
1 structure and the text of the Agreement make it clear
2 that the scope of covered investments is very broad,
3 and the Agrarian Reform Bonds are the type of
4 investment that we endeavored to cover. So, in
5 addition to the Agreement itself, the context of the
6 Agreement negotiations further supports my view, from
7 my perspective. So, what I'd like to do is first talk
8 a bit about the structure of the Agreement and then to
9 talk about the text.
10 So, the objective of the negotiation with
11 Perú was to provide the broadest possible protection
12 to investments by U.S. investors. This was a key
13 requirement of the Model BIT, the Bilateral Investment
14 Treaty. We relied on both the structure of the
15 Agreement and its text to achieve these objectives.
16 Accordingly, we conducted the negotiations under the
17 "negative list" principle to structure the Agreement.
18 The "negative list" approach is a well-known
19 negotiating approach designed to minimize any
20 confusion about what is covered in an Agreement.
21 Under the negative list, any exceptions to the
22 definition of "investment" must, as Perú noted in its
[Page 1320]
1 own negotiating notes, be "expressly stipulated" in
2 the Agreement.
3 We used a negative list to avoid disputes
4 over what is covered in an Agreement and what is not
5 covered, and this enables both Parties to provide
6 expansive coverage and also to exclude specifically
7 from the Agreement items of particular sensitivity to
8 one or both of the Parties.
9 I can give you an example. In one of the
10 negotiations in which I participated, we were
11 negotiating duty-free treatment for certain IT
12 equipment under a positive list approach. The
13 positive list included mobile phones, but relatively
14 quickly, technology advanced, and phones became
15 computers, which hadn't been included in the positive
16 list. So, the question was: Is a smartphone covered
17 or not? The issue was a big dispute over coverage,
18 and if we had used a negative list in that case, the
19 iPhone would have been covered automatically.
20 Now, Perú's own negotiating record of the
21 13th round of negotiations, the final round, confirms
22 that we used the negative list in this Agreement. We
[Page 1321]
1 most certainly did not negotiate under a positive
2 list, which is, by definition, inconsistent with the
3 "negative list" approach.
4 Now, on Friday, Ms. Menaker asserted that the
5 Parties used a so-called "open list" approach.
6 Actually, I never encountered such an approach in any
7 of my negotiations. Now, if by an "open list" she
8 meant expansive coverage, well, perhaps we're talking
9 about the same thing. But if she meant an expansive
10 coverage of exclusions, that would be totally
11 inconsistent with the "negative list" approach and
12 would not accord with what we did.
13 So, adopting this "negative list" approach
14 was standard practice that we have followed at least
15 since 2004 in all of our investment negotiations.
16 And, as I explained in my Report, any departure from
17 this approach would have required approval by
18 cabinet-level departments in consultation with
19 relevant Congressional committees.
20 Let me talk a bit about, then, the text of
21 the Treaty, or what we were trying to do in the text.
22 So, I said this Agreement was negotiated
[Page 1322]
1 under the "negative list" structure to cover the
2 broadest range of investments and investors. So, for
3 a U.S. citizen or U.S.-incorporated enterprise with a
4 qualified investment to be excluded from coverage
5 would require an explicit exception in the Agreement,
6 an explicit exception in the Agreement.
7 Now, the definition of "investment" had with
8 it an illustrative, nonexclusive list of assets that
9 are likely to have the characteristics of an
10 investment: Commitment of capital, expectation of
11 gain or profit, or--to use "or," not "and"--assumption
12 of risk. The Agrarian Reform Bonds seem to exhibit
13 these characteristics.
14 Then, in Footnote 12 on Page 1024 of the
15 Agreement, it indicates that: "Some forms of debt,
16 such as Bonds and long-term notes, are more likely to
17 have the characteristics of an investment." Nowhere
18 in the Agreement is there an exclusion of the Agrarian
19 Reform Bonds from its coverage. In fact, Bonds are
20 specifically enumerated in the list of forms of
21 investment.
22 Now, the text does include an exclusion from
[Page 1323]
1 coverage in Footnote 13 on Page 1024, which specifies
2 bilateral debt--i.e., Government-to-Government loans.
3 And I'll discuss the evolution of this exception,
4 because it is noteworthy, a bit later in my
5 presentation.
6 Now, on Friday, Ms. Menaker referred to
7 Footnote 12 to argue that, since the Agrarian Reform
8 Bonds were past due, "these were claims to payment
9 that were immediately due." And then she quoted
10 Footnote 12, but only in part, saying: "Other forms
11 of debt, such as claims to payment that are
12 immediately due, are less likely to have such
13 characteristics." On that basis, she claimed that the
14 Agrarian Reform Bonds "did not possess the
15 characteristic of a true investment." However, she
16 omitted the critical part of the footnote. The entire
17 phrase says: "Some forms of debt, such as claims to
18 payment that are immediately due and result from the
19 sale of goods and services, are less likely to have
20 such characteristics" of an investment. "Are
21 immediately due and result from the sale of goods and
22 services." This gives an entirely different meaning
[Page 1324]
1 to the footnote, and it provides no basis for
2 excluding the Agrarian Reform Bonds from the
3 Agreement's coverage.
4 Furthermore, there is nothing in the text of
5 the Agreement that would lead a potential investor to
6 believe that long-term Bonds, such as the Agrarian
7 Reform Bonds, were subject to additional limitations,
8 such as a requirement of being offered on
9 international markets or in international currency,
10 nor can one find an exception to coverage in the
11 preamble of the Agreement.
12 The preamble of the U.S.-Perú Trade Promotion
13 Agreement applies to the entire Free Trade Agreement.
14 There is not a separate preamble for the investment
15 chapter. So, it applies to the entire Free Trade
16 Agreement in which investment is only one chapter of
17 nearly two dozen, covering topics as diverse as
18 intellectual property, phytosanitary standards, labor,
19 and environment.
20 Also, as in my Report, the aspiration in the
21 preamble, "to promote integrated economic
22 development," does not provide the basis for an
[Page 1325]
1 exception. The preamble, as we negotiate them,
2 are--is a broad hortatory political statement of the
3 motivation of the Parties in entering negotiations.
4 It was not drafted, nor is it understood, to be a
5 legal filter applied to each and every article of this
6 broad Free Trade Agreement. Indeed, it is so general
7 as to render it unsuitable as an objective metric for
8 interpreting individual provisions of the Agreement.
9 Now I'd like to address some of claims that
10 Perú made on Friday. I recall, again, Ms. Menaker on
11 Friday referred to "the so-called 'Salini factors'"
12 and said that "they"--presumably the
13 negotiators--"wanted to make sure that these
14 characteristics were considered," so they wrote it
15 into their Treaty. Well, I have to admit, that came
16 as a surprise to me, because I never heard of the
17 Salini Case until this Arbitration process. So, we
18 most certainly did not make any attempt to include
19 whatever those Salini characteristics are in the
20 Agreement.
21 Second, Perú asserts that an investor, to
22 qualify for protection under the Agreement, it must
[Page 1326]
1 make some tangible and active contribution. As I
2 stated in my Report, I am not aware of any basis for
3 such a requirement or any evidence agreed by the
4 Parties. So, in my view, therefore, both the
5 structure of the Agreement and its text are consistent
6 with the view that Agrarian Reform Bonds are the type
7 of investment that we endeavored to cover by this
8 Agreement.
9 Now, I just want to say a few things about
10 the context of the negotiations.
11 The structure and the text the Treaty make it
12 clear that the scope of protection was meant to be
13 broad, but, in addition, the context at the time of
14 the negotiations provides further evidence. There are
15 two principle elements in this regard: The first,
16 ongoing, unresolved investment disputes between U.S.
17 investors and the Government of Perú; and, secondly,
18 extensive discussions at very high levels throughout
19 the negotiations on the kinds of public debt to be
20 excluded and how to do so.
21 The issue of investment disputes between U.S.
22 investors and the Government of Perú was central to
[Page 1327]
1 the launch of negotiations. In fact, Perú initially
2 was excluded from the negotiations with the Andean
3 countries because of these outstanding investment
4 disputes. One of the most prominent of the disputes
5 stemmed from the Agrarian Reform, which I cited in
6 Page 67 of my Report of May 2019. Perú was added to
7 the negotiation only after providing assurances of
8 commitment to work to address these outstanding
9 disputes.
10 So, in parallel with and throughout the
11 negotiations, both State and USTR and Embassy Lima
12 worked with the Peruvian Government to resolve the
13 outstanding disputes. Now, the linkage between the
14 investment disputes and the negotiations was an
15 important political issue. It was not a technical
16 issue, and, therefore, as such, it was handled at the
17 political level rather than by the technocrats who
18 were negotiating individual chapters in this
19 Agreement.
20 So, for example, key members of Congress and
21 senior members of the Administration, including
22 myself, made very clear publicly that the entire
[Page 1328]
1 Agreement was at risk by the unresolved investment
2 disputes. Congress was explicit that it would not
3 consider an agreement with Perú unless the investment
4 disputes were resolved and it--Congress--was confident
5 that the Agreement met the full requirements of the
6 U.S. Model BIT and the authorizing legislation for
7 negotiations, the Trade Promotion Act.
8 This message was reinforced by numerous press
9 releases, delegation visits to Perú, and other
10 diplomatic messages to Perú. The high-level attention
11 to the investment disputes with Perú was underlined by
12 various public reports to Congress from the
13 Congressional Research Service and in public
14 testimony, such as the extensive hearing by the House
15 Subcommittee on the Western Hemisphere in October of
16 2004, at which the Chairman and ranking member both
17 made clear their opposition to acting on an Agreement
18 with Perú while any investment disputes were still
19 unresolved.
20 Now, with my Expert Reports, I've documented
21 extensive and ongoing efforts to resolve these cases.
22 I've provided seven diplomatic cables, seven official
[Page 1329]
1 U.S. Reports on Perú's investment climate and
2 eligibility for trade preferences, one Congressional
3 Research Service Report on the Agreement negotiations,
4 and three official statements from USTR.
5 Although the negotiations with Perú were
6 concluded in December 2005, the Agreement was not
7 signed until April 12 of 2006, and that was only after
8 we received confirmation from our Ambassador in Lima
9 that the LeTourneau investor had accepted a settlement
10 offer from the Government of Perú on March 30 of 2006.
11 So, this record demonstrates clearly that the
12 Land Reform was very connected with the negotiating
13 process and, indeed, a determining factor in the
14 success of the negotiations themselves. Basically, it
15 was a proverbial Damocles sword over the enterprise.
16 Just a quick word on public debt. The
17 question of public debt was an ongoing topic of
18 negotiation through most of the rounds. The U.S. had
19 wanted to include all public debt, but the Andean
20 countries objected. Ultimately, a compromise proposed
21 by the U.S.--and this is recorded in Footnote 13 on
22 Page 1024 of the Agreement--was accepted by Perú.
[Page 1330]
1 Bilateral--that is, Government-to-Government--debt
2 would be excluded, and there would be some additional
3 time provided--or required, I should say, before one
4 could file a claim against either Party for such debt.
5 Perú's negotiating notes from the 10th round
6 of negotiations confirmed that the U.S. proposal for
7 the treatment of public debt--Perú's words--"fully
8 satisfies the interest of the Ministry of Economy and
9 Finance."
10 So, given this context of the negotiations,
11 Perú could easily have eliminated its obligations on
12 the Agrarian Reform Bonds by taking an explicit
13 reservation in the Agreement. Perú did not do that.
14 So, in conclusion, in light of these
15 structural, textual, and contextual factors, it is my
16 conclusion that covering the Agrarian Reform Bonds is
17 entirely consistent with the U.S.-Perú Trade Promotion
18 Agreement.
19 Thank you.
20 PRESIDENT FERNÁNDEZ ARMESTO: Thank you.
21 Thank you, Ambassador. And thank you also for being
22 brief in your presentation.
[Page 1331]
1 Is there any further direct question to the
2 Ambassador?
3 MS. POPOVA: I will also be brief,
4 Mr. President. No further questions.
5 Thank you, Ambassador Allgeier.
6 PRESIDENT FERNÁNDEZ ARMESTO: So, I give the
7 floor to the Republic of Perú.
8 MR. HAMILTON: Mr. Ulrich will handle the
9 examination. Thank you.
10 PRESIDENT FERNÁNDEZ ARMESTO: Mr. Ulrich?
11 Would you like a short break, Mr. Ulrich?
12 Okay. Perfect. As you prefer.
13 CROSS-EXAMINATION
14 BY MR. ULRICH:
15 Q. Ambassador Allgeier, good afternoon.
16 A. Good afternoon.
17 Q. I'm Jonathan Ulrich. I'm going to be asking
18 you some questions today.
19 A. Thank you.
20 Q. You have your two Reports in front of you.
21 We're going to hand out a binder as well.
22 A. I just got the binder.
[Page 1332]
1 Q. Perfect. I know that you've watched a couple
2 of the examinations, and you're accustomed to seeing
3 many piles and many binders of documents. I hope you
4 are not disappointed; we're going to try to keep this
5 one targeted and focused today.
6 A. No, no, not at all.
7 Q. Okay. Ambassador, I'd like to start with a
8 few preliminary questions on the scope of your
9 expertise and the scope of your Reports.
10 A. Umm-hmm.
11 Q. So, you worked as a trade negotiator at the
12 Office of the U.S. Trade Representative, yes?
13 A. Yes, I did.
14 Q. Okay. And you--including in the position of
15 the Deputy U.S. Trade Representative.
16 A. That is correct.
17 Q. And you left government service in 2009?
18 A. That is correct.
19 Q. And since then you have worked as a trade
20 consultant; is that right?
21 A. Yes, that is right, although part of the
22 time, I was the head of a trade association here in
[Page 1333]
1 Washington.
2 Q. Okay. Ambassador, you're not an
3 international law expert; correct?
4 A. I do not claim to be.
5 Q. And you're not a lawyer.
6 A. I do not claim to be.
7 Q. And you don't draw any legal conclusions on
8 treaty interpretation; correct?
9 A. That is not my job.
10 Q. And no legal conclusions on any other issue;
11 correct?
12 A. I can't think of a time that I would have
13 done that. As I say, that is not part of my job.
14 Q. Okay. Right. In fact, you state in your
15 Reports--right?--in First Report, "I am not a lawyer
16 and do not intend to address arguments of treaty
17 interpretation"?
18 A. I do just want to address what we were trying
19 to do in the negotiations.
20 Q. And in your Second Report, similarly, you
21 state: "I don't purport to interpret the Agreement as
22 a matter of international law"; right?
[Page 1334]
1 A. Again, that's not my job.
2 Q. Okay. You do purport to respond to Perú's
3 International Law Expert Professor Reisman; right?
4 A. You say I intend to. I have provided in my
5 Reports my view of certain arguments that were made in
6 other people's Reports, including Professor Reisman's.
7 Whether they were matters of law or other assertions
8 is another matter.
9 Q. So, you are more a fact witness, then,
10 speaking to your experience with the negotiation?
11 PRESIDENT FERNÁNDEZ ARMESTO: He's here at an
12 expert. He has taken the oath as an expert.
13 BY MR. ULRICH:
14 Q. Okay.
15 PRESIDENT FERNÁNDEZ ARMESTO: He's an expert
16 here on international treaty negotiation.
17 BY MR. ULRICH:
18 Q. Professor Reisman draws conclusions on treaty
19 interpretation as a matter of international law;
20 right?
21 A. I believe that was his intention.
22 Q. Okay. And you can't respond in kind as a
[Page 1335]
1 matter of international law; correct?
2 PRESIDENT FERNÁNDEZ ARMESTO: Mr. Ulrich, it
3 is quite clear what Ambassador Allgeier--his expertise
4 is on. It is evidently not a professor of
5 international law. He's a U.S. trade negotiator, and,
6 yeah, his expertise is negotiation of trade agreements
7 between States.
8 MR. ULRICH: Thank you, Mr. President, just
9 laying a foundation.
10 BY MR. ULRICH:
11 Q. Let's please move along. Looking at your
12 First Report, please.
13 A. That is the May--
14 Q. That in the spiral binding that Gramercy's
15 counsel gave you.
16 A. Okay.
17 Q. Let's take a look at Page 3, please,
18 Paragraph 11. So, here's where you say you're not a
19 lawyer, you're not addressing treaty interpretation,
20 but then you say: "I'm instructed that a treaty must
21 be interpreted in good faith in accordance with the
22 ordinary meaning to be given to its terms in
[Page 1336]
1 context"--"in a context and in light of the Treaty's
2 object and purpose."
3 I'll stop there briefly. So, you were
4 instructed--that was by Gramercy?
5 A. I was given assistance in organizing my
6 presentation in a way that could be helpful to the
7 Tribunal.
8 Q. Okay. So, when you say here "I am
9 instructed" and you say now that you received
10 assistance, that was from Gramercy, they instructed
11 you what to say here?
12 A. On this part of it.
13 Q. Okay. And they also instructed you that in
14 certain circumstances, the Tribunal may resort to
15 supplementary means of interpretation, including the
16 preparatory works and the circumstances of the
17 Treaty's conclusion?
18 A. I assumed that this was basic language that
19 was put in submissions in order to fit with the way
20 Tribunals are conducted.
21 Q. Well, those instructions sound a lot like the
22 rules of treaty interpretation under international
[Page 1337]
1 law, don't they?
2 A. No, I don't think so.
3 Q. Okay.
4 A. I think it is more of an editing instruction.
5 Q. Okay. Those instructions don't track the
6 Vienna Convention on the Law of Treaties?
7 A. I am not familiar with the Vienna Convention
8 on the Law of Treaties.
9 Q. Okay. Well, in any event, interpreting the
10 Vienna Convention would be outside the scope of your
11 expertise; right?
12 A. Yeah, because that was not part of our
13 negotiations.
14 Q. Right. And applying the Vienna Convention to
15 the Treaty in this case, also outside the scope of
16 your expertise; right?
17 A. I believe that's a matter for the Tribunal.
18 Q. Ambassador, an issue you've addressed is the
19 U.S. Government's approach to Treaty Negotiation and
20 ratification. You've demonstrated that U.S. law
21 establishes certain substantive and procedural
22 requirements; right?
[Page 1338]
1 A. Correct.
2 Q. So, for example, U.S. law known as the Trade
3 Promotion Authority sets out objectives that provide
4 the overall direction trade negotiations are expected
5 to take; right?
6 A. Correct.
7 Q. And as another example, the Trade Promotion
8 Authority also establishes procedures and timetables
9 for Congressional oversight of Treaty Negotiation;
10 right?
11 A. That's correct. Well, actually, it's--they
12 are not Treaties. They are agreements. A treaty
13 would have to go through the Senate, as you know, and
14 be ratified by the Senate. What we are negotiating
15 are agreements, and what Congress deals with is the
16 implementing legislation that would be required to
17 bring a whole variety of U.S. laws into compliance
18 with the Agreement.
19 So, in the case of the agreements that we
20 negotiate, they have to be approved by the majority in
21 both Houses as opposed to a treaty, which is the
22 Senate. I just want it to be clear.
[Page 1339]
1 Q. Okay. So, these various requirements under
2 the U.S. law that you're talking about, they govern
3 how U.S. treaty negotiators go about doing their job;
4 right?
5 A. That is correct.
6 Ω. And this U.S. legal framework isn't binding
7 on the counterparty to Treaty Negotiations; right?
8 A. No, of course not. We each have our own
9 mandates.
10 Q. And so, in the case of U.S.-Perú Treaty,
11 Perú's negotiators are not bound by this U.S.
12 framework; right?
13 A. No. But if they expect to conclude a
14 successful agreement, they are going to have to pay
15 some attention to it or we're not going to be able to
16 agree, not to say--I'll leave it at that.
17 Q. Well, Perú has its own legal
18 framework--right?--for Treaty Negotiation and
19 ratification?
20 A. I assume so. I don't know that for a fact.
21 Q. And you're not a Peruvian lawyer.
22 A. No, never claimed it.
[Page 1340]
1 Q. Well, is it fair to say as a general matter
2 that, in Treaty Negotiations, each State shows up with
3 its own objectives and its own requirements?
4 A. That is correct.
5 Q. And the goal ultimately is to arrive at a
6 mutual agreement that reconciles the objectives and
7 requirements of each side?
8 A. That is correct.
9 Q. And at the end of the day, the Treaty
10 reflects what both States agree together.
11 A. And what is--yes, and is what is documented
12 in the Agreement itself.
13 Q. And that Agreement--it doesn't document the
14 unilateral requirements of a one State?
15 A. No. It documents what we agreed upon.
16 Q. And in your Second Report, you said it
17 profoundly surprising to you that the U.S. legal
18 framework would be irrelevant to interpreting the
19 Treaty. The instructions you've received to treaty
20 interpretation, they didn't say that to understand the
21 Treaty, you should examine the domestic legal
22 framework of one Contracting Party; right? It didn't
[Page 1341]
1 say that?
2 A. Could you repeat that?
3 Q. Sure. The instructions you received, looking
4 at the text of the Treaty, object and purpose, may be
5 supplementary means. It didn't say you should also
6 look at the unilateral legal requirements of one
7 Contracting Party, did it?
8 A. Each Contracting Party would lay that out for
9 the other side to understand.
10 Q. And you offer no conclusion as a matter of
11 international law as to the relevance or irrelevance
12 of the U.S. legal framework to understanding this
13 Treaty?
14 A. No, I'm not sure that I agree with that. I'm
15 sorry, could you ask that question again.
16 Q. Sure.
17 As a matter of law, international law, you're
18 not weighing in on how relevant or irrelevant the U.S.
19 framework is to interpreting the Treaty. That is
20 outside the scope of your expertise; right?
21 A. That's right. Yeah. I'm quite up front that
22 I'm not a lawyer.
[Page 1342]
1 Q. Okay. Thank you. Let's move to the Treaty
2 text, please.
3 As an initial matter, you've said you are
4 thoroughly familiar with the U.S. Government's
5 understanding of the coverage of its investment
6 treaties; is that right?
7 A. I'm sorry, you want me to look at the
8 agreement itself? Is that what you're asking?
9 Q. I'm going to take you to your Report
10 actually--
11 A. Oh.
12 Q. --but we're going to look at your Report as a
13 way of discussing a few points on the Treaty.
14 A. Okay.
15 Q. But as a preliminary matter, you've said you
16 have a thorough understanding--you are thoroughly
17 familiar--excuse me, your First Report, "thoroughly
18 familiar with the U.S. Government's understanding of
19 the coverage of its treaties."
20 A. Yes. At least of the trade--trade
21 agreements.
22 (Overlapping speakers.)
[Page 1343]
1 ARBITRATOR DRYMER: Counsel, I'm sorry, I
2 just want to--I don't want me to interrupt your
3 answer, but help me find where you are in this
4 Statement, please.
5 MR. ULRICH: Absolutely, Mr. Drymer.
6 ARBITRATOR DRYMER: Thank you.
7 MR. ULRICH: That particular statement is in
8 his First Report, Paragraph 3.
9 ARBITRATOR DRYMER: Thank you.
10 MR. ULRICH: But in the interest of time, I'm
11 trying to just move along--
12 ARBITRATOR DRYMER: Understood.
13 MR. ULRICH: --and not necessarily point to
14 the Report in each instance.
15 ARBITRATOR DRYMER: Thank you.
16 PRESIDENT FERNÁNDEZ ARMESTO: That's
17 appreciated.
18 BY MR. ULRICH:
19 Q. Ambassador, could you please turn to Page 11
20 of this First Report. I'm looking at Paragraph 35.
21 And for the record, Members of the Tribunal,
22 his First Report is at CER-7.
[Page 1344]
1 ARBITRATOR DRYMER: I didn't mean to
2 interrupt before, but I did. Was the Ambassador's
3 answer recorded? I don't have access to any of that.
4 THE WITNESS: What is question?--other than
5 directing me to this paragraph?
6 BY MR. ULRICH:
7 Q. I haven't gotten to the question yet.
8 A. I didn't think so.
9 Q. I think Arbitrator Drymer is referring to the
10 prior question--
11 (Overlapping speakers.)
12 Q. --for the paragraph number? Paragraph 3--
13 ARBITRATOR DRYMER: If you got the answer,
14 that's all that matters.
15 (Overlapping speakers.)
16 BY MR. ULRICH:
17 Q. Yes. "Thoroughly familiar with the U.S.
18 Government's understanding of its investment
19 treaties," that's the point.
20 A. Yes.
21 Q. We are just clarifying for the Transcript.
22 A. Yes.
[Page 1345]
1 Q. Okay. Thank you.
2 Okay. Here at Paragraph 35 now, you quote
3 the definition of "investment" under Article 10.28.
4 We've all read it. You and I have studied it. I'm
5 going to avoid reading the whole thing out loud, so
6 maybe keep it here for reference, and I'll ask you
7 questions; okay?
8 A. Yes.
9 Q. We agree that here in Article 10.28, the
10 Treaty requires that for an investment to meet the
11 definition of "investment" it has to have the
12 characteristics of an "investment"; right?
13 A. I'm sorry. Where are you reading this from?
14 Q. I'm at your First Report, Paragraph 35.
15 A. 35, right.
16 Q. You quote Article 10.28, definition of
17 "investment."
18 A. Okay.
19 Q. And are you with me?
20 A. Yeah.
21 Q. Okay. It says here: "'Investment' means
22 every asset an investor owns or controls, directly or
[Page 1346]
1 indirectly, that has the characteristics of an
2 investment."
3 So, we agree that's a requirement, yes?
4 MS. POPOVA: Objection, Mr. President.
5 Are you asking him to agree to what you
6 believe the Treaty requires, or are you asking him his
7 understanding of what that language means?
8 PRESIDENT FERNÁNDEZ ARMESTO: Ms. Popova,
9 let's go on, please. I think it was going very
10 smoothly.
11 Why don't you go on, Mr. Ulrich. It is clear
12 that the treaty has that language and that it's a
13 requirement.
14 (Overlapping speakers.)
15 MR. ULRICH: Thank you, Mr. President.
16 BY MR. ULRICH:
17 Q. And the definition also includes a list of
18 forms that an investment may take; right?
19 A. Yes.
20 Q. And you said in your Opening Presentation,
21 that's an illustrative list, the forms that an
22 investment may take; right?
[Page 1347]
1 A. It is an illustrative list--
2 Q. Okay. And let's please turn just to the next
3 page in Paragraph 36. And further on this point, you
4 say: "This is not a limiting list. On the other
5 hand, the assets specifically listed are intended to
6 qualify as investments. The descriptive list includes
7 Bonds, debentures, other debt instruments, and loans,
8 and means these types of assets are presumed to,
9 indeed, present the characteristics of an investment."
10 Do you see that? That's your understanding.
11 A. Yes. I agree with that sentence as it is
12 written.
13 Q. Okay. But the U.S. Government has a
14 different understanding, doesn't it?
15 A. No. What do you mean it has a different
16 understanding?
17 Q. Let's take a look, please, if you could open
18 your binder to Tab 2. This is the submission of the
19 United States of America filed in this proceeding. If
20 you could please follow me to Page 7, in Tab 2, I'm
21 looking at Paragraph 18 with the heading of
22 "Article 10.28."
[Page 1348]
1 A. Okay.
2 Q. So, the United States says here that: "The
3 enumeration of a type of an asset in Article 10.28,
4 however, is not dispositive as to whether a particular
5 asset, owned or controlled by an investor meets the
6 definition of an investment. It must still always
7 possess the characteristics of an investment,
8 including such characteristics as commitment of
9 capital or other resources, the expectation of gain of
10 profit or the assumption of risk."
11 Do you see that?
12 A. Yeah. It just quotes from the agreement.
13 Q. Okay. So, it's not the position of the
14 United States, as you have said, that all of the
15 assets specifically listed are intended to qualify as
16 investments?
17 A. I don't agree with that. I am not a lawyer,
18 and so if you are asking for legal interpretations,
19 I'm not in a position to give you legal
20 interpretations. And this is not a part of the
21 agreement. This is a description by the Department of
22 State.
[Page 1349]
1 Q. Okay. Well, the Department of State, the
2 United States says that the fact that a certain type
3 of asset is listed not dispositive; right? That's the
4 position of the U.S. Government in this case?
5 A. No--
6 Q. Yeah.
7 A. --it is the position of the United States
8 Department of State in the L Bureau. That's who
9 signed it.
10 PRESIDENT FERNÁNDEZ ARMESTO: I don't think
11 the Ambassador says that contrary to what the United
12 States says. The Ambassador says that descriptive
13 lists are presumed to, indeed, present the
14 characteristics of an investment. He says there is a
15 presumption. But he doesn't--I don't think this is a
16 rebuttal presumption, so you could rebut the
17 presumption that a certain type of asset, which is on
18 the list, still does not comply with all the
19 characteristics of an investment?
20 THE WITNESS: I think that's a legal
21 question.
22 PRESIDENT FERNÁNDEZ ARMESTO: Yeah. Yeah.
[Page 1350]
1 But to take an example, you could have an Option
2 Agreement, which is in the list of--if I am not wrong,
3 options are in the list of these assets, and it
4 could--what you say it is presumed to be an
5 investment, but it is a rebuttal presumption, which
6 can be rebutted if the asset does not meet the
7 inherent characteristics of "investment." It gets
8 confusing to say it in words.
9 THE WITNESS: I assume that's what Tribunals
10 are for.
11 PRESIDENT FERNÁNDEZ ARMESTO: Please.
12 MR. ULRICH: Well, Mr. President, it's the
13 conclusion of Ambassador Allgeier that there's a
14 presumption.
15 PRESIDENT FERNÁNDEZ ARMESTO: That's what I
16 wrote.
17 MR. ULRICH: Correct. That is what he wrote.
18 That's not what the United States says and that's not
19 what Perú says. In the referenced paragraph, it says
20 nothing about a presumption that something listed will
21 be an investment.
22 PRESIDENT FERNÁNDEZ ARMESTO: That is true.
[Page 1351]
1 BY MR. ULRICH:
2 Q. Correct, Mr. Allgeier? The U.S. doesn't
3 state that there's an alleged presumption that
4 something listed will be an investment.
5 A. In this document, the Department of State did
6 not say that.
7 Q. Okay. They say here, as Perú has submitted,
8 that even a type of asset listed must still have the
9 characteristics of an investment; right?
10 A. That's what it says.
11 Q. Okay. So if an asset doesn't have those
12 characteristics, it's not an investment covered under
13 the Treaty; right?
14 A. Again, you're getting me into the legal area,
15 but if it's an illustrative list, I don't think that
16 it means that those are the only type of assets or
17 those are the only characteristics of an investment.
18 But, again, I'm treading now into the Tribunal's area.
19 Q. Okay. Well, let's go into an area that you
20 have covered, including today. You said that the
21 Treaty was negotiated according to a so-called
22 "negative list" approach; right?
[Page 1352]
1 A. I said not so-called. The "negative list,"
2 yes.
3 Q. Okay. So this "negative list" approach,
4 under that all assets are supposed to be covered
5 unless they are expressly excluded; right?
6 A. That is the principle of the negative list.
7 Q. Okay. "Negative list," that's not a term
8 that's used in Article 10.28 of the Treaty; right?
9 A. That is a negotiating approach, and so you
10 don't put your negotiating approach in the Treaty, but
11 it is not mentioned in the agreement, no.
12 Q. Okay. So we agree it is not a legal
13 requirement. It's an approach that the U.S. follows.
14 A. And many other countries.
15 Q. And here in the U.S. submission before you,
16 where they are articulating a position on Article
17 10.28, they don't say anything about "negative list,"
18 do they?
19 A. Who they, I'm sorry.
20 Q. The United States Government in this
21 submission before you.
22 A. I don't believe they are commenting on the
[Page 1353]
1 approach, but they do not mention the "negative list"
2 in this summary of the Agreement.
3 Q. Okay. Moving along.
4 So, we agree, I think, that, if an asset
5 doesn't have the characteristics of an investment, it
6 is not a covered investment under the Treaty; right?
7 The Treaty requires it must have the characteristics
8 of an investment.
9 A. I believe--characteristics of an--there are
10 several pieces of guidance, I believe, in determining
11 whether an investment is covered, and it includes a
12 presumptive list that you talked about where Bonds are
13 included. It includes the characteristics, those--one
14 or more of those characteristics, and possibly other
15 characteristics.
16 Q. And the Treaty specifies some characteristics
17 of an investment; right?
18 A. Illustrative, yes.
19 Q. But before the illustrative forms of
20 investment, the Treaty specifies that characteristics
21 of an investment include such characteristics as
22 contribution risks.
[Page 1354]
1 A. Those characteristics are listed, yes.
2 Q. So, if an investment, for example, didn't
3 involve contribution, didn't meet that characteristic
4 of an investment, then it wouldn't fall under coverage
5 of the Treaty; right?
6 A. Wait, what do you mean "contribution"?
7 Contribution wasn't one of those characteristics that
8 you were just citing, I don't believe.
9 PRESIDENT FERNÁNDEZ ARMESTO: It is
10 commitment. The Treaty says it is commitment of
11 capital or other resources. That's the precise term.
12 So, I think you are referring--
13 MR. ULRICH: Precisely, Mr. President. Thank
14 you for the clarification.
15 BY MR. ULRICH:
16 Q. So, at Article 10.28, we see that
17 characteristics of an investment include such
18 characteristics as the commitment of capital. So, if
19 a type of asset that you're looking at didn't have a
20 commitment of capital--
21 A. No, because the list uses the conjunction
22 "or" not "and."
[Page 1355]
1 Q. Well, can we agree that if an asset doesn't
2 have any of the characteristics of an investment
3 listed in Article 10.28, then it can't be an
4 investment under the Treaty?
5 A. No, because it's an illustrative list, as you
6 said, and as it says there.
7 Q. I think we're talking about two different
8 lists. Maybe it might make sense to go back to
9 Page 11 of your First Report, Paragraph 35.
10 A. Page 11 of my First Report. The First
11 Report. Okay. All right. Page 11.
12 Q. Yes. Paragraph 35. This is where you just
13 have a big block quote of Article 10.28; right?
14 A. Right.
15 Q. And we see that the Treaty specifies--states
16 that: "Investment means every asset that an investor
17 owns or controls, directly or indirectly, that has the
18 characteristics of an investment, including such
19 characteristics as the commitment of capital or the
20 resources, the expectation of gain or profit, or the
21 assumption of risks."
22 A. Umm-hmm.
[Page 1356]
1 Q. So, the Treaty gives some examples of what a
2 characteristic of an investment is; right? Of
3 capital, assumption of risk, expectation of gain or
4 profit.
5 A. It gives some characteristics, yes. It does
6 not here specify that all of these characteristics
7 have to be held by an investment. It is "or." It
8 could be all three, it could be two, it could be one,
9 it could be some other.
10 Q. Let's assume that there are zero. An asset
11 doesn't meet any of these characteristics of an
12 investment.
13 So, if an investment under the Treaty means
14 an asset that has the characteristics of an
15 investment, and we're looking at an asset that doesn't
16 have those characteristics, then it falls outside the
17 scope of the definition of "investment"; right?
18 A. No. Because there could be other
19 characteristics. This is illustrative.
20 PRESIDENT FERNÁNDEZ ARMESTO: Any further
21 questions, Mr. Ulrich?
22 MR. ULRICH: Yes, Mr. President.
[Page 1357]
1 BY MR. ULRICH:
2 Q. Let's move on from this point.
3 Let me ask you this, Ambassador. The Treaty
4 doesn't contain a "negative list" identifying every
5 asset under the sun that doesn't have the
6 characteristics of an investment; right?
7 A. No. It is up to each Party to identify
8 specific exceptions. In other words, either Party
9 wants to make very clear, look, this particular asset
10 or characteristic of an investment is not covered, and
11 the only place that that occurs is in that footnote--I
12 believe it is Footnote 13, Government-to-Government
13 loans.
14 Q. Well, if we're going to look at an asset to
15 determine if it possesses the characteristics of an
16 investment, that's a fact-specific, case-specific
17 inquiry; right?
18 A. Repeat the question, please.
19 Q. If you're going to examine an asset to
20 determine if it meets the characteristics of an
21 investment as required by the Treaty, that's going to
22 depend on the particular characteristics of that
[Page 1358]
1 particular asset; right?
2 A. When you say characteristics required by the
3 Agreement, the characteristics were illustrative
4 guidance, so one would look at characteristics. But
5 one would have to look at the entire section on the
6 definition of "investment," I would think. I'm not a
7 lawyer, but it seems logical.
8 Q. The definition states that "investment" means
9 every asset that has the characteristics of an
10 investment; right?
11 A. Umm-hmm.
12 Q. So, to determine if an asset is an
13 investment, you have to look at it to see if it has
14 the characteristics of an investment. We agree?
15 PRESIDENT FERNÁNDEZ ARMESTO: Mr. Ulrich, it
16 is not really very helpful because this is a question
17 for the Tribunal to decide. It's a very difficult
18 question of how--as you know, of how the
19 characteristics of an investment and what is an
20 investment and what is not. But eventually this is
21 something which falls on the Tribunal.
22 Ambassador Allgeier is not really very--he's
[Page 1359]
1 very helpful with his explanations of the trade
2 negotiations, but I don't think he can actually help
3 us too much here.
4 BY MR. ULRICH:
5 Q. All right. Let's talk about Footnote 12 for
6 a minute. That's something you address in your
7 Report. And you also addressed it here today.
8 A. Footnote 12.
9 Q. You also quote Footnote 12 on Page 11 of your
10 First Report, if you want to refer there.
11 A. Yeah. I was just looking for the text of
12 Footnote 12. All right.
13 Q. Okay. Now, you've said that the purpose of
14 Footnote 12 is to establish the presumption that forms
15 of debt meet the definition of a covered investment;
16 right? So a Tribunal should start from the fact that
17 it's intended to be covered and work backwards if it's
18 not; right?
19 A. Footnote 12 is additional guidance for people
20 to understand what sorts of assets the negotiators
21 intended to cover.
22 Q. Footnote 12 doesn't say that some forms of
[Page 1360]
1 debt are presumed to be investments; right?
2 A. No. That's covered elsewhere in that
3 definition.
4 Q. Well, the definition doesn't say "presumed"
5 either; right? We covered that.
6 A. No, it doesn't say "presumed."
7 Q. And the footnote doesn't say that some forms
8 of debt are investments; right? It says some forms
9 are more likely, some less likely, to have the
10 characteristics of an investment; right?
11 A. That's what it says.
12 Q. Okay. So the footnote doesn't obviate the
13 need to look for these characteristics of an
14 investment. There's a spectrum. You still have to
15 look.
16 A. It may be more obvious in some cases than
17 others.
18 Q. The Bonds that are at issue in this case,
19 you're aware that Gramercy acquired them through sales
20 contracts providing them for an expectative right of
21 possible payment?
22 A. No. I'm not familiar with the transactions
[Page 1361]
1 involving the Bonds, how they were acquired.
2 Q. Okay. And you didn't review the sales
3 contracts?
4 A. No.
5 Q. Okay. Gramercy didn't show you those.
6 A. No.
7 Q. Okay. You're aware that Gramercy didn't plan
8 to submit the Bond coupons for payment at designated
9 dates? In fact, most of them were past maturity?
10 A. No.
11 Q. Are you aware that--
12 A. Just to save you time, I am totally
13 unfamiliar with the Bonds themselves and the
14 transactions that took place. That's not my area of
15 expertise. Sorry.
16 Q. Okay. Well, let's cover briefly, then,
17 something that you did cover in your presentation.
18 A. Umm-hmm.
19 Q. We were talking about the issue of a claim
20 for payment immediately due; right? So, in this
21 Footnote 12, it says that at one end of the spectrum,
22 where something is less likely to have the
[Page 1362]
1 characteristics of an investment, that includes claims
2 to payment that are immediately due, and then you
3 emphasize in your presentation "end result from the
4 sale of goods or services"; right?
5 A. Yeah, I was just trying to be accurate as to
6 what the footnote says.
7 Q. Sure. So, if Gramercy is making a claim for
8 payment immediately due on a contract that they use to
9 acquire these Bonds, we are talking about something on
10 the other end of that spectrum; right? Less likely to
11 have characteristics of an investment?
12 A. I don't follow that at all. Explain that,
13 please.
14 Q. Okay. Gramercy has said that it acquired a
15 bond.
16 PRESIDENT FERNÁNDEZ ARMESTO: It is--I'm
17 trying to help, Mr. Ulrich. It is not really very
18 helpful. I mean, I think what is the take I have from
19 the Experts is his negotiation with his experience as
20 a negotiator of the U.S.
21 What he makes out of a text--and he was not
22 even the negotiator of this text. He was the boss of
[Page 1363]
1 the negotiator of this text.
2 THE WITNESS: Right.
3 PRESIDENT FERNÁNDEZ ARMESTO: No,
4 Professor--Ambassador Allgeier--I'm making you now a
5 Professor. Ambassador Allgeier, you were the boss of
6 the negotiators.
7 THE WITNESS: Yes. Regina Vargo was my
8 Deputy on Western Hemisphere, that's correct.
9 PRESIDENT FERNÁNDEZ ARMESTO: And he can tell
10 us something about the practice of U.S. trade
11 negotiations, but it is not helpful, really,
12 Mr. Ulrich. But in the interest of time, I find that
13 he cannot really help us much.
14 MR. ULRICH: Okay, Mr. President, I'll move
15 along.
16 BY MR. ULRICH:
17 Q. Ambassador Allgeier, you mentioned in your
18 presentation today that you never heard of the Salini
19 Case until this Arbitration; right?
20 A. That's correct.
21 Q. And so your Reports, they don't address any
22 of the jurisprudence on the definition of "investment"
[Page 1364]
1 under international law; right?
2 A. Pardon me. Say that, again, please.
3 Q. Your Reports don't address jurisprudence,
4 like Salini, on the definition of "investment" under
5 international law.
6 A. That's correct.
7 Q. Not covered.
8 Okay. That would be outside the scope of
9 your Reports; yes?
10 A. To comment on it, yes. The only part of it
11 was, as I said, I have no awareness that we had any
12 discussions about so-called "Salini Cases" during the
13 negotiations.
14 Q. Okay. And were there any lawyers involved on
15 the U.S. side in negotiating the Treaty or with input
16 into negotiating?
17 A. Absolutely.
18 Q. And it's possible they had some input into
19 the investment chapter of this Treaty?
20 A. Certainly, they had a lot of input into it,
21 but let me just explain one thing about the way we
22 work. And that is that the lawyers are all--my
[Page 1365]
1 experience is the lawyers at USTR have been very good
2 about explaining to nonlawyer supervisors why certain
3 language is put into an agreement. And there are a
4 number of occasions where I would say to one of our
5 lawyers, why are we putting that language in?
6 And they would then explain to me, "well,
7 maybe it was some WTO case they were worried about or
8 some other."
9 At no time do I recall having a discussion
10 with any of the lawyers about why we were putting in
11 something called "the Salini Case factors," whatever
12 the term is.
13 Q. Okay. You're not familiar with the
14 so-called "Maffezini footnote in the U.S. Model BIT;
15 is that right?
16 A. The what footnote?
17 (Comments off microphone.)
18 A. What fun to watch from the side.
19 Q. So, you're not familiar with the Maffezini
20 Case?
21 A. No.
22 Q. Okay. And you're not familiar with the
[Page 1366]
1 Maffezini footnote in the U.S. Model BIT?
2 A. I'm not aware of a footnote called the
3 "Maffezini footnote." I don't know which footnote
4 you're talking about. Maybe you could direct me to
5 it, but I don't know who Mr. or Ms. Maffezini was.
6 PRESIDENT FERNÁNDEZ ARMESTO: For once, we
7 are not discussing Maffezini. So let's not open that
8 can of worms.
9 Is there any further question for the
10 Ambassador?
11 MR. ULRICH: Yes, Mr. President.
12 PRESIDENT FERNÁNDEZ ARMESTO: Because we have
13 been just going--it's more than half an hour of
14 cross-examination, and we have--we must go on. I hate
15 to do this, Mr. Ulrich, but it is my duty, as
16 Chairman, to move this procedure along, because
17 otherwise we will not finish.
18 MR. ULRICH: We are mindful of the time,
19 Mr. President. We'll move along. Okay? But I do
20 have some additional questions.
21 PRESIDENT FERNÁNDEZ ARMESTO: Let's keep them
22 to the areas where the Ambassador can really help us.
[Page 1367]
1 MR. ULRICH: Mr. President, every single
2 question here is on an issue that is covered in his
3 Report and covered in his testimony today.
4 PRESIDENT FERNÁNDEZ ARMESTO: Yes, but you
5 know what part of his testimony is really unique and
6 relevant.
7 MR. ULRICH: Well, perhaps that's the problem
8 with his testimony.
9 BY MR. ULRICH:
10 Q. Ambassador, let's quickly talk about object
11 and purpose. Okay?
12 Now, you've said that the language of the
13 preamble in the Treaty was not intended to act as a
14 mandatory filter for understanding the terms of the
15 Treaty; correct?
16 A. That's correct.
17 Q. If we go--we can turn back or just think back
18 to those instructions that you received for your
19 Report that specified that "a Treaty must be
20 interpreted in good faith in accordance with ordinary
21 meaning to be given to terms in their context and in
22 light of the Treaty's object and purpose"; right?
[Page 1368]
1 Those instructions were set out in your
2 Report?
3 A. Whereabouts in the Report?
4 Q. This is Paragraph 11 of your First Report.
5 A. Of the First Report?
6 Q. Yes. Page 3, Paragraph 11 of your First
7 Report.
8 A. Oh.
9 Q. So, "a Treaty must be interpreted in good
10 faith in accordance with the ordinary meaning to be
11 given to the terms in their context and in light of
12 the Treaty's object and purpose."
13 Do you see that?
14 A. Yeah, I see it.
15 Q. Okay. When something "must be done," another
16 way of saying that is that it's "mandatory;" right?
17 A. It's a requirement that it must be
18 interpreted--well, that could be read. If you need to
19 interpret it, then you must do it in good faith, in
20 accordance with the ordinary meaning.
21 Q. "In context and in light of the Treaty's
22 object and purpose." Right? We agree?
[Page 1369]
1 A. Okay.
2 Q. Okay. So, are you aware that, under
3 principles of treaty interpretation, the preamble is
4 considered context to be considered?
5 A. I don't know that for a fact.
6 Q. Okay. And you're not aware that, under
7 principles of treaty interpretation, the preamble is
8 also viewed as evidence of object and purpose?
9 A. Now, I don't know international law, so I
10 don't know that for a fact.
11 Q. Okay.
12 A. I know how we go about drafting preambles.
13 And often we are doing that to deal with some concern
14 of Congress.
15 Q. Okay. Let's move along, last line of
16 questioning, Mr. President.
17 PRESIDENT FERNÁNDEZ ARMESTO: Thank you,
18 Mr. Ulrich.
19 BY MR. ULRICH:
20 Q. Let's talk a couple minutes about disputes
21 predating the Treaty. Okay? That is something you've
22 covered in your Reports and in your presentation
[Page 1370]
1 today.
2 Now, we've had an exchange in the Briefs as
3 to whether it was a true "precondition" as to whether
4 these preexisting disputes between U.S. investors and
5 Perú had to be resolved before negotiations could
6 begin. I think we're at the point where, we agree,
7 negotiations began before all of these disputes were
8 resolved; right?
9 A. The negotiations began only after the
10 Administration had a degree of confidence that the
11 Government of Perú would work with us seriously to
12 resolve these disputes.
13 Q. Okay. And some of these disputes that we're
14 talking about, they are disputes arising out of Perú's
15 Agrarian reform? We agree on that?
16 A. That's correct.
17 Q. Okay. And so, we agree these disputes arose
18 well before Treaty Negotiations be began; right?
19 A. Yes. There were a number of--there were
20 quite a number of disputes that started at different
21 times. A whole range of disputes, yes.
22 Q. Okay. And the disputes involving the
[Page 1371]
1 Agrarian Reform, in particular, those dated back
2 decades--right?--well before the Treaty negotiation?
3 A. That's correct.
4 Q. Okay. One of the higher profile disputes
5 that you've addressed, and today as well, LeTourneau
6 Case; right?
7 LeTourneau was a U.S. investor and had a
8 dispute with Perú?
9 A. That's correct.
10 Q. Okay. And Perú and the U.S. were aware of
11 that case at the time of the Treaty negotiations?
12 A. That and other disputes, yes.
13 Q. Okay. And you've suggested that because
14 cases like LeTourneau were on the radar of the
15 Contracting Parties, they must have accounted for the
16 Land Bonds during negotiations; right? That's your
17 position?
18 A. I would assume that they did. They should
19 have. They had to, because we were raising that in a
20 variety of ways at a very high political level, and
21 our Embassy was extremely active in that.
22 Q. And in this respect, you relied on--you
[Page 1372]
1 mentioned a couple documents in your presentation that
2 included leaked internal diplomatic cables from the
3 U.S. Embassy in Lima; right?
4 A. I don't know if they were leaked. All I'm
5 saying is there was--certainly there were cables back
6 and forth about the Embassy's work with the Government
7 of Perú to resolve this.
8 Q. Okay. Well, the exhibits you attach to your
9 Statement, they are internal cables sent from the U.S.
10 Embassy in Lima to certain U.S. Government agencies
11 that happened to be published on WikiLeaks; right?
12 A. I don't know that they were published on
13 WikiLeaks, and I will say that, of course, at the time
14 I had a very high security clearance, and so all those
15 cables would have been cables that I would have seen.
16 Q. Okay.
17 A. At the time.
18 Q. If all those exhibits had a WikiLeaks icon on
19 it and said WikiLeaks, printed from WikiLeaks, in the
20 header, that might be some indication that they were
21 drawn off of WikiLeaks?
22 A. I'm sorry, I didn't pay attention to what the
[Page 1373]
1 icon was up at the paper. I was more interested in
2 the content.
3 Q. Okay. Well, in any event, the LeTourneau
4 Case wasn't about Land Bonds, was it?
5 A. The LeTourneau Case, it was--well, it was
6 about Agrarian Reform. It had a connection with
7 Agrarian Reform.
8 Q. Why don't we take a quick look, please, in
9 back in the binder, Tab 3.
10 A. Now, I do see the WikiLeaks icon there.
11 Q. Okay.
12 PRESIDENT FERNÁNDEZ ARMESTO: Do you have the
13 precise number?
14 MR. ULRICH: CE-453.
15 BY MR. ULRICH:
16 Q. Well, now that you've noticed the WikiLeaks
17 icon, as a former high-level U.S. official, you
18 endorse the use of WikiLeaks documents in public
19 proceedings like this?
20 A. I'm not--that is not my area of expertise.
21 MS. POPOVA: Objection. Mr. President, that
22 is really not appropriate.
[Page 1374]
1 BY MR. ULRICH:
2 Q. Okay. Moving along, just a few quick
3 questions left. I'm at exhibit--this is Tab 3,
4 Exhibit CE-435.
5 (Overlapping speakers.)
6 A. Would you like me to look at this cable?
7 Q. Yes.
8 A. Okay.
9 Q. We're at the cable. Okay. Let's take a
10 quick look at a few lines here. On the first page,
11 the subject line says "LeTourneau and GOP reach
12 settlement after 35 years;" right?
13 A. That's what it says.
14 Q. Okay. And "GOP" here, I presume that means
15 Government of Peru?
16 A. Correct.
17 Q. Okay. And if we look at the bottom of the
18 page, Item Number 1, the last full paragraph here,
19 says "LeTourneau's attorney on March 30 accepted
20 Perú's offer of compensation for road construction
21 performed more than 35 years ago;" right?
22 A. Yes.
[Page 1375]
1 Q. Okay. Let's please take a look at Page 2.
2 I'm near the top of the page, Item 2, about halfway
3 through that paragraph. Okay. It says: "Perú
4 recognized the need to implement a 1970 Peruvian
5 Supreme Court Decision that ordered LeTourneau be
6 compensated for the value of a 60-kilometer road the
7 Company built in difficult jungle terrain;" right?
8 A. That's what it says.
9 Q. Okay. And then Item 3, just below that,
10 "LeTourneau accepted the GOP's approximately
11 $10 million settlement offer;" right?
12 A. That's what it says.
13 Q. Okay. So, this case was a commercial
14 dispute; right? Adjudicated in Peruvian Court over a
15 road. That's what this cable says.
16 A. No, it doesn't say where it was adjudicated.
17 Q. Well, it says there was a 1970 Peruvian
18 Supreme Court Decision on it; right?
19 A. Okay.
20 Q. Okay. And this is a dispute over a road,
21 yes?
22 A. It is part--it was the last part of a broader
[Page 1376]
1 dispute, and the road question was the last remaining
2 part of it.
3 Q. LeTourneau didn't seek payment for the road
4 in Land Bonds; right? And Perú didn't pay them in
5 Land Bonds; right? It was a $10 million lump sum
6 settlement payment?
7 A. I don't know what LeTourneau sought
8 initially, what they were seeking initially.
9 Q. Okay.
10 A. This talks about the settlement.
11 Q. All right. So, LeTourneau, then, that
12 case--it wasn't about the legal status of the Bonds or
13 valuation of the Bonds or payment of the Bonds.
14 A. No. It was one of the disputes that we were
15 concerned about with Perú, and it was only after it
16 was settled that we agreed to sign the Agreement.
17 Q. Okay. And LeTourneau, that case, it wasn't
18 about any Peruvian Court Decision or a draft decree
19 or--
20 (Overlapping speakers.)
21 Q. --law about the Bonds?
22 A. I have no idea. I have not gone in detail to
[Page 1377]
1 follow the tortuous route of the LeTourneau Case.
2 Q. Okay. And the other two cases that you've
3 cited involving U.S. investors and Perú, they likewise
4 involved a dispute over expropriation of land and
5 weren't in dispute over the Bonds; right?
6 A. I don't know. My area was not to go into
7 detail on these disputes. My responsibility was to
8 convey to Perú that they needed to resolve an array of
9 disputes. There were other disputes. There were tax
10 disputes, other disputes, they had to deal with and
11 resolve before they were going to see any final
12 Agreement with us.
13 Q. Okay. But from what we've seen, none of
14 these pre-Treaty cases addressed in your Report
15 specifically concern the Bonds.
16 We agree on that; right?
17 A. I don't know. As I said, I have not gone
18 into the detail of each and every case.
19 Q. Okay. Okay. Thank you. We'll move along.
20 Last few questions.
21 PRESIDENT FERNÁNDEZ ARMESTO: Any further
22 questions?
[Page 1378]
1 MR. ULRICH: Maybe a minute, Mr. President.
2 BY MR. ULRICH:
3 Q. All right. You were here, yesterday; right?
4 You saw the testimony from Mr. Herrera,
5 Perú's Chief Negotiator for the investment chapter of
6 the Treaty?
7 A. Yes.
8 Q. And you saw that he testified the Land Bonds
9 were never even mentioned during Treaty Negotiations;
10 right?
11 A. That's what he said, yep.
12 Q. Okay. And Mr. Herrera, he personally
13 participated in the negotiations; right?
14 A. That's my understanding, from his submission.
15 Q. And you didn't personally participate; right?
16 You weren't in the room.
17 A. I was the supervisor, that's correct.
18 Q. Okay.
19 A. So, the supervisor doesn't normally sit there
20 and undercut the lead on the negotiating team.
21 Q. Okay. And the minutes of the 13 rounds of
22 the Treaty negotiations, to assist those of us who
[Page 1379]
1 weren't in the room, they make no mention of the Land
2 Bonds; right?
3 A. I don't recall. I think that's right. I
4 think that's right. They don't mention it.
5 Q. Okay. Thank you.
6 (Overlapping speakers.)
7 A. Yeah. Okay.
8 MR. ULRICH: No more questions at this time.
9 PRESIDENT FERNÁNDEZ ARMESTO: Very good.
10 Thank you. Thank you, Mr. Ulrich.
11 Ms. Popova, do you have any redirect for the
12 ambassador?
13 MS. POPOVA: A very limited one,
14 Mr. President. Thank you.
15
16 BY MS. POPOVA:
17 Q. Ambassador Allgeier, you were just asked by
18 Mr. Ulrich--it was put to you that at 15:13 in the
19 Transcript: "None of the pre-Treaty cases addressed
20 in your Report specifically concern the Bonds."
21 Do you remember that question?
22 A. Yes.
[Page 1380]
1 Q. Yes. Could I take you, please, to
2 Paragraph 67 of your Second Report.
3 A. I'm sorry. First?
4 Q. Apologies. Your First Report.
5 A. Yeah. Okay.
6 Q. Thanks to my colleague keeping me honest.
7 First Report, Paragraph 67. Thank you.
8 A. Okay. Yes.
9 Q. Do you see at the end of that paragraph, you
10 quote a document, the very end, you say: "One of the
11 disputes identified by the U.S. Government involved a
12 U.S. person who claimed that, in about 1970, Perú's
13 military Government expropriated his farm as part of a
14 general land"--
15 A. Did you say Paragraph 57?
16 Q. Paragraph 67.
17 A. Oh, 67. I'm sorry. Yeah.
18 PRESIDENT FERNÁNDEZ ARMESTO: I think she
19 said 57, to be fair to you. I think she started with
20 57, and then it became 67.
21 THE WITNESS: Okay. All right.
22 PRESIDENT FERNÁNDEZ ARMESTO: I was also at
[Page 1381]
1 57.
2 BY MS. POPOVA:
3 Q. 67.
4 A. I see 67. Fine.
5 Q. Thank you.
6 A. Okay.
7 Q. Yes. Let me know when you've read that
8 paragraph.
9 A. Okay. Yes, I've read it, yeah.
10 Q. You see you quote there from Document CE-46,
11 and you say that one of the Claimants was "issued
12 compensation Bonds."
13 Do you see that?
14 A. Yes.
15 Q. I'd like to take you to that document. It is
16 in the binder that was given to you by my learned
17 friends. It is CE-456, which is the document you cite
18 here at Tab 4.
19 A. Tab 4. Okay. The cable from the Embassy.
20 Q. Yes. Would you look with me at Paragraph 11
21 of this document, which is what you cite in this
22 Report.
[Page 1382]
1 A. All right. About Claimant K.
2 Q. K, yes. Could you look at, please, at the
3 last two sentences on that page.
4 A. On that page. Oh, okay. Umm-hmm.
5 Q. Do you see where it says "Claimant K was
6 issued compensation Bonds, which have since become
7 worthless as a result of hyperinflation?"
8 A. Yes, I see that.
9 Q. So, could you please explain to the Tribunal
10 what you understand this reference to compensation
11 Bonds that have become worthless refers to?
12 A. Well, as I understand it to be, that a
13 particular Claimant, so-called "Claimant K "was issued
14 some form of Bonds in compensation for the land that
15 was taken earlier, but these Bonds, because they have
16 been--the value of what they had when they were given
17 to him in compensation, have lost most of that value
18 because of the high rate of inflation.
19 Q. And you described earlier that there were
20 several cases arising out of Perú's Land Reform.
21 Is this one of the cases that arose out of
22 Perú's Land Reform that you described earlier?
[Page 1383]
1 A. Yeah. Yes, it is.
2 Q. Thank you, Ambassador Allgeier. No further
3 questions.
4 MR. ULRICH: Mr. President, could we have
5 very brief follow-up just on this document?
6 PRESIDENT FERNÁNDEZ ARMESTO: Of course.
7
8 BY MR. ULRICH:
9 Q. Okay. Ambassador Allgeier, I'm still on same
10 page of CE-456, and it says that "Claimant K made no
11 attempt to redeem the Bonds;" right? And that
12 maintaining--
13 A. I'm sorry. Where does that say?
14 Q. It's at the top of Page 10, beginning--it
15 reads "Claimant K asserts." You're in that paragraph?
16 A. "Claimant K." Oh, "Claimant K asserts that
17 because he believed." Yeah.
18 Q. Okay. And it says there he made no attempt
19 to redeem the Bonds, and, in fact, he maintained his
20 goal was to have his land returned?
21 A. Umm-hmm.
22 Q. And he had begun efforts to recover the farm.
[Page 1384]
1 That's what the cable says; right?
2 A. Yeah, that's what it says.
3 Q. Okay. So, he wasn't disputing the Bonds. He
4 was trying to get his farm back.
5 A. Well, I don't know what Claimant K's
6 objectives were. We--I agree with what you said when
7 you were quoting this. So, that's whatever evidence
8 we have.
9 Q. Okay. Thank you. One last very quick
10 question. Let's just turn briefly to the first page
11 of this document. Same document we're in, same tab.
12 A. Of this cable?
13 Q. Of this cable.
14 A. Okay. Yeah.
15 Q. And I'm looking at the paragraph at the
16 bottom that says "the U.S. Government is aware of
17 seven claims"--
18 A. Umm-hmm.
19 Q. --"that may be outstanding?"
20 A. Right.
21 Q. And then at the bottom there, just before we
22 turn the page, it says "post also recommends the
[Page 1385]
1 removal of five cases due to continued lack of
2 involvement by the Claimants;" right?
3 Do you see that?
4 A. Yes.
5 Q. And Claimant K is one of those Claimants?
6 A. That is correct.
7 Q. Okay. Thank you, Ambassador.
8 PRESIDENT FERNÁNDEZ ARMESTO: Very good.
9 Professor Stern?
10 ARBITRATOR DRYMER: No, I'm okay. Thank you.
11 PRESIDENT FERNÁNDEZ ARMESTO: Ambassador,
12 thank you very much for helping to better understand
13 the policies of the United States in negotiating trade
14 Agreements and, with that, we finalize your
15 examination. Thank you very much.
16 THE WITNESS: Thank you very much,
17 Mr. Chairman, Members of the Tribunal.
18 (Witness steps down.)
19 PRESIDENT FERNÁNDEZ ARMESTO: We are now--it
20 is now 3:20. We will reconvene at 3:30.
21 (Brief recess.)
22 PRESIDENT FERNÁNDEZ ARMESTO: We resume the
[Page 1386]
1 Hearing, and we do so to examine, in Lima, the Expert
2 Professor Mario Castillo Freyre.
3
MARIO CASTILLO FREYRE, CLAIMANTS' WITNESS, CALLED
4 PRESIDENT FERNÁNDEZ ARMESTO: Professor
5 Castillo, good afternoon to you in Lima.
6 THE WITNESS: Good afternoon, Mr. President.
7 PRESIDENT FERNÁNDEZ ARMESTO: Very well.
8 Thank you very much for being here with us.
9 The first thing we need to do, Professor, as
10 you know, is to take your declaration as an Expert. I
11 would ask that you please stand up, and you should
12 have before you the declaration, and I would ask that
13 you please read it out.
14 THE WITNESS: Of course.
15 I solemnly declare, upon my honor and
16 conscience, that my statement will be in accordance
17 with my sincere belief.
18 PRESIDENT FERNÁNDEZ ARMESTO: Very well.
19 Thank you very much, Professor.
20 Ms. Popova is going to put a series of
21 questions to you on behalf of Claimant.
22 MS. POPOVA: Thank you, Mr. President.
[Page 1387]
1
2 BY MS. POPOVA:
3 Q. Good afternoon, Professor Castillo.
4 A. Good afternoon.
5 Q. You will find your Report in front of you.
6 Can you please confirm that this is the Report that
7 you've submitted in this Arbitration, and that the
8 signature on the last page is yours?
9 A. Yes. It is the Report that I produced a few
10 months ago.
11 Q. And do you agree with the Tribunal relying on
12 this Report as your testimony in this Arbitration?
13 A. Yes, and here I see the English-language
14 version. Ah, here it is.
15 Q. Do you have any corrections to make to the
16 Report?
17 A. No, I do not have any corrections to make.
18 Q. Thank you.
19 You have prepared a presentation for the
20 Tribunal. And if you are ready, then can you begin.
21 A. Of course. Of course.
22 Thank you very much.
[Page 1388]
1
2 THE WITNESS: Mr. President of the Tribunal,
3 Juan Fernández-Armesto; Arbitrator Brigitte Stern;
4 Mr. Steven Drymer; attorneys; and representatives of
5 the Parties, my name is Mario Castillo Freyre, and I
6 was called by the Company Gramercy some months ago to
7 prepare a legal Report on issues having to do with
8 nominalism and the current value principle in Perú and
9 how this is related to the debt of the Agrarian
10 Reform. This is what it says in the Report, and I
11 will talk about this for just a few brief moments this
12 afternoon.
13 I must begin by indicating that I teach a
14 course on obligations in Perú as of exactly 30 years
15 ago--I began in 1990--and I have also published other
16 material on contracts' general and special
17 considerations.
18 Moreover, part of my academic work is
19 writing. Since 1993 and for 21 years, I wrote with
20 Mr. Osterling Parodi, my mentor. He was Chair of the
21 Commission that drafted the Civil Code in its current
22 form, and the--I also have written a treatise on
[Page 1389]
1 obligations that was published twice. One appeared
2 shortly before his death in 2014. We also drew up a
3 compendium on obligations that is often used in Perú,
4 and two years ago I published a manual on obligations
5 within a centenary at the Catholic University. I've
6 also given any number of talks on these topics
7 throughout my professional and academic activity. So,
8 what I'm going to say is consistent with what I have
9 been addressing in my research and in my professional
10 life in the last 30 years.
11 One of the issues on which I was called to
12 give an opinion has to do with the treatment of
13 nominalism and current value in--principle in Perú.
14 The treatment of these topics is quite clear, in my
15 view. The Civil Code regulates this matter in three
16 different Articles. The general rule on obligations
17 to pay sums of money is constituted by Article 1234 of
18 the Civil Code. This is the general rule, and
19 1234--I'm going to read the four lines of this brief
20 paragraph. It says: "The payment of a debt
21 contracted in national currency cannot be demanded in
22 a different currency, nor in any sum other than the
[Page 1390]
1 original nominal amount agreed upon." In other words,
2 if one is obligated to give 1,000 soles, for example,
3 under a contract, and I'm required to return them in
4 one year, I have to return those 1,000 soles
5 independent of any interest that might be called for,
6 but I have to repay those--that same quantity
7 independent of the value of those 1,000 soles at the
8 time that the obligation was contracted and at the
9 time that I delivered the 1,000 soles.
10 That is the rule, but it is a rule that has
11 two noteworthy exceptions. The first major exception
12 is constituted by Article 1235 of the Civil Code,
13 which regulates the so-called "value clauses" or
14 current value clauses, and they are called "clauses"
15 precisely because, in order for 1235 to apply, there
16 must be an agreement as between the Parties.
17 What I'm going to read now, it does not hold
18 unless there is a meeting of minds, an agreement as
19 between the Parties. In other words, an obligation
20 cannot be updated applying the factors mentioned in
21 Article--at 1235 just randomly. Rather, it would have
22 to--it would be applied only because the Parties have
[Page 1391]
1 agreed upon a certain factor.
2 What does 1235 say, just in its first
3 paragraph which is relevant? Well, not withstanding
4 what is established in Article 1234, the Parties may
5 agree that the amount of a debt contracted in national
6 currency is referred to automatic adjustment indices
7 set by the Central Bank of Reserve of Perú to other
8 currencies or merchandise or commodities in order to
9 keep that value at a constant value.
10 It mentions three factors of readjustment by
11 reference or for illustrative purposes. The first is
12 the Consumer Price Index, but with a one-month lag.
13 It mentions other currencies or commodities, and what
14 is clear about this--there is no question at all in
15 Peruvian doctrine or Peruvian legal practice--is that
16 the three mentions made by 1235 are merely
17 illustrative--that is to say, in Perú, there is no
18 restriction when it comes to agreeing on value or
19 current value clauses as the Parties see fit.
20 And why do Parties agree on such provisions?
21 In order to safeguard the value of a given
22 consideration. If I don't want to simply contract a
[Page 1392]
1 money debt--I want that to be tied to the value of
2 gold or the value of fluctuating foreign currency or
3 the value of a given product--I can do so together
4 with the Party with which I'm entering into the
5 Contract. But this first has to be a matter of
6 initial agreement, and one will apply the factor
7 chosen by the Parties, agreed upon. That's
8 Article 1235.
9 The second exception--I said just a moment
10 ago that there are two exceptions to the nominalist
11 tool--is constituted by Article 1236. Article 1236
12 regulates what is known by obligations of value or
13 debts of value by nature. In other words, the
14 application of Article 1236 is not a matter of
15 agreement between the Parties. That is not what kicks
16 it in, but rather, it is because the nature of the
17 obligation so requires, and on a regular basis the law
18 recognizes it.
19 Article 1236, which is also a very brief
20 provision, says that when one must restore the value
21 of a consideration, it is calculated as of the date of
22 payment unless there are legal provisions otherwise or
[Page 1393]
1 it is agreed upon otherwise. This implies updating
2 the value of a given consideration.
3 Now, if I were to be asked what is the
4 example par excellence of a debt in value, the one I
5 have been teaching in class since December when one
6 refers to this issue is the case of expropriations,
7 because expropriation, as a matter of mandate of the
8 successive Articles of the Constitution that have held
9 in Perú, and particularly by mandate of Article 70 of
10 the 1993 Constitution, one must compensate at fair
11 market price, which includes possible damages suffered
12 by the person expropriated, such that the debt that
13 arises from an expropriation is no doubt a debt of
14 value.
15 Now, there are other examples that one could
16 think of applied to these cases and which I'll refer
17 to in just a moment. What is important is that the
18 current value principle determines that the obligation
19 has to be adjusted to value as of the moment the
20 obligation is born--otherwise, we would be talking
21 about anything other than an updating of value; that
22 is fundamental--and, second, that updating of value
[Page 1394]
1 has to be done in keeping with the nature of the
2 obligation.
3 In other words, if we were to speak of
4 restitution because of an accident, what have you, of
5 the value of a load of gold that has been lost, well,
6 what one would have to do is see, what would the value
7 of that gold be at the moment when such payment has to
8 be in the national currency to be paid, or had the
9 damage been, with respect to oil, the same thing? If
10 it were real property, for example, then one would
11 have to see, how much would that real property cost at
12 the moment that it is paid?
13 And, naturally, if it's a question of
14 updating a sum of money--that is to say, a sum in
15 soles, national currency--what one would have to do
16 would be to apply the only adjustment factor that is
17 possible to apply in this case, which is the Consumer
18 Price Index, which is nothing other than the index
19 which, for practically one century in Perú, is applied
20 to measure the variation in the cost of the basic
21 market basket of goods and services, which is nothing
22 other than an increase in the cost of life and the
[Page 1395]
1 depreciation of the national currency in relation to
2 the goods and services consumed in Perú, such that
3 that would be the formula that one would have to
4 follow.
5 Now, what I've just been explaining with
6 respect to current value principle is
7 independent--that is to say, it does not rule out or
8 exclude those obligations in which one would have to
9 apply an interest rate. Those obligations in respect
10 of which one would pay a rate of interest, well, that
11 doesn't mean that the updating of value, if it's a
12 question of a debt of value, does not exclude
13 application of interest. They are two totally
14 different things.
15 Now, in the case of the agrarian debt, in the
16 case of the debt associated with the Agrarian Bonds, I
17 consider naturally that in respect of this, there
18 should be no controversy that it is a debt of value,
19 and it's a debt that Article 1236 of the Civil Code
20 applies to. It requires an updating, clearly, in
21 light of these current value principles that I have
22 been discussing.
[Page 1396]
1 Now, the date as of which this updating
2 should be done, I consider, is the date of issue of
3 the securities, because that's the date at which the
4 obligation emerged or was born. So, as I said a
5 moment ago, it's an updating just in quotes--rather,
6 it is not just an updating in name. Updating of a
7 debt in national concern, there is only one way to do
8 it, and it's through the CPI.
9 There are not two ways to do it, because any
10 other factor that is chosen is going to yield a
11 different figure which is going to be different, too
12 little or too much, but it doesn't mean that I'm not
13 applying the correct criterion. I have to apply the
14 criterion that corresponds to the nature of the debt
15 of value.
16 Now, in the case of the agrarian debt, I am
17 of the view that one must pay the opportunity cost for
18 not having paid it in a timely fashion. This is
19 reflected in Article 70 of the Constitution, when it
20 speaks with us not only of payment of fair market
21 price; it also says that one must compensate the harm
22 suffered.
[Page 1397]
1 On this issue, based on the documentation
2 that I've had the opportunity to review, the Bonds
3 contain a rate of interest, a rate of interest which
4 is set by Bond. For some it was 4 percent, for others
5 it was 5 percent, and for still others it was
6 6 percent.
7 Now, I believe that, no doubt, there being a
8 set rate, that set rate would have to be paid in any
9 event. Now, what is novel in this case with respect
10 to interest and how interest is handled in my country
11 has to do with the term of compensation of the harm
12 suffered as established by Article 70 of the
13 Constitution, in that, if there is a possibility of
14 paying compensation beyond what is established by rate
15 of interest--that is to say, if one must compensate
16 all of the harm suffered, as Article 70
17 establishes--well, naturally, this has not been
18 addressed in detail in my Report, and evidently,
19 obviously, it will be a matter for the analysis of the
20 Honorable Tribunal.
21 I've also had the opportunity to read the
22 Judgment, the 2001 Judgment of the Constitutional
[Page 1398]
1 Tribunal, which found unconstitutional some of the
2 provisions of Law 26597. This has been very important
3 because, first of all, it found unconstitutional the
4 application of a nominalist calculation in relation to
5 the Agrarian Reform Bonds and, therefore, one had to
6 apply Article 1236 of the Civil Code--that is to say,
7 the current value principle--as it was a debt the
8 nature of which is a debt of value. So, what the
9 Constitutional Tribunal did, in my view, was to
10 recognize the nature always of the Agrarian form--or
11 the Agrarian Bonds, rather.
12 It's not that in 2001, the debt all of a
13 sudden became a debt of the value. No, because the
14 debt in the case of expropriation is a debt of value,
15 but, unfortunately, it was necessary for there to be
16 litigation and for the Constitutional Tribunal to
17 state what, in my view, it never had to say, insofar
18 as for someone who was on top of the issues in the law
19 of obligations as well as others related thereto, it
20 is clear that it was always a debt of value, as is any
21 debt that is the result of an expropriation.
22 Now, on this point, there are also implicit
[Page 1399]
1 consequences, in my view. The first is that, if we
2 talk about a debt of value, that value should be
3 updated as of the date that the obligation emerges and
4 not as of any later date. This is an important issue.
5 And, second, that the updating, hand-in-hand with what
6 I've been arguing, should be done in keeping with the
7 nature of the obligation applying the correct factor,
8 which is nothing other than--in this specific case, as
9 this is the updating of natural currency, it is
10 nothing other than application of the Consumer Price
11 Index.
12 In 2004, there was another Judgment by the
13 Constitutional Tribunal that referred to a claim of
14 unconstitutionality on--with respect to Emergency
15 Decree 088 of 2000, which the Constitutional Tribunal
16 did not find unconstitutional. They considered that
17 it was constitutional. This provision established a
18 procedure of dollarization for payment of the agrarian
19 debt.
20 What the Tribunal did in a very detailed
21 fashion, when one reads each of the measures of that
22 claim on--unconstitutionality claim and the Tribunal's
[Page 1400]
1 analysis, well, it was not unconstitutional
2 insofar--and I'm summarizing--insofar as the mechanism
3 established by Emergency Decree 088 was not
4 obligatory--that is to say, it did not stand in the
5 way of the interested Party being able to have
6 recourse to the Courts of Justice with the claims for
7 the compensation as it saw fit. That was not being
8 prohibited by Supreme Decree 088 of 2000, and that is
9 why the Tribunal did not find unconstitutional.
10 Now, after this 2004 Judgment, another one
11 was handed down, which was a decision of 2013 in
12 relation to what was decided in 2001, and which I
13 referred to earlier, which is--which goes to the need
14 to update of the value of Agrarian Reform Bonds. Now,
15 in my view, the judgment of 2013, no doubt, was at
16 odds with the 2001 judgment. What needs to be done,
17 at any rate, is to facilitate its enforcement. That
18 was the idea. Yet, the Judgment --yet, it was
19 flagrantly at odds with the Judgment of 2001; first,
20 because it established a special system of
21 dollarization as of date of payment of the last
22 coupon, and second, it applies an interest rate
[Page 1401]
1 for--based on U.S. Treasury Bonds, which has nothing
2 to do with the situation. So, it really is out of
3 whack, because the 2001 Judgment simply establishes
4 that there must be a calculation of current value, and
5 the only way that can be done is looking at the
6 depreciation of the national currency in Peru with
7 respect to goods and services that can be purchased
8 with the same sum, the same sum of units of national
9 currency on a given date and the sum of units of
10 national currency on another date. How many--with how
11 many units of national currency can I buy the same
12 goods and services that I would be able to purchase
13 before? Well, it's a different sum, but that has
14 nothing to do with any foreign currency, with no
15 foreign currency at all.
16 So, it's a very exotic method, I would say.
17 First of all, it's not a straightforward
18 dollarization. Straightforward dollarization would
19 apply as--it would be applied uniformly to everyone in
20 Perú. Dollarization is applied independent of the
21 fluctuation of the value of the dollar at any period.
22 That's dollarization of an obligation, which would not
[Page 1402]
1 have been the appropriate thing to do, either.
2 I defend the thesis that the only factor that
3 should be applied is the CPI. But this is not even a
4 simple straightforward dollarization. It's a halfway
5 dollarization of an obligation that does not bring its
6 value to current value.
7 So, so strange is the application of the
8 dollar as a reference as if one had said the
9 Sterling--the pound sterling. Foreign currencies
10 suffer ups and downs, having to do with any number
11 political and economic factors, so if we had applied
12 the pound sterling in Perú for this debt, then we
13 would be seeing what are the consequences for it of
14 Brexit, which has nothing to do with the situation in
15 Perú, nor does the dollar, but this is what the
16 Constitutional Tribunal did with its Order of 2013.
17 Now, it was based on the Judgment of 2004,
18 which I made reference to, but the 2004 Judgment,
19 which did not find the dollarization unconstitutional,
20 well, that was because it was an optional procedure,
21 and it was very much an alternative that one might
22 choose to bring before the Tribunal--that is, that the
[Page 1403]
1 creditors--Agrarian Reform Bond creditors might bring
2 before the Court. So, it wasn't mandatory.
3 Thus, in addition, the 2013 Ruling by the
4 Constitutional Court produced--well, when I read it
5 for the first time, it very much surprised me. It
6 established that to update the value and to determine
7 the values for adjusting for it, one must bear in mind
8 the fiscal capacity of the debtor. In other words, it
9 is as though we, private persons, were allowed to
10 establish how much we owe to say what is our ability
11 to pay.
12 Well, I don't have a strong ability to pay,
13 therefore, I can reduce any of my debts, well, not
14 just any but all of my debts.
15 Now, with 2013 and what the Constitutional
16 Court said, well, its logical result is that everyone
17 could take some of the zeros off the debts they owe
18 because at the end of day, it would be the debtor
19 himself who would determine the amount of the
20 obligation. If that were generalized, quite simply,
21 tomorrow one would no longer write about the law and
22 obligations, and there would be no more courses to be
[Page 1404]
1 given in Perú on the law of obligations.
2 It is the debtor who sets the figure, and
3 that is not exactly what the 2001
4 Judgment established. It did not establish any
5 parameter, the 2001 Judgment did not, any parameter of
6 the sort. The thing is, the phraseology used by the
7 2013 Ruling leaves no sensation other than, well, even
8 though it is recognized that it is a major debt, the
9 Tribunal has adopted a mechanism to reduce it. No
10 doubt, that is not acceptable within the law of
11 obligations, not only in Perú, but any country that
12 claims to be a civilized one.
13 Now, even though I do not agree at all with
14 the Order of 2013, I must say that the judicial
15 decisions that have been based on it have recognized
16 the mechanism established by the Constitutional
17 Tribunal in that order, and they also accepted payment
18 of interest, not only those established in that Order,
19 but also interest established in the 4 or 5 or
20 6 percent Bonds.
21 Now, what would my conclusions be in
22 30 seconds? My conclusions are three mainly: The
[Page 1405]
1 first conclusion is that the debt associated with the
2 Agrarian Bonds is an obligation of value as a matter
3 of nature and because it is so established by the
4 Constitutions that have held in this period in Perú,
5 the last one that I just cited, in the latest I cited
6 just now, and under which Article 1236 would be the
7 only relevant provision in this regard of the Civil
8 Code.
9 In addition, second conclusion, that, as a
10 factor of updating, one must apply the Consumer Price
11 Index because it is the only relevant factor for
12 updating. I don't accept, in a strictly legal and
13 theoretical framework of law of obligations, that
14 there are different ways to update the value of the
15 debt, but, rather, just one, what I just said, having
16 to do with Consumer Price Index.
17 And, finally, the holders of the Agrarian
18 Bonds have the right not only to the principal
19 updated, but also to payment of compensatory interest.
20 Thank you very much, Mr. President of the
21 Tribunal.
22 PRESIDENT FERNÁNDEZ ARMESTO: Thank you very
[Page 1406]
1 much, Professor. Any additional questions by
2 Claimant?
3 MS. POPOVA: No. I'll give the floor to
4 Mr. Hamilton or to Mr. Jijón.
5 PRESIDENT FERNÁNDEZ ARMESTO: Mr. Jijón.
6 Professor, on behalf of the Republic of Perú,
7 Mr. Jijón is going to pose some questions to you.
8 But before giving you the floor, Mr. Jijón,
9 we need to mark the presentation by Professor Castillo
10 H-6.
11 THE INTERPRETER: No microphone.
12 PRESIDENT FERNÁNDEZ ARMESTO: Clearly, we
13 have a day filled with technical difficulties.
14 MR. JIJÓN: Thank you very much,
15 Mr. President.
16
17 BY MR. JIJÓN:
18 Q. Good afternoon, Mr. Castillo. How are you?
19 A. Good afternoon, sir. How are you?
20 Q. Thank you very much for being here today this
21 afternoon, albeit virtually. I'm going to ask you a
22 few questions in connection with your Report. I'm
[Page 1407]
1 sure you have before you a binder that has a number of
2 tabs. Each one of these tabs makes reference to a
3 document, and we are going to refer to those
4 documents.
5 At the outset, I'd like to clarify some
6 issues in connection with the scope of your Report, if
7 you see fit.
8 A. Of course, gladly.
9 Q. Thank you. You say that counsel for Gramercy
10 asked you to prepare this Report. When was this,
11 please?
12 A. I do not recall exactly the date, but if I
13 look at my Report, I will be able to tell you
14 approximately. My Report was May 21, 2019. I may
15 have worked on it for about a month. I don't remember
16 exactly the date when the request was made.
17 Q. We could say the beginning of 2019 then;
18 right?
19 A. Yes, of course. It was at the beginning of
20 the year.
21 Q. All right. Thank you.
22 Your Report is legal in nature, and it's not
[Page 1408]
1 economic in nature.
2 A. It is legal in nature, yes. It is legal in
3 nature, juridical, if you will. It is not economic.
4 Q. You are not an economist; right?
5 A. No, I am not an economist. I am a lawyer.
6 Q. Thank you.
7 In particular, you make reference to a number
8 of issues that have to do with the current value
9 principle and the nominalistic principle?
10 A. Yes. You're making straight reference to the
11 items I was asked to opine in connection with the
12 application of these principles vis-à-vis the rulings
13 and judgments by the Constitutional Tribunal.
14 Q. Thank you.
15 In connection with the issue of interests
16 that--you mentioned this, but just to confirm, you
17 don't delve into the issue of interest, but you
18 confirm that interest is something different from the
19 current value principle?
20 A. Yes. That's right. I do not delve into the
21 matter of interest, but interest is something
22 different from the updating of value.
[Page 1409]
1 Q. You mentioned that you looked at the Report
2 of Ms. Revoredo; correct?
3 A. Yes, I did look at it.
4 Q. Have you talked to Ms. Revoredo about her
5 Report?
6 A. No, not at all.
7 Q. Many of the issues that Ms. Revoredo deals
8 with, you also deal with; is that correct?
9 A. Yes.
10 I understand that they may have asked her,
11 well, before her health declined, well, to opine on
12 issues that I was asked to opine on as well.
13 Q. However, you do not deal with every one of
14 the issues that Ms. Revoredo dealt with. I'm going to
15 ask you to confirm that you have not dealt with the
16 issue of the jurisdiction of the Constitutional
17 Tribunal.
18 A. No, I don't.
19 Q. You do not opine in connection with the
20 accusations in connection with forgery and illicit
21 acts?
22 A. I do not at all.
[Page 1410]
1 Q. Excuse me. Apparently, there was an issue
2 with the signals.
3 A. In connection with the question that you
4 posed, I said that I was not asked to opine on the
5 accusations related to the Decision or to the
6 Enforcement Act Order of 2013.
7 Q. You were not asked to opine either in
8 connection with matters of due process, voting, the
9 process of takings of a Constitutional Tribunal, none
10 of those issues?
11 A. No, sir, none of those.
12 Q. Just to confirm, none of those issues, sir?
13 A. None of those, sir. None of those, sir.
14 They are not part of my Reports. I was not asked to
15 do this.
16 PRESIDENT FERNÁNDEZ ARMESTO: Mr. Jijón, how
17 is he going to opine about something like that?
18 MR. JIJÓN: Mr. President, I'm trying to do
19 my cross-examination.
20 PRESIDENT FERNÁNDEZ ARMESTO: Mr. Jijón, we
21 have all read the Report. We are going to have to
22 move forward, please.
[Page 1411]
1 BY MR. JIJÓN:
2 Q. Mr. Castillo, do you hold Land Reform Bonds?
3 A. No.
4 Q. Anyone in your family?
5 A. No, no one in my family either.
6 Q. Thank you.
7 A. You're welcome.
8 Q. I'd like to consider the main conclusions of
9 your Report. You considered that the 2001 Ruling did
10 not require any kind of clarification; correct?
11 A. Correct. Technically speaking, it did not
12 require any clarification.
13 Q. Okay. You said technically speaking. It was
14 very clear; right?
15 A. In my opinion, yes.
16 Q. Your position is that the Bonds undoubtedly
17 were debts of value.
18 A. Undoubtedly.
19 Q. Okay. One single value may be kept in time
20 by using the correct updating methodology; right?
21 A. That's right.
22 Q. You would say logically that to use the
[Page 1412]
1 incorrect methodology would be to breach the current
2 value principle?
3 A. Yes, because it could be possible and it may
4 so happen that different values would be obtained
5 instead of obtaining the right value.
6 Q. And you're saying that it is absolutely clear
7 that the 2013 Ruling violates the current value
8 principle?
9 A. Yes. I have no doubts about that.
10 Q. Okay. You have no doubts about that. In
11 fact, you say this with absolute belief, that the 2013
12 Ruling violates the current value principle?
13 A. Yes.
14 Q. Have you reviewed the ruling in detail?
15 A. The 2013 Ruling? Yes, I have.
16 Q. Apart from agreeing with what the
17 Constitutional Tribunal said, do you think you
18 understand what the Constitutional Tribunal said?
19 A. Yes, I think I understand what the CT said.
20 Undoubtedly.
21 Q. You have no doubts about what this ruling
22 means?
[Page 1413]
1 A. In accordance with my understanding and what
2 I have been able to read as a lawyer, I have no
3 doubts.
4 Q. Do you think that on the basis of the ruling
5 of the CT--let me rephrase.
6 Do you think that the CT Ruling is clear
7 enough for someone to be able to implement an updating
8 formula?
9 A. Are you making reference to the one in 2001?
10 Q. No, to the one in 2013.
11 A. The one in 2013. Well, the 2013 Ruling was
12 the basis of a number of Supreme Decrees that were
13 necessary for its implementation. Clearly, the ruling
14 itself--and this is clear to me--the ruling itself has
15 certain aspects that I can delve into in detail, if
16 you want me to do so, that violate the current value
17 principle. I think I said that in my Opening. But
18 for its implementation, the Government sought
19 necessary to issue some Supreme Decrees to put it into
20 practice.
21 Q. I understand that you think the ruling
22 violated the current value principle. But my question
[Page 1414]
1 has to do with whether the ruling was clear enough
2 from a legal viewpoint so that an updating mechanism
3 could be implemented.
4 A. The 2013 Resolution?
5 Q. Correct.
6 A. The 2013 Resolution or ruling--well, let me
7 be honest. In connection with the 2013 Ruling, well,
8 I've studied it from a legal viewpoint. I have
9 objections that are legal in nature in connection with
10 the application of the rules of value and the
11 applicable factors, but as a lawyer, I could not tell
12 you whether the Supreme Decrees were necessary or they
13 were not necessary. They were issued later. This was
14 not asked of me by Gramercy, and it was not the
15 subject matter of analysis in my Report.
16 Q. I think we are understanding each other, sir.
17 But just to confirm, I am not making reference to the
18 Supreme Decrees. I just wanted to know whether you
19 think that the 2013 Ruling did not require any
20 clarification.
21 A. It's an issue that I have not examined. In
22 connection with the 2013 Ruling, I have looked at the
[Page 1415]
1 aspects that are included in my Report, but to be
2 perfectly honest, I cannot answer your question
3 because I have not examined that in detail.
4 Q. Now, in connection with the 2001 Ruling, you
5 think that that ruling is absolutely clear?
6 A. The 2001 Ruling is clear because the terms
7 are absolutely clear in connection with the fact that
8 the Articles of the Law 26597 were deemed
9 unconstitutional. I don't think there is any major
10 objection for the application of a value updating, as
11 it should.
12 Q. Thank you very much, Mr. Castillo.
13 A. With pleasure.
14 Q. Let's move on. We are going to talk about
15 the underlying obligation in connection with the Land
16 Reform Bonds. We've heard a lot at this
17 Hearing--well, but before, have you been following the
18 Hearing? If I refer to issues that we dealt with
19 before, are you going to know what I'm talking about?
20 A. No.
21 Q. There has been discussion here in the sense
22 that the current value principle protects the original
[Page 1416]
1 value of on obligation.
2 I understand that you agree with that
3 principle?
4 A. Yes, I agree with that principle.
5 Q. From your Report, I understand that you think
6 that the methodology to update a debt of value has to
7 reflect the nature of the underlying obligation?
8 A. That's correct. That's right.
9 Q. Let's go back to that point. In connection
10 with the Bonds, you know that the obligations in the
11 Bonds is borne of a land expropriation?
12 A. Yes, of course. The Land Reform Law of 1969.
13 Q. Yes, exactly. These were rural lands that
14 were expropriated, and in exchange for that, Bonds
15 were issued and delivered.
16 A. Yes, sir.
17 Q. The Bonds were given to pay that debt.
18 A. No. The Bonds did not pay the debt. The
19 Bonds had to be paid ever so often in money.
20 Q. But they--the Bonds were provided as a
21 compensation.
22 A. Well, they were securities that represented a
[Page 1417]
1 compensation that was going to be paid gradually.
2 Q. Okay. And like you said, they were going to
3 be paid from time to time?
4 A. Yes, that was the idea.
5 Q. Just to confirm--and I think we agree on
6 this--you did not consider that the value of the Bonds
7 is linked to the value of the expropriated lands?
8 A. No. What I understand from the documents
9 that I read to produce my Report is that what is being
10 discussed here is the updating of the face value of
11 the Bonds as national currency that can be updated to
12 national currency in 2020 and not the value of the
13 lands. That is separate from the subject matter of
14 the dispute in these proceedings.
15 Q. Okay. We will have to see what the Bond says
16 to talk about. The land is something separate.
17 A. I have no doubts about that, sir.
18 Q. You mentioned the Land Reform law. I think
19 you're making reference to the Decree-Law 17716?
20 A. Yes, that's right.
21 Q. Have you examined that law?
22 A. Yes, I read it for purposes of my Report.
[Page 1418]
1 Q. That law is the one that establishes how the
2 Bonds are going to be issued and paid; right?
3 A. Right.
4 Q. Apart from looking at what is written on the
5 Bonds, we would--it would be relevant for us to
6 consider what the law says.
7 A. Yes, of course.
8 Q. Let's go at--let's go to Tab 3 in your
9 folder.
10 A. Yes, of course. One moment.
11 Q. Tab 3, for the record, is the Land Reform
12 law.
13 PRESIDENT FERNÁNDEZ ARMESTO: You said "for
14 the record." Don't use--well, I have spent a long
15 time in the United States, so I used certain words in
16 English that have come into Spanish. So, I would like
17 for you to use the correct Spanish words. Don't use
18 the word "record." I'm sorry. I'm trying to do that.
19 The French also do that when they try to defend the
20 French language, and we need to be very detailed when
21 we defend the Spanish language.
22 MR. JIJÓN: I fully agree. Please correct
[Page 1419]
1 me, sir.
2 BY MR. JIJÓN:
3 Q. Right. For the record then, this is RA-155.
4 Do you have it before you, sir?
5 A. Yes, I do. I have 17716 before me.
6 Q. Please go to Article 174.
7 PRESIDENT FERNÁNDEZ ARMESTO: Just one
8 moment. I am a little behind.
9 MR. JIJÓN: RA-155.
10 PRESIDENT FERNÁNDEZ ARMESTO: I have found
11 it.
12 THE WITNESS: Yes, and I have also found
13 Exhibit 174.
14 MR. JIJÓN: Mr. President.
15 PRESIDENT FERNÁNDEZ ARMESTO: Go ahead,
16 please.
17 BY MR. JIJÓN:
18 Q. Article 174 is the Article that indicates how
19 the Bonds are going to be; is that correct?
20 A. Yes, indeed.
21 Q. And something we've seen tangentially here at
22 the Hearing, but we should look at in detail, so,
[Page 1420]
1 there are three types of Bonds: Class B, A, and C?
2 A. Yes, that's what the provision says.
3 Q. Each one of these have different interest
4 rates: 6, 4, and 5 percent?
5 A. Yes. That is what Article 174 says.
6 Q. And each one of them will be redeemed by
7 equal yearly redemption rates.
8 A. Yes.
9 Q. And that's what you said when--what you meant
10 when you said that they were going to be paid from
11 time to time?
12 A. Yes.
13 Q. When we talk about coupons, we are talking
14 about both principal and interest in connection with
15 this debt; correct?
16 A. Yes, both.
17 Q. Go to 180, Article 180.
18 A. Yes, I'm looking at it.
19 Q. Here the law provides for the payment process
20 for redemptions and interest for coupons, that is.
21 A. Yes, that's right.
22 Q. What it says is that those payments were
[Page 1421]
1 going to be done in cash up to a value of 150 salaries
2 of the Province of Lima and a difference in shares at
3 Market Value that the Industrial Development Bank
4 Companies deemed fit for the payment of the Land
5 Bonds; correct?
6 A. Yes, correct.
7 Q. So, the idea was that each coupon was to be
8 paid yearly up to a certain limit, and the difference
9 would be paid through the shares.
10 A. That's what Article 180 says. If this
11 obligation had materialized in the timelines provided
12 for, surely this would have been the way things would
13 have gone.
14 Q. Right. You understand that during the years
15 of Land Reform, there was a period of high inflation?
16 A. Well, the inflation started to run rampant in
17 Perú at the end of the '70s, when the Land Reform
18 started, and then it ended in a very disastrous manner
19 in 1994 or--I'm sorry, 1992 and '93--but in '72 to
20 '77, there was inflation, but the inflation was not
21 rampant in the country, as far as I can remember.
22 Q. Okay. Agree. In fact, in those first years,
[Page 1422]
1 some Bondholders did get paid through their coupons.
2 A. Yeah, I have no doubt. I'm sure they got
3 paid. I just wanted to supplement my answer by saying
4 that if this process had happened under normal
5 circumstances, apart from substantial issues that have
6 to do with the Regulations modifying the Constitution
7 in '73, if this process had ended in an opportune
8 manner, we wouldn't be discussing anything here. The
9 circumstances show that that is not how things ended
10 up, and that's the problem.
11 Q. Now before, talking about how it ended,
12 during the period where payments were made, you were
13 saying that the inflation was not huge, but there was
14 a little bit of inflation; right?
15 A. Yes, of course there was inflation, but
16 compared to what we had during the second half of the
17 '80s and the '90s, well, it was very different. I
18 don't remember the rates, but I lived through it.
19 Q. Do you know of any case where it was claimed
20 that the payment had to be updated? I'm talking about
21 that time, during that time.
22 A. I had not conducted a historic review of
[Page 1423]
1 those cases. Professionally, I have not looked at
2 those. I wouldn't be able to tell you because that
3 was not part of what I was asked to research.
4 Q. You said that the Bonds were debts of value.
5 They could have been updated yearly; right?
6 A. Yes, of course. I understand your question
7 now. The Bonds were a debt of value.
8 According to my theory, a depreciation
9 process of the currency could have had the interested
10 Party go to the courts. But we need to be careful
11 here. From '69 to 1980--this is the period when the
12 Land Reform took place--we had a military dictatorship
13 in Perú, so it was very hard to claim before the
14 Courts, specifically with such a specific thing as the
15 Land Reform process at the time.
16 In Perú since 1990, when the old
17 Constitutional Guarantee was established, today it's
18 called the Constitutional Tribunal, well, that made
19 people know their rights, their Constitutional rights.
20 So in the military Government, the courts
21 were controlled by the military, and inflation was not
22 rampant. So, this issue at the time was not on the
[Page 1424]
1 table. I am giving you a backwards-looking view. I
2 was a kid at the time. I wasn't even a lawyer at that
3 time.
4 Q. Well, I understand what you're saying. I
5 just wanted to confirm, you have not seen those cases.
6 You have not cited those cases.
7 A. Of course not. Of course not. I'm just
8 trying to provide an answer as to why I think it's
9 reasonable that that was the way things went, but that
10 was not the subject matter of my research to write
11 this Report.
12 Q. Last question on this issue.
13 PRESIDENT FERNÁNDEZ ARMESTO: This is very
14 far from our discussion.
15 MR. ULRICH: This is about the underlying
16 obligation.
17 BY MR. ULRICH:
18 Q. We were talking about determining the value
19 of the Bonds or of a current debt of value. What we
20 were saying is that what has to be updated is the
21 value of the unpaid principal; correct?
22 A. Yes, indeed.
[Page 1425]
1 Q. From date of issue of Bonds.
2 A. What I was saying is that indeed the
3 theory--I think it's applicable--is that the CPI needs
4 to be applied from the date of the issuance of the
5 Bonds.
6 Q. But we're not talking about paying the
7 difference of the updated value of what was already
8 paid.
9 A. Oh, no. What was already paid was already
10 paid, and that is not the subject matter of debate in
11 these proceedings.
12 Q. Thank you very much, Mr. Castillo.
13 A. With pleasure.
14 Q. Let us now talk about the current value
15 principle.
16 PRESIDENT FERNÁNDEZ ARMESTO: Excuse me.
17 This is an issue that I wanted to ask the Professor
18 about.
19 You remember that the Constitutional Tribunal
20 in the 2013 Ruling said that things have to be updated
21 as of the date of the last unpaid coupon.
22 THE WITNESS: Yes.
[Page 1426]
1 PRESIDENT FERNÁNDEZ ARMESTO: And you
2 disagree with that Decision.
3 THE WITNESS: Of course. Because in reality,
4 the debt did not start at the date of the last unpaid
5 coupon. Perhaps, the last unpaid coupon was in '85.
6 And the obligation was borne in 1970. So, the CT,
7 when it says that an update is necessary, it said that
8 in 2013, well, that was mystical. Nothing was
9 updated.
10 So, we are eating up a number of years with
11 no updating whatsoever. So, if you allow me, the
12 updating that the CT is referring to in its 2013
13 Ruling is an update.
14 PRESIDENT FERNÁNDEZ ARMESTO: But it's a,
15 quote/unquote, "updating." It's not a true updating.
16 Let me give you an example to understand this
17 better. In 1950, I leased a piece of land. It's a
18 fixed rent of 1,000 soles each year, and I sign 50
19 IOUs to pay the 50 years of rent from 1950 to 2000.
20 THE WITNESS: Correct.
21 PRESIDENT FERNÁNDEZ ARMESTO: And for
22 40 years, the IOUs are paid, and they are redeemed.
[Page 1427]
1 Then imagine that in 2005, a court says that the last
2 10 years of IOUS, this--well, they are now soles
3 oro--they are worth nothing, and because of the
4 hyperinflation, their value disappeared. Well, the
5 landowner goes to a judge, and the judge recognizes
6 that the value needs to be updated.
7 There is something that I wanted you to
8 explain to me. Why is it that in the value updating
9 in 2005 in connection with the IOUs that remain unpaid
10 from 1990 to 2000--why is it that the value update is
11 going to have to apply the indices of 1950? I
12 instinctively would say that the unpaid IOUs in 2005
13 need to be updated as of 1990.
14 Explain this to me, please.
15 THE WITNESS: This is a different issue. In
16 your example, what one could discuss in Peruvian law
17 is the updating of the value of the debt in general.
18 In your example, Mr. President, and according to the
19 Agreement, this is a money debt. It's not a debt of
20 value.
21 PRESIDENT FERNÁNDEZ ARMESTO: No, I would not
22 agree with you, sir. I wouldn't agree with you. A
[Page 1428]
1 debt borne of a lease of a piece of land for 50 years,
2 it is a long-term debt, and it is adversely impacted,
3 such as an expropriation, 20-year expropriation, it is
4 impacted because of effects of inflation.
5 So, it would be reasonable for a court to
6 say, okay, you are going to pay 1 cent a year for this
7 enormous plot of land. This is an expropriation. So,
8 this is also a debt of value.
9 My point is the following: The payment of
10 the first 40 IOU extinguish the debt. Since the debt
11 is extinguished, I don't understand why it is
12 extinguished. When we want to update the value, we do
13 the update from the initial date of the Lease and not
14 from the date of the first breach. And that's why it
15 is hard for me to understand. Why is it like this?
16 THE WITNESS: Well, the differences are many,
17 sir. Let me finish the first idea.
18 It may sound very unfair, but in my country's
19 law, the Lease Agreement would be a money debt. It's
20 not a debt of value, and the mechanisms to update the
21 value lost would not be governed by 1235 or 1236 of
22 the Civil Code. They would have to do with abuse of
[Page 1429]
1 process or any other provision in the Code in my
2 country.
3 This is not a debt that in and of itself is a
4 debt of value. That's the first difference.
5 The second difference is that no claim can be
6 brought for the payments made. The payments made were
7 made. Now, what we're saying in your example of the
8 Lease, that the installments that have just come to
9 were not the installments where the debtor is in
10 arrears. And as a creditor, you look for a remedy to
11 claim against the debtor.
12 The difference with this case is that we're
13 talking about debts that came due a long time ago and
14 they were not paid opportunely. So the way to update
15 this is to readjust those installments that were not
16 paid and that have become, in practical terms,
17 historical debts.
18 PRESIDENT FERNÁNDEZ ARMESTO: But your
19 argument is that the debt, the lease in the '90s up
20 and to 2000, would have to be updated to reflect the
21 same value that the lease had in 1950. Is that
22 what--so that would be the principle under Peruvian
[Page 1430]
1 law?
2 THE WITNESS: But I also need to underscore
3 something. To get to that solution, I could not apply
4 1235 because I am not allowed. I have not agreed on a
5 current value principle, and I cannot apply 1236
6 because it has to do with value obligations, and this
7 is a money debt, but not a debt of value.
8 But I think that because of justice, we need
9 to try to find a solution to that problem, and it
10 would not be applicable to use 1236 or 1235. They are
11 not relevant because we also have 1234. 1234 is a
12 rule that comes from the Code of 36, and this has
13 illustrations similar to the one that you just
14 indicated. When we have a debt that is not a debt of
15 value and it is an expropriation debt, we had problems
16 such as the one related to the lease that you
17 mentioned.
18 PRESIDENT FERNÁNDEZ ARMESTO: Now, question:
19 The purchase of a lot, we're talking about the
20 purchase of a lot that is paid over the long term. Is
21 that a debt of value?
22 THE WITNESS: No, it's a money debt.
[Page 1431]
1 PRESIDENT FERNÁNDEZ ARMESTO: Why is
2 expropriation a debt of value?
3 THE WITNESS: It is a debt of value because
4 of the Constitution of 3379 and 93 that provides for
5 the payment of the updated value of the Property.
6 PRESIDENT FERNÁNDEZ ARMESTO: What other debt
7 of value do you have under Peruvian law, for example,
8 the debt related to undue payment received in bad
9 faith that has to be returned.
10 THE WITNESS: So, those are exceptional
11 cases, very exceptional, when you explain that--in the
12 classroom, you explain the expropriation, the undue
13 payment received in bad faith because it is stated in
14 the Civil Code.
15 PRESIDENT FERNÁNDEZ ARMESTO: And do you have
16 any other under Peruvian law?
17 THE WITNESS: The rules are the money debt,
18 and the exceptions, the most significant one, 1235,
19 the clauses that include value debt and the most
20 restricted one have to do with value nature debt.
21 Over the last 80 years, there has been no change to
22 the 1234 rule. Therefore, the current value examples
[Page 1432]
1 are not very many in my country.
2 PRESIDENT FERNÁNDEZ ARMESTO: I apologize,
3 Mr. Jijón. I just wanted to clarify this.
4 MR. JIJÓN: Thank you very much,
5 Mr. President. I have some follow-up questions based
6 on what Mr. Castillo just mentioned.
7 BY MR. JIJÓN:
8 Q. You indicated that the reason why this is a
9 value debt is because of some provisions--
10 constitutional provisions. You mentioned three
11 various Constitutions?
12 A. Yes, indeed.
13 Q. Now, I understand, based on your Report, that
14 this is also the reason why you consider that the
15 date--the benchmark date to update the reference date
16 that gives birth to the obligation is the date of
17 expropriation?
18 A. Yes, otherwise we would not be paying--we
19 would not be actually updating the amount of money
20 expressed in the Bonds to an equivalent amount in
21 2020. That would be the only way to do it.
22 Q. And in your Report, as a matter of fact, you
[Page 1433]
1 cite three provisions, constitutional provisions, that
2 state that the price has to be paid before
3 expropriation? That is one of the requirements under
4 Article 70?
5 A. Yes, because of the negative experience with
6 the Agrarian Reform, the members of the Reform of '73
7 eliminated the payment in Bonds and also established
8 the scope of expropriation compensation. The scope of
9 the compensation had to do with the damages suffered
10 by the expropriated Party. It was a rule that was
11 elaborated based on the Peruvian experience.
12 Q. Yes, but the 1933 Constitution also stated
13 that the expropriation had to be compensated before?
14 A. Yes, but the '33 and '79 Constitutions, when
15 considering the Bond issue, also opened up a door that
16 has created a problem in relation with the Bonds that
17 has led to these hearings.
18 Q. Yes. I think that you are referring to the
19 law of '64 that modified--that amended Constitution?
20 A. Yes. Prior to that law, the Constitution of
21 '33 did not consider that, but the land reform was
22 also political topic in the '60s, and at the beginning
[Page 1434]
1 of the Belaúnde Administration, this law amended the
2 Constitution with the addition that you are
3 mentioning.
4 Q. And in particular, that constitutional
5 amendment stated that whenever it had to do with
6 expropriation for land reform purposes, the State did
7 not have to pay a compensation before; rather, they
8 could pay towards the future with Bonds or some other
9 form?
10 A. Yes.
11 Q. That was the Constitution, and that is what
12 happened. The payment was in Bonds and the payment
13 was after a specific period, not at the time of
14 expropriation.
15 A. Yes. Here you need to differentiate. Bonds
16 were given, but it doesn't mean that the expropriation
17 was paid. The expropriation was always paid in money,
18 so it was going to be paid slowly. So, the Bonds were
19 not a form of payment. They were the instruments that
20 were going to allow the expropriated Party to cash
21 little by little.
22 Q. Okay. Little by little.
[Page 1435]
1 So, you're saying, in particular, that we
2 need to refer to the date of expropriation, but also
3 in your Report you indicate that the original value of
4 the Bonds has to be determined as of the issuance of
5 the dates of the Bonds?
6 A. Yes.
7 Q. I understand that when the Bonds are issued,
8 the obligation therein contained is borne. So, do you
9 understand that the date of expropriation is not the
10 same as the date of Bond issuance?
11 A. Well, clearly it is not the same because the
12 Expropriation Law of 1969 indicates the beginning of
13 an expropriation process, all of the--not all the laws
14 were expropriated in the same manner. The amount of
15 land that was expropriated was very significant and
16 not all of the Bonds were issued on the same date.
17 Q. And not all of the lots have the same
18 expropriation date.
19 A. Exactly.
20 Q. Do you know, for example, that the process
21 started with the Supreme Decree that stated that there
22 would be expropriation and then there was a process
[Page 1436]
1 that could take up to two years that had to do with
2 impairment and after there was a valuation process and
3 also there were Bonds in exchange for the titles to
4 those plots and the date of issuance for those Bonds
5 was not necessarily related to all of this.
6 A. Yes, that's the reason why, even though this
7 can be--you can use in terms the date of
8 expropriation, expropriation is a very broad term. It
9 doesn't mean that just as an act of magic everything
10 is expropriated. So, the date that I consider the
11 most proper for the updating of the value is the date
12 of issuance of the Bonds.
13 Q. So, you're saying the date that you consider
14 the most relevant. Do you think that there is a
15 discussion around it? Do you think that everyone
16 agrees on that?
17 A. Let me see. It is difficult. It is very
18 difficult to say that it is such a controversial
19 political issue--that is to say, the land reform we
20 can say that there is a unanimous agreement. I offer
21 my opinion as a professor, as an attorney, and in my
22 opinion, the relevant date would be the date of
[Page 1437]
1 issuance of those Bonds.
2 Q. Do you know that some courts have not agreed
3 with that, in that they have estimated the updating
4 after the date of the last payment?
5 A. Yes. I have read some resolutions that show
6 that and others that are contrary to that.
7 Q. And as a matter of fact, you quote some of
8 those--you cite some of those cases.
9 A. Yes, precisely.
10 Q. Very well. Let's move on to the ruling of
11 2001 that you said did not require any clarification.
12 Do you agree that this ruling does not make
13 any reference to the CPI?
14 A. Yes, agreed, it does not refer to the CPI.
15 And my opinion is that it was not necessary to do it.
16 And here we have a topic that, in my opinion,
17 is key. In theory, as a professor, as a researcher,
18 and attorney devoted to these topics, I think that it
19 was not necessary to clarify, but clearly, since this
20 is a topic in which someone will have to pay a debt,
21 the topic has been affected by the problem that I
22 mentioned. From the legal standpoint, I don't think
[Page 1438]
1 there was nothing to clarify.
2 Q. So, there was nothing to clarify from the
3 legal point, but, in practice, there were some--some
4 clarification was due; correct?
5 A. Well, when you analyze the right--and I think
6 that the law will help me charge an amount for an X
7 amount of debt, for me, for counsel, and Experts on
8 this subject matter may be clear. But it does not
9 imply that the debtor will be paying or that the
10 courts will decide in my favor.
11 Q. Those are other elements that are not only
12 characteristic of this obligation, but characteristic
13 of any obligation or any creditor that has a problem
14 with a debtor.
15 And here the creditor, the State, may not
16 have had this clarity. Is that what you're saying?
17 A. The debtor, you mean?
18 Q. Yes. Thank you for the correction.
19 The debtor?
20 A. Yes, the debtor did not have that clarity,
21 and, honestly, I don't know whether the clarity did
22 not exist. I think that unfortunately there was a
[Page 1439]
treatment of these Bonds that was different in Perú, but Perú has duly approached some of the debts in a way that should be applauded--
Q. But, yes, this is something debatable. You have your opinion and others may have a different opinion.
A. I respect, as I couldn't do otherwise, other people's opinions, but in this forum, I should say that I strongly believe in the opinion that I express in my Report, and that I have summed up before the Tribunal.
PRESIDENT FERNÁNDEZ ARMESTO: Mr. Jijón, please move forward.
BY MR. JIJÓN:
Q. In your Report, you referred to several cases that were cited by Mr. Hundskopf, I think, where the application of 1236 was mentioned, and, instead, of CPI, dollarization was applied.
Do you recall that?
A. Yes. There were four or five cases that my esteemed colleague, Mr. Hundskopf, cited in his Reports. Yes, the Tribunals or the Courts decided to
[Page 1440]
apply dollarization. But as far as I recall, they were not land issues, they were issues related to other claims.
Q. And that was my next question. I thought to understand today after your direct examination that the CPI was applied as a general rule, by default?
A. The CPI by default, no. What I said is that when we're talking about obligations due to the nature of value, the rate to be applied to the nature of the subject matter to be analyzed has to be applied. For example, if we think of oil, we need to think of the current value of oil. The same applies to gold. And if we need to update an amount of value in time--throughout time, yes, we do need to apply the CPI.
Q. And in three of the cases that we were citing, you said that the reason why the dollar was used or it was allowed to be used, it was because they were using an earlier version of the Civil Code; is that correct?
A. Yes. But there is something that is not clear from the reading of the Resolution because with
[Page 1441]
the reading of an appeal or a legal decision, we cannot appreciate everything that is behind it. There are some cases in which there may be the intent to receive an amount of money, of U.S. dollars, yes, and that's okay. But if I had had, for example, damages done on to my vehicle and the spare parts will be paid in U.S. dollars, I should ask for a compensation in U.S. dollars because I will have to pay U.S. dollars to buy the spare parts in my car. That would be proper in that case. But that, again, depends on the nature of the Claimant, also why it is being claimed and the relationship of the dollar to the subject matter of the claim.
So, in the case of the land debt, this dollarization would not be applicable.
Q. So, you think that--you think it is relevant if Gramercy bought the Bonds in U.S. dollars, do you think that would be relevant?
A. No. I wouldn't say so.
Q. The reason I'm asking you this is because I understood from your Report, that you thought that there was an earlier version of Article 1236 that was
[Page 1442]
not relevant. It was a version that you cited in a footnote and that refers expressly to the powers that the judges had to use any index, including the ones mentioned under 1235.
Do you recall that?
A. When the Civil Procedural Code was passed, the civil rules of 1236 were amended because of what you just mentioned. But when we discussed this topic, we thought it was okay, but also indicated, yes, it is okay but not for the judge to have the power to determine the updating value that he or she desires, but it has to do with the nature of the obligation to be updated.
That rule, in general, was not widely accepted by the legal field, and it was abrogated three years later. It was a rule that was in force for three years, and it was the only Article that was amended twice, but the second--in the second instance, it went back to the original draft that I included in my Report.
Q. So, basically there was a version that did not refer to the index, and for three years, there was
[Page 1443]
a version that the judges were empowered to use these other indices and then it reverted?
A. That is correct. That's what happened.
Q. Can we please look at--
PRESIDENT FERNÁNDEZ ARMESTO: No, no, no. We are not going to see the evolution of 1236. That is irrelevant. That is an evolution in 1236 in the '90s. This is 2013. This is 2013. So, please, let's go to the relevant portion.
MR. JIJÓN: I was taking him to the Judgment of 2001.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah, but let's come closer to 2013.
MR. JIJÓN: But this is the history of Perú, but at the end of the day, we need to make a Decision whether the Resolution of 2013 and the Supreme Decrees violate international law or not. We need to focus on the relevant aspects.
PRESIDENT FERNÁNDEZ ARMESTO: With due respect, Mr. Jijón, I think that Mr. Mark Friedman on the first day of the Hearing enumerated the key points that, in his opinion, had to be decided by the
[Page 1444]
Tribunal. And the first point was that there was an absolute rule in connection with the principle of updating a valuation, and it is very important to determine whether that rule actually existed and how to be interpreted.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. Let's move on.
MR. JIJÓN: Thank you, Mr. President. I will try to speed up.
PRESIDENT FERNÁNDEZ ARMESTO: I am just letting you know that we have another Expert, and we need to conclude at a reasonable time. So, we need to focus on the object of the claim.
Yes, the Reports are very interesting. We read them, and we have very good underlying information about everything that happened, for example, Article 1236. Yes, I am fully aware that there was a version that also led to a breach because the judges may reassess obligations. That is a factor that leads to inflation and that was later on eliminated. But this is in the '90s, and let's move on to 2001.
[Page 1445]
MR. JIJÓN: Mr. President, you just saved 10 minutes of questioning because that was my question.
BY MR. JIJÓN:
Q. Mr. Castillo, the Judgment of 2001 refers to the constitutionality of Law 26597; correct?
A. Yes.
Q. And that law or Article 2 has been cited in the background to the Judgment or the underlying facts; correct?
A. Yes.
Q. And what it says--and here I am going to show you Article 2, is that based on Article--
PRESIDENT FERNÁNDEZ ARMESTO: If you're going to ask him that this judgment refers to the previous--or that the law declaring the unconstitutionality refers to the Civil Code, it is clear to me. Was that your question?
MR. JIJÓN: More or less it was. I was going to ask him whether he was aware that this law, 26597, was the one prior to the one that derogated the Civil Code.
[Page 1446]
THE WITNESS: The one that was immediately prior to the law that amended the change--that amended the Article of 276 under the Civil Code.
BY MR. JIJÓN:
Q. Yes. It's the previous one. So, you have two laws that were passed on the same day?
PRESIDENT FERNÁNDEZ ARMESTO: Well, this law refers to the previous version of the Civil Code that was changed in the law that was passed immediately afterwards.
THE WITNESS: Well, I had not thought about--I think there is a problem here with the audio that I am receiving, but based on what I heard, and if the question is whether I had realized that both laws were successive, no, I had not seen that one came right after the other one.
PRESIDENT FERNÁNDEZ ARMESTO: And it is fun because the law that was declared inconstitutional--unconstitutional refers to the previous draft of 1236 that the subsequent law derogated.
THE WITNESS: Yes, I do understand the
[Page 1447]
question. But if you have the dates handy, and if one is derogated afterwards by another rule, yes, I have no reasons to second-guess that.
BY MR. JIJÓN:
Q. And actually, the Claimants that presented this claim cited both rules and the amendment to both rules as something that was taking their right away--that is to say, the right to apply updating indices.
A. Well, Article 1236 was in force for as long as it was, and then it was amended, and the reasons that led to what the Claimants indicated, that's the way it is, but this rule is no longer in force, and the rule that is applied is the original rule that--and that is the one in force and it was not in force for three years. Yes.
Q. Thank you very much.
A. Thank you.
Q. You told us that Bondholders always had the opportunity to resort to the courts.
A. Correct.
Q. And you know that a judge may solve any
[Page 1448]
debates regarding the updating index to apply?
A. Let me see. As a matter of fact, the judge should decide in connection with the claim and the procedural issues. I could not offer a general Opinion because that is also linked to the content of the claim and the Resolution. The power of the judge, if the question is regarding the fact that the judge may determine the factor or the updating index to apply from a legal standpoint, the answer is no.
He or she should apply the one that is relevant. What I'm saying is that, if the judge applies the right one, he or she will proceed accordingly. But if the--but the conduct is not proper if the index applied is incorrect.
Q. I was referring to Paragraph 82 of your Report where you say that, given a complaint--the updating is in the hands of the judge.
You agree with that; correct?
A. Yes. My Opinion in this paragraph--and I thank you for reading that paragraph. My Opinion is that the judge has to decide the principle or the factor to be applied to the case based on the nature
[Page 1449]
of the subject matter to update.
Q. That is clear. And a Bondholder, as of 2001, according to you, could resort to a judge?
A. The Bondholder could resort to a judge, not only as of 2001, because the Constitutional Tribunal in 2001 stated whatever they stated. They declared the unconstitutional nature of whatever they declare unconstitutional, but in theory, in my country, a person never had a legal standard or a legal rule above the Constitution that would allow them to go to the Courts.
If they did not resort to the Court, and if the judges did not understand the complaint properly, there was always a right to resort to the courts to claim fulfillment of a right beyond the mechanisms that this State has established in certain occasions for the payment of the debt.
Q. Thank you, Mr. Castillo. I am going to look at your answer step by step. First of all, even before 2001, I understand they could resort to the courts because the Bonds had already expired and there was an immediate debt, or an immediate payment to be
[Page 1450]
demanded?
A. Yes. If there was an unpaid debt, there was a right to request payment, and depending on how the Claimants decided to present that claim, they could follow the criterion that I have--the--if they applied a criterion that I am referring to, they would be requesting for the update of the value. Not everyone thought the same way, and I think that we need to analyze the vast jurisprudence in this case.
Q. Thank you very much. Now, the second part of your previous answer, it seems to me that you were referring to the fact that the right to go before the courts had never been taken away.
A. A legal provision could not override any of the Constitutions that have been in force in my country, and had there been such a law, it would have been openly unconstitutional, and the judges would have to refer to--would have to find any such law unconstitutional.
Q. Could you please turn to Tab 28?
A. Of course.
Q. Do you have it there for the Court? This is
[Page 1451]
CE-160. This is a Decision that refers to draft laws of 2011, which have been discussed quite a bit, or it is an Opinion, rather.
Could you please turn to Page 2.
A. Yes. I am at Page 2.
Q. This is a summary of the content of the bill. The second point says Article 4 specifies that the administrative updating that is established is incompatible with the judicial updating. The interested person must desist from this in order--from the latter to take advantage of the former.
Do you see that?
A. Yes.
Q. Now, I understand that you said this was manifestly unconstitutional.
A. No. What this bill said, that if I wanted to have recourse to the mechanism for updating an administrative payment, I would have to give up any judicial action that I might have brought. But it did not say I could not bring a judicial action. It could not say so. Had it said so, it would have been openly unconstitutional, and that's not what it says.
[Page 1452]
Q. Thank you very much.
PRESIDENT FERNÁNDEZ ARMESTO: Do you have much more to go, Mr. Jijón?
MR. JIJÓN: No, I don't, Mr. President.
BY MR. JIJÓN:
Q. I'm now going to take you to the previous page where you see the summary of Article 1. And it says Article 1 sets out that the purpose of the law is to physically and legally clear up the situation of the Properties affected by the Agrarian Reform established mechanisms for updating and payment of the Agrarian debt, and its conversion into productive investment.
Do you interpret this as saying that it was necessary to have a statute for establishing a payment mechanism?
A. No, sir. The thing is that, as it is a debt, most of which has not ended up being honored, or is not completed being honored, in my country, I understand that over the decades, there have been any number of attempts on the part of civil society, associations and in this case, the Congress of the
[Page 1453]
Republic, to establish some legal way in addition to the courts of justice to conclude this history in a satisfactory manner for society in general.
It does not mean that, in my view, it has been indispensable. The evidence is that, in tandem with this bill, there should have been, as, indeed, there was, any number of judicial case claiming payments of the Agrarian debt.
Q. And just to confirm, we're talking, once again, about your Opinion or a consensus that existed at that time?
A. Well, let's see. I could not say whether it was a matter of consensus, because this is not really a matter on which there is consensus. This is a question of who has the right, beyond some persons or actors in this political legal problem and what have you in my country are not in agreement.
I am expressing my Legal Opinion. It is my Opinion, and also it's 2011. I have--was not following the matter at that time, so as to be able to say whether there was or was not a consensus. What there was was an interest in seeing the problem
[Page 1454]
solved.
Q. The reason I ask you is because you cite this document as an example of legislation that confirms your view of what the 2001 Judgment said. And what I'd like to know is, you reading this summary of Article 1--and if you'd like, we could turn to Article 1, but do you believe that it means that it was necessary to have a method for updating, or is that not what the legislature is saying here?
A. First of all, this did not become law. This was a bill that was discussed in the Agrarian Commission. It is a reference that I make to this bill, which I think is quite interesting, but strictly, as a matter of law, the 2001 Ruling did not need anything, but it is something that--well, my title, there is no doubt about it, I knock on the door of the debtor, the debtor doesn't pay me.
So, independent of me having the right. I don't think this is a single comma missing in my title, but if the obligation is not honored that doesn't mean my title is questionable. The issue is one where evidently, in practice, it has met all the
[Page 1455]
obstacles that we are now familiar with, but I believe, and I ratify, that the Decision, the judgment of the Constitutional Court of 2001 did not require any clarification nor any guideline for enforcement, much less the Judgment of 2013.
Q. Thank you, Mr. Castillo. We fully agree that this never was passed into law, and the only reason I mentioned it is because you cited it as something that helped you form your view of the Judgment of 2001.
But I do understand that you did not consider this was necessary because the 2001 Judgment existed.
A. Exactly.
Q. And I also want to confirm that that was not the view of the legislature. Now, if you'd like to turn to Page 13?
PRESIDENT FERNÁNDEZ ARMESTO: I don't think that there is any disagreement at all. We need to look at those issues where there might be some disagreement. There have been a couple of bills to try to revalue the Agrarian Bonds. Neither of them was approved.
And I don't think that the Expert can help us
[Page 1456]
much more here. He understood that the Judgment of 2001 was clear. And I really think that there is not much more here. We have to continue. The problem is that we have another Expert and we have to conclude. His position is clear. And the cross-examination is not making it any clearer and, of course, it is not going to lead him to change his views.
So, I would encourage you to wind up at this time.
MR. HAMILTON: Mr. President, we understand the concern with the clock. Respectfully, we have heard comments for days on 2001. Today, we have spent hours and hours with the Minister. We are now trying to manage the time available to us as best we can. We understand the time pressure, and at the same time we have a responsibility as representatives for the State to respond to the comments or arguments that have been put forth by our colleagues from the other Party, including in examining this Expert.
So, excuse me, but we think that a few points could provide support. I do understand the pressure. We are going to do our best. We spent half the day
[Page 1457]
with the first Witness.
PRESIDENT FERNÁNDEZ ARMESTO: Yes. Yes. I know, but, Mr. Hamilton, please, don't forget you have Mr. Hundskopf who is going to be here the day after tomorrow who covers the same area as Mr. Castillo, and we can discuss this matter, once again, with Mr. Hundskopf. My point is that, once the position of an Expert is clear, it's clear. We could be--we may be in agreement or in disagreement, but it's clear.
In other words, it doesn't help us much more to continue this discussion with the Expert. He has explained his position, made his presentation. It just--there's just no more. I have explained this from the outset, what we cannot do with the Legal Expert is, through a cross-examination, convince him of the contrary of his position.
MR. HAMILTON: It has happened several times in cases with the Republic of Perú, Mr. President. It has happened with the Experts proposed by other companies in the past.
PRESIDENT FERNÁNDEZ ARMESTO: My concern is that we need to reach a result. We have a certain
[Page 1458]
number of hours. We have to examine one more Expert today, and I'd like to still be fresh for the next Expert and to receive him in a positive way.
I'm in your hands, of course, each Party has to be able to present its case, but when I see that my colleagues on the Tribunal, I see that they are concerned, and nor are they--do they feel that we are making much progress in getting deeper into the case, and it's my duty to let you know. You use your time as you wish, Mr. Hamilton. It is your case. It is not my case.
MR. HAMILTON: Thank you very much, Mr. President. Could you give us two or three minutes to coordinate, mindful of the clock and this time pressure.
PRESIDENT FERNÁNDEZ ARMESTO: Of course, Mr. Hamilton. Thank--of course.
(Pause.)
PRESIDENT FERNÁNDEZ ARMESTO: Let's take a five-minute break.
(Brief recess.)
PRESIDENT FERNÁNDEZ ARMESTO: We will now
[Page 1459]
resume, and I will ask the Secretary for a time check, in any case, so that the Parties know where they stand.
SECRETARY PLANELLS-VALERO: As of now, Claimants have 7 hours and 51 minutes left, and Respondent has 7 hours and 52 minutes left.
PRESIDENT FERNÁNDEZ ARMESTO: So it's very, very close.
(Comments off the record.)
PRESIDENT FERNÁNDEZ ARMESTO: So, Mr. Hamilton, we're in your hands. I think that with the utmost of goodwill, later than 7:30, I will die. I will die here, I mean, because it is impossible. So, except if you push me to--
(Comments off the record.)
PRESIDENT FERNÁNDEZ ARMESTO: With that, Dr. Jijón, you have the floor. My apologies if I have been pushing you. It is done in the best of interest of the case, and--please.
MR. JIJÓN: Thank you very much, Mr. President, and thank you, Mr. Castillo, for your patience.
[Page 1460]
BY MR. JIJÓN:
Q. Mr. Castillo, you know that there are many different types of CPI?
A. In theory, yes.
Q. In Perú, there's an official index; there's CPIs that are calculated based on regional price variations, but there is an overall CPI in Perú, yes?
A. There is a general formula that is calculated by the National Institute of Statistics and Informatics. I'm talking about the CPI.
Well, in Perú it was adopted by the Ministry of Treasury a century ago in the wake of research by an engineer, Oscar Arruz (phonetic), and from that time, first the Ministry and then the Institute have been applying CPI.
Q. Thank you, Mr. Castillo.
Just as a matter of time, as the President has indicated, I'm going to try to move a bit more quickly, and I would be grateful if you could just stick to answering my question.
Now, you mentioned the official CPI. I understand that it refers to metropolitan Lima; is
[Page 1461]
that not so?
A. Yes, indeed.
Q. And the same Institute calculates CPI for Piura, Trujillo, Ancash, other regions of Perú?
A. Yes, of course.
Q. And you know that, in cases that have reached the courts regarding the Agrarian Reform Bonds, different courts have used the regional CPIs in some cases to update the debt?
A. I have seen that, yes, indeed. I found that interesting. The only doubt I've had--I've not been able to confirm that in relation to the documentation I've had before me--is whether--or what was the place where the Bonds were issued? I wondered if they were all issued in Lima, or if different Bonds were issued in different parts of country.
Q. If that were the case, then one would have a discussion as to which CPI should be applied?
A. Yes, of course. I would have no conceptual problem opening up such a discussion. Not at all. At the end of the day, I'm talking about CPI, and it would be related to the CPI in the zone or region
[Page 1462]
where the Bonds were issued.
Q. Exactly. Indeed, there could be any infinite number of calculations of CPI; correct?
A. Infinite, no. Infinite, no, because first of all, there is not an infinite number of places where they were issued, nor are there infinite calculations of CPI. It is finite, the number of CPIs, and one would have to look at each specific case if it doesn't answer to the place where the Bond was issued, the general rule which I explained in my Report.
Q. In any event, there would be many ways of calculating it?
A. Well, we're not talking about many forms or many ways. The variation as between CPI Arequipa, CPI Piura, in any event, if you ask me which of them has to be applied in relation to the place of issue of the Bonds, well, the one that corresponds, but it doesn't mean that two or more or applicable. Which? The one--the appropriate one. My answer is not, we can apply just any one. One has to apply the particular one that corresponds to that Bond.
Q. Thank you very much.
[Page 1463]
And the one that corresponds would yield a different updated value than if a different CPI were to be used; correct?
A. Yes, it's minimal, but, yes, there would be a small difference.
Q. You know the Report that was published by a Committee 148 in 2004; correct?
A. I have read that Report. It is not a report that I discovered when I conducted the research to prepare my Report. I gained knowledge of it later on. I have read it and I know of it.
Q. There, they make reference to the CPI and to the adjusted CPI. The Tribunal knows about this.
A. This is a very curious Report. It has a very cheeky formula because it adjusts the CPI of 80 to 93, large inflation in Perú, and they said, "Okay. We are going to have an adjusted CPI there, because things are going to cost a lot."
So, I adjusted the CPI for it to be less, but I cannot accept this adjusted CPI from 80 to 93. The only reason to do that is for the debt to be smaller. That's the reality.
[Page 1464]
Q. It's quite cheeky, you would say; right? That's what you would say?
A. Right.
Q. And the 2001 Ruling does not make reference to any of these things; it does not make reference to the different forms and the adjustments, et cetera?
A. No. The 2001 Ruling didn't need to refer to this because of the terms in which it decided that the subject matter put to it was unconstitutional. So, that's all they had to rule on. Sometimes the CT goes beyond what it is asked to do. But it doesn't have to do that.
Q. Thank you very much, Mr. Castillo.
MR. ULRICH: I have no further questions.
THE WITNESS: Thank you.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you, Mr. Jijón.
Claimant has the floor. Do you have any questions for Mr. Castillo?
MS. POPOVA: Yes, I have a few questions, please, Mr. President.
[Page 1465]
BY MS. POPOVA:
Q. Professor Castillo, I'm going to go back to three issues that you discussed with my colleague.
The first one has to do with a discussion that was had with the President, and they were talking about the examples of debts of value in Peruvian law. You cited some examples.
Do you remember that discussion?
A. Yes, of course. I cited two examples, expropriation and the undue payment received in bad faith by the alleged creditor. These are assumptions of debts of value by nature.
Q. In your presentation, you indicated that you have written about these issues for a long time, many years. So, if you go to Tab 8, RA-357--
MR. JIJÓN: Mr. President, I have not shown the Expert this document.
PRESIDENT FERNÁNDEZ ARMESTO: The issue that the question is being asked on has to do with a question that I asked. Let's look at 357, and we'll see whether it's relevant or not.
BY MS. POPOVA:
[Page 1466]
Q. I'm going to ask Dr. Castillo. Would you please explain to the President of the Tribunal what this document is?
PRESIDENT FERNÁNDEZ ARMESTO: I haven't found it. What is it? RA-357?
MS. POPOVA: Yes, Mr. President. It's behind Tab 8.
PRESIDENT FERNÁNDEZ ARMESTO: It looks like it's an Article. And, Castillo, that must be you.
THE WITNESS: Yes.
PRESIDENT FERNÁNDEZ ARMESTO: Why would you like the professor to cite himself?
MS. POPOVA: Well, just because you were asking about examples of debts of value in Peruvian law.
PRESIDENT FERNÁNDEZ ARMESTO: And we have 90-plus examples here.
MS. POPOVA: Perhaps the professor may wish to correct me.
MR. JIJÓN: Mr. President, this is a typical example of a leading question. We object.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. So
[Page 1467]
RA-357 shows there are more examples of debts of value, and that's what you wanted.
BY MS. POPOVA:
Q. Professor Castillo, the second issue is the following: You remember that you discussed with my colleague your Opinion of the dates as of which the updating should take place.
Do you remember that?
A. I do perfectly well remember that, yes, ma'am.
Q. Mr. Jijón suggested that it was also possible to do an update as of the last date when payment stopped.
Do you remember that discussion?
A. I do not remember that discussion exactly, but I say that the updated value has to start from the moment the obligation was born, because otherwise we wouldn't be talking about a value updating. It would be just an updating. It would be an incomplete calculation process, or something like that. But that would not be an update of value.
Q. Could you please explain in more detail, sir,
[Page 1468]
to the Tribunal why is it that you think that?
A. Gladly. When we talk about updating the value of an obligation in time and we're referring to a debt of value, for example, to update money of 1970 to the year 2020, what we have to see is the purchase power lost in the currency, and in this case we're talking about Perú, of course. But we are talking about the country of Perú.
So, that can only be measured from the very beginning. There is no legal reason to start counting this from a different date. We are updating the value of an amount that has not been paid since 1970. Any other factor would be a distorting factor of the true nature of that updating process.
I cannot update a debt from 1970 starting in 1980. They say, okay, the last coupon was paid in 1980, but I cannot do that. The payment of the last coupon has nothing to do with the debt that remains unpaid since 1970. It has nothing to do.
It would be like saying, okay, I'm going to update since the last Solar Eclipse took place. Well, then we're going to have to see whether the obligation
[Page 1469]
was paid or not. In the law of obligations, we do not have two moments in time to take that reference unless we are talking about the fact that we don't want to see the real figure that is borne of the calculation of the period from 1970 to 2020. That's the only reason.
Q. Thank you, Professor.
Third issue, the last one, Mr. Jijón took you to Article 174 of the Agrarian law.
Do you remember that?
A. Yes, yes, of course. 174. I had it before me, and I think I'm looking at it again.
Q. Okay. Perfect.
Great. So you have anticipated my question. You spoke with Mr. Jijón about the three types of Bonds that are provided for in this law. Do you remember?
A. Indeed, the three types of Bonds, Class A, B, and C.
Q. He also talked about the interest that accrued in each one of these cases, for each one of these types of Bonds.
[Page 1470]
A. Yes, exactly, 4, 5, and 6 percent.
Q. You also talked about the updating of the face value amount of the Bond, and Mr. Jijón suggested to you that this was something different from the value of the expropriated land. Do you remember the discussion?
A. Right. What I understand happened with the Land Reform process and the process after that is that the expropriated land was valued and a face amount was included in the Bonds, and the Bonds were given to each one of the holders of the land. So, we are talking about the updating of the amount of money and not a piece of land. They are two different things.
Q. You also mentioned in answer to questions by Mr. Jijón that in Peruvian law in the Constitution, there is this concept of Fair Market Value for expropriation.
A. Yes, of course, I remember. This was the concept that was included in the three constitutions we've had so far in this country.
Q. Look at Article 177 of the Agrarian law that you should have right after.
[Page 1471]
A. I'm looking at it, ma'am.
PRESIDENT FERNÁNDEZ ARMESTO: Where can I find it, Ms. Popova?
MS. POPOVA: It is at CE-1.
PRESIDENT FERNÁNDEZ ARMESTO: Or RA-155. Perhaps. I think so. And you want us to look at Article 177.
MR. JIJÓN: Mr. President, I think I did not show the Expert this article.
PRESIDENT FERNÁNDEZ ARMESTO: Surely you did not show this to him. What's the question?
MS. POPOVA: Have you found the article, Mr. President?
PRESIDENT FERNÁNDEZ ARMESTO: Yes, ma'am.
BY MS. POPOVA:
Q. Professor Castillo, you see that this article says that the value of the expropriation will be paid in the following manner.
Do you see that?
A. Yes.
Q. And then you can see that it is explained here how Bonds from Class A, B, and C are going to be
[Page 1472]
paid.
MR. JIJÓN: Objection, Mr. President.
PRESIDENT FERNÁNDEZ ARMESTO: We have not heard the question, sir. I don't know what the question is. What's the question?
BY MS. POPOVA:
Q. The question is the following: If you can look at the kinds of land that was paid with the three types of Bonds that Mr. Jijón asked you about.
MR. JIJÓN: Objection, Mr. President.
PRESIDENT FERNÁNDEZ ARMESTO: This is irrelevant. We have Bonds, A, B and C that have to do with different expropriation situations, but I don't think that this is any relevance whatsoever for our purposes.
MS. POPOVA: I disagree, Mr. President. If I could continue with my questions, I'm sure--I hope I will convince you.
MR. JIJÓN: Mr. President, this has nothing to do with my questions to the Expert. This is an opportunity for them to bring up new issues.
MS. POPOVA: This is not a new issue,
[Page 1473]
Mr. President.
PRESIDENT FERNÁNDEZ ARMESTO: Well, ask the question. I don't know how relevant this is. I have some doubts in connection with the relevance of your question.
What is the relevance of your question, ma'am? So, you're saying A, B, C have to do with different expropriation types?
MS. POPOVA: No, sir. No. Perhaps we could read this together, Mr. President.
MR. JIJÓN: Mr. President, I have very diligently tried to cut a large number of questions that were posed to the Expert. But we cannot open this new can of worms here.
PRESIDENT FERNÁNDEZ ARMESTO: This has nothing to do with the examination. We are really at the 11th hour, so if you see fit, we are going to leave this line of questions. I don't think it's relevant.
MS. POPOVA: Mr. President, if you allow me one last question, Mr. Jijón asked Mr. Castillo in connection with the different interest rates, and the
[Page 1474]
different types of Bonds, and the different Bond classes. I don't think that this is not within the scope of the examination.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. Fine. What is the question you would like to ask the Professor? I'm sure the Professor knows the law by heart. Ask the question, please.
MR. HAMILTON: It is completely leading what she is doing. She's leading him like an animal to the water to drink what she wants him to drink, and we have to object. I'm sorry.
PRESIDENT FERNÁNDEZ ARMESTO: The Professor will not be allowed to be led. What's the question?
BY MS. POPOVA:
Q. How the different Bond classes are related to the value of the lands that were expropriated.
MR. JIJÓN: Objection, Mr. President. One of the first questions that I put to the Expert was to confirm that the issue of interest is not or was not a substantial part of his Report. This is not within the scope of his Report. It is almost preposterous.
PRESIDENT FERNÁNDEZ ARMESTO: I think the
[Page 1475]
question, ma'am, is irrelevant. And if it were relevant, we can bring this question up later on.
I think we are far beyond the scope of the cross-examination and the Report by the Witness.
Any other question?
MS. POPOVA: No, Mr. President. No further questions.
PRESIDENT FERNÁNDEZ ARMESTO: Great. More questions from Respondent?
MR. HAMILTON: No, Mr. President.
PRESIDENT FERNÁNDEZ ARMESTO: Mr. Drymer.
ARBITRATOR DRYMER: No, sir, and that's because of the excellent examination conducted by both counsel.
PRESIDENT FERNÁNDEZ ARMESTO: Any other question?
Very well, Professor. Thank you very much for being here with us this afternoon and having helped us. Thank you for your effort, and we are going to end your examination. Thank you, sir.
THE WITNESS: Thank you, Mr. President.
(Witness steps down.)
[Page 1476]
PRESIDENT FERNÁNDEZ ARMESTO: Great. We will now break for 10 minutes, and we will now call Professor Olivares-Caminal.
(Brief recess.)
RODRIGO OLIVARES-CAMINAL, CLAIMANTS' WITNESS, CALLED
PRESIDENT FERNÁNDEZ ARMESTO: Very good. Professor Olivares-Caminal, I don't know in which language to address you. We will be deposing in English?
THE WITNESS: You can address me in any of the two languages of this Arbitration. I will be deposed in English, yes. That's correct.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. So, then, I will address you in English.
Professor, thank you very much for being here with us. The first thing we have to do is to take your oath.
THE WITNESS: I solemnly declare, upon my honor and conscience, that my statement will be in accordance with my sincere belief.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you. Thank you very much, Professor. I give, now, the
[Page 1477]
floor to--
MR. FRIEDMAN: That would be me, Mr. President.
PRESIDENT FERNÁNDEZ ARMESTO: Very good. Thank you, Mr. Friedman.
BY MR. FRIEDMAN:
Q. Good afternoon, Professor.
Do you have in front of you your two Reports dated May 21, 2019, and November 13, 2019?
A. Good afternoon, Mr. Friedman. Yes, I do. I have both Reports in front of me.
Q. Can you confirm for the Tribunal that those are your Expert Reports and that you're content for the Tribunal to rely upon them as your Expert Opinion in this case?
A. Yes, Mr. Friedman, I can confirm that.
Q. You have prepared a presentation, and I'd invite you, with the President's permission, to proceed with that presentation right now.
PRESIDENT FERNÁNDEZ ARMESTO: And we will give the number H-7 to the presentation.
[Page 1478]
Professor, you have the floor.
THE WITNESS: Good afternoon, Mr. President, Members of the Tribunal, and Counsel for Claimants and Respondent. I will start with my presentation.
I am acting in my capacity as an Independent Expert on--my main field of expertise is on private international law, international finance, and focusing mostly on sovereign debt.
From the record, as you may know, I'm a professor in banking and financial law at Queen Mary University of London. At the university, I'm the director of a program in law and economics and another program in law and finance, and I specialize in debt in distressed situations. I have acted for governments, central banks, and many other organizations and creditors, and I have acted as a sovereign debt expert with UNCTAD, a senior insolvency expert with the World Bank, and I have served in several committees, including the Institution of International Finance here in Washington, D.C., in the sovereign risk committee there. I also sit in the
[Page 1479]
Financial Markets Law Group, which is a group within the scope of the Bank of England, and there I sit on the Sovereign Debt Scoping Group.
Besides that, I have been engaged in different academic and professional exercises dealing with sovereign debt under distressed scenarios. I have recently drafted two handbooks for the African Development Bank on how to deal with these types of situations, and I have also called for, with other international experts, a book on how to--for sovereigns, how to deal with situations of distress.
Basically, I have been asked from the perspective of my expertise to look mainly at three things which then I condense under two parts in my presentation. Basically, provide context to the ordinary meaning of certain terms included in Article 10.28 and Annex 10F of the Treaty, and it says how, if at all, these terms apply to the Land Bonds--that would be part one of my presentation--and then I have also been asked to analyzed the MEF process in view of international best practices.
So, I will start with the first part of the
[Page 1480]
presentation focusing on the Land Bonds. Surprisingly enough, I've been requested to explain whether--or to contextualize and understand whether the Land Bonds are a Bond, and basically, I start by going back to very simple definition. Basically, a bond is an instrument that acknowledges a debt, and it's a subsequent debt obligation. And for this, I have contextualized this from an historical perspective, as you can see from my First Expert Report, to more modern sources, and basically whether--another important aspect that has been raised in the context of this arbitration is whether a bond needs to raise new funds for the Government to qualify as a bond. And, in my Expert Opinion, this is not the case. A bond do not necessarily need to raise new financing for the issuer.
A clear example we can draw from Monarch International, what happened with Argentina, for example, that they did a debt swap, and actually, part of the payment mechanisms of the MEF process includes the possibility of receiving another debt instrument. And based on this, for me, the Land Bonds are
[Page 1481]
simply bonds because they acknowledge a debt obligation which is owed to the Agrarian Reform. And what you see there at the bottom of my slide is what I called a bond menu, which is basically--because this is in the context of some of the characteristics of a bond, and basically--a bond can be physical and material; a bond can be bearer or registered; a bond can be subordinated or unsubordinated; short-term, long-term; domestic currency, foreign currency, domestic law--
(Interruption.)
THE WITNESS: Apologies. I got carried away by the excitement.
Basically, there are--actually, the list of characteristics I was referring to is just examples. I'm not sure whether that is relevant for the record, but basically, what--the main point that I want to come across clearly is that there are menus of options that you can choose when you are issuing a bond. You don't necessarily need to have all of these on a bond to make it a bond. And, for me, the most--probably the most striking one is that you can even have a bond
[Page 1482]
which does not have interest rate, and that still is a bond. And, in particular, to the reference that Perú has made, the fact that they are not rated, or not registered, these are nonessential characteristics of a bond.
And it was even more striking when, on day one, I hear that basically they referred to the Land Bonds that they are just paper; they are worthless. And bonds can take multiple forms. They can be--they can refer on its face as a loan, but they are still a bond, because basically, it's a loan that has been securitized in instruments, and there are hundreds of examples from history where you can see this. But basically, as a professor, one of the things in which I spend quite a lot of time is explaining the financial systems and the different instruments you come across in the financial systems, and then when you hear that they refer to a bond that is just paper and it is worthless, it is a bit striking, because then, when we look at a particular one, they have expressed references from the actual instrument, that basically, it has a full guarantee of--unreserved
[Page 1483]
guarantee of the State, or that basically, we pledge the full faith and credit to make all payments on securities.
And why am I referring to this? Because, when we look at the actual instruments on Slide Number 6, from the face of the actual instrument, you see that there is an express reference to the term "bond" on more than one occasion. There's an express acknowledgment of debt. So--and the Land Bonds are even guaranteed. So, basically, the Peruvian Government itself has referred to them as Bonds and expressly acknowledged a debt obligation, which, for me, is the main characterizing element of a Bond.
And if we look from a comparative perspective because of the reference that has been made on record about what has been referred to as "global" or "contemporary" debt instruments, from the face of it, I know that this is the prospectus. I know that this is not the actual instrument because, as we know nowadays, instruments has been first immobilized and then dematerialized. If the paper is worthless, now there are even ones and zeros, which is an electronic
[Page 1484]
record, but there is no more than that. But basically, from the face of it, you can also see that there's an express reference to bonds; there's an express acknowledgment of debt, same as in the Land Bonds. There is no meaningful difference.
And in a rhetorical manner, I see these as--on the next slide, on Slide 8, whether basically we have a car from 1969 which represents the Land Bond, and then we have a car from this year which is basically a Tesla, and basically, the fact that one does not have an airbag, it doesn't make it less of a car. It just makes it a different car. Basically, the Land Bonds may not share all characteristics of modern or contemporary bonds, but that in no way alters their essence. That's the point that I'm trying to make with this.
Looking in slightly more detail at that typology that you can find in Article 10.28 in Annex 10F--and by no means I'm trying to interpret the Treaty; I'm just trying to give context to these terms--the way in which I see these is in concentric circles, where you put the Land Bonds within the
[Page 1485]
category of bonds, the typology of bonds. Bonds can fall also under public debt, because bonds, they can be corporate bonds or Government bonds. The Government bonds, I will definitely put them, without doubt whatsoever, under public debt. And then both bonds that have already been put within public debt and public debt would definitely--because of the debt nature of it, it will definitely fall under debt instruments.
And even if we look at the Spanish version, there's another category in which the bonds can fall, which is obligaciones.
And, since I make reference to public debt, just very briefly: Two of the Experts providing Expert Opinion on behalf of the Republic, they say that, basically, public debt--that the bonds do not fall under the category of public debt and that they will sit uncomfortably within that category. And then we have seen yesterday, Vice Minister Sotelo says, basically, there are domestic public debt. So, I think that, basically, that settles the issue.
With Slide 11, the next slide, I just want to
[Page 1486]
make a brief reference to a point that has been raised by Professor Reisman. I am not trying to interpret the Treaty. I'm just trying to give sense from my field of expertise, which is the way in which I see the Land Bonds and the contribution to the economy, that when Perú carried the Agrarian Reform, they had different options to implement Agrarian Reform. It could have been increasing taxes; it could have been raising money from the markets and using that money to compensate the Bondholders for what they have been expropriated, or issue the Bond and give the Bond to the Bondholders--to the current Bondholders, those that need to receive a compensation for the expropriation. And that is what has happened.
So, basically, it was the decision of Perú to issue this bond, to give the bond to the landowners. It is like--to give you an analogy, it's like paying for this compensation that they have to with a future promise, and that's the acknowledgment of the debt that has materialized on a given date and time.
And, actually, in Articles 1 and 2 of the Law Reform Decree, it says that basically, the Land Reform
[Page 1487]
is part of the social and economic development of the nation, and basically, it will contribute to the national development policy.
If we look at this from today's perspective, in my view, Gramercy has committed capital that has been transferred from the U.S. to Perú, and this has created a multiplier effect.
In addition to that, there has been a creation of a secondary market, transforming an illiquid asset into cash. And, last--and I will probably say, in my view, something which is very important is that we see a sophisticated creditor that can contribute to facilitate a resolution. I have seen this from many other episodes where you have dispersed creditors, that it's very difficult to coordinate. It is very difficult to reach an understanding and resolve the situation, to move forward where can you create value to all Parties. And particularly here, I have put these three flags, because these are three examples.
The Ukrainian one is one that I refer to in my Second Expert Report, where this precisely
[Page 1488]
resolution has been achieved through the involvement of one of these sophisticated creditors, which is on record on my Second Opinion, Franklin Templeton, and then the flags of Argentina and Nicaragua, because those are the ones where Gramercy has been involved. Particularly, the one in Argentina came up on Saturday when there were--when Mr. Koenigsberger was testifying.
Now, moving on into the second part of my presentation, when I talk about the MEF process. One of the things that has been discussed in the view of an Expert is that this is a claims process--i.e., I particularly feel uncomfortable with that position. I don't think that this should be a claims process. I think that, basically, that's not the process. I refer to a debt restructuring process, but I--let me make clear for the record--it is in both of my Reports, but basically, I don't think it's a debt restructuring process, either. I think that debt restructuring is the closest analogy to what we are dealing with, because it will return to service an outstanding debt obligation.
[Page 1489]
So, in my view, Professor Wühler's take on the claim process, I think it is wrong. I think that there are some valuable elements, but the reality that--the rights of the Parties and the value of their Claim has been determined a long time ago, when the expropriation took place. That's why I don't see a claim process there.
And then the other element was the fraud element. Out of all the cases that have been presented through the MEF process, if memory does not fail, I think that there were only 10 that have been rejected. So, basically, the percentage is that 97 percent of Bonds have been accepted. So, basically, fraud has not been a main issue in the validation of the extra titles.
And one of the--for me, one of the main issues that makes me feel quite uncomfortable with this whole process is that--the degree of participation. Basically, if you can spare me--I know that it's late, but a couple of extra minutes, I would like to very quickly walk through this slide, because from the universe of bonds, we have those that have
[Page 1490]
been canceled and we have the actual net placement of bonds, out of which then we need to--
PRESIDENT FERNÁNDEZ ARMESTO: What means "canceled"?
THE WITNESS: From the Commission Report, these are bonds that were--apparently, what I understand--I don't have--basically, it was very difficult to come with sufficient information to formulate the table. My understanding is canceled bonds were bonds that were canceled, and then were annulled by the Government before they were actually placed with Bondholders.
So, that's why it gives a net placement, which is lower than that. It will discount amortization and principal. It gives us a total outstanding ballpark figure of 2.5 billion.
PRESIDENT FERNÁNDEZ ARMESTO: This does not look reasonable. I mean, the interest payments cannot--if you have a 5 percent coupon or interest payment, it seems impossible that the interest payments are 50 percent of the principal payments.
THE WITNESS: Mr. President, that is
[Page 1491]
information that I have taken from the Agrarian Commission with the Peruvian Congress. So, basically, it's not my calculation of interest.
But they do not affect the universe, because basically, what we have is the universe of bonds that have been placed, and then those are outstanding. The interest, in my view, Mr. President, if you agree with me, it is something which is on the side. It is basically an additional piece of information which does not affect what I'm trying to achieve here, which is determining as close as I can the universe of the outstanding bonds.
PRESIDENT FERNÁNDEZ ARMESTO: But don't you agree that this looks extremely high?
THE WITNESS: The way it is explained between the amortization and interest--because I would feel inclined to agree with you, Mr. President, but basically I'm not questioning--I take this as official figures.
PRESIDENT FERNÁNDEZ ARMESTO: Figures.
THE WITNESS: Exactly.
PRESIDENT FERNÁNDEZ ARMESTO: Very good.
[Page 1492]
THE WITNESS: So the total universe of Bonds is 2.5, and this is a figure that has been discussed in the previous days.
PRESIDENT FERNÁNDEZ ARMESTO: And it arises from 13,285 minus 10,763?
THE WITNESS: Correct.
PRESIDENT FERNÁNDEZ ARMESTO: Okay.
THE WITNESS: So then the amount that has been submitted through the MEF process is the 0.22.
PRESIDENT FERNÁNDEZ ARMESTO: Sorry, to be absolutely clear on your numbers, this figure of 2.522 is just the principal. It does not include the interest, the outstanding interest.
THE WITNESS: Yes. It's principal because what I'm trying to quantify is the universe. I'm not looking into interest payment. That's not an area in which I'm supposed to be looking at.
So once we determine the universe, that if you allow me--let's move to the next slide where basically what I tried to do here is I tried to reflect the whole MEF process to determine the percentage of participation in the MEF process.
[Page 1493]
So, basically, from the total universe that I draw from the Agrarian Commission, then what we have that has been submitted through the Claim process is 0.22 billion soles oro, and taking into account what had been paid as of August 2019, it's only 0.0077 billion.
So, if we move now to the column on the right where we have the white bubbles, of course apart from the universe of total outstanding debt, which is 100 percent, and what has been submitted through the MEF process, only 8.7 percent, which is, in my view, based on international experience, it's a very low participation percentage, out of which only 0.3 has been paid.
So, if we look at this in the context of what has happened in similar episodes and what I--on Slide 16, I have different examples of other sovereign debt restructuring episodes, where you see that the degree of participation has in all of them been above 90 percent. And basically sovereign debt restructuring parties have shown the debt, which are, in my view, in a more complex scenario, and have been
[Page 1494]
resolved swiftly and effectively, as long as they have been of certain accepted principles. So the review for the position has been very, very high compared or contrasted with the number that we have seen from the previous slide.
And what I have identified as a flaw--well, this is a process that, to date, has resolved just a tiny fraction of the overall debt. Perú has declined to meet with its creditors and has alienated a number of creditors, which, among others, have resulted in this Arbitration. And the poor result of the Bondholder process for me, no surprise really, if we look at that flaw that we see in the process, it is common practice to engage with creditors, and this process does not contain any of the hallmarks of what is understood as an effective process to resolve sovereign debt obligations.
And these are the six boxes that I list there, which are greater engagement, transparency, good faith, impartiality, the rule of law, legal entitlement, and fair and equitable treatment.
And basically Perú's processes are anathema
[Page 1495]
to establish principles to deal with sovereign debt, and mainly my main takeaway on this is basically the lack of dialogue and the lack of participation. You can claim that one is directly correlated with the other one.
And just some brief concluding remarks. What we are seeing here is one which is usually resolved swiftly. For example, I can refer to some previous examples in Uruguay it took 30 days to resolve the situation without the participation of more than 90 percent. Basically, if there's a way to move forward--and I have seen way more complex situations. I am coordinating, for example, a committee of a country in default since the '80s, and the situation is completely different.
And one of the key elements is trying to have an open, fair, and transparent dialogue with the Parties, and this is--in my view, it's a simple way forward. Basically, just pay an updated value.
The debt is not disputed, and it has been said that basically liquidity/solvency is not a problem in this case, and I have seen in many other
[Page 1496]
situations, and I will refer particularly to African country, where this is a big issue.
What we are witnessing is simply a number of self-imposed obstacles towards favorable Resolution, and I would like--I think that probably I will just conclude there. I don't think that basically--because I think that I said what I thought was relevant to hopefully shed some light to the Tribunal.
Thank you very much for your time.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you. Thank you very much, Professor Olivares-Caminal.
Is there any follow-up question?
MR. FRIEDMAN: No. Thank you, Professor Olivares-Caminal. Thank you, Mr. President.
PRESIDENT FERNÁNDEZ ARMESTO: Excellent. Thank you. So we now give the floor to Mr. Hamilton.
MR. HAMILTON: Mr. President, I'd like to introduce my colleague, Frank Panopoulos.
MR. PANOPOULOS: Good evening, Members of the Tribunal. I think we'll be done before 7:30.
PRESIDENT FERNÁNDEZ ARMESTO: Take your time.
MR. PANOPOULOS: We certainly won't let you
[Page 1497]
die in this room.
PRESIDENT FERNÁNDEZ ARMESTO: We have opened the--no, the windows not, the doors to get some fresh air, because I'm afraid that the air-conditioning has stopped working.
MR. PANOPOULOS: We're distributing a binder for the Witness, and obviously I'll read out the exhibit numbers for the Tribunal.
PRESIDENT FERNÁNDEZ ARMESTO: That's very kind. Thank you.
BY MR. PANOPOULOS:
Q. Good evening, Professor Olivares-Caminal.
A. Good evening, sir.
MR. PANOPOULOS: Could you please put up the last slide you had, the debtor?
BY MR. PANOPOULOS:
Q. So those things hanging from the hands of this distressed debtor here that you have, those are Bonds; right?
A. Hanging from the hands?
Q. Yeah.
[Page 1498]
A. I would say from the hands. Nothing from the wrists.
Q. From the wrists. Okay. From the wrists.
A. Basically, a Bond usually in the '60s was represented and documented in physical form, and it would be--I would say--
Q. My question was whether those are bonds or not.
A. No.
Q. They are not. Okay.
MR. PANOPOULOS: You can take it off.
BY MR. PANOPOULOS:
Q. You don't see them as shackles, huh?
A. You asked me whether I see them as Bonds.
Q. Okay. Do you know that a Bond could mean a shackle, something that ties your hands? In fact, you say that in your Report when you go over the etymology of a Bond. You say it used to be called a band in medieval times because it binds; right?
A. Is that the question or statement? If it's a question, I would say basically it binds the person who made the obligation, which is the acknowledgment
[Page 1499]
over debt and the subsequent obligation that derives from there.
Q. But there's two sides to a transaction. It doesn't only bind the obligations on both sides, both to the issuer and to the person who receives the Bond; right?
A. Yes. But for the--usually it's an upfront obligation which commits to repay the money that it receives today in exchange over payment they have to do tomorrow.
Q. Right. But the problem I have with your Report is that it's from the focus of just the issuer, and you don't really take into account the point of view of the person who received the Bond, but we'll get to that.
Now, in your First Report, you state that you're an Expert on debt instruments in general and sovereign debt, in particular, and you just said that in your direct; right?
But with that background, you purport to address two key topics in your Report. The first is whether the Land Bonds are protected investments under
[Page 1500]
the U.S.-Perú Trade Promotion Agreement; right?
A. What I tried to do is explain and give context to the ordinary meaning of the terms that are included under the definition of the Treaty.
Q. And on this issue, you principally respond to Professor Reisman of Yale University; right?
A. Not only him, but, yes.
Q. And so, if you were to turn to Paragraph 17 of your First Report. Let me know when you're there.
A. Yes, I'm here.
Q. You'll see you say there--and I'll just read it--"as an Expert on debt instruments in general and sovereign debt, in particular, I opine that the Land Bonds clearly are Bonds and meet the definition of investment under the U.S.--under the Treaty"; right? That's what you say?
A. Yes, that's correct.
Q. Right. And you make this opinion in several other places in your Report, which I won't go to for the interest of time.
And my question to you is, you're not an Expert in international law, are you, in public
[Page 1501]
international law, are you?
A. No, I am not, and this is something how qualified as you--because if you read this paragraph in context, you will see that from Paragraph 16, and then I do this, again, for the Report, for example, Paragraph 69, 77, 81.
So, I'm not claiming an expertise on public international law, and I said that from the outset on my presentation and at the beginning of my Report as well.
Q. So, if you go to Paragraph 19 at the bottom.
A. Yes.
Q. You state: "As an Expert on debt instruments, et cetera, et cetera, I conclude the Land Bonds clearly meet the Treaty's definition of investment according to the ordinary meaning of its terms as they are used in the fields of finance, economics, and law"; right?
So, there, you're interpreting the Treaty. You're interpreting what the Treaty means in terms of ordinary meaning, aren't you?
A. I think that basically what you are trying to
[Page 1502]
do there is to twist my words in the sense that basically as it clearly says, as an Expert on debt instruments and sovereign debt, in particular. And as I said before, and it's also included in that line, it says "according to the ordinary meaning of its terms."
I will not try to interpret the Treaty because basically that's what we can call my main area of expertise. And besides that, that is a competence which is reserved for the Tribunal.
Q. Okay. Let's move on.
The second key topic in your Report focuses on Peruvian Bondholder process; is that right?
A. That's right.
Q. And on that topic, you principally respond to Dr. Wühler; is that correct?
A. That's correct.
Q. And on this topic, you admit in your Report, in Paragraph 95 of your First Report, that you're not an Expert in these kinds of claims procedures, right, meaning claims compensation procedures; correct?
A. Correct. Sorry. Can you remind me which paragraph you're referring to?
[Page 1503]
Q. 95 of your First Report.
A. 95. Give me one second. Let me have a look at it. Yes.
Q. Good. Now, you understand that the definition of "investment" in a Treaty requires--means that assets that have the characteristics of investment--now I'm reading from the Treaty, but if you want to read with me, it will be in Tab 1, which is Exhibit RA-1--that "the definition of investment in the Treaty means assets that have the characteristics of an investment"--
A. Sorry, one second, please. I'm turning the page, trying to find 10.28.
Q. Sure.
A. Okay. Yes.
Q. "The characteristics of an investment, including the characteristics as the commitment of capital or other resources, the expectation or gain of profit, or the assumption of risk."
Do you see that?
A. Yes.
Q. And, of course, that requires looking at the
[Page 1504]
facts that are relevant to those characteristics, doesn't it?
A. Can you repeat the question again, please?
Q. And that, of course, understanding what an "investment" is--right?--requires looking at the facts that are relevant to those characteristics; right?
A. Correct.
Q. Good. And understanding the characteristics requires context, doesn't it?
A. Correct.
Q. So, if we were to look at your slide, if you were to go to the picture of the two cars--you're there?
A. I don't have--
MR. PANOPOULOS: Picture of the two cars, can you please put it back up?
THE WITNESS: I remember the picture of the two cars.
MR. PANOPOULOS: Right. I think it would benefit if the Tribunal were to see it too.
ARBITRATOR DRYMER: Slide 8. Don't take my Camaro away, please.
[Page 1505]
(Comments off the microphone)
MR. PANOPOULOS: That's exactly my point.
BY MR. PANOPOULOS:
Q. One is a Camaro SS, a 1969 Chevrolet Camaro--right?--and the other is a Tesla Model 3. Yeah? Have you ever driven a 1969 Camaro SS?
A. No, I have not.
Q. Right. So are you aware that the Camaros were known as the muscle cars in their time, especially in 1969?
A. No, I'm not aware of it.
Q. That the engine was a 400-horsepower engine and it was used for racing?
A. No, I am not, but--
Q. Right. So the difference in the two cars makes a difference. The difference in the characteristics of the two cars makes a difference to the buyer. If you want to buy a muscle car, you'll get a Camaro. If you want to buy a Tesla, you know, an electronic car, you are going to buy a Tesla, not a Camaro; right? It informs your decision, your purchasing decision, doesn't it?
[Page 1506]
A. But we are discussing about two cars, aren't we?
Q. We are.
A. Okay. That's the point I was trying to make, that basically they are two of the same kind with different characteristics.
Q. Oh, you said one doesn't have an airbag. That's what you said. And that's what you say in your Report. You're saying that the difference between the two Bonds is like a '69 Chevrolet Camaro that doesn't have an airbag. But there's more of a difference than just that, especially in this picture between these two cars, which is what you showed us on your direct; isn't that right?
A. Yes, but I think basically what you are doing, you can claim there are two different tones of red, but, again, I don't think that that undermines the essential underlying characteristics of both of them.
And that's what I tried to point out with the Slide 4, where I was referring to the menu of Bonds, where basically in my Reports I also refer to some of
[Page 1507]
the contemporary Bonds or historical Bonds that share the same characteristics.
Q. Right. And that's my point. We can talk about the essence of a Bond. A Bond is a Bond is a Bond or the ontology of a Bond.
(Overlapping interpretation and speakers.)
Q. But the adjectives describe characteristics that are important; isn't that right? That's all we're saying, and I think you agree.
A. Can you repeat that statement, please?
Q. The question is that the characteristics of an item, of a Bond, are important.
A. If there are characteristics that will make the instrument something different, yeah. If they will not alter the essence, and it will not convert it from something into something different, I would say no.
Q. Okay. So, your Report focuses directly on the Agrarian Reform Bonds, or the Land Bonds as we're calling them; is that right?
A. But I also address issues of contemporary Bonds as well.
[Page 1508]
Q. Right. But we're talking about the Land Bonds. You're comparing the contemporary Bonds to the Land Bonds; right?
A. Right.
Q. In your list of documents that you relied upon, in Annex 2 of your First Report--right?--that doesn't include Gramercy's Bond purchase contracts with the people who sold the Bonds to them, does it?
A. No, it doesn't.
Q. Right. And you haven't reviewed those Bond purchase contracts, have you?
A. No, I have not.
Q. And you're not aware of the language in those contracts, are you?
A. If I have not reviewed the contracts, I'm not aware of the language.
Q. And, therefore, you're not familiar with the fact that the funds used to pay these purchase contracts for the Land Bonds came from third parties, are you?
A. Again, I have not seen the contracts, so, basically, I cannot determine what the origin is of
[Page 1509]
the funds.
Q. And you're not a Peruvian lawyer, either, are you?
A. No, I'm not.
Q. And you didn't review the Peruvian law documents related to the Land Bonds, did you?
A. What do you refer by the Peruvian law documents related to the Land Bonds?
Q. The Decree--the Supreme Decree of 2001, the Decrees in 2014 and after, and the Regulations related to the Bondholder process.
A. What I have looked at was basically the law Decree that issued the Bonds, and I have gone through some of the aspects of the MEF process.
Q. The MEF process. So we can call it the MEF process or the Bondholder Process, which there will be--Bondholder process.
And your list of documents relied upon also doesn't include Gramercy's contracts with clients. You haven't reviewed those either?
A. No, I have not.
Q. Okay. And, in fact, your Report is driven by
[Page 1510]
your assumption about Gramercy's interpretation of Peruvian law, and I'll just give you one example. If you were to turn to Paragraph 97 of your First Report. You say there in the one, two, three--four lines down, "unlike," right? "Unlike the international claims commissions," you say, "there is no doubt here as to the existence of a legal obligation or the principles or the principles that guide how to value that obligation as this was determined in the 2001 Constitutional Tribunal Decision."
Do you see that?
A. I see that.
Q. Now, I'm going to give you another example. If you go to the paragraph--
A. Excuse me, excuse me. But basically, this is an example of what? I don't-
Q. It's an example of your assumption of Gramercy's interpretation of Peruvian law.
Your Statement--your Statement that there is "no doubt here as the existence of a legal obligation or the principles that guide how to value that
[Page 1511]
obligation as this was determined in the 2001 Constitutional Tribunal."
That's an assumption on your part. That's one of the very issues in dispute here, isn't it?
A. Counsel, as I have explained from my presentation, the fact that the Government of Perú issue Land Bonds and basically that obligation has not been honored, for me, that is a valid, legal obligation. In addition to that, in 2001, the Constitutional Tribunal Decision reinforced, in my opinion, the view that it is outstanding, that obligation.
Q. Right. But see, if you--see, you're talking about the value of that obligation, and that's the very thing that is in dispute.
Go to Paragraph 96. You say it again there. In the middle--right?--after your citation to CE-275. You say: "I further understand that there is no dispute between the Parties and the Land Bonds continue to be valid and that the Government has an obligation to pay them at 'current value'"; right? Do you see that?
[Page 1512]
A. I see that.
Q. All right. So, again, how did you come to understand that they have to be paid at current value?
A. First thing, I don't know if you notice it's between the inverted commas what I meant with this is basically it has to be the value bring up to today's value, so that's the way in which I use current value. And how do I conclude this? Basically, there is a Court Decision from 2001, and even besides that, there are multiple newspaper articles and academic papers on the subject area. There is also a report by Moody's that different sources that confirm the view that we are talking about value of the obligation. Besides that, my understanding is that--and that's what I have been witnessing in the previous days. We are not discussing the validity of the claim. What is being discussed is what would be the Actual Value of that claim.
Q. And did Moody's say--right?--that the value of the claim is $1.8 billion.
A. Is that document on one of the tabs here? The Moody's Report?
[Page 1513]
Q. Did Moody's say that? You mentioned Moody's. I just said did Moody's say the value their claim is $1.8 billion?
A. I don't have the Report with me. What I remember from the top of my head, if that is useful for the Tribunal, is that they were doing two calculations, two possible calculations, and they were concluding that under any of the two, Perú will face difficulties honoring that obligation.
Q. So, the last point on this questioning, go to Paragraph 111.
A. Sorry? Please? Which paragraph?
Q. Paragraph 111 of your First Report. You there?
A. Yes.
Q. So, you say: "Perú's treatment of the Land Bonds is, therefore, unique"--right?--"in that it is the only debt restructuring in Perú's history." Although you've just said on direct that this is not a debt restructuring. But anyway--"that has not involved creditor participation and that has imposed such substantial reductions in the value of the debt."
[Page 1514]
Do you see that? Right. So, the substantial reductions is in relation to your assumption of the value of the debt, isn't it? Or to put the question another way--right?--you wouldn't say "substantial" if you thought the value of the debt was something less than what the Claimants say; isn't that right?
A. You are right in that respect, and I can explain very easily why.
Q. You answered my question, and on your counsel's time, they can ask you on redirect and you can tell them, unless the Tribunal wants to hear the answer.
All right. So, as we move on, right, please open your binder to Tab 3, which is C-120, CE-120, which is a copy of a Land Bond.
(Comments off microphone.)
Q. You can just take a Land Bond here. And if you were to open your tab to Tab 3, which is Exhibit CE-08, which is the Perú Global Bond 2033. It's a U.S. dollar-denominated Bond. So, if you were to keep both in front of you.
A. Thank you very much.
[Page 1515]
Q. You don't need your binder. You can follow that, if you'd like.
MR. PANOPOULOS: CE-08, Mr. President. I thought I could make copies for the Tribunal, but I was honoring your decision to go electronic.
PRESIDENT FERNÁNDEZ ARMESTO: No problem. Just give me one second. The Prospectus of the Contemporary Bond. Yes. Very good.
BY MR. PANOPOULOS:
Q. So, you have in front of you the Global Bond and the Agrarian Reform Bond, yes?
A. Correct.
Q. Okay. First of all--right?--the Land Bond is a physical bearer instrument, yeah?
A. Correct.
PRESIDENT FERNÁNDEZ ARMESTO: No. It's not bearer. It's not a bearer instrument. It's nominative. It's a nominative instrument.
BY MR. PANOPOULOS:
Q. It's a physical instrument.
A. Correct.
Q. Okay. Secondly, the Agrarian Reform Bond was
[Page 1516]
given to landowners as compensation for the land expropriation. It wasn't purchased by the landowner; correct?
A. Correct.
Q. Now, in contrast--right?--the Global Bonds are purchased by investors?
A. Not all of them. Some of them are given us in exchange for the swap, for example.
Q. That's your debt swap.
A. Yes.
Q. Right. But normally, typically, generally--right?--they're purchased?
A. Yes.
0. Right. You know, the majority of offerings in the markets are not debt swaps; right?
A. Yes.
Q. Okay. By the way, are you aware if Gramercy has any interest in any of the Peruvian Global Bonds?
A. I don't know.
Q. And are you aware that Gramercy's own brochure emphasizes the focus on contemporary instruments with the characteristics of Global Bonds?
[Page 1517]
A. Sorry. Can you repeat that, please?
Q. Are you aware that Gramercy's own brochures--right?--emphasize and focus on contemporary financial instruments with the characteristics of Global Bonds?
A. No, I'm not aware of.
Q. Now, the Global Bonds are marketed through investment banks and other financial institutions; right?
A. Mostly that, yes.
Q. And they are placed in the primary and well-established secondary markets as well, aren't they?
A. No. They are placed in the primary market and then subsequent trades take place in the secondary market.
Q. Right. That was my point, yes.
So, if you were to turn to Page 164 of 202 of the Global Bond. 164. You will see at the top right are the page numbers. The PDF page is a little off. I think it's the same as the PDF page.
ARBITRATOR DRYMER: It is the same thing.
[Page 1518]
THE WITNESS: 164.
BY MR. PANOPOULOS:
Q. 164, yes. Right. And here you see the plan of distribution.
A. I haven't reached there yet, sir.
(Comments off microphone.)
A. Mine doesn't have--
Q. Yes, the page numbers show up. If you look at the binder, it has the page numbers.
A. Okay. Apologies. Finally. Yes.
Q. No, that's okay. We apologize for the copy that doesn't have the page numbers on the top.
So, the plan of distribution, essentially you would agree, shows how the Bonds are going to be distributed, primary market and then resold in the secondary markets on Page 164 and 165; correct?
A. I have not read everything, I'm reading just the overview. It says: "Perú may sell securities in one of the three ways."
If you want me to read the whole page and the following one.
Q. No, I don't because you are an expert on debt
[Page 1519]
1 and bonds like this, and you've probably seen a
2 thousand of them, and so you know that they have
3 pretty much cookie-cutter sections, plans of
4 distributions, et cetera, et cetera; right?
5 A. Let me disagree with that. As an expert in
6 sovereign debt, we have just seen that Argentina has
7 been dragged through 15 years of litigation with only
8 an award in a clause.
9 But let's take for purposes of this
10 hypothetical exercise that this a template clause and,
11 then, eventually we look further into it.
12 Q. Okay. And you'll just see--if you turn to
13 Page 1, you'll see who the distributors
14 are--right?--who the Deutsche Bank and Morgan Stanley;
15 right?
16 A. Yes.
17 Q. Who the underwriters are?
18 A. Yes. Give me just one second. Yes.
19 Q. Right.
20 A. I mean, we go to the last page, it is even
21 simpler because you see all the Parties involved in
22 the issuance.
[Page 1520]
1 Q. Right. And you see who's involved. Exactly.
2 And that's not the case with respect to the
3 Agrarian Reform Bond, is it? It's not marketed in
4 primary or secondary markets; right? It was basically
5 given to the landowners as expropriation; isn't that
6 right?
7 A. No. It's not right. Let me--because there
8 were two questions in the same question.
9 Q. Very good.
10 A. The first part you are asking me whether
11 there were underwriters here.
12 Q. Umm-hmm.
13 A. And the answer is no. And the reason for
14 that I'm happy to explain, which is basically that
15 these were not offers that were allocated.
16 Q. Exactly. They were allocated, and they
17 weren't purchased; right?
18 A. Hold on. Basically, there were two parts to
19 your question. So, basically, that's one, and
20 basically that is one that I have made clear on my
21 presentation as well. So, basically, yes, to your
22 question were there underwriters, no. They are not.
[Page 1521]
1 And to your second question where they have
2 been--I think that you were referring to where they
3 were traded in the primary and secondary market.
4 There was--the moment that they were placed, you can
5 claim that that's the primary market.
6 Between you and me, more from a philosophical
7 discussion, I'm not a greater believer on the
8 existence of primary market because the primary market
9 exists for just a nanosecond, but that's more of a
10 philosophical exercise for one of my lectures.
11 On the second issue whether there has
12 been--during the secondary market where you were
13 expecting me to say that I have not, the answer is
14 yes, they have traded in the secondary market. There
15 was--I can recall two instances. One was in a
16 final--if I'm not mistaken, it was in 1979 that was
17 the Decree that allowed the profitability of these
18 securities and, then, as I mentioned also from my
19 presentation, basically there was a secondary market,
20 which is the one that created by Gramercy when they
21 were acquiring these instruments in--
22 Q. Right. And that's--just to refresh your
[Page 1522]
1 memory, that's in Paragraph 98 of your First Report.
2 A. Yeah.
3 Q. Do you see it there? You say that "there is
4 some evidence."
5 A. Give me one second.
6 Q. Ah, 79. I'm sorry.
7 A. 79.
8 Q. Where you reference the "mesa de
9 negociación." Excuse my Spanish. It's not one of the
10 languages I learned.
11 PRESIDENT FERNÁNDEZ ARMESTO: Very proper
12 pronunciation.
13 BY MR. PANOPOULOS:
14 Q. Very good. Are we there?
15 A. We are there.
16 Q. All right. So, let's look at one of the
17 exhibits you cite. We don't have a handout for this
18 because I wasn't--we didn't know if this would come
19 up. It is CA-87.
20 PRESIDENT FERNÁNDEZ ARMESTO: CA.
21 MR. PANOPOULOS: C-A. C-A, alpha.
22 BY MR. PANOPOULOS:
[Page 1523]
1 Q. If you would pull it up on screen. We'll
2 watch it on screen. We'll watch it on screen. Is it
3 up? Is someone putting it up?
4 MR. CUEVAS: Yeah, it's loading.
5 MR. PANOPOULOS: Let's go. We want to be out
6 of here by 7:00. No, we won't do it by then.
7 PRESIDENT FERNÁNDEZ ARMESTO: "Vademecum
8 Bursátil '84."
9 MR. PANOPOULOS: Yes.
10 BY MR. PANOPOULOS:
11 Q. So, if you were to turn to Page 61 of this
12 document--
13 A. I don't have 61.
14 Q. I'm talking to the person on the screen.
15 PRESIDENT FERNÁNDEZ ARMESTO: 61, internal.
16 MR. PANOPOULOS: 61, internal. Yes, thank
17 you, Mr. President.
18 PRESIDENT FERNÁNDEZ ARMESTO: 61.
19 MR. PANOPOULOS: And if you were to blow it
20 up, please, enlarge it. No, that's not it. The one
21 on the bottom right-hand corner, bottom right. Yes.
22 PRESIDENT FERNÁNDEZ ARMESTO: There.
[Page 1524]
1 Exactly.
2 MR. PANOPOULOS: Can you enlarge it more for
3 the Witness?
4 PRESIDENT FERNÁNDEZ ARMESTO: "We see that
5 there was some small market."
6 BY MR. PANOPOULOS:
7 Q. You can see it? You can see it?
8 A. Yes, I can see it.
9 MR. PANOPOULOS: I'm sorry. I missed what
10 you said, Mr. President.
11 PRESIDENT FERNÁNDEZ ARMESTO: No. There was
12 actually in 1983 a small market "bonos del agraria."
13 MR. PANOPOULOS: Right.
14 BY MR. PANOPOULOS:
15 Q. And, in fact, if you look to see what the
16 nominal value is--do you see it? It is 1.4 million de
17 soles--right?--out of a total market of 12 billion de
18 soles; right?
19 Do you see that?
20 A. Yes, I do.
21 Q. And then the effective payment on them was
22 only .2 million soles or 200,000 soles; is that right?
[Page 1525]
1 A. That's correct.
2 Q. And the analysis says "NS," which is "not
3 significant"; is that right?
4 A. I don't know but I take--
5 Q. You know what an "NS" is--
6 A. --your word for that.
7 Q. Right. So, this secondary market, so-called,
8 "was not only miniscule but deemed not significant."
9 So, it wasn't much of a secondary market; was it?
10 A. I am delighted that you are referring to this
11 as the secondary market. So, you acknowledging it's a
12 secondary market, an insignificant one, but there is a
13 secondary market.
14 Q. I'm saying this "secondary market" because
15 those are your words. In any event--right?--it was
16 not significant, and we're talking about 1983 before
17 the hyperinflation and the devaluation of the
18 currency. Isn't that right?
19 A. I don't know.
20 Q. It says 1983 right there, doesn't it?
21 A. If I can finish, I don't know precisely when
22 the hyperinflation started. My only point was trying
[Page 1526]
1 to clearly establish that there was a secondary
2 market, and this is something that confirms my
3 argument that there has been a secondary market. I
4 didn't say there was a--the biggest secondary market
5 in history. I just said there was a secondary market,
6 and this confirms that statement.
7 Q. And in any event, the hyperinflation was in
8 1988, the devaluations occurred, and there was no
9 secondary market after the mid-1990s, you would agree,
10 in the soles--in the Land Bonds?
11 A. I will disagree because I think that the
12 purchases made by Gramercy created a secondary market
13 after the 1990s.
14 Q. Exactly. Not until Gramercy purchased the
15 Land Bonds do you say in your Report that--you say
16 they revived the secondary market?
17 A. Correct.
18 Q. Okay. Now, a secondary market has certain
19 characteristics, wouldn't you agree?
20 A. I'm not sure what you are referring to.
21 Q. Okay. So, I'll be more specific; right? In
22 a secondary market--a secondary market is transparent,
[Page 1527]
1 would you agree?
2 A. It depends what type of secondary market,
3 because not all secondary markets are--
4 Q. Well, I'm not talking about a black market.
5 (Overlapping speakers.)
6 MR. PANOPOULOS: I'm sorry. I'm sorry.
7 PRESIDENT FERNÁNDEZ ARMESTO: You must let
8 the Expert finalize.
9 MR. PANOPOULOS: I apologize.
10 ARBITRATOR DRYMER: You have until 7:01,
11 Mr. Panopoulos. Not to worry.
12 PRESIDENT FERNÁNDEZ ARMESTO: Sorry. What?
13 ARBITRATOR DRYMER: I said he has until
14 7:01 p.m. So, he can relax.
15 PRESIDENT FERNÁNDEZ ARMESTO: No, no, it's
16 fine. Let's go on.
17 THE WITNESS: What I was referring is that it
18 depends on the actual secondary market, because if we
19 are looking at the secondary market of current
20 extremely liquid Global Bonds, it would be a different
21 secondary global market because they are traded in an
22 actual Stock Exchange.
[Page 1528]
1 BY MR. PANOPOULOS:
2 Q. Exactly. And in the Global Bond secondary
3 markets, you have bid/offer quotations, you have
4 transparency, and you have extremely large volumes of
5 trading, don't you?
6 A. In a private placement, bonds have not been
7 offered to the general public. There are different
8 characteristics of, but that doesn't, in my view,
9 alter the essence of the underlying obligation.
10 Q. Let's move on.
11 The last point, if you were to go to--in the
12 bond, in the Global Bond, if you were to go to the use
13 of proceeds?
14 PRESIDENT FERNÁNDEZ ARMESTO: To the Global
15 Bond.
16 MR. PANOPOULOS: To the Global Bonds, to the
17 use of the proceeds section, which is at 8202.
18 PRESIDENT FERNÁNDEZ ARMESTO: I think we have
19 touched on them. I think Mr. Hamilton referred to
20 that.
21 MR. PANOPOULOS: Yes.
22 PRESIDENT FERNÁNDEZ ARMESTO: It says for the
[Page 1529]
1 general purposes of the economy or for the general
2 purposes. There is a general clause.
3 MR. PANOPOULOS: Yes.
4 PRESIDENT FERNÁNDEZ ARMESTO: I remember
5 this.
6 MR. PANOPOULOS: Good. Okay. Then, we don't
7 need to do anything else about it.
8 THE WITNESS: Sorry, I'm lost here--
9 BY MR. PANOPOULOS:
10 Q. I was just going to say that the use of
11 proceeds in the general bonds is for the financing
12 needs of the country. Right. Okay.
13 Now, in your Report. Right? You state that
14 in Paragraph 77--
15 A. First Report?
16 Q. I'm sorry. Your First Report, Paragraph 77,
17 you state your belief that "the Gramercy's purchases
18 of the Land Bonds contributed to the Peruvian
19 economy."
20 Do you see that?
21 A. Yes.
22 Q. And then in 78, as your first argument under
[Page 1530]
1 that?
2 A. Yes.
3 Q. Is that you say that "Gramercy's purchase of
4 Land Bonds contributed 30 million to Peruvian bank
5 accounts with multiplier effects."
6 Do you see that?
7 A. Correct.
8 Q. And that the purchase, by the way, relates to
9 the Purchase Contracts that you never looked at;
10 right?
11 A. Yes, but that appears on multiple documents,
12 including Perú's Response to Claimants.
13 Q. Yes. So, you're aware that between 2006 and
14 2008 when Gramercy purchased the Land Bonds, the
15 Perú's GDP was approximately $100 billion? And if
16 you're not aware, would you take my word for it?
17 A. I will.
18 Q. So, Gramercy's payments, over 30 million,
19 constitutes .03 percent of Perú's GDP at the time,
20 yeah?
21 A. Correct.
22 Q. All right. So, that's a negligible figure,
[Page 1531]
1 isn't it, relative to the GDP? Not really a
2 contribution, wouldn't you say?
3 A. Again, I can agree with that, but I don't see
4 the relevance because there has been a contribution,
5 yes or no. The answer, in my view, is yes.
6 Whether--again, it's like the question before,
7 basically the secondary market, it is the biggest
8 secondary market in the world, no, it isn't. But it
9 is a secondary market. Have they contributed to the
10 economy? Yes, they have. Significantly? That's
11 debatable.
12 Q. Thank you.
13 Let's go to the Bondholder Process.
14 A. Bondholder Process.
15 MR. PANOPOULOS: I know, Mr. President,
16 you've been waiting for this, haven't you? The
17 Bondholder Process. Wait until tomorrow.
18 BY MR. PANOPOULOS:
19 Q. Now, in Paragraph 93 of your First Report,
20 you state that "Dr. Wühler never refers to any debt
21 restructuring process, nor does he explain why the
22 cases he cites bear any similar to the Bondholder
[Page 1532]
1 Process." Do you see that? Are you there?
2 A. No, I'm not there, yet. Here we are.
3 Paragraph 93.
4 Q. Yes.
5 A. Yes.
6 Q. All right. And that's at the bottom; right?
7 Dr. Wühler never refers to any debt restructuring
8 process, nor does he explain why the cases he cites
9 bear any similarity to the Bond.
10 Do you see that? All right.
11 (Comments off microphone.)
12 A. If I see that paragraph, yes, I see the
13 paragraph.
14 Q. And you see the line?
15 A. Up.
16 Q. Yes.
17 PRESIDENT FERNÁNDEZ ARMESTO: What is the
18 question?
19 BY MR. PANOPOULOS:
20 Q. But Doctor --so, the question is, but
21 Dr. Wühler, in fact, does both, if you turn to
22 Dr. Wühler's First--
[Page 1533]
1 PRESIDENT FERNÁNDEZ ARMESTO: Can I make a
2 proposal?
3 MR. PANOPOULOS: Sure.
4 PRESIDENT FERNÁNDEZ ARMESTO: That we ask
5 this of Dr. Wühler.
6 MR. PANOPOULOS: Sure. I'm fine with that.
7 PRESIDENT FERNÁNDEZ ARMESTO: Because he's
8 now referring to an Expert who will be here the day
9 after tomorrow.
10 MR. PANOPOULOS: Right. The point I was
11 making was he made a statement here that is really
12 contradicted by what Dr. Wühler says, in terms of what
13 he explains. That's all.
14 PRESIDENT FERNÁNDEZ ARMESTO: I would rather
15 have Dr. Wühler contradict him.
16 MR. PANOPOULOS: Well, okay. That's fine.
17 PRESIDENT FERNÁNDEZ ARMESTO: Dr. Wühler, I'm
18 sure, will have the opportunity to explain it and it
19 would be more efficient.
20 MR. PANOPOULOS: We'll be done even quicker.
21 BY MR. PANOPOULOS:
22 Q. Okay. Now, in a--now, in paragraph--so, and
[Page 1534]
1 then we'll do the same. You'll see that in the next
2 paragraph, you refer to Dr.--to the claims
3 compensation procedures that Dr. Wühler references as
4 War and Human Rights Claims Commissions.
5 Do you see that? All right.
6 MR. PANOPOULOS: So, we can also--the same as
7 with the other question, Mr. President, we can ask
8 Dr. Wühler about that question and save me time as
9 well. Okay? Very good.
10 PRESIDENT FERNÁNDEZ ARMESTO: If that's
11 agreeable to you, that's fine.
12 BY MR. PANOPOULOS:
13 Q. All right. So, and then in Paragraph 95, at
14 the end, at the end of the paragraph--right. You
15 state that when Land Bonds were issued and allocated
16 to specific landowners as compensation for the
17 confiscation of lands. And then you say, "now, all
18 that is left is the Bond itself."
19 Do you see that?
20 A. I see that.
21 Q. And then in 96, Paragraph 96 right below
22 that, you say "the only question should be how to
[Page 1535]
1 update the value"--which you assume is the current
2 value--"and what process should be used by Perú to pay
3 that obligation."
4 A. What I said was update the value. The
5 current value was between inverted commas. It is not
6 saying that it needs to be the current value. Because
7 that's not any field of expertise. That can be
8 discussed tomorrow with Professor Edwards.
9 Q. I'm sure it will, but I pointed out before
10 where you used the word "current value."
11 A. And I pointed before--and I pointed before
12 that it was in between inverted commas.
13 Q. So, in any event; right? So, you agree that
14 the Land Bonds have to be authenticated as a matter of
15 evidence, don't you?
16 A. Not necessarily, but if Perú wants to go
17 through that process, I assume--this is not my
18 expertise, as I am not qualified to practice law in
19 Perú--that basically which I can draw from other
20 jurisdictions is that, basically, whenever you
21 initiate a legal procedure, and if you submit a
22 document under--if there is any doubt about its
[Page 1536]
1 validity, the Court will appoint an Expert to look at
2 the document. But only if--but I'm not an Expert on
3 Peruvian law, so I cannot pass a judgment or opine on
4 this.
5 Q. All right. I was talking about the process
6 and the procedure. When you have a--thousands and
7 thousands of Bonds, they have to be authenticated. I
8 think you recognize that. But I--
9 A. No, I don't recognize that. And I said that
10 in my presentation. Out of the many cases, only 10
11 were rejected, so basically that means that the
12 percentage of the fraudulent cases or alleged frauds
13 were only 2, 3 percent.
14 Q. Okay. So, let's go to Paragraph 140 of your
15 Report, First Report. So, there you make the
16 statement at the beginning--right?--the MEF
17 process--right?--the failure of the MEF--right?--to
18 abide by what you say are the international
19 standards--right?--could partially explain why it has
20 made virtually no progress towards its stated goal of
21 resolving Perú's outstanding debt obligations.
22 Do you see that?
[Page 1537]
1 A. I see that.
2 Q. And then you say "as little as 8 percent of
3 the outstanding Bond Principal even participated in
4 the process at all."
5 Do you see that?
6 A. I see that.
7 Q. And then if you turn the page to Page 49,
8 you'll see in your Table 6 that 8 percent figure.
9 Do you see that?
10 A. I see that.
11 Q. Now, in your handout--well, not quite. Not
12 quite.
13 A. What--
14 Q. Okay. I'm asking questions. You don't even
15 know what I'm going to ask. There was a--yes. So,
16 this was slide--the Slides are not numbered.
17 PRESIDENT FERNÁNDEZ ARMESTO: 15.
18 BY MR. PANOPOULOS:
19 Q. 15. So, if you'll see--if you were to look
20 at the handout--right?--submitted through the MEF
21 process, the value is at .220 billion soles. In your
22 chart it is .202. That's the only difference?
[Page 1538]
1 Do you see that?
2 A. Is that a question?
3 Q. No. Well, I'm leading up to the question. I
4 just need to establish the foundation for the
5 question.
6 A. Okay.
7 Q. Do we see it? Mr. President, we're okay.
8 Good. Right.
9 PRESIDENT FERNÁNDEZ ARMESTO: Yeah. Is it a
10 typo or--
11 MR. PANOPOULOS: No, it's not a typo.
12 PRESIDENT FERNÁNDEZ ARMESTO: --or some more
13 Bonds have been tendered.
14 BY MR. PANOPOULOS:
15 Q. And that's what we're getting to.
16 So, this .202 in your Table 6--right?--is a
17 figure as of November 30, 2018, which were the figures
18 then submitted by Respondents on the amount of Bonds
19 that had been gone through the process, yes?
20 A. Correct.
21 Q. And in this chart you've updated that figure
22 to the data submitted by Respondent as of
[Page 1539]
1 August 30, 2019. That's why you have Document R-1062
2 as the reference to this.
3 Do you see that?
4 A. Correct.
5 Q. And so, you agree with that?
6 A. I agree with that.
7 Q. Okay. All right. Now, let's stay with
8 Table 6, or we can go with--it doesn't matter--right?
9 It's easier for me if we use your handout. Let's use
10 your handout. All right. So--
11 A. What is my handout? The table or the slides?
12 ARBITRATOR DRYMER: Your presentation this
13 morning--this evening?
14 MR. PANOPOULOS: Your presentation.
15 THE WITNESS: Thank you.
16 MR. PANOPOULOS: Right.
17 BY MR. PANOPOULOS:
18 Q. Now, in Paragraph 140 of your
19 Report--right?--you state that the figures in your
20 Table 6--right?--which pretty much are the same except
21 for that last figure I noted in the
22 presentation--right?--are derived from a Congressional
[Page 1540]
1 Report of a May 2005 Document, CE-12.
2 Do you see that?
3 A. Yes.
4 Q. Now, I'm not going to pull up CE-12, in the
5 interest of time, unless you want me to, to show where
6 the figures came from?
7 PRESIDENT FERNÁNDEZ ARMESTO: We remember
8 it--
9 MR. PANOPOULOS: You remember it well. Yes.
10 PRESIDENT FERNÁNDEZ ARMESTO: --after we have
11 seen it a couple of times.
12 MR. PANOPOULOS: Very good. Yes.
13 BY MR. PANOPOULOS:
14 Q. Okay. So, now, as you explain in
15 Paragraph 145--right?--and as depicted in Table 6, the
16 8 percent figure--you follow me now--the 8 percent
17 figure is derived by dividing the face
18 value--right?--of the total outstanding Land Bonds,
19 which is 2.522 billion soles de oro, dividing that by
20 the face value of the Land Bonds submitted to the
21 Bondholder process, you have .202 billion SO there,
22 and your presentation is .220.
[Page 1541]
1 Do you see that?
2 A. Yes.
3 Q. Okay. Now, the baseline that you use for the
4 face value of the total outstanding Bonds, that
5 2.522 billion figure?
6 A. Yes.
7 Q. That does not subtract the face value of the
8 Land Bonds that Gramercy holds and controls and which
9 it will not submit to the Bondholder Process; isn't
10 that right?
11 A. Yes, that's right.
12 Q. Okay.
13 A. I'm referring to the what's been submitted
14 through the MEF process.
15 Q. Well, but you're starting from a baseline, to
16 get the 8 percent, you're starting from a baseline.
17 Right? The baseline 2.522 is your denominator.
18 PRESIDENT FERNÁNDEZ ARMESTO: That's clear.
19 Do you know--because it's an interesting number. Do
20 we know what--what is the face--do you know by heart
21 the face value, or do you know that, by heart, the
22 face value of the Bonds held by Gramercy in this case?
[Page 1542]
1 MR. PANOPOULOS: That was my next question.
2 PRESIDENT FERNÁNDEZ ARMESTO: Yeah, because
3 there are others, but in this case, do you remember?
4 THE WITNESS: No, I don't.
5 BY MR. PANOPOULOS:
6 Q. It's, according to Mr. Edwards, at his First
7 Report at Paragraph 44--and I think that is in the
8 tab, one of the tabs--that's all right--it is
9 382 million SO, or .382 million?
10 A. Sorry, can you repeat that.
11 Q. .382 million.
12 PRESIDENT FERNÁNDEZ ARMESTO: .04. So, it
13 would be 2.1 billion, the total Bonds, excluding those
14 which we are dealing with here.
15 MR. PANOPOULOS: Right.
16 MR. FRIEDMAN: Excuse me, may I ask,
17 exceptionally, for a very short break.
18 PRESIDENT FERNÁNDEZ ARMESTO: Of course.
19 MR. PANOPOULOS: No. Wow.
20 (Overlapping speakers.)
21 MR. PANOPOULOS: This is a critical point of
22 questioning.
[Page 1543]
1 PRESIDENT FERNÁNDEZ ARMESTO: He's not
2 feeling well. Are you not feeling well? He's not
3 feeling well.
4 MR. PANOPOULOS: Okay. All right. I'm
5 sorry. I thought it was--
6 (Comments off the microphone.)
7 PRESIDENT FERNÁNDEZ ARMESTO: No, no, no. Of
8 course. Of course. Yeah. It has happened to me too.
9 These things happen.
10 MR. FRIEDMAN: I'm really sorry.
11 (Comments off microphone.)
12 PRESIDENT FERNÁNDEZ ARMESTO: So, let's take
13 a break.
14 (Brief recess.)
15 PRESIDENT FERNÁNDEZ ARMESTO: We resume the
16 Hearing, and we give the floor to Respondent,
17 Mr. Panopoulos.
18 BY MR. PANOPOULOS:
19 Q. Let's pull up Table 6. All right. This is
20 fine, right?
21 So just to go back to where we
22 were--right?--you didn't subtract the amount of
[Page 1544]
1 outstanding value of Bonds that Gramercy is holding in
2 this Arbitration from your baseline figure; correct?
3 A. No, I didn't. I just started all the
4 outstanding Bonds because what I was trying to
5 establish was something in a degree of participation,
6 not who has participated and who hasn't.
7 Q. Right. But the total value of the
8 outstanding Bonds would include the total value that
9 Gramercy holds of the outstanding Bonds.
10 We're talking about the outstanding value,
11 not who is holding them.
12 A. Of course. Otherwise we would not be here.
13 Q. Right. And, further, we learned earlier in
14 this Hearing that Gramercy purchased interest in
15 additional Land Bonds in 2017.
16 Are you aware of that?
17 A. That has come up in discussion or that-
18 Q. In this hearing. In This hearing.
19 In 2017--
20 A. I was here on Saturday, so I heard that
21 reference.
22 Q. You heard that reference. Right.
[Page 1545]
1 And you didn't--did Gramercy tell you the
2 total outstanding face value of those Bonds that it
3 purchased in 2017?
4 A. No.
5 Q. So, you didn't subtract that figure either
6 from your baseline figure, did you?
7 A. No.
8 MR. PANOPOULOS: Anything else we have to say
9 about the Bondholders Process we can wait for
10 Dr. Wühler. I'm done with the questioning unless
11 Tribunal has questions.
12 THE WITNESS: Can I clarify something on the
13 last comment?
14 PRESIDENT FERNÁNDEZ ARMESTO: Sure. Of
15 course.
16 THE WITNESS: I have not subtracted any of
17 those numbers because what I was simply trying to
18 establish was that the participation through the MEF
19 process and clearly Gramercy has not participated,
20 otherwise we would not be here. That is the reason.
21 I don't know what else needs to be said about that,
22 but I'm grateful for the right to clarify that.
[Page 1546]
1 PRESIDENT FERNÁNDEZ ARMESTO: Mr. Friedman,
2 do you have any redirect?
3 MR. FRIEDMAN: None. Thank you.
4 PRESIDENT FERNÁNDEZ ARMESTO: Do you have any
5 questions, Mr. Drymer? We have to--we have to sit
6 until half past 7:00.
7 THE WITNESS: This is my moment of glory.
8 That's what I'm here for.
9 ARBITRATOR DRYMER: Thank you, I appreciate
10 it. I appreciate it, but, no. I think the areas that
11 I might have covered have been well-covered by
12 counsel. Thank you.
13 ARBITRATOR STERN: Same for me.
14 PRESIDENT FERNÁNDEZ ARMESTO: So, thank you.
15 Thank you very much also for making a fast
16 cross-examination.
17 MR. PANOPOULOS: I appreciate the time. It's
18 late.
19 PRESIDENT FERNÁNDEZ ARMESTO: I apologize to
20 Dr. Jijón that I was pushing him, but it gave us the
21 possibility--or it gave your colleague the possibility
22 to finalize the examination.
[Page 1547]
1 And I ask--I thank very much our Expert. It
2 reminds me of when I was a very young professor. It
3 was also my specialty, banking and finance. It brings
4 back nice memories. It's a nice area of the law,
5 international bank and finance. So, thank you very
6 much for coming here.
7 THE WITNESS: Thank you for listening to my
8 presentation.
9 (Witness steps down.)
10 PRESIDENT FERNÁNDEZ ARMESTO: Very good.
11 That was good. Thank you for making the effort of
12 finalizing today.
13 We are off the record.
14 (Whereupon, at 7:21 p.m., the Hearing was
15 adjourned until 9:00 a.m. the following day.)
[Page 1548]
CERTIFICATE OF REPORTER
I, Dawn K. Larson, RDR-CRR, Court
Reporter, do hereby certify that the foregoing
proceedings were stenographically recorded by me
and thereafter reduced to typewritten form by
computer-assisted transcription under my
direction and supervision; and that the
foregoing transcript is a true and accurate
record of the proceedings.
I further certify that I am neither
counsel for, related to, nor employed by any of
the parties to this action in this proceeding,
nor financially or otherwise interested in the
outcome of this litigation.
Signature
Dawn K. Larson
[Page 1549]
INTERNATIONAL CENTRE FOR THE SETTLEMENT OF INVESTMENT
DISPUTES
-X
|
In the matter of Arbitration between: GRAMERCY FUNDS MANAGEMENT LLC AND GRAMERCY PERU HOLDINGS LLC, Claimants, and REPUBLIC OF PERÚ, Respondent. |
: : : : : : ICSID Case No. : UNCT/18/2 : : : : : |
-X Volume 5
HEARING ON JURISDICTION, MERITS AND QUANTUM
Wednesday, February 12, 2020
The World Bank Group
1225 Connecticut Avenue, N.W.
C Building
Conference Room C1-450
Washington, D.C.
The hearing in the above-entitled matter
came on at 9:00 a.m. before:
PROFESSOR JUAN FERNÁNDEZ ARMESTO, President
MR. STEPHEN L. DRYMER, Co-Arbitrator
PROFESSOR BRIGITTE STERN, Co-Arbitrator
In the case of discrepancy, the audio recording in the
original language will prevail.
[Page 1550]
ALSO PRESENT:
On behalf of ICSID:
MS. MARISA PLANELLS-VALERO
Secretary of the Tribunal
MS. KRYSTLE M. BAPTISTA
Assistant to the President of the Tribunal
Realtime Stenographers:
MS. DAWN K. LARSON
Registered Diplomate Reporter (RDR)
Certified Realtime Reporter (CRR)
B&B Reporters
529 14th Street, S.E.
Washington, D.C. 20003
United States of America
MR. PAUL PELISSIER
MR. DIONISIO RINALDI
D.R. Esteno
Colombres 566
Buenos Aires 1218ABE
Argentina
(5411) 4957-0083
Interpreters:
MS. SILVIA COLLA
MR. DANIEL GIGLIO
MR. CHARLES ROBERTS
[Page 1551]
APPEARANCES:
On behalf of the Claimant:
MR. MARK W. FRIEDMAN
MS. INA C. POPOVA
MR. CARL RIEHL
MS. FLORIANE LAVAUD
MS. BERGLIND HALLDORSDOTTIR BIRKLAND
MR. GUILHERME RECENA COSTA
MS. SARAH LEE
MR. DUNCAN PICKARD
MR. JULIO RIVERA RIOS
MS. MARY GRACE MCEVOY
MR. THOMAS G. MCINTYRE
Debevoise & Plimpton, LLP
919 Third Avenue
New York, New York 10022
United States of America
MR. LUIS BEDOYA
MR. FRANCISCO CARDENAS PANTOJA
Rodrigo, Elias & Medrano
Av. San Felipe 758
Jesús María
Lima 15072
Perú
Representing Gramercy Funds Management LLC:
MR. JAMES TAYLOR
MR. JOSHUA M. O'MELIA
MR. NICK PAOLAZZI
MR. THOMAS NORGAARD
[Page 1552]
APPEARANCES: (Continued)
On behalf of the Respondent:
AMBASSADOR HUGO DE ZELA
Republic of Perú
MR. RICARDO AMPUERO
Republic of Perú
MS. MONICA GUERRERO
Republic of Perú
MS. GIOVANNA ZANELLI
Republic of Perú
MR. ALBERTO HART
Republic of Perú
MR. JONATHAN C. HAMILTON
MS. ANDREA MENAKER
MR. RAFAEL LLANO
MR. FRANCISCO JIJÓN
MR. JONATHAN ULRICH
MR. FRANK PANOPOULOS
MR. JOHN DALEBROUX
MR. ALEJANDRO MARTINEZ DE HOZ
White & Case LLP
701 Thirteenth Street, NW
Washington, D.C. 20005-3807
United States of America
[Page 1553]
For the United States of America:
MS. LISA GROSH
MS. NICOLE THORNTON
MS. MARGARET SEDGEWICK
MR. JOHN DALEY
Attorney-Advisers
Office of International Claims and
Investment Disputes
Office of the Legal Adviser
U.S. Department of State
Suite 203, South Building
2430 E Street, N.W.
Washington, D.C. 20037-2800
United States of America
MS. AMY COLLINS
U.S. Department of Treasury
[Page 1554]
C O N T E N T S
PAGE
WITNESSES:
SEBASTIAN EDWARDS
Direct examination by Mr. Riehl. ... 1564
Direct presentation.. ... 1567
Cross-examination by Mr. Llano. ... 1631
Redirect examination by Mr. Riehl. ... 1812
Questions from the Tribunal. ... 1815
Recross-exam. by Mr. Llano. ... 1834
MICHAEL REISMAN
Direct examination by Ms. Menaker. ... 1838
Cross-examination by Ms. Popova.. ... 1847
Redirect examination by Ms. Menaker. ... 1889
ALFREDO BULLARD
Direct examination by Mr. Recena Costa. ... 1895
Cross-examination by Mr. Llano..... ... 1927
Redirect examination by Mr. Recena Costa.. ... 1987
CONFIDENTIAL PORTIONS:
1. ... 1626-1628
2 ... 1660-1679
[Page 1555]
1 PRESIDENT FERNÁNDEZ ARMESTO: Good morning
2 to all of you.
3 We resume the Hearing in this case of
4 arbitration between Gramercy Funds Management LLC and
5 Gramercy Perú Holdings LLC v. The Republic of Perú.
6 If there are no procedural comments, we will
7 start with the examination of Expert Edwards.
8 Yes, point of order.
9 MR. HAMILTON: Thank you very much,
10 Mr. President. On behalf of the representatives of
11 Perú, we are trying to listen to the priorities
12 expressed by the Tribunal as well as the questions,
13 and during the statements provided by Peruvian
14 Witnesses, you mentioned Bondholder Process, interest
15 on coupons, net amount of Bonds, things of this sort.
16 And we understand that, for now, this is not a
17 request that we will be presenting additional
18 documents, or if you'd like to receive additional
19 documents. I don't know if it is part of the
20 Bondholder data, but the Experts of Perú as
21 Mr. Wühler and Quantum Experts will be referring to
[Page 1556]
1 those items in their Statement. But I just want to
2 assert that we are doing what the President prefers.
3 PRESIDENT FERNÁNDEZ ARMESTO: I think that
4 there is one piece of information to follow. There
5 is one data which seems important, which is the best
6 estimate of the outstanding Bonds. Yesterday, we saw
7 that the number given by the Expert was
8 2.3 billion--2.4 billion--whichever it was, but we
9 saw some numbers yesterday, which come from a
10 commissioned Report in the 2004 or something, and I
11 really would like to know.
12 You have seen and I have asked both the Vice
13 Minister and the Minister if the Government had any
14 sort of internal calculation, and it was not--it
15 seemed--at least we have none--as far as I know, we
16 have none in it arbitration, and it is important that
17 at some stage we have the best estimate possible of
18 how much the outstanding Bonds are, and what
19 Gramercy's position represents, whether it is really
20 2-point--whatever it was yesterday, and the number,
21 2.4 billion, no? Wasn't it 2.4 billion?
22 MR. FRIEDMAN: May I, Mr. President?
[Page 1557]
1 The sources that we're aware of that relate
2 to this--I don't have the exhibit numbers handy, but
3 we can get them for you. In the 148 Report, the 148
4 Commission Report, which was commissioned in 2001 and
5 concluded its work with the Report in 2004, there is
6 the analysis that we saw yesterday. The numbers are
7 a little higher than 2.4. I think the net amount
8 they come up with is 2.5 billion something, and then
9 there are a small number of Bonds under another law
10 that they--sort of very similar.
11 The only other--and that number also gets
12 repeated then and picked up by the Agrarian
13 Commission, which did its work in 2005, leading to
14 the 2006 legislation that passed Congress but was
15 vetoed. So, that's been the number that we have been
16 operating under because we have not seen a better
17 analysis, frankly.
18 We did see one other number, as you will
19 recall, when we were speaking with Ms. Sotelo where
20 more recent documents that the Minister produced had
21 a number in there. This was in connection with the
22 switch to the August 2017 formula from the
[Page 1558]
1 February 2017 formula. There is that one page that
2 has an analysis of the impact of the difference
3 between the February formula and the August formula,
4 and you saw on that page an estimate of the total
5 Bond stock of 8.5 billion roughly. It was a more
6 precise number, but it was about that order of
7 magnitude.
8 Now, I have to say, Ms. Sotelo couldn't
9 answer questions about that, didn't vouch for it and
10 so--and we had never seen it before.
11 PRESIDENT FERNÁNDEZ ARMESTO: That was the
12 sheet with some--it started with numbers and then it
13 had some--how do you call that in English?--brackets.
14 It had brackets and then it led to smaller numbers.
15 That is the document you are referring to?
16 MR. FRIEDMAN: Yes. It listed percentages
17 along the right, the right column basically.
18 PRESIDENT FERNÁNDEZ ARMESTO: Yeah. And it
19 did the other numbers than the 2.4, higher.
20 (Comments off microphone.)
21 MR. FRIEDMAN: Yes, it had a number 8.5 in
22 it. Yes, as far as I know, those are the source of
[Page 1559]
1 information in the record that relate to that
2 question.
3 PRESIDENT FERNÁNDEZ ARMESTO: Okay. Thank
4 you. It would be at some stage important that we
5 have the position of the Republic, which of the two
6 numbers, if at all, or what the position is by the
7 Republic. There must be some sort of internal
8 calculations. I mean, I'm sure that at some stage
9 someone about the highly sophisticated services of
10 the MEF must have given some thought to how much is
11 outstanding and whether it's more in the 2.3 or in
12 the 8 billion. I mean, it would be interesting to
13 have some information on that.
14 MR. FRIEDMAN: Mr.--
15 MR. HAMILTON: Just to--sorry, my turn.
16 MR. FRIEDMAN: Of course.
17 MR. HAMILTON: Just to confirm,
18 Mr. President, first of all--and I will be more brief
19 than my colleague was on this procedural point--Perú
20 has produced many documents, has been highly
21 forthcoming with documents on this issue, and what
22 they consistently show is that people don't know for
[Page 1560]
1 sure.
2 And the reason people don't know for sure is
3 because these Bonds, of course, are totally different
4 from the way that people would track Bonds in today's
5 world, either at the time they are issued or at the
6 time that they are restructured, et cetera. And so,
7 you've got a very unique situation here, not only
8 with respect to how many Bonds were given out in the
9 first place, but nobody knows how many still exist,
10 how many have been burned up, thrown away, ignored.
11 There are many different reasons why with
12 historical documents such as these, they don't
13 have--sitting from the vantage point of 2020, it may
14 not be so clear the way that these things evolve over
15 time and what people do or don't do with these.
16 There are also, as Ms. Sotelo mentioned,
17 Bonds that were never retrieved at all, and so there
18 simply are not good records. She also mentioned in
19 response to a question by the President, for example,
20 when the Agrarian Bank closed, that also left--that
21 was at a time of economic emergency and major
22 transition in the country around 1992. So, there are
[Page 1561]
1 many reasons why the data is not absolute, and there
2 are various--there has been various data shared.
3 And so, in any event, the bottom line in my
4 procedural point, we will look. We hear what you're
5 saying, and I think that, you know, on these points I
6 mentioned, you may hear Mr. Wühler or the Quantum
7 Experts will do what they can do assist the Tribunal,
8 and then if there is anything else that we need to
9 discuss, we will. And the same, of course, for the
10 Bondholder Process data. That is data that exists
11 and Ms. Sotelo has offered to make available.
12 Thank you.
13 MR. FRIEDMAN: And if I may, we, of course,
14 want to be sure that the Tribunal has the information
15 that it needs to decide, but I am concerned also
16 about procedurally. It's been--it was very clear and
17 at Respondent's insistence that the record is closed.
18 We had asked for this very kind of data for a long
19 time. It was in our discovery request. This
20 information, so far as we can tell from having looked
21 through everything, is not in what was produced.
22 If new data is now going to be produced, I
[Page 1562]
1 do have a very--we just want to put down a marker
2 that we would probably have a very serious procedural
3 question. If we just get some numbers or a
4 spreadsheet with nobody to interrogate about it and
5 having had to plead our case up until now on the
6 basis on the record that we have, I think it would
7 be--there's a real risk a great amount of unfairness
8 because now the number could be anything, now that
9 the Parties' positions have become more clear about
10 what the implications would be of such a number.
11 And I certainly would resist--I'm not saying
12 that Mr. Hamilton suggested this, but he did mention
13 that the Experts Mr. Wühler and Mr. Kaczmarek may
14 address this issue. If they address it, of course,
15 from the evidence that is in the record so far,
16 that's fine, but if they were to address it from
17 information that is not part of the record, we would
18 have a very serious objection to that.
19 PRESIDENT FERNÁNDEZ ARMESTO: Very good.
20 SEBASTIAN EDWARDS, CLAIMANTS' WITNESS, CALLED
21 PRESIDENT FERNÁNDEZ ARMESTO:
22 Professor Edwards, you will be deposing in
[Page 1563]
1 English or Spanish, Professor Edwards?
2 THE WITNESS: I will speak in English, yes.
3 PRESIDENT FERNÁNDEZ ARMESTO: Very good.
4 So, first of all, thank you very much for being here
5 with us. You are here as an expert, and as you know,
6 the first thing we must do is take your oath as
7 Expert. So, would you be kind enough to stand up and
8 take your oath?
9 THE WITNESS: I solemnly declare, upon my
10 honor and conscience, that my statement will be in
11 accordance with my sincere belief.
12 PRESIDENT FERNÁNDEZ ARMESTO: Very good,
13 Professor Edwards. I give the floor to Claimants.
14 MR. FRIEDMAN: Mr. Riehl will be handling
15 this Witness. Thank you, Mr. President.
16 PRESIDENT FERNÁNDEZ ARMESTO: Excellent.
17 Thank you. And before we start, we are receiving
18 here a presentation, and it is H-8.
19 MR. RIEHL: Mr. President, if I may, I'm
20 wondering if it would be permissible for Mr. Tom
21 McIntyre, who is a Debevoise legal assistant, to sit
22 with him while--only during Professor Edwards'
[Page 1564]
1 presentation in case there are technical issues, he
2 can attend to them very quickly.
3 PRESIDENT FERNÁNDEZ ARMESTO: Yeah. If
4 Professor Edwards does not mind having a bodyguard at
5 his back.
6 THE WITNESS: If he bothers me, I'll throw
7 him out.
8 PRESIDENT FERNÁNDEZ ARMESTO: Okay.
9 DIRECT EXAMINATION
10 BY MR. RIEHL:
11 Q. Good morning, Professor Edwards.
12 A. Good morning.
13 Q. On the table in front of you, there should
14 be your three Reports. Do you recognize those as the
15 Reports that you submitted in this proceeding?
16 A. Yes.
17 Q. Are there any corrections that you would
18 like to make to them at this time?
19 A. Yes, Mr. Riehl. There are two corrections.
20 The first one relates to the date on the Bonds. We
21 found that there were two coupons that were
22 duplicate, and we have now corrected that--only
[Page 1565]
1 two--and we have subtracted them, and this changes my
2 valuation by less than $1 million. So, whatever the
3 number was, 1.79 billion minus 1 million. And the
4 second correction--
5 PRESIDENT FERNÁNDEZ ARMESTO: You must
6 repeat that. What is the correction? There were two
7 coupons.
8 THE WITNESS: There were two coupons that
9 were duplicated. They were in the data set in two
10 different--appeared under two different--as if they
11 were two different Bonds, and they were not. So,
12 there was one Bond with 14 coupons and one Bond with
13 two coupons, but they were the same Bond. So, those
14 two coupons were already taken into account in the
15 14, in the one row above. So, those were deleted
16 from the data set.
17 PRESIDENT FERNÁNDEZ ARMESTO: Okay.
18 THE WITNESS: Okay. And that has changed
19 the valuation by less than $1 million, by about
20 $800,000.
21 PRESIDENT FERNÁNDEZ ARMESTO: Okay. It
22 changes the whole valuation?
[Page 1566]
1 THE WITNESS: Right. Those two coupons, I
2 had added their value, and now they are not part of
3 the value.
4 PRESIDENT FERNÁNDEZ ARMESTO: Okay. So, you
5 will have to give us at some stage the correct set of
6 figures.
7 MR. RIEHL: Yes.
8 THE WITNESS: Absolutely.
9 And the second correction, Mr. President, is
10 that there is one paragraph in my Report where I talk
11 about a particular case in Perú in one of the courts,
12 and I refer to it as updating from date of issuance.
13 And I looked again at the information, and, instead,
14 of looking at the translation as I had originally, I
15 looked now at the Spanish original, and there was a
16 typo.
17 This is a case that has 25 Bonds, five of
18 which had one clipped coupon, and 20 all the coupons
19 were unclipped. And they were in the courts in the
20 procedure in Perú. They were updated from last
21 clipped coupon and not from issuance. The difference
22 is only one coupon and only five Bonds. But I want
[Page 1567]
1 to make clear that once we looked at Spanish
2 original, we realized that as they say in the movies,
3 "It got lost in translation."
4 PRESIDENT FERNÁNDEZ ARMESTO: And the case,
5 do you have the reference to the case?
6 THE WITNESS: I think it was the Laredo
7 Case, but I will have to refresh my memory. But it's
8 just for accuracy, it doesn't affect the calculation
9 or anything of that sort.
10 PRESIDENT FERNÁNDEZ ARMESTO: Very good.
11 THE WITNESS: Do I start?
12 MR. RIEHL: Yes, we would be ready to
13 proceed with the presentation, Mr. President.
14 PRESIDENT FERNÁNDEZ ARMESTO: Very good.
15 Thank you, Mr. Riehl and Professor.
16 DIRECT PRESENTATION
17 THE WITNESS: So, now that we have
18 clear--let me say good morning. With the
19 proceedings, I didn't say so.
20 Good morning, President Armesto; good
21 morning, Professor Stern; good morning, Mr. Drymer;
22 good morning, Mr. Hamilton, Jonathan; good morning,
[Page 1568]
1 the Perú lawyers; and, of course, good morning to the
2 Gramercy lawyers.
3 What I'm going to do is try to present my
4 two Reports--three Reports, one is an amended version
5 of the first, so it is really two reports. And there
6 is a lot of material here, and I will try to be brief
7 so that we can have enough time for a conversation
8 and to clarify doubt and so on and so forth. But
9 since it's very complex and there are many issues
10 here, if I'm going too fast, I will be very happy to
11 slow down and to explain. And, of course, if I'm
12 going too slow and I'm boring you, I will be very
13 happy to speed up and take up the pace.
14 So, let me start very briefly with my
15 qualifications. I am a Professor of Economics at
16 UCLA, where I have spent most of my career. I am the
17 holder of the Henry Ford II Chair in International
18 Economics since 1991. Between 1993 and 1996, I was
19 the chief economist for Latin America at the World
20 Bank, and in that position, I had to oversee all the
21 economic and analytical work of the bank with Latin
22 America, and I was a member of the loan committee for
[Page 1569]
1 Latin America.
2 I'm a member of the National Bureau of
3 Economic Research, and I ran their Latin America
4 program for a long time. I was awarded--I was a
5 founder and then later became a president of the
6 Latin America and Caribbean Economic Association,
7 which is an association of professional and academic
8 economists. The association is based here in the
9 United States, but the membership comes from all over
10 the world--from Europe, Greece, France, Italy, Spain,
11 everywhere--the United Kingdom and from the United
12 States.
13 The Association honored me with a prize
14 which is given every two years to a scholar from
15 around the world to honor his or her research on
16 Latin America on the basis of a lifetime achievement.
17 It's called the Carlos Díaz Alejandro Award, in honor
18 of Carlos Díaz, who was a professor of Cuban origin
19 at Harvard.
20 I've published a number of books. I've been
21 a consultant to a number of places. I list some of
22 the books in the slide; I don't want to go through
[Page 1570]
1 that. My latest book was published in 2018 by
2 Princeton University Press, and it deals with the
3 abrogation of the gold clause in 1933 in the United
4 States, and it is titled "American Default."
5 So, let me now move to--
6 PRESIDENT FERNÁNDEZ ARMESTO: I hope your
7 green card is not in danger.
8 THE WITNESS: I thought about that, so I
9 became a citizen first.
10 One of the areas in research that I've
11 worked on, Mr. President, is sequencing of economic
12 policy, what you should do before what, and getting
13 the passport was a good step to take before
14 publishing that book.
15 So, this is an outline of what I'm going do.
16 I'm going to try to cover all of these issues, as I
17 said, in as little time as possible. And let me
18 start with what I think needs to be a clarification,
19 and that is the nature of these Bonds. I was here at
20 the Hearings on Monday and Tuesday. I was unable to
21 be here Friday and Saturday--I was teaching at
22 UCLA--but I think there is still some confusion that
[Page 1571]
1 needs to be clarified about the nature of the Bonds.
2 And what we have here are two coupons from the same
3 Bond, and this, I think, will clarify what is going
4 on. This is a particular Bond--08615, I believe.
5 And it's a coupon that is a 5 percent coupon, so that
6 means it's a 25-year coupon--excuse me, Bond.
7 And we have here the first on the left.
8 This is the 13th coupon. It says there "treceava
9 amortizacíon," 1/25th, un veinticinco," of the face
10 value, which is 10,000 soles oro, and 1/25th of
11 10,000 is 400, and then it says 5 percent interest
12 annual over, and it says it is annual, and it's
13 5,200, cincomil doscientos, which is the remaining
14 value of the Bond after having clipped 12 coupons.
15 So, the interest is on the remaining amount,
16 on 5 percent. It is not 5 percent over the whole
17 coupon and then distributed year by year. It is every
18 year 5 percent, as Vice Minister Sotelo clarified, and
19 it is on the balance. So, in order to make that even
20 clearer, here we have the last coupon of this Bond, so
21 it is veinticincoava, or uno vigésimoquinto
22 yes, I guess it should say.
[Page 1572]
1 PRESIDENT FERNÁNDEZ ARMESTO: It's a
2 mistake.
3 THE WITNESS: (in Spanish) of 1/25th of
4 10,000, so the amortizacíon, the payment is 400,
5 5 percent interest annual over the remaining, 400, so
6 it's 20. So, the payment on the 13th coupon is 660,
7 and here it is 420.
8 So, what that means is that the payment
9 structure of this Bond through its life is given by
10 the blue bars, and not, as the Perú Quantum Expert,
11 Mr. Kaczmarek, claims it's the little green bars
12 here, which are the bars that result from
13 misunderstanding these Bonds and applying the
14 5 percent to the 10,000 and then dividing that by 25.
15 So, this is a clarification on the nature of the
16 Bonds.
17 PRESIDENT FERNÁNDEZ ARMESTO: This is
18 important, Professor, because I had read what
19 Mr. Kaczmarek had said, and are you sure that all
20 Bonds are like this one?
21 THE WITNESS: Yes.
22 PRESIDENT FERNÁNDEZ ARMESTO: Or are there
[Page 1573]
1 Bonds and Bonds?
2 THE WITNESS: Well, they are not all like
3 this, because, as you know, there are some 4 percent,
4 6 percent, 20 and 30, but all the Bonds are like this
5 in the sense that the payment is on the balance. And
6 the 5 percent, as Vice Minister Sotelo, I think, very
7 strongly pointed out on Monday, that was the nature
8 of these Bonds. And I think it's an important
9 clarification for the reason that you mentioned,
10 Professor Armesto.
11 So, let me now move to the land value of the
12 Bonds. And we know that, because of inflation, the
13 nominal value of these Bonds was severely eroded
14 through time, and the nominal value started to become
15 very small quite early on, and as the Vice Minister
16 said in her testimony, at one point the nominal value
17 became 1 cent of one Nuevo Sol, which is 1 million.
18 So, it's 1 cent divided by 1 million of the soles
19 oro. So, of course, it was eroded. And the question
20 here is, given the guidance from the 2001
21 Constitutional Tribunal, given best practices in
22 terms of economics from around the world, given Perú
[Page 1574]
1 law, legislation, and jurisprudence, how to obtain or
2 go back or recalculate a full updated value of these
3 ones.
4 And this implies taking basically two steps.
5 The first step is to update for inflation. In order
6 to get the creditor, the person who--to use the
7 language properly, Mr. President, the person who was
8 forced to take these Bonds in exchange for his or her
9 land--these were not willingly two-side
10 transactions--in order for the purchasing power that
11 they received at the time the Bonds was forced on
12 them to be maintained through time, we have to find a
13 way to updating that value, and I am going to argue
14 that the best way of doing is to use Consumer Price
15 Index. But it gives the individual a command over
16 goods and services of an equivalent basket through
17 time as we move along. And in addition, we have to
18 provide for compensatory interest that takes into
19 account lost opportunity for not having received
20 those monies on time.
21 So, I have a picture here with different
22 steps that are included in the CPI update. So, the
[Page 1575]
1 first thing is we take the Bond and we realize that
2 some Bonds--not all of them, but some Bonds; maybe
3 many of them or most of them--have clipped and
4 unclipped coupons. So, this is a Bond with 25
5 coupons, five by five. The gray parts were clipped;
6 the blue were unclipped. And my first step is to
7 separate these two. And I'm only going to work on
8 the fraction of Bonds that were unclipped. The
9 clipped ones were paid; the obligation for those
10 ones, I assume, was extinguished. In this case, we
11 are going work with 13 out of 25 coupons, and this is
12 captured by this ratio here in this equation.
13 So, we have the face value in soles oro at
14 issuance multiplied by the ratio. If all of them are
15 unclipped, the ratio is 1. If all of them are
16 clipped, the ratio is zero, and the calculation ends
17 there because there is nothing to revalue or to
18 calculate.
19 The next step here is apply Perú inflation
20 all the way from issuance to payment due--payment
21 date, excuse me. The third step, or fourth step, is
22 to provide interest to compensate for foregone
[Page 1576]
1 opportunity starting from the last clipped date. So,
2 this date--as you can see, the starting point of the
3 two arrows is different. And then we get the updated
4 value in soles oro, which we have to convert to Nuevo
5 Soles.
6 So, this process is very simple, very
7 straightforward. It includes separating clipped from
8 unclipped, updating by CPI since issuance, providing
9 some compensatory interest, and then converting back
10 by a ratio that we know has nine zeroes, which always
11 makes me very confused, and I make lots of mistakes
12 with the nine zeroes. But that's reality.
13 This CPI method is very standard around the
14 world. I think that if you were to ask 100
15 economists a sort of very short question and you
16 would tell them the story--there is a debt that
17 became--was reduced to zero through inflation; we
18 need to bring it back to some updated value; what
19 would you use?--99, in my view, in my opinion,
20 economists would say, "Well, we would use CPI." And
21 then you say, "Would you do anything else?" And
22 "Well, we would add compensatory interest." And we
[Page 1577]
1 will get to that details in a second.
2 This is normal. It is used in many
3 countries. It is used currently in Chile. When my
4 father died, I inherited a small apartment which I
5 rent in Chile out, and the Contract is nuevos, which
6 is updated daily by inflation. Perú has a daily
7 updating system, which is called the VAC, which is
8 published by the Central Bank every day. You go and
9 say "VAC," and they give you every year daily
10 updating which is based on the inflation data CPI,
11 official CPI published in Perú.
12 Colombia is famous because they claim they
13 invented indexation and updating using this period.
14 Brazil, of course, used it for a very long time,
15 since the time at least of Roberto Campos, and now
16 his grandson is the governor of the Central Bank. He
17 continues to apply it. It was used in Argentina for
18 a long period of time, and then it stopped being
19 used.
20 It is used in México. It is called the UDI.
21 The United States has the TIPS. And I could go on
22 and on. I am now working with the Government of
[Page 1578]
1 Iceland, and all mortgages in Iceland are indexed to
2 inflation, and it was a very useful tool after the
3 2008 large, significant crisis that Iceland had.
4 Now, let's move to interest.
5 So, you go back to the picture that I showed
6 with the arrows. What we've dealt with until now is
7 the green arrow. Let me now deal with the yellow
8 arrow. And the question is: What kind of
9 compensatory interest should we use? And the logical
10 approach here is that, of course, we don't know what
11 each individual Bondholder would have done if he or
12 she had received the funds that were owed to them.
13 So, what I assume in my paper is--I say the
14 average Bondholder had the opportunity to invest in
15 the average project in Perú. And this is--I'm not
16 going region by region. I'm saying averages are
17 averages, and we will assume that that is the case.
18 So, what I'm going to try to do, then, is
19 find: What was the return on capital, any investment
20 that involves capital in Perú during this period?
21 And what I do is I use a technique known as the
22 Harberger method, which refers to Professor Arnold
[Page 1579]
1 Harberger, formerly from the University of Chicago,
2 currently retired at UCLA. He's a 95-year-old
3 wonderful man, and his system has been used around
4 the world in order to deal with these kind of issues
5 and issues related to the return on capital.
6 And the procedure--just I'm going to give a
7 very simple description of procedure. So, what it
8 does is that it takes GDP, which is income received
9 by everyone in a country in a given year, and it
10 separates the GDP according to who receives part of
11 that income. And it separates it between the
12 Government, which receives taxes; labor, which
13 receives its share; and the rest, we attribute it to
14 capital. We deconstruct the thing.
15 And now, we have what is income, measured in
16 soles, in soles oro, in Nuevo Soles, in yuan,
17 depending on the country, and we have to divide that
18 by the stock of capital, and that will give us the
19 average rate of return.
20 Stock of capital is calculated by the United
21 Nations through a very well-known system called the
22 Penn Tables, and we get the data from the Penn
[Page 1580]
1 Tables, but the stock of capital that the Penn Tables
2 give is only what we call "produced" or
3 "reproducible" capital, which is not the whole
4 capital, because there is also capital that has to do
5 with natural resources, with land, with forest, and
6 so on.
7 So, if we only use the Penn Tables capital,
8 the denominator is small, and the resulting return is
9 going to be too high. So, we adjust the denominator
10 by adding an imputed amount of capital for
11 agriculture, and we then lower the return. And what
12 we get is a return that we see here for capital in
13 Perú year after year.
14 And instead of using the data year after
15 year, I use the average, which is 10.95 percent.
16 This is the return that capital as a whole obtained.
17 I decided in my calculations, Mr. President, that I
18 was going to be conservative on every step. So, I
19 said, well, the foregone opportunity at the abstract
20 over a level we can think is capital as a whole. But
21 to be conservative, let's assume that people are
22 foregoing the opportunity to participate in projects
[Page 1581]
1 and businesses, that they forego their opportunity to
2 participate in the capacity of passive investments;
3 they are on the passive side, they are not running
4 the business.
5 So, what I'm going to do is I'm going to
6 deconstruct this 10.95 percent, and I'm going to
7 deconstruct it, and when I do, I'm going to separate
8 the return on equity and the return on debt. And the
9 return on debt, of course, is much lower, and here we
10 have all capital, the same as before, and that's a
11 purple, and the red is debt. And the average, if
12 these people had participated as passive investors in
13 all these different projects--supermarket, un
14 almacén, any emprenimiento (in Spanish), any project,
15 then they would have obtained, on average,
16 7.22 percent.
17 Now, I used as long as possible a series,
18 because if you use the assured--and when I get to
19 this, very short periods of time, and you look only
20 at one month or one year, you may be looking at an
21 abnormal year, and that distorts the analysis. So, I
22 look all the way from the 1950 all the way to 2016.
[Page 1582]
1 Now, of course, I am aware that the Agrarian
2 Reform Bonds were issued in '69, but look what
3 happens here. If I were to exclude this earlier
4 part, then my average would be even higher, because I
5 would be excluding these lower numbers, and this is
6 another illustration that I'm working at every step
7 trying to be conservative.
8 So, if you, at every step, tried to be
9 conservative, you know that the final outcome is
10 conservative. If sometimes you're conservative and
11 sometimes you're not, you don't know which way is
12 here. We're going to know what the final outcome is.
13 And when we use this system, this procedure,
14 CPI, and this rate of return, we get the estimates
15 and the valuation that I pointed out in--point out in
16 my Report.
17 As I said, the Harberger method which is
18 behind this is universally accepted. When I was at
19 the World Bank, running the economics division for
20 Latin America, we used it all the time. It was the
21 preferred method to evaluate projects. So, of
22 course, when the bank lends money--$3 billion to
[Page 1583]
1 build a road, to build a dam, to build a
2 hydroelectric plant--it asks the country to do a
3 project analysis and evaluation, to have a hurdler
4 rate, to see whether those monies are going to be
5 spent wisely, and the hurdle rate is calculated in
6 most of these countries using--including in
7 Perú--using the Harberger method, which is the method
8 that I am using in this particular case, and I am
9 very confident that it is--and I point out in my
10 Report that the number I get, 7.22, is consistent
11 with other estimates from around the world.
12 So, let me now move to what I think are some
13 flaws in the Constitutional Tribunal Order of July of
14 2013. And, of course, I don't have to repeat the
15 narrative of how we went from 2001 to the Commissions
16 in between and 2013. And I'm going to deal with four
17 issues: The issue that hyperinflation does not
18 provide a--because of hyperinflation, the CPI is not
19 reasonable, and the other three that I have here, I'm
20 going to try to work you through that rather quickly.
21 So, the Order, the 2013 Order by the
22 Tribunal--and I quote here, but we've gone through
[Page 1584]
1 this several times during these proceedings--points
2 out that: "In times of hyperinflation, there are
3 distortions, and the CPI calculation is divorced from
4 reality." And I'm going to argue that that is an
5 incorrect statement for a number of reasons.
6 This is in a logarithmic scale, and you will
7 forgive me for that. But when you have
8 hyperinflation, you just cannot draw the picture, the
9 official inflation rate in Perú during this period.
10 And we can see that it is very low starting in 1950.
11 It starts going up in the 19--when the coup takes
12 place, the Velasco Alvarado coup in October of 1968
13 takes place, and then there is this spike. This is
14 the second Belaúnde. Don Fernando was very upset
15 that he had to deal with two very serious
16 macroeconomic crises. This is the second Belaúnde.
17 And then we have Alan García I, and the big
18 hyperinflation.
19 Now, let's talk a little bit about
20 hyperinflation. It's an issue that I've studied;
21 I've written about it; I lived through
22 hyperinflation. I was young, but I lived through a
[Page 1585]
1 hyperinflation in my country of origin in 1973, a
2 1,000 percent inflation towards the end, just before
3 the coup and the dictatorship.
4 So, a hyperinflation is when prices go up
5 simultaneously very, very, very fast, and the main
6 characteristic of hyperinflation is that all prices
7 go up at the same time. That means that the
8 phenomenon that we economists spend a lot of time
9 looking at, which is changes in relative prices that
10 determine whether people eat duck or chicken or
11 geese, is not very important to know, because the
12 price of duck, chicken, and geese are all going up
13 more or less at the same level. And one of the
14 objections to using this data is that we are going to
15 have substitutions that divorces it from reality.
16 The second point that we have to do is that,
17 even if that happened, there is a counterforce, and
18 that counterforce is that during hyperinflation,
19 governments try to deal with it by controlling
20 prices. And I worked during the Unidade Popular as a
21 young college student in the price control office in
22 Chile. And I know what it is with 1,000 percent
[Page 1586]
1 inflation to control prices. And you just say the
2 official price of Nescafé--which is an awful kind of
3 thing, but anyway--nothing against Nestlé, by the
4 way--the official price on Nescafé is cien pesos, and
5 inflation keeps going up, and this Nescafé disappears
6 from the shelves of supermarket. But when the
7 inspector or the official from the statistical office
8 goes to the supermarket, looks at either the one can
9 or asks--writes 100, although the real price in the
10 parallel black market is 500. So, we have a force
11 where, in fact, hyperinflation, in many countries,
12 inflation tends to be underreported, rather than
13 overreported, because of price controls.
14 And the third point is that, in my
15 calculation, we take the CPI at this point, which is
16 when the Bonds are issued, and then we use it again
17 to see by how much it has increased in 2018, and at
18 that time we have skipped the hyperinflation. Things
19 have come back to normal. Even if the price of
20 chicken, duck, and geese got distorted here, it came
21 back to normality here, and we are not--there is no
22 contagion of this spike in the actual calculations
[Page 1587]
1 that we are undertaking. And I'm going to argue that
2 the dollarization method has that contagion. It
3 includes--it introduces the CPI exactly at this
4 point, which is something that I don't do.
5 The final point that I want to do--
6 PRESIDENT FERNÁNDEZ ARMESTO: You must
7 repeat that, because instinctively I would have said
8 that if you calculate the 2018 CPI, it takes into
9 account that, in 1992, inflation was 12,800.
10 THE WITNESS: Of course. Of course it does.
11 But what I'm saying is that the argument of the Perú
12 Report is that, at this point, there is a high
13 distortion, and we are measuring the price of
14 chicken, but everyone is eating duck, or
15 Chinese--"cerdo chino," Chinese pork, which is what
16 we ate in Chile during hyperinflation. And what I'm
17 saying is that this is true here--may be true here; I
18 don't know if it is true--but that is offset by the
19 price controls. But once hyperinflation disappears,
20 the relative prices of all the goods go back to line,
21 and if people did not eat chicken here, they are
22 starting to eat chicken over here. Okay?
[Page 1588]
1 PRESIDENT FERNÁNDEZ ARMESTO: Yeah, but I
2 would assume that what those--the critics of CPI say
3 is that you are adding 12,800, and the real number
4 could have been 11,000, 14,000; that at these levels,
5 the numbers are meaningless, that it could be 12,800,
6 it could be 15,000, and that you are just taking
7 economic data which are humbug, which are irrelevant.
8 50, 52, there is still a difference, but 12,800 or
9 12,900 is a guesstimate. I suppose that that is the
10 criticism.
11 THE WITNESS: No, no, no. That's not the
12 criticism.
13 PRESIDENT FERNÁNDEZ ARMESTO: That's not the
14 criticism?
15 THE WITNESS: No. The criticism is that
16 it's distorted and that relative prices change, and
17 the point is that when relative prices change--so the
18 point is this. Let me go a little bit slowly.
19 So, the CPI is measured by serving prices,
20 and you send an agent, and in the case of Perú it is
21 about 562, and you go and see what is the price of
22 different things. The criticism is that, if you have
[Page 1589]
1 in the basket Nescafé, and if the price of Nescafé
2 during hyperinflation went up by 1,000 percent and
3 the price of tea went up by only 500, people will
4 start drinking tea and not Nescafé. But the index
5 has Nescafé. Okay? That's what they are saying.
6 That's one of the criticisms.
7 And what I'm saying is that inflation moves
8 both prices in hyperinflation--all prices at the same
9 rate. They are all going--sh, sh, sh, sh. Okay.
10 And in the German hyperinflation, of course, which
11 Phil Kagan from Columbia studied very--they went up
12 from the morning to the afternoon and then to the
13 evening.
14 PRESIDENT FERNÁNDEZ ARMESTO: I am
15 interested to see what the court reporter has written
16 by "sh, sh, sh, sh."
17 (Laughter.)
18 THE WITNESS: That's why we are videotaping
19 it; right?
20 So, that's the first one. The second point
21 that it is important is that the basket used becomes
22 updated. As I point out in my Report, it is updated,
[Page 1590]
1 and you don't stay with the same basket.
2 And when inflation is very high, what you do
3 is that you start updating at closer intervals, and
4 you send out your survey go out more often. And in
5 Perú, the basket was updated in '88, it was updated
6 in '89, and it was updated in 1990, and once
7 inflation started to subside, then they started again
8 updating it every five years or every seven years.
9 Okay. So, the Peruvian Institute of
10 Statistics, INEI, they are highly professional people
11 with very highly skilled statisticians, and they
12 understood that what was going on required the basket
13 to be updated. And they did it in '88, '89, and '90.
14 So, I think--and the final point, as I will point out
15 later, is that the Republic of Perú or dollarization
16 method uses the same CPI data.
17 PRESIDENT FERNÁNDEZ ARMESTO: I know.
18 THE WITNESS: And so, you criticize it and
19 then you use it.
20 The next point I want to address is the one
21 also made by the Constitutional Tribunal in its 2013
22 Order, which says that Perú would have difficulties
[Page 1591]
1 servicing the debt if CPI is used, and again, I
2 disagree with that.
3 We were told yesterday and the day before by
4 Vice Minister Sotelo, by Minister Castilla, how Perú
5 is very strong, and Minister Castilla several times
6 repeated that Perú had the lowest Country Risk
7 Premium in Latin America. I was born in Chile. I'm
8 not going to dispute that at this point, but we know
9 that it's a real strong economy, and we also know
10 that the Republic of Perú has very low debt at this
11 point over GDP, one of the lowest in all of Latin
12 America, around 25, 26 percent of GDP.
13 So, what I do in my Report--so this is GDP.
14 The green line is GDP, and--the bar, and the pink bar
15 here is government expenditures. And what I did in
16 my Report is I assumed that there was a valuation for
17 the whole package of bonds that was $12 billion,
18 which is using my valuation for the Gramercy Holdings
19 as about 15 percent, 16 percent, but we don't know
20 exactly, but I used 16 percent. I tend to be on the
21 conservative side.
22 And then I said, well, let's assume that
[Page 1592]
1 using the rates that were prevailing in late 2017,
2 early 2018, Perú were to issue a 30-year Bond to deal
3 with that $12 billion. And what I calculated is that
4 that would require payment every year of around $800
5 to $900 million, which represented less than one-half
6 of 1 percent of GDP, which is totally manageable.
7 Remember that Perú's debt is 25 percent.
8 PRESIDENT FERNÁNDEZ ARMESTO: One second.
9 You're exchanging this Bond dollar for dollar?
10 THE WITNESS: You are exchanging them dollar
11 for dollar at face value, 30-year bonds with a coupon
12 of 6.8 percent.
13 PRESIDENT FERNÁNDEZ ARMESTO: Okay. You are
14 not making any sort of Present Value of the Bond.
15 THE WITNESS: No. No.
16 PRESIDENT FERNÁNDEZ ARMESTO: Just dollar
17 for dollar.
18 THE WITNESS: Yeah.
19 PRESIDENT FERNÁNDEZ ARMESTO: Okay.
20 THE WITNESS: So, now, let me make two
21 additional points here, Professor Armesto.
22 The first one is that Perú, of course, is
[Page 1593]
1 very proud of its economic achievements, which are
2 significant, and we saw that--this is growth in Perú,
3 which, as Mr. Castilla pointed out yesterday, is now
4 one of the fastest of Latin America, probably the
5 fastest of South America, second only to Panamá,
6 which has become the superstar in Latin America.
7 It's a very small country, but a superstar.
8 So, Perú is doing very well, and it is
9 investment grade. So, yesterday when Minister
10 Castilla talked about Moody's, he very proudly said
11 we are investment grade, and investment grade has
12 been granted to us. And Perú has 25 percent or 26,
13 27 percent of GDP as debt.
14 México has about double, a little less than
15 double, 46 percent. It still is Triple B Plus. It
16 still is investment grade. So, there is a lot of
17 room, if you look around the region, for Perú to
18 maintain its solvency, its rating, its reputation,
19 and absorb this debt that would come from the
20 exchange if they were to do that using my valuation.
21 The third point I want to do--to make is a
22 very fast one, which says that updating the Bonds
[Page 1594]
1 from the last clipped coupon, as opposed to from
2 issuance, does not restore the original purchasing
3 power. It doesn't give back to the investor a
4 command over goods and services of a basket that is
5 equivalent.
6 And this is in this graph. What we have is
7 the same Bond we were talking about before, the one I
8 showed the clips on, and I'm thinking of just the
9 principal, not the interest, the 400 divided by 25;
10 right?
11 So, if we update at issuance the payments of
12 the 13th and the 14th or the 15th, every coupon will
13 have the same purchasing power, but if we update only
14 for clipping, given the inflation that we observed in
15 Perú during the life of this particular Bond, by the
16 time we pay the first unclipped coupon, what we would
17 be restoring is almost zero. It is not zero, but in
18 this picture, it's so small that we cannot actually
19 see it.
20 The reason being, that there was a lot of
21 inflation that eroded the value of this Bond. So, if
22 one thinks that "deuda de valor" and the "teoría
[Page 1595]
1 valorista" means that you have to restore the
2 purchasing power of an equivalent basket, that means
3 that if you update since clipping, you're not doing
4 that.
5 So, let me now move to my fourth point on
6 the elements of the 2013 Constitutional Tribunal
7 Order, and what you can see there is that they also
8 say that foregone opportunity should be dealt with
9 U.S. Treasuries, one-year U.S. Treasury, the short
10 Bond or the short bill, and here we have real Rates
11 of Return.
12 And just for illustration purposes for
13 different periods, I have the Treasuries in real
14 terms is less than 1 percent, so this is what we are
15 compensating. This would be, according to the 2013
16 Constitutional Tribunal Order, the compensation for
17 foregone opportunity. This is the return of a
18 passive investment on average in Perú during this
19 period at the 7.22 that I mentioned. This would be
20 the Standard & Poor's in the U.S., and this is
21 capital in Perú during this period. So, we can see
22 that it's a very, very small period.
[Page 1596]
1 PRESIDENT FERNÁNDEZ ARMESTO: Professor,
2 what would be--this is a 25-year Bond. Let me start
3 with the obvious question. There are long-term U.S.
4 Bonds.
5 THE WITNESS: There are long-term Bonds. In
6 the 1990s--so there are 5, 10, 20, 30.
7 PRESIDENT FERNÁNDEZ ARMESTO: Very good. If
8 I take a 20- or this was a 25-year Bond--
9 THE WITNESS: From the top of my head--I
10 would say it would be about 4 percent, but from the
11 top of my head, I--but significantly higher. So what
12 we have--
13 ARBITRATOR DRYMER: I'm sorry, so that the
14 record ends up being clear, that's an answer to what
15 question? That would be the rate on a 30-year--
16 THE WITNESS: U.S. Bond.
17 ARBITRATOR DRYMER: U.S. Bond, right. As of
18 what year? Issued when?
19 THE WITNESS: Well, they are underrun and
20 overrun. So they are 30-year bonds that have one
21 month left and there are 30-year bonds that were
22 issued last week. And when we look at the 30-year
[Page 1597]
1 bonds in the U.S., there is a gap because Treasury
2 Secretary Larry Summers, during the Clinton
3 administration, for a while stopped issuing the long
4 bond.
5 PRESIDENT FERNÁNDEZ ARMESTO: The logic here
6 would be to take the 1985--to assume that the
7 investor, converting the principal into dollars,
8 would have invested into a long-term dollar bond, so
9 it would--is there--let me ask this in a neutral way:
10 Would there be financial logic in looking at the
11 long-term U.S. Bonds at the time of conversion to
12 dollars?
13 THE WITNESS: The answer is complex, and I
14 will give it in parts.
15 The long bond existed, and you could
16 have--someone around the world could have invested in
17 the long bond. The long bond, the 30-year Bond, we
18 can have one that still has 30 years to go and the
19 new one is--so most of time there is a 30-year Bond
20 that is available, except for this gap when they were
21 not issued, so the oldest 30-year Bond then was 29,
22 28, 27, until it got to around 24.
[Page 1598]
1 So, then we could substitute for 20-year
2 bonds; right? So there is a long bond. But that's
3 the first part of your question, first part of my
4 answer.
5 The second part is that there is, of course,
6 a yield curve, which gives you the yield of different
7 bonds or different maturities, and the longer under
8 normal circumstances, not always, but under normal
9 circumstances the long bond has a much higher yield
10 than the short bond. The data, I don't have it from
11 the top of my head, but, of course, it could be found
12 very easily. Two clicks on the computer and we get
13 it.
14 The third point that I want to make, which I
15 think is important, Professor Armesto, is that at the
16 time we were talking, Peruvian nationals could not
17 have done this.
18 PRESIDENT FERNÁNDEZ ARMESTO: Could not
19 have?
20 THE WITNESS: Could not have done this,
21 could not have bought a treasury because there were
22 exchange controls. There were capital controls. And
[Page 1599]
1 there was a parallel market for the exchange rate.
2 So, you receive your Bond for a thousand--1 million
3 soles. Let's assume that you have an uncle that is
4 willing to buy it from you at face value. Now, you
5 have a million soles oro in cash, a beautiful note.
6 You go to the bank and say, I want to buy dollars at
7 38.7, which was the official rate, and they say, you
8 cannot buy dollars, unless you want to buy medicine
9 or you want to--the very short restricted list.
10 Why do you want it? I want to buy Treasury
11 Bonds. They would laugh at you. That's capital
12 flight. It's impossible. You cannot do that. You
13 cannot.
14 So, now if a little old lady that has now a
15 stack of Nuevos Soles wants to actually do this, she
16 would have to change them in the black market--she
17 wants extra pay. They're now in the black
18 market--carry them in her purse to Miami, find a
19 broker in Miami, breaking the Peruvian law because
20 she cannot do that.
21 So, the answer is that it could be done
22 internationally because the Bonds were there. It
[Page 1600]
1 could not be done in Perú.
2 ARBITRATOR STERN: But Gramercy could do it.
3 THE WITNESS: Well, I'm talking about '69
4 to--what would have happened to those who received
5 the Bond at the time they received it.
6 In 1990, President Fujimori is elected. He
7 has a team of economists and a cabinet that reforms
8 the economy, and they go through what is known as the
9 "Fujishock," a team led by Minister Carlos Boloña,
10 which liberalizes the Peruvian economy and transforms
11 this country, which has become very dormant, as it
12 were, and growing very slowly and with a lot of
13 problems with terrorism, hyperinflation into the
14 superstar that it is today.
15 So, everything that--Gramercy could only do
16 this because of the liberalization. So Professor
17 Stern, the point I'm making is that in '69 through
18 '81, when the Agrarian Reform Bonds were issued, that
19 option was not open for a Peruvian national, for
20 anyone in Perú. There were severe exchange and
21 capital controls.
22 When Fujimori came--excuse me, President
[Page 1601]
1 Alberto Fujimori and Minister Carlos Boloña and his
2 team, and Minister Apsara, and the whole group,
3 things started changing and then we had the
4 reborne--the rebirth of the Peruvian economy that
5 Mr. Castilla spoke about yesterday with great pride.
6 Let me now move to MEF Formula, which is a
7 complicated subject, President Armesto. But we have
8 to deal with it.
9 So, the notion here is that there is an
10 alternative, at least on paper, way of updating the
11 Bonds, and that is dollarization. So, let me give
12 you a very brief overall, some very high-up
13 description--of course, you are aware of this--of how
14 dollarization could be done, and I'm going to call
15 this the proper way of doing dollarization.
16 So, you have an instrument that is
17 denominated in soles oro, and you transform it using
18 an exchange rate. I want to be very clear here: I'm
19 saying "an exchange rate," "one exchange rate," which
20 I'm going to call the Parity Exchange Rate, and it's
21 going to play a key role in our conversation, because
22 what you have are soles and which you are
[Page 1602]
1 dollarizing, and you're going to carry the accounting
2 in dollars. You have to transform the soles in
3 dollars. So, you have to divide the amount you have
4 in soles by the exchange rate.
5 And once you have the value in dollars, then
6 you have to separate the clipped from the unclipped.
7 PRESIDENT FERNÁNDEZ ARMESTO: And you have
8 the same discussion we had before whether you use the
9 Parity Exchange Rate at issuance or at the last
10 coupon.
11 THE WITNESS: I'm just telling you what the
12 proper way would be in my view, at issuance.
13 PRESIDENT FERNÁNDEZ ARMESTO: Yeah. But it
14 depends, you could here use--you could use two Parity
15 Exchange Rates.
16 THE WITNESS: We get to that as the MEF does
17 it at different points.
18 PRESIDENT FERNÁNDEZ ARMESTO: Very good.
19 THE WITNESS: So, you use the exchange rate
20 and you separate the clipped and unclipped. You
21 update using a consistent--with the other method
22 using CPI in the United States. Why? Because we now
[Page 1603]
1 have dollars. So you update CPI within the States.
2 PRESIDENT FERNÁNDEZ ARMESTO: No, because
3 this is hard currency, and the inflation is taken
4 care of in the interest rate. You would not--I mean,
5 no, no, no. You would never, in U.S. dollars,
6 revalue using the inflation rate. If we award an
7 amount in dollars valued in 1989, we will add an
8 interest rate that brings you to 2020, but I will not
9 do this type of revaluation, which I would do if I
10 award monies in reales or in México pesos where you
11 first make the indexation and then you add. But in
12 U.S. dollars, this is not the financial practice,
13 Professor.
14 THE WITNESS: Well, you are absolutely
15 right, President Armesto, and you and I are in
16 complete agreement because what comes next is that
17 the interest rate that I use is real. I stripped
18 inflation. I broke down the interest rate into the
19 inflation component, which is here, and the real
20 interest only. Okay? And that is something that you
21 could do.
22 We have in the U.S. the TIPS, as you know,
[Page 1604]
1 Treasury Inflation-Protected Securities, which are
2 treasury securities that provide interest above
3 inflation. So, you're absolutely right, that if I
4 use the nominal interest rate in a dollarization
5 case, I'm taking care of inflation, but if I am using
6 the real interest rate, which I'm stripping
7 inflation, I have to put inflation somewhere, which,
8 in order to compare the two methods, I put it
9 outside. But you and I are in absolute 100 percent,
10 1,000 percent agreement.
11 ARBITRATOR DRYMER: Hyper-agreement.
12 THE WITNESS: Hyper-agreement, right.
13 Now, why do I want to do this and break it
14 up, President Fernández-Armesto, Professor Stern, and
15 Mr. Drymer? It is because the two arrows start at
16 different points. So, once I break it down, the
17 inflation part I'm going to start from issuance date,
18 and the real interest, which is only real, I'm going
19 to start from last clipped coupon. Okay?
20 And once I get here, now I have dollars in
21 my account, but I am in Perú. I have to pay even to
22 anyone, even to Sebastián Edwards from Chile, if I
[Page 1605]
1 come and claim one of these, which I don't own, so I
2 cannot. They would pay me in soles.
3 But accounting is in dollars, so they have
4 to transform it back to pay me. The payment will
5 have to be done in Nuevos Soles.
6 PRESIDENT FERNÁNDEZ ARMESTO: And do you
7 usual the official rate because you now accept that
8 now parity and the official rate is the same?
9 THE WITNESS: We're going to get to that in
10 a minute because there are lots of inconsistencies
11 with that.
12 PRESIDENT FERNÁNDEZ ARMESTO: Okay.
13 THE WITNESS: And I'm going to argue that if
14 you use parity rate, you should use parity rate here.
15 I'm going to make that point, which you are
16 anticipating my presentation.
17 PRESIDENT FERNÁNDEZ ARMESTO: Sorry.
18 THE WITNESS: Okay. So the MEF Formulas
19 don't quite do that. They do something else, as we
20 were just discussing. And I don't want to go through
21 the details.
22 First, the parity rate--let me make a
[Page 1606]
1 general criticism or comment to why I think they are
2 flawed. First, the parity rate that they use is
3 questionable. And I'm going to talk about the--I'm
4 going to talk only about the three--2014,
5 February 2017, and August 2017. So the parity rate--
6 PRESIDENT FERNÁNDEZ ARMESTO: We will need
7 at some stage an education on how economists
8 calculate Parity Exchange Rates. That is also for
9 Mr. Kaczmarek. It is not in--say, in European
10 economies, it is not an economic term which is
11 frequently used, and we would really like to
12 understand what it is about and how it is a standard
13 way of calculating it.
14 THE WITNESS: I will do my best today to do
15 that, and I have written very extensively on the
16 subject. I wrote a lot about it when I was at the
17 IMF, to the point that the Managing Director of the
18 IMF called the President of the World Bank, the two
19 sister, but rival, institutions, and told him
20 exchange rate is part of the IMF work. Tell that guy
21 Edwards to stop writing about exchange rates.
22 So, I was told by Mr. Preston, the
[Page 1607]
1 then-President of the World Bank, stop writing about
2 exchange rates, and I said, but, Mr. President, it's
3 very important. Call it something else, he said,
4 which we did not.
5 So, I will try to explain to you what it is,
6 because it's a complicated point; okay?
7 So this is what the MEF does is that instead
8 of doing--separating and breaking down inflation,
9 U.S. inflation, and the real interest rate, they
10 amalgamate them and they only have one arrow, but
11 that has--if it were only what you said, President
12 Armesto, that you break them down, it would be
13 unimportant. But in doing that, they change the
14 length of the blue arrow. See the blue arrow here is
15 long? Here is short.
16 And here is the exchange rate that the 2014
17 MEF Supreme Decree has, and I'm going to work you
18 through the formulas. I'm going to talk about what
19 the parity rate is in a second.
20 MR. HAMILTON: Excuse me, can we just get an
21 estimate of time? We are at about 50 minutes right
22 now.
[Page 1608]
1 PRESIDENT FERNÁNDEZ ARMESTO: Yeah, I have
2 interrupted also.
3 How long do you have to go, Professor
4 Edwards?
5 THE WITNESS: Well, it depends on how much
6 you want to know about the parity rate.
7 MR. HAMILTON: It depends on the Procedural
8 rules actually.
9 PRESIDENT FERNÁNDEZ ARMESTO: No, I know.
10 Can we agree on the following: Can we give
11 the equivalent time to Expert Kaczmarek, because this
12 is helpful? I mean, this is helpful to the Tribunal.
13 It's going very slowly.
14 THE WITNESS: I can speed up.
15 PRESIDENT FERNÁNDEZ ARMESTO: It's going
16 slowly, but I am making a lot of questions, and it's
17 been helpful.
18 So, let's do a middle term. Let's try to
19 speed up, and I will try to shut up, and so that
20 we--but as much time as you use, Mr. Kaczmarek, whom
21 I see there in the back, you, of course, have exactly
22 the same time.
[Page 1609]
1 MR. HAMILTON: We had reduced time yesterday
2 when we would have liked to use, but we understand.
3 PRESIDENT FERNÁNDEZ ARMESTO: But
4 Mr. Kaczmarek--this is very difficult. I mean, if we
5 don't have the explanation, I'm sure that I will be
6 exactly--as Professor Edwards is educating us, it
7 will be very, highly, highly interest and educational
8 when Mr. Kaczmarek makes his presentation, and to
9 which I look forward.
10 It is not really in the interest of the
11 Tribunal that we shorten this part of the--because
12 it's something which is very difficult for us on our
13 own to work us through this, and it is so much easier
14 if it is explained to us while we can work ourselves
15 through Peruvian law, which at the end is very
16 similar to French law or to Quebecois law. So, let's
17 do both.
18 MR. HAMILTON: We understand your point of
19 view.
20 THE WITNESS: I'm asking for more coffee, if
21 that's okay, Mr. President.
22 PRESIDENT FERNÁNDEZ ARMESTO: Yes, of
[Page 1610]
1 course.
2 THE WITNESS: So, let me try to speed up.
3 This is a 2014 formula, and the point I make in my
4 Report is that there is a gross mistake here. And
5 the mistake is that it ends up saying that any unit
6 in soles oro is equal to some unit in soles oro
7 squared.
8 The first thing that we learn about
9 arithmetics is that if you have inequality, the units
10 have to be the same on the same side. There's a
11 saying, you cannot compare pears to apples.
12 This is the MEF 2015 exchange rate, the
13 green one. This is the parity rate calculated if you
14 use that rate. The blue line is the official
15 exchange rate, and the red line is the Parity
16 Exchange Rate that I calculate.
17 And, as you can see, Members of the
18 Tribunal, the green line is always higher--this is
19 algorithmic scale, so not only higher, a lot higher,
20 than the official and the other parity rate.
21 Remember, that to produce initial value that
22 we are going to be updating through time, we divide
[Page 1611]
1 the value in Nuevos Soles by the parity rate.
2 PRESIDENT FERNÁNDEZ ARMESTO: The higher the
3 parity rate, the lowest dollars you obtain.
4 THE WITNESS: The lowest dollars you obtain.
5 So, let me give you a brief example. In
6 1969, the official rate was, if I remember correctly,
7 38.7 soles oro per dollar. Let's round it to 40.
8 The parity rate in the Supreme Decree of
9 2014 is 1,000, 40 to 1,000. So, if you get a
10 million--a bond with a face value of a million Nuevo
11 Soles, at the official rate you said I got $25,000.
12 At this rate you got $4. So--excuse me, 2.5--$4.
13 So, we are reducing it to 1/25th, not to 1/4th, not
14 to 1/10th, 1/25th. We transform $25,000 into $1,000.
15 So, it is an order of magnitude.
16 And the second point, members of the
17 Tribunal, that I want to make is that the parity rate
18 at the end here it's much higher than the official
19 rate. So, this formula expropriated for a second
20 time the Bondholders, hereby transforming the value
21 of soles into dollars at a very high rate. But when
22 it came to pay back in soles, instead of
[Page 1612]
1 using--because now everything is carried in the
2 accounts in dollars.
3 Instead of using this exchange rate, which
4 is, I think, 18 trillion or quadrillions or
5 quintillions--I don't know. They use 3.5. So, it's
6 expropriating here, it's expropriating here. There
7 are mistakes. So, this is the 2014, and I'm moving
8 quickly.
9 The February 2017 tried to be a precision or
10 a clarification, and it made things more complicated
11 because it was very cryptic, and the cryptic aspect
12 of it is that the CPI Index should be expressed in
13 soles oro. That's what the proposal said. And as we
14 said earlier the CPI Index is an index, it is 100,
15 110, so it cannot be expressed in any currency.
16 Now, one could try to interpret that in many
17 different ways, and when I try to do that, just for
18 illustrative purposes, you can see that there
19 are--and I have them in my Report--many different
20 interpretations that go from as little as 5 million
21 to 2.6 billion. And when you have this kind of
22 disparity, you are, or you suspect that there is
[Page 1613]
1 something wrong, and that means that, instead of
2 clarifying, it muddled the water even more.
3 And that brings us now--and now I'm moving
4 very fast to 2017. In 2017, August, it's a
5 completely different rate than before--
6 PRESIDENT FERNÁNDEZ ARMESTO: A completely
7 different?
8 THE WITNESS: Different rate, different
9 system, a different approach. Instead of issuing a
10 clarification or saying, our formula, it really
11 should be interpreted this way, either one that can,
12 they--it's a completely different one, which they
13 obtain by asking the Central Bank to produce a real
14 exchange rate since 1969. And we have--
15 PRESIDENT FERNÁNDEZ ARMESTO: A real or a
16 parity?
17 THE WITNESS: They asked for a real from
18 which they can get the parity. And so, the Central
19 Bank--so, we have the letter from Minister Thorne,
20 one of the lawyers called him yesterday "Thorne."
21 His name is Thorne--they pronounce it Alfredo
22 Thorne--to Julio Velarde, who is the governor of the
[Page 1614]
1 Central Bank asking for that, and we have the Reply
2 when the Central Bank writes back, and what the
3 Central Bank produces and what you can find in their
4 website is the real exchange rate but not the parity
5 rate.
6 But the Supreme Decree provides the equation
7 to get the rate, and you can get all those data from
8 the website. And what is remarkable, this--and now
9 we are going to talk about the--what the parity rate
10 really is, Mr. President. I would hope it is not
11 very long--that it uses one month as the base,
12 January of 1969.
13 Without explanation why it was used, without
14 explanation why it made sense, but it determines in a
15 very important way what kind of real exchange rates
16 you use. And if you use the--and what kind of parity
17 rate you get. And if this number is very big, the
18 parity rate that you get is going to be very big.
19 The parity rate is big, since it counts into the
20 nominator to calculate the original or initial value
21 of the claim, it becomes too small. So, let's go--
22 PRESIDENT FERNÁNDEZ ARMESTO: Because--let
[Page 1615]
1 me understand. And this is on my time. When you
2 calculate a Parity Exchange Rate, you take a basis,
3 some real exchange rate which you deem to be a fair
4 real exchange rate, and then you update that with the
5 CPIs of the Perú and the United States. Is that how
6 you do it?
7 THE WITNESS: That's almost 100 percent.
8 PRESIDENT FERNÁNDEZ ARMESTO: Okay. So, you
9 give me a C grade.
10 THE WITNESS: No. No. A. A. You get an
11 A, but not an A+ yet.
12 PRESIDENT FERNÁNDEZ ARMESTO: Okay.
13 THE WITNESS: So, let me tell you what the
14 parity rate is. It's an old concept, and I am not
15 surprised that it is not used that often in Europe,
16 only in academic circles, maybe, and the reason for
17 that is that in Europe, the official rate is
18 considered to be a parity. It moves and it doesn't
19 deviate from parity very significantly.
20 The notion of the--why does the parity rate
21 come about? It's because there is a notion that
22 official rates, at times, especially in emerging
[Page 1616]
1 markets, are out of line with exactly what you said,
2 equilibrium. So, the parity--the Purchasing Power
3 Parity Theory says what we have to do is find the
4 value of the real exchange rate, which is the
5 exchange rate that drives international trade.
6 It's the one that drives exports and
7 imports, is the one that drives--so, when the real
8 exchange rate was in equilibrium, and in a
9 sustainable long-term equilibrium, we find that
10 period and we fix that period, which I'm going argue
11 that has to be multi-years because of fluctuation,
12 you say that is my equilibrium, Fair Value, balance
13 value, tranquility.
14 The country is moving at what economists
15 call at a "steady state." And then you say what we
16 need to do is, for the rest of the period, find
17 nominal exchange rates in every period that would
18 render the real exchange rate of that period equal to
19 that equilibrium. And this is where we come to this
20 adjust--what you said, Mr. President, you adjust by
21 the two inflation.
22 But the first step is to determine what is
[Page 1617]
1 the equilibrium period, and using January of 1969 is,
2 first of all, it is wrong to use one month. You want
3 equilibrium, and equilibrium from month to month,
4 things move around. This also 1969, it's three
5 months after the October 1968 coup where Perú was in
6 turmoil. It is when they were going through
7 significant structural and political changes. There
8 was no Legislative Power in the way that we
9 understand it.
10 Parliament had been closed. The military
11 were in charge. They were undertaking very deep
12 reforms, Quechua was about to become a co-official
13 language in the country, which is a marvelous thing,
14 but what I'm trying to illustrate is it's not a
15 period of tranquility and of balance. And the--there
16 were exchange controls. There were capital controls.
17 There were black markets for currency. So, under no
18 circumstance would you use that period as the base.
19 Now, why did they use the base? I don't
20 know. One explanation, which I don't want to presume
21 that there was here bad faith, one explanation is
22 that when Minister Thorne writes to Velarde and asks
[Page 1618]
1 him from '69, the technicians at the Central Bank
2 just say, well, January '69, let's put in 100. And
3 it carried on.
4 It was just carried on without thinking,
5 without reflecting, and what I'm going to argue is
6 that that is a mistake, and that what one should
7 really look at is a long period of time of
8 tranquility, a long period of time of progress, of
9 moving towards prosperity, no capital controls, the
10 balance of payments not out of whack, and that's why
11 I use in my Report 1999 to 2015, or '16, I forget
12 exactly when it is.
13 And I take a long average when, as you saw
14 in my previous graph here, the market. So, now here
15 I say Perú is becoming like maybe like Portugal, like
16 a normal European country, and the parity rate is not
17 deviating a lot from the official rate.
18 PRESIDENT FERNÁNDEZ ARMESTO: And you are
19 then working backwards.
20 THE WITNESS: So, now I--this is my parity
21 rate is around here, and then I have to find out what
22 is the nominal rate that will satisfy the parity
[Page 1619]
1 rate, the real exchange rate would be equal to the
2 parity rate. That's the procedure that we use in
3 this process. Okay.
4 PRESIDENT FERNÁNDEZ ARMESTO: And you work
5 back on the basis of inflation, of comparing
6 inflation.
7 (Overlapping speakers.)
8 THE WITNESS: On the basis of inflation.
9 So, this is a point where we can go back to something
10 I said earlier, and I tried to be very brief,
11 President Armesto, two things. This is a clipping of
12 the methodological note, "nota metodológica," that
13 the Central Bank sent back to the Ministry when they
14 did this calculation, and they made the point, which
15 cannot be read here because it is very blurred, but
16 they made the point the parity rate depends on the
17 base you use.
18 So, they are completely aware of it, and
19 they say, careful, we are giving you this base, but
20 if you change the base, these things are going to
21 change. And there is no comment on where that's a
22 right base or not.
[Page 1620]
1 But here is what the formula, the 2017
2 Formula does, and here is the "value hoy," the value
3 today of the claim of the--so, it's the original sol
4 oro, divided by the parity rate, and then this is the
5 interest adjustment, and tipo "de cambio hoy," and
6 I'm arguing that if you use a parity rate, you have
7 to make sure that it is true that your parity rate is
8 giving you that tipo "de cambio hoy," official market
9 is the parity.
10 If not, you have to use parity on both ends;
11 right? It's only logical. And here we have, then,
12 the tipo "de cambio de Paridad," which enters here in
13 the denominator, and what you can see--and I'm going
14 to skip the details, we can go through them after I
15 finish, if you want, is that the IPC Perú enters
16 here, and this is, Members of the Tribunal, very
17 important.
18 This is the CPI in Perú from the year of
19 issuance, relative to January of 1969. So--excuse
20 me, last clipped coupon. So, the last clipped coupon
21 was in 1989, we are contaminating straight the
22 equation with that spike of 12,000 percent. We
[Page 1621]
1 haven't allowed the system to go back into
2 equilibrium.
3 We haven't allowed the price of chicken,
4 duck, and geese to go back to the regular prices if
5 they did ever get out of line. So, this is an
6 additional problem that this system has.
7 PRESIDENT FERNÁNDEZ ARMESTO: But let me
8 understand this. If I do a dollarization, if I make
9 a revaluation of a historic amount, using
10 dollarization at parity exchange, through the formula
11 for calculating the parity exchange, the CPI will
12 always creep in.
13 THE WITNESS: Always creep in.
14 PRESIDENT FERNÁNDEZ ARMESTO: Because it is
15 in the very definition of how you calculate a parity
16 rate.
17 THE WITNESS: Parity rate. Yes.
18 PRESIDENT FERNÁNDEZ ARMESTO: There is no
19 other way of calculating a parity rate except
20 through--
21 THE WITNESS: There are other ways.
22 PRESIDENT FERNÁNDEZ ARMESTO: Okay.
[Page 1622]
1 THE WITNESS: I wrote a whole book. And it
2 may be famous.
3 PRESIDENT FERNÁNDEZ ARMESTO: Okay.
4 THE WITNESS: But it's--
5 PRESIDENT FERNÁNDEZ ARMESTO: It's the
6 standard way of doing that.
7 THE WITNESS: No. It is a way of doing it.
8 It's a simple way of doing it. It is easy to
9 understand. The other ones require modeling at a
10 level that it's a little more complicated, and as I
11 said, I published a whole book, MIT Press in 1989,
12 where I go through that process. But the parity
13 rate, if you'd use parity rate, there is no way to
14 get rid of the CPI creeping in. All right.
15 So, I'm about to finish now.
16 PRESIDENT FERNÁNDEZ ARMESTO: Yeah, please.
17 THE WITNESS: I'm moving pretty fast.
18 PRESIDENT FERNÁNDEZ ARMESTO: And that
19 was--you must put that on the Tribunal's time. Yes.
20 THE WITNESS: So, let me go back to--so, I
21 argue in my Report, and I argued in the--in my
22 testimony here now that the dollarization system used
[Page 1623]
1 by the Supreme Decree of August of 2017 is flawed for
2 a number of reasons, but I think that, if one wants
3 to stay within that framework and wants to produce a
4 better system that stays within the framework, there
5 are several aspects where one can work and try to
6 improve.
7 After all, we economists, our job and what
8 we teach students of economics is, is optimizing,
9 subject to constraints, legal constraints,
10 environmental constraints, cultural constraints. So,
11 if one wants to stay within this framework, we can
12 make things much better by using a parity rate that
13 makes sense, not an arbitrary 1969 rate, and I argue
14 that the rate that I use is one that makes sense.
15 We can add compensatory interest if we think
16 that the interest rate that is used, the Treasury
17 bill, it's for one year. It is only a proxy for
18 inflation. And we can use a Parity Exchange Rate on
19 the back end, at the end, unless we prove that our
20 parity rate is equal to, at the back end, is equal to
21 the market rate. So, there are ways of improving,
22 and here I am proposing three ways that we can do it
[Page 1624]
1 if one stays within the framework.
2 Let me now move, finally, as you'll see I'm
3 coming to an end, to the Fair Market Value
4 discussion, and what I'm going to argue is that, of
5 course, Fair Market Value is different from Full
6 Updated Value.
7 Full Updated Value is the intrinsic value of
8 these obligations in case that the adjustment was
9 made according to best practices in the economics
10 profession, and that means adjusting by loss of
11 purchasing power in order to provide the right type
12 of command over goods and services, or an equivalent
13 basket, and providing a compensatory interest that
14 takes into care the foregone opportunity.
15 And I argue that the foregone opportunity is
16 the average opportunity.
17 Now, Fair Market Value is intrinsic value
18 adjusted by a number of risks, the most important of
19 which is probably nonpayment risk. And I think that
20 it's important to understand that, for illiquid
21 assets, the first step to do Fair Market Value is to
22 have inherent value, intrinsic value, which is what I
[Page 1625]
1 do in my Report.
2 So, I think now that we're going into
3 confidential mode. I'm going to show some data that
4 was already shown in the confidential mode.
5 (End of open session. Attorneys'
6 Eyes Only information follows.)
[Page 1626]
CONFIDENTIAL SESSION
[Redacted]
[Page 1627]
[Redacted]
[Page 1628]
[Redacted]
(End of Attorneys' Eyes Only session.)
[Page 1629]
OPEN SESSION
2 THE WITNESS: So, let me now conclude very
3 quickly, Members of the Tribunal. The four points
4 that I want to make, current value has an objective
5 meaning and can be calculated easily and reliably by
6 using CPI and using an estimate of foregone
7 opportunity, which I take to be the average
8 opportunities open to the average Peruvian citizen
9 during this period in a conservative way, because I
10 assume that they are acting in as passive investors.
11 There are a number of flaws in the July 2013
12 Constitutional Tribunal Order, which I explain in
13 four different issues, and it lacks economic
14 rationale.
15 The MEF Formulas are arbitrary,
16 contradictory--soles cannot be equal to soles square,
17 they produce this incredibly large--when the nominal
18 rate was 38, the parity rate is 1,000, and then, of
19 course, destroys the value of the claim, and when
20 properly calculated, the updated value of the Land
21 Bonds in my--as I point out in my Report was
22 $1.8 billion.
[Page 1630]
1 So, I want to thank the Tribunal for their
2 patience. I want to thank Dr. Hamilton for his
3 patience, and I thank you so much.
4 PRESIDENT FERNÁNDEZ ARMESTO: Thank you,
5 Professor. Let us get a time check, so we know
6 exactly where we stand. How long has the Professor
7 really--
8 SECRETARY PLANELLS-VALERO: One hour.
9 PRESIDENT FERNÁNDEZ ARMESTO: One hour.
10 SECRETARY PLANELLS-VALERO: And the Tribunal
11 asked questions for 20 minutes.
12 PRESIDENT FERNÁNDEZ ARMESTO: Okay. So,
13 Mr. Kaczmarek, you can adjust and I'm happy--I'm sure
14 you're happy to hear that you have one hour to
15 present your case.
16 We will now break for--it's now--what it is
17 now--
18 MR. HAMILTON: We are ready to continue.
19 PRESIDENT FERNÁNDEZ ARMESTO: Not me. I
20 need a break.
21 MR. HAMILTON: Okay.
22 PRESIDENT FERNÁNDEZ ARMESTO: It's now
[Page 1631]
1 10:40--no, 10:34--let's come back at 10:45.
2 You know the Rules, and please--
3 THE WITNESS: I know the Rules, yeah.
4 PRESIDENT FERNÁNDEZ ARMESTO: And I know
5 that counsel knows the rule. Thank you.
6 (Brief recess.)
7 PRESIDENT FERNÁNDEZ ARMESTO: We resume the
8 Hearing, and I give now the floor to Mr. Hamilton.
9 And take your time, Mr. Hamilton. It has
10 been a long deposition. Take your time and I will
11 not press you at all on time issues.
12 (Comments off the record.)
13 PRESIDENT FERNÁNDEZ ARMESTO: You have the
14 floor.
15 MR. HAMILTON: Thank you very much. We've
16 coordinated over the break, and Mr. Llano is going to
17 handle the questions now.
18 PRESIDENT FERNÁNDEZ ARMESTO: Oh, very good.
19 CROSS-EXAMINATION
20 BY MR. LLANO:
21 Q. Good morning, Mr. Edwards.
22 How are you?
[Page 1632]
1 It's a pleasure, sir. We haven't dealt with
2 each other before; right?
3 A. That is correct.
4 Q. Let's pass out the binders, if we can.
5 Mr. Edwards, in the meantime, you mentioned
6 you're a Chilean citizen, or national, sorry--
7 A. By birth.
8 Q. --at least?
9 A. Yeah. I have a dual passport, yes.
10 Q. Right. So, I have a very important
11 threshold question for you, which I hope you can
12 clarify, and we are, of course, in a case against the
13 Government of Perú, so my question is: Pisco is
14 Peruvian; correct?
15 A. Yes.
16 Q. Good.
17 (Comments off the record.)
18 BY MR. LLANO:
19 Q. Okay. Let's talk economics, sir.
20 A. Yes, sir.
21 Q. In this arbitration, Gramercy is seeking
22 relief with respect to its holdings in some 9600 Land
[Page 1633]
1 Bonds; correct?
2 A. Yes.
3 Q. And those Bonds do not all have the same
4 issuance date; correct?
5 A. Yes.
6 Q. They were issued on different dates to
7 different Bondholders; right?
8 A. Yes.
9 Q. And in the case of the Gramercy-held Bonds,
10 they have dates ranging from 1970 to 1981; correct?
11 A. Yes.
12 Q. And about 94 percent of these Bonds were
13 issued between 1970 and 1976. Does that sound about
14 right?
15 A. Yes.
16 Q. And these Bonds were issued as compensation
17 for the expropriation of lands; correct?
18 A. Yes.
19 Q. But the Bonds themselves do not indicate on
20 their face when the expropriation took place;
21 correct?
22 A. Yes.
[Page 1634]
1 Q. So, in your Reports, when you calculate, for
2 example, inflation as of the date of issuance, that
3 date may not necessarily coincide with the date of
4 the expropriation; correct?
5 A. It may not coincide, but my understanding is
6 that each expropriation required a Supreme Decree and
7 that the Bonds were handled to the landowners, or
8 then land--former landowners at the time the Supreme
9 Decree of expropriation was signed.
10 PRESIDENT FERNÁNDEZ ARMESTO: Sorry. Can
11 we--because it was--I was looking at the Transcript,
12 and it is also not clear in the Transcript. These
13 are important dates. The Bonds were issued between?
14 BY MR. LLANO:
15 Q. My question--my prior question was that
16 94 percent--around 94 percent of the Gramercy-held
17 Bonds were issue between 1970 and 1976.
18 PRESIDENT FERNÁNDEZ ARMESTO: 1970--
19 MR. LLANO: And 1976.
20 PRESIDENT FERNÁNDEZ ARMESTO: So, that's the
21 bulk, that is 96 percent.
22 MR. LLANO: Yes.
[Page 1635]
1 PRESIDENT FERNÁNDEZ ARMESTO: Or 94 percent.
2 MR. LLANO: 94 percent. And that, of
3 course, is Tranche 1--right?--just to be clear?
4 PRESIDENT FERNÁNDEZ ARMESTO: Yeah, of
5 course. Of course.
6 MR. LLANO: Tranche 1.
7 PRESIDENT FERNÁNDEZ ARMESTO: This is the
8 only one we really know some details.
9 MR. LLANO: That's right. For now.
10 PRESIDENT FERNÁNDEZ ARMESTO: And can you
11 give us the dates when the last coupon--of the last
12 coupon so that we see the difference between issuance
13 date and the dates of last--when the last coupon was
14 clipped.
15 MR. LLANO: I don't have that.
16 PRESIDENT FERNÁNDEZ ARMESTO: You don't have
17 it. You did not refer to it now?
18 MR. LLANO: I did not refer to that--
19 PRESIDENT FERNÁNDEZ ARMESTO: Okay. Thank
20 you.
21 BY MR. LLANO:
22 Q. So, Mr. Edwards, you do not list, for
[Page 1636]
1 example, in your Report the specific tracts of land
2 that were expropriated; correct?
3 A. Correct.
4 Q. Nor do you put a monetary value on those
5 lands; correct?
6 A. Correct.
7 Q. Nor did you attempt to establish whether the
8 Bonds at issue in this Arbitration were fair
9 compensation against the Actual Value of those lands;
10 correct?
11 A. I did not attempt to do that, no.
12 Q. Right. So, it is irrelevant for purposes of
13 your assignment whether the value of the Bonds
14 reflects now or ever reflected the value of the
15 expropriated lands; correct?
16 A. I don't know if it's irrelevant, but I did
17 not attempt to estimate the value of the land.
18 Q. Okay. And Gramercy, of course, does not
19 suggest that it was one of the expropriated Peruvian
20 landowners from the 1960s and 1970s; correct?
21 A. Correct.
22 Q. Now, there were three classes of Land Bonds;
[Page 1637]
1 right?
2 A. Yes.
3 Q. A, B, and C, yes?
4 A. Yes.
5 Q. And each class had a different coupon rate
6 and term; right?
7 A. Correct.
8 Q. They had 6, 5, and 4 percent coupon rates
9 respectively; correct?
10 A. Yes.
11 Q. And terms of 20, 25, and 30 years
12 respectively; right?
13 A. Yes.
14 Q. And according to your Reports, Gramercy, in
15 its Tranche 1 holding, holds Bonds in each of these
16 classes: A, B, and C.
17 Right?
18 A. Right.
19 Q. Now, it's also correct, is it not, that
20 about 87 percent of the Gramercy-held Bonds in
21 Tranche 1 were Class B?
22 A. Yes.
[Page 1638]
1 Q. And for the record, again, this is the
2 class, Class B with a 5 percent coupon rate and a
3 25-year term; correct?
4 A. Correct.
5 Q. Okay. Now, coupon payments included both
6 portions of principal and interest; is that right?
7 A. Right.
8 Q. And I think you testified to that in the
9 direct presentation; right?
10 A. Yes.
11 Q. Now, the coupons were redeemable on a yearly
12 basis; right?
13 A. Right.
14 Q. The coupons could not be redeemed before
15 their respective maturity date; right?
16 A. That's my understanding.
17 Q. Right. So, if a Bondholder sought to redeem
18 a coupon before its maturity, the State had no
19 obligation to make payment on that particular coupon;
20 right?
21 A. That's my understanding, yes.
22 Q. And some of the coupons in the Gramercy-held
[Page 1639]
1 Bonds--again, we're talking about Tranche 1--were
2 redeemed or clipped; right?
3 A. Right.
4 Q. And for the record, I think this is just a
5 statistical piece of information, but out of the
6 96--I'm sorry 9,656 Gramercy Land Bonds in Tranche 1,
7 2,653 are Bonds with fully unclipped coupons.
8 Does that sound about right?
9 A. That sounds about right.
10 Q. So, that's about 27 percent of the total
11 Bonds in Tranche 1.
12 A. Sounds about right.
13 Q. Good.
14 Now, clipped coupons are the coupons that
15 were redeemed by the former Bondholders; correct?
16 PRESIDENT FERNÁNDEZ ARMESTO: Can you be
17 slow, slightly slower.
18 MR. LLANO: Okay.
19 PRESIDENT FERNÁNDEZ ARMESTO: I am not even
20 able to make notes.
21 MR. LLANO: I'm sorry.
22 PRESIDENT FERNÁNDEZ ARMESTO: If you don't
[Page 1640]
1 mind.
2 MR. LLANO: Yes.
3 PRESIDENT FERNÁNDEZ ARMESTO: A little bit
4 of pause between question, and I take note of all the
5 data you are giving. Thank you.
6 THE WITNESS: Yes.
7 BY MR. LLANO:
8 Q. Okay. Good.
9 Now, Gramercy is not making a claim in
10 respect of the clipped or lost coupons, for example;
11 right?
12 A. Right.
13 Q. Are there any claims that you are aware of
14 by any other Bondholders, Bondholders other than
15 Gramercy in connection with clipped coupons, sir,
16 that you know of?
17 A. I don't know of any.
18 Q. Sure.
19 Now, during the 1970s and particularly in
20 the 1980s, there was severe inflation in Perú;
21 correct?
22 A. Correct.
[Page 1641]
1 Q. And that became hyperinflation in the late
2 1980s; correct?
3 A. Correct.
4 Q. And the Land Bonds did not contain an
5 explicit textual adjustment for inflation such as a
6 reference to an inflation index; correct?
7 A. Correct.
8 Q. The Bonds also did not contain a textual
9 acceleration clause; right?
10 A. Right.
11 Q. And so, in the 1980s, the value of the
12 Bonds, the Land Bonds, plummeted; right?
13 A. The nominal value plummeted.
14 Q. Sure. And they became virtually worthless
15 as the Peruvian currency lost value; correct?
16 A. In nominal terms, they became virtually
17 worthless, not zero, but very low nominal value.
18 Q. You do say in your Report that the Bonds
19 became virtually worthless as the Peruvian currency
20 lost value; isn't that right?
21 A. In terms of nominal value, they became
22 virtually worthless, yes.
[Page 1642]
1 Q. Sure.
2 And many Bondholders during that time simply
3 stopped redeeming coupons; correct?
4 A. That's what it seems if you look at the
5 Bonds, yes.
6 Q. In fact, many Bondholders stopped redeeming
7 coupons since around the mid-1980s; right?
8 A. I don't have off the top of my head the
9 exact date, but that sounds about right.
10 Q. And you will agree that a decision by a
11 Bondholder to not redeem a coupon for whatever reason
12 is not the same thing as the Peruvian State refusing
13 to pay on that coupon; correct?
14 A. Yes.
15 Q. And ultimately, in May of 1992, Perú shut
16 down the Agrarian Bank which was the entity in charge
17 of making payments on the Land Bonds; correct?
18 A. Yes. Banco Desarrollo de Agropecuario, yes.
19 Q. That's the Spanish name. The Banco
20 Desarrollo de Agropecuario; correct?
21 A. Si, Señor.
22 Q. I'm Paraguayan, you're Chilean; we're doing
[Page 1643]
1 this in English.
2 Now, you don't state in your Report how much
3 Perú would have needed to pay out in May of 1992 to
4 redeem the Gramercy Bonds in Tranche 1; correct?
5 A. Correct.
6 Q. Do you agree, disagree, or have no comments
7 on Mr. Kaczmarek's and Ms. Kunsman's calculation that
8 the Gramercy Bonds were worth 48 cents of one U.S.
9 dollar in May 1992?
10 A. I think that it's important to separate the
11 nominal value from the intrinsic value, and the
12 intrinsic value is--they are different. So, the
13 nominal value, as I point out, became very low. The
14 Vice Minister said it is less than one centavo. So,
15 I didn't do the calculation, but I think it's--I take
16 it at face value at 48 cents--
17 Q. I'm sorry.
18 A. I take it at face value the number you read.
19 Q. 48 cents?
20 A. Yeah. In nominal terms.
21 Q. And that's for all of the Gramercy-held
22 Bonds in Tranche 1; right?
[Page 1644]
1 A. I didn't do that calculation, but, again, I
2 read it in the Report.
3 Q. It sounds right?
4 A. More or less, yes. More or less.
5 (Overlapping interpretation and speakers.)
6 Q. I said you mentioned intrinsic value, and we
7 will come back to that.
8 Now, Perú, in 1992, could have paid off all
9 of the Gramercy held Bonds with less than $1;
10 correct?
11 A. I don't know. It's--I mean, I don't know.
12 Q. You just accepted my representation, or,
13 rather, Mr. Kaczmarek's and Ms. Kunsman's
14 representation, that the value, the nominal value of
15 those Bonds in 1992 was 48 cents.
16 So, my question is: In 1992, a Peruvian
17 official could have come over to the houses of these
18 individual Bondholders and paid it off with 48 cents,
19 all of the Gramercy-held Bonds in Tranche 1; correct?
20 A. I'm going to stand by my answer, Mr. Llano.
21 I don't know. I'm not a lawyer. It is logical that
[Page 1645]
1 if they had tried to do that, they would have
2 encountered a legal pushback. So, that was the value
3 in the books, I assume, before the records of a
4 State-owned bank were destroyed apparently. But what
5 I'm saying is that I don't know if they could have
6 paid at that point if the payment would have been
7 accepted. That, I cannot tell.
8 Q. You're not saying that there was a Tribunal,
9 Constitutional Tribunal Decision in 1992 ordering a
10 revaluing of these Bonds; correct?
11 A. I'm not saying that, no.
12 Q. Right. And so, in 1992, in the absence of
13 any such Decision, Perú could have paid off all of
14 the Gramercy-held Bonds in Tranche 1 with 48 cents;
15 correct? It's a simple question.
16 A. No. I think that there is a legal aspect in
17 that question, and I'm not a lawyer.
18 Q. All right. From an economic standpoint, not
19 legal, you will agree that an inflation adjustment
20 like CPI or any other method doesn't add value to an
21 asset. It just prevents value from being eroded;
22 correct?
[Page 1646]
1 A. Correct.
2 Q. Now, Mr. Edwards, just to be clear on your
3 overall position, you're saying that Bonds that were
4 worth less than $1 in 1992 are now worth
5 $1.8 billion; is that correct?
6 A. I think that you are conflating here
7 different values. You are taking the nominal value
8 in 1992 and comparing that to my calculation of
9 intrinsic value in 2018, but there is also an
10 intrinsic value using my method in 1992. You can use
11 my method to any date, and if you use my method to
12 value the Bonds in 1969, one month after they
13 were--the first batch was issued, you will get the
14 face value.
15 Q. Right.
16 A. And if you started moving along, and for the
17 clipped coupons, you will get zero, for the clipped
18 Bond--with all the Bonds clipped. But in 1992, or
19 1988, for that matter, there was an intrinsic value
20 which you can get through my method.
21 So, I think that the right comparison would
22 be my method in 1992 to my method in 2018.
[Page 1647]
1 Q. And, of course, you were not available in
2 1992 to do that exercise for the Bondholders that
3 existed at the time; correct?
4 A. I was available, but they didn't ask me.
5 Q. They didn't ask you. That's good.
6 All right. So, in fact, you say in your
7 Report--Reports, plural--that you have been
8 conservative in coming up with that $1.8 billion
9 figure; correct? You said it this morning as well;
10 right?
11 A. I made an effort to err on the conservative
12 side, and, again, as I pointed out this morning, the
13 principle there in economic valuation of
14 macroeconomics is that, if you want to err, you want
15 to err in every step on the same side because you
16 don't want--the items--you are conservative on one,
17 you are not conservative on the other. You don't
18 even know what it adds up. So, I made an effort,
19 every time I had a doubt, to be conservative.
20 Q. So, in your view, a nonconservative number
21 would be much higher than the $1.8 billion figure
22 that you come up with; right?
[Page 1648]
1 A. Yes.
2 Q. Now, Mr. Edwards, you mentioned in your
3 direct testimony that obligations for clipped coupons
4 are extinguished. I think you used the word
5 "extinguished"; correct?
6 A. I may have. Yeah.
7 Q. Right.
8 A. But let's see where we go. I may have to
9 look back, but let's proceed, yeah.
10 Q. All right. Just--apologies for this. I
11 should have asked in the beginning, but you are, of
12 course, compensated for your services as part of this
13 arbitration; correct?
14 A. Yes.
15 Q. And is your compensation linked in any way
16 to the outcome of the dispute?
17 A. No.
18 Q. You perform consulting services in Perú; is
19 that right?
20 A. No.
21 Q. You don't consult for other clients in Perú?
22 A. No. I have given speeches, speaking
[Page 1649]
1 engagements, which is different from consulting. I
2 have addressed groups of industry, academic groups,
3 but consulting in Perú, I have not done.
4 Q. Private companies?
5 A. No.
6 Q. Have you or are you currently advising other
7 Land Bondholders in Perú or outside the Perú?
8 A. No.
9 Q. And you're not getting paid with Land Bonds,
10 I take it.
11 A. No.
12 Ω. That would be a great retirement strategy,
13 by the way, wouldn't it?
14 (Comments off microphone.)
15 Q. Apparently. I can download this off of eBay
16 for 49 cents in 1992, if it existed, and get
17 $1.8 billion 25 years later; correct?
18 A. I have no opinion on what you just said.
19 Q. Fair enough.
20 Now, you understand that Gramercy purchased
21 the Bondholders at issue in this arbitration in 2006
22 and 2008; correct?
[Page 1650]
1 A. Yes.
2 Q. And the actual Gramercy entity that made
3 those purchases is Gramercy Perú Holdings LLC;
4 correct?
5 A. Yes.
6 Q. Now, you don't mention, for the record, in
7 your Reports where the money to purchase the Bonds
8 came from; correct?
9 A. Yes.
10 Q. You don't; right?
11 A. "Yes" means correct, yeah.
12 Q. Okay.
13 You don't mention, for example, whether
14 those funds were raised by Gramercy from third-party
15 investors prior to the purchase; correct?
16 A. Correct.
17 Q. And you don't know or you have not stated in
18 your Reports whether Gramercy Perú Holdings was
19 acting as a mere pass-through for those funds;
20 correct?
21 A. Correct.
22 Q. But you do know how much Gramercy paid to
[Page 1651]
1 the sellers for the purchase of the Land Bonds;
2 correct? You mentioned it in one of your slides this
3 morning; right?
4 A. Yes.
5 Ω. And that was about 33.2 million; correct?
6 A. Correct.
7 Q. Now, you did not include this amount in any
8 of your three Reports; correct?
9 A. I'm not 100 percent sure, but probably I did
10 not.
11 Q. Right. And you did not see the actual
12 purchase contracts behind that number; correct?
13 A. Correct.
14 Q. Now, I want to take you to that slide. It
15 was--oh, I'm sorry, let's do this in a minute because
16 it's confidential information, so let's table that
17 for a moment.
18 In your Reports, you do not reference any
19 contemporaneous evidence of Gramercy's due diligence
20 prior to the acquisition of its Land Bonds; correct?
21 A. Prior to the acquisition, no.
22 Q. Right. Did you ask Gramercy or their
[Page 1652]
1 counsel for such due diligence documents and were
2 rebuffed, or did you not even ask for such documents?
3 A. I asked for photographs of some of the
4 Bonds. I--the first thing I wanted to do was to see
5 the Bonds. So I Googled "bonos reforma agraria
6 Perú," which I'm sure you've done too, and there's a
7 little old lady holding a bond in her hands.
8 And then I asked Gramercy if I could see
9 some photographs, which I did. And then I asked
10 them, "How do we know that these are the Bonds?" And
11 they told me that these were--have been audited by
12 one of the Big 4.
13 And then I asked, "Are you sure that that's
14 the number?" And they said yes.
15 And then they made a correction of a
16 different number, and I said, "What is the
17 correction?"
18 They said, "Well, we audited again and
19 that's number."
20 But I did not go and count the Bonds one by
21 one. The only original Bond I've seen is the one the
22 President has.
[Page 1653]
1 You still have it, no?
2 PRESIDENT FERNÁNDEZ ARMESTO: Yes. Not the
3 original.
4 (Overlapping speakers.)
5 BY MR. LLANO:
6 Q. Now, since you mentioned Google searches,
7 sir, are you aware that there is a fake Wikipedia
8 page concerning the Land Bonds at issue in this
9 arbitration?
10 A. I was not aware of that.
11 Q. Well, I hope you were not misled by such
12 information is my point.
13 A. I've never read that page. I did not know
14 there was one.
15 Q. It was a manipulated page, in any event.
16 A. Since I haven't seen it, I wouldn't be able
17 to comment on what you just said, or not.
18 Q. Got it.
19 Now, you did not actually answer the
20 question that I asked you, which is: Did you ask for
21 due diligence documents by Gramercy? I wasn't asking
22 about your due diligence as part of your Report. I
[Page 1654]
1 understand you did some due diligence. I was asking
2 if you asked to see the Gramercy due diligence
3 documents, any due diligence documents, prior to
4 their purchase in 2006 to 2008, and were denied those
5 documents or whether you did not even ask for them.
6 That was my question.
7 A. Oh, okay. I asked about the process that
8 they went through, how did they find out about the
9 Bonds, and how did they find them. So, I asked
10 general questions. I didn't ask for any documents,
11 which is part of your question.
12 You said, "Did you ask for documents?" I
13 didn't ask for documents, so I was not rebuffed. And
14 when I was asked, how did this happen and how--there
15 are lots of old Bonds, and someone who has dealt with
16 emerging markets debt, there is the Cuban debt, and
17 how did you find it? And they told me a story, which
18 I don't remember the details now, but I didn't ask
19 for documents, no.
20 Q. Okay. Thank you.
21 Now, you also do not reference in your
22 reports Gramercy's internal financial model from
[Page 1655]
1 2009; correct?
2 A. I think it's correct.
3 Q. Did you see it?
4 A. No.
5 Q. You didn't ask Gramercy for this document
6 either; correct?
7 A. Correct.
8 Q. You didn't think this document might be
9 relevant to assess Gramercy's understanding of the
10 applicable rules and standards in Perú to calculate
11 the value of its Bonds; correct?
12 A. Let me elaborate a little. My assignment
13 was to calculate according to my methodology what was
14 the intrinsic value of these Bonds.
15 Q. Right.
16 A. And I thought that what Gramercy did was
17 completely independent, so it was not relevant for me
18 to ask for those, for that data.
19 Q. Mr. Edwards, you're a pro. You've been in
20 other ICSID and investment treaty arbitrations;
21 correct?
22 A. In some. Not in many, but in some.
[Page 1656]
1 Q. In some. Right.
2 A. Yeah.
3 Q. And you understand that in an investment
4 treaty arbitration, it is important to understand
5 what the investor expected at the time it made its
6 investment; right?
7 A. That is correct, but that was not my
8 assignment. My assignment was to calculate using the
9 best practices in economics what the intrinsic value
10 of these Bonds were and not the Market Value or what
11 model the investor was using.
12 Q. Thank you.
13 Now, you also do not reference Gramercy's
14 financial statements in your Reports; correct?
15 A. I don't remember offhand, but probably not.
16 Q. And you do mention or at least you obliquely
17 alluded to the financial statements in one of your
18 slides, and we'll come back to that slide in a
19 moment, but you do make a reference to Gramercy's
20 financial statements in the last slide or the
21 penultimate slide in your presentation from today;
22 correct?
[Page 1657]
1 A. Yes.
2 Q. Have you seen those financial statements,
3 sir?
4 A. I've seen them.
5 Q. You've seen them.
6 A. Yeah, and I've looked through them, yes.
7 Q. Right. So, you chose, you made an
8 affirmative option not to reference those financial
9 statements in any way in any of your three Reports;
10 correct?
11 A. Incorrect.
12 Q. You did not make a choice not to cite to
13 them?
14 A. So, there is an issue of time; right? The
15 First Report is mid-2016, the Second Report is late
16 2018, and the Third Report is a Reply Report from
17 May 2019. And at that time, I had not seen them.
18 So, I cannot--I could not have referenced them if I
19 had not seen them until--so, I saw them after--
20 Q. I see. When?
21 A. I forget, but very recently.
22 Q. How recently?
[Page 1658]
1 A. I don't know. Six months, six weeks.
2 Recently. Very recently.
3 Q. In what context?
4 A. I was preparing for the Hearings.
5 Q. Right.
6 A. And I asked to see them.
7 Q. You asked to see them. And, at that point
8 in time, for the first time since your engagement
9 four years ago, you saw those financial statements
10 for the first time; correct?
11 A. Correct.
12 Q. Okay. When were you first engaged,
13 Mr. Edwards?
14 A. In 2016.
15 Q. When exactly, or month?
16 A. I don't know. January, maybe. I forget.
17 PRESIDENT FERNÁNDEZ ARMESTO: When you speak
18 about the financial statements, it's the financial
19 statements of the funds who invest in Gramercy Perú
20 Holdings?
21 THE WITNESS: Right. I'm trying--I mean,
22 what I tried to understand is how there were--how
[Page 1659]
1 Gramercy was valuing these Bonds, and I think that I
2 now have somewhat of a picture.
3 I know that they used first start cost, and
4 then they used models, and then scenarios, but I have
5 never met with anyone from Gramercy to talk about
6 this. It was not part of my assignment.
7 MR. LLANO: Now, as I mentioned, we will
8 very briefly move to confidential session.
9 (End of open session. Attorneys' Eyes Only
10 information follows.)
[Page 1660]
CONFIDENTIAL SESSION
[Redacted]
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[Page 1678]
[Redacted]
[Page 1679]
[Redacted]
(End of Attorneys' Eyes Only session.)
[Page 1680]
OPEN SESSION
2 BY MR. LLANO:
3 Q. Okay. Now, you are aware, are you not, that
4 a Gramercy affiliate purchased additional Land Bonds
5 in 2017, the so-called "Tranche 2"; right?
6 A. I found out about that on either Sunday or
7 Monday, reading the Transcript.
8 Q. You did not know about that before?
9 A. No.
10 Q. And so, you had no opportunity of factoring
11 this information into your valuation of the Gramercy
12 Land Bonds; correct?
13 A. Correct.
14 Q. You don't know, for example, what price was
15 paid for Tranche 2; right?
16 A. I know nothing about that except what I read
17 in the Transcript.
18 Q. Right. And, you know, I apologize in
19 advance, but I have to ask you some questions. I can
20 anticipate what the answer will be, but I need to get
21 them on the record.
22 ARBITRATOR DRYMER: As any good
[Page 1681]
1 cross-examiner, you know the answer before you ask
2 the question.
3 MR. LLANO: I try to.
4 BY MR. LLANO:
5 Q. You don't know what representations were
6 made between the Sellers and Gramercy for Tranche 2;
7 correct?
8 A. My answer will be--as you know what it will
9 be--all I know is what I read in the Transcript.
10 Q. You don't know the valuation that was given
11 to Tranche 2; right?
12 A. Right.
13 Q. Are you curious to see that valuation, sir?
14 A. I would not object to seeing it. I would
15 not reject looking at it. And I'm very curious about
16 many things, yes.
17 Q. Good.
18 So, you don't know also what expectations,
19 considerations, risks, haircuts, or other factors
20 were taken into account in this 2017 purchase of
21 Tranche 2; correct?
22 A. Correct.
[Page 1682]
1 Q. And you, therefore, have no idea how this
2 actual information would have measured up against
3 your own valuation; correct?
4 A. No idea.
5 Q. Because you were not provided this
6 information by Gramercy, even though you issued two
7 Reports after these purchases took place; correct?
8 A. Correct.
9 Q. Now, you've testified and you mentioned this
10 before in other investment treaty arbitrations;
11 correct?
12 A. Correct.
13 Q. Including in arbitrations dealing with
14 issues of expropriation; right?
15 A. I'm not sure. You are the lawyers. Is
16 Argentina considered an expropriation from a legal
17 point of view?
18 MR. HAMILTON: We're not going to answer
19 that.
20 PRESIDENT FERNÁNDEZ ARMESTO: Good lawyers.
21 (Comments off microphone.)
22 THE WITNESS: But I--so, Mr. Llano, I
[Page 1683]
1 couldn't tell you. As Mr. Hamilton knows, I did
2 testify in a number of the Argentina cases. So, my
3 main experience are those cases. And I think there
4 were quite a few of them; one as them, as I pointed
5 out earlier, working with your fine law firm.
6 BY MR. LLANO:
7 Q. Right. And of course, just for the record,
8 that case involved global sovereign bonds; correct?
9 A. That is correct.
10 Q. Right. Now, I'm not asking you about legal
11 standards, but purely from my commercial standpoints,
12 you have a general notion about what an expropriation
13 is; right?
14 A taking; right?
15 A. I have a general notion, yes.
16 Q. So, if an asset still has value today, by
17 definition, it cannot be an expropriation in a purely
18 commercial sense; right?
19 A. I disagree.
20 Q. The asset still has value?
21 A. I disagree. The value may be a fraction of
22 the commercial value, of the Fair Value, of the
[Page 1684]
1 intrinsic value ahead of time.
2 Q. Right.
3 A. So, I--I'm not a lawyer. Sometimes I wish I
4 were, but I understand that taken without appropriate
5 compensation is, in your profession, a no-no; right?
6 Q. And, of course, we don't know--you don't
7 know what the valuation for Tranche 2 was. Gramercy
8 knows that; right?
9 A. Tranche 1 or Tranche 2?
10 Q. 2.
11 A. I know Tranche 1.
12 Q. That's my point. We don't know what the
13 valuation was for Tranche 2. If that valuation shows
14 that those Bonds had value, by definition there
15 cannot have been an expropriation. The measures by
16 the State of Perú could not have destroyed the value
17 of the asset; correct?
18 A. Mr. President, I think I'm going to excuse
19 myself from opining on Tranche 2, since--as I pointed
20 out, I learned about Tranche 2--I'm trying to
21 remember if I learned while I was at 30,000 feet in
22 the air flying from California or after I landed
[Page 1685]
1 here, but I read that very difficult format where
2 they have the four pages, and you get very confused.
3 The first time I learned about that tranche
4 was trying to figure out how to go--it's not even
5 counted. It is up, down, up, down.
6 So, I'm going to excuse myself, if the
7 Tribunal agrees with it. I know nothing about
8 Tranche 2, and I understand this is not about Tranche
9 2 either.
10 Q. But I have to ask you because you said
11 before that you are curious to see those numbers.
12 So, my question--
13 A. Say that again? That I'm what?
14 Q. Curious.
15 A. Oh, I'm curious about so many things,
16 Mr. Llano.
17 Q. Let me finish my question, sir, please.
18 Now, since you're curious about that
19 information, are you bothered by the fact that
20 Gramercy withheld relevant and material information
21 from you in connection with this exercise that you
22 were performing?
[Page 1686]
1 A. No.
2 Q. You're not.
3 A. No.
4 Q. Okay. Now, let's go to Tab 8, please. Tab
5 8 is Claimants' Statement of Reply dated May 21,
6 2019.
7 ARBITRATOR DRYMER: If I may ask just one
8 quick question to follow up on Dr. Llano's last
9 question.
10 Would that information, the valuation
11 information--excuse me, information on how Gramercy
12 valued Tranche 2, could it affect your own
13 calculations?
14 THE WITNESS: No.
15 ARBITRATOR DRYMER: No.
16 THE WITNESS: No.
17 ARBITRATOR DRYMER: Thank you.
18 THE WITNESS: As I pointed out, Mr. Drymer,
19 I'm very confident and proud about my method. I'm
20 very confident, so it would not have affected my
21 valuation.
22 BY MR. LLANO:
[Page 1687]
1 Q. Thank you. And the reason it would not
2 affect your valuation is because you are not doing a
3 Fair Market valuation assessment in your Reports;
4 correct?
5 PRESIDENT FERNÁNDEZ ARMESTO: Yeah, because
6 he's doing a valuation just taking the CPI from the
7 date of issuance until 2018.
8 THE WITNESS: I'm doing intrinsic--
9 PRESIDENT FERNÁNDEZ ARMESTO: And I am sure
10 that the valuation done by Gramercy would be based on
11 different criteria.
12 MR. LLAΝΟ: Point made. Thank you.
13 PRESIDENT FERNÁNDEZ ARMESTO: That's the
14 point. So, it probably has no impact on his
15 intrinsic value.
16 BY MR. LLANO:
17 Q. Okay. Now, we're in Tab 8, Claimants'
18 Statement of Reply dated May 21, 2019, and it's
19 not--the whole Brief is not there, but I wanted to
20 just refer you to one paragraph. It's on Page 201.
21 There's the section called "Request for Relief."
22 Do you see that?
[Page 1688]
1 A. Yes.
2 Q. And there is Paragraph 612 and below that,
3 on the next page, is item D, as in delta.
4 A. Yes.
5 Q. Do you see that?
6 A. I do.
7 Q. And that items reads: "In the further
8 alternative to the requests set out at items (b) and
9 (c), ordering Respondent to pay monetary damages
10 equal to the Fair Market Value of the Land Bonds as
11 of immediately before Perú's breaches, which is
12 approximately 550 million plus interest at commercial
13 annually compounding rates, such as the rate of the
14 real return on debt in Perú, on that amount from the
15 date of the breach through the date of the award."
16 Do you see that?
17 A. I do.
18 Q. Now, you did not validate or were asked to
19 validate this calculation in any of your Reports;
20 correct?
21 A. Correct.
22 Q. You were not asked to assess this supposed
[Page 1689]
1 quantification of the Fair Market Value of the Land
2 Bonds as at the time of Perú's supposed breaches;
3 correct?
4 A. Correct.
5 Q. And you did not perform a Fair Market Value
6 valuation of the Gramercy Bonds as at the time of
7 Perú's supposed breaches; correct?
8 A. I don't know what the exact answer is. I
9 will go back to the fact that I provided a model that
10 will give you the estimate intrinsic value at any
11 point in time that you ask the model to do it.
12 So, it could give you the amount at the date
13 of the breach or at any date that you ask it. So, I
14 was not asked specifically "go forward to the date of
15 the breach and give me that number," as I recall, but
16 I was asked to do it to a certain date, and it's a
17 rolling number. In the 2016, it's up until that
18 date. In the 2018 Report, it's until May of 2018.
19 Q. Are you aware that the phrase "Fair Market
20 Value" does not appear in the first two of your three
21 Reports, Mr. Edwards?
22 A. Yes.
[Page 1690]
1 Q. Moving on. Let's go to Tab 1. That
2 is--sorry. Hold on. Don't go anywhere.
3 A. I'm very curious, so I won't.
4 Q. Go to your Second Report.
5 A. So that's Tab 1.
6 Q. It is. It is. And Paragraph 37. The last
7 sentence says: "In 2013, the Constitutional Tribunal
8 reinforced its 2001 Decision again stating that the
9 Land Bonds were to be repaid on the basis of value
10 that was to be updated to the present day."
11 Do you see that?
12 A. I do.
13 Q. You reviewed, did you not, both the 2001 and
14 2013 Constitutional Tribunal Decisions; right?
15 A. Right.
16 Q. So, when you say that the Land Bonds were to
17 be "repaid on the basis of value that was to be
18 updated to the present day," you're referring to the
19 application of the current value principle; correct?
20 A. Yes. Let's say yes for now. Let's see
21 where we go. Yes.
22 Q. So, it is your understanding that the 2013
[Page 1691]
1 Decision confirmed the applicability of the current
2 value principle to the Land Bonds; correct?
3 A. Yes.
4 Q. Now, in the next paragraph, Paragraph 38,
5 you mention that the Constitutional Tribunal rejected
6 applying a CPI method to adjust for inflation;
7 correct?
8 A. Correct.
9 Q. Instead, the Tribunal held that the
10 appropriate updating method was a dollarization
11 approach in which the unpaid principal balance of the
12 Land Bonds would be converted to U.S. dollars and
13 accrue interest; correct?
14 A. Correct.
15 Q. Now, the MEF August 2017 formula applies
16 interest based on the coupon rates on one-year U.S.
17 Treasury bills; correct?
18 A. I think it applies the yield on the Treasury
19 bill, not the coupon, but the yield.
20 Q. Sure.
21 A. Those are two different concepts.
22 Q. Right. And the yield includes an interest
[Page 1692]
1 component; right?
2 A. It does.
3 Q. Right. So, those coupon rates are nominal
4 interest rates; yes?
5 A. Right.
6 Q. So, this means that there is both an
7 inflation component and an interest component; right?
8 A. That's a conversation I had earlier with the
9 President, Professor Fernández Armesto, yes.
10 Q. Exactly.
11 A. It's called a Fisher equation that
12 decomposes into a real component interest rate and an
13 inflation component.
14 Q. And the interest component is called a real
15 interest rate; correct?
16 A. That's correct. And I calculated in one of
17 my slides that the implicit real interest rate in the
18 one-year Treasury is 0.77 percent, which I find to be
19 extremely low, as I point out, and does not cover
20 lost opportunity.
21 Q. Right. And I think you mentioned this. You
22 are proposing a longer term for U.S. Treasury bills
[Page 1693]
1 if such bills were to be adopted as a measure of
2 interest in the formula; correct?
3 A. I wouldn't say that I'm proposing that. I
4 think that what I pointed out is that if one were to
5 be constrained by certain framework, and I think I
6 added that we economists, that's what we do. We
7 optimize, subject to constraints, and I think I said
8 legal, environmental, cultural, and other.
9 And if we want to make corrections to the
10 MEF Formula, which, as we know, was completely messed
11 up in 2014 and in February of 2017--if we were to
12 make corrections, one possible correction--and I had
13 a conversation there with Professor Armesto--would be
14 to use longer rates, and we talked about 30 years,
15 and there was a gap when they were not issued and all
16 that, yes.
17 Q. And you mentioned in your direct testimony
18 that long bonds--you called them the long bonds--have
19 a much higher yield; correct?
20 A. That's correct.
21 ARBITRATOR DRYMER: He said usually.
22 THE WITNESS: I said usually, yeah.
[Page 1694]
1 BY MR. LLANO:
2 Q. Yeah.
3 A. Right. Which is the best predictor of a
4 recession coming, and it failed only once, and this
5 was last year.
6 Q. But, of course, if you're given a bond
7 today, that's different from knowing retroactively
8 how much those Bonds yielded; correct?
9 A. That's correct.
10 Q. So, if you were given a bond today, a long
11 bond, as you call it, 20 years, for example, there is
12 some risk associated with that. The longer the term,
13 the higher the risk; right?
14 A. Let's say yes for now. Let's see where you
15 are going.
16 Q. Well, that's it.
17 A. Okay.
18 Q. Now, let's go to Tab 11. This is your Third
19 Report, which is dated May 21, 2019. Paragraph 15,
20 please. The last sentence reads: "Indeed, the MEF,
21 as well as independent experts retained by the MEF,
22 Peruvian Courts, and others who have considered the
[Page 1695]
1 value of the Land Bonds all agree that the Land
2 Bonds' value today encompasses both of these
3 components: Inflation adjustment and compensation
4 for the cost of foregone investment opportunities."
5 Do you see that?
6 A. Yes.
7 Q. You mentioned two components here, inflation
8 and interest; right?
9 A. Yes.
10 Q. So, now that we've seen what Perú did in the
11 MEF 2017 formula, let's look at your opinions on
12 inflation and interest, and I'd like to start with
13 interest. Okay?
14 A. Yep.
15 Q. All right. Just one paragraph above that,
16 Paragraph 14, in the last sentence, which begins on
17 the fourth line, you mention your assignment.
18 A. Excuse me. I thought you meant
19 Paragraph 14. Which paragraph?
20 Q. Same Report.
21 A. Yeah.
22 Q. Right. And Paragraph 14.
[Page 1696]
1 A. Yeah.
2 Q. Fourth line says: "In carrying out that
3 assignment."
4 Do you see that?
5 A. I don't see that.
6 Q. We're in your Third Report, Tab 11.
7 A. Tab 11, yes.
8 Q. Yes. Paragraph 14.
9 A. It starts "as I described"?
10 Q. Yeah.
11 ARBITRATOR DRYMER: Next sentence.
12 THE WITNESS: Oh. Okay. Yeah, right.
13 BY MR. LLANO:
14 Q. Right. And you mention your assignment, and
15 then you mention in that same sentence two different
16 understandings that you have in this respect.
17 Do you see that?
18 A. Yes.
19 Q. And the first understanding has to do with
20 the current value principle.
21 A. Yes.
22 Q. And you note here that this principle
[Page 1697]
1 relates to adjustment for inflation.
2 Do you see that?
3 A. Yes.
4 Q. And we will discuss inflation later.
5 Now, separately in Point 2, you say that
6 "under Peruvian law, the total amount owed under an
7 obligation of value includes interest to compensate
8 the creditor who did not receive timely payment for
9 the loss of use of money."
10 Do you see that?
11 A. Yes.
12 Q. So, this point relates to interest; right?
13 A. Yes.
14 Q. Now, let's go to Page 35. Same Report.
15 Page 35.
16 A. Yes.
17 Q. There's a heading there for a Section B.
18 And it is entitled "the August 2017 MEF formula
19 incorrectly accounts for inflation."
20 Do you see that?
21 A. Yes.
22 Q. So, this section obviously deals with
[Page 1698]
1 inflation and your application of the current value
2 principle; correct?
3 A. Yes.
4 Q. Now, if we move to Page 37, there's another
5 heading there for Section C, which is entitled "the
6 August 2017 MEF formula incorrectly accounts for
7 Bondholders' foregone investment opportunities."
8 Do you see that?
9 A. Yes.
10 Q. So, this is a section in this Report that
11 deals with interest; correct?
12 A. Yes.
13 Q. Now, Paragraph 118, just below the heading,
14 says: "In addition to--in addition to being
15 inconsistent with the current value principle, the
16 August 2017 MEF Formula also employs a Rate of Return
17 that does not reflect the foregone investment
18 opportunities of Bondholders."
19 Do you see that?
20 A. Yes.
21 Q. So, in addition to the issue of the
22 application of the current value principle, you
[Page 1699]
1 question, in this section, the way that the MEF
2 August 2017 formula applies interest; correct?
3 A. No.
4 Q. Go on?
5 A. Pardon me?
6 Q. Do you have anything else?
7 A. Yeah. As I read the sentence, it says: "The
8 August 2017 MEF formula employs a Rate of Return that
9 does not reflect the foregone investment." And I
10 think that your question is that I object to the
11 method. There's a difference.
12 Q. I see. Good.
13 But my point was a different one. What I
14 was asking is you seem to have two boxes. You have
15 the issue of the application of the current value
16 principle, and that relates to inflation, and then in
17 addition to that, you have another issue, which is
18 the foregone investment opportunity to Bondholders;
19 correct?
20 A. Correct.
21 Q. Okay. Because--
22 A. But that method is different from--the only
[Page 1700]
1 point I want to make clear for the record is that the
2 method is different from the value of the Rate of
3 Return.
4 Q. Fair enough.
5 Now, the reason why you make this
6 distinction, the "in addition to" language, is that
7 the 2001 Constitutional Tribunal Decision does not
8 relate to the issue of interest--correct?--or the
9 current value principle; correct?
10 A. You are taking me, Mr. Llano, to, I think,
11 legal terrain, and I'm not a lawyer. Let me say that
12 for now, and let's see where you go.
13 Q. Right. So, perhaps another way of putting
14 it is as follows: Current value principle, column on
15 the left, that's inflation. Interest, column on the
16 right, that's a different thing; yes?
17 A. Yes.
18 Q. Good.
19 Now, the 2001 Constitutional Tribunal
20 Decision, as far as you know, does not discuss
21 interest at all; correct?
22 PRESIDENT FERNÁNDEZ ARMESTO: It doesn't. I
[Page 1701]
1 mean, let me represent that, to the Expert. He's a
2 Professor of Economy. They are still leaving the law
3 so that we can live with that. Don't give him an
4 idea that economy is now started. We have already
5 law in economics, so they are intruding into our
6 field. Don't give him the opportunity that they
7 absorb the law. Don't agree.
8 MR. LLANO: Good.
9 BY MR. LLANO:
10 Q. Paragraph 49, same Report, please.
11 A. Yes.
12 Q. It says: "As a further critique of my
13 calculation of the real Rate of Return, the Quantum
14 Report"--by that you refer to the Report by
15 Mr. Kaczmarek and Ms. Kunsman--"observes that
16 interest accounts for over 91 percent of my
17 $1.8 billion estimate of the value of the Gramercy
18 Land Bonds. Insofar as the Quantum Report intends to
19 suggest that a high proportion of interest indicates
20 a flaw in my updating methods, it is incorrect."
21 Do you see that?
22 A. Yes.
[Page 1702]
1 Q. You do agree that about 91 percent of your
2 quantification of the value of the Gramercy Bonds in
3 Tranche 1 is represented by interest; is that right?
4 A. Let's say yes. I don't want to check the
5 math. But let's assume it's okay, yeah.
6 Q. Okay. And that is approximately
7 $1.55 billion; correct?
8 A. Right.
9 Q. Now, the MEF August 2017 Formula applies
10 interest, as we've discussed, based on the yields on
11 one-year U.S. Treasury bills; correct?
12 A. Yes.
13 Q. And the MEF Formula applies that interest on
14 a compound basis; correct?
15 A. That's my understanding, yes.
16 Q. And that's compounded yearly; is that right?
17 A. Yes.
18 Q. So, on the one-year U.S. Treasury bills,
19 what happens is that you get rolled over every year;
20 is that right?
21 A. That's the definition of compounded interest
22 rates, yes.
[Page 1703]
1 PRESIDENT FERNÁNDEZ ARMESTO: When you roll
2 over, you add it to the capital and it accrues
3 interest from that date on.
4 THE WITNESS: Yes, that's compounded
5 interest, yes.
6 BY MR. LLANO:
7 Q. Excellent.
8 Now, let's see what you propose.
9 So, in Paragraph 31, same Report,
10 Paragraph 31. Second sentence says: "An appropriate
11 measure of that loss"--
12 (Comments off microphone.)
13 Q. The second sentence says: "An appropriate
14 measure of that loss is the Rate of Return that
15 Bondholders could have earned had they been able to
16 invest the unpaid principal balances of the Land
17 Bonds in the Peruvian economy."
18 Do you see that?
19 A. Yes.
20 Q. And you propose a real interest rate of
21 7.22 percent, which you describe as the real Rate of
22 Return on debt in Perú; is that correct?
[Page 1704]
1 A. That's correct.
2 Q. Debt.
3 A. Let me clarify--
4 PRESIDENT FERNÁNDEZ ARMESTO: No, it
5 was--why don't you clarify it. I thought it was in
6 capital.
7 THE WITNESS: So, let me clarify.
8 So what I did, Mr. President, is I take
9 income arrears, and I decompose it into what goes to
10 the Government, what goes to labor, and what goes to
11 capital. And what goes to capital is the income of
12 capital in soles oro, in (in Spanish) Nuevos Soles
13 three times, and that income is divided by an
14 appropriate measure of the stock of capital, and that
15 gives you the Return on Capital on average. That's
16 10.9--
17 PRESIDENT FERNÁNDEZ ARMESTO: 10.9
18 something.
19 THE WITNESS: 10.97. And then I say that
20 capital invested in Perú, on average, which according
21 to the Harberger method, yields 10.97, and, which
22 according to the MEF application of the Harberger
[Page 1705]
1 method, is 11.26, if I remember correctly.
2 That 10.97, I can decompose it into what
3 goes to those who are the active investors. That's
4 equity. And what are--of the passive investors, from
5 capital, I divide it into two. One is going to be
6 higher. The active investment equity is going to
7 have a higher return. I choose the lower return.
8 So, it's the passive investment component of
9 the Return on Capital. So, it's Return on Capital,
10 but assuming that--I'm not assuming here,
11 Mr. President, that people who would have received
12 this money would have gone out prospecting for copper
13 in Perú. There is lots of copper in Perú. They
14 would not be the active investors, but they would
15 have the opportunity to participate in the average
16 investment, which yielded the average return.
17 They would have been able to participate on
18 a passive--from the passive side. And using those
19 data, that number is 7.22 percent.
20 I hope that that clarified the way I do it.
21 PRESIDENT FERNÁNDEZ ARMESTO: Thank you.
22 BY MR. LLANO:
[Page 1706]
1 Q. Thank you. Now, in your dollarization
2 approach in your Reports, you add an inflation
3 component to this real interest rate of 7.22 percent;
4 correct?
5 A. You ask inflation because we are carrying
6 now on the accounting in dollars.
7 Q. Right.
8 A. So may I clarify? So, the way I think about
9 this, and I think this is a proper way to think about
10 this, is that in this exercise, we are carrying the
11 accounting in dollars.
12 We are not assuming that every individual
13 who received the Bonds got on a plane and went to
14 Detroit to buy, or wherever it was--to buy the
15 Treasury Bonds.
16 We assume that they, most of them, stayed in
17 Perú and tried to go on with their lives, except they
18 didn't have their land. So, but what we are carrying
19 out in this exercise, the accounting is in dollars.
20 So, we are transforming the original value, Nuevos
21 Soles--excuse me--soles oro, into dollars using that
22 parity exchange, and I explained it is very important
[Page 1707]
1 which parity exchange we use.
2 And then we carry the accounting in dollars.
3 And at the end, as I pointed out, and as you pointed
4 out, at the end we have to reconvert this accounting
5 in dollars back into soles because the payment, when
6 it happens--and I think that--I read that maybe 400
7 people or 25 people have been paid. They were paid
8 soles.
9 So, this is the process. So, these are
10 people in Perú--
11 MR. LLANO: Mr. President--
12 THE WITNESS: And I'm answering your
13 question now, Mr. Llano.
14 MR. LLANO: I'm sorry, but it is really not.
15 And this was for his Direct Presentation, in
16 any event, not for answering a simple question.
17 THE WITNESS: Well, I don't know if it was
18 simple.
19 PRESIDENT FERNÁNDEZ ARMESTO: Why don't you
20 repeat the question because I'm now getting slightly
21 lost. What is the question?
22 BY MR. LLANO:
[Page 1708]
1 Q. That's my question. So, my question, very
2 simply put, was in your dollarization approach, you
3 add an inflation component--let's call it U.S.
4 CPI--to the real interest rate of 7.22 percent;
5 correct?
6 A. That is correct. And that's why--that was
7 my--because I'm assuming that these individuals still
8 have the opportunity of investing in Perú.
9 Q. Okay.
10 A. That's the 7.22 percent.
11 Q. Thank you.
12 PRESIDENT FERNÁNDEZ ARMESTO: But the
13 dollarization is not the one which yields
14 1.8 billion, because the 1.8 billion is just--you
15 just do the CPI in local currency.
16 THE WITNESS: May I clarify that?
17 PRESIDENT FERNÁNDEZ ARMESTO: Yes, please.
18 This is fundamental.
19 THE WITNESS: So, I do--I argue that
20 dollarization is not the right method.
21 PRESIDENT FERNÁNDEZ ARMESTO: Correct.
22 THE WITNESS: And a flawed method, but I
[Page 1709]
1 say, but if you do it right, it will deal 1.6 or
2 something.
3 PRESIDENT FERNÁNDEZ ARMESTO: Okay. It
4 gives you a somewhat--
5 THE WITNESS: I don't know--200 million, I
6 don't know if it's slight, but it gives you--so, I'm
7 doing it correctly using what I propose as a parity
8 rate, which coincides in the recent years with the
9 market rate and the 7.22 percent, and the adjustment
10 for U.S. inflation, not for Peruvian inflation, of
11 course, because we are now dealing with dollars.
12 PRESIDENT FERNÁNDEZ ARMESTO: But that is a
13 backup calculation. That is not--
14 THE WITNESS: No. My principal calculation
15 is 1.8 using CPI. This is a backup that says that if
16 you do dollarization properly, you get 1.6. I forget
17 the number, Mr. President.
18 PRESIDENT FERNÁNDEZ ARMESTO: This is why I
19 was now slightly lost. This is the backup. We are
20 now speaking about the backup calculation. Please.
21 We will have to make a new break at some
22 stage, because I think we are all getting tired.
[Page 1710]
1 THE WITNESS: I'm doing fine.
2 PRESIDENT FERNÁNDEZ ARMESTO: Yeah, but you
3 are enjoying this.
4 THE WITNESS: I am.
5 PRESIDENT FERNÁNDEZ ARMESTO: But you are
6 the only one who is enjoying this. This is off the
7 record.
8 (Comments off microphone.)
9 BY MR. LLANO:
10 Q. All right. Now, Mr. Edwards, you seemed not
11 to recall the quantum that results from your
12 dollarization model.
13 Does $1.72 billion sound about right?
14 A. Yeah.
15 Q. Okay. So, in your dollarization model, the
16 nominal interest rate that you apply comes to about
17 10.5 percent; is that correct?
18 A. That seems to be correct, yeah. About 7.2
19 plus 3. No, probably it is lower because inflation
20 in the U.S. is lower than 3 percent.
21 Q. I did a calculation, I represent to you, you
22 can agree or disagree, and it came out to an average
[Page 1711]
1 of about 10.5 percent. But I'll leave it at that.
2 A. I mean, this is--
3 PRESIDENT FERNÁNDEZ ARMESTO: 7.22 plus
4 inflation.
5 THE WITNESS: 7 plus 3 is 10, so, yeah,
6 approximately, yeah. "Mas o menos."
7 BY MR. LLANO:
8 Q. That seems to be a running theme, "mas o
9 menos," right, Mr. Edwards?
10 PRESIDENT FERNÁNDEZ ARMESTO: That was not a
11 question. Let's go on.
12 BY MR. LLANO:
13 Q. Okay. Now, you have been proposing an
14 interest rate based on a real Rate of Return on debt
15 in Perú since your very First Report; correct?
16 A. Correct.
17 Q. Let's go there. And it's at Tab 13. That's
18 your First Report, and may I direct you to
19 Paragraph 10, please.
20 A. Paragraph?
21 Q. 10.
22 A. 10.
[Page 1712]
1 ARBITRATOR DRYMER: This is the First or the
2 Amended First?
3 MR. LLANO: No, it's the First.
4 ARBITRATOR DRYMER: Thank you.
5 MR. LLANO: Unamended.
6 PRESIDENT FERNÁNDEZ ARMESTO: Slightly.
7 ARBITRATOR DRYMER: Yes.
8 MR. LLANO: It's on the screen, also.
9 PRESIDENT FERNÁNDEZ ARMESTO: We'll have it.
10 It is easier to follow it on the screen
11 because--since there are various Reports.
12 MR. LLANO: Right.
13 BY MR. LLANO:
14 Q. So, if you start from the third line from
15 the top, it says: "To compensate for this lost
16 opportunity, it is necessary to apply an interest
17 rate to the outstanding amount of the Land Bonds and
18 compound that interest from Perú's default through
19 the present day."
20 Do you see that?
21 A. I do.
22 Q. And then you wrote: "This interest rate
[Page 1713]
1 should be a real, rather than a nominal, interest
2 rate because the CPI and Dollarization Methods
3 separately account for the effect of inflation.
4 Furthermore, this real interest rate should reflect
5 Bondholders' foregone investment opportunities in
6 Perú."
7 A. I do.
8 Q. Now, Mr. Edwards, will you agree as a
9 starting proposition that this case is not really
10 about whether it is CPI versus some other thing. It
11 is about--the big chunk of money is on the real
12 interest rate, is it not?
13 A. Interest is a very important--many years
14 have passed. So, the last--may I?
15 Q. Sorry. Sorry, please.
16 A. The last Bond was issued in '81. As you
17 pointed out, clipping stopped around that time. So,
18 we have to--1973 inflation goes to double digits.
19 1983, it goes to triple digits, and it's moving
20 towards hyperinflation, so at some point you say the
21 mid-'80s. I would say earlier. Clipping stopped.
22 So, let's say from '81 until now, there are many,
[Page 1714]
1 many years, and if you apply 7.22 percent, plus
2 inflation, of course, it adds. Inflation is very
3 important. Of course.
4 Q. Right. Because--just to give you an
5 example--if we were to take the nominal value of--I'm
6 sorry, the exchanged dollar value of the Gramercy
7 Bonds as of, let's say, 1992, and applied CPI plus
8 7.22 percent, you would get about four dollars;
9 right?
10 A. I am not sure I'm following your
11 calculation, but the right way of doing it is
12 apply--not from 1992. What you are doing is you are
13 leaving out all of the inflation.
14 Q. And we'll come back to that, but I just want
15 to lay out the parameters of the discussion here, and
16 it seems to me that the two biggest things that this
17 Tribunal needs to be concerned about is, do we go all
18 the way back and do we apply a huge real interest
19 rate. Those are the two big items in the room, are
20 they not?
21 A. I don't know if they are "the" two big
22 items, but certainly they are very important items,
[Page 1715]
1 and I think that on both cases I've taken the best
2 practices approach for an economist, which is to
3 update since the issuance of the obligation, and to
4 maintain the original intent, which was that
5 there--those people who had to--had to accept these
6 Bonds would maintain a purchasing power through time
7 over an equivalent basket and to compensate them for
8 foregone opportunities.
9 So, those are two components, and I stand by
10 my model, and I think that updating from 1992 after
11 hyperinflation has happened is totally--I'm going to
12 use strong language, I say, yeah--totally and
13 completely incorrect.
14 Q. Got it.
15 Now, still on Paragraph 10, you say: "I
16 estimate"--this is on the sixth line from the bottom.
17 "I estimate a conservative real interest rate in Perú
18 by first calculating the real Return on Capital in
19 Perú and then, based on that measure, deriving
20 estimates of the real Rates of Return on debt and
21 equity in Perú."
22 Do you see that?
[Page 1716]
1 A. Yeah.
2 Q. Now, there is no footnote in Paragraph 10 of
3 this Report; correct?
4 A. Correct.
5 Q. There is no reference to Peruvian law for
6 your proposed interest rate in this Paragraph or
7 anywhere else in this Report; correct?
8 A. I am not a lawyer, Mr. Llano.
9 Q. Right. And, in fact, there is no reference
10 to Peruvian law anywhere in this Report for the
11 specific interest rates that you propose, which
12 results in a quantum of $1.5 billion; correct?
13 A. So, let's be clear. I think that in my
14 Second Report, there is a reference.
15 Q. I asked about your First Report, the one
16 that we're looking at now.
17 A. You said in any of your Reports.
18 Q. No, I said in this Report. In fact, I said,
19 I will read the question again--there is no reference
20 to Peruvian law anywhere in this Report for the
21 specific interest rate that you propose that results
22 in a quantum of $1.5 billion; correct?
[Page 1717]
1 A. I think I answered that, that you're right,
2 and that's--
3 Q. Yes.
4 A. I did answer that before.
5 Q. Good. Now, you don't state in this
6 Report--this Report--that your proposed interest rate
7 is mandated by any provision of Peruvian law;
8 correct?
9 A. I'm not a lawyer, Mr. Llano.
10 Q. You didn't say in this Report that any
11 particular interest rate was mandated by the 2001
12 Constitutional Tribunal Decision; correct?
13 A. That's correct. I'm not a lawyer. I'm
14 using best economics practices.
15 Q. You didn't cite in this Report to any
16 evidence to the effect that when Gramercy purchased
17 its Bonds between 2006 and 2008 it expected an
18 interest rate of 7 percent plus CPI; correct?
19 PRESIDENT FERNÁNDEZ ARMESTO: Dr. Llano, I
20 think he quotes in his next Report, Professor
21 Castillo.
22 THE WITNESS: Castillo Freyre, yes.
[Page 1718]
1 (Overlapping speakers.)
2 THE WITNESS: In the next Report.
3 MR. LLANO: That's my point--
4 PRESIDENT FERNÁNDEZ ARMESTO: This is why--
5 MR. LLANO: This is where we are headed,
6 sir.
7 (Overlapping speakers.)
8 THE WITNESS: Okay. May I make a
9 clarification? So, this--I need--
10 (Comments off microphone.)
11 PRESIDENT FERNÁNDEZ ARMESTO: Not to confuse
12 you--
13 THE WITNESS: No, but June of 2016 is before
14 2019 or 2018, which is when Mr. Castilla Freyre wrote
15 his Report. I cannot quote a Report that has not
16 been written.
17 BY MR. LLANO:
18 MR. LLANO: Right. Exactly.
19 A. So, of course not.
20 Q. Yeah.
21 A. I don't know where you're going, but yeah,
22 the answer is of course not.
[Page 1719]
1 (Overlapping speakers.)
2 A. We'll find out.
3 Q. Now, I'm moving on from Peruvian law. I'm
4 asking you now, you didn't cite in this Report to any
5 evidence, factual evidence to the effect that when
6 Gramercy purchased its Bonds between 2006 and 2008,
7 it expected an interest rate of 7 percent; correct?
8 A. No. I don't cite it.
9 Q. Or any other percentage; correct?
10 A. Correct.
11 Q. Now, you don't cite to any such evidence of
12 Gramercy's expectations of a specific interest rate
13 in any of your Reports; correct?
14 A. I don't talk about Gramercy's expectations
15 because that is not my assignment. My assignment is
16 to value the Land Bonds in Gramercy's possession, and
17 by extension all Land Bonds that were issued under
18 the Agrarian Reform Law. So, no, I don't, because
19 that is not part of my assignment.
20 Q. Now, Perú could have adopted the interest
21 rate on the face of the Bonds, could it not?
22 A. They could have done anything, I assume, I
[Page 1720]
1 could have. Yeah.
2 Q. And that would have been a reasonable
3 application of interest rate; correct?
4 A. I'm not going to opine on the word
5 "reasonable." I'm going to stand by my Report,
6 which, as I repeat, is assuming that investors'
7 average recipient, average individuals who were
8 forced to receive these Bonds could have enjoyed the
9 opportunity that was available to an average investor
10 in Perú, and I was conservative. I didn't assume
11 that these were the guys that went out and
12 prospected. They are passive.
13 And when you do that calculation--this is
14 very simple--you go out and you do it, as the MEF did
15 it in 2011. You get a number like the one I got.
16 And then you apply it, and you say to the square, to
17 the third power, to the fourth power, and then you do
18 it many years to the many powers, and this is the
19 number that comes up.
20 Q. But you would agree, would you not, that we
21 are acting, all of in us this room, are acting under
22 certain constraints, including Peruvian law; correct?
[Page 1721]
1 A. Yes.
2 Q. Okay. Now, let's go to Tab 14, Please.
3 And this is Mr. Castillo's PowerPoint
4 presentation from yesterday?
5 A. Okay.
6 PRESIDENT FERNÁNDEZ ARMESTO: Why don't you
7 blow it up.
8 THE WITNESS: Yes.
9 PRESIDENT FERNÁNDEZ ARMESTO: Instead of
10 looking it up.
11 MR. LLAΝΟ: I am told it will take a moment,
12 sir, let--
13 (Comments off microphone.)
14 PRESIDENT FERNÁNDEZ ARMESTO: Okay. Then I
15 can get it in paper. Let's not lose time. Here it
16 is.
17 (Comments off microphone.)
18 MR. LLAΝΟ: 7.
19 PRESIDENT FERNÁNDEZ ARMESTO: It is H-6.
20 BY MR. LLANO:
21 Q. And I'm referring to Slide 7, sir. Are you
22 with me?
[Page 1722]
1 A. Yeah.
2 Q. And this is in Spanish, of course. And the
3 second bullet point is entitled "implicit
4 consequences."
5 Do you see that?
6 A. Yeah.
7 Q. And the third subbullet says: "The
8 Bondholders are entitled to compensatory interest:"
9 Do you see that?
10 A. Yeah.
11 Q. And then there are two options. And the
12 first one is rates of 4 percent, 5 percent, and
13 6 percent indicated in the Bonds?
14 A. Yeah.
15 Q. Right?
16 A. I can read that, yeah.
17 Q. And the next option is compensation for the
18 opportunity costs.
19 Do you see that?
20 A. Yes.
21 Q. And, of course, you went for opportunity
22 costs, which is Option 2; right?
[Page 1723]
1 A. No, I didn't go for anything. This is first
2 time I've seen this. I was not here for
3 Mr. Castillo Freyre's presentation yesterday, and I
4 have never seen this. I did not read his Report
5 because it didn't exist before I went for any
6 methodology.
7 Q. Exactly.
8 A. My methodology starts and then it coincides
9 with Peruvian law, and I can see here, but I went
10 to--I'm happy that he says this, being a "letrado de
11 importancia," that he says this.
12 But I am acting according to best practices,
13 the kind of thing that we would have done at the
14 World Bank, or that they still do at the World Bank,
15 the type of calculation that the MEF did in 2011 in
16 the paper that is in the record, and I am happy that
17 he says that there are these two options, and I think
18 that the correct option is the Number 2, so the
19 compensation for the opportunity cost, real interest
20 rate.
21 Q. So, you would agree that, according to
22 Mr. Castillo, whom you relied on in your next Report,
[Page 1724]
1 there is at least one--at least one other option in
2 addition to the option that you chose in your First
3 Report; correct?
4 A. Yes.
5 Q. Okay. Now--
6 PRESIDENT FERNÁNDEZ ARMESTO: We saw it in
7 this graph.
8 THE WITNESS: Yeah. The yellow points. No.
9 PRESIDENT FERNÁNDEZ ARMESTO: His numbers go
10 around the top and the--
11 THE WITNESS: The middle ones.
12 PRESIDENT FERNÁNDEZ ARMESTO: And the middle
13 ones are those which reflect these.
14 THE WITNESS: Right. That is correct,
15 Mr. President.
16 BY MR. LLANO:
17 Q. Now, at the time that you wrote your First
18 Report, June 2016, you were not given this
19 instruction that we see on the screen; right? That
20 you have these two options; correct?
21 A. I was never given any instructions. I was
22 asked to use the best--my best judgment and to apply
[Page 1725]
1 best economic practices--and I, of course, was given
2 to read the Constitutional Tribunal Decision, which
3 of course I did.
4 Q. Umm-hmm. Now, let's go to your Third Report
5 please. And it's at Tab 11.
6 PRESIDENT FERNÁNDEZ ARMESTO: That's the
7 Reply Report.
8 MR. LLANO: Yes, correct. For simplicity,
9 I'm calling them First, Second, and Third.
10 PRESIDENT FERNÁNDEZ ARMESTO: Thank you.
11 BY MR. LLANO:
12 Q. Paragraph 14, please.
13 A. 14? 1-4?
14 Q. Yes.
15 A. Yep.
16 Q. The very last part, which is Number 2.
17 PRESIDENT FERNÁNDEZ ARMESTO: Let's read it
18 together, and then you put the question.
19 BY MR. LLANO:
20 Q. Yes. So, you can read it to yourself.
21 Okay?
22 A. Yeah.
[Page 1726]
1 Q. Now, there is a footnote at the end of that
2 portion of the sentence; right?
3 A. Yeah.
4 Q. And it cites to the Report by Mr. Mario
5 Castillo, Paragraph 63.
6 Do you see that?
7 A. Yeah.
8 Q. So, let's go there. And it's at Tab 15.
9 This is the Report by Mr. Mario Castillo, whom you
10 rely on. And let's go to Paragraph 63, the paragraph
11 that you cited. And you can read it to yourself
12 again.
13 A. Yes.
14 Q. Right. So, there is no mention in this
15 paragraph to the words "foregone investment
16 opportunities;" correct?
17 A. It says "interés compensatorio," but not
18 "foregone investment opportunities."
19 Q. Right. And as you will recall, because we
20 just saw it, the presentation from Mr. Castillo from
21 yesterday included foregone investment opportunities
22 as the second option of his two options; correct?
[Page 1727]
1 A. I would have to look again.
2 Q. Right.
3 A. Which tab?
4 PRESIDENT FERNÁNDEZ ARMESTO: It does.
5 THE WITNESS: Okay.
6 PRESIDENT FERNÁNDEZ ARMESTO: It gives to--
7 THE WITNESS: I will always take your word,
8 Professor Fernández-Armesto.
9 PRESIDENT FERNÁNDEZ ARMESTO: Don't, but he
10 says that the "interés compensatorios" can be either
11 the 4, 5, or 6 percent, or "indemnizacion por la
12 costa de oportunidad", Paragraph 63.
13 BY MR. LLANO:
14 Q. Now, Mr. Edwards, are you aware that
15 Gramercy adopted the stated interest rate on the face
16 of the Bonds in its own internal model in 2009?
17 Are you aware of that?
18 A. I think I am. I'm getting confused on what
19 I know and what I don't know, but I think I am.
20 Q. Right. So, you, just to clarify, I'm
21 talking about the Gramercy internal Valuation Model
22 from 2009, and my question is, are you aware that
[Page 1728]
1 Gramercy adopted the stated interest rate from the
2 face of the Bonds in that model?
3 A. Yes.
4 Q. Okay. So, even as late as 2009, after
5 Gramercy had concluded all of its Bond purchases, it
6 was still calculating interest on the basis of the
7 stated rate in each Bond; correct?
8 A. Yes.
9 Q. So--
10 A. Let me rephrase that. That's my
11 understanding.
12 Q. Right. And Gramercy, of course, had no
13 reason to undervalue its investment at the time, as
14 we know very well; right?
15 A. Of course.
16 Q. So, wouldn't you agree, Mr. Edwards, that
17 these differences reflect the fact that there was no
18 certainty at the time when Gramercy made its
19 purchases of Tranche 1 as to the applicable interest
20 rate to these Agrarian Bonds?
21 A. I cannot answer that question. All I know
22 is that they used the coupon rates. I don't know if
[Page 1729]
1 they ran a model or looked at different options. I
2 don't know.
3 Q. But you will agree, at least, that even
4 Gramercy did not consider this rate, the stated rate
5 on the face of the Bonds, to be inappropriate at that
6 point in time; correct?
7 A. "Inappropriate" is a word that I have a lot
8 of problem with. I, of course, agree that that's
9 what they used.
10 Q. They used it.
11 A. Yes. Right.
12 Q. Now, Perú also could have adopted the
13 default legal interest rate in Perú, for example;
14 right?
15 A. I suppose so. I don't know.
16 Q. Or--
17 A. I'm not an Expert in bankruptcy or in
18 commercial law, or I don't know if that was possible,
19 but I assume so. Yeah.
20 Q. You're aware that there is such a thing in
21 many countries as a default legal interest rate;
22 right?
[Page 1730]
1 A. I don't know exactly what you have in mind,
2 but there is a "tasa de interés máxima convencional."
3 I don't know if that's what you have. That is
4 conventional maximum interest rate. Is that what you
5 have?
6 Q. No. I'm saying that some civil codes, for
7 example. I'm not asking a legal question. I'm just
8 asking, conceptually, if you know, that many
9 countries in the civil law system, for example, you
10 can find in the Civil Code, you know, the default
11 rate will be whatever, 4 percent, 5 percent, whatever
12 it is. Are you aware--
13 A. Yeah, I'm aware of that, but--okay. Let's
14 see where you go.
15 Q. But you're not aware of what Perú's default
16 legal interest rate is; correct?
17 MR. RIEHL: Mr. President, this Witness has
18 not expressed Opinions on legal matters, and we did
19 have an Expert who addressed these matters. This is
20 very far beyond the scope of his Reports.
21 PRESIDENT FERNÁNDEZ ARMESTO: What is
22 the--where are you going to? That he did not apply
[Page 1731]
1 the--he could have applied the Peruvian default rate,
2 but he applied the 7.22 rate. That's his
3 professional Opinion as an economist.
4 MR. LLAΝΟ: We're going through the menu of
5 options, and I want to understand within that menu
6 what ingredients he knew about for each dish. Okay.
7 BY MR. LLANO:
8 MR. LLANO: So, we're talking about default
9 interest rate. Simple question on this: Did you
10 know or do you know what the default legal interest
11 rate in Perú is?
12 A. I don't know.
13 Q. Okay. And Perú also could have adopted, as
14 it did, the yield on one-year U.S. Treasury bills;
15 correct?
16 PRESIDENT FERNÁNDEZ ARMESTO: Well, it
17 depends. It depends if the debt is in soles, no. It
18 depends on what the debt is expressed in.
19 MR. LLANO: Good addition.
20 BY MR. LLANO:
21 Q. So, we're in the dollarization method.
22 PRESIDENT FERNÁNDEZ ARMESTO: Okay. The
[Page 1732]
1 dollarization, method, yes.
2 MR. LLANO: All these questions are in the
3 dollarization world. Good point.
4 ARBITRATOR DRYMER: And just so, I'm clear,
5 when you say "Perú could have," you mean in its
6 calculations in this case? Is that what you're--
7 MR. LLANO: Yes.
8 ARBITRATOR DRYMER: Okay. Fine.
9 MR. LLANO: Yeah. Right. Sir?
10 THE WITNESS: Could you repeat the question
11 please. Is there a question?
12 PRESIDENT FERNÁNDEZ ARMESTO: Well, that
13 in--when you have a debt in dollars, you can apply up
14 to the debt in dollar the--
15 THE WITNESS: Yeah, you could apply--
16 PRESIDENT FERNÁNDEZ ARMESTO: Any
17 reasonable--the rate of the U.S. Treasury bills.
18 THE WITNESS: They can--I mean, I think that
19 at one level the right answer is they can apply any
20 rate they want. The question, what is the correct
21 rate, which is the one that satisfies a condition of
22 compensating for foregone opportunities, which, from
[Page 1733]
1 an economic point of view, from a financial point of
2 view, from a professional point of view, is the right
3 thing to do.
4 So, yes, the answer is yes. They could use
5 that rate or two years or the three-month Treasury
6 bill or the 20 years or the 12 years, anything they
7 wanted.
8 BY MR. LLANO:
9 Q. Right. So, you say that the question is
10 what is the correct rate, which is the one that
11 satisfies a condition of compensated for foregone
12 opportunities from an economic point of view.
13 That's what you just said, and so my
14 question is, that's not the only option; right?
15 Under the parameters of Peruvian law, is it?
16 A. That is correct. I could have used 10.97,
17 which is capital as a whole. I could have used 14.6,
18 which is the--when you decompose--remember, my
19 calculation, which coincides with the MEF of the Rate
20 of Return of capital in Perú is roughly 11 percent.
21 And you decompose it into the passive investments,
22 7.22. The only way to get to 7.22 for the passive,
[Page 1734]
1 the active has to get around 14 to get to 11 on
2 average. Right? I could have used 14. I could have
3 used 11.
4 I went conservative, and I think that that
5 I've repeated that enough times, Mr. President, and
6 the model and the methodology is very simple. We're
7 dealing with a country. I decided that the proper
8 way to do is to assume that average opportunities to
9 average investors in Perú during this period as
10 reflected by the rate of return on capital were
11 available to average people who were forced to
12 receive the Bonds.
13 And I want to strongly stand by that
14 methodology, which I think is very robust. Now, of
15 course, they could have used other methodologies, and
16 used a different interest rate including 14 percent,
17 which would have resulted in higher return--higher
18 valuation; right?
19 Q. Right.
20 MR. LLANO: Mr. President, I think that this
21 is a good time for that break.
22 PRESIDENT FERNÁNDEZ ARMESTO: How long do
[Page 1735]
1 you have to go?
2 MR. LLANO: We're about halfway through.
3 PRESIDENT FERNÁNDEZ ARMESTO: We are off the
4 record.
5 (Comments off microphone.)
6 PRESIDENT FERNÁNDEZ ARMESTO: Very good.
7 Very good. 12:36 to 1:45.
8 (Whereupon, at 12:36 p.m., the Hearing was
9 adjourned until 1:45 p.m., the same day.)
[Page 1736]
AFTERNOON SESSION
2 PRESIDENT FERNÁNDEZ ARMESTO: We resume the
3 Hearing, and I will ask the Secretary for a time
4 check.
5 SECRETARY PLANELLS-VALERO: So far, the
6 Respondent has used 1 hour, 33 minutes in the
7 cross-examination. So, at this point, Claimants have
8 6 hours and 17 minutes left, and Respondent has
9 5 hours and 21 minutes left.
10 MR. LLAΝΟ: Okay.
11 PRESIDENT FERNÁNDEZ ARMESTO: Very good.
12 (Comments off microphone.)
13 MR. LLANO: Okay. Good.
14 (Comments off microphone.)
15 BY MR. LLANO:
16 Q. So, Mr. Edwards, you mentioned this morning
17 in your presentation, and you also mention in your
18 Report, that the Gramercy Land Bonds represent
19 between 15 and 20 percent of all outstanding Land
20 Bonds; is that correct?
21 A. That is a very rough estimate. As the
22 President pointed out this morning, and what I heard
[Page 1737]
1 yesterday, we really don't know.
2 Q. And why is that a rough estimate and not a
3 fixed percentage?
4 A. For the reasons explained by the Vice
5 Minister yesterday and by Minister Castilla.
6 The--apparently there are even Bonds that were never
7 claimed by the Banco de la Nación. And I don't know,
8 by the way. I don't know. The answer is, no one
9 knows.
10 Q. No one knows?
11 A. Apparently no one knows, I said.
12 Q. You don't know; right?
13 A. I don't know for sure, no.
14 Q. Okay. Now, going back to our interest
15 discussion, let's turn back to Tab 1, which is your
16 Second Report, please.
17 (Comments off microphone.)
18 Q. Please turn to Page 42.
19 A. Yes.
20 Q. And you'll see there a heading for
21 Section VI, entitled "The Real Interest Rate in
22 Perú."
[Page 1738]
1 Do you see that?
2 A. Yes.
3 Q. And that section runs--or there's a
4 discussion that runs through Page 52; right?
5 A. Yes.
6 Q. Right. And between Page 42, where
7 Section VI begins, and Page 52, in that 10-page
8 range, I counted a total of 12 different formulas
9 that you developed to come up with your proposed
10 interest rate; correct?
11 A. I'll take your word for the number of
12 formulas, yeah.
13 Q. And you also mention some gaps in the
14 available information to resolve those formulas or to
15 produce those formulas; correct?
16 A. Yes, Paragraph 129.
17 Q. Right. And let's look at some of these
18 gaps, just to have them in the record.
19 You mentioned Paragraph 129. Let's go
20 there. In the second line, you say, "Due to severe
21 inflation, political instability, terrorism, and
22 economic meltdowns, there are no reliable sources of
[Page 1739]
1 clean and straightforward data, as would typically be
2 available in more stable or developed countries with
3 which real Rates of Return in Perú can be estimated."
4 Do you see that?
5 A. I do.
6 Q. Now, Paragraph 142, first sentence: "Perú
7 lacks reliable historical economic data."
8 Do you see that?
9 A. Yes.
10 Q. And here in this paragraph, you're talking
11 about the lack of data on the proportion of the
12 Peruvian economy that is funded with equity versus
13 debt; correct?
14 A. Correct.
15 Q. Now, Paragraph 150, first sentence.
16 A. Yes.
17 Q. "Due to the lack of reliable historical
18 data, precise measures of the real return on equity
19 and the real return on debt cannot be directly
20 estimated."
21 Do you see that?
22 A. Yes.
[Page 1740]
1 Q. Paragraph 158, third line, you say: "In
2 contrast, data on Perú's debt risk premium for the
3 relevant period are unavailable."
4 Do you see that?
5 A. I do.
6 Q. Paragraph 161, fourth line: "I am unable to
7 find reliable data with respect to the equity risk
8 premium for earlier years."
9 Do you see that?
10 A. Why.
11 Q. Now, each of these gaps in information that
12 we have just talked about needs to be resolved in
13 order for your proposed formulas to work; correct?
14 A. I think that the way I discuss this in my
15 Report, Mr. Llano, I don't use the word "gap." I
16 don't think there is the words "data gap" anywhere in
17 the Report. I did use it when I was talking to the
18 President about the availability of the 30-year Bond
19 yield in the U.S., and I said there was a period when
20 Secretary Lawrence Summers decided not to float
21 the--so, what I'm saying is that--and this is
22 customary with emerging markets--there are no
[Page 1741]
1 reliable data for the whole period.
2 We are dealing here with a very long period
3 starting in 1969, and for some of the calculations I
4 go back to 1950, and most of these countries
5 developed more reliable data as they went along.
6 Originally, they had reliable data on a small subset
7 of variables, and as they moved along, they developed
8 a better capacity. National income accounts were
9 developed early on with the help of the United
10 Nations and the Economic Commission for Latin
11 America, CEPAL. Price indices were developed early
12 on. So, a number--lots of payments with the help of
13 the International Monetary Fund.
14 But the lack of reliable data on early
15 periods is a very common occurrence, as you know, and
16 there are customary solutions which have been
17 developed by practitioners, by scholars, by the IFIS,
18 international financial institutions, and what I do
19 is in the absence of all this data, I do the best
20 work that I can, and this is very customary. It's
21 nothing surprising. But, of course, there are
22 assumptions, and as I pointed out earlier--and I
[Page 1742]
1 finish my answer with this--every time I faced a fork
2 on the road, as it were, I took the conservative line
3 in an effort to under rather than overestimate the
4 value.
5 Q. Right. So, let's use your fork in the road
6 analogy where you encounter yourself with a fork in
7 the road. You have to pick one road, right?
8 A. And I pick the more conservative one, yes.
9 Q. Right. But you have to determine what
10 substitute information you will use to replace the
11 unreliable data for purposes of your formula;
12 correct?
13 A. Let me give you a conditional yes and let's
14 see where we go.
15 Q. Okay. As a general matter, we can agree
16 that you are trying to value Bonds; correct?
17 PRESIDENT FERNÁNDEZ ARMESTO: Yes.
18 THE WITNESS: I am trying to value Bonds,
19 yes.
20 BY MR. LLANO:
21 Q. And Bonds are contracts; right?
22 PRESIDENT FERNÁNDEZ ARMESTO: You are
[Page 1743]
1 getting me on my old hat of professor of commercial
2 law. That looks like a question for students in a
3 test on securities.
4 BY MR. LLANO:
5 Ω. From a commercial standpoint?
6 A. That's a question on commercial law, and I'm
7 not a lawyer.
8 Q. Okay. And Bonds have terms; right?
9 A. They do.
10 Q. And the value of a Bond derives from those
11 terms; correct?
12 A. Correct.
13 Q. You can't just make up the terms that you
14 like; right?
15 A. That's correct.
16 Q. But it's also true that we're not just
17 valuing Bonds; instead, we are valuing Bonds at a
18 specific point in time which is, for purposes of an
19 expropriation, the moment right before the
20 expropriating measure took place; correct?
21 A. We are--let me state it in my words, what we
22 are doing. We are calculating the intrinsic value of
[Page 1744]
1 Bonds that, due to an act of the issuer, where the
2 issuer has responsibility, the creation of
3 hyperinflation, we have lost their nominal value, and
4 we have to value them at a given point in time in
5 which we are now valuing at the current time, or at
6 the time of this Report, May of 2018.
7 Q. Now, in your Reports, you don't express any
8 particular understanding or notion or position as to
9 what exactly is or are the expropriating measures at
10 issue in this case; correct?
11 A. Could you clarify your question? When you
12 talk about expropriatory measures, are you talking
13 about the loss of the value of the Bonds or the
14 expropriation of the land?
15 Q. That's my question. What do you understand
16 is the expropriatory measure?
17 A. There is a long discussion on background of
18 the Peruvian Agrarian Reform. There is reference to
19 Peruvian economic history. There is a reference to
20 Don Fernando Belaúnde being elected in '63. There is
21 a reference of the 1967 devaluation. There's a
22 reference to the October 3 coup d'état that ended
[Page 1745]
1 democracy in Perú. So, there is reference to the
2 Agrarian Reform and to the expropriation. So, there
3 is a very clear background.
4 Now, the Bonds were issued and the holders
5 of the land, as I explained here, were forced to take
6 them. And inflation, as the different discussion
7 that we had here, eroded the nominal value in a
8 significant way. And we--I am taking as a valuation
9 point, for inflation, the issuance, and for interest,
10 the moment the coupons became unclipped. So, they
11 are very--there are several variables going on, so my
12 answer is complex, because the question--I think it
13 merits that kind of answer.
14 Q. Now, you mentioned events in 1963, the 1967
15 devaluation. You mentioned a coup, and Mr. Belaúnde.
16 You will agree that that's a long history. We're
17 talking about a 50-year history here, are we not?
18 A. The Bonds were first issued in 1969.
19 Q. Right. And so, my question, coming back to
20 it, is: What is the expropriatory measure, in your
21 understanding?
22 MR. RIEHL: Mr. President, this is, again,
[Page 1746]
1 beyond the scope of his testimony, and counsel seems
2 to be looking for a legal opinion and he's not a
3 legal scholar. That's not the capacity in which he's
4 here to testify.
5 MR. LLAΝΟ: I'm not asking for a legal
6 opinion. I'm asking for the understanding of what
7 the expropriation is, in his view, because that is a
8 driver for the quantification in a treaty case.
9 PRESIDENT FERNÁNDEZ ARMESTO: I think he
10 simply calculated the intrinsic value as of 2018. He
11 has to decide whether that value has or not any
12 relevance for an expropriation.
13 To the best of my understanding of his
14 expertise, he's not saying there was an
15 expropriation, and I am valuing that--the Bonds as of
16 the date of expropriation. He is just saying the
17 intrinsic value--he has developed a model for
18 establishing the intrinsic value of all Land Bonds in
19 Perú at any moment in time, and it could be used for
20 these Bonds, for the second tranche, for some other
21 Bondholder. It is just a general model.
22 Professor, is that--
[Page 1747]
1 THE WITNESS: That is correct,
2 Mr. President.
3 MR. LLANO: But in assessing that model and
4 that quantification, perhaps it might be helpful for
5 the Tribunal to understand if he has any notion or
6 position on what the expropriation was, and that
7 could assist you in considering all the menu of
8 options that are available in his Report.
9 THE WITNESS: I think that that's a legal
10 opinion, and that is beyond my competence.
11 MR. LLAΝΟ: Okay.
12 MR. HAMILTON: Mr. President, if I might, we
13 heard from Mr. Edwards for an extended direct talking
14 about chickens and geese and all sorts of other
15 stories. This is directly pertinent and material to
16 the issues that Quantum Experts deal with in a Treaty
17 claim.
18 PRESIDENT FERNÁNDEZ ARMESTO: Yes--yes and
19 no, because he is not--we are used to seeing a Fair
20 Market Value of a--whatever, of a mine or something.
21 He has not made a fair market valuation of Bonds. He
22 has made a model for the intrinsic value of Land
[Page 1748]
1 Bonds in Perú. So, it is not exactly comparable to
2 most models we have seen.
3 MR. HAMILTON: That's true.
4 MR. FRIEDMAN: May I make just one brief
5 procedural point? I believe we're dealing with one
6 lawyer per Witness. I have not spoken. I just would
7 suggest that we stick with that model.
8 PRESIDENT FERNÁNDEZ ARMESTO: Yeah. Let's
9 go on.
10 BY MR. LLANO:
11 Q. Now, whatever the expropriation date is or
12 could be, you do not state in your Reports that at
13 that specific point in time, whenever the
14 expropriation might be, that right before those
15 measures there was an unequivocal provision of
16 Peruvian law or a judgment of a Peruvian Court that
17 would be applicable to all Land Bonds saying that
18 interest rate must be exactly X, Y, or Z; correct?
19 A. I'm not a lawyer.
20 Q. You do not state that in your Report. I'm
21 not asking for a legal position; correct?
22 A. I'm not a lawyer, and it's not in my Report.
[Page 1749]
1 Q. Okay. Instead, you calculate what you think
2 should be the appropriate interest rate; correct,
3 Mr. Edwards?
4 A. I use the best practices, or the World Bank
5 uses, and what the MEF in Perú used in 2011, which is
6 the Harberger model, to calculate the foregone
7 opportunities of people who were denied payment or
8 did not receive payment, and it's an acceptable
9 model.
10 We used it at the World Bank. It was used
11 by the authorities in Colombia. It was used by the
12 Project Valuation Office in Chile. It is used in
13 Perú. It's an accepted model that--I'm not going to
14 explain it again. It composed of--we know all of
15 that. And it's a nice standby model, and it makes a
16 lot of sense.
17 Someone obtained 10.97 percent under
18 capital, and if you were passive, you obtained 7.2.
19 This is historical data, and someone obtained it, and
20 it's obtained on average, and I'm saying the average
21 person that was subject to these situations--to this
22 situation, it's very reasonable to assume that they
[Page 1750]
1 obtained that--on a conservative side, that return.
2 Q. And instead of starting from a position of,
3 what is the understanding of Peruvian law and what
4 are the parameters to which you are constrained, you
5 start from your own set of 12 formulas with a bunch
6 of gaps that you chose how to fill; correct?
7 A. I did not choose my own system. This is--I
8 will go over it again. This is accepted best
9 practices. This is what--Mr. President, do you want
10 me to repeat this again and again?
11 PRESIDENT FERNÁNDEZ ARMESTO: No. I'm
12 almost able now to repeat it myself.
13 THE WITNESS: Yeah. Shall we use a shortcut
14 and say "the Harberger method" going forward? And
15 with an understanding that the MEF has used it as
16 recently as 2011, yielding a rate that is higher than
17 the one that I use?
18 BY MR. LLANO:
19 Q. Okay. Now, you do not cite in your Report
20 to any evidence--evidence to the effect that there
21 was certainty at the time before the measures at
22 issue in this case that these 12 formulas, with these
[Page 1751]
1 particular fillers and this particular output of
2 7.22 percent, was the law of the land for all of the
3 Land Bonds; correct?
4 A. I am not a lawyer. I don't know. That is
5 beyond my expertise.
6 Q. You do not cite to any evidence to that
7 effect; correct?
8 A. I am not a lawyer, so I don't cite detailed
9 legal precedent.
10 Q. Right. Now, let's look at your formula a
11 bit more in depth. Your calculation of interest,
12 Mr. Edwards, begins with an estimate of the Return on
13 Capital, including both debt and equity across the
14 entire Peruvian economy; correct?
15 A. That's correct.
16 Q. And your calculation of the real Return on
17 Capital is equal to the real income earned by capital
18 divided by the real total capital stock; correct?
19 A. That's correct.
20 Q. And the Tribunal can see this equation at
21 Paragraph 132 of your Report; correct?
22 A. Yes. Yes.
[Page 1752]
1 Q. And in that equation, the numerator--that is
2 the real income generated in Perú--is GDP less
3 adjustments for labor and taxes; correct?
4 A. That is correct. That is customary. That
5 is what we do. GDP is income accrued to everyone,
6 and we are attributing one part to capital, one part
7 to labor, one part to the Government.
8 Q. Right. So, you are subtracting labor and
9 taxes, just to be clear; right?
10 A. Yes.
11 Q. Right. Now, GDP is like a measure of total
12 value of all goods and services produced in an
13 economy; correct?
14 A. Yes. Let's say yes for now.
15 Q. Now, as to the denominator in the formula,
16 which is capital stock, you don't provide a
17 definition of capital stock in this Report; correct?
18 A. No. I think I do.
19 Q. Where, please?
20 A. It's in--Footnote 106 gives us--says that
21 it's the Penn World Tables, and I think that in my
22 not amended Report, the First Report, it's a detailed
[Page 1753]
1 discussion and in Paragraph 136, it says the Penn
2 World Table provides annual estimates of capital
3 stock for Perú in 2005 dollars. That is the source,
4 the Penn Tables.
5 Q. Right. That's the source. It's not a
6 definition of capital stock, is it?
7 A. Well, I guess it's not a definition. I
8 don't define GDP either. It doesn't say that GDP is
9 consumption, plus investment, plus Government,
10 expenditures, plus export, minus imports.
11 Q. Okay. Now, is it fair to say that capital
12 stock is essentially the value of all
13 income-producing assets in the economy?
14 A. Yes, but--let's say yes for now. Let's see
15 where you are going.
16 Q. So, assets in the economy would include
17 things like the street out there, electricity wires,
18 bridges, infrastructure, and the like; correct?
19 A. Yes.
20 Q. And the result of this equation, which you
21 have in Paragraph 132, is a 10.97 percent Return on
22 Capital in the Peruvian economy; correct?
[Page 1754]
1 A. We obtain the return year by year, and I
2 showed in my--I don't want to show it again--in my
3 direct--the date on the year by year, which starts
4 with lower as the economy was highly distorted, and
5 subject to protectionism measures and regulations,
6 and that grows through time. So, I have it year by
7 year, and then I take an average of all these years,
8 and I get 10.97.
9 Q. Okay.
10 A. And, again, to make clear, to be on the
11 conservative side, I include the earlier part when
12 the return is lower. If I have a (in Spanish)
13 starting in '69, maybe I'll get back to the MEF
14 number, which is 11.26.
15 Q. Okay. So, the average is 10.97 percent; is
16 that right?
17 A. That is correct.
18 Q. Okay. Now, you then take the result of that
19 equation, the 10.97 percent, which is the real Return
20 on Capital in the Peruvian economy. You apply some
21 Algebra to that, and you split it between returns to
22 lenders on all of these assets and return to equity
[Page 1755]
1 on all of these assets; correct?
2 A. Yeah. So, let me give you some context.
3 And I'm repeating myself, Mr. President.
4 I'm sorry because of the questions.
5 I am now--I say it, we have 10.97, and I'm
6 really looking for compensation for foregone
7 opportunity. That 10.97 includes entrepreneurs, the
8 active and the passive. And I could say, well, on
9 average, these people whose land was taken and
10 received these Bonds, could have been some active and
11 some passive, and I say, well, let's go conservative.
12 Let's assume that they are going to be passive.
13 MR. LLANO: Mr. President, this is really
14 not my question. I'm just breaking down the formula.
15 I'm not asking for the reasons. The reasons are in
16 his Report. The Tribunal can read the Report.
17 BY MR. LLANO:
18 Q. I just said, you split the Return on Capital
19 between returns to lenders and return to equity; is
20 that correct?
21 A. I'm giving you context, Mr. Llano. I--
22 Q. I didn't ask for context.
[Page 1756]
1 (Overlapping speakers.)
2 THE WITNESS: I cannot answer the question,
3 Mr. President, if I don't get to give you the
4 context.
5 PRESIDENT FERNÁNDEZ ARMESTO: Yeah. I mean,
6 we have been through this. You are welcome to
7 continue, the answer is--I think it is--
8 (Overlapping speakers.)
9 PRESIDENT FERNÁNDEZ ARMESTO: --yes, and he
10 was explaining that. And let's go on.
11 BY MR. LLANO:
12 Q. Okay. Now, you find in your Report that the
13 estimated ratio of equity relative to all capital in
14 Perú is 45 percent and the estimated ratio of debt
15 relative to all capital is 55 percent; is that
16 correct?
17 A. That is--I think is correct.
18 Q. It is in Paragraph 144 of your Report, last
19 sentence.
20 A. Yeah, the reason I say that I'm not sure is
21 the previous sentence says 49 and 51. So, we are
22 doing--
[Page 1757]
Q. 50/50--
A. Yeah, 50/50.
Q. Okay. Let's do 50/50.
(Overlapping speakers.)
A. By 50/50, again, conservatively. I'm lowering, I'm going from--you remember the First Report, 749 and I'm going down, I'm getting to lower and lower numbers. I am not saying--I'm not going to use 10.97. Let's be conservative.
Q. All right. Now, with your Algebra--and we don't need to get into the details of how you get there, but you end up saying that the return on lending to construct all assets in the Peruvian economy is 7.22 percent?
A. Yes.
Q. And the return on equity investments to construct all assets in the Peruvian economy is 14.72 percent; correct?
A. That's--I seem to remember--7.22 I know is the number. The equity, I think, that that's the right number.
Q. Right. So, let's look at Paragraph 138.
[Page 1758]
The first sentence says: "This real Return on Capital is a reasonable estimate of the return that Bondholders could have earned had they been able to invest the unpaid principal balances of the Land Bonds in the Peruvian economy."
Do you see that?
A. No.
Q. First sentence.
A. Which paragraph?
Q. 138?
A. Okay.
Q. Are you with me?
A. Yep.
Q. All right. So, I read the first sentence of Paragraph 138, which ends with "had they been able to invest the unpaid principal balances of the Land Bonds in the Peruvian economy."
Do you see that? Third line, 138. Yes?
A. Well, that's not--okay. Let's see. Yes.
Q. That's what it says.
A. No. The--that doesn't matter. Okay. Go ahead.
[Page 1759]
Q. Now, in this Report, you do not cite to any kind of Peruvian security or other Peruvian investment in which a Peruvian Bondholder could have invested to generate a specific lending return based on all assets in the country; correct?
A. I do.
Q. Where?
A. Footnote 108. Fernández Baca, Ministry of Economy and Finance, April 17, 2011.
Q. What is the specific security?--let me finish. Let me finish. What is the specific security or investment that a Peruvian Bondholder could have invested in that will generate a specific lending return that is based on all assets in the country?
You do not cite that in this Report; correct?
A. I don't--I don't cite that because I am not talking about a specific bondholder. I am talking about someone who received the Bond. That's not a bondholder. That is not a bond investor. These people did not acquire these Bonds.
[Page 1760]
Q. Yeah.
A. These people had to take these Bonds. So, no, I don't talk about a bond investor who has, by being a bond investor, established a preference for bonds. I talk about the average for the economy.
Q. You're talking about foregone investment--sorry, foregone opportunity costs, yes?
A. Yes.
Q. Okay. What is it? What specific type of asset, security or otherwise, could have--could a Peruvian Bondholder have invested in that would yield a specific lending return based on all assets in the country, sir?
A. We are getting--we are getting the average here of the return. So, the average person has--financial opportunity to invest in the average investment.
As the Professor said, the division of capital are all income-producing assets. And this is the average. And if you read Document CE-158, you will find the breakdown in their assets that yielded 16 percent in real terms and so on and so forth. Of
[Page 1761]
course, this is not a memory test. I don't remember all the numbers in the Fernández Baca Report, but it's in the record, and we can look at it, I assume.
Q. You certainly do not attest in any of your Reports to the existence of a security or other investment in Perú in the 1970s, 1980s, and 1990s, that included a specific lending return that is based on all assets in the Peruvian economy; correct?
A. That's correct. I don't mention a security because there was none.
Q. Right. So, this is a return that is measured on a theoretical investment that is not really possible to make in practice; correct?
A. I don't know if it is possible to make it. On average, people obtained it. There were people that made more. There were people that made less, and we are working here with an average. It was obviously available to Peruvians because these are ex post data. This is what happened.
Q. Yep.
A. This is not an invention. It is not taken out of thin air. It is not a magical number. It is
[Page 1762]
the reality of Perú.
Q. Yeah. Now, you criticized this morning in your presentation the use of the one-year U.S. Treasury bills, and you had this analogy of a person, a Peruvian flying to Miami to buy a one-year U.S. Treasury Bill.
Do you recall that?
A. I do.
Q. And I know you don't think Bondholders could or would make such an investment, but an investment in one-year U.S. Treasury bills is actually possible, such a security exists; right?
A. It is--it was not legally possible for Peruvians during most of that period, if not all of the period under consideration.
Q. Okay.
A. There were exchange controls, there were capital controls. I'm not a lawyer, but it was an offense that was legally punishable to go beyond a certain amount of dollars or any other foreign currency. So, that's the reality.
Q. And you also mentioned in your presentation
[Page 1763]
that the World Bank uses the--what is it?--the Harbinger approach?
ARBITRATOR DRYMER: Harberger.
BY MR. LLANO:
Q. Harberger. Okay. Harberger approach.
And they use that when they lend money to States--
A. No, I didn't say that.
Q. What does the World Bank use the Harberger approach for?
A. We're going to go back, Mr. President. I'm sorry. I'm forced to do this.
What I said was that when the World Bank lends money for a hydroelectric project, for a highway, for an infrastructure investment, it has to make sure that the client, which is a sovereign government, invests those monies wisely. I think I used the word "wisely." In order to do that, it has to calculate a hurdle rate, and that hurdle rate is in economic theory known as the opportunity cost of funds. It is how those funds--would those funds, if they had been introduced into the economy would have
[Page 1764]
yielded--we are now instead of introducing it into the economy, we are going to use them to finance the hydroelectric project.
That's the hurdle rate, which is not very different from hurdle rates that companies use as a concept. And the hurdle rate, I said, at the World Bank for a long period of time has been calculated using the Harberger approach. And I added--now it's going to be like the 10th time--that the MEF in Perú has used same model as recently at 2011.
Q. Thank you.
And we happen to be sitting in the World Bank, and we can agree, can we not, Mr. Edwards, that the World Bank does not lend to individual investors, including to Peruvian Bondholders; correct?
A. Complicated answer.
PRESIDENT FERNÁNDEZ ARMESTO: As a general norm, I think no.
THE WITNESS: No. Well, there is the arm of the World Bank that does; right? The World Bank is a group. This is the Bank of International Reconstruction. I mean, we are going to
[Page 1765]
get--Mr. President, we can get in depth at any level the lawyers want. This is the World Bank rule. The World Bank Group includes as a branch as the IFC. The IFC does lend to individual companies in the private sector. The international bank, the IBRF does not, but at the same time, the methodology that we use is what it is opportunity cost, and the opportunity cost comes from extracting a dollar from a country and devoting it to a government project. That dollar is extracted, comes partially from foregone investments, partially from postponed consumption. We have to use--I'm going to get here into the details because this is what--he is asking for that, Mr. President.
(Overlapping speakers.)
PRESIDENT FERNÁNDEZ ARMESTO: No, no, no. He's definitely not. No, but he is definitely not, Professor.
THE WITNESS: If he needs it, I'm available.
BY MR. LLANO:
Q. Great.
So, you cite in your Report to no evidence,
[Page 1766]
contemporaneous to Gramercy's purchase of Land Bonds indicating that Gramercy expected a theoretical approach in setting an interest rate under Peruvian law for a Peruvian instrument; correct?
A. Correct.
Q. Okay. Now, you're calculating foregone opportunity foregone opportunities costs on an opportunity that never existed and that no Peruvian could actually forego; correct?
A. No, not correct.
PRESIDENT FERNÁNDEZ ARMESTO: No. No.
THE WITNESS: I don't know.
BY MR. LLANO:
Q. You don't mention anything, do you?
A. Someone got that return, and that someone is the average. So, of course, there are lots of people above the average and below the average, and there are people on the average.
Q. We just established that you cited no specific investment that is based on the lending return to all assets in the economy, and I'm asking you how could someone forego an opportunity that you
[Page 1767]
cannot buy. There is no such security, no such title; correct?
A. Mr. Llano, I've said a hundred times now that this is the average. We are estimating--I am estimating the average foregone opportunity for an average investment in Perú, and I think that was available because this is on the passive side. You didn't have to put on your boots and get the boots on the ground.
On the passive side, it was available for the people who originally received the Bonds. It's an average. Of course, it's an average. And there were no EPFs at the time. There was no Vanguard 500 or equivalent at the time. Of course not.
Q. Right.
A. But the average individual obtained--the average capital obtained in Perú, 10.97, and that number that I calculated is confirmed by a number of other estimates which I cite in my Report.
Q. Okay. Now, let's go to your Third Report, Tab 11.
A. Yeah, I have it.
[Page 1768]
Q. Sure. And at Paragraph 67, please. You mention here valuation of Land Bonds by an association called ADAEPRA.
Do you see that?
A. Yes.
Q. And ADAEPRA is an association of Peruvian holders of these Land Bonds; correct?
A. Yes.
Q. And ADAEPRA performed this valuation in December 2006; correct?
A. Yes.
Q. So, that was around a time that Gramercy started purchasing the Land Bonds; right?
A. That's my understanding, yes.
Q. For Tranche 1, I mean. Yeah.
A. The only tranche I know, yes.
Q. So, would you agree that ADAEPRA has an interest in maximizing recovery on the Bonds, sir?
A. Yes.
Q. And they are unlikely to want to undervalue these Bonds; correct?
A. I think that they would try to value them
[Page 1769]
fairly so that they, in their legal claims, they will be--if they get awarded the amount they are claiming there. I don't think--but I don't know. I've never met the ADAEPRA people. I don't know what they are doing.
Q. Just based on pure common sense, they wouldn't want to undervalue; right?
A. They would want to value them fairly so that the Courts would agree with them.
Q. Right. So still on Tab 11, your Third Report, and still on Paragraph 67, in the fourth line, you say: "ADAEPRA did so by adjusting the outstanding face value of the Bonds by the increase in Perú CPI between the issuance date and present and applied interest on a simple basis at the stated coupon rates of the Bonds from the years of the last clipped coupons."
Do you see that?
A. I do.
Q. And you then mention the differences between your approach and the ADAEPRA approach in the Report; correct?
[Page 1770]
A. Yes.
0. And the first difference is that ADAEPRA used an interest rate that was equal to the stated coupon rate on the face of the Land Bonds, rather than your rate of 7.22 percent; correct?
A. Yes. Yes.
Q. And the second difference is that ADAEPRA applied a simple, rather than compound interest, and did so from the year of the last clipped coupon rather than from the date of the--from the year of the last clipped coupon rather than from the date of the last clipped coupon; correct?
A. Yes.
Q. Paragraph 68, short paragraph.
A. Hold on. I also applied from the date of the last clipped coupon, both. So--so I think that the difference there is compounded as opposed to simple interest.
Q. Right. So are you aware of connections between--or payments by Gramercy to ADAEPRA?
A. The answer is no, but with that no is that I may have read in the Transcript that there was a
[Page 1771]
connection between Gramercy and ADAEPRA. So, I don't remember the details. So, it's a no that I don't know. It is not like the clear, but I seem to remember something, and if you want me, we can read the Transcript.
Q. We don't need to. But just to try to refresh your recollection, do you recall testimony by Mr. Joannou in connection with their costs incurred or expenses incurred and payments to ADAEPRA in that connection? Do you recall that?
A. This is what I'm just telling you. I seem to have read in the Transcript while I was on the plane a connection between the two. But I don't remember the details, and if you say that there was payments, there must have been payments later on.
Q. Now, Paragraph 68 in your Report says that this different approach between ADAEPRA and yourself leads to a valuation of the Gramercy Land Bonds of $330 million.
Do you see that?
A. Which--there are several bullet points.
Q. Paragraph 68.
[Page 1772]
A. But there are several bullet points; right?
ARBITRATOR DRYMER: I think you're in the wrong Report.
THE WITNESS: Wrong Report?
MR. LLANO: Tab 11?
ARBITRATOR DRYMER: It's in your Reply Report.
MR. LLANO: Yes, Third Report.
THE WITNESS: Reply Report. It's easier to handle these. But now I go to the wrong one. 68?
BY MR. LLANO:
Q. Yes.
A. Maybe that's why we were disagreeing. Maybe we'll go back to agreeing, Mr. Llano. I was looking at the wrong booklet.
Q. We were becoming fast friends already.
A. Yes.
Q. So, Mr. Edwards, Paragraph 68?
A. Yes, I can see it now.
Q. Right. It's a short paragraph.
A. Yeah.
Q. It's two lines and you say--
[Page 1773]
(Interruption.)
Q. I will just repeat the point for the record. The point is that the different approach between ADAEPRA and yourself leads to a valuation of the Gramercy Land Bonds of 330 million; correct?
A. Yes.
Q. And that is about 20 percent of the 1.8 billion at which you value the Gramercy Land Bonds; correct?
A. Yes.
Q. So, in addition to Gramercy itself in its 2009 model, the local Bondholders association also applied the stated interest rate on the face of the bonds; correct?
A. Well, I understand that there are other instances where other interest rates were used, like 6.7 percent in the--I think it was Agricultural Commission. Yeah, but this was--there is a difference here in the interest rate between what they are using and what I am using.
Q. Right. And ADAEPRA specifically is applying the stated interest rate on the face of the Bonds;
[Page 1774]
yes?
A. Yes.
Q. And so it would be fair to assume that ADAEPRA also considered the stated interest rate on the Bonds to be fair and appropriate; correct?
A. I don't know if they considered it to be fair and appropriate. My guess--or maybe you don't want my guess.
Q. Well, we started this discussion by saying that ADAEPRA would try to get to a fair outcome that the Tribunals would uphold. That was your testimony.
A. Yes.
Q. So, it would be fair to assume, on that basis, that ADAEPRA considered the stated interest rate on the Bonds to be fair; right?
A. I think that they did not have the expertise to look at the--at a technical analysis of those foregone opportunities, but I don't know.
Q. So, those contributions by Gramercy did not help to get them the expertise that was necessary to make this calculation; correct?
A. I cannot answer that question.
[Page 1775]
Q. All right.
PRESIDENT FERNÁNDEZ ARMESTO: I'm surprised that the compounding implies $510 million.
THE WITNESS: It's called the magic of compounding. So think that--
PRESIDENT FERNÁNDEZ ARMESTO: It uses annual compounding.
THE WITNESS: But remember the Rule of 72; right? The Rule of 72 says that at 7.2 percent per year you double in 10 years.
Now, when I tell that to my daughter, who is a lawyer, she says, no, it increases by 72 percent. And then I explain to her compounding. When you do this over time--and I haven't done it, but if we do it--I'm sure that it's right.
PRESIDENT FERNÁNDEZ ARMESTO: I'm looking at your numbers.
THE WITNESS: Yeah. So, this is magical. This is what compounding does when you do it for 30 or 40 years. It blows out.
And the first way to think about it is the Rule of 72, which doubles in 10 years, although
[Page 1776]
people that use simple interest say, no, you need 10 percent to double in 10 years, not 7.2.
MR. LLANO: May I proceed, sir?
PRESIDENT FERNÁNDEZ ARMESTO: Yes, of course.
MR. LLANO: Thank you.
BY MR. LLANO:
Q. In fact, the heading right above Paragraph 67 refers to approaches that are based on "simple interest at the original coupon rate."
Correct?
A. Yes.
Q. And you don't cite in this Report to any changes in Peruvian law between 2009 and 2013 that would justify a higher interest rate or, in fact, any particular rate for all Land Bonds; correct?
A. Correct.
Q. Now, leaving these particular numbers aside for a moment--the Gramercy model, the ADAEPRA model, the Castillo model--we can agree that all of these options show that at the time when Gramercy bought its Land Bonds, there wasn't a fixed rule that
[Page 1777]
everyone knew and everyone had a consensus about as to how interest should be calculated on all Land Bonds; correct?
A. I would qualify that saying, I would say that if you ask economists, there would be a consensus on the procedure and the method to use, although, before doing it, you would know what the value--the actual number was.
Q. I will repeat my question: Can we agree that the fact that we have all these models--ADAEPRA, Gramercy internal model, Castillo model, the fact that we have a menu shows that at the time when Gramercy purchase its Bonds, 2006 to 2008, there wasn't a fixed rule as to how interest should be calculated on all the universe of Land Bonds; correct?
MR. RIEHL: Mr. President, again, this is calling for a legal conclusion, and this is not a legal Expert.
PRESIDENT FERNÁNDEZ ARMESTO: No. No. I think it's a fair--well, to the extent--
(Comments off microphone.)
[Page 1778]
THE WITNESS: I answered it, and the answer is that--I think that in the first time you asked the question, the word "consensus" was included. And my answer was that, I think that if you assemble a group of top economists, they would come to a rapid consensus that the way to do this is--the methodology, not the number, but the methodology is to look for foregone opportunity, and that the Harberger method is a very highly respected and proved method to be used, which is what I did.
BY MR. LLANO:
Q. But I'm not just talking about ADAEPRA, sir. I'm talking about Gramercy. Their own internal model, your client, they came up with a model that said stated interest rate. Mr. Castillo, a Peruvian law Expert, gave a menu of options. Can we agree, sir, that there wasn't a fixed rule as to how the interest should be calculated on all Land Bonds at the time that Gramercy purchased the Bonds? Simple question.
A. I'm going to answer that--again, not a fixed rule, but I think we could have reached a rapid
[Page 1779]
consensus.
Q. Okay. Got it.
Now, let's go to Tab 17. Tab 17 is CE-339.001. These are the Bond contracts.
PRESIDENT FERNÁNDEZ ARMESTO: Okay.
MR. LLANO: The Bond purchase contracts, and I am referring to the first contract.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. Which is 001.
THE WITNESS: I'm lost here.
BY MR. LLANO:
Q. Tab 17 on your binder, sir.
A. I have like an Excel.
Q. Yeah, it's many pages, and we'll go through it.
A. Okay.
Ω. You have not seen this document before, have you?
(Comments off microphone.)
Q. You have not seen this document before; correct?
A. Not the way it is presented here, but I've
[Page 1780]
seen some of the contracts, yes.
Q. You have seen some of the purchase contracts.
A. I think so, yes.
Q. You cite to none of them in your Reports; correct?
A. I don't remember.
Q. So, is it fair to assume that you saw these purchase contracts in the context of your hearing preparations in the same way as you saw the financial statements, sir?
A. No. If I did see them, it was earlier.
Q. What do you mean?
A. Well, when I saw the scan of one of the Bonds. So, if I have seen them. I frankly don't remember if I've seen them or not.
Q. So, you saw these before your First Report; is that correct?
A. I am telling you, I don't remember.
Q. Okay. But sometime during the preparation of your three Reports, you saw one or more of these Contracts?
[Page 1781]
A. They look familiar, but I don't remember. They look--the pages, everything in caps, they look familiar.
Q. Okay.
A. But I frankly don't know.
Ω. All right. Now, you see on the very first page of the PDF of the document, there's a number 1?
A. Yes.
Q. With a circle on it; right?
A. Yes.
Q. If you turn the page--
A. Hold on. Yes.
Q. Yeah? On Page 2.
A. Yeah.
Q. The second page of the document.
A. Yeah.
Q. There is a number of unclipped coupons.
A. Yeah.
MR. LLANO: I'm sorry, Mr. Edwards. Hold on one second.
PRESIDENT FERNÁNDEZ ARMESTO: We are waiting for Professor Stern.
[Page 1782]
ARBITRATOR STERN: Okay. I'm here.
BY MR. LLANO:
Q. Okay. We were on Page 2 of the document.
A. Yeah. Yes.
Q. And on the fifth column, starting from the left side, you see a Column called "unclipped coupons."
Do you see that?
A. Yes.
Q. Then if you turn two pages, there's a cover letter from the Muñiz law firm.
Do you see that?
A. Yes.
Q. And on the second page of that cover letter, which is Page 5 of the full document, there is a reference to Annex 1-D.
Do you see that?
A. Yes.
Q. And that is the amount paid for the Bonds at issue; correct?
A. I would have to read the whole Report. I don't know--the whole letter.
[Page 1783]
Q. Okay. No, but just read with me. It says Annex 1D is a copy of the check for $11,500.
Do you see that?
A. Yeah. I thought that that was the fee Mr. Muñiz was getting.
Q. No, it's not.
A. The lawyer.
Q. I represent to you that it's not. It's the purchase price.
A. Okay. I will take your word for it, of course.
Q. Okay. Now, let's go to Page 9. So, I want to go to Clause 1.7 of the Purchase Contract?
A. Yeah.
Q. And to assist you, the page numbers are also--
A. I'm there.
Q. On the bottom right. Okay. Good.
Clause 1.7, you see that there's a face value, a face value in the narrative--not in the table--of 193,546.66 soles oro.
Do you see that?
[Page 1784]
A. I do.
Q. And below that there are a list of the Bonds that are covered by the Contract; right?
A. Yes.
Q. And just below the table, there is a reference to an Annex 3?
Do you see that?
A. No.
Q. "Sin perjuicio," right below the table.
A. Yeah, I see that.
Q. And at the end of that same line, there's a reference to Annex 3.
A. Yeah, I see that.
Q. Okay. And that Annex 3, if you keep reading, contains the summary provided by ADAEPRA of the current value calculation for those Bonds.
Do you see that?
A. Yes.
Q. And according to ADAEPRA, if you just scroll down visually, you'll see that ADAEPRA calculates a current value of, including interest, of 232,037.56 Nuevo Sol.
[Page 1785]
Do you see that?
(Interruption.)
A. Yes.
Q. And are you aware that the other Purchase Contracts, the other Bond Purchase Contracts by Gramercy contain a similar reference to the ADAEPRA valuation?
A. That's my understanding, yes.
Q. Okay. So, this is the--these are the numbers, the--in terms of valuation, that Gramercy decided to reference in its Purchase Contracts; correct?
A. Let's say conditional, yes.
Q. Well, there no reference to another alternative valuation in these Contracts; correct?
A. You want me to read the whole Contract?
Q. Well, you told me that you saw some of them.
MR. RIEHL: Mr. President, I'm not--
PRESIDENT FERNÁNDEZ ARMESTO: It is not, really. Mr. Riehl, let me. I don't know where you are aiming as regards Professor Edwards' Expert Opinion. Where do you want him--to take him?
[Page 1786]
MR. LLANO: Well, I can tell you the bottom line. Gramercy relied on these numbers in these Contracts and no other numbers.
PRESIDENT FERNÁNDEZ ARMESTO: I'm sure that it is true.
MR. LLANO: Yeah. Okay.
PRESIDENT FERNÁNDEZ ARMESTO: And the numbers they relied upon are those which are in these Contracts. I'm sure. They could not have relied on Professor Edwards' numbers because they were inexistent.
BY MR. LLANO:
Q. Right. They are in this arbitration, though; right? They exist in this arbitration, helpfully for Gramercy; right?
So, Mr. Edwards, I'll move on, Page 10, next page.
A. Yes.
Q. There is a clause third, "conditions for sale."
Do you see that?
A. Yes.
[Page 1787]
Q. And subsection 6, VI--
PRESIDENT FERNÁNDEZ ARMESTO: "Derecha expectaticio," you are there.
BY MR. LLANO:
MR. LLANO: Yeah. So, there's a reference to an expectation right here; right?
A. Hold on. You have to--where is that? Number 6.
Q. Yeah.
A. "La posibilidad de cobro efectiva."
Q. Umm-hmm?
A. Are you talking about the possibility of effective collection?
Q. Do you see that?
A. Yeah.
Q. And do you see the reference to an expectative right?
A. Yes.
PRESIDENT FERNÁNDEZ ARMESTO: We have seen that somewhere, sometime in this week.
BY MR. LLANO:
Q. Good. So, it was explicitly stated in these
[Page 1788]
Contracts that what Gramercy was buying was an expectation right, and that it took the risk that it would receive that expectation; correct?
MR. RIEHL: Mr. President, that calls for legal conclusions and these documents obviously speak for themselves. We don't even know that he has seen these documents before.
PRESIDENT FERNÁNDEZ ARMESTO: I mean, what is the relationship with his Expert Report?
MR. LLANO: The relation is what was Gramercy buying.
PRESIDENT FERNÁNDEZ ARMESTO: He is not. He is--he has--I have said that. He developed a model with which we can agree or disagree, maybe right or wrong, on valuation of Land Bonds in Chile at any time--in Perú at any time since they were issued to 2018, based on CPI. This was the purchase of a bond by Gramercy. This is for us. It may be highly relevant for us, but it is--I wonder if it is relevant for the Expert.
MR. LLANO: Umm-mmm.
PRESIDENT FERNÁNDEZ ARMESTO: I see the
[Page 1789]
relevance, and we have gone through this document, I have a note here on this, and I perfectly remember, and it says in Spanish, "derecho expectaticio," is also an unusual expression in Spanish, so I have it in mind. But I wonder if Professor Edwards can actually help us with that.
MR. LLANO: We can move on, Mr. President. Thank you very much.
BY MR. LLANO:
Q. Let's talk about inflation, Mr. Edwards.
A. Yeah.
Q. Let's go to--one second.
(Comments off microphone.)
PRESIDENT FERNÁNDEZ ARMESTO: Of course. Let us take--let us take--because I think we all need a break. It is now--let's come back at 3:00.
(Brief recess.)
PRESIDENT FERNÁNDEZ ARMESTO: We resume, and we give the floor to Dr. Llano.
MR. LLANO: Thank you, Mr. President.
BY MR. LLANO:
Q. Mr. Edwards, let's go to your--hold on.
[Page 1790]
I'll tell you which Report. It's your First Report, Tab 13.
A. Yes.
Q. And you provide an example about a car purchase in this paragraph.
A. You didn't give me a paragraph number.
Q. Oh, 41. Sorry. Paragraph 41.
PRESIDENT FERNÁNDEZ ARMESTO: 41.
MR. LLANO: Yes.
THE WITNESS: Yes. It's not the amended one. It's the other one. First First.
BY MR. LLANO:
Q. It's on the screen now as well.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you.
BY MR. LLANO:
Q. Okay. Good. Mr. Edwards, you see the example about a car purchase.
A. Yes.
Q. Now, let's consider that example. And it starts on the third line from the top. You say: "Consider the following example. Suppose that Perú had given a landowner 100,000 soles oro in cash
[Page 1791]
in January 1970 when the earliest of Gramercy's Land Bonds were issued, in exchange for his or her land."
PRESIDENT FERNÁNDEZ ARMESTO: Can we read it to ourselves?
MR. LLANO: Absolutely.
PRESIDENT FERNÁNDEZ ARMESTO: I mean, I think the Court Reporters have promised me a coffee if I can convince counsel not to read into the record.
(Comments off the record.)
PRESIDENT FERNÁNDEZ ARMESTO: Let's read it, and then you put your question.
MR. LLANO: Great. So, please read Paragraph 41 to yourself, Mr. Edwards.
BY MR. LLANO:
Q. Okay. At the end of that paragraph, you say that: "The landowner would need the equivalent of roughly 103 trillion soles oro to purchase a new car today."
Do you see that?
A. Yes.
Q. And then you give a formula for that. Do
[Page 1792]
you see that?
A. Yes.
Q. And then in Paragraph 42, you start by acknowledging that Perú did not make a cash payment but instead gave Bonds to these landowners; correct?
A. Right.
Q. And in the third sentence in Paragraph 42, you write that: "If he"--the landowner--"would be paid now, many years later, he would have to receive not the nominal amount of 100,000 soles oro but the amount of money that would allow him to purchase the same car."
Do you see that?
A. No, it doesn't say that. It says "the same kind of car."
In the previous paragraph, it says:
"Setting outside technological factors," in--since '85 until now, it is not going to be the same model of car because it's not available.
I'm trying to be careful in this Report. It says there are technological factors and it's the same kind of car, not the same car.
[Page 1793]
Q. If you look at the sixth line from the top, it says "same car" not "same kind of car"; correct?
A. I'm reading--
Q. It's highlighted on your screen in front of you as well. It says "same car"; right?
A. Yeah. And in the four lines down, it says "same kind of car."
Q. Yeah, I was reading--
A. I mean, that's fine. I mean, that portion.
Q. Now, you conclude this paragraph by saying: "In other words, adequate compensation"--I'm referring to the last sentence now--"adequate compensation for the effects of severe inflation is the amount of money that would allow the landowner to purchase the same kind of car today that the face value of the Bond would have allowed the landowner to purchase in January of 1970"; correct?
A. Yeah.
Q. Now, if we turn down to Paragraph 43, there's a reference there to Article 1236 of the Peruvian Civil Code.
Do you see that?
[Page 1794]
A. Yes.
Q. And there's a quotation to that Article, which I will not read, but you do quote the Article in that paragraph; correct?
A. Yes.
Q. Now, Article 1236 does not say, according to this quotation, that the value of an unclipped coupon on a Bond should be restored as of the date of the underlying Bond issuance as opposed to the date of the maturity of that coupon for principal and interest; correct? It doesn't say that?
A. It doesn't say that, that's correct.
Q. In fact, in the previous paragraph, which we just quoted, Paragraph 42, you mentioned the words "adequate compensation" twice, but you never say here "compensation in accordance with the current value principle under Peruvian law"; correct?
A. It doesn't say that, I agree.
Q. And for the record, there is no reference in this Report, dated June 2016, to a legal opinion or other Peruvian law authority for the proposition that Article 1236 requires updating value all the way back
[Page 1795]
from the date of issuance of the Bond and not just from the date of maturity of each coupon; correct?
A. It doesn't say that, no.
Q. All right. And you don't say in this Report, dated June 2016, that the 2001 Constitutional Tribunal Decision says that coupons should be adjusted for inflation as of the date of issuance of the Bond all those years ago as opposed to the coupon maturity date or the date of the last coupon payment; correct?
A. I believe that that's correct.
Q. What you do say in Paragraph 43 is: "This reasoning reflects the fact that in the absence of an appropriate adjustment, the economic value of an obligation at a point in the past--at a point in the past--may differ dramatically from the economic value of that same obligation at the present day."
Do you see that?
A. I do.
Q. You don't reference in this paragraph or anywhere else in this Report a provision of Peruvian law or advice that you received on Peruvian law
[Page 1796]
saying that the words "a point in the past" means exactly the date of issuance of the Bond and not the date of maturity of the coupons for principal and interest. You don't reference that; right?
A. I don't.
Q. And you don't cite in this Report to any evidence as to Gramercy's understanding of the start date for calculating inflation adjustments at the time when it purchased its Bonds in between 2006 and 2008; correct?
A. Correct.
Q. Let's go to Paragraph 155. Second sentence says: "The MEF Formula calls for the face value of the Bond to be converted to U.S. dollars at the Parity Exchange Rate at the date of the first unclipped coupon."
Do you see that?
A. I do.
Q. And by "MEF Formula" you mean the formula that the MEF implemented to compensate Bondholders in August of 2017; correct?
A. Incorrect.
[Page 1797]
Q. What's the MEF Formula in this paragraph referring to?
A. I think that we are referring to my First Report?
Q. I'm sorry?
A. We are referring to my First Report?
Q. Yes.
A. It was produced on June of 2016. It cannot refer to a formula that was produced in February of 2017.
Q. True. True.
Now, in that reference that you make to the previous formula, to the existing formula at the time, you are talking about the date of the first unclipped coupon as a description of that MEF Formula; correct?
A. Yeah. The paragraph starts--it is "fatally flawed" that formula, and I explain that in my direct.
Q. Sure.
A. Which part are you referring me to?
Q. Well, the second sentence says, again: "The
[Page 1798]
MEF Formula calls for the face value of the Bond to be converted to U.S. dollars at the Parity Exchange Rate at the date of the first unclipped coupon," and you even have that phrase in italics; right?
A. I do. I do.
Q. Right. And then you go on to say: "This has the result of failing to compensate the Bondholder for any inflation from the date of issuance to the date of the first unclipped coupon, which for some clipped Bonds was significant"; right?
A. I do.
Q. So, it is your position that Perú must compensate Bondholders for inflation that occurred even during periods of time when those Bondholders voluntary redeemed coupons; correct?
A. Yes.
Q. And then you give an example, which I think is helpful. And we're still on Paragraph 155. You say, for example--
Following the Tribunal's instructions, just read Paragraph 155.
PRESIDENT FERNÁNDEZ ARMESTO: Yes. Why
[Page 1799]
don't you? I think it's more efficient.
(Comments off microphone.)
BY MR. LLANO:
Q. Okay, Mr. Edwards.
A. Yeah.
Q. In this example, the Bondholder chose to clip and collect on coupons between 1972 and 1984; correct?
A. Yes.
Q. And you note that inflation during this period increased by about 20,000 percent; correct?
A. Yes.
Q. And so, the 12 clipped coupons on this Bond also underwent this inflationary effect; correct?
A. Not all of them. It depends on when they were clipped.
Q. Well, we're talking about a limited window of time during which there was inflation of 20,000 percent?
A. At the end.
Q. Sure.
PRESIDENT FERNÁNDEZ ARMESTO: So, since it's
[Page 1800]
annual, it goes from zero to 20,000.
BY MR. LLANO:
Q. Right.
A. And we can assume that they were clipped one year at a time. We don't know in reality if people for one year didn't clip and then they submitted two. There is no accelerated payment.
Q. Right.
A. But there is, of course, recourse to delay payment. They can bring three coupons in a year. So, we don't know when they were clipped.
Q. But one or more of these coupons would have suffered this inflation--right?--during that period of time?
A. Not necessarily, but let's say yes.
Q. Okay. And we know, of course, from economic downturns, that this is what happens sometimes to investments; right?
A. No.
Q. Well, sometimes investments make losses, don't they?
A. Sometimes we have hyperinflations. Very few
[Page 1801]
times we have hyperinflations. When we teach hyperinflations, we count them with maybe four hands; right? We start with the German hyperinflation; we go to the Austrian hyperinflation; we go to Hungarian hyperinflation; we go to Perú, we go to Argentina, Chile at the end of the Allende--the beginning of the dictatorship. We go to Zimbabwe. It is not--we go to Venezuela now. So, no, it's not--I wouldn't say it is common.
Q. I didn't say "common."
A. No--well, could you repeat, then, your question?
ARBITRATOR DRYMER: You said "sometimes."
BY MR. LLANO:
Q. I did say "sometimes."
A. Well, very often. Let me specify. Very--excuse me, on the contrary. Very seldom do we see this situation of 20 percent inflation.
PRESIDENT FERNÁNDEZ ARMESTO: 20,000.
THE WITNESS: 20,000 percent inflation.
BY MR. LLANO:
Q. Right. You will agree, as a general
[Page 1802]
proposition, that sometimes investments make losses; right?
A. Yes, I agree with that.
Q. Right. And now Gramercy is not making a claim to the effect that the clipped coupons were underpaid; correct?
A. The point that I make is that even the clipped coupons suffered significantly from inflation erosion, and that the intrinsic value should be calculated on the inflation component from day of issuance, because that is the only way this debt, under the current value principle, principio valorista, maintains the purchasing power and equivalent basket of the original obligation.
Q. Thank you. Now, my question was more specific than that.
Gramercy is not making a claim in this Arbitration--right?--to the effect that the clipped coupons were underpaid; correct? They are not claiming for that; right?
A. I think that that has a legal connotation, and I am not comfortable answering that.
[Page 1803]
Q. Well, you are not quantifying in your Report any alleged damages to Gramercy for the clipped coupon component; right?
A. I--the clipped coupon, as I in my direct, has two components: The body of the coupon, and the--I'm sorry, you are right. Yeah. That's a gray part that separates. Yes.
Q. Yeah. So, Gramercy is not asking this Tribunal to go back, unravel those 12 coupon redemptions, and pay the Bondholders more; correct?
A. That is correct.
Q. Right. And for the record, you are not quantifying such a claim, either; correct?
A. That is correct.
Q. Now, therefore, that means that clipped coupons are gone--I think you said "extinguished" in your direct examination--and they are not the subject of this arbitration; correct?
A. That's my understanding. They are not.
Q. Now, in your three Reports, you don't reference any cases where a State went back and paid more for coupons that were redeemed decades ago;
[Page 1804]
correct?
A. No.
Q. Because clipped and paid coupons are presumed to be settled obligations--again, extinguished; right?
A. Correct.
Q. So, for Bonds with at least some coupons clipped--okay? We're talking about the universe of Bonds with some clipped coupons--for those Bonds, it would never be the case that the Bondholder would be able to buy the same car now as in 1972, because you don't get to revalue the coupons that were already paid; correct?
A. That sounds correct, yes.
Q. Now, going back to your example on Paragraph 155, you wrote that the last coupon in that example was clipped in November 1984; correct?
A. Correct.
Q. So, if that Bondholder, that hypothetical Bondholder, had shown up at the Agrarian Bank in November of 1985, the following year, they would have received another payment that would be similarly
[Page 1805]
affected by inflation; correct?
A. Yes.
Q. And that Bondholder at that point in time--
A. Hold on. Could you remind me of the paragraph we're talking about now?
Q. 155.
A. 155. Okay.
Q. And that hypothetical Bondholder would not have received a revalued payment for the inflation of the prior 13 years; correct?
A. For the clipped coupons, no.
Q. Or for the unclipped ones?
A. Oh, if he had shown up in '85?
Q. Yeah.
A. No.
Q. Same thing in 1986; correct?
A. Correct.
Q. And same thing until at least November of 1991, given that the Agrarian Bank closed in May of 1992; correct?
A. I'd say yes for that time. Yeah. Okay.
Q. And so, that Bondholder chose not to show
[Page 1806]
up, or maybe became unavailable; right?
A. Or maybe thought that he didn't--it was not worth his while, given that the nominal value, due to the hyperinflation generated by Perú, had eroded the value of his Claim.
Q. We are on the same page.
A. Okay. Excellent.
Q. Either way, you're not alleging in your Report that between 1984 and 1991, the Agrarian Bank refused payment on these outstanding coupons; correct?
A. No.
Q. So, under the explicit terms of the Bonds, of the Land Bonds, if the Bondholders were paid duly and on time in 1984, 1985, 86, and so on, there was no mandate back then to make a revaluation for past inflation; correct?
A. I think that this is taking me to a legal terrain, which I'm not very comfortable with.
Q. You're not aware of any such mandate, yes?
A. I'm not aware of any such mandate, no.
Q. Right. Now, in the established Peruvian
[Page 1807]
Bondholder Process--I'm switching gears now--from that period to the current Peruvian Bondholder Process--and I'm talking about the August 2017 MEF Supreme Decree--the adjustment for inflation is made as of the date of the last clipped coupon, as we know, and in your example, that would be November 1984; correct?
A. Let me--give me a second to look at something here in my--
THE WITNESS: Mr. President, can I look at my own--
PRESIDENT FERNÁNDEZ ARMESTO: Yes, of course. You can look at anything you want.
THE WITNESS: This will be very short. Okay. Could you ask--Mr. Llano, could you ask your question again?
BY MR. LLANO:
Q. Yeah. So, under the August 2017 MEF Formula, the adjustment for inflation is made as of the date of the last clipped coupon?
A. That's correct.
Q. And, in your example, that would be
[Page 1808]
November 1984; correct?
A. Yes.
Q. Now, Perú did not set the start date as the date of maturity of each coupon; correct?
A. That's correct.
Q. It also did not set the start date as of when the Agrarian Bank closed; right?
A. That's correct.
Q. In fact, it went further back, and set the date when the Bondholders last cashed in on a coupon; correct?
A. That's correct.
Q. And in the case of Bonds with fully unclipped coupons, that would be the issuance date; correct?
A. That's correct.
Q. And in the case of the Gramercy Bonds, you confirmed earlier that about 27 percent of those Bonds are fully unclipped; correct?
A. Yes, 27 percent.
Q. Sure. And whoever left their Bonds fully unclipped, whoever saved it as a token or put it away
[Page 1809]
in a vault or chose not to do anything, could have shown up at the Agrarian Bank and cashed in on their coupons until 1992; right?
A. They could have after the value had been eroded.
Q. I'm not talking about the value being eroded. I'm literally talking about day one, the first coupon. They chose not to collect; right?
A. Well, let's say yes.
Q. Okay. And had those Bondholders shown up, until 1992, they would not have received an inflation-adjusted payment like the one that you propose in your Reports; right?
PRESIDENT FERNÁNDEZ ARMESTO: I'm not quite sure that it is true that they could have collected, because I have a feeling from--that they were so worthless that they would not even get--there was nothing to collect, because--so I am not quite sure that your question--we may have to look into this. But from what the Vice Minister told us, I think that they actually had no value, that you could not pay in money because they were--there was no fractional
[Page 1810]
money to pay them. But it may be wrong.
MR. LLANO: Thank you, Mr. President. Thank you. I was talking about the period before hyperinflation, let's say 1971; right?
PRESIDENT FERNÁNDEZ ARMESTO: Yeah. I was speaking shortly before the Land Bank disappeared.
MR. LLANO: Fair enough.
PRESIDENT FERNÁNDEZ ARMESTO: When you ask, "Why did Bondholders not go?" And I think one of the reasons was that what they got was nothing. I mean, there was no possibility of paying them the nominal value, because the nominal value was so eroded that there was no physical means of giving them a coin.
BY MR. LLANO:
Q. I think we can cut to the chase, so to speak. And my point wasn't why they didn't show up. I understand there may be multiple reasons. My question was: Had they shown up, had they shown up, they would not have received an inflation-adjusted payment like the one that Mr. Edwards proposes in his Report; correct?
A. That's correct.
[Page 1811]
Q. And you certainly would not have suggested that Gramercy should now recover lost value on those paid coupons; right?
A. Right.
Q. So, what Gramercy is asking for in this Arbitration is, effectively, more than what the original Bondholders would have received at the time; correct?
A. That's obviously correct.
MR. LLANO: Mr. President, I have no further questions.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you. Thank you, Dr. Llano.
Mr. Riehl, do you have any questions, any redirect?
MR. RIEHL: I do. Could I request a short break to get my thoughts in order, please?
PRESIDENT FERNÁNDEZ ARMESTO: Okay. Yes. Let's then--how long would you need?
MR. RIEHL: It should be about five minutes, I believe.
PRESIDENT FERNÁNDEZ ARMESTO: Very good.
[Page 1812]
Five minutes.
(Brief recess.)
MR. RIEHL: Mr. President, we are ready.
PRESIDENT FERNÁNDEZ ARMESTO: Whenever you are ready.
REDIRECT EXAMINATION
BY MR. RIEHL:
Q. Professor Edwards, this morning President Fernández Armesto asked you about the relationship between CPI in 2018 and CPI in 1992.
Can you please describe how CPI was measured in 2018?
MR. LLANO: Mr. President, I'm sorry to interrupt.
PRESIDENT FERNÁNDEZ ARMESTO: Dr. Llano, please. Let's finish this, please. It will not help if we start--please. Let's move on, and I may or may not have asked about that, and it's a redirect question. Let's move on.
THE WITNESS: CPI is measured in Perú as in any other country. There is a basket that comes from a survey of people's preferences. The basket is
[Page 1813]
updated with some frequency in order to incorporate changes and dates and preferences and technological changes, and every month there are functionaries. There are officials from the statistical office that go around and that sample goods and write down the prices.
In the old times, it was in a little black book. Now, maybe they take iPads. That, I don't know. And you value the basket in 2018--in 2018 May, and then you value the same basket in June, and the difference is the monthly inflation.
BY MR. RIEHL:
Q. And what relationship, if any, would there be between the CPI measurement in 2018 and the CPI measurement in 1992?
A. Well, what the CPI does, as I said, it has--it starts with a survey of what people--the typical household purchases, and that survey then is, as I said, adjusted with some--with some frequency, and the effort that is made is that it is maintained as equivalent.
I've used the word "equivalent" throughout
[Page 1814]
my testimony because, of course, the goods that we have today, including iPhones, were not around in 1992. So, what they do is they change sometimes occasionally and sometimes frequently. As I explained, during the hyperinflation in Perú, there were surveys in '88 and '89 and '90.
Traditionally, it is every 10 years or so, and we use what is known as an overlap system, where you do value the same--the old basket and the new basket, one particular or maybe two or three particular months, at the same time, and you get what in Spanish is called "con catanal" to build a chain between the different indices.
So, in 1992, the index would have reflected the prices of goods and services, the typical basket at the time, and then we follow how much you pay in soles every time. And when you change the basket, then you have the overlap. You have the chain index, and then you continue.
So, it's a typical basket of a typical household, how many soles first, Nuevos Soles oro (in Spanish), you buy differences across time, inflation.
[Page 1815]
MR. RIEHL: We have no further questions.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you.
Professor Stern or Mr. Drymer, any questions for Professor Edwards?
ARBITRATOR DRYMER: Give me one second, please.
No, none for me, sir. Thank you.
Again, thanks to counsel for their assistance in this process.
PRESIDENT FERNÁNDEZ ARMESTO: Professor Edwards, two questions for you.
QUESTIONS FROM THE TRIBUNAL
PRESIDENT FERNÁNDEZ ARMESTO: I want to go with you through the two systems of dollarization which have existed officially in Perú, and I want to have your opinion, as an economist of the implications. The first is in your Reply, which would be 3; no?
THE WITNESS: Yes.
PRESIDENT FERNÁNDEZ ARMESTO: It's your Expert Report Paragraph 3, Paragraph 71. And that is the Emergency Decree. Do you remember that? You
[Page 1816]
wrote about it.
THE WITNESS: Paragraph 71.
PRESIDENT FERNÁNDEZ ARMESTO: Yes, sir.
THE WITNESS: Yes.
PRESIDENT FERNÁNDEZ ARMESTO: Now, under this Emergency Decree, can you explain to us how that Emergency Decree proposed the dollarization be made?
THE WITNESS: It's not the most clear thing in my mind, the 2000 Emergency Decree. It is clear the actual Supreme Decrees from 2014 and 2017.
What I do know is that in the Emergency Decree, there was no specification on when interest should have begun with respect to the clipped--either it was last clipped or not.
PRESIDENT FERNÁNDEZ ARMESTO: Can I--sorry to interrupt.
THE WITNESS: Yes.
PRESIDENT FERNÁNDEZ ARMESTO: Because the first thing which drew my attention is that in 71, at the end, you say that this here, the calculation is made using the official exchange rate.
THE WITNESS: Right.
[Page 1817]
PRESIDENT FERNÁNDEZ ARMESTO: Okay. And this is what I wanted--this is my first question to you, and that is because we saw then that afterwards it is the other exchange rate.
THE WITNESS: Parity.
PRESIDENT FERNÁNDEZ ARMESTO: Parity Exchange Rate. What is the difference? From an economist's point of view, how can in 2004 be a proposal to do it using the official exchange rate, and why is it then in 2013 a proposal to do it using the Parity Exchange Rate? I would like to--that you explain to me the difference.
THE WITNESS: Yeah. So, I can only speculate, but I can give you what are the economic reasons for that thinking. I did not talk to the MEF officials. I did not talk to Dr. Seminario or anyone there.
The reality, as I said, in Perú from '69 to 1990, a little bit into 1990, is one of a highly distorted economy where there is not one official exchange rate. I wrote my Ph.D. dissertation on the Peruvian economy, and the question that I was asking
[Page 1818]
is floating market determination exchange rates, would they work in emerging countries, but Perú had that system, but it had a dual system between 1950 and 1954.
So, throughout this period, there were multiple exchange rates, and the official rate that we are talking about, 18.7, 38.7, and 19, and then it becomes 43, and then 45, and then 75, and today, after many changes, the floating rate of around 3.4.
The official exchange rate originally was one of many exchange rates and was one that was used to transform the dollars, say, that the mining companies produced by exporting back into soles oro, and was an exchange rate that was accessible to certain importers, mostly of first necessity items. So, if you need magazines and so on.
But for normal people, and if you wanted to import a watch or some nice eyeglasses or a nice tie, you had in general--and it varies through time--access to a different exchange rate.
So, under those circumstances, the official rate does not capture the reality. So let me add one
[Page 1819]
more thing. In many cases, what we have done in the past is take that rate, the black-market rate, and then take an average. That is--Governments don't do that because doing that means that they recognize that there was a black-market rate which they, of course, don't want to do.
So the parity rate, the change that someone recognizes--this is the good-faith assumption. And I'll finish with that, I promise. Someone recognized that, well, there is this theoretical issue, let's go for parity. Another theory is that they did official, and they found out, wow, we're getting too high of value. Let's get higher--of the valuation. Let's get a higher denominator to divide the original value to determine dollars. Let's find--and there you see how the MEF 2014 produces that enormous values that just by dividing make poof.
PRESIDENT FERNÁNDEZ ARMESTO: But my point to you is, if you use the official exchange rate, the amount of dollars which result is higher.
THE WITNESS: I assume so. It depends on which parity you use.
[Page 1820]
PRESIDENT FERNÁNDEZ ARMESTO: Okay.
THE WITNESS: And the parity--you have to do it carefully and you have to select the period, as I explained in the morning.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. And if you take the official exchange rate and you take a 7.5 percent compound interest, Gramercy Bonds are valued at USD 157 million.
THE WITNESS: I don't remember the figure.
PRESIDENT FERNÁNDEZ ARMESTO: It is in Paragraph 73.
THE WITNESS: Yes. This is what it says.
PRESIDENT FERNÁNDEZ ARMESTO: Very good. Now, if we go now to the other system, which is the Constitutional Court, the 2013 Decision, and you have that on Page 34 of your handout, very nicely done.
THE WITNESS: Yeah. In 34, I talk about potential adjustments to that, yes.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. So, for the first difference we see here, it is a Parity Exchange Rate.
[Page 1821]
THE WITNESS: Yes.
PRESIDENT FERNÁNDEZ ARMESTO: Now, if I ask you, Professor, where can I--where I do find a series of parity exchange rates of Chile, is there any international source--
THE WITNESS: No.
PRESIDENT FERNÁNDEZ ARMESTO: --which gives you the parity exchange rates of Chile?
THE WITNESS: No.
PRESIDENT FERNÁNDEZ ARMESTO: Is there any source where I can find the international--sorry, the parity exchange rates of Perú?
THE WITNESS: No, not easily. Some investment banks publish the real exchange rate in an effort to know if the observed rate is close or not to the equilibrium rate, and the basic--the most basic, basic, basic approximation is the parity rate.
But as I said earlier, modern approaches are much more sophisticated. The notion is that sometimes the exchange rate gets out of line, by a little bit. You may have heard yesterday that the Government of the United States said that it was
[Page 1822]
going expand its analysis of whether other countries were currency manipulators. That requires that they have a judgment on what should be the fair value of the exchange rate, so the Treasury will have to do that. But you cannot find it. If you Google "Parity Exchange Rate of Iceland," it doesn't pop up at all.
PRESIDENT FERNÁNDEZ ARMESTO: It doesn't pop up?
THE WITNESS: No.
PRESIDENT FERNÁNDEZ ARMESTO: Because there is no standard way of making that calculation. Is that the reason?
THE WITNESS: Because it is very difficult to choose the base that you have to apply, and when you do it, it is complex. And that's what I did in an effort and in my Report.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. So, each economist will calculate a different parity exchange because there is a judgment of decision in which is the base period you take.
THE WITNESS: I wouldn't say that that is exactly the case. There are some basic rules that we
[Page 1823]
all would agree on. One of them is that you never use one month. You use a longer period of time.
The second one is you don't use an extraordinary month. In my country, 1973 where there was a coup d'état, where the freely elected President Allende was toppled, as you know. We never would use '73 as the parity rate. We would never use '82 when there was a big crisis. We would not use '79, which was the second oil shock.
So, we get together, we talk, and we could come easily to our conclusion. So, it is not that everyone and it is totally arbitrary. No, it requires a prior conversation, and it requires looking at things like "what is the current account balance?"
The parity rate should be defined as that rate that is consistent with sustainable, external equilibrium. The country is not going towards crisis, and it is not going towards recession. So, we can agree on that. It is not too difficult. We did it at the World Bank sometimes.
PRESIDENT FERNÁNDEZ ARMESTO: But the World
[Page 1824]
Bank does not publish?
THE WITNESS: No.
PRESIDENT FERNÁNDEZ ARMESTO: I cannot go to the database of the World Bank and download the parity exchange rate of Perú.
THE WITNESS: No. No. And let me just add that that's why the Central Bank--that's my reading. The Central Bank of Perú, when asked by Minister Thorne, sends the inputs but does not send the parity rate itself and does not publish it in its web page because it is reluctant to go so far.
PRESIDENT FERNÁNDEZ ARMESTO: Very good. So, if we apply the Decision of el auto from the Constitutional Court of 2013, we have to take a parity exchange rate and we convert the face value of all the outstanding coupons and we do it to the date of the last clipped coupon date.
THE WITNESS: That's my understanding, the "auto" says.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. I heard you, and under your system, which was based on CPI, that you said: "I have to take the CPI to the date
[Page 1825]
of issuance, although I calculate interest from the date of the last clipped coupon."
Now, here you seem to agree that it is--that when you do the dollarization, to go back to the date of the last clipped coupon you agree that that is, in a dollarization procedure, that is the proper way of doing it?
THE WITNESS: Not quite. My preferred dollarization is on Page 25 of my Report--of my Slides in the morning and we had the discussion in the morning when you properly said that we cannot double count. The interest rate in the U.S. does include inflation. So, that's when I told you, Mr. President, I break down the interest rate in the U.S. into a real component.
PRESIDENT FERNÁNDEZ ARMESTO: But I'm now here only speaking about the date of conversion.
THE WITNESS: Yeah. Look at 25.
PRESIDENT FERNÁNDEZ ARMESTO: 25.
THE WITNESS: The green arrow starts from issuance, but only for inflation.
PRESIDENT FERNÁNDEZ ARMESTO: I know. I
[Page 1826]
know. For inflation it is clear to me.
But my question here is since--I know that for inflation you go back to issuance. My question is, is the factor that you advocate going back to the date of issuance, is that specific for the CPI method--
THE WITNESS: No.
ARBITRATOR STERN: --or is it also in your opinion applicable to the dollarization method?
THE WITNESS: In the ideal dollarization method, what I want to do is break down the interest rate that is applicable to the U.S. dollar into two components: the inflation component and the real component, and apply the inflation part in U.S. dollars, because now we have dollars in our accounts, since issuance.
PRESIDENT FERNÁNDEZ ARMESTO: Okay.
THE WITNESS: And interest only since last clipped.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. But the Constitutional Court says we have to go to the date of the last clipped coupon.
[Page 1827]
THE WITNESS: Right. And in 34 then, Mr. President, I say there are ways of--within that framework of constraints, there are ways of improving it, and it would be--instead of using the short term, using the long term, using--
PRESIDENT FERNÁNDEZ ARMESTO: Let me go step by step, Professor.
THE WITNESS: Yes, sir.
PRESIDENT FERNÁNDEZ ARMESTO: Then step two is the proportion between unclipped and clipped coupons.
THE WITNESS: Yes.
PRESIDENT FERNÁNDEZ ARMESTO: That's clear.
And then we get the Supreme--no, the Constitutional Court says applying interest of dollar-denominated Bonds. I do not think that it gives any time period. Now, you--
THE WITNESS: It may say "treasury." I don't know it says "corporate" or "treasury."
PRESIDENT FERNÁNDEZ ARMESTO: I must get. No, no, this is important.
THE WITNESS: It may say "treasury" but we
[Page 1828]
can read the--
PRESIDENT FERNÁNDEZ ARMESTO: But the--plus the interest rate of U.S. Bonds.
THE WITNESS: It does say Treasury, Treasury bonds. "Del tesoro americano."
PRESIDENT FERNÁNDEZ ARMESTO: Interest rate of U.S. Treasury Bonds. What is your opinion "bonos del tesoro Americano"?
THE WITNESS: Those are Bonds that are issued by the U.S. Treasury, and as we said, they issue very short-term bills, three months, which are 90 days, one year, five--and the most popular one is five years. There's a seven year that was very popular. 10 year, 20 year, 30 year.
PRESIDENT FERNÁNDEZ ARMESTO: Okay.
THE WITNESS: It doesn't say, so one could apply 20 years, one could apply 30 years.
PRESIDENT FERNÁNDEZ ARMESTO: That is my question to you. What is from the--an economist's point of view, what would be the appropriate bond to apply?
THE WITNESS: If I am operating under
[Page 1829]
constraints--and this seems to be what you are asking me--stay within the framework of the Constitution.
PRESIDENT FERNÁNDEZ ARMESTO: "Bonos del Tesoro Americanos." That's-
THE WITNESS: I would say 30 years, and there is a gap when the 30 years were not issued. So, I would use the longest surviving 30 years, which the first year when they were not issued was a 29 year--a bond with a 29 year life. And I would use the longest bond as a rate. That would be--
PRESIDENT FERNÁNDEZ ARMESTO: Okay. Now, let us understand how this works. These Treasury--long-term Treasury Bonds have coupons.
THE WITNESS: Some do. Some, no. Some are zero coupons.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah. But some are clear.
THE WITNESS: But the yield--the yields are similar. What we do is we calculate. We--I don't do it, but investment banks and brokers--and we can get it. That we can get on the internet. You press click and, (whistling sound), they jump at you. You
[Page 1830]
can download them. You get the yield, which is the embodied return of the bond, and that changes hourly.
PRESIDENT FERNÁNDEZ ARMESTO: So, you could look up in Bloomberg--
THE WITNESS: Yes.
PRESIDENT FERNÁNDEZ ARMESTO: --the yield of a 30-year bond in the year--
THE WITNESS: You could do several things. You could find 30-year bond of constant maturity, which is always the 30-year, the newest 30-year bond. Or you could take a particular bond that had 30 years at issuance and follow it through life. So, then you would have 29, 28, so on. But that will come from Bloomberg instantaneously and at every minute, more than that. Every second you will get it.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. And that leads to us an amount in dollars. If I do that up to the date of when I'm revaluing the bond I will get an amount in dollars.
THE WITNESS: Yes. Yes, sir.
PRESIDENT FERNÁNDEZ ARMESTO: And now I have to put that amount back into soles, of--in present
[Page 1831]
soles.
THE WITNESS: Yes, sir.
PRESIDENT FERNÁNDEZ ARMESTO: And that--there, the proper way of doing it is to apply the Official Exchange Rate.
THE WITNESS: If the Official Exchange Rate is now equal to the parity rate. If they diverge, if the parity that you chose at the beginning, after doing all your calculations and getting your economists together and choosing--all of that, it gives you at the end a value that is not the official rate to be consistent. You need apply the parity right.
So, it's parity on both ends, and the feature of my parity, the parity I calculated with a very long base, '99 to 2016, is that it is very similar to the official rate at the end. So, I have no problem, when I did my calculation, using official at the end, because I calculated the parity that was--that had that feature, but if you have a parity like we saw in that green line. I don't know if you remember from the 2014--
[Page 1832]
PRESIDENT FERNÁNDEZ ARMESTO: There should not be a gap between parity and--
THE WITNESS: Right. If there is a gap at the end, you have to use, and to be consistent, if you use the parity at the beginning, you have to use the parity at the end as well.
PRESIDENT FERNÁNDEZ ARMESTO: Very good. And coming to the interest, we saw the importance of interest--how did you call--the 760-
THE WITNESS: Rule of 72.
PRESIDENT FERNÁNDEZ ARMESTO: Rule of 72.
THE WITNESS: At 7.2, it doubles every 10 years, which means that approximate--3.6 is 20 years to double.
PRESIDENT FERNÁNDEZ ARMESTO: My point to you is, if you use a long-term bond, do long-term bonds accrue as simple interest or as compound interest?
THE WITNESS: Compounded interest.
PRESIDENT FERNÁNDEZ ARMESTO: Because the price is calculated--because they are probably--they are written to accrue simple interest, but the market
[Page 1833]
price calculates them at compound rate?
THE WITNESS: Right. Because you get--you clip your coupon and you invest it back into the same bond, which is very, very liquid. It's the most liquid asset in the world.
PRESIDENT FERNÁNDEZ ARMESTO: And you have--you told us that applying the 2004 Decree you had reached 157 million.
Do you remember that?
THE WITNESS: I don't remember that.
Applying which Decree?
PRESIDENT FERNÁNDEZ ARMESTO: The 2004 Emergency Decree.
THE WITNESS: 2000 Decree, yes, I see that in Paragraph 73.
PRESIDENT FERNÁNDEZ ARMESTO: Do you remember that?
THE WITNESS: I see it in Paragraph 73 of my--
PRESIDENT FERNÁNDEZ ARMESTO: And you have not done a calculation. If we apply the--auto, the Resolution of the Constitutional Court, literally,
[Page 1834]
you have not made a calculation of the amount which--
THE WITNESS: I don't remember if I did. I focused on the ones I did, but I will be happy to do whatever you want me to do, Mr. President.
PRESIDENT FERNÁNDEZ ARMESTO: Excellent.
(Comments off microphone.)
PRESIDENT FERNÁNDEZ ARMESTO: Is there any follow-up question?
MR. RIEHL: No, Mr. President. Thank you.
PRESIDENT FERNÁNDEZ ARMESTO: Yes, of course.
RECROSS-EXAMINATION
BY MR. LLANO:
Q. You were asked about Decree 88. Do you recall that? Just now.
A. I was asked about so many things.
PRESIDENT FERNÁNDEZ ARMESTO: About what?
MR. LLANO: Decree 88.
(Overlapping speakers.)
THE WITNESS: The Emergency of 2000.
MR. LLANO: Yes.
BY MR. LLANO:
[Page 1835]
Q. And that Decree provided for a bond swap, right?
A. It allowed for a bond swap, yes.
Q. And that bond--the substitute bonds, the replacement bond was a 30-year bond; correct?
A. That's what I remember. I don't remember the details, Mr. Llano.
Q. And it's a zero coupon bond; right?
A. It rings a bell, yeah.
Q. So, that person would not get anything for 30 years--
A. No, no.
Q. Right?
A. We just said that after Perú came back from wherever it was, from "Sendero Luminoso" and "President Gonzalo," this has been an amount--an incredible amount of progress, as Minister Castilla suggested. The secondary bonds that trade daily, very liquidly for Peruvian Bonds. That person could trade that bond instantaneously in the market.
And right now the--Perú issued a bond in dollars, in June 2019, at a 2.8 percent coupon rate,
[Page 1836]
and it has--Minister Castilla said yesterday, 50 basis points currency, the full swap, CDSs. So, Perú is in a situation with a very liquid market if there is a bond swap.
The owners of these Bonds, the families of the people, the campesinos, and the hacendados can immediately market it and sell it. There are no controls. You can get dollars in and out of Perú easily. So, that would be--that could happen instantaneously.
Q. And, of course, the purchaser of that bond in that secondary market would take into account the fact that that's a zero coupon bond; right?
A. I assume. Of course, I assume, of course.
Q. Thank you.
MR. LLANO: I have nothing further.
PRESIDENT FERNÁNDEZ ARMESTO: Very good.
Professor Edwards, thank you very much. It has been a long examination. Thank you for your help.
THE WITNESS: You're welcome.
(Witness steps down.)
[Page 1837]
PRESIDENT FERNÁNDEZ ARMESTO: And we will now--thank you. And we'll break the--we will speak five minutes off the record, because--so, that our court reporters have some time to relax.
(Comments off microphone.)
(Brief recess.)
PRESIDENT FERNÁNDEZ ARMESTO: We resume the Hearing and we do so in order to examine Professor Reisman.
MICHAEL REISMAN, RESPONDENT'S WITNESS, CALLED
PRESIDENT FERNÁNDEZ ARMESTO: Professor Reisman, thank you very much for being here with us. And you are here as an Expert, and as an Expert, you have a duty--you have the duty to take your oath as Expert. And so, could I kindly ask you that you stand up and that you take your oath?
THE WITNESS: Thank you, Mr. President.
I solemnly declare, upon my honor and conscience, that my statement will be in accordance with my sincere belief.
PRESIDENT FERNÁNDEZ ARMESTO: Very good. Thank you very much.
[Page 1838]
Professor, you are here as an expert designated by the Republic of Perú, and I will give the floor now to the Republic.
Mr. Hamilton?
MR. HAMILTON: Ms. Menaker?
PRESIDENT FERNÁNDEZ ARMESTO: Ms. Menaker?
MS. MENAKER: Thank you.
DIRECT EXAMINATION
BY MS. MENAKER:
Q. Good afternoon, Professor Reisman.
You should have before you your two Expert Reports that you submitted in this Arbitration, the first dated September 4, 2018 and the second dated September 6, 2019.
Can you confirm that those are, indeed, your Reports?
A. I confirm they are my Reports.
Q. And do you have any corrections to make to either of the Reports?
A. No.
Q. And for the record, we've also placed in front of Professor Reisman a clean copy of excerpts
[Page 1839]
of the Treaty, just the preamble and Chapter 10.
So, Professor Reisman, you've opined that the Bonds that are at issue in this Arbitration are not investments within the meaning of the Treaty. Can you please explain how you drew that conclusion?
A. As a matter of Treaty interpretation, I applied Article 31 of the Vienna Convention on International Treaties and examined the text and the context. Context includes the provisions of the Treaty that are not directly under scrutiny, the rest of the body of the Treaty, as well as the preamble.
I was struck by this particular Treaty in its reiterated use of the word "characteristics," and the definition of "investments." The definition imposes on the interpreter the need to take account of the text, and also to look beyond it to consider the objects and purposes of the Treaty, and my Application to which I will refer in both the First Opinion and the Supplementary Opinion led me to the conclusion that the question was "investment" and its required reference to a variety of factors that are ordinarily referred to as the "Salini factors."
[Page 1840]
And the composite of all these considerations, which I'm happy to expound, led me to the conclusion that the Agricultural Bonds were not within the contemplation of investments in the Treaty.
Q. Claimants' Expert Ambassador Allgeier has argued that the United States insisted on using a "negative list" approach to the definition of the term "investment," and because these Bonds were not specifically excluded, they are included within the definition of "investment."
Can you please respond to that?
A. I find it difficult to believe that the negative list limited the intentions of the Parties to conclude that some matters that might be on the list and other matters that are off the list would not qualify or would qualify as investments.
If I may draw your attention to--I'm sorry. I've asked someone to help me. My fingers are not very nimble. I found particularly compelling the United States' Submission as one of the State Parties to the Treaty indicating that the enumeration of the
[Page 1841]
type of an asset in Article 10.28, however, is not dispositive as to whether a particular asset owned or controlled by an investor meets the definition of "investment." It must still always possess the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk.
Moreover, I would include in these criteria the question as to whether or not the transaction in question, which is trying to qualify as an investment as a term of art, contributes to the development of the Host State, a point that is raised in the preamble part of the Treaty, subject to interpretation, and something that is one of the latent purposes of this entire genre of treaties.
Q. Thank you, Professor.
Now, you just referenced the United States' Submission, and in your Supplementary Opinion, you discuss the Contracting Parties' Agreement on certain aspects of Treaty interpretation. And can you explain the relevance of any agreement between Perú
[Page 1842]
and the United States under the Vienna Convention?
A. What I say in the Opinion is there is "agreement," not "an agreement." I didn't say that there is "an agreement." The Vienna Convention instructs us in interpreting to take account beyond-the-text context and objects and purposes, any subsequent agreements that have been reached by the Parties.
In this instance, I noted that positions taken with respect to ratione temporis jurisdiction and ratione materiae jurisdiction expressed by the United States in its submission and expressed by the Government of Perú in its written pleadings were congruent, and that seemed to me to be something that the interpreter is entitled, if not mandated, to take account of.
Q. Thank you. Can you please explain why you consider Claimants' Claims before this Arbitral Tribunal to be an abuse?
A. The jurisprudence of international investment law has recognized that some uses by a putative Claimant of an investment treaty with
[Page 1843]
respect to a particular Respondent are abuses of process. I think that there should be a high threshold for this, whether it's reasonable certainty that changes are made in the structure or the design of an investment in order to take advantage of an investment treaty without a corresponding creation of a benefit for the counterparty, or whether the standard is near certainty.
I think there's a common recognition that the international legal concept of abuse of law, abus de droit, is a factor which can lead to the refusal to recognize an otherwise good argument for jurisdiction. And in this case, my opinion was that the ratione materiae and ratione temporis positions with respect to jurisdiction failed, but I think that Abuse of Process is an independent ground which, in my view, would lead to the refusal to allow a case to proceed for want of jurisdiction.
The reasons for this, I would summarize as follows: The Claimant in this case acquired Bonds over 50 years long since in defunct, and seeks to bring those Bonds as a claim for remuneration without
[Page 1844]
a corresponding benefit accorded by the action to the Respondent Perú.
Q. Now, during the course of this Hearing this weekend, I know that you were not present, but Perú has learned that Claimants purchased additional Bonds in 2017 after this Arbitration had been commenced.
Is this relevant to your Opinion that Claimants purchased claims in a preexisting dispute and did not make an investment, and therefore, their arbitration claim is abusive?
A. I don't know the facts to which you are referring, and they may be in dispute, but on the basis of what you say, yes, that would be abusive. It would also run afoul of the temporal requirement of Article 1, 10.1.3, and Article 10.13.
Q. And even if they are not bringing claims with respect to those Bonds in this Arbitration, is it--let me move on and ask you a similar--another question about these later purchased Bonds in 2017.
So, Claimants argue that the Bondholder Process that Perú established is unfair, and they point to the allegedly low participation rate as
[Page 1845]
evidence of that. Now, had you been aware of the fact that Gramercy purchased additional Bonds after they filed this arbitration, while the Peruvian Bondholder Process was ongoing, would that fact have been relevant to your abuse analysis?
A. If I understood you correctly, the Claimant would have been holding forth that these Bonds are valueless because of action by the Peruvian Government, while the nonpublic fashion of acquiring the Bonds themselves, and I suppose its acquisition of Bonds would necessarily lose the--reduce the number of Bonds by Peruvian--acquisitions by Peruvians, which would be doubly misleading. Without knowing the details of the action, I would say that that would be abusive.
Q. Thank you. And, Professor, you remarked before that you have opined that the Claimants here lack jurisdiction ratione temporis. Can you--you said that that is on two separate grounds: First, as a matter of general international law and as set forth in this Treaty in particular, the Treaty does not apply retroactively to any act or fact that
[Page 1846]
existed before the Treaty's entry into force; and, secondly, that Gramercy's claims run afoul of the Treaty's three-year prescription period.
Can you just briefly explain your views on both of those points?
A. Law is prospective, not retroactive, unless it explicitly says that the intention of the legislature or the Treaty Parties intended to make their instrument retroactive. Article 1.3 says explicitly that the Parties did not want to empower Tribunals to rewrite history, ancient history, and they say that acts or facts which occurred--with respect to acts or facts which occurred prior to the entry into force of the Treaty, each Party will deny the application of the Treaty to them.
Q. Thank you, Professor.
MS. MENAKER: And Members of the Tribunal, I have no further questions on direct.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you. Thank you very much, Ms. Menaker.
Is there any question?
MR. FRIEDMAN: Yes. Ms. Popova will do the
[Page 1847]
questioning.
PRESIDENT FERNÁNDEZ ARMESTO: Dr. Popova, please.
MS. POPOVA: Thank you, Mr. President.
CROSS-EXAMINATION
BY MS. POPOVA:
Q. Good afternoon, Professor Reisman.
It's a pleasure to see you again. Thank you for joining us today.
You can leave it on. I think that might be easier for our interpreters and the rest of us.
A. It's a generational thing.
Q. I understand.
I'm going to be asking you some questions about the two Opinions you submitted in this proceeding, and unfortunately, we don't have the time today that I believe either of us would like. So, while I would very much enjoy discussing these issues with you in greater detail, we might have to save that for another forum. So, I will try to make my questions as short and direct as possible, and I would be very grateful if you could try and do the
[Page 1848]
same with your answers.
Needless to say, Ms. Menaker will be able to come back if she believes that any additional detail would be helpful.
Would you agree to proceed on that basis?
A. To the best of my ability.
Q. That's all any of us can do. Thank you, Professor.
Professor Reisman, your two Opinions are based on the text, context, and object and purpose of the Treaty, as well as principles of international law that are reflected in the jurisprudence; is that right?
A. Yes.
Q. And all of those things, would you agree with me, are within the expertise of this distinguished Tribunal?
A. Yes.
Q. And factual--
PRESIDENT FERNÁNDEZ ARMESTO: Some members have more expertise than others.
MS. POPOVA: Certainly.
[Page 1849]
PRESIDENT FERNÁNDEZ ARMESTO: I always am the one who has the coming from--I come from commercial law, Professor Reisman, and have entered international law in later years of my experience. So, I never dare to say I have the same expertise as fully bred international law specialists.
MS. POPOVA: We are, indeed, all of us, learning.
BY MS. POPOVA:
Q. Factual matters, Professor Reisman, are also within the scope of the mandate of this distinguished Tribunal; correct?
A. Yes, of course.
Q. And those factual matters would include things like Gramercy's investment strategy; right?
A. Yes.
Q. And Gramercy's experience in facilitating historical debt claims?
A. I'm not sure that I would call that a relevant factual matter to the question of whether or not a transaction conducted by Gramercy qualifies as an investment under the Treaty.
[Page 1850]
Q. But it is a factual matter; correct?
A. It's a factual matter, but you slipped it in that it's something that is relevant to my discussion of jurisdiction ratione materiae.
Q. I was simply asking whether you agree that certain factual matters are within the scope of the mandate of this Tribunal, and I'm talking about what those factual matters include.
Another one of those factual matters, Professor, is the question of whether Gramercy has provided enough evidence about how it bought the Bonds; correct?
A. The Tribunal will have to decide that.
Q. Indeed.
And also, the Tribunal will have to--
A. Excuse me. May I correct that answer?
Q. Yes.
A. If the decision of the Tribunal is based on temporal jurisdiction, it will not get into those issues, so this is just a minor.
Q. Understood. Gramercy's motives for investing in the Bonds are also a factual matter;
[Page 1851]
correct?
A. They could be.
Q. And Gramercy's state of mind at any particular point in time is also a factual matter; correct?
A. I suppose.
Q. Okay. You would agree with me, would you not, Professor Reisman, that the investment chapter of the U.S.-Perú TPA forms part of a special series of treaties for the benefit of third parties which here are investors?
A. Yes.
Q. And so, in those treaties, there is a special concern not to undermine the rights and expectations of those investors in the way in which we go about interpreting them; correct?
A. I fear that I would not be able to answer that with a single word, "Correct." The determination of whether or not there are expectations depends upon the scope and what the Treaty promises.
If the Treaty has promised something and
[Page 1852]
then the Parties refuse to--together, refuse to let it materialize, that would be a violation of the third parties that would have been--would have relied. But you can't say that a third party's reliance is something that a third party itself, in its subjective universe, decides. This is something that has to be determined by the Tribunal.
Q. Yes. I agree with you on that. My point was a little bit different, I think. My question is: The investment chapter of the U.S.-Perú TPA is part of a special--part of a species of treaties, forgive me, for the benefit of third parties in which there is a special concern that interpretation by one or both of the State Parties not undermine the rights and expectations of those third parties; correct?
A. It is certainly a treaty in favor of third parties, but the final part of your statement, I think, introduces some things that may not be valid expectations by the third party purporting to rely on the treaty, such as this genre of treaty.
Q. Well, I was quoting an Opinion that you had given in the--
[Page 1853]
A. I recognize it.
Q. I thought so. That's why I was surprised that we weren't in agreement.
In any event, let me move on.
In particular, Professor Reisman, would you agree with me that it would not be reasonable to rummage about in documents outside of the four corners of the Treaty for something to support a litigating position when the applications of the canons of the Vienna Convention would lead to a result that is neither unreasonable nor absurd?
A. Yes.
Q. And that's because States express their consent to the Treaty and investors rely for their rights and obligations on the Treaty's text; correct?
A. If the entity purporting to be an investor qualifies under the Treaty and its transaction qualifies as an investment. If you don't make that clear, then any investor--any putative investor can simply say that it had a legitimate expectation and it would not have been granted in the Treaty.
Q. In any event, you would agree with me that
[Page 1854]
one should not interpret the text of the Treaty based on extra-textual subjectivities of one of the Contracting Parties; correct?
A. The Contracting Parties, you mean the State's Parties?
Q. Yes, sir.
A. That's right.
Q. And the observation would be especially valid in a treaty that was negotiated in a multilateral fashion where searching for the shared objectivities of the State Parties would be akin to a pursuit of the ignis fatuus; correct?
A. Could you repeat that?
Q. Yes. That observation would be especially valid in a treaty that was negotiated in a multilateral fashion where searching for the shared objectivities of the State Parties would be akin to the pursuit of the ignis fatuus?
A. I'd need more of the context of that quotation to respond to it. The Vienna Convention is the 204, the interpretation of bilateral, plurilateral and multilateral instruments, and in all
[Page 1855]
of them, the text is the indicator of the shared expectations of those who are making the Treaty, whether they are just two States, three or four States, or a multitude of States. This is one of the reasons why we look to the text and treat it with great respect.
Q. Indeed, and because the text is the indicator of the shared expectations of the States that subscribe to it, it would not be faithful to the Vienna Convention framework for us to use instruments or communications within just one of those contracting Parties to counter the results that would otherwise apply under the Vienna Convention; correct?
A. I would agree with that, subject to the caution that the expectations of the Parties, the State's Parties may be expressed in the Agreement and subsequent behavior in Submissions, in actions under a Free Trade Commission, if the Treaty provides for it.
Q. Yes. Let's talk about that for a moment. Now, just because investment treaty Tribunals frequently admit and review materials like
[Page 1856]
the travaux préparatoires of a treaty, that simple practice does not necessarily mean that the way in which they are using those materials is legitimate. Would you agree with me on that?
A. Certainly, even resort to the travaux under Article 32 of the Vienna Convention requires that the text itself under application of Article 31 is producing either an absurd or--an absurd outcome, at which point one resorts to Article 32.
So, certainly it would be improper to resort to the travaux, whatever they consist of, unless the condition in 31, which is either no answer or an absurdity, has resulted from the application of Article 31.
Q. And the same applies for submissions made by the Contracting Parties; correct? You would only look at them if the answer produced under Article 31 would be absurd, to use the term you just described?
A. No. If the Treaty itself provides for them to express their views, then that is permissible.
Q. Now, when you say provides for them to express their views, do you mean a joint
[Page 1857]
interpretation of the Free Trade Commission that you just mentioned?
A. No. I think you're referring to a unilateral statement by one party, and there are international investment treaties that provide for the Party that is not the Respondent in the case or the parties that are not Respondents in the case to make known to the Tribunal their interpretation of issues of law having to do with the interpretation of the Treaty. That is different than the Free Trade Commission.
Q. Do you believe, Professor Reisman, that the legal Briefs submitted by the Republic of Perú and the submission of the United States as a Non-Disputing Party should be taken to constitute an agreement of the Contracting States on the interpretation of the Treaty within the meaning of the Vienna Convention?
A. I did not say that there is an agreement, but if there is substantial agreement, the views are expressed by both States with respect to a common problem, then I think that that is something that the
[Page 1858]
interpreter should take account of.
Q. And would they only take account of it if the interpretation under Article 31 of the Vienna Convention is absurd?
A. No. It would be subsequent behavior of the Parties.
Q. Now, Professor Reisman, are you aware that there is, to my knowledge, not a single investment treaty Tribunal that has held that Briefs submitted by a disputing Party and a non-disputing Party taken together constitute an agreement of the Contracting Parties on the interpretation of that bilateral Treaty?
A. I'm not aware of it, but it doesn't shake my conviction that this is right in the circumstances. Certainly, a Tribunal may make its own decision, and a Decision that didn't take account of submissions by other States might be--might have been caused by a variety of other factors.
But I think that it's perfectly appropriate for a Tribunal not to ignore this interpretation of a Treaty--the congruent statements, one, in the course
[Page 1859]
of a pleading, the other in a submission under the Treaty, into the interpretation.
Q. Is it your Opinion, Professor Reisman, that the legal Briefs submitted by disputing and Non-Disputing Parties constitute a subsequent agreement--subsequent practice of the States in the application of the Treaty?
A. I think there can be--you can view it as that.
Q. Are you aware that several investment Treaty Tribunals have expressly rejected that proposition?
A. I'm not, but I'm not daunted by that.
Q. Well, do you disagree with them?
A. If you will explain the facts and the considerations, I might, but I, offhand, don't know them. I don't know what you're referring to.
Q. I appreciate that. Are you familiar with the International Law Commission's Draft Conclusions on Subsequent Agreements and Subsequent Practice of States in Relation to the Interpretation of Treaties?
A. Yes.
Q. Are you also aware that in that document,
[Page 1860]
the ILC has stated that subsequent agreement must be reached and presupposes a deliberate common act or undertaking by the Parties?
A. I think the reference there was not to congruent positions taken by both States with respect to a common problem but the need to make something part of the Treaty for general purposes.
Q. Let's turn now to another topic, if you will.
Professor Reisman, is it your Opinion that Bonds and public debt have a different meaning in the U.S.-Perú TPA than they do in any other context?
A. Could you say that again, Ms. Popova?
Q. Yes. Is it your Opinion that the terms "bonds" and "public debt" have a different meaning in the United States-Perú Trade Promotion Agreement than the ordinary meaning in any other context?
A. You could make your question a little more precise. The reference to "ordinary meaning" brings in quite a large range of views.
Q. Yes, I'd be happy to.
Do you accept, Professor Reisman, that one
[Page 1861]
can arguably construe the Land Bonds at issue in this Arbitration as falling within the scope of public debt in this Treaty?
A. With respect, the question is not whether these Bonds are like some other Bonds. The question is, are they an investment for which there's a methodology in the Treaty, which looks at a variety of different factors, which I reviewed.
I think it's very misleading to say this instrument is--fulfills the requirements of a Treaty, and this other instrument is like it, therefore, it does as well, when the Treaty in question, the one that we're discussing, requires a constant reference to the characteristics of the Treaty of the term and the use it's being put to.
Q. My question was not comparing different instruments, but do you accept, Professor Reisman, that one could arguably construe the term "public debt" in the United States-Perú Treaty to cover the Land Bonds that are at issue in this Arbitration?
A. I suppose one could.
Q. But you believe that one shouldn't; right?
[Page 1862]
A. That's correct.
Q. And the reason why I believe--or it seems that you believe that is you say it would sit uncomfortably with two things; right? The first is what you call the common understanding of "public debt" in the investment context.
A. Umm-hmm.
Q. And the second is what you call the United States' long-standing understanding of the meaning of "public debt"?
A. Umm-hmm.
Q. Sorry, just for the Transcript, is that a yes?
A. Yes.
Q. Let's talk about those two concepts.
Professor Reisman, in support of that proposition in your Reports, you rely on four sources. The first is an undated article from an unknown author found on an unmoderated blog in September 2018. The second is the summary of functions of an internal United States agency that no longer exists. The third is a January 2019 academic working paper surveying the
[Page 1863]
history of sovereign debt over two millennia. And the fourth is a screenshot taken in September 2019 of a web page on the website of the United States' Central Intelligence Agency.
Does that sound familiar to you?
A. Yes.
Q. I'd like to spend a little bit of time looking at some of those. We can't go through all of them today, but let's begin with the--what you describe as the commonly accepted understanding of public debt in the investment context.
Is it your testimony, Professor Reisman, that the commonly accepted understanding of "public debt" in the investment context is to be found in an undated article by someone that you identify as Ritika Motley from a web page that you identify as "economicsdiscussion.net" which you say was last visited in September of 2018?
A. I supplied four different Statements. One was the ordinary use of the term, and I looked at the internet for that. Another was the use by a governmental agency, and another was a paper prepared
[Page 1864]
under the aegis of the IMF. And I think I had a fourth that I can't recall at the moment.
So, I think I established that this is a common understanding, looking at four different sources. One can mock the internet, but if one wants to know what's being said on the street, where else does one look?
Q. Yes. So, when you went to the internet to find what you said the ordinary use of the term was, that's where you found the entry by Ritika Motley?
A. Yes.
Q. Okay. Now, Professor Reisman, could you tell me who Ritika Motley is?
A. I don't know.
Q. Do you know what his or her professional affiliation is?
A. I don't know.
Q. Do you know if he or she has published any other academic scholarship on this issue?
A. I don't know.
Q. Do you know if he or she has published anywhere else, other than the website
[Page 1865]
economicsdiscussion.net?
A. I don't know.
Q. Professor Reisman, you said that you looked on the internet to find this article, and can you explain to me how exactly you found it?
A. It popped up as I was working very late at night.
Q. Do you remember what you searched for that made it pop up?
A. I don't.
Q. I ask because I've tried to find this article, and it's actually very difficult unless you find it--search for it by the name of Ritika Motley.
A. I have tried, again, to find it, but where it is, I don't know.
Q. And did you succeed when you tried, again, to find it?
A. I did not.
Q. You did not.
In your Report, you provided the original web page link where you found this article. You don't provide an exhibit number, but I would like us
[Page 1866]
to look at that web link together, with my colleague's cooperation.
So, do you see at the top there, there's a--I'll represent to you that that is the link that you provided in your Reports.
Do you recognize this as the article that you found, Professor Reisman?
A. Yes, I do.
Q. So, you recognize this website?
A. I don't remember.
Q. Well, you see we have a title here "Public Debt meaning classification method of redemption" and it says it is being shared by Ritika--it says "Motley." And I know in your Report you say "Muley," but is this the article that you intended to cite in your Report?
A. I wish I could be certain.
MS. MENAKER: Mr. President.
PRESIDENT FERNÁNDEZ ARMESTO: I don't think that it takes us much further. I wonder if it takes us much, much further if we start, to here, looking at what. It is just--as we all do sometimes in the
[Page 1867]
internet, things come up, and it's like Wikipedia. Sometimes it is very valuable and sometimes it is less valuable. I don't think it will help us too much, and in the interest of time, maybe we can just accept that it is one of these documents which pop up late at night in the internet.
MS. POPOVA: Yes. Thank you, Mr. President.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you. Thank you, Dr. Popova. I don't think it really helps us.
MS. POPOVA: If you would just bear with me one more minute, Mr. President. Thank you.
PRESIDENT FERNÁNDEZ ARMESTO: Of course.
BY MS. POPOVA:
Q. Professor Reisman, have you ever used--
(Comments off microphone.)
BY MS. POPOVA:
Q. Have you ever used this website for your scholarship before, Professor Reisman?
A. No.
Q. Do you know what this website allows you to do?
[Page 1868]
MS. MENAKER: Mr. President, he did answer these questions.
PRESIDENT FERNÁNDEZ ARMESTO: We can leave this point.
MS. POPOVA: Fair enough, Mr. President.
BY MS. POPOVA:
Q. We can take that down, but let me ask you this, Professor Reisman. Is it your Opinion that the scope of coverage of the investment chapter of the Free Trade Agreement signed between the United States and Perú on the 12th of April 2006 is to be determined by reference to the website that we just looked at?
PRESIDENT FERNÁNDEZ ARMESTO: No. I think the answer is--it is what it is. It is just a reference, among others, to an article in the internet.
Dr. Popova, I don't think the Tribunal gives too much--I don't think the Expert gives too much value to this quote, and I don't think it is--we should devote much more time to it.
MS. POPOVA: Point taken, Mr. President, but
[Page 1869]
I--given that this is the only Article that he quotes in Paragraph 29 of his Report, I believe that it was fair to put it to him. But I will move on.
MS. MENAKER: Although, in fairness, he quoted other sources.
MS. POPOVA: Which I am getting to.
PRESIDENT FERNÁNDEZ ARMESTO: Okay.
BY MS. POPOVA:
Q. Now, let's talk about the other sources that you quoted, Professor Reisman.
The second thing that we saw earlier was what you call the United States's understanding of the meaning of the term "public debt."
Do you remember that?
A. Yes.
Q. And for that, in your Report, you cite a description of an agency that is called the Bureau of Public Debt in the United States Department of the Treasury; correct?
A. Yes.
Q. This agency, needless to say, is a domestic agency of the United States; correct?
[Page 1870]
A. Yes.
Q. And it no longer exists; correct?
A. Yes.
Q. So, let me ask you, since do you quote that also in Paragraph 29 of your First Report, Professor Reisman, is it your opinion that the scope of coverage of the investment chapter of the United States-Perú Trade Promotion Agreement is to be found in the mission statement of the United States's Bureau of Public Debt, which no longer exists?
A. No.
Q. Thank you. You would agree with me, would you not, that interpreting the Treaty is fundamentally an exercise in understanding what the Contracting Parties agreed together under the Treaty and not the domestic legal framework of any one of them?
A. Yes.
Q. And it would be misguided, in fact, to devote considerable attention to only the United States's perspectives in interpreting the Treaty; correct?
[Page 1871]
A. Yes.
Q. And you would agree with me that, at a minimum, if the United States's perspective were relevant, then Perú's perspective would also be relevant; correct?
A. Correct. But, of course, above all of the text of the Treaty.
Q. Indeed. And in your Reports, Professor Reisman, you do not consider what Perú's understanding of the term "public debt" might have been; correct?
A. Correct.
Q. Thank you.
MS. POPOVA: In the interest of time, Mr. President, I'll move onto another topic.
PRESIDENT FERNÁNDEZ ARMESTO: Please.
BY MS. POPOVA:
Q. Professor Reisman, you have mentioned in your Reports and, again, this morning in response to questioning by Ms. Menaker, that the Treaty expressly mentions three characteristics of an "investment": the commitment of capital or other
[Page 1872]
resources, the expectation of gain or profit, and the assumption of risk; correct?
A. Correct.
Q. And you would agree with me that no one those three characteristics alone is decisive; correct?
A. Nor are they together the only factors that I've taken into account.
Q. And the age of the asset is also not a characteristic that is expressly identified in the Treaty; correct?
A. Correct.
Q. In fact, the Treaty expressly covers preexisting investments; correct?
A. Correct.
Q. Now, to these three nondecisive, noncumulative, as you said, characteristic, it is your opinion that the Tribunal must added the fourth--what you call the fourth element of Salini; is that fair?
A. That's correct.
Q. And that fourth element would also not be
[Page 1873]
decisive whether standing on its own or taken together; correct?
A. That's correct. It is a consideration of all--for example, Abuse of Process, it's the interdependency of many of the different factors in order to determination of whether or not a particular transaction qualifies as an investment.
May I say, just to clarify one point, let's not be misunderstood, Dr. Popova, the Treaty talks about existing investments, but it doesn't talk about existing transactions that don't qualify as investments.
Do you follow me?
Q. I do indeed.
And I must just correct for the Transcript one item, which is the President very kindly promoted me to Doctor, but Ms. Popova will be just fine.
A. Sorry, I misspoke.
ARBITRATOR DRYMER: "Doctora" in Spanish.
THE WITNESS: We say that equity views as done what ought to be done.
BY MS. POPOVA:
[Page 1874]
Q. Professor Reisman, is it your Opinion that Salini is controlling law?
A. In Salini, in my Opinion, is not controlling law. I've been critical of Salini, particularly when it's been moved to PCA cases, UNCITRAL cases.
But Salini is--in ICSID, is widely used by Tribunals, and the reason why I think that Salini is appropriate and its jurisprudence is relevant for illuminating the Treaty in question is that the definition of "investment" explicitly cites the three criteria of Salini and, hence, where else to construe them but an examination of the jurisprudence.
Q. You're aware, are you not, Professor Reisman, that this is an UNCITRAL proceeding?
A. Yes, I am.
Q. So, you said you've been critical of Salini, as have many others. Do you agree, then, that without Salini, uncertainty would be introduced into the realm of international investing which could chill the flow of capital?
A. Without Salini?
Q. Umm-hmm.
[Page 1875]
A. I'm sorry, I don't mean to dodge that question, Ms. Popova, but--
MS. MENAKER: Ms. Popova, are you quoting from something?
MS. POPOVA: Well, I'm asking him whether he agrees, so can we hear the answer first?
PRESIDENT FERNÁNDEZ ARMESTO: Is it a quote from him? Because it is a strange statement.
MS. POPOVA: All right. It is, in fact, a quote from Paragraph 44 of his Report, but in the interest of time, I'll just move onto the next question.
PRESIDENT FERNÁNDEZ ARMESTO: Yes.
Because--yeah. It is nicely worded, but it looked like an argument more than a fact.
BY MS. POPOVA:
Q. Yes, indeed.
The reason I raise that, Professor Reisman, is because in your Reports you cite statements like that from a journal article which was published in the Chicago Journal of International Law by someone called Alex Grabowski.
[Page 1876]
Does that ring a bell for you?
MS. MENAKER: Could you please guide him to where in his Report?
MS. POPOVA: Yes. It is Paragraph 44 of his First Report.
PRESIDENT FERNÁNDEZ ARMESTO: So, that I can deflect something to Professor Stern, she reminds me that I said that we should devote approximately an hour to each Expert. Just so that you have that in mind, Ms. Popova.
Sorry for. I really thought you were Doctor.
MS. POPOVA: I'm very grateful, but did not want to disabuse--I thought I should disabuse you of that promotion before it continue. But I'm, nevertheless, grateful.
BY MS. POPOVA:
Q. Paragraph 44, Professor Reisman of your First Report, do you see that?
A. Yes.
Q. Yes. And what I had in mind was the very last sentence of that Statement, of that paragraph
[Page 1877]
which says: "Without it, uncertainty would be introduced into the realm of international investing," and there you quote "which could chill the flow of capital."
Do you see that statement?
A. Yes, I do.
Q. So, do you agree with that statement?
PRESIDENT FERNÁNDEZ ARMESTO: If I may give some hint, to be very frank--and I stand to be corrected here by my colleagues, but I don't think that either applying or disapplying Salini will either chill nor increase the flow of capital in the world. That is given to a single judgment in a Moroccan case of construction, really some world-shattering relevance which I think we all agree is only in our world.
Let me tell you, Professor, that we asked Ambassador Allgeier. I don't know if you know him.
THE WITNESS: I don't.
PRESIDENT FERNÁNDEZ ARMESTO: He was the chief negotiator of the U.S. Trade Agreement, whether--I think it was you. You asked him or some
[Page 1878]
of the lawyers asked him Salini, and he said, Sorry, what is Salini? And he had no idea. So, it just proves that even the negotiators, the U.S. negotiators, did not even know what Salini is.
So, I think we should--we are very self-centered in our world, and we think that Salini is everything, but probably merchants and investors will continue to do their business, whether we think that Salini is very important or less important.
MS. MENAKER: Although, Mr. President, I would say that Mr. Allgeier--Ambassador Allgeier did say that the lawyers, of course, were involved who, of course, know Salini and put its text into the Treaty.
PRESIDENT FERNÁNDEZ ARMESTO: Of course. That the U.S.--even added that U.S. trade lawyers were excellent lawyers and that they probably knew all about Salini. I think that is a fair statement. I don't want to prejudge your opinion whether you agree or not with Grabowski's statement that uncertainty would be introduced into the realm of international investing, which could chill the
[Page 1879]
flow of capital.
THE WITNESS: I think it's an overstatement. My Application of Salini factors to this interpretative exercise is simply because the Treaty itself indicates the three factors, as I said earlier.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah. It is evident that these factors come--or are related to Salini.
THE WITNESS: Thank you.
BY MS. POPOVA:
Q. Yes. Again, precisely because you have been very critical of Salini in your writings, that I was surprised by this statement in Paragraph 44 and, again, wanted to give you the opportunity to address it, Professor Reisman.
PRESIDENT FERNÁNDEZ ARMESTO: Very good.
BY MS. POPOVA:
Q. Let me move on.
PRESIDENT FERNÁNDEZ ARMESTO: Yes. We must move on. Yes.
MS. POPOVA: I'm trying, Mr. President.
[Page 1880]
BY MS. POPOVA
Q. Professor Reisman, do you know who Alex Grabowski is?
A. I don't.
Q. Would it surprise you to learn that he wrote this article when he was a law student on the staff of the journal that published it?
A. Absolutely not. Absolutely--
PRESIDENT FERNÁNDEZ ARMESTO: There are some brilliant law students. Maybe he had been your student before.
THE WITNESS: I wish he had been.
If I may say, Mr. President, one of the unusual things about legal research in the United States is that it's given to law students to control rather than the dead hand of the past, and sometimes this produces some absurd results, but very often it reintroduces the extraordinary vigor and excitement of American legal thinking.
So, my answer, again, is "absolutely not."
BY MS. POPOVA:
Q. And I would venture to suggest that if he
[Page 1881]
had been your student, he might not have written something like that "the fact that arbitral boards regularly use Salini as the starting point from which to base their analysis demonstrates that the test has gained no small degree of legitimacy"?
A. I would still be very proud of him.
PRESIDENT FERNÁNDEZ ARMESTO: Do we have any further questions for Professor Reisman?
MS. POPOVA: One moment, Mr. President.
PRESIDENT FERNÁNDEZ ARMESTO: I'm sorry.
(Overlapping speakers.)
PRESIDENT FERNÁNDEZ ARMESTO: I'm the voice of conscience. I'm sorry.
MS. POPOVA: One minute to confirm, Mr. President.
PRESIDENT FERNÁNDEZ ARMESTO: Of course. Do take some more time if you need.
MS. POPOVA: Thank you, Mr. President. Another voice of reason is encouraging me to proceed more swiftly. So, I believe I have maybe seven more minutes, with your indulgence. Thank you.
BY MS. POPOVA:
[Page 1882]
Q. Professor Reisman, you say you've been very critical of the way in which Salini has been applied, and some of the ways in which you've described Salini's progeny include that "those cases were puzzling, nominalistic, incoherent, strikingly state-centric, remarkably inconsistent, and regulent of the long defunct NIEO," the New International Economic Order; is that right?
A. I don't remember.
Q. And some of the cases that--
A. It is certainly very colorful language.
Q. Yes.
PRESIDENT FERNÁNDEZ ARMESTO: Very well drafted.
BY MS. POPOVA:
Q. I couldn't agree more, Professor Reisman, but some of the cases that you have described that way are the Decisions on Jurisdiction in Joy Mining against Egypt and Jan de Nul against Egypt and also the Annulment Decision in Mitchell and the Democratic Republic of the Congo.
PRESIDENT FERNÁNDEZ ARMESTO: The good point
[Page 1883]
is none of them is mine. That's a good point. If you had to use that--objectives regarding mine, I would have some comments to make, but since they are--are they yours?
(Comments off microphone.)
MS. POPOVA: None of them are yours, Professor.
ARBITRATOR STERN: Well, one of them.
MS. POPOVA: Yes.
BY MS. POPOVA:
Q. And the only point there, Mr. President, is those three cases, Professor Reisman, are the ones that you cite in your First Report in support of the--your application of the Salini test; correct?
A. Correct.
Q. Now, despite all of that, your testimony to this Tribunal is that in this particular case, this UNCITRAL Tribunal should retrofit into the State Party's definition of an investment the fourth prong of the Salini test; correct?
A. No. That's not correct. The Treaty in Chapter 10, in defining "investments," which is
[Page 1884]
critical to a determination of material jurisdiction mentions the three prongs of Salini is to be taken into consideration, and I think that an interpreter has no choice, whatever it is his or her view of Salini in general to apply these criteria, because the exercise must, in fact, give full effect to the wishes of the State's Parties.
State's Parties say that they wanted this to be part of the consideration and, therefore, it seems to me appropriate, and it would be inappropriate when everyone's view otherwise--to ignore them.
Q. And you say that the State's Parties say that they wanted this to be part of the consideration, does "this" include the full settlement of Salini?
A. Which is?
Q. Contribution to the economic development of the Host State.
A. That comes from the preamble.
Q. Yes. That's what I had thought.
So, the reason why you believe that this Tribunal should incorporate the contribution to
[Page 1885]
economic development of the Host State prong of Salini is because of what the preamble of the United States-Perú Trade Promotion Agreement says?
A. That's correct.
Q. Okay. And you say in your Reports that some elements of that preamble are relevant to this exercise; correct?
A. Correct.
Q. The one, in particular, that you rely on is the Statement in the preamble that the Parties intend to promote broad-based economic development in order to reduce poverty and generate opportunities for sustainable economic alternatives to crop production?
A. I cite that, yes.
Q. Okay. Can I ask you this? Why some?
A. You may.
Q. Why just some of the provisions of the preamble? Why not all?
A. If all of them were relevant to the interpretive exercise, I would have done so. There was a provision--if I may consult the preamble.
Q. Of course.
[Page 1886]
A. Paragraph 6 of the preamble says the Parties are resolved to: "Agree that foreign investors are not hereby accorded greater substantive rights with respect to investment protections than domestic investors under domestic law where, as in the United States, protections of investors' rights under the domestic law equal or exceed those set forth in this agreement."
I didn't think this was relevant. I think it is relevant to the construction and examination of Merits issues, but it was not jurisdictional.
Q. Well--
A. And I think--I don't mean to waste your time, so I'm not going to read others that are equally--are not relevant to a jurisdictional inquiry, but I selected the one that was relevant to a jurisdictional inquiry in response to the clear indication by the Parties in the text that this is what they wanted.
Q. And I will accord you the same courtesy. Trust me, I do not intend to go through all of them, but on what basis are you suggesting that one aspect
[Page 1887]
of the preamble is more relevant than other aspects of the preamble? I mean, is the part of the preamble--you see, for example, the preamble also says that the Parties "resolve to ensure predictable legal and commercial framework for business and investment."
There is no textual basis, at least, would you agree with me, in this preamble to say that one provision is more or less relevant than another provision to particular aspects of the Treaty?
A. I will concede that there are other provisions that are relevant to the interpretation of the Treaty. The one that you cite, certainly.
Q. Can we take a look at that, actually?
MS. POPOVA: Tom, would you show the one.
BY MS. POPOVA:
MS. POPOVA: So, the one--the second one, I believe, that you rely on, "promote broad-based economic development."
A. I'm looking at it.
Q. Yeah? Great. Do you see that--actually it says that: "The Parties have resolved to promote
[Page 1888]
broad-based economic development in order to reduce poverty and generate opportunities for sustainable" alternatives--"sustainable economic alternatives to drug-crop production"?
A. Yes.
Q. But you would agree with me that whether or not an investment is an alternative to drug-crop production is not one of the characteristics of investment that one should read into the investment chapter of the Treaty?
A. I would say that it is not one of the requisites.
Q. Thank you, Professor Reisman, just one final, hopefully, question for you.
In all cases, however one uses the preamble, you would agree with me, would you not, that one cannot use the Treaty's object and purpose to arrive at a meaning that contradicts or displaces the clear meaning of the Treaty's text; correct?
A. Yes, I do.
Q. Thank you, Professor Reisman. I have no further questions for you and I'm grateful for your
[Page 1889]
time.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you. Thank you, Ms. Popova.
Ms. Menaker.
MS. MENAKER: Thank you, Mr. President.
I only have a few questions.
REDIRECT EXAMINATION
BY MS. MENAKER:
Q. First, Professor Reisman, Ms. Popova-- opposing counsel asked--excuse me--pointed you to some language where you had been previously critical of the Salini Case.
In any of those cases, did the Treaty at issue contain language incorporating the Salini factors into the definition of "investment"?
A. No.
Q. Okay. Ms. Popova also pointed you to some, but not all, of the sources that you cited in support for your definition of--or your understanding of "public debt," so we did not look at, for instance, the CIA fact sheet or the IMF paper, but was--in reaching your conclusion that these Land Bonds are
[Page 1890]
not investments covered by the Treaty, did you depend upon the fact that the Bonds were not Bonds within the ordinary meaning of the word, or were not public debt within the meaning--within the ordinary meaning of the word? Was that--were those exclusive determinants for your analysis?
MS. POPOVA: Sorry. Apologies, that's a very leading question. I don't object to you rephrasing it, although the objection--point of the objection has now been lost. Andrea, please.
PRESIDENT FERNÁNDEZ ARMESTO: I don't think that Professor Reisman is easily led by anyone. I'm sure he has his own Opinions. Feel free to answer it in the way you want, Professor.
THE WITNESS: I understood the question, didn't find it leading, and I'm very happy to have the opportunity to clarify what may have been a misapprehension.
The criteria for determining whether or not a transaction in this case, the expropriation of land and the provision of Bonds for repayment at a nominal interest were not, in my view, Bonds in the same
[Page 1891]
sense as the Bonds that are ordinarily used, for example, in Abaclat. These Bonds did not have a Willing Buyer. These Bonds were simply paper that was given to people for their land.
So, to view these as Bonds in the sense of investment, to view these as somehow or other "investment," overlooking for the moment the anachronism of applying the 2016 Treaty--2016 Treaty--2019, I think it was.
BY MS. MENAKER:
Q. 2009.
A. 2009. So, it would be, I think, to me, wrong to take those standards and apply them to a transaction that I would not have thought was Bonds and which was in no sense an investment within the meaning of the TPA.
Q. Thank you. And, finally, Professor Reisman, you were asked a number of questions about supplementary means of interpretation under Article 32 of the Vienna Convention, where supplementary means can only be resorted to in limited circumstances to confirm the ordinary meaning under
[Page 1892]
Article 31.
Or if that meaning leads to a result that is unreasonable or absurd, and then you were asked a number of questions about subsequent agreement between the Parties regarding the interpretation of the Treaty or subsequent practice in the application of the Treaty.
And the provision of the Vienna Convention that tells a Tribunal--or tells an interpreter that they must take into account the subsequent agreement, or subsequent practice, is that under Article 31 or under Article 32 of the Vienna Convention?
A. 31.
Q. Thank you.
MS. MENAKER: I have no further questions.
PRESIDENT FERNÁNDEZ ARMESTO: Very good.
Professor Stern?
ARBITRATOR DRYMER: Thank you, no.
PRESIDENT FERNÁNDEZ ARMESTO: Professor Reisman, thank you. You have come from New Haven to help us.
THE WITNESS: I have, sir.
[Page 1893]
PRESIDENT FERNÁNDEZ ARMESTO: So, is that very far away? Probably less than Lima in Perú, I would assume.
THE WITNESS: Considerably.
PRESIDENT FERNÁNDEZ ARMESTO: Considerably.
Anyway, I know it's an effort. We thank you for having come from New Haven and to have helped us to better understand this case, and with this we now finalize your examination. Thank you very much, Professor Reisman.
THE WITNESS: Thank you, Mr. President. It was an honor to be before you at this Tribunal.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you.
(Witness steps down.)
PRESIDENT FERNÁNDEZ ARMESTO: So, we will break for 10 minutes, and then we continue with Professor Bullard. Very good.
(Brief recess.)
PRESIDENT FERNÁNDEZ ARMESTO: We resume the Hearing.
And now we will be examining the Legal Expert of Claimants, Mr. Alfredo Bullard.
[Page 1894]
Mr. Bullard has been with us throughout the week.
ALFREDO BULLARD, CLAIMANTS' WITNESS, CALLED
PRESIDENT FERNÁNDEZ ARMESTO: Good afternoon. First of all, we need to have you read the Expert's declaration.
THE WITNESS: I solemnly declare, upon my honor and conscience, that my statement will be in accordance with my sincere belief.
PRESIDENT FERNÁNDEZ ARMESTO: Very well. Thank you very much, Mr. Bullard.
Mr. Friedman?
MR. FRIEDMAN: Yes. Mr. Recena Costa will present Professor Bullard.
MR. RECENA COSTA: Thank you very much, Mr. President. I will be speaking in English because I speak Portuguese--
DIRECT EXAMINATION
BY MR. RECENA COSTA:
Q. Good afternoon, Professor Bullard.
A. Good afternoon.
Q. Do you have in front of you the Report dated May 21, 2019?
[Page 1895]
A. Yes, I have.
Q. Are there any corrections that you wish to make to this Report?
A. Yes. There are a few. I have prepared a chart, so most of them are very, very small mistakes in writing. The only one that is--not really, but is important is the one that is in Paragraph 141 to 142. As you see, after Paragraph 142, there is a sort of scheme of a norm which were supposed to go in Paragraph 141, not in Paragraph 142. So, we have to move that to the other paragraph.
All others are only very small typos.
Q. Thank you. And other than for these corrections, you are content for the Tribunal to rely upon your Report as your Expert Opinion?
A. Yes.
MR. RECENA COSTA: So, Professor Bullard has prepared a presentation. With the Tribunal's indulgence, I would invite him to deliver it now.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you. Thank you very much, Mr. Recena Costa. I will not make you a doctor, just in case I get it
[Page 1896]
wrong again.
MR. RECENA COSTA: I actually do have a Ph.D., for the record.
PRESIDENT FERNÁNDEZ ARMESTO: Okay, then. So, Doctor. I'm sorry, I was misled.
MR. RECENA COSTA: But I go by Mr. Recena Costa. That is totally fine.
PRESIDENT FERNÁNDEZ ARMESTO: I was misled by Ms. Popova, so, sorry for that, Dr. Recena Costa. And we acknowledge with thanks the Report on Peruvian law and we give it H-9.
Dr. Bullard, you have the floor.
DIRECT PRESENTATION
THE WITNESS: Good afternoon. I will be speaking in Spanish, but I do not have any problem in answering the question in either language, in English or in Spanish.
I will be presenting my Report that is basically divided into two sections. Here, we have a summary of my conclusions. The first one is that Gramercy acquired validly the Bonds under Peruvian law; and the second one is that, under Peruvian law,
[Page 1897]
the four Supreme Decrees that governed the payment of the land debt are illegal, unreasonable, and, in my opinion, automatically inapplicable.
Let's start with the first point that has to do with Gramercy acquiring validly its Land Bonds under Peruvian law. There is no dispute between the Parties that the Constitution of 1979 and also Law 22749 of 1979 determined the free transfer of those Land Bonds and also eliminated any limitations. They were freely transferable. However, these rules did not establish the transfer, the way they should be transferred. Since it was not provided for, the applicable rules for the transfer of the Bonds after 2000 and after 1994, when the securities law came into effect, was the Securities Act of 2000 and the Civil Code. And these laws do have regulations to allow for an explanation of how to transfer the Bonds.
The Civil Code established--or the securities law establishes that the Bonds are established by an assignment of rights, and the law of securities, too--on securities, too, also
[Page 1898]
indicates that you need to indicate the name of the assignee and the assignor. So, as you can see in the following slide, the transfer of the assignment document that I was able to review are in writing, and here you have the name of the assignor and the assignee that are requested or provided for under the law.
What is it that was assigned under the Peruvian law? We have here in the next law that the object of the assignment is at Clause Number 3. It is clearly established that this assignment of rights comprises all of the Assets, and "Assets" is capitalized. During the hearing, I have heard reference to Clause 3.2 under contract, and 3.2, in my opinion, should be read as a whole from the heading where we see that the assignor declares and guarantees that, to the date of signing of this Contract--at the date of signing of this Contract, once again, the assignor declares and guarantees that there are a series of guarantees such as the one that we see here at Subparagraph 4, and it recognizes the possibility of collecting the compensation accrued by
[Page 1899]
the assets, and this is an expectative right that is to be performed by the assignee.
This is referring to the possibility to collect, to the expectation, not the existence, of the right. The right is reflected in the first clause. The first clause defines that the Bonds and also the rights to any loans that are indicated at 1.3 of this contract. Under here, there is a listing of all the Bonds, including--in here we have the Bonds, and also the rights to those--to the Loans, includes all the supplementary rights or the rights to sue, and also the expectative rights, and here it says they will be considered the assets as a whole. And then you remember that, at 3.1, you define the meaning of assets. 3.2.6 establishes, in fact, to the possibility to collect. This is a guarantee who has the risk that it will not be collected.
The Bonds were validly acquired, in my opinion, and the purpose and the object of the transfer was--and this was included also in the accessory clauses to this, and this is a short comment to the rebuttal by Mr. Hundskopf. And in
[Page 1900]
connection with the transfer of the Bonds, he indicates that the Law-Decree of 1979 provided for the transfer, and that the transfer was valid, and he also indicated that these conditions included for the Bond to be also registered with the holders of Land Bonds under the Agricultural Development Bank Registry. I have not found any reference to that, and I understand that Mr. Hundskopf is referring to Article 7 of this Decree-Law that empowers the MEF to issue some regulations, but I have not found any regulation to that end--that is to say, the regulation to require the recording of the Bonds.
There is no legal provision, in my opinion, that imposes registration as a validity requirement.
In Perú, Registries are declarative, not constitutive of rights, unless otherwise stated in the law, and there is no law that establishes that.
Now, this is also explained on the Securities Law, Article 29.2, for to be able to enforce these rights, it is necessary to record this, to be able to inform the debtor who should be paid. This is a protection of the debtors' right. If the
[Page 1901]
debtor is not notified that there has been a payment, the debtor could be paying the--rather, he could be paying the wrong creditors. So, the debtor should know who the creditor is, and otherwise there couldn't be any--the Claim on that payment could not be presented against third parties.
So, in my opinion, Gramercy did notify the Peruvian Government. We have some letters that show that the State was informed that the Bonds were transferred, and they said, "You need to record that." But there was no register that had disappeared with the bank that was in charge of it.
So, as a conclusion, these Bonds were validly acquired, and the lands were transferred with the right--with their rights to the--the associated rights.
Now I am going to move to the fourth.
PRESIDENT FERNÁNDEZ ARMESTO: So, you're saying that the endorsement is not necessary or was irrelevant?
THE WITNESS: It was agreed. It was agreed that, under the Contract, that there would be an
[Page 1902]
endorsement.
PRESIDENT FERNÁNDEZ ARMESTO: So, the endorsement is not a requirement?
THE WITNESS: Well, it's not a requirement under the legislation to be applied in this case. It was not established. It was not a requirement.
Now, if the President doesn't have any further questions about the first item, I am going to move on to the second one, and that is that the four Supreme Decrees are illegal, unreasonable, and automatically inapplicable under Peruvian law.
So, the Peruvian Constitution establishes some limitations to the public power, and also the possibility to act that are reflected in two central principles or key principles, the legality principle and the reasonableness principle.
These principles act as limitations to be able to avoid the arbitrary actions vis-à-vis the State--vis-à-vis the citizens and the companies in Perú. This pyramid that I am showing you is intended to briefly explain to you, and also in a very systematic way, the meaning of "legality" and
[Page 1903]
"reasonableness." These are two basic principles that are used to build up on Decisions, legislation and regulation to the left, and also jurisprudence to the right. Clearly, I have not included all of them, because we have a very high number, but here we see different blocks to understand reasonableness and legality under Peruvian law.
We have more than 6,000 Decisions by INDECOPI on regulatory activities, and also administrative proceedings, where we assess--where they assess these two principles. And different regulations have established standards to be followed by the State to comply with these principles, and they are very specific, as we are going to see. They are not abstract principles. They are quite concrete, specific, and they are defined accurately.
If we removed some of these elements, the system is still standing. There are many standards, many regulations, that are applicable to all of these.
I would like to start from the beginning itself. This is a decision of 1997 that is widely
[Page 1904]
known, that is the Yellow Taxi Case. This Decision was issued when a company, a taxi company, that had painted their taxi cars gray were asked by the municipality to have them painted yellow. So, they claimed that this Decision was not legal and was not reasonable. They presented the case before INDECOPI. They were told--what is the reason, members of the municipality? And they said, because of security reasons. They could not prove that the color of the vehicle was related to security; therefore, the Administrative Decision was declared illegal.
Why is this important, something that is so far away from the Land Bonds? If you move on to the next page, the chart to the left is not a demonstration that I have prepared. It's part of the Resolution. The Resolution establishes a sequence of steps, and they are the ones to be followed to analyze whether the requirements of legality and reasonableness are met. And it is interesting to review this, because here we see the four principles that will be discussed today: Legality--that breaks down into the jurisdiction and compliance with the
[Page 1905]
main requirements--and reasonableness; that means adequacy, necessity, and proportionality. And we are going to see their meaning.
MR. RECENA COSTA: Mr. Bullard, I'm not sure that everything is getting picked up by the Transcript.
THE WITNESS: I will try to speak slower.
PRESIDENT FERNÁNDEZ ARMESTO: You are being--you are being interpreted into English. And we also have court reporters who are making an effort, but the truth is that you are going very fast.
THE WITNESS: Then I will try to speak slower.
So, on the next slide, I have just shown one example as to the Decision by this administrative body in connection with these cases, and this is very important because the Yellow Taxi Case dates back to 1997. It has an impact on the regulation that came, the subsequent legislation, because that followed the principles established under that Decision. This is not the Decision of the Yellow Taxis, but it is a
[Page 1906]
different one that is quite clear. This is a case on buses, and they were being required to install a terminal in all of the towns that they went through.
PRESIDENT FERNÁNDEZ ARMESTO: But we need to translate it. Why don't we read it to ourselves and then you continue?
THE WITNESS: Yes. You can read it and then I can explain it to you.
Here we see, first of all, as you can see, that the--based on the Decision by the State entity to approve a Regulation, it needs to study the precedent or the background to that, so they need to establish that the underlying analysis was carried out before the issuance of the law. So, there is no reverse engineering whenever I issue the Regulation and then I justify it. First, I need to analyze, and then I need to be able to pass that Regulation, and INDECOPI rejects any ex post analysis. And also, at Paragraph 48, there needs to be, among other elements, a cost-benefit relationship, and we are going to see how that is complied with in this Regulation.
[Page 1907]
Next, we have a CT Order that, after the Yellow Taxi Case, had the same analysis--that is, they also showed adequacy, proportionality, and necessity, after analyzing the legality principle.
And more recently, and this is already 2016, this Legislative Decree was passed, Number 1310, which is quite interesting, and it established an ex ante control in a sunset law system. How does it work? This law was passed, and even though there were some control mechanisms with INDECOPI, there was a previous control mechanism that were established for the Decisions, and it works in both ways.
First of all, the in stock clause that already existed when the Regulation was passed had to be presented and supported before a commission that evaluates the three principles--four: Legality, adequacy, necessity, and proportionality. And if they are not approved, the Regulation is passed, and if it is not presented, it is passed. So, every year it needs to go through the same study, through the same analysis, to analyze the context in which it was applied. And all of the previous Regulations need to
[Page 1908]
go through the Commission before they are issued.
So, there is a system that--we call it "sunset." The sunset comes to an end if there is an expiration, if it has not been renewed through the cost-benefit analysis that I just mentioned a minute ago.
In this chart, I am trying to sum up the analysis of a Peruvian law that also includes the sunset law that I just mentioned, but also the principles that I have explained.
And now specifically we're getting to Supreme Decrees, and I have only included two, the first one and the last one. And these are the documents that were used to support them. In the first case, we have a total of 27 pages, and this is all of the documents supporting this. Some of them were the draft law, and this would be the analysis.
And here I was able to identify, as part of a very quick exercise, 36 paragraphs that contained an analysis of the first Decree, four pages. In the case of the legislative--or the last Supreme Decree, the one that would be still in force, we have 12
[Page 1909]
pages of support, 93 paragraphs in all, and I would say that there are 22 paragraphs on analysis, more or less two pages. But the number is not that important. It could be relevant, just to have an idea, but also the quality of the work done.
And the Peruvian regulation also requires, as I just mentioned, not only through jurisprudence of INDECOPI, but also through specific Regulations, how to conduct that analysis. First, there is an analysis that I called the cost-benefit analysis that is also mentioned at 31. And here we see that the cost-benefit analysis is a method to get to see in quantitative fashion the impact and the effect of the regulatory proposal. And at the end, it says that the need of the law needs to be justified, given the nature of the problems, the costs and benefit probable, costs and benefits and also alternative mechanisms to solve them.
And this is also related to what I heard during the presentation by Vice Minister Sotelo, when you asked her whether this is the paragraph that showed everything they had to do. And she said yes.
[Page 1910]
And then you told them you will need to be more sophisticated in your analysis, because this is what we will have in the future. This has been enforced since the '90s--not this one, but the other one--and it does require an analysis, and this Regulation does refer to this quantity of analysis. And not only this provision; I've listed below a number of provisions that derive from the need for this analysis, and in passing, I could note that they are not they only ones. There are others.
This is the paragraph of which mention was made in the--what I commented on a moment ago. It says in that regard, there is no additional cost other than that which is represented by the Agrarian Bonds at their current value. And this is the paragraph that upholds the cost-benefit analysis. It actually has an additional paragraph.
Now, it's interesting there is a guide for a cost-benefit analysis that has been issued by the Ministry of Justice, and I believe it has had four editions. They are all more or less similar, and it does cite examples of how a cost-benefit analysis is
[Page 1911]
not done, and that down and to the left. The adoption of this bill does not represent any expenditure whatsoever by the public treasury and, to the contrary, will be useful for better and more efficient administration of justice. That is incorrect, and if you realize it in a few more words or a few less words, it's the same logic as the paragraph above.
Indeed, this was sent to the Ministry of Justice in consultation with the Ministry of Economy. And the Ministry of Justice answered that it had not undertaken the cost-benefit analysis in keeping with the standard which was applicable in its view. And I might note in passing that this was not binding for the Ministry of Economy. It was just a matter of reference. The opinion of the Ministry wasn't binding. The legal provision, of course, was, and the Ministry of Economy answered that it was not necessary to make any adjustment to the cost-benefit analysis that had already been performed. That is in R-690.
Now, I've identified Reports--I've not
[Page 1912]
identified Reports, rather, in which where there has been a solid establishing with an explanation of a statement of grounds containing the cost-benefit analysis. So, there is no evidence that this process of analysis was carried out.
The Peruvian law also requires a consultation stage. This is one of the examples of the several provisions--there are several that are mentioned below--that make reference to the need to have a prior consultation through the prepublication of the provision, Article 14. It says, "Without prejudice to what is established in Article 2"--
PRESIDENT FERNÁNDEZ ARMESTO: We can read it, and that will be that.
THE WITNESS: So, as you have seen, the provision says that the provision must be prepublished and there must be consultation with 30 days' lead time. This is a binding provision, and I understand that from--that the Report of García-Godos indicates that it should not be published. I think that is quite clear.
And these Decrees were not prepublished.
[Page 1913]
Then in this framework, it is required that legal reviews be undertaken--that is to say, the lawyers evaluate the provision, evidently, not just the technical people, but also the lawyers. And it's interesting, because I've drawn paragraphs that are in the Reports that underlie the Supreme Decrees or that support them regarding the formulas, and what their legal analysis says is that they are not going to issue any opinion on the formulas because that's a technical matter, but if you go to the Report of the Office on Indebtedness, nor do they say anything. They put a formula, but they don't analyze it. So, they leave everything in sort of no man's land, where the supposedly technical office says, "I'm not going to say whether or not what the Constitutional Court did fits with the formula or not, because it seems to be a legal matter," and when it goes to legal, they say, "I'm not going to analyze what it says because it's a technical matter." So, no one does say whether or not it is in compliance.
Now, what should we do? I think what the Ministry should have done, it should have answered
[Page 1914]
three questions, and here we are at the analysis of adequacy, necessity, and proportionality.
First, one must ask whether the administrative process is adequate to achieve the public interest at stake. And you'll recall that there is a mandate in the Constitutional Tribunal to take stock of how much must be paid, the possibility of payment. That analysis has not been done, with which there is no evidence that adequacy was examined. Adequacy is that the public purpose can be met with the procedure that's been established.
The second question is the question having to do with the analysis of necessity. That means comparing several alternative measures and seeing why this is the best one, the least costly one. That is necessity. Nor was that analysis undertaken. I have not identified in the Reports any alternative analyses. One analyzes only one of them, and so there is no evidence that this formula met with compliance and the proportionality analysis and cost-benefit, well, you've seen the paragraph that was included. I cite the Article of Supreme
[Page 1915]
Decree 008. Once again, it requires a quantitative cost-benefit analysis, and I recommend that the Tribunal read the guide for the preparation of the legal provisions of the Executive Branch. This is, if I'm not mistaken, the Fourth Edition. There, there are three pages that explain how the cost-benefit analysis is to be performed.
Just by way of example--and I'm not going to read it; it is there for you to take a look at it--this is also an INDECOPI resolution that rejects and explains why it rejects. And, if you realize, it asks that an evaluation be undertaken of the number of companies, market conditions; once again, the bus stations; number of land terminals that exist; cost of investment required to install terminals if there is not a possibility of leasing them.
So, in other words, they establish the need to bring data into the analysis prior to issuing the provision, or a justification that the three steps of reasonability analysis, reasonableness analysis required by the legislation have been performed.
In my view, the proportionality analysis was
[Page 1916]
not done in the case of the Supreme Decrees. I haven't seen it. There is no analysis taking stock.
And another example, of the many that we can cite: There is no explanation of why one-year U.S. Treasury Bonds are selected. There are several alternatives. One would have had to have undertaken the economic analysis which was most appropriate or the most adequate; that was not done. Accordingly, my opinion is that the analysis of proportionality was never conducted.
To conclude, I go back very quickly to Legislative Decree 1310, which I mentioned a moment ago, which has ex ante control and a sunset law system. It establishes the stock for the existing provisions with analysis every three years of the entire existing stock, and it establishes the need for prior approval, and if you realize it, this provision has the same four principles: Legality, necessity, effectiveness, and proportionality.
And this must go to a Commission to be validated before they come into force, or even before they are issued by the system, and the consequence is
[Page 1917]
1 regulated by Article 2.5. Those provisions that do
2 not pass because they don't carry out the analysis,
3 or they simply are not presented for analysis, are
4 automatically derogated. And those that are new do
5 not enter into force, if they don't undergo this
6 analysis.
7 PRESIDENT FERNÁNDEZ ARMESTO: And this
8 Legislative Decree was prior to the Supreme Decree?
9 THE WITNESS: That's a good question. The
10 first two Supreme Decrees are prior to this
11 provision. Accordingly, they are in the field of the
12 stock. They should have gone through, but because of
13 stock and--and the three and four are new Decrees,
14 because they are new. Being new, they should have
15 gone through prior approval.
16 PRESIDENT FERNÁNDEZ ARMESTO: They should
17 have gone through the Commission? Any Supreme Decree
18 now has to go through this Commission?
19 THE WITNESS: Any Supreme Decree that
20 creates an Administrative Procedure with some
21 exceptions that are set forth in the provision.
22 Now, anticipating the comment on one of the
[Page 1918]
1 points of discrepancy with Mr. García-Godos,
2 Mr. García-Godos indicates, and in effect the
3 provision says, that--and not just Supreme Decrees;
4 there could be other kinds of legal provisions, which
5 are general in scope, is what it says, and what
6 Mr. García-Godos says is that this is a provision of
7 specific scope. In my opinion, it is not of specific
8 scope, but rather, it is of general scope, because it
9 regulates an indeterminate category: All persons who
10 come forward to claim having a Bond acknowledged for
11 purposes of payment, and that is an indeterminate
12 category.
13 Consequently, for me, it is a general
14 provision. There are other exceptions; for example,
15 the rules of regulatory agencies of the sectoral
16 agencies, Telecom--there are exceptions for its
17 application. There are several exceptions. The
18 Supreme Decrees, in my opinion, do not fall under any
19 of the exceptions.
20 Accordingly, given that they have not
21 undergone this analysis, these Decrees are
22 automatically inapplicable, and if these provisions
[Page 1919]
1 had not existed, I don't think there would have been
2 an analysis before INDECOPI with subsequent
3 oversight.
4 Now, just very briefly, my comments on the
5 Report by Mr. García-Godos. He makes reference to
6 one of the instruments that I've mentioned, which is
7 the MEF guide. There is an MEF guide for undertaking
8 this analysis, and he says it doesn't apply because
9 it's a matter of indebtedness. In effect, there is a
10 reference to laws tied to indebtedness.
11 First of all, I think they were applicable
12 because this Administrative Procedure aimed at paying
13 the Agrarian Reform Bonds, and if you see the Supreme
14 Decrees and the support that was set forth, none of
15 them cites any provision on indebtedness. And had
16 they done so, it would have been more complex,
17 because the laws on indebtedness, because the laws on
18 indebtedness require that one undergo a much more
19 technically complicated procedure, and that procedure
20 would have included review of the budgetary impact.
21 They would have included precisely review of the
22 possibilities of payment in the following years, and
[Page 1920]
1 so on.
2 In other words, they would have had to have
3 gone through these steps, which are even more
4 sophisticated than those that are subject to the
5 regular provisions. The second discrepancy--
6 ARBITRATOR DRYMER: Pardon me. If I may
7 just ask a question following up on the theme that
8 the President raised, thank you, because I was
9 curious about the retroactivity of certain of these
10 instruments. This guide you mention is dated 2018,
11 is it not?
12 THE WITNESS: Which one are you referring
13 to?
14 ARBITRATOR DRYMER: The--well, I'm looking
15 at Slide 42. This is the legislative technical guide
16 for preparation of normative drafts.
17 THE WITNESS: Oh, yeah.
18 ARBITRATOR DRYMER: And, actually, it comes
19 under CE-653, which is dated 2018, after the dates of
20 the four Supreme Decrees at issue.
21 THE WITNESS: You are absolutely correct.
22 ARBITRATOR DRYMER: Yes.
[Page 1921]
1 THE WITNESS: I make two comments.
2 ARBITRATOR DRYMER: Yes. I want you to,
3 please.
4 THE WITNESS: The first one: This is the
5 Fourth Edition. There are four--I quoted here the
6 last one, but there were editions that were before
7 the Supreme Decrees. Second--
8 ARBITRATOR DRYMER: Yes?
9 THE WITNESS: Second is a guideline.
10 Really, the basis of the guideline are all the norms.
11 The guideline is a reflection of the best practice
12 that were supposed to be followed by the public
13 offices to comply with all these norms.
14 ARBITRATOR DRYMER: All right. Fair enough.
15 Thank you. And for the rest, the President addressed
16 the questions on that that I might have asked, and
17 I'm sure the Parties would have gotten to it
18 themselves as well.
19 THE WITNESS: Only to finish my comment
20 about the annulment issue--
21 ARBITRATOR DRYMER: Please feel free to
22 continue in Spanish, notwithstanding me.
[Page 1922]
1 THE WITNESS: Sorry. The provisions that
2 are down in the box are all of those that would be
3 applicable, other than the guide that I just
4 mentioned, which is not the same as the one we just
5 discussed, because there is a guide from the Ministry
6 of Economy, and there's another general one for all
7 State offices. The one that Mr. García-Godos refers
8 to is the one that applies to the Ministry of Economy
9 only.
10 The second point is that Mr. García-Godos
11 indicates that there's strict compliance, that there
12 was no necessity to carry out a reasonableness
13 analysis because it abides strictly by what the
14 Constitutional Tribunal says. I've listened closely
15 in recent days, and I've studied this for my Report.
16 There are a number of aspects that have been
17 supplemented and modified by the Supreme Decrees with
18 respect to this Decision that had to undergo a
19 reasonableness analysis. The first is to see whether
20 they justified or fit within the public purposes that
21 the Judgment of the Constitutional Court had. Under
22 the argument by García-Godos, the Supreme Decrees
[Page 1923]
1 should have matched what the Constitutional Tribunal
2 said, and that's not so. There are several
3 additional elements that must be verified.
4 Then it is said that the sunset law system,
5 the ex ante sunset law, it does not apply--I already
6 said this in response to a question by the Court,
7 because it's not a general provision--I believe that
8 it is--the Supreme Decrees are defined as being
9 general in nature. Some are specifically; the
10 general rule is that they are general in nature.
11 And with that, I conclude. This is the
12 table that summarizes. It's in my Report. It
13 summarizes my analysis on compliance with the
14 requirements established, and here I think it is very
15 simple to take into account beyond this legal
16 framework, which is better explained in the
17 provisions that I cite in my Report.
18 What you can note clearly is that there is a
19 principle of prior justification that must be abided
20 by--otherwise, it cannot come into force--an ex post
21 control phase through INDECOPI or other judicial
22 entities that can review what's done, and now there's
[Page 1924]
1 an ex ante system, which was established precisely to
2 have better control over any excesses that the State
3 might commit as regards the principles of legality
4 and reasonableness.
5 My opinion is that the Supreme Decrees did
6 not satisfy this sequence. And I am available to the
7 Tribunal and the Parties for any questions.
8 PRESIDENT FERNÁNDEZ ARMESTO: Before giving
9 the floor to the Parties, I have a commonsense
10 question. This has been published in El Peruano--the
11 official gazette of the State is called El Peruano.
12 This has been published in El Peruano, and,
13 therefore, it has an appearance of validity.
14 So, my question is--these are internal
15 provisions of the administration that somebody would
16 have to implement, a judge or INDECOPI; I don't know.
17 So, my question is: I assume that the laws and
18 regulations, once published in El Peruano, have a
19 presumption of validity and must be enforced so long
20 as an authority with the power does not declare them
21 to be derogated.
22 THE WITNESS: That's an excellent question,
[Page 1925]
1 and there are various angles from which one can
2 answer. The first, the sunset law itself, which is
3 Decree-Law 1310--it's explained in my Report--it
4 establishes that if these steps are not carried out,
5 one may file a complaint with INDECOPI, precisely to
6 secure a Declaration of Nonapplication or to leave it
7 without force. INDECOPI can strip a Supreme Decree
8 of force if what's been violated is the principle of
9 legality.
10 If the principle of legality has not been
11 violated, but the principle of reasonableness has,
12 then it doesn't have--then it can be declared that it
13 doesn't apply in a given State, but that doesn't have
14 ergo omnes effect.
15 Now, the second thing is if I don't send the
16 Supreme Decree to the Commission and El Peruano is
17 not going to ask if I have complied with that
18 requirement, and it will publish the Decree. And
19 that Decree is exposed to the legal questions being
20 asked about it, be it at INDECOPI or before the
21 regular courts, regarding its validity.
22 So, it's not that the Commission--it's not
[Page 1926]
1 really the Commission. The thing is the Commission,
2 when it approves, it works in the President's--in the
3 Office of the Prime Minister, and that Commission
4 periodically publishes Supreme Decrees with a full
5 description of the procedures that continue to be in
6 force and authorizes--and all of this is through IT.
7 The requests are filed through a web page.
8 You can go in, seek authorization, and theoretically
9 it can be published.
10 Now, I could note in passing that failing to
11 comply with these provisions gives rise to
12 administrative liability, even economic liability,
13 because INDECOPI can impose fines on public servants
14 when they don't comply, for example, with the
15 mandates that INDECOPI has issued saying that the
16 provision cannot be applied.
17 So, there is a whole system that has been
18 constructed in Perú, beginning in the late 1980s, but
19 it began to be constructed in a firmer manner in the
20 late 1990s. This whole system has gradually been
21 established, and I feel a bit bad when they say
22 you're going to have to get used to--well, one thinks
[Page 1927]
1 that this system is quite primitive.
2 But actually I think it's one of the most
3 sophisticated ones I'm familiar with, and it's a
4 system that has all these mechanisms. And just as
5 Minister Castilla explained Perú's prestige, because
6 of its management of macroeconomic policy, I believe
7 that these administrative mechanisms have made a
8 great contribution to more efficient operation of the
9 State.
10 Now, unfortunately what happens in this case
11 is I see that they were not abided by.
12 PRESIDENT FERNÁNDEZ ARMESTO: Very well.
13 Sir, any additional questions?
14 MR. RECENA COSTA: No questions from us.
15 PRESIDENT FERNÁNDEZ ARMESTO: So we give the
16 floor to the Respondent, Mr. Hamilton.
17 MR. HAMILTON: It's a temptation, but I'll
18 give the floor to Mr. Llano.
19 CROSS-EXAMINATION
20 BY MR. LLANO:
21 Q. I'll ask my questions in English since your
22 Report was in English and I understood that you were
[Page 1928]
1 going to testify in English this afternoon. So, I
2 hope that's okay with you.
3 A. That's okay. The only thing is if I feel to
4 explain any kind of text in Spanish, it is better to
5 switch to English. I think it is better because
6 sometimes the translation could miss the real sense
7 of the word.
8 Q. Thank you.
9 A. I will try avoid to do that. I will do that
10 only if it's strictly necessary.
11 Q. We'll take it one step at a time.
12 A. Okay.
13 Q. Perfect.
14 Now, Mr. Bullard, you and I have--you and I
15 have known each other for quite some time as
16 reflected in some of the cases that you list at the
17 start of your Report; correct?
18 A. Sure.
19 Q. And I was curious, I've got to say, was
20 there any particular reason to reference individual
21 attorney names, including me, by name in your Report?
22 A. No. It's a standard I use to follow when I
[Page 1929]
1 make that kind of declaration.
2 Q. Right. But, for example, when you cited to
3 work that you're doing with King & Spalding, you
4 didn't say, you know, I'm working with Ed Kehoe or
5 the like; right?
6 A. Yeah. But they are not involved in this
7 case.
8 Q. Okay. Did you know that I was involved?
9 A. I was not sure at that time.
10 Q. Okay. Now, you also mention in your Report
11 that you are acting as counsel for the Claimants in
12 an ICSID Arbitration against the Republic of Perú;
13 correct?
14 A. That's correct.
15 Q. And that is the case of Kuntar Wasi v. Perú;
16 correct?
17 A. That's correct.
18 Q. And that's obviously an investment treaty
19 arbitration; correct?
20 A. Correct.
21 Q. And in that case, you, on behalf of your
22 client, have filed a memorial last September;
[Page 1930]
1 correct?
2 A. That's correct. I don't remember the
3 precise, but it should be.
4 Q. And so, you're expecting a counter-memorial
5 from the State at some point in the near future;
6 correct?
7 A. I assumed it.
8 Q. Well, you must know the Procedural Calendar.
9 You're counsel; right?
10 A. Yes.
11 Q. Okay. Good.
12 And in that case, you allege that certain
13 measures taken by the Peruvian State were in breach
14 of the expropriation provision in the Perú-Argentina
15 Bilateral Investment Treaty; correct?
16 A. That's correct.
17 Q. And you also allege on behalf of your
18 investor clients that Perú violated the fair and
19 equitable treatment provision in that case; correct?
20 A. That's correct.
21 Q. Including through administrative measures
22 taken by the Peruvian State, my client; right?
[Page 1931]
1 A. That's correct.
2 Q. And, among other things, you argue in that
3 case that those measures that were taken by Perú were
4 unreasonable and arbitrary; correct?
5 A. Correct.
6 Q. And in addition to the Kuntar Wasi Case, you
7 are also acting as counsel for other clients in
8 disputes against Perú; correct?
9 A. Other clients against Perú as counsel. Not
10 that I remember.
11 Q. Are you not acting as counsel for a client
12 in the oil-and-gas sector in a case where you have
13 filed a Notice of Claim against the Republic of Perú?
14 A. Yeah, that's correct. Yeah. The
15 Notification of Controversy; that's correct.
16 Q. Right. And so that's another investor-State
17 dispute that you are acting on behalf of the
18 investor; correct?
19 A. Sure.
20 Q. And so--and that Notice of Dispute was filed
21 when?
22 A. Sometime two or three months ago. No. Yes.
[Page 1932]
1 No, more because it's about five months ago.
2 Q. All right. So around September of last
3 year; is that correct?
4 A. Yeah, more or less.
5 Q. So, while you were acting as an independent
6 Expert in this case, you agreed to take on additional
7 representations against the Republic of Perú;
8 correct?
9 A. That's correct.
10 Q. And, to be clear, in this matter, the
11 Gramercy v. Perú matter, you argue that several acts
12 of the Peruvian State were illegal and unreasonable;
13 correct?
14 A. I make that analysis about the Supreme
15 Decrees, and in the way I have just explained.
16 Q. Yes. And the Supreme Decrees are
17 Administrative Acts; correct?
18 PRESIDENT FERNÁNDEZ ARMESTO: Legislative
19 acts.
20 BY MR. LLANO:
21 Q. Supreme Decrees?
22 PRESIDENT FERNÁNDEZ ARMESTO: Yeah. It is
[Page 1933]
1 legislative acts.
2 THE WITNESS: Yeah, that's correct.
3 BY MR. LLANO:
4 Q. Okay. Fine.
5 PRESIDENT FERNÁNDEZ ARMESTO: Not
6 Administrative Acts. It's the legislative branch of
7 the public administration.
8 THE WITNESS: All right. Switching to
9 Spanish. They are regulations.
10 BY MR. LLANO:
11 Q. But the distinction is not really pertinent
12 to my question. My question is you are arguing that
13 these acts by the Peruvian State were or are illegal
14 and unreasonable; correct?
15 A. In this case.
16 Q. Yeah.
17 A. What I explain in my Report is that I
18 understand that they don't comply with Peruvian law.
19 Q. Right.
20 A. Because they break the legality principle
21 and the reasonability principle.
22 Q. Correct. And so the main takeaway is that
[Page 1934]
1 these acts by the Peruvian State that you discuss in
2 your Report are illegal and unreasonable; right?
3 Slide 53 of your presentation.
4 A. Sure. Of course.
5 Q. Yes. As you do in these other cases where
6 you're acting as counsel for Claimant, the Claimants,
7 plural; correct?
8 A. There are important differences between both
9 things. First, the facts are totally different.
10 Second, the kind of analysis that I'm making in that
11 case, in those cases are related to the application
12 of international law and the application of the
13 Treaty.
14 Here I'm talking about municipal. I'm
15 talking about reasonability and legality inside Perú
16 and inside Peruvian regulations. So, I understand
17 that it's a totally different standard, totally
18 different rules, totally different statutes, totally
19 different norms.
20 Q. Got it.
21 Are there any other matters where you act as
22 counsel against the Peruvian State, either in
[Page 1935]
1 domestic or international arbitration?
2 A. There is only one more against the Ministry
3 of Energy.
4 Q. And what is that case?
5 A. It's a commercial case.
6 Q. Commercial case. And your opponent, your
7 counter-party, is the Minister of Energy of the
8 Republic of Perú; yes?
9 A. Yes.
10 Q. Right. And if you can reveal it, who is
11 your client?
12 A. I cannot reveal it.
13 Q. Okay. Fair enough.
14 A. It is confidential.
15 Q. Okay. Now--
16 A. Until the award. When the award is come
17 out--
18 (Comments off microphone.)
19 THE WITNESS: Okay.
20 BY MR. LLANO:
21 Q. Now, I want to, since you come to the
22 conclusion that several acts of the Peruvian State
[Page 1936]
1 were "illegal" and "unreasonable," I want to discuss
2 some of your writings at a time when you were not
3 counsel for investors--for foreign investors against
4 the State.
5 And you have now a binder in front of you,
6 and I want to direct you to Tab 16, please. RA-302.
7 MR. RECENA COSTA: May we please get a
8 second binder. I think the practice of the Parties
9 has been to share two binders. We requested one but
10 we did not receive it yet.
11 MS. POPOVA: It is also in Procedural Order
12 10.
13 (Comments off microphone.)
14 BY MR. LLANO:
15 Q. Okay. So we're at--this is the award in
16 Convial?
17 PRESIDENT FERNÁNDEZ ARMESTO: That was
18 definitely off the record, but you are there.
19 THE WITNESS: And I remember her.
20 BY MR. LLANO:
21 Q. This is the award in the Convial v. Perú
22 Case, and you're familiar with that award; correct,
[Page 1937]
1 sir?
2 A. I read it many years ago, but, yeah, I'm
3 familiar with it.
4 PRESIDENT FERNÁNDEZ ARMESTO: Your name is
5 also there, Dr. Llano.
6 MR. LLANO: Indeed.
7 PRESIDENT FERNÁNDEZ ARMESTO: We keep it in
8 family.
9 BY MR. LLANO:
10 Q. Good.
11 So can you turn to Paragraph 149, please,
12 Mr. Bullard. 149.
13 PRESIDENT FERNÁNDEZ ARMESTO: Of the Award.
14 MR. LLANO: Of the Award.
15 BY MR. LLANO:
16 Q. And I would ask you, in the interest of
17 facilitating the work for our transcribers, that you
18 read to yourself Paragraph 149, please. Let me know
19 when you're done.
20 A. Yes.
21 Q. So, you see there that there was a question
22 or a claim, rather, by the Claimant in respect of
[Page 1938]
1 certain actions taken by the Peruvian State and, in
2 particular, the justification that was given to those
3 actions; is that correct?
4 A. That's correct.
5 Q. And you submitted Expert Reports in the
6 Convial case on behalf of--as an expert on behalf of
7 the Republic of Perú; correct?
8 A. That's correct.
9 Q. You were a legal expert in this case as
10 well; correct?
11 A. Yeah.
12 Q. And in your Reports in that case, which are
13 in the record in this case, you came to the
14 conclusion that the municipality of Callao had acted
15 reasonably in reaching its decision to terminate the
16 contract at issue in that case; correct?
17 A. That's correct.
18 Q. Now, let's look at that Report, and it's at
19 Tab 15.
20 Exhibit Number RA-355.
21 ARBITRATOR DRYMER: Thank you.
22 BY MR. LLANO:
[Page 1939]
1 Q. Let's turn to paragraph 105, please.
2 A. Sorry, which paragraph?
3 Q. 105.
4 (Comments off microphone.)
5 MR. LLANO: 105.
6 BY MR. LLANO:
7 Q. Before we do that, just to confirm,
8 Mr. Bullard, this is a Report that you submitted on
9 July 22, 2011, in the Convial v. Perú matter;
10 correct?
11 MR. RECENA COSTA: Sorry, this document is
12 marked "confidential."
13 MR. LLANO: It is marked "confidential" by
14 Perú. We don't mind sharing this information at this
15 point.
16 THE WITNESS: Sorry, can you repeat your
17 question, the date?
18 BY MR. LLANO:
19 Q. Yes. It is July 22, 2011.
20 A. Correct.
21 MR. RECENA COSTA: Sorry to interrupt again.
22 So, the cover page to this document says it has been
[Page 1940]
1 designated confidential by Gramercy. So that's an
2 inaccurate statement?
3 MR. LLANO: It is. It's an error.
4 MR. LLANO: Okay. I doubt that Gramercy
5 cares about Mr. Bullard being in the Convial Case.
6 ARBITRATOR DRYMER: Okay. Which paragraph
7 again?
8 MR. LLANO: 105.
9 BY MR. LLANO:
10 Q. Right. And you say in this case--I'm
11 sorry--in this paragraph that the provincial
12 municipality of Callao declared the termination of
13 the Concession Contract.
14 Do you see that?
15 A. Yes.
16 Q. And then you quote the termination from the
17 termination letter.
18 Do you see that?
19 A. Yes.
20 Q. And the entire quote--the entire analysis by
21 the municipality of Callao is four paragraphs long.
22 Do you see that?
[Page 1941]
1 A. Yes.
2 Q. And in Paragraph 106, you say--and I'm
3 translating freely at this point--you say: "As can
4 be seen, the municipality decided to exercise its
5 power to declare the termination of the Concession on
6 the basis of public interest."
7 Do you see that?
8 A. Yes.
9 Q. And then on the next page, you consider
10 adequacy, necessity, and proportionality, among other
11 things?
12 Do you see that?
13 A. Correct.
14 Q. And these are the same three criteria that
15 you considered in the case of the Supreme Decrees in
16 your Report in this case, the Gramercy Case; correct?
17 A. That's correct.
18 Q. You concluded in the Convial Case that all
19 of these three criteria were met; right?
20 A. That's correct, but it's a totally different
21 situation. This is an act by the municipality where
22 they terminated a contract. They are not subject to
[Page 1942]
1 all the rules that I have just explained. These
2 rules are referred to regulations or "reglamentos,"
3 and they have to comply and (in Spanish) as some sort
4 of a specific reglamentos, (in Spanish).
5 So, the standard is very clearly defined in
6 that Peruvian law about that kind of facts that are
7 object of my opinion, and it is totally different
8 than this one, where you are exercising the power of
9 the municipality to terminate a contract under--under
10 a contractual clause like that was what happened
11 here.
12 So, the analysis of interes publico is
13 subject to what the contract defines or applied--the
14 definition is applied--to the Contract, not to an act
15 of Government or sovereign.
16 As a matter of fact, if I'm not wrong, in
17 this case what happened is finally the Tribunal says
18 that this is a contractual case, because it was not a
19 sovereign act to terminate a contract.
20 Q. We'll see what the Tribunal said in a
21 second, but before we get to that, you are discussing
22 in your Gramercy Report--rather, in the Reports that
[Page 1943]
1 you submitted here in the Gramercy Case, you discuss
2 the reasonableness principle; correct?
3 A. Yes.
4 Q. And the reasonableness principle is a
5 principle that is driven by a number of different
6 factors that you set out in your Report; correct?
7 A. That's correct.
8 Q. Right. And among those things are court
9 decisions, INDECOPI awards, and the like; yes?
10 A. Yes.
11 Q. And these are not criteria that are defined
12 in any statute in Perú; correct?
13 A. I understand your question. These are
14 not--they are defined in anything--
15 Q. Statute, not an INDECOPI Decision or some
16 other random award. I'm talking about a statute.
17 You don't reference in your Report a statute--
18 A. Yes.
19 (Overlapping speakers.)
20 PRESIDENT FERNÁNDEZ ARMESTO: You are going
21 very fast.
22 MR. LLANO: Well, we have very little time.
[Page 1944]
1 PRESIDENT FERNÁNDEZ ARMESTO: No, let's take
2 as much time as you need. Let's go. "Haste makes
3 waste."
4 Apparently, the correct way of saying what I
5 said yesterday, the (in Spanish).
6 Let's go slowly.
7 THE WITNESS: Can you repeat your question
8 because I think I missed--
9 PRESIDENT FERNÁNDEZ ARMESTO: I think the
10 question was whether the standards of reasonableness
11 are set forth in the law.
12 THE WITNESS: Yes, they are.
13 BY MR. LLANO:
14 Q. Where?
15 A. They are. There are different statutes that
16 I quoted in my Report, in the Report in this case,
17 related to my Opinion in this case.
18 Q. Yes. Okay. And we'll get to that. We'll
19 get to that.
20 A. Okay.
21 Q. But for present purposes, let me just
22 confirm with you that this analysis that you set out
[Page 1945]
1 at Paragraph 107 in your Convial opinion has to do
2 with the issue of reasonableness; yes?
3 A. In this Report?
4 Q. Yes.
5 A. Yes. Yes.
6 Q. Good.
7 Now, you are aware that the Tribunal--the
8 arbitral tribunal in that case agreed with you,
9 agreed with your position in this paragraph; correct?
10 A. I understand that, yes.
11 Q. And agreed with the Republic of Perú; right?
12 A. Agreed in this case with the Republic of
13 Perú, correct. Correct.
14 Q. Yes. Now, let's look at that. Let's go
15 back to Tab 16.
16 A. I want to say something about that. They
17 agreed with the standard I used for a contractual
18 case in the analysis of the termination of the
19 Contract under a contractual clause.
20 It is very different about what I was
21 talking some minutes ago about the standard that is
22 applicable to Peruvian regulations.
[Page 1946]
1 Q. Are you saying that the municipality of
2 Callao could be any less reasonable than the Ministry
3 of Economy and Finance in reaching its Decisions?
4 A. Reasonable depends on how you are exercising
5 powers. In the case of giving regulation, those
6 powers, have limited--limitation established in
7 different statutes that are very specific about what
8 you have to do. In this case, that kind of standard
9 was not applicable.
10 Q. Okay. Let's go back to the Award, please.
11 A. Okay.
12 Q. It's Tab 16, and, again, this is RA-302.
13 And I would like to direct you to Paragraph 617.
14 PRESIDENT FERNÁNDEZ ARMESTO: At the end.
15 BY MR. LLANO:
16 Q. It is on Page 178. Page 178. It's on the
17 screen as well.
18 Now, I'll just read the first sentence. You
19 can take a look at the rest afterwards: "In
20 addition, this Tribunal emphasizes that the
21 arbitrariness of an act of domestic law to reach the
22 level of an international violation must affect both
[Page 1947]
1 the reasons that motivated the act as well as the
2 procedures that were carried out to take it, and in
3 the present case, it is proven that the declaration
4 of termination was not taken arbitrarily."
5 Do you see that?
6 A. Yes.
7 Q. So the Tribunal agreed with the Republic of
8 Perú, and with your Report, that that four-paragraph
9 letter was sufficient to show that it had not acted
10 arbitrarily; correct?
11 A. That's correct, but that do not mean that a
12 four-paragraph document can be used to justify a
13 Supreme Decree in Perú.
14 Q. Okay. Now, in Paragraph 618, the very next
15 paragraph in the award--
16 ARBITRATOR DRYMER: Let me just ask you this
17 question because clearly this is a family affair.
18 Both of you know--both of you know what
19 happened in that case, but it's not apparent on the
20 face of this particular--
21 PRESIDENT FERNÁNDEZ ARMESTO: And Professor
22 Stern.
[Page 1948]
1 ARBITRATOR DRYMER: I mean--
2 PRESIDENT FERNÁNDEZ ARMESTO: This is a
3 trio.
4 ARBITRATOR DRYMER: All right. You know the
5 answer to this question. Was that the only evidence
6 of the--that's sufficient to prove the reasonability?
7 MR. LLANO: More importantly, Mr. Drymer,
8 the question is, is it the only evidence that
9 Mr. Bullard relied on in making his conclusion in
10 that Report?
11 ARBITRATOR DRYMER: But you're also
12 referring us to the Award here, to standards which
13 apparently have been--you're going to tell us have
14 been applied elsewhere.
15 So, you can interpret my question any way
16 you want. Was that the only evidence you're
17 telling--that Mr. Bullard relied on? The only
18 evidence before the Tribunal?
19 MR. LLANO: It was the justification that
20 the municipality gave to terminate the Contract.
21 ARBITRATOR DRYMER: That four-paragraph
22 reason (in Spanish).
[Page 1949]
1 MR. LLANO: Yes.
2 ARBITRATOR DRYMER: There was nothing else.
3 Thank you.
4 BY MR. LLANO:
5 Q. All right. Good.
6 Now, in your Report, Mr. Bullard, you
7 reference the July 2013 Constitutional Tribunal
8 Decision; right?
9 A. You're going back to the Report in this
10 case.
11 Q. We're back to the present, back to the
12 future.
13 A. Okay. Perfect.
14 ARBITRATOR DRYMER: It's rare to see an
15 Expert or any Witness being cross-examined with such
16 a big smile on his face as he is in this case.
17 BY MR. LLANO:
18 Q. July 2013 Decision, you're familiar with it;
19 right?
20 A. Yes.
21 Q. And, in fact, you include it as an exhibit
22 to your Report; correct?
[Page 1950]
1 A. Yes.
2 0. Let's go to that document, please, sir, and
3 it's at Tab 8.
4 (Comments off microphone.)
5 Q. Yes. It's C-17.
6 A. Tab 8.
7 Q. Yes.
8 A. Paragraph.
9 Q. Paragraph 19.
10 A. 19.
11 Q. Yes. And I think there's a translation
12 here. Yes, there's a translation after the blue
13 page, and I will read from the translation.
14 PRESIDENT FERNÁNDEZ ARMESTO: Let's try not
15 to read, Dr. Llano.
16 BY MR. LLANO:
17 Q. Okay. Can you please read Paragraph 19 to
18 yourself, Mr. Bullard.
19 A. I will read from the Spanish one also.
20 PRESIDENT FERNÁNDEZ ARMESTO: To yourself.
21 THE WITNESS: Yeah, by myself. Yeah.
22 BY MR. LLANO:
[Page 1951]
1 Q. Okay. Just to be complete, if you can look
2 at the last sentence in Paragraph 17, it says--it's
3 short, so I'll just read it. It says: "Instead,
4 this Tribunal determined that the Constitution
5 required a valuation and updated payment of a debt;
6 even though it did not specify what the criterion was
7 for determining said current value."
8 Okay?
9 A. Correct.
10 Q. So, the Constitutional Tribunal stated that
11 the object of this Decision was to enforce the
12 March 2001 judgment of the Constitutional Tribunal;
13 correct?
14 A. That's what I say.
15 Q. And the Tribunal said that it, therefore,
16 needed to establish the valuation and updated payment
17 criteria for this debt; right?
18 A. Yes.
19 MR. RECENA COSTA: Objection. Mr. Bullard
20 is not tendered as a Witness on civil law. Mario
21 Castillo Freyre was here yesterday, so these
22 questions should really have been directed to him, I
[Page 1952]
1 believe.
2 MR. LLANO: This is the support for the
3 necessity of the Supreme Decrees. It is more than
4 relevant.
5 PRESIDENT FERNÁNDEZ ARMESTO: But what is
6 the question? I mean, we have all read a couple of
7 times this auto. What is the question for Expert
8 Bullard?
9 BY MR. LLANO:
10 Q. You're aware the Constitutional Tribunal in
11 its analysis adopted a dollarization method; right?
12 A. Yes.
13 Q. And the Tribunal--the Constitutional
14 Tribunal also directed the conversion of the unpaid
15 principal into U.S. dollars; correct?
16 A. Yes, that's what it says.
17 Q. And that was as of the date of default on
18 the payment of the coupons on the Bond; correct?
19 A. That's the text of the Decision, yes.
20 Q. And it also ordered the use of the interest
21 rate in U.S. Treasury Bonds; correct?
22 A. Yes.
[Page 1953]
1 Q. And it ordered the Executive Branch within
2 six months from the issuance of this ruling to issue
3 a Supreme Decree governing the procedure for the
4 registration, valuation, and payment of the Land
5 Reform Debt Bonds; correct?
6 A. That's correct.
7 Q. And it ordered also obviously to comply with
8 the parameters that were set out in the Decision in
9 respect of the formula for valuation; correct?
10 A. Correct.
11 Q. That included dollarization as of the date
12 of default--
13 PRESIDENT FERNÁNDEZ ARMESTO: Yes. Yes. We
14 know it all by heart. What is the question for
15 Dr. Bullard?
16 BY MR. LLANO:
17 Q. Yes. In Decree--Supreme Decree 242, 2017,
18 that's the August 2017 Supreme Decree. You remember
19 that?
20 A. I'm sorry. Can you repeat the number?
21 Q. 242.
22 A. 242. Yes, the last one, the TUA.
[Page 1954]
1 Q. The TUA.
2 A. Right.
3 Q. Of the four Supreme Decrees that you discuss
4 in your Report, that is the only one that remains in
5 force today; correct?
6 A. Correct.
7 Q. Now, you analyze the reasonableness of the
8 Supreme Decrees under three tests: For adequacy,
9 necessity, and proportionality; correct?
10 A. Correct.
11 Q. So, let's try very briefly to get to these
12 tests, or at least to a few of them.
13 Now, you write--let's go to Paragraph 114 of
14 your Report, Tab 1.
15 A. 114?
16 Q. Yes. Tab 1, Paragraph 114. For the record,
17 this is where you describe the adequacy test.
18 Do you see that?
19 A. Yes.
20 Q. And I won't read that. I'm assuming that
21 you know what the adequacy test is, but let's go to
22 Paragraph 193.
[Page 1955]
1 A. 193. The same Report.
2 Q. Yes. And here you apply the adequacy test
3 to Supreme Decree 242; yes?
4 A. Okay.
5 Q. And you write that: "The MEF failed to show
6 how Supreme Decree 242 effectively contributed to
7 solving the Agrarian debt issue."
8 Do you see that?
9 A. Yes.
10 Q. Now, the Constitutional Tribunal ordered
11 payment to the Bondholders; correct?
12 A. That's correct.
13 Q. And we saw that it ordered dollarization.
14 But my next question to you is that you do not
15 mention anywhere in your Report that the
16 Constitutional Tribunal also included a requirement
17 or an instruction to start dollarization from the
18 date of the last coupon payment.
19 You did not mention this specific
20 instruction in your Report; correct?
21 A. I don't remember, but I take your word.
22 Q. And you also do not mention anywhere in your
[Page 1956]
1 Report that the Constitutional Tribunal ordered the
2 use of U.S. Treasury Bonds to assess interest. That
3 particular instruction is nowhere to be found in your
4 Report; correct?
5 A. I take your word.
6 Q. Now, I think this is obvious, but the MEF
7 was required to comply with the Constitutional
8 Tribunal ruling; right?
9 A. That's correct.
10 Q. So, it wasn't for the MEF to assess whether
11 the Constitutional Tribunal's instructions
12 contributed to solving the Agrarian debt issue;
13 correct?
14 A. Of course, but that has to be done in a way
15 that complies with what the Constitutional Tribunal
16 has said and in a reasonable way under all the
17 standards I have explained.
18 Q. Okay.
19 A. If you see, for example, that--you talk
20 about the Bonds--sorry--the American Treasury Bonds.
21 There is no selection in that decision of which one
22 of that kind of Bonds will be used. What that means
[Page 1957]
1 is somebody has to take that decision. That decision
2 is subject to, for example, the reasonable analysis.
3 There is nothing about how you are going to balance
4 the budget with the need to pay. Somebody has to say
5 that. Who? That MEF. To which procedure? Through
6 the procedure that I have just explained.
7 I don't say that they don't have to comply
8 with what the Constitutional Tribunal said. What I'm
9 saying is that to comply with that, they have to
10 follow the procedure that is established in the law.
11 For me, there are no main difference between giving a
12 Supreme Decree in this case and giving a Supreme
13 Decree to regulate what the law said, a law statute.
14 There are gaps in the statute that have to be
15 fulfilled by the Regulation, and to fulfill that gaps
16 and to explain and to develop, you have to comply
17 with the law, to comply with the rest of the legal
18 order, and to apply the reasonable--the reasonability
19 principle, together with the legality principle.
20 So, unless have you the capacity to--and I
21 will use a word in Spanish because I don't know how
22 to say it in English.--calcar (in Spanish), to make
[Page 1958]
1 up exact copy of that Constitutional Tribunal is the
2 only way of saying something without taking all the
3 words of the Constitutional Tribunal. Somebody have
4 to fulfill, and that's the reason why the
5 Constitutional Tribunal delegate to MEF to take all
6 these Decisions.
7 Q. Now, you mentioned the term of the U.S.
8 Treasury Bonds as an issue of concern. Any other
9 issues that the MEF was charged with looking at that
10 was under its own discretion?
11 A. The most important one is the formula.
12 There is--I understand that there is a very general
13 statement about what--how the dollarization has--they
14 only talk about dollarization using an interest rate
15 of the American Treasury Bonds. Nothing else.
16 If the Constitutional Tribunal had mentioned
17 formula in the Decision and they copy the formula in
18 the Supreme Decree, I have nothing to say that they
19 cannot change the formula.
20 As a matter of fact, if they change the
21 formula, they will break Peruvian law because they
22 are breaking the interest that was defined by
[Page 1959]
1 Constitutional Tribunal, but that is not what
2 happened in the case.
3 Q. I'm asking within the formula, within the
4 formula, the formula incorporates dollarization and
5 it also incorporates U.S. Treasury Bonds, yes?
6 A. Yes. But that's why you use reasonability.
7 Q. Yes.
8 A. Because reasonability means to use a formula
9 that reasonably compensate, taking into
10 account--according to the Constitutional Tribunal,
11 taking into account that equilibrium in the budget.
12 That's what I understand.
13 (Interruption.)
14 A. That equilibrium in the budget, in the
15 Peruvian budget.
16 Q. Do you know how many Bondholders there exist
17 that hold Land Bonds in Perú or outside of Perú?
18 A. No, I don't know.
19 Q. Right. And do you know what the outstanding
20 value of such available Bonds might be?
21 A. No, I don't.
22 PRESIDENT FERNÁNDEZ ARMESTO: He would be a
[Page 1960]
1 magi if he knew that. Because we have been
2 discussing this a week.
3 BY MR. LLANO:
4 Q. So, would we. So, would be the Republic of
5 Perú, would be magi in order to guess that; right?
6 A. No. But there is a big difference, and the
7 difference is that if you want to have an economic
8 analysis, you can use different scenarios. You use
9 the data that you have, and you can project different
10 scenarios, and analyze each scenario, and say, well,
11 this is reasonable, this is not reasonable, and try
12 decide how you are going regulate that.
13 What you cannot do is go blind. You cannot,
14 as a professor in the States say, in God we trust,
15 but all others bring data. You need data and explain
16 the data to show how it have to be complied with what
17 the Decision of the Constitutional Tribunal said.
18 What I understand is what the reason that
19 the Constitutional Tribunal did not put the formula
20 here and did not give more details is because they
21 don't have data. And the reason why they encharge
22 the MEF to give the Supreme Decrees is because they
[Page 1961]
1 are expecting the MEF doing the work that they cannot
2 do, and that's the reason.
3 It's a very strange Decision because they
4 say that one of the Parties have to fulfill, which it
5 has not been defined in the Decision. And that's
6 another reason to think that it is very important to
7 have a reasonable analysis and complying with all the
8 rest of the Peruvian legal framework. So, reasonable
9 in the analysis have to be achieved.
10 ARBITRATOR DRYMER: I think the original
11 expression was, in God we trust, all others pay cash.
12 BY MR. LLANO:
13 Q. It wasn't for the MEF to say, for example,
14 we need to assess whether dollarization will fairly
15 compensate Bondholders; correct?
16 A. Sorry. I don't--
17 Q. It was not for the MEF to say, to analyze,
18 to consider, we need to assess whether dollarization
19 will fairly compensate the Bondholders because that
20 was an instruction from the Constitutional Tribunal;
21 correct?
22 A. No. But they were supposed to choose a
[Page 1962]
1 method of dollarization that is reasonable.
2 PRESIDENT FERNÁNDEZ ARMESTO: I think the
3 position of the Expert is pretty clear. I mean, he
4 says that--that certain Decisions should have been
5 reasoned and explained that--which were adopted by
6 the MEF in the Decree.
7 BY MR. LLANO:
8 Q. Right. And so let's go to that analysis by
9 the MEF. All right.
10 PRESIDENT FERNÁNDEZ ARMESTO: Yeah.
11 BY MR. LLANO:
12 Q. So--but before that, just one more point.
13 Paragraph 197.
14 A. 197 of my Report.
15 Q. Yes. Yes.
16 PRESIDENT FERNÁNDEZ ARMESTO: Let's read it.
17 We will read it each for oneself.
18 THE WITNESS: Yes.
19 BY MR. LLANO:
20 Q. So, here you apply the necessity test to the
21 Supreme Decree 242; correct?
22 A. That's correct.
[Page 1963]
1 Q. And this section is three paragraphs long?
2 Do you see that?
3 A. Yes.
4 Q. And you write: "The Peruvian Government
5 failed to explain why the changes being implemented
6 to the Bondholder Process are the most effective and
7 least invasive regulatory option available to solve
8 the Agrarian debt problem."
9 Do you see that?
10 A. Sorry. In which part?
11 Q. 197.
12 A. 197. Okay. Yeah.
13 PRESIDENT FERNÁNDEZ ARMESTO: What is your
14 question?
15 BY MR. LLANO:
16 Q. Yes. So, this paragraph is referring to the
17 point that you were making earlier about whether
18 sufficient analysis was made of this issue; correct?
19 A. One part of the Decision.
20 Q. Right.
21 A. It is referred that you have to analyze on
22 the options. It is not enough to make only a
[Page 1964]
1 cost-benefit analysis, showing that the benefit is
2 over the Cost is not enough. You have to see for an
3 option which has the less cost with the most
4 benefits. So, for doing that, you have to analyze
5 different possible alternative of the Decision that
6 you are going to take.
7 Q. Understood. Now, in the very next
8 paragraph, you mention one example of this concern
9 that you have. You say, "for example."
10 PRESIDENT FERNÁNDEZ ARMESTO: We will read
11 it.
12 MR. LLANO: Okay.
13 THE WITNESS: Yes.
14 BY MR. LLANO:
15 MR. LLANO: Yeah. So, you mention a new
16 Parity Exchange Rate in this paragraph.
17 Do you see that?
18 A. Yes.
19 Q. And let's go to the document that you
20 reference in this paragraph, which is Report
21 Number 731.
22 A. Report.
[Page 1965]
1 Q. You see in the -in Paragraph 198, you
2 reference a Report Number 731; right?
3 A. Yes.
4 Q. So, let's go to that. It's at Tab 10, and
5 it is Document CE-631.
6 So, if you go to Page 5, you'll see that
7 this document is signed by a lawyer; correct?
8 A. Javier Chocano.
9 Q. Yeah. And--
10 (Interruption.)
11 A. Javier Chocano. The answer is yes. Javier
12 Chocano.
13 Q. And that person is a lawyer; right?
14 A. Yes.
15 Q. That that person is--belongs--sorry, to the
16 MEF legal counsel's office; correct?
17 A. That's what I understand, yes.
18 Q. So, this is a legal Report; right?
19 A. Correct.
20 Q. And in your analysis of the--in the
21 three-paragraph analysis of the necessity test, you
22 did not mention the technical Report that underlies
[Page 1966]
1 that Decree; correct?
2 A. Sorry. Which technical Report?
3 Q. That's my question. That's my point.
4 A. Which technical Report?
5 Q. Let's go to that. Page 1 of the same
6 document, there is a reference, it says "referencia."
7 Do you see that?
8 A. Sorry. I got lost.
9 Q. Same document. Page 1.
10 A. Oh, Page 1. Okay.
11 Q. And there is a "referencia."
12 Do you see that?
13 A. Yes.
14 Q. And that "referencia" cites to Report
15 Number 124.
16 Do you see that?
17 A. Correct.
18 Q. And then Paragraph 1.1, just below that,
19 also references that same Report.
20 A. Yes.
21 Q. And that Report, according to this
22 paragraph, was issued by DGETP, which is the
[Page 1967]
1 Indebtedness Department of the MEF; right?
2 A. Correct.
3 Q. Let's go to that document. It's at the very
4 next tab, Tab 11--
5 A. Yes.
6 Q. --and that is CE-630?
7 A. Yes. 6--that's before.
8 Q. Yeah. And if you go to the last page, which
9 is Page 7 or so, you'll see that the document is
10 signed by the Head of the Directorate of Indebtedness
11 and Public Treasury.
12 Do you see that?
13 A. Correct.
14 Q. Mr. Valentin Cobeñas.
15 Do you see that?
16 A. Yes.
17 Q. Do you know him?
18 A. No.
19 Q. Okay.
20 A. No, I don't remember.
21 Q. Okay. So, paragraph--I'm sorry.
22 Page 3--Page 3, there is analysis.
[Page 1968]
1 Do you see that?
2 A. Page 3, I don't have the numbers of the
3 pages here.
4 Q. Yeah, the third page of the document.
5 A. Analysis, yeah. Okay.
6 Q. Right. There's a heading entitled
7 "analysis."
8 Do you see that?
9 A. Yes.
10 Q. And on the next page, the very next page,
11 there's a Paragraph 3 (b).
12 Do you see that?
13 A. 3 (b). Yes.
14 Q. And it says: "The information for the
15 updating of the BDA"--that is, the Agrarian debt
16 Bonds--"include:"
17 Do you see?
18 A. Sorry, which paragraph?
19 Q. 3 (b)?
20 A. 3(b). Okay.
21 Q. "The information for the updating of the BDA
22 includes."
[Page 1969]
1 Do you see?
2 A. Yes.
3 Q. And then the first item says that "the
4 Parity Exchange Rate will be obtained from the
5 Central Bank of Perú," and a website is provided.
6 Do you see that?
7 A. Yes.
8 Q. And this is the Parity Exchange Rate issue
9 that you mentioned in your Report; right?
10 A. Yes.
11 Q. Now, you don't state in your Report what the
12 nature is of the adjustment in the Parity Exchange
13 Rate that is at issue in this Report and in Report
14 731 that we saw just now; right?
15 A. I don't issue that, because that's not
16 something that I analyze. What I analyze here is
17 that there were not other alternatives that were
18 analyzed.
19 Q. Okay.
20 A. Because about the necessity principle means
21 that you have to analyze different alternatives and
22 not only mention alternatives, you have to analyze
[Page 1970]
1 each alternative, compare them, and explain why this
2 one is better than this one, under which basis, in
3 data, and in analytics of what we are--you're doing.
4 Q. Okay. Now, this Tribunal will consider
5 whether the information that the MEF came up with was
6 sufficient to justify its Decisions, but we'll leave
7 it at that.
8 Do you see on the last page of the memo--I'm
9 sorry, the Report, that there's an Aide Memoire?
10 A. Yes.
11 Q. "Ayuda memoria."
12 Do you see that?
13 A. That's correct. Sí.
14 Q. And Paragraph 5, second bullet, says: "The
15 Parity Exchange Rate shall be obtained from the
16 Central Bank source instead of the MEF calculation,
17 as established in Annex 1 approved by Supreme Decree
18 017-2014."
19 Do you see that?
20 A. Yes.
21 MR. LLANO: There we go. Next. Next page
22 there. There we go. So, Paragraph 5, second bullet,
[Page 1971]
1 Mark.
2 BY MR. LLANO:
3 MR. LLANO: Okay. Yeah. So, now that we
4 got here, let's go back to Page 4 of the document,
5 which was, again, the Paragraph 3 (b) that we were
6 just looking at before.
7 A. Okay.
8 Q. And we were looking at 3(b) (i); right? Just
9 now. And you'll see that there is a Footnote 10
10 right after that little (i); right?
11 A. It's a document that is on the screen? No.
12 Q. No. It's on your document. Page 4. We
13 were looking at Paragraph 3 (b) earlier, in the main
14 body of the Report?
15 A. In the--okay. Okay.
16 Q. 3(b), under 3(b), there's little (i).
17 A. Yes.
18 Q. At the end of that is a Footnote 10.
19 Do you see that?
20 A. Yes. Correct.
21 Q. And Footnote 10--
22 PRESIDENT FERNÁNDEZ ARMESTO: We have read
[Page 1972]
1 that.
2 MR. LLANO: You have read that.
3 PRESIDENT FERNÁNDEZ ARMESTO: Dr. Bullard is
4 reading it right now.
5 MR. LLANO: Good.
6 THE WITNESS: The footnote.
7 BY MR. LLANO:
8 Q. Yeah. Please.
9 A. Yes.
10 Q. And you'll see that there's a reference to
11 the Central Bank; right?
12 A. There is a reference to the Central Bank,
13 correct.
14 Q. And to the functions of the Central Bank;
15 right?
16 A. Yes.
17 Q. And it has been deemed pertinent to clarify
18 the source for the Parity Exchange Rate.
19 Do you see that?
20 A. Yes.
21 Q. So, in fact, are you aware, Mr. Bullard,
22 that the Report that you reference in Paragraph 198
[Page 1973]
1 of your Report, the Report 731, let's call it, was
2 not talking about, as you put it, a "new Parity
3 Exchange Rate." It was talking about a simple switch
4 in the source of the rate to the Central Bank data.
5 Were you aware of that?
6 A. That's correct, but without any explanation
7 of that cost benefit of shifting that to another
8 rate.
9 Q. Right. So, before--are you aware that
10 before this switch, the prior MEF Decree was relying
11 on MEF data as the source for the Parity Exchange
12 Rate? Were you aware of that?
13 A. No.
14 Q. And now, as of this Report, it's relying on
15 Central Bank data, because the Central Bank is the
16 independent, autonomous, regionally renowned
17 institution that preserves monetary stability and
18 provides transparent information.
19 Do you disagree with that statement?
20 A. I don't disagree with that statement, but I
21 don't know if that is enough to make a cost-benefit
22 analysis and to decide which of the option is the
[Page 1974]
1 better one. You cannot--you have only to give some
2 reason. You have to give a reason that proves that
3 the Decision is reasonable.
4 So, in my--in my point of view, the switch
5 is not explained without detailed explanation of why
6 you switch. It is only the reference that this maybe
7 is a better one, but there is no explanation of why
8 these options or other options can be better.
9 Q. Okay. But, just to confirm, you hadn't seen
10 this document before I showed it to you just now;
11 right?
12 A. No. I have--yeah, I have read this
13 document.
14 Q. But you don't cite it in your analysis of
15 the necessity test; right?
16 (Overlapping speakers.)
17 Q. You do not cite to this document in your
18 three-paragraph analysis of the necessity test in
19 connection with Supreme Decree 242; correct?
20 A. I read the whole support, and I don't find
21 what I mention in the end of that paragraph,
22 developing any of the Reports, that are in this part.
[Page 1975]
1 Q. It's a simple yes-or-no question, sir.
2 In the three paragraphs, where you analyze
3 the necessity test for Supreme Decree 242, you do not
4 reference these pages that I've just showed you;
5 right?
6 A. I don't reference, but I analyze them.
7 Q. Okay. Now--
8 PRESIDENT FERNÁNDEZ ARMESTO: These are the
9 Reports which form part of the file for approval of
10 the TUA?
11 THE WITNESS: Every one of the four Supreme
12 Decrees has a file with different documents. This is
13 the one of the third one.
14 PRESIDENT FERNÁNDEZ ARMESTO: Very good.
15 BY MR. LLANO:
16 Q. Okay. Now, I'd like to just add one more
17 piece that I think is relevant to this discussion.
18 PRESIDENT FERNÁNDEZ ARMESTO: Yes. And you
19 must--I mean.
20 MR. LLANO: Five minutes, sir.
21 PRESIDENT FERNÁNDEZ ARMESTO: Yeah.
22 MR. LLANO: Five minutes.
[Page 1976]
1 PRESIDENT FERNÁNDEZ ARMESTO: The
2 "potato-sack situation" is approaching.
3 MR. LLANO: Five minutes.
4 BY MR. LLANO:
5 Q. Tab 12.
6 PRESIDENT FERNÁNDEZ ARMESTO: Yes.
7 BY MR. LLANO:
8 Q. Tab 12 is R-1072. And--
9 A. Yes.
10 Q. And within 1072, you'll see that there are a
11 number of PDFs, and I am referring to the PDF
12 entitled ROP034572.
13 PRESIDENT FERNÁNDEZ ARMESTO: We have seen
14 that.
15 MR. LLANO: Yes.
16 PRESIDENT FERNÁNDEZ ARMESTO: It was somehow
17 difficult to find. I'll rely on the screen.
18 BY MR. LLANO:
19 MR. LLANO: Okay. So, on the first page of
20 Tab 12, Mr. Bullard, you can see that this is Supreme
21 Decree 242; right?
22 A. Correct.
[Page 1977]
1 Q. And it is dated August 18, 2017; correct?
2 A. Correct.
3 Q. And behind the Decree are supporting
4 materials. You can flip through and check it out.
5 A. Yes.
6 Q. And the whole document--I represent to you,
7 the whole PDF is 77 pages long.
8 Do you accept my representation?
9 A. The whole? 70.
10 Q. 77.
11 A. 77. Yeah, it looks right.
12 Q. And, in fact, Gramercy's counsel showed
13 parts of this document to Ms. Sotelo the other day.
14 Do you recall that?
15 A. I don't remember--yeah, I think so. I'm not
16 sure, I wasn't in the room at that moment, but I
17 think I have seen that.
18 Q. And I'll just rattle this off because it's
19 simple, and we can finish here.
20 You do not mention the letter from the MEF
21 to the Central Bank; right?
22 A. I don't mention it, yeah.
[Page 1978]
1 Q. You don't mention the Response from the
2 Central Bank to the MEF; right?
3 A. No.
4 Q. You don't mention the Technical Report that
5 incorporates the Central Bank formula; right?
6 A. Correct.
7 Q. You don't mention the formula and the
8 discussion of the formula in that Technical Report;
9 right?
10 PRESIDENT FERNÁNDEZ ARMESTO: Wait. One
11 second. Because this is important. This is the
12 documents which were exhibited in the document
13 production stage?
14 MR. LLANO: Correct.
15 PRESIDENT FERNÁNDEZ ARMESTO: But I have a
16 question for Dr. Bullard. And we have seen here the
17 letter to the Central Bank, and then the answer from
18 the Central Bank, and we went at some length through
19 all the charts from the Central Bank and the formula.
20 And are these documents, which we have seen
21 here, are they in the file of the Royal Decree? Do
22 you see my point? My question.
[Page 1979]
1 THE WITNESS: Yes. What I have to see, and
2 I don't remember, I have in my Appendix what I
3 understand was the file.
4 PRESIDENT FERNÁNDEZ ARMESTO: Yes.
5 THE WITNESS: To be honest, there are some
6 documents that I have never seen before, so I'm not
7 sure if they were part of the file. That's what
8 I--what I have, what I receive and what I make--for
9 making my analysis, it include not all these
10 documents. I don't remember these documents with all
11 these numbers. I don't remember the chart at the
12 end. I understand that--I check what was supposed to
13 be a file that was used to analyze the Supreme Decree
14 before its annulment.
15 PRESIDENT FERNÁNDEZ ARMESTO: Then I am
16 slightly lost. Because if we are to analyze the
17 reasonability or--of the Royal Decree of the--Supreme
18 Decree, you must look at all the documents in the
19 file because maybe in the seventh document there is a
20 memorandum which justifies why they are switching
21 from one type of Parity Exchange Rate to another type
22 of Parity Exchange Rate.
[Page 1980]
1 I mean, you can only evaluate the
2 reasonability and the correctness of the legislative
3 procedure if you really review the whole file.
4 THE WITNESS: Well, what I see here are some
5 documents at the end with data, with--what I don't
6 see is how this data was used to justify the Supreme
7 Decree.
8 What I read in that Report, that I have
9 check, is that there are not specific mention to many
10 of these Reports. There was no mention to this one,
11 to this one, to this one, that are at the end. So, I
12 assume that they were not evaluated, or were
13 discarded because they don't think they are relevant.
14 What I read are what the Reports mention. And what
15 the Report mention do not contain the kind of
16 analyses that I assume has to be made to have this
17 Supreme Decree approved.
18 MR. LLANO: I have a practical suggestion,
19 Mr. President.
20 PRESIDENT FERNÁNDEZ ARMESTO: Yes.
21 MR. LLANO: I would like to, simply in the
22 interest of time, invite the Tribunal to read for
[Page 1981]
1 itself this document and see the progression of how
2 one document leads to the next, the next, to the
3 next, to the formula. I think that would be a more
4 practical way of going about this then doing it
5 through--doing it through--
6 PRESIDENT FERNÁNDEZ ARMESTO: Yeah, yeah,
7 yeah. I just want to understand the following. In
8 Page 28 of your presentation today, Dr. Bullard.
9 THE WITNESS: 28 of my presentation.
10 PRESIDENT FERNÁNDEZ ARMESTO: You presented
11 this chart.
12 THE WITNESS: Yeah, correct.
13 PRESIDENT FERNÁNDEZ ARMESTO: And in this
14 chart you said, that is the complete File 4. One
15 Supreme Decree and for the other Supreme Decree. One
16 for the 2014, and one for the 2017, and you said--I
17 have just taken the first and the last.
18 Do you remember?
19 THE WITNESS: That's correct.
20 PRESIDENT FERNÁNDEZ ARMESTO: Okay. And my
21 question to you is reasonably simple. Have you--is
22 this the complete file? Or was the--did the official
[Page 1982]
1 file comprise more documents?
2 THE WITNESS: These are the documents that I
3 understand were part of the file. The complete file.
4 PRESIDENT FERNÁNDEZ ARMESTO: No, that's not
5 my question.
6 THE WITNESS: The complete file. That's
7 what I understand when I check it.
8 PRESIDENT FERNÁNDEZ ARMESTO: That isn't.
9 Wait. That is--you said this is your professional
10 Opinion is that this is the complete file?
11 THE WITNESS: Correct.
12 PRESIDENT FERNÁNDEZ ARMESTO: Okay. And now
13 my next question is, you have reviewed every single
14 document in that complete file?
15 THE WITNESS: Of all the documents quoted
16 here, I check every one.
17 PRESIDENT FERNÁNDEZ ARMESTO: Okay. And is
18 the letter, for example, the letter we saw to the
19 governor of the Reserve Bank, and the answer from the
20 Central Bank, are they in these files?
21 THE WITNESS: I don't think so. I don't
22 think so. The letter is not.
[Page 1983]
1 PRESIDENT FERNÁNDEZ ARMESTO: Okay.
2 (Interruption.)
3 MR. LLANO: Can I make a quick point of
4 order?
5 PRESIDENT FERNÁNDEZ ARMESTO: Of course. Of
6 course, of course.
7 MR. LLANO: So, I think it will assist the
8 Tribunal to--again, and I apologize for reiterating,
9 this is Document R-1072.
10 ARBITRATOR DRYMER: Yes.
11 MR. LLANO: And within R-1072, this is
12 ROP034--
13 PRESIDENT FERNÁNDEZ ARMESTO: Wait, wait,
14 wait. You must--ROP--
15 MR. LLANO: 034.
16 PRESIDENT FERNÁNDEZ ARMESTO: 034.
17 MR. LLANO: 572.
18 PRESIDENT FERNÁNDEZ ARMESTO: 572. And this
19 is what?
20 MR. LLANO: And this is the complete file
21 for Supreme Decree 242, including its backup.
22 PRESIDENT FERNÁNDEZ ARMESTO: Okay.
[Page 1984]
1 Because--and let me understand. This was a document
2 production exercise?
3 MR. LLANO: Correct.
4 PRESIDENT FERNÁNDEZ ARMESTO: And the
5 document production exercise was that you--that the
6 whole official file in the Ministry of Economy and
7 Finance.
8 MR. LLANO: The Republic of Perú, as part of
9 its document production effort, produced this
10 document in its document production prior to
11 Mr. Bullard's Report.
12 PRESIDENT FERNÁNDEZ ARMESTO: Okay. So,
13 your point is that for any analysis of reasonability
14 of cost-benefit analysis or proportionality, one has
15 to look at the complete file.
16 MR. LLANO: This is--Sure. Yes. Yes. And
17 this is the official file for that purpose.
18 PRESIDENT FERNÁNDEZ ARMESTO: And it has
19 more documents than the files referred to by
20 Dr. Bullard on Page 28?
21 MR. LLANO: Absolutely.
22 PRESIDENT FERNÁNDEZ ARMESTO: What do you
[Page 1985]
1 have to say, Mr. Bullard?
2 THE WITNESS: What I received is a file that
3 contains the documents.
4 (Interruption.)
5 THE WITNESS: When I received--I received
6 the documents, not all the documents. I received the
7 documents, that Report that I mention here in my
8 presentation, as the file that is used to support
9 that. What I find in that file are the Reports,
10 mainly the Reports that are mentioned here, the
11 Project of the Supreme Decree, the exposicion de
12 motivos (in Spanish), what is mentioned there, and the
13 ayuda memoria (in Spanish). That's what I received,
14 and my understanding and my analysis was on the basis
15 of that.
16 What I understand is that all these
17 documents are some kind of Appendix. I don't see
18 analysis here. I mainly see--I don't know. I'm only
19 checking in general. There is a chart with comparing
20 text, but I don't know if there is some analysis
21 there. What I saw is this initial file. I made my
22 analysis. I read the Reports. I tried to find the
[Page 1986]
1 Reports where the analysis is, and I didn't find the
2 analysis for most of the points that I think are
3 relevant.
4 PRESIDENT FERNÁNDEZ ARMESTO: Thank you.
5 Thank you, Dr. Llano.
6 ARBITRATOR DRYMER: Just again, just on that
7 point so that I understand, the tenor of your Report
8 is that there might be a thousand pages of relevant
9 evidence, but what you were looking for is an
10 explanation by the MEF regarding--
11 THE WITNESS: That's--
12 ARBITRATOR DRYMER: --these various
13 criteria--
14 THE WITNESS: That's correct.
15 ARBITRATOR DRYMER: --reasonability,
16 necessity, proportionality--
17 THE WITNESS: That's correct.
18 ARBITRATOR DRYMER: Thank you.
19 THE WITNESS: We only have to trust in data.
20 ARBITRATOR DRYMER: Yes.
21 THE WITNESS: We have to process the data,
22 analyze the data, and develop conclusions that are
[Page 1987]
1 consistent with necessity, adequacy, and
2 proportionality using the data. So, having data is
3 not enough. You need data, plus analysis following
4 the steps that I have described.
5 PRESIDENT FERNÁNDEZ ARMESTO: Very good.
6 MR. LLANO: I had one more.
7 PRESIDENT FERNÁNDEZ ARMESTO: Okay. It's
8 the last question, please.
9 MR. LLANO: No, I just wanted to note.
10 PRESIDENT FERNÁNDEZ ARMESTO: I thought you
11 had finished.
12 MR. LLANO: Thank you, Mr. President. I
13 have no further questions on the understanding that
14 there are multiple documents in relation to this
15 Decree that Mr. Bullard never saw. In fact, he said
16 there are some documents I have never seen before.
17 And on that basis I pass the Witness. Thank you.
18 PRESIDENT FERNÁNDEZ ARMESTO: Dr. Costa.
19 MR. RECENA COSTA: Thank you, Mr. President.
20 REDIRECT EXAMINATION
21 BY MR. RECENA COSTA:
22 Q. Professor Bullard, can we go to
[Page 1988]
1 Paragraphs 197 to 199 of your Report. You recall
2 that you were taken there by my learned friend.
3 A. Yes. 197.
4 Q. 197.
5 A. I will go to the Spanish version--English
6 version. Okay. I'm there.
7 Q. And opposing counsel suggested to you that
8 you had never looked at what is marked in this binder
9 that was given to us as Tab 11 or CE-630; is that
10 right?
11 A. That's right. That's what he suggested.
12 Q. Can you let us know which document is cited
13 in Footnote 184 or your Report.
14 A. 1184. Yeah, CE-630.
15 MR. LLANO: I object because that's not the
16 premise of my question. My question was whether that
17 document was cited in connection with the specific
18 paragraphs that I referenced as part of the one of
19 the tests that Mr. Bullard performed. Not whether he
20 had ever looked at a certain document. Whether that
21 document was referenced in connection with his
22 laconic analysis of that particular test. That was
[Page 1989]
1 my question. So I object to the premise of the
2 question. Thank you.
3 PRESIDENT FERNÁNDEZ ARMESTO: Let's go on.
4 BY MR. RECENA COSTA:
5 Q. Can we take a look now at Slide 28 of your
6 presentation, please?
7 PRESIDENT FERNÁNDEZ ARMESTO: Yes.
8 BY MR. RECENA COSTA:
9 Q. And you'll see that there is--there are two
10 charts, so to speak. Can you explain to us what your
11 understanding of those two charts is?
12 A. These charts are all the documents that I
13 think are relevant in terms of analysis to understand
14 if that Peruvian law was compliant in respect to
15 legality and reasonable analysis. The Reports in the
16 first case, they are the copy of a Supreme Decree,
17 the ayuda memoria, the exposicion de motivos, and in
18 the other one, the two Reports, the Supreme Decree,
19 the exposicion de motivos, and the ayuda memoria.
20 Q. Okay. Can you read for us the
21 identification of this exhibit, please?
22 A. They are down in the--
[Page 1990]
1 Q. I mean in the square itself. There is--
2 A. Ah, oh, yeah. R-317 and R-359.
3 Q. Okay. Does this suggest to you which Party
4 produced this?
5 A. Yes.
6 MR. LLANO: Objection.
7 (Comments off microphone.)
8 PRESIDENT FERNÁNDEZ ARMESTO: He let him,
9 yes. At 7:20 of the evening, Professor Bullard is
10 excused if he did not catch that an "R" is from the
11 Republic, especially if he has on other occasions
12 acted as Expert for the Republic.
13 BY MR. RECENA COSTA:
14 Q. With your permission, Mr. President, can I
15 also ask that we look at Ms. Sotelo's Statement, the
16 First Statement at Paragraph 39, please?
17 MR. LLANO: Objection.
18 PRESIDENT FERNÁNDEZ ARMESTO: Oh, come on.
19 Please, please, please, please, Dr. Llano. Let's
20 finish this.
21 You want to go which place, please?
22 MR. RECENA COSTA: It's Paragraph 39 of
[Page 1991]
1 Ms. Sotelo's First Witness Statement, Mr. President.
2 PRESIDENT FERNÁNDEZ ARMESTO: Okay. Why
3 don't you blow it up?
4 THE WITNESS: Yeah, because I cannot read
5 from here.
6 (Comments off microphone.)
7 MR. RECENA COSTA: Sir, can you blow up
8 Paragraph 39, if we can.
9 MR. LLANO: Mr. President, what's going on
10 here? Mr. President, it was suggested--
11 PRESIDENT FERNÁNDEZ ARMESTO: Let's hear the
12 question, please. We don't even know the question.
13 Please.
14 MR. LLANO: I never showed this document,
15 Ms. Sotelo's testimony.
16 PRESIDENT FERNÁNDEZ ARMESTO: I know.
17 MR. RECENA COSTA: It was suggested to the
18 Witness that he's reviewed an incomplete record. We
19 want to establish where the record that the Witness
20 reviewed came from.
21 MR. LLANO: It's simple. We gave him more
22 documents.
[Page 1992]
1 PRESIDENT FERNÁNDEZ ARMESTO: Wait, wait.
2 Please, Dr. Llano.
3 Dr. Costa, do put your question.
4 BY MR. RECENA COSTA:
5 Q. Professor Bullard, I invite you to read this
6 paragraph and then comment on this paragraph, please.
7 A. Okay.
8 PRESIDENT FERNÁNDEZ ARMESTO: Annex 86.
9 Let's not make it more complicated than it is.
10 It is your representation that Annex 86 are
11 the same documents which appear here?
12 MR. RECENA COSTA: Exactly, Mr. President.
13 PRESIDENT FERNÁNDEZ ARMESTO: Okay. We have
14 to clarify that.
15 Wait a second, Dr. Llano, because we--to
16 extract this information through the Witness is too
17 complicated.
18 Your point is that the Vice Minister had an
19 Annex 86, que es el registro del Decreto Supremo, and
20 that registro --your representation is that that it
21 includes these documents.
22 MR. RECENA COSTA: It not only includes, but
[Page 1993]
1 it is exactly that exhibit, Mr. President.
2 PRESIDENT FERNÁNDEZ ARMESTO: It is exactly
3 that exhibit.
4 MR. RECENA COSTA: Yes. That is what--
5 ARBITRATOR DRYMER: That's a representation.
6 PRESIDENT FERNÁNDEZ ARMESTO: Okay. A
7 representation.
8 MR. RECENA COSTA: Subject to confirmation
9 by my learned friend.
10 MR. LLANO: This is the point. This is
11 creating confusion now, and instead of clarifying a
12 point--
13 MR. HAMILTON: I'm sorry. I'm sorry,
14 Mr. President.
15 PRESIDENT FERNÁNDEZ ARMESTO: No. No.
16 Dr. Llano has the floor, Dr. Hamilton. And Dr. Llano
17 will finalize this cross-examination.
18 MR. LLANO: Mr. President, I have to
19 reiterate my objection here because the point is
20 these documents were produced as part of Perú's
21 document production effort and were not referenced in
22 full by Mr. Bullard. And it--to cite random exhibit
[Page 1994]
1 numbers and suggesting that that is somehow not true
2 is incorrect. The Tribunal must consider what these
3 particular documents that are listed in Slide 28 are
4 and compare that to the exhibit that I showed to
5 Mr. Bullard, and you will see that there are
6 differences. There are many pages in this document
7 that Mr. Bullard does not refer to or has never seen.
8 PRESIDENT FERNÁNDEZ ARMESTO: Okay. But so
9 that we have the precise references, we now know
10 where these documents come from. Your point is that
11 in R-1072, ROP034572, which is the document
12 production exhibit, that there are a fuller, a more
13 extensive version of the file.
14 MR. LLANO: Yes. And to just explain the
15 chronology, we gave documents, and then we gave more,
16 and Mr. Bullard did not cite to the "more" part.
17 PRESIDENT FERNÁNDEZ ARMESTO: Yeah. Okay.
18 Very good.
19 MR. RECENA COSTA: Mr. President, just for
20 the record--
21 PRESIDENT FERNÁNDEZ ARMESTO: Yes.
22 MR. RECENA COSTA: --I would ask for the
[Page 1995]
1 opposing counsel to confirm that this is the full
2 record that was certified by Ms. Sotelo.
3 PRESIDENT FERNÁNDEZ ARMESTO: Yeah, we'll
4 leave this all for argument and we'll see--I
5 understand now where Mr. Bullard's file comes from,
6 which you say is from the Vice Minister, and what you
7 say is that there are additional documents. There is
8 evidently additional documents because we have now
9 established that, for example, the letter to the
10 Central Bank is not in the file which was presented
11 to Dr. Bullard but is in the other documents. There
12 may be other documents because if this is--it must be
13 a very, very big file, and that's as far as we can go
14 on a Wednesday at 7:30 p.m., having started at 9:00
15 a.m., with one hour for break.
16 So, with this, Dr. Costa, you have--you look
17 at me as if you wanted to say something. It's the
18 last.
19 MR. RECENA COSTA: I wish to ask just one
20 final question of the Witness, if I may.
21 PRESIDENT FERNÁNDEZ ARMESTO: Okay, the very
22 last.
[Page 1996]
1 BY MR. RECENA COSTA:
2 Q. And you remember you were shown Tab 12 in
3 this binder that we received. I would ask you to
4 flip with me to the Bates Number which is ROP034625.
5 A. Okay. The last numbers are?
6 Q. The last numbers are 625. So 34625.
7 PRESIDENT FERNÁNDEZ ARMESTO: Will you
8 please blow that up, if you can.
9 THE WITNESS: Okay. The letter.
10 BY MR. RECENA COSTA:
11 Q. Yes, yes, it's a letter.
12 A. Okay.
13 Q. May I invite you just to take a few seconds
14 to read this letter.
15 A. Okay.
16 Q. Now that you have seen this document, in
17 your opinion, does it comply with the standards under
18 Peruvian law for reasonableness and legality?
19 A. By itself, no. It needs to have some kind
20 of additional information and analysis in the context
21 of all the other documents.
22 PRESIDENT FERNÁNDEZ ARMESTO: I think,
[Page 1997]
1 Dr. Costa, we are potato sacks.
2 MR. RECENA COSTA: Thank you, Mr. President.
3 No further questions.
4 PRESIDENT FERNÁNDEZ ARMESTO: We will have
5 to leave this for argument after the Hearing. Thank
6 you. Thank you, Dr. Costa.
7 Very good. Dr. Bullard, thank you very
8 much.
9 With this, thank you very much to our Court
10 Reporters and Interpreters. And tomorrow, half past
11 9:00, or do you prefer 9:00?
12 (Comments off microphone.)
13 PRESIDENT FERNÁNDEZ ARMESTO: 9:00, and we
14 must be more--thank you, Mr. Bullard.
15 (Witness steps down.)
16 (Whereupon, at 7:29 p.m., the Hearing was
17 adjourned until 9:00 a.m. the following day.)
[Page 1998]
I, Dawn K. Larson, RDR-CRR, Court
Reporter, do hereby certify that the foregoing
proceedings were stenographically recorded by
me and thereafter reduced to typewritten form
by computer-assisted transcription under my
direction and supervision; and that the
foregoing transcript is a true and accurate
record of the proceedings.
I further certify that I am neither
counsel for, related to, nor employed by any of
the parties to this action in this proceeding,
nor financially or otherwise interested in the
outcome of this litigation.
Signature
Dawn K. Larson
[Page 1999]
INTERNATIONAL CENTRE FOR THE SETTLEMENT OF INVESTMENT
DISPUTES
-x
In the matter of Arbitration :
between: :
:
GRAMERCY FUNDS MANAGEMENT LLC AND
GRAMERCY PERU HOLDINGS LLC,
:
Claimants, :
ICSID Case No.
and : UNCT/18/2
REPUBLIC OF PERÚ, :
Respondent. :
-x Volume 6
Thursday, February 13, 2020
The World Bank Group
1225 Connecticut Avenue, N.W.
C Building
Conference Room C1-450
Washington, D.C.
The hearing in the above-entitled matter
came on at 9:00 a.m. before:
PROFESSOR JUAN FERNÁNDEZ ARMESTO, President
MR. STEPHEN L. DRYMER, Co-Arbitrator
PROFESSOR BRIGITTE STERN, Co-Arbitrator
In the case of discrepancy, the audio recording in the
original language will prevail.
[Page 2000]
ALSO PRESENT:
On behalf of ICSID:
MS. MARISA PLANELLS-VALERO
Secretary of the Tribunal
MS. KRYSTLE M. BAPTISTA
Assistant to the President of the Tribunal
Realtime Stenographers:
MS. DAWN K. LARSON
Registered Diplomate Reporter (RDR)
Certified Realtime Reporter (CRR)
B&B Reporters
529 14th Street, S.E.
Washington, D.C. 20003
United States of America
MR. PAUL PELISSIER
MR. DIONISIO RINALDI
D.R. Esteno
Colombres 566
Buenos Aires 1218ABE
Argentina
(5411) 4957-0083
Interpreters:
MS. SILVIA COLLA
MR. DANIEL GIGLIO
MR. CHARLES ROBERTS
[Page 2001]
APPEARANCES:
On behalf of the Claimant:
MR. MARK W. FRIEDMAN
MS. INA C. POPOVA
MR. CARL RIEHL
MS. FLORIANE LAVAUD
MS. BERGLIND HALLDORSDOTTIR BIRKLAND
MR. GUILHERME RECENA COSTA
MS. SARAH LEE
MR. DUNCAN PICKARD
MR. JULIO RIVERA RIOS
MS. MARY GRACE MCEVOY
MR. THOMAS G. MCINTYRE
Debevoise & Plimpton, LLP
919 Third Avenue
New York, New York 10022
United States of America
MR. LUIS BEDOYA
MR. FRANCISCO CARDENAS PANTOJA
Rodrigo, Elias & Medrano
Av. San Felipe 758
Jesús María
Lima 15072
Perú
Representing Gramercy Funds Management LLC:
MR. JAMES TAYLOR
MR. JOSHUA M. O'MELIA
MR. NICK PAOLAZZI
MR. THOMAS NORGAARD
[Page 2002]
APPEARANCES: (Continued)
On behalf of the Respondent:
AMBASSADOR HUGO DE ZELA
Republic of Perú
MR. RICARDO AMPUERO
Republic of Perú
MS. MONICA GUERRERO
Republic of Perú
MS. GIOVANNA ZANELLI
Republic of Perú
MR. ALBERTO HART
Republic of Perú
MR. JONATHAN C. HAMILTON
MS. ANDREA MENAKER
MR. RAFAEL LLANO
MR. FRANCISCO JIJÓN
MR. JONATHAN ULRICH
MR. FRANK PANOPOULOS
MR. JOHN DALEBROUX
MR. ALEJANDRO MARTINEZ DE HOZ
White & Case LLP
701 Thirteenth Street, NW
Washington, D.C. 20005-3807
United States of America
[Page 2003]
For the United States of America:
MS. LISA GROSH
MS. NICOLE THORNTON
MS. MARGARET SEDGEWICK
MR. JOHN DALEY
Attorney-Advisers
Office of International Claims and
Investment Disputes
Office of the Legal Adviser
U.S. Department of State
Suite 203, South Building
2430 E Street, N.W.
Washington, D.C. 20037-2800
United States of America
MS. AMY COLLINS
U.S. Department of Treasury
[Page 2004]
PAGE
WITNESSES:
OSWALDO HUNDSKOPF
Direct examination by Mr. Jijón. ... 2006
Questions from the Tribunal ... 2033
Cross-examination by Ms. Popova. ... 2037
Redirect examination by Mr. Jijón ... 2074
EDUARDO GARCÍA-GODOS
Direct examination by Mr. Jijón. ... 2077
Cross-examination by Mr. Recena Costa. ... 2098
Redirect examination by Mr. Jijón. ... 2156
NORBERT WÜHLER
Direct examination by Mr. Hamilton. ... 2168
Cross-examination by Ms. Lavaud. ... 2199
Redirect examination by Mr. Hamilton. ... 2259
PABLO GUIDOTTI
Direct examination by Mr. Hamilton. ... 2271
Cross-examination by Mr. Friedman. ... 2293
Redirect examination by Mr. Hamilton. ... 2329
[Page 2005]
1 P R O C E E D I N G S
2 PRESIDENT FERNÁNDEZ ARMESTO: Good morning,
3 everyone.
4 We begin this sixth day of Hearings in the
5 Arbitration between Gramercy Funds Management LLC and
6 Gramercy Perú Holdings LLC against the Republic of
7 Perú.
8 And we do so, if there is no point of order.
9 Mr. Friedman, nothing?
10 MR. FRIEDMAN: We can proceed. Thank you,
11 Mr. President.
12 PRESIDENT FERNÁNDEZ ARMESTO: Thank you.
13 And Mr. Hamilton?
14 MR. HAMILTON: Ready to proceed as well.
15 PRESIDENT FERNÁNDEZ ARMESTO: Very well.
16 Then we welcome Professor Hundskopf.
17 OSWALDO HUNDSKOPF, RESPONDENT'S WITNESS, CALLED
18 PRESIDENT FERNÁNDEZ ARMESTO: How are you,
19 sir? I see you are already standing up.
20 We can all stand up, and if you would be so
21 kind as to read out the declaration.
22 THE WITNESS: Thank you.
[Page 2006]
1 My name is Oswaldo Hundskopf, and I solemnly
2 declare, upon my honor and conscience, that my
3 statement will be in accordance with my sincere
4 belief.
5 PRESIDENT FERNÁNDEZ ARMESTO: Thank you very
6 much, Professor Hundskopf. You are here as an Expert
7 on behalf of the Republic of Perú, and I give
8 Mr. Hamilton or Mr. Llano--no, it will be Mr. Jijón.
9 It is Mr. Jijón who will put some initial questions to
10 you.
11 MR. JIJÓN: Thank you very much,
12 Mr. President, Members of the Tribunal.
13 DIRECT EXAMINATION
14 BY MR. JIJÓN:
15 Q. Good morning, Professor Hundskopf.
16 A. Good morning.
17 Q. First of all, could you briefly summarize for
18 us your professional and academic history or
19 background?
20 A. Yes, I'd be pleased to do. Soon it will be
21 48 years since I've been working as a lawyer. I have
22 had the opportunity, the good luck, of studying at the
[Page 2007]
1 Universidad Católica, which is a major private
2 university in Perú, the leading one at the time. I
3 had class with many persons who were children of
4 persons who'd been expropriated. This is an
5 experience that I had at a very young age when I began
6 university.
7 As a student--after being a student, I joined
8 the largest corporate group. It was 44 companies from
9 different economic sectors, and we underwent several
10 expropriations: Of course, the agrarian expropriation
11 in 1969; then the expropriation of fisheries in 1963;
12 the expropriation of newspapers in 1974; and of one
13 more sector in 1975. This is an experience that I had
14 in Perú, because I began to work as an attorney. I
15 was selected through a process, and I worked until
16 1992. This was an excellent opportunity, in addition
17 to teaching in the university, because I had an
18 opportunity, through an agreement that this group had
19 with a son, to undertake a master's degree in foreign
20 trade, a master's degree in law, and then a doctorate
21 in law.
22 In addition, in the 1990s, when arbitration
[Page 2008]
1 began to develop in Perú with the special law, I had
2 the opportunity to be a member of the first list of
3 Arbitrators at the Arbitration Center of the Chamber
4 of Commerce of Lima. At this time, I belonged to
5 all--or rather, to the eight most important
6 arbitration institutions in the country.
7 To summarize and conclude, notwithstanding
8 this combination, which has made it possible for me to
9 be a part of many working committees that have drawn
10 applause, such as the Law on the Securities
11 Commission, the Law on Incorporations, framework for
12 business, and many others--and that was another
13 law--despite having had many offers to serve in
14 political positions, I never accepted such offers,
15 because I prefer to maintain my independence and my
16 professional practice combined with the academic
17 world. And I never accepted a political position,
18 though I have been close to many authorities for,
19 obviously, professional reasons having to do with
20 consulting and advising.
21 Thank you.
22 Q. Thank you very much, Professor Hundskopf.
[Page 2009]
1 And I'm calling you Professor Hundskopf, and
2 you just mentioned the academic world. Could you
3 briefly tell us what your academic history has been?
4 A. Yes. In 1974, Carlos Neuhaus stepped down
5 for health reasons at the University of Lima, and his
6 course was open. They were looking for a professor.
7 I was quite young, and I had already graduated, and so
8 I took it on. I began--that began the 45 years that I
9 worked at the University of Lima.
10 At the same time, I was offered to join the
11 Graduate School of San Marcos as a professor, where I
12 worked for 15 years. It's a very large public
13 university. And now that I've retired from the
14 University of Lima, because unfortunately there a
15 statute whose Rule 41 says that at age 70, one must
16 step down or retire, my good fortune is that I had two
17 significant offers to serve as Dean or Director of
18 Master's Programs at other private universities.
19 Q. Thank you, Professor Hundskopf. And simply
20 to clarify, I understand that you were Dean at the
21 University of Lima?
22 A. For 14 years.
[Page 2010]
1 Q. What does that entail?
2 A. Dean is basically an academic position. In
3 my case--well, this is what the authorities
4 understood--I had to be there from 8:00 a.m. to
5 1:00 p.m., basically to look at the structuring of
6 programs of study, selection of professors,
7 development of the courses, and so on.
8 But the Rector gave me to understand--well,
9 understood that I had a law firm and that I was
10 engaged in professional practice and that I could not
11 abandon that. So, I was never full-time in academia.
12 I've always combined the two activities.
13 Q. Thank you very much. And one final question
14 with respect to experience.
15 In your Report, I see that you say you are a
16 member of--a full member of the Peruvian Academy of
17 Law. What does it mean to be a full member?
18 A. Well, there are 30 who are called "miembros
19 de número," or full members according to the statute
20 of the academy, and, of course, there must be a
21 proposal put forward and supported by five members of
22 the academy. It is a very difficult, demanding
[Page 2011]
1 process. Everyone aspires to that, and clearly, from
2 an academic standpoint, it is very gratifying.
3 And one of the reasons that comes into play a
4 great deal is not only--they take into account not
5 only one's teaching work, but also one's written work.
6 I have had the opportunity to be the author of 23
7 books. Some are, say, a manual of corporate law in
8 five different traditions.
9 Q. Thank you very much. I understand that
10 you've prepared a presentation for the Tribunal.
11 A. Yes. No doubt about it. I simply wanted to
12 say that I've been invited to prepare a report, 14
13 December 2018. I delivered it 14 months ago, in
14 December--September 2019. These are two complete
15 Reports that are in the record before the
16 Distinguished Members of the Tribunal and everyone.
17 Nonetheless, since it is a very lengthy
18 Report in the two parts, I have made a very brief
19 presentation with respect to Agrarian Bonds.
20 DIRECT PRESENTATION
21 THE WITNESS: For me, it's important to
22 clarify with respect to Legislative Degree 17716 of
[Page 2012]
1 1969, which was issued as one of the most important
2 laws of the Peruvian military Government that was in
3 place from 1968 to 1980, the main obligation was
4 compensation for land expropriations.
5 These are not the first expropriations. The
6 military Government came in in 1968, expropriating the
7 refineries and the oil companies, IPC especially. The
8 compensation was paid by distributing Agrarian Bonds.
9 Of course there was a process with respect to each of
10 the properties, especially in the coast, excepting
11 Casa Grande, which covered jungle regions, but there
12 was anywhere from 50 hectares to 50,000 hectares.
13 We're talking about 20,000 properties, and clearly it
14 was a complicated process in which one had to
15 designate an evaluation committee or assessment
16 committee with respect to each property, and then, of
17 course, issue the Bonds, and--as a final phase, after
18 Ministerial Resolution.
19 Evidently, in the cases that I've become
20 familiar with, the process takes one, two, three, or
21 four years. I have persons very close to me who have
22 received the Bonds in 1972 and 1973, and as
[Page 2013]
1 payment--final payment of the valuation, well, this
2 was a debt and as a result of the Agrarian Reform.
3 There were annual obligations. Once you knew the
4 amount, you had to take Series A, Series B, or
5 Series C. A was 20 years, B was 25 years, and C was
6 30 years. A, 6 percent interest, B with 5 percent
7 annual interest, and Series C with 4 percent annual
8 interest.
9 But the important thing is that the Bonds are
10 constituted not only by the nominal amount, which
11 could be 10,000, 20,000, 30,000, up to 500,000 soles,
12 because, if my memory serves me well, some had coupons
13 that would mature annually, and each coupon would
14 incorporate the value that resulted from the division
15 plus the interest rate, 6 percent, 5 percent, or
16 4 percent. It was a very large document. I have seen
17 any number of such documents.
18 And the State had the obligation to pay each
19 coupon on the maturity date. So, here, it's not a
20 question of one having to pay the entirety of the Fair
21 Market Price at the moment of the valuation or the
22 payment of the debt. No, each coupon had to be paid
[Page 2014]
1 on its maturity date. And the maturities were annual.
2 Yesterday I had the opportunity to hear the
3 presentation by Alfredo Bullard, a friend and
4 colleague, who referred to a contract for assignment
5 of rights related to the Bond. I don't want to
6 explain the origin or the history of the Agrarian
7 Development Bank. What is important is that the
8 original Bonds of 1969 were personal obligations that
9 were nontransferable. The Decree-Law 22749 which made
10 the Bonds really transferable required that they be
11 registered with the Bank of Agricultural Development,
12 paid in 1992, which created--which was liquidated in
13 1992, which created the uncertainty. There's a
14 very--assignment to contract cited by Bullard shows
15 that it was not guaranteed that one could collect the
16 payments for the goods, which is to say--or the
17 property, which is to say the Bonds.
18 No, it's the possibility of collecting
19 compensation stemming from this property constitutes
20 an expectative right whose maturization is on account
21 of and at the risk of the assignee.
22 So, what does this mean? It's a gamble.
[Page 2015]
1 It's an option. It is something that could be
2 remotely possible, even. So, it is not like the
3 circulation of securities in general. And in that
4 regard, I want to be very clear. In Law 16587 of '67,
5 there's two Articles. One is Article 210, which
6 clearly says that securities issued by the State are
7 governed by their own laws, and on a complementary
8 basis by the law on the securities.
9 PRESIDENT FERNÁNDEZ ARMESTO: Excuse me,
10 Professor, but you are being interpreted into English,
11 and you are going very quickly.
12 THE WITNESS: Thank you very much. I
13 apologize for that. I have tried to stay calm.
14 This presentation leads me to analyze the two
15 securities laws that have been in force in the
16 country.
17 PRESIDENT FERNÁNDEZ ARMESTO: Let me ask you
18 a question, because I'm getting a bit lost, Professor.
19 Is it your Opinion that the Peruvian State
20 did not have an obligation to pay these Bonds and that
21 it was an option? You use the word "option," clearly.
22 So, did you understand that there was not an
[Page 2016]
1 obligation on the Peruvian State to pay?
2 THE WITNESS: No. Perhaps the word "option"
3 was not the most accurate, and I apologize. I'd like
4 to withdraw that.
5 Actually, it is no doubt an obligation of the
6 State to pay the Bonds. There is no doubt about it.
7 There is on obligation of the State to pay the Bonds,
8 independent of the prior valuation that had been done
9 of the properties.
10 And, recapitulating the legislative history,
11 Decree-Law 22749, which is the second securities law
12 of 2000, says in Article 275 that the securities
13 issued by the central Government are governed by their
14 own laws and--in all aspects not covered by the Law on
15 Securities, which means that the Agrarian Reform Bonds
16 are unique, exceptional securities. They are unique
17 and they are exceptional.
18 PRESIDENT FERNÁNDEZ ARMESTO: But they are
19 securities. And on a subsidiary basis, they are
20 subject to the Law on Securities.
21 THE WITNESS: Exactly.
22 PRESIDENT FERNÁNDEZ ARMESTO: And you said
[Page 2017]
1 that there have been two securities laws?
2 THE WITNESS: Yes. One of 1967, which is
3 16587, which was in force--obviously, when the
4 Agrarian Reform Law was issued in 1969, it was the
5 applicable law. But later, there's an Article 210
6 that says that Bonds or securities issued by the
7 Peruvian State evidently are governed by their own
8 laws and, on a supplementary basis, by the securities
9 law.
10 Same happens with Law 22287, the law of 2000,
11 which--that is Article 275. It has three Articles
12 that refer to those Bonds. It says the same thing,
13 that the special provisions in respect of each of the
14 Bonds apply, and, on a supplemental basis, the
15 securities law.
16 PRESIDENT FERNÁNDEZ ARMESTO: Very well.
17 Thank you very much.
18 THE WITNESS: Now, in the next overhead, I'm
19 going to refer to the judgment of the Constitutional
20 Court of 2001. Now, I want to clarify: This is the
21 only Judgment, because the 2013 one is an order of
22 enforcement of this Judgment.
[Page 2018]
1 This pronouncement by the CT began with a
2 proceeding brought by the College of Engineers in
3 1986, and there was a great deal of uncertainty about
4 the criteria to be used. That is why the Resolution
5 of 2001, the Judgment of 2001, is so important. It
6 constitutes the legal instrument of the greatest
7 importance that inspires all others of lesser rank,
8 which confirms that having used Agrarian Bonds as a
9 means of payment was not unconstitutional. Quite to
10 the contrary, it was perfectly constitutional and
11 compatible with the 1933 Constitution at that time.
12 When the Agrarian Reform law was handed down,
13 the Constitution of 1933 was in force. It was then
14 replaced in 1979, and subsequently in 1993, the one
15 that is currently in force. I don't want to make a
16 comparison as between them. The important thing is to
17 refer to the 1933 Constitution. The ruling by the
18 Constitutional Court found unconstitutional a claim
19 that sought to have a nominal payment made by--because
20 it granted inalterable treatment, unattached to the
21 circumstances of time.
22 Well, that Judgment did not establish--and I
[Page 2019]
1 put this in my Report--how to determine the current
2 value; for example, to apply a particular index or the
3 data of which it should be updated. It doesn't say
4 so, nor does it say with respect to a payment
5 criterion--it didn't refer to the payment procedure.
6 So, I believe that the 2001 Judgment being of
7 singular importance because it is the highest-level
8 organ for interpretation of Peruvian legislation,
9 well, the starting point after the Constitution
10 for--in the whole legal structure, there's a lack of
11 certainty, clarity, and precision. In my view, there
12 is no legal provision that establishes that one must
13 use solely and exclusively the Consumer Price Index
14 for updating these obligations.
15 The current value principle is not a synonym
16 of CPI. It does not mean that one must exclusively
17 use the CPI. The Civil Code refers to the theory of
18 current value in Article 1235. The title of the
19 article says "valuation theory," "teoria valorista,"
20 which mentions different indicators, indices that are
21 automatically adjusted set by the Central Bank, other
22 currencies, or other merchandise.
[Page 2020]
1 Now, Article 1236 does not refer to
2 indicators, nor does it keep the judge from deciding
3 what is the appropriate indicator. In general, one
4 could say that the current value theory is not 1234;
5 rather, it is 1235 and 1236.
6 The 2001 Judgment, well, nor does it state
7 the date as of which one should calculate the updated
8 value of the Agrarian Bonds, leaving it open that--the
9 possibility of choosing different dates. Now, this is
10 one of the most important aspects of the 2001
11 Judgment that should be highlighted, because,
12 obviously, there were different dates. The date of
13 issue of the Bonds, the date of payment of the last
14 Bond, the date of payment of the totality of the
15 Bonds; there are all these different possibilities.
16 Foundation 25 of the 2013 rulings, which I
17 will refer to subsequently, does say that it is to
18 calculated from the last moment the last annual coupon
19 ceased to be paid.
20 PRESIDENT FERNÁNDEZ ARMESTO: Who was
21 president in 2001?
22 THE WITNESS: The President of Perú in 2000
[Page 2021]
1 was the third reelection of President Fujimori, and
2 that was very much called into question. And then
3 there was a whole scandal that I don't want to get
4 into, but then there was a transition Government that
5 began in November of 2000, and it led up to the 2001
6 elections. It was President Valentín Paniagua, the
7 Caretaker-President.
8 PRESIDENT FERNÁNDEZ ARMESTO: So, when the
9 Constitutional Tribunal handed down this Judgment,
10 there was a transition administration?
11 THE WITNESS: Yes, March of 2001. Elections
12 had been called, and then President Alejandro Toledo
13 was elected in 2001.
14 PRESIDENT FERNÁNDEZ ARMESTO: One question,
15 Professor: You were in academia at that time. What
16 was the reaction on the part of the legal world when
17 this Judgment was handed down? Was it a secondary
18 issue that wasn't much discussed in society, or was it
19 very much debated in society? Were there different
20 political positions in respect of it? Tell me a bit
21 about the sociology of the decision of the
22 Constitutional Tribunal.
[Page 2022]
1 THE WITNESS: It's an excellent question,
2 sir, and it will enable me to clarify that in the
3 1980s, from '80 to '85, the President was Belaúnde,
4 and then in the last years, there was hyperinflation
5 that reached 7,000 percent. The juncture, the
6 economic and financial circumstances, were very
7 difficult.
8 In 1990, President Fujimori came in to
9 office. On 5 February 1992, he dissolved Congress.
10 He convened a Constitutional Assembly which drew up
11 the 1993 Constitution, and it's a very good
12 regime--well, the good years were 1992 to 1997. And
13 then from '97 to 2000, once again there were
14 difficulties, various situations leading the situation
15 in Perú to be very complicated; so much so that there
16 was a debate about the famous reelection, whether
17 Fujimori could or could not be reelected, and he ran
18 for reelection. In my opinion he should not have done
19 so, but he did so, and unfortunately, this brought
20 about a major problem.
21 PRESIDENT FERNÁNDEZ ARMESTO: But with
22 respect--no, but I was asking about the sociology
[Page 2023]
1 behind the Decision; in other words, how many
2 landowners were expropriated?
3 THE WITNESS: I could not tell you an exact
4 number, but around 20,000.
5 PRESIDENT FERNÁNDEZ ARMESTO: 20,000. And
6 were they a pressure group? Were they protesting
7 because their Bonds had been rendered worthless? Was
8 it a peaceful situation? Was there--were there
9 writings in the university circles? How did the legal
10 doctrine come into play? The social background behind
11 the Decision of the Constitutional Tribunal. First,
12 the College of Engineers that raised the
13 Constitutionality of this provision, upholding
14 principle of nominal value, and then the position of
15 the Constitutional Tribunal saying, "No, you have to
16 apply the current value principle."
17 THE WITNESS: Thank you very much. In
18 effect, in 1996, the College of Engineers brought the
19 constitutional challenge. There was a new
20 Constitutional Tribunal with a 1993 Constitution.
21 PRESIDENT FERNÁNDEZ ARMESTO: So, it took
22 five years? From the time the legal action was
[Page 2024]
1 brought and the Judgment handed down, five years
2 elapsed?
3 THE WITNESS: Yes. And from the 1969 Law,
4 well, you can imagine--so many years that went by from
5 '69 to '96. On the part of the persons who had been
6 expropriated, there were many differences. Some were
7 very obedient and submissive and they went through the
8 procedures. Others raised issues. The Agrarian
9 Tribunal, well, it no longer existed in Perú, but
10 there one could go and call into question the
11 valuation that was initially assigned.
12 So, some took their Bonds, picked them up in
13 a timely fashion, within two, three, or four years,
14 and I would say, with all due respect, there were some
15 persons who never came and actually collected their
16 Bond, never had their Bond.
17 PRESIDENT FERNÁNDEZ ARMESTO: And the
18 Fujimori administration, in general, what was its
19 position vis-à-vis this social problem? Was it one of
20 maintaining the nominalist criterion, seek a solution?
21 What was the political backdrop?
22 THE WITNESS: I think the 1984 Civil Code,
[Page 2025]
1 while in contrast to other provisions in other
2 countries and the 1936 Code, well, as of 1980, there
3 was a lot of talk about the current value principle in
4 Perú, but there was no interpretation or--specific
5 interpretation or application, and the opportunity to
6 do so that was so great was the Agrarian Reform Bonds,
7 which affected so many families. Who were the persons
8 impacted? Individuals, successions--that is to say,
9 heirs--or groups, partnerships of persons which had
10 developed at that time, and the assignees, those who
11 acquired the Bonds, that persons could do that as of
12 1979. But the discrepancies as of 1996 were of such a
13 magnitude and the criteria were very much at odds with
14 one another.
15 So, one could find rulings in one direction
16 and in another, and I can say this based on my
17 professional experience and supporting friends of mine
18 who were not attorneys, and who nonetheless--well, and
19 understood that there was definitely a problem. And
20 so, the Judgment of the 2001 was of singular
21 importance, because it incorporated the current value
22 principle.
[Page 2026]
1 PRESIDENT FERNÁNDEZ ARMESTO: Very well.
2 Thank you.
3 So, let's go to the ruling of 2013.
4 THE WITNESS: The Constitutional Tribunal
5 determined that the 2001 Resolution does not specify
6 what the criterion is for determining said valuation,
7 and that, with the purpose of making possible
8 implementation of the Judgment of 15 March 2001 and of
9 actually making effective the obligation of the
10 Peruvian State to pay the Agrarian Reform Debt, this
11 Tribunal proceeded to establish the criterion of
12 valuization and updated payment of the debt, as well
13 as the procedure that the Executive should follow in
14 order to make said payment effective.
15 I would like to highlight the case that led
16 to this. It came from the same College of Engineers.
17 It was 0022 of 1996. Now, the Constitutional Tribunal
18 examined various methods for updating, all of them
19 potentially valid, and concluded that one should use
20 the dollarization method. That was the criterion
21 imposed by the Order of 2013. The Decision of the
22 Constitutional Tribunal is also based on the fact that
[Page 2027]
1 the method for conversion to dollars had its legal
2 foundation in Emergency Decree 088 of 2000, and
3 because other methods would entail grave impacts on
4 the budget of the Republic. It is totally true that,
5 in the wake of the development of the analysis that I
6 had the opportunity to do of the 29 Foundations of the
7 2013 Order, I do--I noted that one takes into account
8 as a basis for the Decision on dollarization a number
9 of circumstances having to do.
10 PRESIDENT FERNÁNDEZ ARMESTO: If you could
11 just go back a moment, please, to 6, this. Let's talk
12 a little bit about the Emergency Decree of the year
13 2000. This is an Emergency Decree issued by the
14 Fujimori administration?
15 THE WITNESS: Yes.
16 PRESIDENT FERNÁNDEZ ARMESTO: And it was
17 handed down when the remedy pursued by the College of
18 Engineers had already been in process or before the
19 courts for four years?
20 THE WITNESS: Four years.
21 PRESIDENT FERNÁNDEZ ARMESTO: Would you say
22 it was an effort on the part of the Fujimori
[Page 2028]
1 administration using an exceptional instrument, which
2 is the Emergency Decree, to resolve this social
3 problem?
4 THE WITNESS: Yes, that is right, sir. It
5 was an effort; moreover, I know there's a history.
6 President Fujimori was an agrarian engineer. He had
7 been the President of Agrarian University, and he was
8 very close to the issue. So, no doubt whatsoever, in
9 one way or another he supported this initiative.
10 But I believe the issue went to sleep--that
11 is to say, it wasn't implemented as it should have
12 been done. Had that been done, then the 2001 Decision
13 would not have been necessary.
14 PRESIDENT FERNÁNDEZ ARMESTO: So, the 2001
15 Decision ended up supplementing, so it was another
16 basis.
17 Now, on this I would like to ask you here in
18 this order handed down by the Constitutional
19 Tribunal--you're very familiar with it?
20 THE WITNESS: Yes.
21 PRESIDENT FERNÁNDEZ ARMESTO: It analyzes
22 various valuation systems, and it goes with
[Page 2029]
1 dollarization. Is there some other example in
2 Peruvian law where the current value principle has
3 been applied through the dollarization method, or is
4 this an exceptional situation, and it has only
5 happened with respect to the Agrarian Bonds?
6 THE WITNESS: Well, the analysis in the
7 ruling includes different options, including, for
8 example, the Consumer Price Index adjusted; yes, the
9 family income, the impact on the budget.
10 PRESIDENT FERNÁNDEZ ARMESTO: But that's not
11 my question. My question is--there must have been
12 many situations in which this problem of
13 hyperinflation has affected different persons' legal
14 situations.
15 My question for you is the following: In
16 this case Agrarian Bonds, did--the Constitutional
17 Tribunal went with the method of dollarization. My
18 question is: Are there other situation, other
19 examples, where either the law or the courts have
20 opted to apply the current value principle using
21 dollarization?
22 THE WITNESS: Yes. If memory serves, in
[Page 2030]
1 2004, there was a Supreme Decree, and there were
2 rulings by the Supreme Court that referred to the
3 implication of dollarization as a method. There were
4 so many cases, so many, and the rulings were so
5 contradictory that it was necessary that--
6 PRESIDENT FERNÁNDEZ ARMESTO: You're not
7 understanding what I'm asking, sir.
8 Excuse me. Excuse me for one moment. I
9 forgot to turn this off. Yesterday, Mr. Hamilton had
10 this issue, and now I have it.
11 Okay. My question is the following: We've
12 seen that one of the ways in which we could apply the
13 current value theory is the Consumer Price Index?
14 THE WITNESS: Yes.
15 PRESIDENT FERNÁNDEZ ARMESTO: And the other
16 one is the adjusted Consumer Price Index.
17 THE WITNESS: Yes.
18 PRESIDENT FERNÁNDEZ ARMESTO: And the other
19 one is dollarization. It is clear that the
20 Constitutional Tribunal, in connection with the Land
21 Bonds, said that they opted for the dollarization.
22 THE WITNESS: Yes, dollarization.
[Page 2031]
1 PRESIDENT FERNÁNDEZ ARMESTO: And, for
2 example, in the case of urban leases or in the case of
3 other matters in Peruvian law--I don't know about
4 Peruvian law, you know it. But are there any other
5 situations where the method to apply the current value
6 theory was dollarization, or is dollarization only
7 applicable in the realm of Land Bonds?
8 THE WITNESS: My personal opinion is that the
9 Application and interpretation of 1235 of the Civil
10 Code applies to all sectors, all activities, and there
11 have been rulings, legal provisions that make
12 reference to this, in one case dollarization, and the
13 other cases in connection with the Consumer Price
14 Index. So, there was a dispute. There was a little
15 bit of a lack of settlement in this case. So, this
16 didn't really have to do exclusively with the Land
17 Reform. This was a general problem in Perú. The
18 problem in Perú is multisectoral.
19 In connection with ruling of 2013 by the
20 Constitutional Tribunal, there is a procedure for the
21 updated payment. In this case, a Tribunal said that
22 it is necessary to establish the procedure for the
[Page 2032]
1 payment of the land debt, and this must be established
2 by the Executive. And a Supreme Decree needs to be
3 issued regulating the procedure for registration,
4 updating, and a payment form of the debt within the
5 six months from this ruling.
6 Unlike the 2001 Ruling, this made it possible
7 for the MEF to establish a payment procedure
8 administratively. So, when the Constitutional
9 Tribunal opted for dollarization, it said that
10 dollarization had to be applied but also how it had to
11 be applied.
12 So, there were studies that the Justices had
13 at hand. They looked at them, and there were reasons
14 in connection with financial equilibrium, budget
15 balance, et cetera. So, from 26 to 29, the procedure
16 is established, and it talks about the same terms that
17 are included in the Supreme Decrees: Five years at a
18 maximum, and then two years to obtain the valuation
19 updating, and then eight years to collect on the debt.
20 And then the Order offers alternatives. The most
21 important thing, I think, is that it sets aside and
22 rejects a new valuation of the lands, and that's very
[Page 2033]
1 important. This is Article 1 of the 2013 Ruling.
2 And, Number 2, we have dollarization, and the
3 criteria for dollarization, and the most important
4 thing is Article 3 that establishes the mechanism to
5 be applied. And this establishes the guidelines set
6 forth in the Supreme Decrees, and then we have a
7 consolidative text of Decree 242 of 2017.
8 PRESIDENT FERNÁNDEZ ARMESTO: Very well.
9 Thank you very much, Professor.
10 Mr. Jijón, any other questions--Mr. Drymer
11 has a question, Professor Hundskopf.
12 ARBITRATOR DRYMER: Thank you, Professor.
13 QUESTIONS FROM THE TRIBUNAL
14 ARBITRATOR DRYMER: I'll speak English so I
15 won't butcher the language of Cervantes.
16 On Slide 7, your last point, the second point
17 on Slide 7, well, it says what it says. I won't read
18 it. But it suggests that it was only in 2013, not in
19 2001, that the Ministry of Economy was enabled,
20 "habilito," to establish a payment process. Is it
21 your Opinion that the 2001 Decision of the
22 Constitutional Tribunal did not empower the Ministry
[Page 2034]
1 to establish a procedure for payment?
2 THE WITNESS: Yes. With respect, I'm quite
3 critical of the 2001 Ruling because it includes in its
4 Resolution Foundation 6 and now Foundation 7. I think
5 that the good thing about this ruling is that it
6 established the guidelines, the mechanisms, procedures
7 and timelines and the stages--specifically, the
8 stages--registration, authentication, the Technical
9 Experts' Opinion so that the MEF by different legal
10 processes could put this into practice. And this had
11 not happened in the 2001 Ruling.
12 ARBITRATOR DRYMER: With apologies, I won't
13 stay long on this, but, perhaps, it's a translation
14 issue or at least an understanding issue for me.
15 PRESIDENT FERNÁNDEZ ARMESTO: Can I clarify
16 the question.
17 ARBITRATOR DRYMER: Please do. Please do.
18 PRESIDENT FERNÁNDEZ ARMESTO: Let me ask you
19 because I know what Mr. Drymer is asking, and
20 sometimes things are lost in translation.
21 One of the things that we have examined is
22 the following: We have the 2001 Ruling, and it
[Page 2035]
1 entailed a development. There was a law that was
2 drafted, but it was never passed in Congress?
3 THE WITNESS: Yes, there were bills, sir.
4 Yes, there were bills.
5 PRESIDENT FERNÁNDEZ ARMESTO: Now, when you
6 have a ruling, a 2013 Ruling, well, this is put into
7 practice via a Supreme Decree. This means that no
8 Congress action is necessary. My question, or, rather
9 Mr. Drymer's question--my Co-Arbitrator--is the
10 following: Couldn't we have passed a Supreme Decree
11 in 2002, 2003, 2004, to implement the criteria put
12 forth by the 2001 Judgment by the Constitutional
13 Tribunal?
14 THE WITNESS: Your question is very
15 interesting, but the breadth of the current value
16 theory is so large that it admits a number of
17 methodologies. A Supreme Decree is a lower-ranking
18 provision, so what we needed was an enforcement
19 judgment by the Constitutional Tribunal because this
20 had to do with constitutional development of this
21 judgment at that level, at the constitutional level,
22 meaning at the Constitutional Tribunal level. I don't
[Page 2036]
1 think we could have done this via a Supreme Decree.
2 ARBITRATOR DRYMER: Right. And so, when you
3 say in Slide 7 that (la diferencia de la sentencia)
4 unlike in the 2001 Ruling, the 2013 Order "auto
5 habilito", enabled the Ministry to act. I think
6 you're--enabled the Ministry to act. It facilitated
7 the Ministry's action. It didn't empower the Ministry
8 to act.
9 The Ministry was equally empowered after the
10 2001 Decision; is that correct?
11 THE WITNESS: Yes. I insist. The 2001
12 Ruling was good, but it had legal lacuna. It had
13 things that were not precise.
14 ARBITRATOR DRYMER: Thank you.
15 PRESIDENT FERNÁNDEZ ARMESTO: Very good.
16 Mr. Jijón.
17 MR. JIJÓN: Thank you very much,
18 Mr. President. We have no further questions at this
19 time.
20 PRESIDENT FERNÁNDEZ ARMESTO: Very well.
21 Mr. Costa, Ms. Popova, Mr. Friedman.
22 MR. FRIEDMAN: Ms. Popova. You will be glad
[Page 2037]
1 to know that Ms. Popova will be handling this Witness
2 since it will be in Spanish.
3 PRESIDENT FERNÁNDEZ ARMESTO: Muy bien.
4 Ms. Popova, you have the floor.
5 MS. POPOVA: Thank you, Mr. President.
6 CROSS-EXAMINATION
7 BY MS. POPOVA:
8 Q. Good morning, Professor Hundskopf.
9 I introduced myself before. I am
10 representing Gramercy. I am Ms. Popova, and I'm going
11 to have the honor of asking a number of questions on
12 the Reports that you submitted and the Statements that
13 you have made this morning.
14 I wanted to start by saying that you talked
15 about your long academic experience. You said, in
16 particular, that you had the opportunity of authoring
17 23 books and also some university courses that you
18 took, and if I understand correctly, some of these
19 books had to do with Constitutional Law; right?
20 A. Well, actually, if you allow me to answer the
21 question, my books had to do with business law and
22 corporate law.
[Page 2038]
1 Q. Of course, many of the issues have
2 constitutional implications.
3 A. Yes, certainly. And I do mention this.
4 There is a compendium of core decisions of the
5 recordation court, where a number of issues are dealt
6 with that have a constitutional impact. Many of the
7 books are compilations of articles that have been
8 published periodically in a number of journals in the
9 University of Lima and in the Legal Gazette. Many
10 have legal connotations.
11 Q. And have you ever taught a course in civil
12 law and the law of obligations?
13 A. Well, in San Martín de Porres University, in
14 2019, I taught a course on the basis of private
15 contracts. That was the first time that I left my
16 specialty, which is corporate law, and I have taught
17 that for a number of years, for many years. But
18 because of my master's and the doctorate, I had the
19 opportunity to study those issues and to participate
20 in a number of events. I have been invited to the
21 University of Buenos Aires at the master's level, to
22 the University of Callao, and I have done lectures on
[Page 2039]
1 civil law.
2 Q. I'm not going to ask you to drop away from
3 your area of expertise, but I'm going to ask you, the
4 Land Bonds are securities; correct?
5 A. They are monetary securities--they are
6 securities, yes, they are securities.
7 Q. And specifically, they are nominative
8 securities.
9 A. Yes, that's right.
10 Q. You said this morning that one had to choose
11 the Bonds, A, B, or C. There were three classes:
12 Class A, Class B, Class C. Perhaps, your Statement
13 was not quite precise because these Bonds had to be
14 accepted compulsorily; correct?
15 A. Undoubtedly yes. The Bonds, as a means of
16 payment, as an instrument of payment, yes.
17 PRESIDENT FERNÁNDEZ ARMESTO: Okay. We are
18 going to move ahead much faster. Please answer the
19 question asked. It was posed by counsel. Because if
20 we don't do that, we are going to be here for a long
21 time.
22 THE WITNESS: Yes, of course, I will.
[Page 2040]
1 PRESIDENT FERNÁNDEZ ARMESTO: Don't forget
2 that we have read your Reports and we know your--
3 THE WITNESS: Yes. It was a decision to opt
4 for one of these classes: Class A, Class B, or
5 Class C. It's a decision.
6 BY MS. POPOVA:
7 Q. You maintain that it is a decision of the
8 party expropriated to opt for each one of these
9 classes, A, B, or C?
10 A. Well, the Bonds that I have seen are 25-year
11 bonds, Class C Bonds.
12 Q. You know that according to the Agrarian law,
13 the different class of Bonds corresponded not to an
14 option by the expropriated Party but the kind of land
15 expropriated?
16 A. I am not sure about that, Counsel, with
17 respect. The expropriated lands were rural lands or
18 agricultural lands and they were located at different
19 places and they were under different conditions and
20 situations, so much so that--
21 PRESIDENT FERNÁNDEZ ARMESTO: Professor.
22 Professor, excuse me for the interruption. We are
[Page 2041]
1 pressed for time, so what counsel is telling you--and
2 that was my understanding as well--was that the
3 determination of whether the Bonds were A, B, or C was
4 not based on the option by the expropriated Party but
5 the quality of the lands.
6 THE WITNESS: Personally I don't think so,
7 sir.
8 BY MS. POPOVA:
9 Q. You have not read Article 167 of the Agrarian
10 law.
11 A. I have followed a number of procedures, and I
12 have had the opportunity to submit pleadings, and the
13 aggrieved Party decides to opt for Class A, B, or C.
14 Q. Do you agree with me that the different
15 classes of Bonds had to do with the productivity of
16 the expropriated lands. You talked about the quality
17 of the lands. Isn't it true that the more productive
18 lands were compensated with Class A Bonds. Class A
19 Bonds have the largest interest rates, and the lands
20 that were of lower value were compensated with Class C
21 Bonds?
22 A. In the cases that I have gained knowledge of,
[Page 2042]
1 the aggrieved Party had a plot of land that had a
2 number of different kinds of land, excellent plots of
3 lands, intermediate plots of lands, and low quality
4 plots of lands. So, how can you give someone land
5 like this if you think (in Spanish) haciendas like
6 that?
7 How can you give a bond to people like that?
8 Q. You can do that by applying Article 177 of
9 the Agrarian law. We can move on.
10 I understand that you are not familiar with
11 that Article?
12 A. I am familiar with that Article.
13 MR. JIJÓN: We don't need that kind of
14 comment and lack of respect of the Expert.
15 PRESIDENT FERNÁNDEZ ARMESTO: All right.
16 Let's move on.
17 BY MS. POPOVA:
18 Q. Of course, I did not want to disrespect you
19 in any way, Professor.
20 All right. Let's move on then.
21 (Comments off the record.)
22 Q. Let us go back to your area of expertise,
[Page 2043]
1 which is securities law. You agree with me that
2 nominative securities law are transferred via an
3 assignment of rights?
4 A. Yes.
5 Q. In your Reports, you talk about the legal
6 framework applicable to these kinds of securities,
7 specifically in connection with the transfer of Land
8 Bonds; correct?
9 A. Yes.
10 Q. However, you do not issue any opinion in
11 connection with the validity of the purchase of the
12 Land Bonds by Gramercy?
13 A. That specific question was never posed to me.
14 Q. You never looked at the contracts whereby
15 Gramercy acquired its Land Bonds.
16 A. I have had the greatest amount of information
17 possible, and, undoubtedly, I have seen the evolution
18 of the guarantees that one must have when one acquires
19 Bonds, and this changes with time in Perú.
20 Now, the transfer has to identify the
21 assignor and the assignee. Now, if there is reference
22 to a registry or not, that's not important because the
[Page 2044]
1 most important thing here are the assignor and the
2 assignee.
3 Q. One of the pieces of information that you've
4 had is the Report by Dr. Bullard?
5 A. Yes.
6 Q. And you know that Mr. Bullard opined on the
7 legal framework for the transfers and also for the
8 application of that legal framework to the specific
9 contracts that Gramercy entered into; correct?
10 A. Yes.
11 Q. But you issue no opinion in connection with
12 this second point. You have not reviewed the
13 contracts?
14 A. Yes. Yes. And I saw that in the
15 presentation, and in my second slide, I talk about the
16 clause related to the assignment of rights.
17 PRESIDENT FERNÁNDEZ ARMESTO: I think,
18 Professor, what counsel is asking is whether you have
19 any doubts that Gramercy is the legitimate acquirer of
20 the securities.
21 THE WITNESS: I would have no doubts if there
22 is an assignment of rights where the assignor and the
[Page 2045]
1 assignee are identified. Then I would have to doubts
2 whatsoever.
3 BY MS. POPOVA:
4 Q. Thank you.
5 But instead of that, what you say in your
6 Reports is that in 2006 there was uncertainty in
7 connection with whether the Land Bonds could be
8 validly transferred under Peruvian law; correct?
9 That's what you say in your Reports.
10 A. Well, I'm not saying sure I'm saying that in
11 those terms. One thing is a transfer that can be
12 registered and then--well, we're not saying that a
13 transfer in Perú constitutes rights. It is simply
14 declaratory in nature. If I were the lawyer for
15 Gramercy or any acquirer, any legal or juridical
16 person, I would say, well, we need, of course, a
17 Notary's deed, an authenticated signature, et cetera,
18 but there was no specific registry at the time. It
19 existed until 1992, but then there was none. The best
20 way to do this was by doing this via a public deed for
21 the assignment of rights. I agree with Mr. Bullard
22 100 percent in connection with that.
[Page 2046]
1 Q. One of the things you say in your Reports to
2 support this opinion in the sense that there was
3 uncertainty in connection with this matter is that the
4 Land Bonds were obligations that were in express
5 consideration of the person, intuitu personae?
6 A. The Bonds?
7 Q. Yes.
8 A. At the beginning?
9 Q. Yes.
10 A. When the expropriation took place in '69,
11 yes, they were nontransferable securities.
12 Q. When you say at beginning they were, are you
13 maintaining that the Land Bonds were intuitu personae
14 obligations?
15 A. Until what time?
16 Q. Until 1979.
17 A. Okay. Each aggrieved Party, each one of the
18 aggrieved Parties, received an official letter with a
19 certain valuation and all the facilities needed to be
20 extended to them. Personally, I'm saying that the
21 relationship was an intuitu personae relationship, the
22 aggrieved Party versus the State. It was an
[Page 2047]
1 obligation in express consideration of the person, and
2 they received the Bonds in accordance with a certain
3 procedure that they had to follow.
4 Q. Your conclusion is, then, that the obligation
5 under the Land Bond was in the hands of the State?
6 A. Yes. The State was a debtor. The State had
7 to pay.
8 Q. Oh, okay. The Statement was a debtor, and
9 you maintain that the obligation by the State to pay
10 as a debtor was an obligation that was intuitu
11 personae?
12 A. Yes, until 1979, with the original aggrieved
13 Party because these Bonds were nontransferable.
14 Q. When you say that this was an obligation in
15 express consideration of the person, intuitu personae
16 by nature, how was it possible that in the
17 Constitution of July '79 declared that they were fully
18 transferable?
19 A. Well, there was a transitory provision of the
20 Constitution?
21 Q. Are you making reference to the Decree of
22 November '79?
[Page 2048]
1 A. Yes. That was taken up by the Constitution
2 of '79.
3 Q. This was a few months after the July
4 Constitution?
5 A. Well, the July Constitution came into force
6 in November, more or less about that time. What I'm
7 saying is that the situation and the development of
8 the country evolved notably. The military
9 dictatorship was coming to an end, and I'm not going
10 to give you details, but the situation of the country
11 was very difficult.
12 Q. What I meant is that starting in 1979--
13 A. Yeah, '79.
14 Q. --the Bonds had no limitation whatsoever or
15 any kind of agreement-related issue to transfer their
16 property?
17 A. When they say that they are freely
18 transferable, no limitations exist.
19 Q. Now, you mentioned this before. An
20 assignment in 2006 of Land Bonds would be invalid
21 because it couldn't have been registered with the
22 Agrarian Bank.
[Page 2049]
1 Have you maintained that?
2 A. I have never said that ever. It is not
3 invalid. It creates uncertainties. That's a very
4 different thing. It creates an expectative right
5 whether payment will be given or not, but I never said
6 that its invalid.
7 Q. Okay. As you mentioned, the formalities in
8 connection with registration are basically declaratory
9 in nature, and they don't constitute rights. You did
10 not identify any regulation in Peruvian law that
11 requires the registration of the assignment of Land
12 Bonds?
13 A. Specifically, no. There is none?
14 Q. There is no provision in the Peruvian law
15 that says if there is no registration, the assignment
16 would be invalid; right?
17 A. That's right. That doesn't exist. It is a
18 risk that is run by the acquirer. It has to do with
19 an investment and that he or she makes with other
20 certainty of collecting anything. This is an
21 expectative right. I said that.
22 Now, if we are talking about speculation of
[Page 2050]
1 securities, what you're doing is that you are
2 purchasing something without knowing what you are
3 going to recover, five times more or five times less.
4 It is a risk-related investment.
5 Q. In that regard, that is not different from
6 another securities.
7 A. Of course not.
8 Q. Now, Professor, you cite a number of authors
9 in connection with the nominalistic and current value
10 principle in Peruvian law. I have read all of them.
11 They were very interesting. Thank you. One of the
12 authors that you cited is Professor Mario Castillo;
13 correct?
14 A. Yes, of course. And also Mr. Díaz Picaso.
15 He's the most important for me.
16 Q. Well, perhaps, we disagree in this
17 connection, but he also read the Report of former
18 Justice Revoredo; correct?
19 A. Yes.
20 Q. She also cited Professor Osterling and
21 Castillo in connection with the meaning of the current
22 value principle; correct?
[Page 2051]
1 A. Yes.
2 Q. And also the Supreme Court of Perú. It has
3 also cited Osterling and Castillo in connection with
4 the meaning of the current value principle; correct?
5 A. Felipe Osterling, who was a very dear friend
6 and a professor of two courses as well, he was the
7 Chairman of the Commission in charge of reforming the
8 Civil Code. Who better than him than to make comments
9 in connection with the draft civil law process?
10 So, Mr. Castillo came to the University of
11 Lima as a professor of the law on obligations. He was
12 also the professor of law on obligations for 14 years
13 when I was there.
14 Q. Okay. Perfect. But in your Report, you
15 opine that Professor Castillo, who taught class at
16 your university, is mistaken in connection with the
17 whole theoretical construct applicable to Agrarian
18 Bonds?
19 A. In my opinion, and with all respect to
20 Professor Castillo--we have participated together in a
21 number of academic events--I think he considers that
22 the current value principle is synonymous with the
[Page 2052]
1 Consumer Price Index. And that's a mistake.
2 0. You also think, if I'm not mistaken--because
3 you mentioned this--that the Land Bonds are a monetary
4 debt?
5 A. They are a monetary debt because of the
6 ruling of 2001, and the current value theory applies
7 to them.
8 Q. In your opinion, because of their very
9 nature, Land Bonds, are they subject to a nominalistic
10 principle or not?
11 A. They were originally, but starting in 2001,
12 no longer. In 2001, the current value theory applies
13 to them.
14 Q. And, according to you, it is not related to
15 their nature but because the Constitutional Tribunal
16 ruled so?
17 A. Yes. That's right. Undoubtedly.
18 Q. But you consider that was a mistake.
19 A. What I do consider that's a mistake is to say
20 that the current value theory is synonymous with the
21 Consumer Price Index.
22 Q. I'm asking you something else. The CT made a
[Page 2053]
1 mistake, you think, in 2001, when it ruled that the
2 Land Bonds are obligations of value?
3 A. No, not at all. I think that was correct. I
4 think the country needed that kind of ruling.
5 PRESIDENT FERNÁNDEZ ARMESTO: So, it was a
6 necessity given historical need for those people that
7 have been expropriated?
8 THE WITNESS: Yes.
9 BY MS. POPOVA:
10 Q. And in spite of the fact that in your own
11 opinion they should be debts of value.
12 A. But, once again, there have been four
13 subsequent currencies. There was a devaluation,
14 hyperinflation, and we had a combination of very
15 serious events, so there was a need to assess the
16 budgetary economic fiscal issues.
17 Q. And is that the reason why you think that
18 your Judgment of 2001, the Constitutional Tribunal,
19 based their Decision on equity and not on right or
20 law?
21 A. Well, I think that there was a convergence of
22 different factors, in the sense of justice based on
[Page 2054]
1 the famous compensation. The Bondholders had to be
2 compensated in a way that they could actually recover
3 value, and I don't think it was a mistake, and I think
4 that--I think I have even said this in writing, that
5 the Resolution of 2001, even though they didn't do it
6 technically fine, because it is not indicated under
7 the Resolution, but it is indicated under the
8 "whereas" clauses.
9 PRESIDENT FERNÁNDEZ ARMESTO: So, if I bought
10 a bond in 2002, would you agree with me the
11 expectative right as a buyer, it would be clear to me
12 that the Peruvian Government had the obligation to pay
13 400 soles oro of the principal for each of the
14 coupons, two, that that figure needs to be subject to
15 the current value theory based on a criterion that is
16 not clear but it has to be readjusted based on the
17 current value theory. Those two concepts were clear.
18 THE WITNESS: Yes.
19 PRESIDENT FERNÁNDEZ ARMESTO: Thank you,
20 Professor.
21 BY MS. POPOVA:
22 Q. So when you--rather, let me ask you this way.
[Page 2055]
1 Do you consider that this judgment of the CT in 2001
2 is not based on a specific legal standard but on
3 equity considerations?
4 A. The Civil Code of 1984, at Articles 1234,
5 refers to the nominalistic principle, and 1235 and
6 1236 refer to the current value principle, and that's
7 where it is based.
8 Q. And it also went back to Article 7069
9 Constitution?
10 A. Yes, clearly. That is compensation due to
11 expropriation, Article 70.
12 Q. Perfect.
13 Professor Hundskopf, to go back to a question
14 by the President, in your two Expert Reports, you did
15 not identify one single Decision by the Peruvian Court
16 between the Judgment of the CT of 2001 and the
17 Resolution of July 2013 that applies the nominalistic
18 principle to Land Bonds; is that correct?
19 A. I could refer you to 500, 300 proceedings,
20 but the positions were so contradictory that it was
21 necessary, so much so that the Engineers Association
22 in 2011 asked to implement the Resolution of 2011 in
[Page 2056]
1 the correct way, because there was uncertainty that
2 was so significant that led to opposing positions
3 within the Supreme Court.
4 Q. But that was before 2001.
5 A. Well, you asked me 2013, also before 2013.
6 Q. Let me repeat my question. So, you did not
7 cite in your Report any Decision between March 2001
8 and July 2013, whereby the Peruvian Courts apply the
9 nominalistic principle to the Land Bonds?
10 A. It was impossible because it didn't have the
11 strength, Decision by the Supreme Court cannot oppose
12 a Decision by the Constitutional Tribunal.
13 Q. And you did not identify a single Decision in
14 this period that applied the dollarization to the Land
15 Bonds?
16 A. Well, I mentioned Resolution 088 of 2000,
17 Supreme Decree.
18 PRESIDENT FERNÁNDEZ ARMESTO: No. You are
19 being asked whether there is any Judgment, any
20 Resolution ruling by the Courts.
21 Let me ask the question, if there is any
22 ruling after 2001 that provide for dollarization of
[Page 2057]
1 Land Bonds by applying dollarization.
2 THE WITNESS: I am convinced after my search
3 that there were some, but I do not know them off the
4 top of my head. But there were rulings that also
5 applied a different methodology other than
6 dollarization.
7 PRESIDENT FERNÁNDEZ ARMESTO: Off the top of
8 my head, I think that Professor Castillo said that the
9 Judgment you were quoting had a different legal
10 linkage, but they were not Land Bond situations?
11 THE WITNESS: But they did have the
12 application of the current value theory.
13 PRESIDENT FERNÁNDEZ ARMESTO: Yes.
14 THE WITNESS: And that was important, the
15 application of the current value theory. That is to
16 say that it was applied, but the situations were
17 different.
18 PRESIDENT FERNÁNDEZ ARMESTO: I think that he
19 said that if my car is destroyed and the spare parts
20 need to be imported, I may request dollar-denominated
21 compensation, so he mentioned these type of
22 situations, but the current value theory as a
[Page 2058]
1 dollarization was not applied to Land Bonds.
2 Do you agree that for Land Bonds the Courts
3 apply the CPI as a general rule?
4 THE WITNESS: Well, we could say that they
5 had three options, and they apply one. Correct.
6 BY MS. POPOVA:
7 Q. When you said that they were three options,
8 you also mentioned Article 275 of the Civil Code, but
9 we also agree that this Article only applies upon
10 agreement by the Parties.
11 A. Article 275 says "theory of valuation." That
12 is the subtitle.
13 Q. Yes.
14 A. The text of the Article provides for that,
15 but beyond the Agreement, we have the Resolutions by
16 the CT.
17 Q. Yes. But when you are saying that there are
18 three options, I think that we agree that the options
19 at Article 275 only apply based on the Agreement of
20 Parties.
21 A. As attorney of one of the Parties, I would
22 probably discuss which one is best--
[Page 2059]
1 PRESIDENT FERNÁNDEZ ARMESTO: No. What
2 counsel is asking you is that--is telling you that 275
3 requires agreement.
4 THE WITNESS: Yes, but above that you have
5 the Resolution by the CT.
6 PRESIDENT FERNÁNDEZ ARMESTO: But 275 is
7 enforced only upon agreement of the Parties.
8 THE WITNESS: That is what Mr. Castillo said.
9 PRESIDENT FERNÁNDEZ ARMESTO: Well, it seems
10 that it is common sense.
11 THE WITNESS: Yes, this is stated in the body
12 of the Rule.
13 BY MS. POPOVA:
14 Q. You said that you do not know off the top of
15 your head if there were other rulings. The State as
16 debtor of the Land Bonds is always a party to these
17 processes to update and pay the Bonds; correct?
18 A. Yes.
19 Q. So, if there were rulings where the Courts
20 applied dollarization to Land Bonds, the State would
21 need to have a copy; right?
22 PRESIDENT FERNÁNDEZ ARMESTO: I imagine that
[Page 2060]
1 rulings are public in Perú; correct?
2 THE WITNESS: Yes, all of them.
3 PRESIDENT FERNÁNDEZ ARMESTO: I think that
4 everyone has access to all of the rulings.
5 BY MS. POPOVA:
6 Q. But in this period, between March 2001 and
7 July 2013, there were two other judgments by the CT;
8 correct? And in connection with the Land Bonds?
9 A. Yes. Clearly, yes, but the Engineer's
10 Association--
11 PRESIDENT FERNÁNDEZ ARMESTO: Yes, there were
12 two. Now, let's go there.
13 BY MS. POPOVA:
14 Q. I am trying not to interrupt you, but I am
15 going to ask you to answer my question.
16 PRESIDENT FERNÁNDEZ ARMESTO: I apologize,
17 Professor, if I am interrupting you, but this is to
18 make faster progress. Please go ahead.
19 BY MS. POPOVA:
20 Q. So, one these rulings was issued in
21 August 2004, according to you?
22 A. Yes.
[Page 2061]
1 Q. And this ruling declared that the
2 dollarization was appropriate and also compatible with
3 the March 2001 Decision.
4 A. I said voluntary. Voluntary.
5 Q. Yes, that is an important qualification;
6 correct?
7 A. Yes.
8 Q. And that is a qualification that you had not
9 mentioned in your Report.
10 A. Well, this invitation led me to read the
11 interventions in depth, and that's the reason why I
12 can answer.
13 Q. And so, you agree with me that the CT
14 declared that the dollarization would be
15 constitutional only upon agreement of the Bondholders?
16 A. No. In 2001--
17 PRESIDENT FERNÁNDEZ ARMESTO: It is 2004. In
18 2004, whenever it is an option for the Bondholder, it
19 is constitutional.
20 MR. JIJÓN: I apologize, but that is not a
21 completely accurate interpretation, and we will make a
22 comment later on.
[Page 2062]
1 PRESIDENT FERNÁNDEZ ARMESTO: If I have said
2 it incorrectly, I do not want to misrepresent this.
3 Please, Mr. Jijón, I apologize. Please, state it
4 correctly.
5 MR. JIJÓN: If I am not wrong, and I do not
6 have it in front of me, the ruling of 2004--and this
7 is not an argument. This is based on an invitation by
8 the President--has several sections, and one of the
9 statements by the CT was that in that case the text of
10 the--of Decree 88 did not impose something, but it was
11 voluntary.
12 But it also recognized, and this is something
13 that I cited--and maybe I went too fast in my Opening
14 Argument. It also recognized that the dollarization
15 principle was not foreign to the treatment of time,
16 therefore it was consistent with the ruling of the CT
17 in 2001, and that was a specific question that the CT
18 was asked to answer, separate from the voluntary
19 aspect.
20 PRESIDENT FERNÁNDEZ ARMESTO: All right.
21 Ready. Let's move on.
22 MS. POPOVA: Thank you. Let me continue with
[Page 2063]
1 my questions. I just wanted to--
2 BY MS. POPOVA:
3 Q. So, you wanted to highlight one of the
4 Parties, but it does not exclude the other one. So,
5 in this ruling in 2004, the CT also addressed the
6 application of interest in arrears to the Bonds?
7 A. Well, the application of the interest rate, I
8 think it was about 5 percent of the--based on the U.S.
9 dollar.
10 Q. Well, one of the unconstitutionality elements
11 was that the Decree was not in accordance with the
12 calculations contemplated under the Civil Code, and to
13 that end, the CT decided that it was not against the
14 Constitution because it was an option; correct?
15 A. It is clearly based on their position of
16 2001.
17 Q. During this period, March 2001 and July 2013,
18 there were several other Decisions by the Supreme
19 Court of Perú applying the current value principle to
20 the Bonds. Do you agree?
21 A. Yes.
22 Q. In your Second Report, you state that there
[Page 2064]
1 are some rulings by the Supreme Court of Perú that
2 apply the dollarization principle, and this in
3 which--and this one applies dollarization to the Land
4 Bonds.
5 Do you recall?
6 A. Well, you're talking 2013 onwards?
7 Q. Yes. 2013 onwards.
8 A. Yes. 2013 imposed the current value theory
9 as mandatory, and there is another Decision of
10 November 2013 that confirmed this.
11 Q. Yes. And the reason why this Judgment
12 applied dollarization for the first time to the Land
13 Bonds is because of the Decision of the CT in 2013
14 that decided that it was mandatory for application for
15 all of the public branches.
16 And this was the basis for the rulings, four
17 or five rulings that you cited; correct?
18 A. Yes.
19 Q. We do not have time to see all of them. I
20 will be showing you one. And please look at 23,
21 Tab 23 in your binder. And this is RA-394.
22 A. What Article?
[Page 2065]
1 Q. Let's look at 10.3.
2 A. This is a judgment on appeal, and it analyzes
3 the application of Article 7, and the application of
4 1242, 1243 of the Civil Code. This is a judgment on
5 appeal that was issued by a court that had some
6 Decisions that had already been--this had to do with
7 some Decision that were contradictory, so this
8 Judgment is of 2018. 2018? The one you're mentioning
9 is the Decision of 2018.
10 Q. Yes. This is the one after 2013 that you
11 cited in your Report.
12 Do you recognize this?
13 A. Yes.
14 Q. Please look at 10.3. Here, and because of
15 the text, of the regular text of Article 1242, it is
16 stated that the interest will be compensatory when it
17 is a consideration for the use of money or because of
18 any other asset?
19 PRESIDENT FERNÁNDEZ ARMESTO: Why don't we
20 wait to hear the question by counsel? Why don't you
21 read it to yourself. If you read it aloud, we need to
22 type it, it needs to be interpreted, and it is a very
[Page 2066]
1 significant effort.
2 BY MS. POPOVA:
3 Q. So, you read it, you are familiar with this.
4 Do you agree with me that this is an example
5 of what the Courts did in the application of the
6 Judgment of 2013?
7 A. Yes. Because of that Judgment of 2013, there
8 was a need to establish a difference between interest
9 in arrears and in compensatory interest. The Civil
10 Code had to be applied.
11 PRESIDENT FERNÁNDEZ ARMESTO: So, the
12 Judgment said that the Bonds had to be reassessed by
13 applying dollarization and then add interest.
14 THE WITNESS: Yeah.
15 BY MS. POPOVA:
16 Q. Well, we have two concepts here, we have the
17 updating that is based on the method established by
18 the CT in July. So, it is converted into dollars and
19 then the interest rates are applied. This was the
20 first part of what the Courts did, that is to update
21 the amount of the debt; correct?
22 A. Well, there was the first updating and then
[Page 2067]
1 the compensatory interest, the second one, and after
2 the updating with the method determined by the CT in
3 July 2013, in addition to this, compensatory interest
4 is added as established under the Civil Code; is that
5 correct?
6 PRESIDENT FERNÁNDEZ ARMESTO: Let's have a
7 brief pause.
8 MS. POPOVA: Just a minute.
9 PRESIDENT FERNÁNDEZ ARMESTO: We're going to
10 have--
11 MS. POPOVA: I am okay. We are about to
12 finish. Please give me a minute to talk to my
13 colleagues.
14 PRESIDENT FERNÁNDEZ ARMESTO: And I have some
15 questions. Do you want me to start asking the
16 questions? Are you okay?
17 MS. POPOVA: Yes.
18 PRESIDENT FERNÁNDEZ ARMESTO: Let me ask you
19 about this Judgment, or are you going to ask the
20 Expert? I am interested in this Judgment. The truth
21 of the matter is that I did not read it even though I
22 should have read it, but there are so many. And could
[Page 2068]
1 you please start with 10.2. Just read it to yourself
2 and then 10.3. And once you finish reading both,
3 please let me know.
4 THE WITNESS: Yes.
5 PRESIDENT FERNÁNDEZ ARMESTO: It is important
6 for you to look at the final Order. My question is
7 the following: This Judgment is a little bit
8 different from the Decision by the CT. Let's look at
9 10.2. You would recall that the CT Order in their
10 Decision to revalue the principal of all of the
11 coupons as of the date of the last unpaid coupon, and
12 you would recall that it is going to be done at the
13 Parity Exchange Rate.
14 THE WITNESS: Yes.
15 PRESIDENT FERNÁNDEZ ARMESTO: And here it
16 says that it should be estimated based on the
17 opportunity when those coupons were no longer paid and
18 also in keeping with the Constitutional Tribunal
19 criterion, the debt shall be converted into American
20 dollars by applying the current exchange rate.
21 It doesn't say "parity" as of the date of
22 expiry for each coupon because that is a time when
[Page 2069]
1 they were no longer paid for these Land Bonds, and in
2 that case there should be an addition of the interest
3 rate of the American--the U.S. Treasury Bonds.
4 So, it seems that it is reassessing by
5 applying the U.S. Treasury Bond rate, interest rate,
6 but then it appeals the Judgment of the First Instance
7 Court because it says that there it has not--that
8 Judgment has not granted the interest rate of 4 or
9 5 percent, so it means--the Judgment is appealed and
10 then it says, if you look at the bottom of the
11 Decision, it says towards the end, it says the Order
12 that has the implementation of the Judgment, there
13 will be liquidation of this compensatory interest
14 based on the Judgment by implementing the
15 dollarization as of the first date of nonpayment for
16 the coupons of each Bond to which the addition of the
17 U.S. Treasury Bonds as stated at 5.2 shall be
18 implemented in addition to the payment of compensatory
19 interest.
20 I just wanted to ask you if this is the
21 interpretation as to how, under Peruvian law, the
22 Judgment by the CT needs to be enforced, the Decision
[Page 2070]
1 by the CT needs to be enforced?
2 THE WITNESS: I think that this is a very
3 interesting Judgment because it reflects the essence
4 of the provisions of the Resolution in 2013 by the CT,
5 by applying dollarization, and clearly interest as of
6 the date the last coupon was paid, and I think it is
7 highly coherent. But I think that the final Decision
8 does not contradict--and I may be wrong--the
9 Resolution of 2013.
10 PRESIDENT FERNÁNDEZ ARMESTO: So, you are
11 saying it is not contradictory. You are saying that
12 it is correct. Okay. Phenomenal.
13 Counsel, shall we continue? And we have the
14 break very briefly.
15 MS. POPOVA: I think that I only have two
16 questions left.
17 PRESIDENT FERNÁNDEZ ARMESTO: So, let's try
18 to finish. So, you can do it?
19 MS. POPOVA: Yes. Thank you.
20 PRESIDENT FERNÁNDEZ ARMESTO: So, that we
21 conclude with the professor's cross-examination.
22 BY MS. POPOVA:
[Page 2071]
1 Q. I just wanted to ask you whether this is what
2 all of the judgments that you cited to--that is to
3 say, judgments that are subsequent to the Decision by
4 the CT of 2013?
5 A. Yes. At one point there was a forum in Lima
6 as to how the Resolution of 2013 had impacted the
7 Resolutions of the Court, and there were--there was a
8 long list of resolutions, and I think that it was a
9 consequence, and it was based on the Decision by the
10 CT in 2013.
11 Q. And out of all of these judgments, the Court
12 updated, by applying inflation, the U.S. Treasury
13 Bonds, and in addition to that, they also order the
14 payment of compensatory interest based on the Bond
15 interest rate 4, 5, or 6 percent?
16 A. So, I think it is--you're talking about
17 double compensatory interest. I think there should be
18 only one.
19 Q. No, it's not double.
20 MR. JIJÓN: Well, Mr. President, I think that
21 he has already answered the question.
22 PRESIDENT FERNÁNDEZ ARMESTO: No. This is
[Page 2072]
1 important. This is an important question. Counsel,
2 please go ahead and put the question to the professor.
3 BY MS. POPOVA:
4 Q. No, I was not suggesting that double
5 compensatory interest was being paid. What I was
6 saying was that the Judgment--there is this Judgment
7 and there are other examples of this in this and in
8 others, what the Court does is orders the payment of
9 compensatory interest based on the interest rate
10 that's in the coupon of the Bond; correct?
11 A. Yes. The interest rate is preestablished on
12 the Bond. Exactly.
13 Q. Thank you very much, Professor Hundskopf. I
14 don't think I have any more questions for you. But
15 let me just confirm. Yes, that is right.
16 PRESIDENT FERNÁNDEZ ARMESTO: Mr. Jijón, any
17 question for the professor?
18 MR. JIJÓN: Could I take just one minute to
19 go through my notes.
20 PRESIDENT FERNÁNDEZ ARMESTO: Of course. Or
21 would you prefer that we take the break at this point?
22 Because we have been going for some time now.
[Page 2073]
1 MR. JIJÓN: That's fine.
2 PRESIDENT FERNÁNDEZ ARMESTO: Okay.
3 Professor Hundskopf, we are going to take a 10-minute
4 break. It is 10:30 right now, so we'll take a break
5 until 10:40, and then there will be a couple of
6 questions from Mr. Jijón, and then we'll conclude.
7 THE WITNESS: Fine, sir.
8 PRESIDENT FERNÁNDEZ ARMESTO: What I'm going
9 to ask is that during this break, please don't speak
10 with any of the counsel.
11 THE WITNESS: I'll stay right here.
12 PRESIDENT FERNÁNDEZ ARMESTO: No, I fully
13 trust you. I'm just going to ask you not to engage in
14 conversation with any of the counsel for the Republic
15 of Perú. There is coffee. There is fruit. There is
16 everything. Please.
17 THE WITNESS: Excellent.
18 (Brief recess.)
19 PRESIDENT FERNÁNDEZ ARMESTO: We resume the
20 Hearing, and we give the floor to legal counsel for
21 the Republic of Perú.
22 MR. JIJÓN: Thank you very much,
[Page 2074]
1 Mr. President.
2 REDIRECT EXAMINATION
3 BY MR. JIJÓN:
4 Q. Professor Hundskopf, at the end of the
5 cross-examination, you were asked several questions
6 related to a Judgment of Cassation handed down by the
7 Supreme Court Standing Chamber of Constitutional and
8 Social Law.
9 Do you recall that?
10 A. Yes, the 2018 one.
11 Q. Correct. I don't have questions about the
12 content, but, rather, the source of this Decision.
13 Could you please explain for us what the relationship
14 of--what the hierarchical relationship is as between
15 the Chamber of Constitutional and Social Law and the
16 Constitutional Tribunal, and what does that suggest
17 for what we must do in case of inconsistencies?
18 A. No doubt whatsoever, above the Constitutional
19 Chamber of the Supreme Court is the Constitutional
20 Tribunal, which is the highest level supreme organ for
21 interpretation of the Constitution, and it is the one
22 that prevails. It establishes the criteria
[Page 1917]
regulated by Article 2.5. Those provisions that do not pass because they don't carry out the analysis, or they simply are not presented for analysis, are automatically derogated. And those that are new do not enter into force, if they don't undergo this analysis.
PRESIDENT FERNÁNDEZ ARMESTO: And this Legislative Decree was prior to the Supreme Decree?
THE WITNESS: That's a good question. The first two Supreme Decrees are prior to this provision. Accordingly, they are in the field of the stock. They should have gone through, but because of stock and--and the three and four are new Decrees, because they are new. Being new, they should have gone through prior approval.
PRESIDENT FERNÁNDEZ ARMESTO: They should have gone through the Commission? Any Supreme Decree now has to go through this Commission?
THE WITNESS: Any Supreme Decree that creates an Administrative Procedure with some exceptions that are set forth in the provision.
Now, anticipating the comment on one of the
[Page 1918]
points of discrepancy with Mr. García-Godos,
Mr. García-Godos indicates, and in effect the provision says, that--and not just Supreme Decrees; there could be other kinds of legal provisions, which are general in scope, is what it says, and what Mr. García-Godos says is that this is a provision of specific scope. In my opinion, it is not of specific scope, but rather, it is of general scope, because it regulates an indeterminate category: All persons who come forward to claim having a Bond acknowledged for purposes of payment, and that is an indeterminate category.
Consequently, for me, it is a general provision. There are other exceptions; for example, the rules of regulatory agencies of the sectoral agencies, Telecom--there are exceptions for its application. There are several exceptions. The Supreme Decrees, in my opinion, do not fall under any of the exceptions.
Accordingly, given that they have not undergone this analysis, these Decrees are automatically inapplicable, and if these provisions
[Page 1919]
had not existed, I don't think there would have been an analysis before INDECOPI with subsequent oversight.
Now, just very briefly, my comments on the Report by Mr. García-Godos. He makes reference to one of the instruments that I've mentioned, which is the MEF guide. There is an MEF guide for undertaking this analysis, and he says it doesn't apply because it's a matter of indebtedness. In effect, there is a reference to laws tied to indebtedness.
First of all, I think they were applicable because this Administrative Procedure aimed at paying the Agrarian Reform Bonds, and if you see the Supreme Decrees and the support that was set forth, none of them cites any provision on indebtedness. And had they done so, it would have been more complex, because the laws on indebtedness, because the laws on indebtedness require that one undergo a much more technically complicated procedure, and that procedure would have included review of the budgetary impact. They would have included precisely review of the possibilities of payment in the following years, and
[Page 1920]
so on.
In other words, they would have had to have gone through these steps, which are even more sophisticated than those that are subject to the regular provisions. The second discrepancy--
ARBITRATOR DRYMER: Pardon me. If I may just ask a question following up on the theme that the President raised, thank you, because I was curious about the retroactivity of certain of these instruments. This guide you mention is dated 2018, is it not?
THE WITNESS: Which one are you referring to?
ARBITRATOR DRYMER: The--well, I'm looking at Slide 42. This is the legislative technical guide for preparation of normative drafts.
THE WITNESS: Oh, yeah.
ARBITRATOR DRYMER: And, actually, it comes under CE-653, which is dated 2018, after the dates of the four Supreme Decrees at issue.
THE WITNESS: You are absolutely correct.
ARBITRATOR DRYMER: Yes.
[Page 1921]
THE WITNESS: I make two comments.
ARBITRATOR DRYMER: Yes. I want you to, please.
THE WITNESS: The first one: This is the Fourth Edition. There are four--I quoted here the last one, but there were editions that were before the Supreme Decrees. Second--
ARBITRATOR DRYMER: Yes?
THE WITNESS: Second is a guideline. Really, the basis of the guideline are all the norms. The guideline is a reflection of the best practice that were supposed to be followed by the public offices to comply with all these norms.
ARBITRATOR DRYMER: All right. Fair enough. Thank you. And for the rest, the President addressed the questions on that that I might have asked, and I'm sure the Parties would have gotten to it themselves as well.
THE WITNESS: Only to finish my comment about the annulment issue--
ARBITRATOR DRYMER: Please feel free to continue in Spanish, notwithstanding me.
[Page 1922]
THE WITNESS: Sorry. The provisions that are down in the box are all of those that would be applicable, other than the guide that I just mentioned, which is not the same as the one we just discussed, because there is a guide from the Ministry of Economy, and there's another general one for all State offices. The one that Mr. García-Godos refers to is the one that applies to the Ministry of Economy only.
The second point is that Mr. García-Godos indicates that there's strict compliance, that there was no necessity to carry out a reasonableness analysis because it abides strictly by what the Constitutional Tribunal says. I've listened closely in recent days, and I've studied this for my Report. There are a number of aspects that have been supplemented and modified by the Supreme Decrees with respect to this Decision that had to undergo a reasonableness analysis. The first is to see whether they justified or fit within the public purposes that the Judgment of the Constitutional Court had. Under the argument by García-Godos, the Supreme Decrees
[Page 1923]
should have matched what the Constitutional Tribunal said, and that's not so. There are several additional elements that must be verified.
Then it is said that the sunset law system, the ex ante sunset law, it does not apply--I already said this in response to a question by the Court, because it's not a general provision--I believe that it is--the Supreme Decrees are defined as being general in nature. Some are specifically; the general rule is that they are general in nature.
And with that, I conclude. This is the table that summarizes. It's in my Report. It summarizes my analysis on compliance with the requirements established, and here I think it is very simple to take into account beyond this legal framework, which is better explained in the provisions that I cite in my Report.
What you can note clearly is that there is a principle of prior justification that must be abided by--otherwise, it cannot come into force--an ex post control phase through INDECOPI or other judicial entities that can review what's done, and now there's
[Page 1924]
an ex ante system, which was established precisely to have better control over any excesses that the State might commit as regards the principles of legality and reasonableness.
My opinion is that the Supreme Decrees did not satisfy this sequence. And I am available to the Tribunal and the Parties for any questions.
PRESIDENT FERNÁNDEZ ARMESTO: Before giving the floor to the Parties, I have a commonsense question. This has been published in El Peruano--the official gazette of the State is called El Peruano. This has been published in El Peruano, and, therefore, it has an appearance of validity.
So, my question is--these are internal provisions of the administration that somebody would have to implement, a judge or INDECOPI; I don't know. So, my question is: I assume that the laws and regulations, once published in El Peruano, have a presumption of validity and must be enforced so long as an authority with the power does not declare them to be derogated.
THE WITNESS: That's an excellent question,
[Page 1925]
and there are various angles from which one can answer. The first, the sunset law itself, which is Decree-Law 1310--it's explained in my Report--it establishes that if these steps are not carried out, one may file a complaint with INDECOPI, precisely to secure a Declaration of Nonapplication or to leave it without force. INDECOPI can strip a Supreme Decree of force if what's been violated is the principle of legality.
If the principle of legality has not been violated, but the principle of reasonableness has, then it doesn't have--then it can be declared that it doesn't apply in a given State, but that doesn't have ergo omnes effect.
Now, the second thing is if I don't send the Supreme Decree to the Commission and El Peruano is not going to ask if I have complied with that requirement, and it will publish the Decree. And that Decree is exposed to the legal questions being asked about it, be it at INDECOPI or before the regular courts, regarding its validity.
So, it's not that the Commission--it's not
[Page 1926]
really the Commission. The thing is the Commission, when it approves, it works in the President's--in the Office of the Prime Minister, and that Commission periodically publishes Supreme Decrees with a full description of the procedures that continue to be in force and authorizes--and all of this is through IT.
The requests are filed through a web page. You can go in, seek authorization, and theoretically it can be published.
Now, I could note in passing that failing to comply with these provisions gives rise to administrative liability, even economic liability, because INDECOPI can impose fines on public servants when they don't comply, for example, with the mandates that INDECOPI has issued saying that the provision cannot be applied.
So, there is a whole system that has been constructed in Perú, beginning in the late 1980s, but it began to be constructed in a firmer manner in the late 1990s. This whole system has gradually been established, and I feel a bit bad when they say you're going to have to get used to--well, one thinks
[Page 1927]
that this system is quite primitive.
But actually I think it's one of the most sophisticated ones I'm familiar with, and it's a system that has all these mechanisms. And just as Minister Castilla explained Perú's prestige, because of its management of macroeconomic policy, I believe that these administrative mechanisms have made a great contribution to more efficient operation of the State.
Now, unfortunately what happens in this case is I see that they were not abided by.
PRESIDENT FERNÁNDEZ ARMESTO: Very well. Sir, any additional questions?
MR. RECENA COSTA: No questions from us.
PRESIDENT FERNÁNDEZ ARMESTO: So we give the floor to the Respondent, Mr. Hamilton.
MR. HAMILTON: It's a temptation, but I'll give the floor to Mr. Llano.
CROSS-EXAMINATION
BY MR. LLANO:
Q. I'll ask my questions in English since your Report was in English and I understood that you were
[Page 1928]
going to testify in English this afternoon. So, I hope that's okay with you.
A. That's okay. The only thing is if I feel to explain any kind of text in Spanish, it is better to switch to English. I think it is better because sometimes the translation could miss the real sense of the word.
Q. Thank you.
A. I will try avoid to do that. I will do that only if it's strictly necessary.
Q. We'll take it one step at a time.
A. Okay.
Q. Perfect.
Now, Mr. Bullard, you and I have--you and I have known each other for quite some time as reflected in some of the cases that you list at the start of your Report; correct?
A. Sure.
Q. And I was curious, I've got to say, was there any particular reason to reference individual attorney names, including me, by name in your Report?
A. No. It's a standard I use to follow when I
[Page 1929]
make that kind of declaration.
Q. Right. But, for example, when you cited to work that you're doing with King & Spalding, you didn't say, you know, I'm working with Ed Kehoe or the like; right?
A. Yeah. But they are not involved in this case.
Q. Okay. Did you know that I was involved?
A. I was not sure at that time.
Q. Okay. Now, you also mention in your Report that you are acting as counsel for the Claimants in an ICSID Arbitration against the Republic of Perú; correct?
A. That's correct.
Q. And that is the case of Kuntar Wasi v. Perú; correct?
A. That's correct.
Q. And that's obviously an investment treaty arbitration; correct?
A. Correct.
Q. And in that case, you, on behalf of your client, have filed a memorial last September;
[Page 1930]
correct?
A. That's correct. I don't remember the precise, but it should be.
Q. And so, you're expecting a counter-memorial from the State at some point in the near future; correct?
A. I assumed it.
Q. Well, you must know the Procedural Calendar. You're counsel; right?
A. Yes.
Q. Okay. Good.
And in that case, you allege that certain measures taken by the Peruvian State were in breach of the expropriation provision in the Perú-Argentina Bilateral Investment Treaty; correct?
A. That's correct.
Q. And you also allege on behalf of your investor clients that Perú violated the fair and equitable treatment provision in that case; correct?
A. That's correct.
Q. Including through administrative measures taken by the Peruvian State, my client; right?
[Page 1931]
A. That's correct.
Q. And, among other things, you argue in that case that those measures that were taken by Perú were unreasonable and arbitrary; correct?
A. Correct.
Q. And in addition to the Kuntar Wasi Case, you are also acting as counsel for other clients in disputes against Perú; correct?
A. Other clients against Perú as counsel. Not that I remember.
Q. Are you not acting as counsel for a client in the oil-and-gas sector in a case where you have filed a Notice of Claim against the Republic of Perú?
A. Yeah, that's correct. Yeah. The Notification of Controversy; that's correct.
Q. Right. And so that's another investor-State dispute that you are acting on behalf of the investor; correct?
A. Sure.
Q. And so--and that Notice of Dispute was filed when?
A. Sometime two or three months ago. No. Yes.
[Page 1932]
No, more because it's about five months ago.
Q. All right. So around September of last year; is that correct?
A. Yeah, more or less.
Q. So, while you were acting as an independent Expert in this case, you agreed to take on additional representations against the Republic of Perú; correct?
A. That's correct.
Q. And, to be clear, in this matter, the Gramercy v. Perú matter, you argue that several acts of the Peruvian State were illegal and unreasonable; correct?
A. I make that analysis about the Supreme Decrees, and in the way I have just explained.
Q. Yes. And the Supreme Decrees are Administrative Acts; correct?
PRESIDENT FERNÁNDEZ ARMESTO: Legislative acts.
BY MR. LLANO:
Q. Supreme Decrees?
PRESIDENT FERNÁNDEZ ARMESTO: Yeah. It is
[Page 1933]
legislative acts.
THE WITNESS: Yeah, that's correct.
BY MR. LLANO:
Q. Okay. Fine.
PRESIDENT FERNÁNDEZ ARMESTO: Not Administrative Acts. It's the legislative branch of the public administration.
THE WITNESS: All right. Switching to Spanish. They are regulations.
BY MR. LLANO:
Q. But the distinction is not really pertinent to my question. My question is you are arguing that these acts by the Peruvian State were or are illegal and unreasonable; correct?
A. In this case.
Q. Yeah.
A. What I explain in my Report is that I understand that they don't comply with Peruvian law.
Q. Right.
A. Because they break the legality principle and the reasonability principle.
Q. Correct. And so the main takeaway is that
[Page 1934]
these acts by the Peruvian State that you discuss in your Report are illegal and unreasonable; right? Slide 53 of your presentation.
A. Sure. Of course.
Q. Yes. As you do in these other cases where you're acting as counsel for Claimant, the Claimants, plural; correct?
A. There are important differences between both things. First, the facts are totally different. Second, the kind of analysis that I'm making in that case, in those cases are related to the application of international law and the application of the Treaty.
Here I'm talking about municipal. I'm talking about reasonability and legality inside Perú and inside Peruvian regulations. So, I understand that it's a totally different standard, totally different rules, totally different statutes, totally different norms.
Q. Got it.
Are there any other matters where you act as counsel against the Peruvian State, either in
[Page 1935]
domestic or international arbitration?
A. There is only one more against the Ministry of Energy.
Q. And what is that case?
A. It's a commercial case.
Q. Commercial case. And your opponent, your counter-party, is the Minister of Energy of the Republic of Perú; yes?
A. Yes.
Q. Right. And if you can reveal it, who is your client?
A. I cannot reveal it.
Q. Okay. Fair enough.
A. It is confidential.
Q. Okay. Now--
A. Until the award. When the award is come out--
(Comments off microphone.)
THE WITNESS: Okay.
BY MR. LLANO:
Q. Now, I want to, since you come to the conclusion that several acts of the Peruvian State
[Page 1936]
were "illegal" and "unreasonable," I want to discuss some of your writings at a time when you were not counsel for investors--for foreign investors against the State.
And you have now a binder in front of you, and I want to direct you to Tab 16, please. RA-302.
MR. RECENA COSTA: May we please get a second binder. I think the practice of the Parties has been to share two binders. We requested one but we did not receive it yet.
MS. POPOVA: It is also in Procedural Order 10.
(Comments off microphone.)
BY MR. LLANO:
Q. Okay. So we're at--this is the award in Convial?
PRESIDENT FERNÁNDEZ ARMESTO: That was definitely off the record, but you are there.
THE WITNESS: And I remember her.
BY MR. LLANO:
Q. This is the award in the Convial v. Perú Case, and you're familiar with that award; correct,
[Page 1937]
sir?
A. I read it many years ago, but, yeah, I'm familiar with it.
PRESIDENT FERNÁNDEZ ARMESTO: Your name is also there, Dr. Llano.
MR. LLANO: Indeed.
PRESIDENT FERNÁNDEZ ARMESTO: We keep it in family.
BY MR. LLANO:
Q. Good.
So can you turn to Paragraph 149, please, Mr. Bullard. 149.
PRESIDENT FERNÁNDEZ ARMESTO: Of the Award.
MR. LLANO: Of the Award.
BY MR. LLANO:
Q. And I would ask you, in the interest of facilitating the work for our transcribers, that you read to yourself Paragraph 149, please. Let me know when you're done.
A. Yes.
Q. So, you see there that there was a question or a claim, rather, by the Claimant in respect of
[Page 1938]
certain actions taken by the Peruvian State and, in particular, the justification that was given to those actions; is that correct?
A. That's correct.
Q. And you submitted Expert Reports in the Convial case on behalf of--as an expert on behalf of the Republic of Perú; correct?
A. That's correct.
Q. You were a legal expert in this case as well; correct?
A. Yeah.
Q. And in your Reports in that case, which are in the record in this case, you came to the conclusion that the municipality of Callao had acted reasonably in reaching its decision to terminate the contract at issue in that case; correct?
A. That's correct.
Q. Now, let's look at that Report, and it's at Tab 15.
Exhibit Number RA-355.
ARBITRATOR DRYMER: Thank you.
BY MR. LLANO:
[Page 1939]
Q. Let's turn to paragraph 105, please.
A. Sorry, which paragraph?
Q. 105.
(Comments off microphone.)
MR. LLANO: 105.
BY MR. LLANO:
Q. Before we do that, just to confirm, Mr. Bullard, this is a Report that you submitted on July 22, 2011, in the Convial v. Perú matter; correct?
MR. RECENA COSTA: Sorry, this document is marked "confidential."
MR. LLANO: It is marked "confidential" by Perú. We don't mind sharing this information at this point.
THE WITNESS: Sorry, can you repeat your question, the date?
BY MR. LLANO:
Q. Yes. It is July 22, 2011.
A. Correct.
MR. RECENA COSTA: Sorry to interrupt again. So, the cover page to this document says it has been
[Page 1940]
designated confidential by Gramercy. So that's an inaccurate statement?
MR. LLANO: It is. It's an error.
MR. LLANO: Okay. I doubt that Gramercy cares about Mr. Bullard being in the Convial Case.
ARBITRATOR DRYMER: Okay. Which paragraph again?
MR. LLANO: 105.
BY MR. LLANO:
Q. Right. And you say in this case--I'm sorry--in this paragraph that the provincial municipality of Callao declared the termination of the Concession Contract.
Do you see that?
A. Yes.
Q. And then you quote the termination from the termination letter.
Do you see that?
A. Yes.
Q. And the entire quote--the entire analysis by the municipality of Callao is four paragraphs long.
Do you see that?
[Page 1941]
A. Yes.
Q. And in Paragraph 106, you say--and I'm translating freely at this point--you say: "As can be seen, the municipality decided to exercise its power to declare the termination of the Concession on the basis of public interest."
Do you see that?
A. Yes.
Q. And then on the next page, you consider adequacy, necessity, and proportionality, among other things?
Do you see that?
A. Correct.
Q. And these are the same three criteria that you considered in the case of the Supreme Decrees in your Report in this case, the Gramercy Case; correct?
A. That's correct.
Q. You concluded in the Convial Case that all of these three criteria were met; right?
A. That's correct, but it's a totally different situation. This is an act by the municipality where they terminated a contract. They are not subject to
[Page 1942]
all the rules that I have just explained. These rules are referred to regulations or "reglamentos," and they have to comply and (in Spanish) as some sort of a specific reglamentos, (in Spanish).
So, the standard is very clearly defined in that Peruvian law about that kind of facts that are object of my opinion, and it is totally different than this one, where you are exercising the power of the municipality to terminate a contract under--under a contractual clause like that was what happened here.
So, the analysis of interes publico is subject to what the contract defines or applied--the definition is applied--to the Contract, not to an act of Government or sovereign.
As a matter of fact, if I'm not wrong, in this case what happened is finally the Tribunal says that this is a contractual case, because it was not a sovereign act to terminate a contract.
Q. We'll see what the Tribunal said in a second, but before we get to that, you are discussing in your Gramercy Report--rather, in the Reports that
[Page 1943]
you submitted here in the Gramercy Case, you discuss the reasonableness principle; correct?
A. Yes.
Q. And the reasonableness principle is a principle that is driven by a number of different factors that you set out in your Report; correct?
A. That's correct.
Q. Right. And among those things are court decisions, INDECOPI awards, and the like; yes?
A. Yes.
Q. And these are not criteria that are defined in any statute in Perú; correct?
A. I understand your question. These are not--they are defined in anything--
Q. Statute, not an INDECOPI Decision or some other random award. I'm talking about a statute. You don't reference in your Report a statute--
A. Yes.
(Overlapping speakers.)
PRESIDENT FERNÁNDEZ ARMESTO: You are going very fast.
MR. LLANO: Well, we have very little time.
[Page 1944]
PRESIDENT FERNÁNDEZ ARMESTO: No, let's take as much time as you need. Let's go. "Haste makes waste."
Apparently, the correct way of saying what I said yesterday, the (in Spanish).
Let's go slowly.
THE WITNESS: Can you repeat your question because I think I missed--
PRESIDENT FERNÁNDEZ ARMESTO: I think the question was whether the standards of reasonableness are set forth in the law.
THE WITNESS: Yes, they are.
BY MR. LLANO:
Q. Where?
A. They are. There are different statutes that I quoted in my Report, in the Report in this case, related to my Opinion in this case.
Q. Yes. Okay. And we'll get to that. We'll get to that.
A. Okay.
Q. But for present purposes, let me just confirm with you that this analysis that you set out
[Page 1945]
at Paragraph 107 in your Convial opinion has to do with the issue of reasonableness; yes?
A. In this Report?
Q. Yes.
A. Yes. Yes.
Q. Good.
Now, you are aware that the Tribunal--the arbitral tribunal in that case agreed with you, agreed with your position in this paragraph; correct?
A. I understand that, yes.
Q. And agreed with the Republic of Perú; right?
A. Agreed in this case with the Republic of Perú, correct. Correct.
Q. Yes. Now, let's look at that. Let's go back to Tab 16.
A. I want to say something about that. They agreed with the standard I used for a contractual case in the analysis of the termination of the Contract under a contractual clause.
It is very different about what I was talking some minutes ago about the standard that is applicable to Peruvian regulations.
[Page 1946]
Q. Are you saying that the municipality of Callao could be any less reasonable than the Ministry of Economy and Finance in reaching its Decisions?
A. Reasonable depends on how you are exercising powers. In the case of giving regulation, those powers, have limited--limitation established in different statutes that are very specific about what you have to do. In this case, that kind of standard was not applicable.
Q. Okay. Let's go back to the Award, please.
A. Okay.
Q. It's Tab 16, and, again, this is RA-302. And I would like to direct you to Paragraph 617.
PRESIDENT FERNÁNDEZ ARMESTO: At the end.
BY MR. LLANO:
Q. It is on Page 178. Page 178. It's on the screen as well.
Now, I'll just read the first sentence. You can take a look at the rest afterwards: "In addition, this Tribunal emphasizes that the arbitrariness of an act of domestic law to reach the level of an international violation must affect both
[Page 1947]
the reasons that motivated the act as well as the procedures that were carried out to take it, and in the present case, it is proven that the declaration of termination was not taken arbitrarily."
Do you see that?
A. Yes.
Q. So the Tribunal agreed with the Republic of Perú, and with your Report, that that four-paragraph letter was sufficient to show that it had not acted arbitrarily; correct?
A. That's correct, but that do not mean that a four-paragraph document can be used to justify a Supreme Decree in Perú.
Q. Okay. Now, in Paragraph 618, the very next paragraph in the award--
ARBITRATOR DRYMER: Let me just ask you this question because clearly this is a family affair.
Both of you know--both of you know what happened in that case, but it's not apparent on the face of this particular--
PRESIDENT FERNÁNDEZ ARMESTO: And Professor Stern.
[Page 1948]
ARBITRATOR DRYMER: I mean--
PRESIDENT FERNÁNDEZ ARMESTO: This is a trio.
ARBITRATOR DRYMER: All right. You know the answer to this question. Was that the only evidence of the--that's sufficient to prove the reasonability?
MR. LLANO: More importantly, Mr. Drymer, the question is, is it the only evidence that Mr. Bullard relied on in making his conclusion in that Report?
ARBITRATOR DRYMER: But you're also referring us to the Award here, to standards which apparently have been--you're going to tell us have been applied elsewhere.
So, you can interpret my question any way you want. Was that the only evidence you're telling--that Mr. Bullard relied on? The only evidence before the Tribunal?
MR. LLANO: It was the justification that the municipality gave to terminate the Contract.
ARBITRATOR DRYMER: That four-paragraph reason (in Spanish)
[Page 1949]
MR. LLANO: Yes.
ARBITRATOR DRYMER: There was nothing else. Thank you.
BY MR. LLANO:
Q. All right. Good.
Now, in your Report, Mr. Bullard, you reference the July 2013 Constitutional Tribunal Decision; right?
A. You're going back to the Report in this case.
Q. We're back to the present, back to the future.
A. Okay. Perfect.
ARBITRATOR DRYMER: It's rare to see an Expert or any Witness being cross-examined with such a big smile on his face as he is in this case.
BY MR. LLANO:
Q. July 2013 Decision, you're familiar with it; right?
A. Yes.
Q. And, in fact, you include it as an exhibit to your Report; correct?
[Page 1950]
A. Yes.
0. Let's go to that document, please, sir, and it's at Tab 8.
(Comments off microphone.)
Q. Yes. It's C-17.
A. Tab 8.
Q. Yes.
A. Paragraph.
Q. Paragraph 19.
A. 19.
Q. Yes. And I think there's a translation here. Yes, there's a translation after the blue page, and I will read from the translation.
PRESIDENT FERNÁNDEZ ARMESTO: Let's try not to read, Dr. Llano.
BY MR. LLANO:
Q. Okay. Can you please read Paragraph 19 to yourself, Mr. Bullard.
A. I will read from the Spanish one also.
PRESIDENT FERNÁNDEZ ARMESTO: To yourself.
THE WITNESS: Yeah, by myself. Yeah.
BY MR. LLANO:
[Page 1951]
Q. Okay. Just to be complete, if you can look at the last sentence in Paragraph 17, it says--it's short, so I'll just read it. It says: "Instead, this Tribunal determined that the Constitution required a valuation and updated payment of a debt; even though it did not specify what the criterion was for determining said current value."
Okay?
A. Correct.
Q. So, the Constitutional Tribunal stated that the object of this Decision was to enforce the March 2001 judgment of the Constitutional Tribunal; correct?
A. That's what I say.
Q. And the Tribunal said that it, therefore, needed to establish the valuation and updated payment criteria for this debt; right?
A. Yes.
MR. RECENA COSTA: Objection. Mr. Bullard is not tendered as a Witness on civil law. Mario Castillo Freyre was here yesterday, so these questions should really have been directed to him, I
[Page 1952]
believe.
MR. LLANO: This is the support for the necessity of the Supreme Decrees. It is more than relevant.
PRESIDENT FERNÁNDEZ ARMESTO: But what is the question? I mean, we have all read a couple of times this auto. What is the question for Expert Bullard?
BY MR. LLANO:
Q. You're aware the Constitutional Tribunal in its analysis adopted a dollarization method; right?
A. Yes.
Q. And the Tribunal--the Constitutional Tribunal also directed the conversion of the unpaid principal into U.S. dollars; correct?
A. Yes, that's what it says.
Q. And that was as of the date of default on the payment of the coupons on the Bond; correct?
A. That's the text of the Decision, yes.
Q. And it also ordered the use of the interest rate in U.S. Treasury Bonds; correct?
A. Yes.
[Page 1953]
Q. And it ordered the Executive Branch within six months from the issuance of this ruling to issue a Supreme Decree governing the procedure for the registration, valuation, and payment of the Land Reform Debt Bonds; correct?
A. That's correct.
Q. And it ordered also obviously to comply with the parameters that were set out in the Decision in respect of the formula for valuation; correct?
A. Correct.
Q. That included dollarization as of the date of default--
PRESIDENT FERNÁNDEZ ARMESTO: Yes. Yes. We know it all by heart. What is the question for Dr. Bullard?
BY MR. LLANO:
Q. Yes. In Decree--Supreme Decree 242, 2017, that's the August 2017 Supreme Decree. You remember that?
A. I'm sorry. Can you repeat the number?
Q. 242.
A. 242. Yes, the last one, the TUA.
[Page 1954]
Q. The TUA.
A. Right.
Q. Of the four Supreme Decrees that you discuss in your Report, that is the only one that remains in force today; correct?
A. Correct.
Q. Now, you analyze the reasonableness of the Supreme Decrees under three tests: For adequacy, necessity, and proportionality; correct?
A. Correct.
Q. So, let's try very briefly to get to these tests, or at least to a few of them.
Now, you write--let's go to Paragraph 114 of your Report, Tab 1.
A. 114?
Q. Yes. Tab 1, Paragraph 114. For the record, this is where you describe the adequacy test.
Do you see that?
A. Yes.
Q. And I won't read that. I'm assuming that you know what the adequacy test is, but let's go to Paragraph 193.
[Page 1955]
A. 193. The same Report.
Q. Yes. And here you apply the adequacy test to Supreme Decree 242; yes?
A. Okay.
Q. And you write that: "The MEF failed to show how Supreme Decree 242 effectively contributed to solving the Agrarian debt issue."
Do you see that?
A. Yes.
Q. Now, the Constitutional Tribunal ordered payment to the Bondholders; correct?
A. That's correct.
Q. And we saw that it ordered dollarization.
But my next question to you is that you do not mention anywhere in your Report that the Constitutional Tribunal also included a requirement or an instruction to start dollarization from the date of the last coupon payment.
You did not mention this specific instruction in your Report; correct?
A. I don't remember, but I take your word.
Q. And you also do not mention anywhere in your
[Page 1956]
Report that the Constitutional Tribunal ordered the use of U.S. Treasury Bonds to assess interest. That particular instruction is nowhere to be found in your Report; correct?
A. I take your word.
Q. Now, I think this is obvious, but the MEF was required to comply with the Constitutional Tribunal ruling; right?
A. That's correct.
Q. So, it wasn't for the MEF to assess whether the Constitutional Tribunal's instructions contributed to solving the Agrarian debt issue; correct?
A. Of course, but that has to be done in a way that complies with what the Constitutional Tribunal has said and in a reasonable way under all the standards I have explained.
Q. Okay.
A. If you see, for example, that--you talk about the Bonds--sorry--the American Treasury Bonds. There is no selection in that decision of which one of that kind of Bonds will be used. What that means
[Page 1957]
is somebody has to take that decision. That decision is subject to, for example, the reasonable analysis. There is nothing about how you are going to balance the budget with the need to pay. Somebody has to say that. Who? That MEF. To which procedure? Through the procedure that I have just explained.
I don't say that they don't have to comply with what the Constitutional Tribunal said. What I'm saying is that to comply with that, they have to follow the procedure that is established in the law. For me, there are no main difference between giving a Supreme Decree in this case and giving a Supreme Decree to regulate what the law said, a law statute. There are gaps in the statute that have to be fulfilled by the Regulation, and to fulfill that gaps and to explain and to develop, you have to comply with the law, to comply with the rest of the legal order, and to apply the reasonable--the reasonability principle, together with the legality principle.
So, unless have you the capacity to--and I will use a word in Spanish because I don't know how to say it in English.--calcar (in Spanish), to make
[Page 1958]
up exact copy of that Constitutional Tribunal is the only way of saying something without taking all the words of the Constitutional Tribunal. Somebody have to fulfill, and that's the reason why the Constitutional Tribunal delegate to MEF to take all these Decisions.
Q. Now, you mentioned the term of the U.S. Treasury Bonds as an issue of concern. Any other issues that the MEF was charged with looking at that was under its own discretion?
A. The most important one is the formula. There is--I understand that there is a very general statement about what--how the dollarization has--they only talk about dollarization using an interest rate of the American Treasury Bonds. Nothing else.
If the Constitutional Tribunal had mentioned formula in the Decision and they copy the formula in the Supreme Decree, I have nothing to say that they cannot change the formula.
As a matter of fact, if they change the formula, they will break Peruvian law because they are breaking the interest that was defined by
[Page 1959]
Constitutional Tribunal, but that is not what happened in the case.
Q. I'm asking within the formula, within the formula, the formula incorporates dollarization and it also incorporates U.S. Treasury Bonds, yes?
A. Yes. But that's why you use reasonability.
Q. Yes.
A. Because reasonability means to use a formula that reasonably compensate, taking into account--according to the Constitutional Tribunal, taking into account that equilibrium in the budget. That's what I understand.
(Interruption.)
A. That equilibrium in the budget, in the Peruvian budget.
Q. Do you know how many Bondholders there exist that hold Land Bonds in Perú or outside of Perú?
A. No, I don't know.
Q. Right. And do you know what the outstanding value of such available Bonds might be?
A. No, I don't.
PRESIDENT FERNÁNDEZ ARMESTO: He would be a
[Page 1960]
magi if he knew that. Because we have been discussing this a week.
BY MR. LLANO:
Q. So, would we. So, would be the Republic of Perú, would be magi in order to guess that; right?
A. No. But there is a big difference, and the difference is that if you want to have an economic analysis, you can use different scenarios. You use the data that you have, and you can project different scenarios, and analyze each scenario, and say, well, this is reasonable, this is not reasonable, and try decide how you are going regulate that.
What you cannot do is go blind. You cannot, as a professor in the States say, in God we trust, but all others bring data. You need data and explain the data to show how it have to be complied with what the Decision of the Constitutional Tribunal said.
What I understand is what the reason that the Constitutional Tribunal did not put the formula here and did not give more details is because they don't have data. And the reason why they encharge the MEF to give the Supreme Decrees is because they
[Page 1961]
are expecting the MEF doing the work that they cannot do, and that's the reason.
It's a very strange Decision because they say that one of the Parties have to fulfill, which it has not been defined in the Decision. And that's another reason to think that it is very important to have a reasonable analysis and complying with all the rest of the Peruvian legal framework. So, reasonable in the analysis have to be achieved.
ARBITRATOR DRYMER: I think the original expression was, in God we trust, all others pay cash.
BY MR. LLANO:
Q. It wasn't for the MEF to say, for example, we need to assess whether dollarization will fairly compensate Bondholders; correct?
A. Sorry. I don't--
Q. It was not for the MEF to say, to analyze, to consider, we need to assess whether dollarization will fairly compensate the Bondholders because that was an instruction from the Constitutional Tribunal; correct?
A. No. But they were supposed to choose a
[Page 1962]
method of dollarization that is reasonable.
PRESIDENT FERNÁNDEZ ARMESTO: I think the position of the Expert is pretty clear. I mean, he says that--that certain Decisions should have been reasoned and explained that--which were adopted by the MEF in the Decree.
BY MR. LLANO:
Q. Right. And so let's go to that analysis by the MEF. All right.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah.
BY MR. LLANO:
Q. So--but before that, just one more point. Paragraph 197.
A. 197 of my Report.
Q. Yes. Yes.
PRESIDENT FERNÁNDEZ ARMESTO: Let's read it. We will read it each for oneself.
THE WITNESS: Yes.
BY MR. LLANO:
Q. So, here you apply the necessity test to the Supreme Decree 242; correct?
A. That's correct.
[Page 1963]
Q. And this section is three paragraphs long? Do you see that?
A. Yes.
Q. And you write: "The Peruvian Government failed to explain why the changes being implemented to the Bondholder Process are the most effective and least invasive regulatory option available to solve the Agrarian debt problem."
Do you see that?
A. Sorry. In which part?
Q. 197.
A. 197. Okay. Yeah.
PRESIDENT FERNÁNDEZ ARMESTO: What is your question?
BY MR. LLANO:
Q. Yes. So, this paragraph is referring to the point that you were making earlier about whether sufficient analysis was made of this issue; correct?
A. One part of the Decision.
Q. Right.
A. It is referred that you have to analyze on the options. It is not enough to make only a
[Page 1964]
cost-benefit analysis, showing that the benefit is over the Cost is not enough. You have to see for an option which has the less cost with the most benefits. So, for doing that, you have to analyze different possible alternative of the Decision that you are going to take.
Q. Understood. Now, in the very next paragraph, you mention one example of this concern that you have. You say, "for example."
PRESIDENT FERNÁNDEZ ARMESTO: We will read it.
MR. LLANO: Okay.
THE WITNESS: Yes.
BY MR. LLANO:
MR. LLANO: Yeah. So, you mention a new Parity Exchange Rate in this paragraph.
Do you see that?
A. Yes.
Q. And let's go to the document that you reference in this paragraph, which is Report Number 731.
A. Report.
[Page 1965]
Q. You see in the -in Paragraph 198, you reference a Report Number 731; right?
A. Yes.
Q. So, let's go to that. It's at Tab 10, and it is Document CE-631.
So, if you go to Page 5, you'll see that this document is signed by a lawyer; correct?
A. Javier Chocano.
Q. Yeah. And--
(Interruption.)
A. Javier Chocano. The answer is yes. Javier Chocano.
Q. And that person is a lawyer; right?
A. Yes.
Q. That that person is--belongs--sorry, to the MEF legal counsel's office; correct?
A. That's what I understand, yes.
Q. So, this is a legal Report; right?
A. Correct.
Q. And in your analysis of the--in the three-paragraph analysis of the necessity test, you did not mention the technical Report that underlies
[Page 1966]
that Decree; correct?
A. Sorry. Which technical Report?
Q. That's my question. That's my point.
A. Which technical Report?
Q. Let's go to that. Page 1 of the same document, there is a reference, it says "referencia."
Do you see that?
A. Sorry. I got lost.
Q. Same document. Page 1.
A. Oh, Page 1. Okay.
Q. And there is a "referencia."
Do you see that?
A. Yes.
Q. And that "referencia" cites to Report Number 124.
Do you see that?
A. Correct.
Q. And then Paragraph 1.1, just below that, also references that same Report.
A. Yes.
Q. And that Report, according to this paragraph, was issued by DGETP, which is the
[Page 1967]
Indebtedness Department of the MEF; right?
A. Correct.
Q. Let's go to that document. It's at the very next tab, Tab 11--
A. Yes.
Q. --and that is CE-630?
A. Yes. 6--that's before.
Q. Yeah. And if you go to the last page, which is Page 7 or so, you'll see that the document is signed by the Head of the Directorate of Indebtedness and Public Treasury.
Do you see that?
A. Correct.
Q. Mr. Valentin Cobeñas.
Do you see that?
A. Yes.
Q. Do you know him?
A. No.
Q. Okay.
A. No, I don't remember.
Q. Okay. So, paragraph--I'm sorry.
Page 3--Page 3, there is analysis.
[Page 1968]
Do you see that?
A. Page 3, I don't have the numbers of the pages here.
Q. Yeah, the third page of the document.
A. Analysis, yeah. Okay.
Q. Right. There's a heading entitled "analysis."
Do you see that?
A. Yes.
Q. And on the next page, the very next page, there's a Paragraph 3 (b).
Do you see that?
A. 3 (b). Yes.
Q. And it says: "The information for the updating of the BDA"--that is, the Agrarian debt Bonds--"include:"
Do you see?
A. Sorry, which paragraph?
Q. 3 (b)?
A. 3(b). Okay.
Q. "The information for the updating of the BDA includes."
[Page 1969]
Do you see?
A. Yes.
Q. And then the first item says that "the Parity Exchange Rate will be obtained from the Central Bank of Perú," and a website is provided.
Do you see that?
A. Yes.
Q. And this is the Parity Exchange Rate issue that you mentioned in your Report; right?
A. Yes.
Q. Now, you don't state in your Report what the nature is of the adjustment in the Parity Exchange Rate that is at issue in this Report and in Report 731 that we saw just now; right?
A. I don't issue that, because that's not something that I analyze. What I analyze here is that there were not other alternatives that were analyzed.
Q. Okay.
A. Because about the necessity principle means that you have to analyze different alternatives and not only mention alternatives, you have to analyze
[Page 1970]
each alternative, compare them, and explain why this one is better than this one, under which basis, in data, and in analytics of what we are--you're doing.
Q. Okay. Now, this Tribunal will consider whether the information that the MEF came up with was sufficient to justify its Decisions, but we'll leave it at that.
Do you see on the last page of the memo--I'm sorry, the Report, that there's an Aide Memoire?
A. Yes.
Q. "Ayuda memoria."
Do you see that?
A. That's correct. Sí.
Q. And Paragraph 5, second bullet, says: "The Parity Exchange Rate shall be obtained from the Central Bank source instead of the MEF calculation, as established in Annex 1 approved by Supreme Decree 017-2014."
Do you see that?
A. Yes.
MR. LLANO: There we go. Next. Next page there. There we go. So, Paragraph 5, second bullet,
[Page 1971]
Mark.
BY MR. LLANO:
MR. LLANO: Okay. Yeah. So, now that we got here, let's go back to Page 4 of the document, which was, again, the Paragraph 3 (b) that we were just looking at before.
A. Okay.
Q. And we were looking at 3(b) (i); right? Just now. And you'll see that there is a Footnote 10 right after that little (i); right?
A. It's a document that is on the screen? No.
Q. No. It's on your document. Page 4. We were looking at Paragraph 3 (b) earlier, in the main body of the Report?
A. In the--okay. Okay.
Q. 3(b), under 3(b), there's little (i).
A. Yes.
Q. At the end of that is a Footnote 10.
Do you see that?
A. Yes. Correct.
Q. And Footnote 10--
PRESIDENT FERNÁNDEZ ARMESTO: We have read
[Page 1972]
that.
MR. LLANO: You have read that.
PRESIDENT FERNÁNDEZ ARMESTO: Dr. Bullard is reading it right now.
MR. LLANO: Good.
THE WITNESS: The footnote.
BY MR. LLANO:
Q. Yeah. Please.
A. Yes.
Q. And you'll see that there's a reference to the Central Bank; right?
A. There is a reference to the Central Bank, correct.
Q. And to the functions of the Central Bank; right?
A. Yes.
Q. And it has been deemed pertinent to clarify the source for the Parity Exchange Rate.
Do you see that?
A. Yes.
Q. So, in fact, are you aware, Mr. Bullard, that the Report that you reference in Paragraph 198
[Page 1973]
of your Report, the Report 731, let's call it, was not talking about, as you put it, a "new Parity Exchange Rate." It was talking about a simple switch in the source of the rate to the Central Bank data.
Were you aware of that?
A. That's correct, but without any explanation of that cost benefit of shifting that to another rate.
Q. Right. So, before--are you aware that before this switch, the prior MEF Decree was relying on MEF data as the source for the Parity Exchange Rate? Were you aware of that?
A. No.
Q. And now, as of this Report, it's relying on Central Bank data, because the Central Bank is the independent, autonomous, regionally renowned institution that preserves monetary stability and provides transparent information.
Do you disagree with that statement?
A. I don't disagree with that statement, but I don't know if that is enough to make a cost-benefit analysis and to decide which of the option is the
[Page 1974]
better one. You cannot--you have only to give some reason. You have to give a reason that proves that the Decision is reasonable.
So, in my--in my point of view, the switch is not explained without detailed explanation of why you switch. It is only the reference that this maybe is a better one, but there is no explanation of why these options or other options can be better.
Q. Okay. But, just to confirm, you hadn't seen this document before I showed it to you just now; right?
A. No. I have--yeah, I have read this document.
Q. But you don't cite it in your analysis of the necessity test; right?
(Overlapping speakers.)
Q. You do not cite to this document in your three-paragraph analysis of the necessity test in connection with Supreme Decree 242; correct?
A. I read the whole support, and I don't find what I mention in the end of that paragraph, developing any of the Reports, that are in this part.
[Page 1975]
Q. It's a simple yes-or-no question, sir.
In the three paragraphs, where you analyze the necessity test for Supreme Decree 242, you do not reference these pages that I've just showed you; right?
A. I don't reference, but I analyze them.
Q. Okay. Now--
PRESIDENT FERNÁNDEZ ARMESTO: These are the Reports which form part of the file for approval of the TUA?
THE WITNESS: Every one of the four Supreme Decrees has a file with different documents. This is the one of the third one.
PRESIDENT FERNÁNDEZ ARMESTO: Very good.
BY MR. LLANO:
Q. Okay. Now, I'd like to just add one more piece that I think is relevant to this discussion.
PRESIDENT FERNÁNDEZ ARMESTO: Yes. And you must--I mean.
MR. LLANO: Five minutes, sir.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah.
MR. LLANO: Five minutes.
[Page 1976]
PRESIDENT FERNÁNDEZ ARMESTO: The "potato-sack situation" is approaching.
MR. LLANO: Five minutes.
BY MR. LLANO:
Q. Tab 12.
PRESIDENT FERNÁNDEZ ARMESTO: Yes.
BY MR. LLANO:
Q. Tab 12 is R-1072. And--
A. Yes.
Q. And within 1072, you'll see that there are a number of PDFs, and I am referring to the PDF entitled ROP034572.
PRESIDENT FERNÁNDEZ ARMESTO: We have seen that.
MR. LLANO: Yes.
PRESIDENT FERNÁNDEZ ARMESTO: It was somehow difficult to find. I'll rely on the screen.
BY MR. LLANO:
MR. LLANO: Okay. So, on the first page of Tab 12, Mr. Bullard, you can see that this is Supreme Decree 242; right?
A. Correct.
[Page 1977]
Q. And it is dated August 18, 2017; correct?
A. Correct.
Q. And behind the Decree are supporting materials. You can flip through and check it out.
A. Yes.
Q. And the whole document--I represent to you, the whole PDF is 77 pages long.
Do you accept my representation?
A. The whole? 70.
Q. 77.
A. 77. Yeah, it looks right.
Q. And, in fact, Gramercy's counsel showed parts of this document to Ms. Sotelo the other day.
Do you recall that?
A. I don't remember--yeah, I think so. I'm not sure, I wasn't in the room at that moment, but I think I have seen that.
Q. And I'll just rattle this off because it's simple, and we can finish here.
You do not mention the letter from the MEF to the Central Bank; right?
A. I don't mention it, yeah.
[Page 1978]
Q. You don't mention the Response from the Central Bank to the MEF; right?
A. No.
Q. You don't mention the Technical Report that incorporates the Central Bank formula; right?
A. Correct.
Q. You don't mention the formula and the discussion of the formula in that Technical Report; right?
PRESIDENT FERNÁNDEZ ARMESTO: Wait. One second. Because this is important. This is the documents which were exhibited in the document production stage?
MR. LLANO: Correct.
PRESIDENT FERNÁNDEZ ARMESTO: But I have a question for Dr. Bullard. And we have seen here the letter to the Central Bank, and then the answer from the Central Bank, and we went at some length through all the charts from the Central Bank and the formula.
And are these documents, which we have seen here, are they in the file of the Royal Decree? Do you see my point? My question.
[Page 1979]
THE WITNESS: Yes. What I have to see, and I don't remember, I have in my Appendix what I understand was the file.
PRESIDENT FERNÁNDEZ ARMESTO: Yes.
THE WITNESS: To be honest, there are some documents that I have never seen before, so I'm not sure if they were part of the file. That's what I--what I have, what I receive and what I make--for making my analysis, it include not all these documents. I don't remember these documents with all these numbers. I don't remember the chart at the end. I understand that--I check what was supposed to be a file that was used to analyze the Supreme Decree before its annulment.
PRESIDENT FERNÁNDEZ ARMESTO: Then I am slightly lost. Because if we are to analyze the reasonability or--of the Royal Decree of the--Supreme Decree, you must look at all the documents in the file because maybe in the seventh document there is a memorandum which justifies why they are switching from one type of Parity Exchange Rate to another type of Parity Exchange Rate.
[Page 1980]
I mean, you can only evaluate the reasonability and the correctness of the legislative procedure if you really review the whole file.
THE WITNESS: Well, what I see here are some documents at the end with data, with--what I don't see is how this data was used to justify the Supreme Decree.
What I read in that Report, that I have check, is that there are not specific mention to many of these Reports. There was no mention to this one, to this one, to this one, that are at the end. So, I assume that they were not evaluated, or were discarded because they don't think they are relevant.
What I read are what the Reports mention. And what the Report mention do not contain the kind of analyses that I assume has to be made to have this Supreme Decree approved.
MR. LLANO: I have a practical suggestion, Mr. President.
PRESIDENT FERNÁNDEZ ARMESTO: Yes.
MR. LLANO: I would like to, simply in the interest of time, invite the Tribunal to read for
[Page 1981]
itself this document and see the progression of how one document leads to the next, the next, to the next, to the formula. I think that would be a more practical way of going about this then doing it through--doing it through--
PRESIDENT FERNÁNDEZ ARMESTO: Yeah, yeah, yeah. I just want to understand the following. In Page 28 of your presentation today, Dr. Bullard.
THE WITNESS: 28 of my presentation.
PRESIDENT FERNÁNDEZ ARMESTO: You presented this chart.
THE WITNESS: Yeah, correct.
PRESIDENT FERNÁNDEZ ARMESTO: And in this chart you said, that is the complete File 4. One Supreme Decree and for the other Supreme Decree. One for the 2014, and one for the 2017, and you said--I have just taken the first and the last.
Do you remember?
THE WITNESS: That's correct.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. And my question to you is reasonably simple. Have you--is this the complete file? Or was the--did the official
[Page 1982]
file comprise more documents?
THE WITNESS: These are the documents that I understand were part of the file. The complete file.
PRESIDENT FERNÁNDEZ ARMESTO: No, that's not my question.
THE WITNESS: The complete file. That's what I understand when I check it.
PRESIDENT FERNÁNDEZ ARMESTO: That isn't. Wait. That is--you said this is your professional Opinion is that this is the complete file?
THE WITNESS: Correct.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. And now my next question is, you have reviewed every single document in that complete file?
THE WITNESS: Of all the documents quoted here, I check every one.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. And is the letter, for example, the letter we saw to the governor of the Reserve Bank, and the answer from the Central Bank, are they in these files?
THE WITNESS: I don't think so. I don't think so. The letter is not.
[Page 1983]
PRESIDENT FERNÁNDEZ ARMESTO: Okay.
(Interruption.)
MR. LLANO: Can I make a quick point of order?
PRESIDENT FERNÁNDEZ ARMESTO: Of course. Of course, of course.
MR. LLANO: So, I think it will assist the Tribunal to--again, and I apologize for reiterating, this is Document R-1072.
ARBITRATOR DRYMER: Yes.
MR. LLANO: And within R-1072, this is ROP034--
PRESIDENT FERNÁNDEZ ARMESTO: Wait, wait, wait. You must--ROP--
MR. LLANO: 034.
PRESIDENT FERNÁNDEZ ARMESTO: 034.
MR. LLANO: 572.
PRESIDENT FERNÁNDEZ ARMESTO: 572. And this is what?
MR. LLANO: And this is the complete file for Supreme Decree 242, including its backup.
PRESIDENT FERNÁNDEZ ARMESTO: Okay.
[Page 1984]
Because--and let me understand. This was a document production exercise?
MR. LLANO: Correct.
PRESIDENT FERNÁNDEZ ARMESTO: And the document production exercise was that you--that the whole official file in the Ministry of Economy and Finance.
MR. LLANO: The Republic of Perú, as part of its document production effort, produced this document in its document production prior to Mr. Bullard's Report.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. So, your point is that for any analysis of reasonability of cost-benefit analysis or proportionality, one has to look at the complete file.
MR. LLANO: This is--Sure. Yes. Yes. And this is the official file for that purpose.
PRESIDENT FERNÁNDEZ ARMESTO: And it has more documents than the files referred to by Dr. Bullard on Page 28?
MR. LLANO: Absolutely.
PRESIDENT FERNÁNDEZ ARMESTO: What do you
[Page 1985]
have to say, Mr. Bullard?
THE WITNESS: What I received is a file that contains the documents.
(Interruption.)
THE WITNESS: When I received--I received the documents, not all the documents. I received the documents, that Report that I mention here in my presentation, as the file that is used to support that. What I find in that file are the Reports, mainly the Reports that are mentioned here, the Project of the Supreme Decree, the exposicion de motivos (in Spanish), what is mentioned there, and the ayuda memoria (in Spanish). That's what I received, and my understanding and my analysis was on the basis of that.
What I understand is that all these documents are some kind of Appendix. I don't see analysis here. I mainly see--I don't know. I'm only checking in general. There is a chart with comparing text, but I don't know if there is some analysis there. What I saw is this initial file. I made my analysis. I read the Reports. I tried to find the
[Page 1986]
Reports where the analysis is, and I didn't find the analysis for most of the points that I think are relevant.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you. Thank you, Dr. Llano.
ARBITRATOR DRYMER: Just again, just on that point so that I understand, the tenor of your Report is that there might be a thousand pages of relevant evidence, but what you were looking for is an explanation by the MEF regarding--
THE WITNESS: That's--
ARBITRATOR DRYMER: --these various criteria--
THE WITNESS: That's correct.
ARBITRATOR DRYMER: --reasonability, necessity, proportionality--
THE WITNESS: That's correct.
ARBITRATOR DRYMER: Thank you.
THE WITNESS: We only have to trust in data.
ARBITRATOR DRYMER: Yes.
THE WITNESS: We have to process the data, analyze the data, and develop conclusions that are
[Page 1987]
consistent with necessity, adequacy, and proportionality using the data. So, having data is not enough. You need data, plus analysis following the steps that I have described.
PRESIDENT FERNÁNDEZ ARMESTO: Very good.
MR. LLANO: I had one more.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. It's the last question, please.
MR. LLANO: No, I just wanted to note.
PRESIDENT FERNÁNDEZ ARMESTO: I thought you had finished.
MR. LLANO: Thank you, Mr. President. I have no further questions on the understanding that there are multiple documents in relation to this Decree that Mr. Bullard never saw. In fact, he said there are some documents I have never seen before. And on that basis I pass the Witness. Thank you.
PRESIDENT FERNÁNDEZ ARMESTO: Dr. Costa.
MR. RECENA COSTA: Thank you, Mr. President.
REDIRECT EXAMINATION
BY MR. RECENA COSTA:
Q. Professor Bullard, can we go to
[Page 1988]
Paragraphs 197 to 199 of your Report. You recall that you were taken there by my learned friend.
A. Yes. 197.
Q. 197.
A. I will go to the Spanish version--English version. Okay. I'm there.
Q. And opposing counsel suggested to you that you had never looked at what is marked in this binder that was given to us as Tab 11 or CE-630; is that right?
A. That's right. That's what he suggested.
Q. Can you let us know which document is cited in Footnote 184 or your Report.
A. 1184. Yeah, CE-630.
MR. LLANO: I object because that's not the premise of my question. My question was whether that document was cited in connection with the specific paragraphs that I referenced as part of the one of the tests that Mr. Bullard performed. Not whether he had ever looked at a certain document. Whether that document was referenced in connection with his laconic analysis of that particular test. That was
[Page 1989]
my question. So I object to the premise of the question. Thank you.
PRESIDENT FERNÁNDEZ ARMESTO: Let's go on.
BY MR. RECENA COSTA:
Q. Can we take a look now at Slide 28 of your presentation, please?
PRESIDENT FERNÁNDEZ ARMESTO: Yes.
BY MR. RECENA COSTA:
Q. And you'll see that there is--there are two charts, so to speak. Can you explain to us what your understanding of those two charts is?
A. These charts are all the documents that I think are relevant in terms of analysis to understand if that Peruvian law was compliant in respect to legality and reasonable analysis. The Reports in the first case, they are the copy of a Supreme Decree, the ayuda memoria, the exposicion de motivos, and in the other one, the two Reports, the Supreme Decree, the exposicion de motivos, and the ayuda memoria.
Q. Okay. Can you read for us the identification of this exhibit, please?
A. They are down in the--
[Page 1990]
Q. I mean in the square itself. There is--
A. Ah, oh, yeah. R-317 and R-359.
Q. Okay. Does this suggest to you which Party produced this?
A. Yes.
MR. LLANO: Objection.
(Comments off microphone.)
PRESIDENT FERNÁNDEZ ARMESTO: He let him, yes. At 7:20 of the evening, Professor Bullard is excused if he did not catch that an "R" is from the Republic, especially if he has on other occasions acted as Expert for the Republic.
BY MR. RECENA COSTA:
Q. With your permission, Mr. President, can I also ask that we look at Ms. Sotelo's Statement, the First Statement at Paragraph 39, please?
MR. LLANO: Objection.
PRESIDENT FERNÁNDEZ ARMESTO: Oh, come on. Please, please, please, please, Dr. Llano. Let's finish this.
You want to go which place, please?
MR. RECENA COSTA: It's Paragraph 39 of
[Page 1991]
Ms. Sotelo's First Witness Statement, Mr. President.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. Why don't you blow it up?
THE WITNESS: Yeah, because I cannot read from here.
(Comments off microphone.)
MR. RECENA COSTA: Sir, can you blow up Paragraph 39, if we can.
MR. LLANO: Mr. President, what's going on here? Mr. President, it was suggested--
PRESIDENT FERNÁNDEZ ARMESTO: Let's hear the question, please. We don't even know the question. Please.
MR. LLANO: I never showed this document, Ms. Sotelo's testimony.
PRESIDENT FERNÁNDEZ ARMESTO: I know.
MR. RECENA COSTA: It was suggested to the Witness that he's reviewed an incomplete record. We want to establish where the record that the Witness reviewed came from.
MR. LLANO: It's simple. We gave him more documents.
[Page 1992]
PRESIDENT FERNÁNDEZ ARMESTO: Wait, wait. Please, Dr. Llano.
Dr. Costa, do put your question.
BY MR. RECENA COSTA:
Q. Professor Bullard, I invite you to read this paragraph and then comment on this paragraph, please.
A. Okay.
PRESIDENT FERNÁNDEZ ARMESTO: Annex 86. Let's not make it more complicated than it is.
It is your representation that Annex 86 are the same documents which appear here?
MR. RECENA COSTA: Exactly, Mr. President.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. We have to clarify that.
Wait a second, Dr. Llano, because we--to extract this information through the Witness is too complicated.
Your point is that the Vice Minister had an Annex 86, que es el registro del Decreto Supremo, and that registro --your representation is that that it includes these documents.
MR. RECENA COSTA: It not only includes, but
[Page 1993]
it is exactly that exhibit, Mr. President.
PRESIDENT FERNÁNDEZ ARMESTO: It is exactly that exhibit.
MR. RECENA COSTA: Yes. That is what--
ARBITRATOR DRYMER: That's a representation.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. A representation.
MR. RECENA COSTA: Subject to confirmation by my learned friend.
MR. LLANO: This is the point. This is creating confusion now, and instead of clarifying a point--
MR. HAMILTON: I'm sorry. I'm sorry, Mr. President.
PRESIDENT FERNÁNDEZ ARMESTO: No. No. Dr. Llano has the floor, Dr. Hamilton. And Dr. Llano will finalize this cross-examination.
MR. LLANO: Mr. President, I have to reiterate my objection here because the point is these documents were produced as part of Perú's document production effort and were not referenced in full by Mr. Bullard. And it--to cite random exhibit
[Page 1994]
numbers and suggesting that that is somehow not true is incorrect. The Tribunal must consider what these particular documents that are listed in Slide 28 are and compare that to the exhibit that I showed to Mr. Bullard, and you will see that there are differences. There are many pages in this document that Mr. Bullard does not refer to or has never seen.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. But so that we have the precise references, we now know where these documents come from. Your point is that in R-1072, ROP034572, which is the document production exhibit, that there are a fuller, a more extensive version of the file.
MR. LLANO: Yes. And to just explain the chronology, we gave documents, and then we gave more, and Mr. Bullard did not cite to the "more" part.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah. Okay. Very good.
MR. RECENA COSTA: Mr. President, just for the record--
PRESIDENT FERNÁNDEZ ARMESTO: Yes.
MR. RECENA COSTA: --I would ask for the
[Page 1995]
opposing counsel to confirm that this is the full record that was certified by Ms. Sotelo.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah, we'll leave this all for argument and we'll see--I understand now where Mr. Bullard's file comes from, which you say is from the Vice Minister, and what you say is that there are additional documents. There is evidently additional documents because we have now established that, for example, the letter to the Central Bank is not in the file which was presented to Dr. Bullard but is in the other documents. There may be other documents because if this is--it must be a very, very big file, and that's as far as we can go on a Wednesday at 7:30 p.m., having started at 9:00 a.m., with one hour for break.
So, with this, Dr. Costa, you have--you look at me as if you wanted to say something. It's the last.
MR. RECENA COSTA: I wish to ask just one final question of the Witness, if I may.
PRESIDENT FERNÁNDEZ ARMESTO: Okay, the very last.
[Page 1996]
BY MR. RECENA COSTA:
Q. And you remember you were shown Tab 12 in this binder that we received. I would ask you to flip with me to the Bates Number which is ROP034625.
A. Okay. The last numbers are?
Q. The last numbers are 625. So 34625.
PRESIDENT FERNÁNDEZ ARMESTO: Will you please blow that up, if you can.
THE WITNESS: Okay. The letter.
BY MR. RECENA COSTA:
Q. Yes, yes, it's a letter.
A. Okay.
Q. May I invite you just to take a few seconds to read this letter.
A. Okay.
Q. Now that you have seen this document, in your opinion, does it comply with the standards under Peruvian law for reasonableness and legality?
A. By itself, no. It needs to have some kind of additional information and analysis in the context of all the other documents.
PRESIDENT FERNÁNDEZ ARMESTO: I think,
[Page 1997]
Dr. Costa, we are potato sacks.
MR. RECENA COSTA: Thank you, Mr. President.
No further questions.
PRESIDENT FERNÁNDEZ ARMESTO: We will have to leave this for argument after the Hearing. Thank you. Thank you, Dr. Costa.
Very good. Dr. Bullard, thank you very much.
With this, thank you very much to our Court Reporters and Interpreters. And tomorrow, half past 9:00, or do you prefer 9:00?
(Comments off microphone.)
PRESIDENT FERNÁNDEZ ARMESTO: 9:00, and we must be more--thank you, Mr. Bullard.
(Witness steps down.)
(Whereupon, at 7:29 p.m., the Hearing was adjourned until 9:00 a.m. the following day.)
[Page 1998]
CERTIFICATE OF REPORTER
I, Dawn K. Larson, RDR-CRR, Court Reporter, do hereby certify that the foregoing proceedings were stenographically recorded by me and thereafter reduced to typewritten form by computer-assisted transcription under my direction and supervision; and that the foregoing transcript is a true and accurate record of the proceedings.
I further certify that I am neither counsel for, related to, nor employed by any of the parties to this action in this proceeding, nor financially or otherwise interested in the outcome of this litigation.
Signature
Dawn K. Larson
[Page 1999]
INTERNATIONAL CENTRE FOR THE SETTLEMENT OF INVESTMENT DISPUTES
-x
In the matter of Arbitration :
between: :
:
GRAMERCY FUNDS MANAGEMENT LLC AND :
GRAMERCY PERU HOLDINGS LLC, :
:
Claimants, : ICSID Case No.
: UNCT/18/2
and :
:
REPUBLIC OF PERÚ, :
:
Respondent. :
-x Volume 6
HEARING ON JURISDICTION, MERITS AND QUANTUM
Thursday, February 13, 2020
The World Bank Group
1225 Connecticut Avenue, N.W.
C Building
Conference Room C1-450
Washington, D.C.
The hearing in the above-entitled matter came on at 9:00 a.m. before:
PROFESSOR JUAN FERNÁNDEZ ARMESTO, President
MR. STEPHEN L. DRYMER, Co-Arbitrator
PROFESSOR BRIGITTE STERN, Co-Arbitrator
In the case of discrepancy, the audio recording in the original language will prevail.
[Page 2000]
ALSO PRESENT:
On behalf of ICSID:
MS. MARISA PLANELLS-VALERO
Secretary of the Tribunal
MS. KRYSTLE M. BAPTISTA
Assistant to the President of the Tribunal
Realtime Stenographers:
MS. DAWN K. LARSON
Registered Diplomate Reporter (RDR)
Certified Realtime Reporter (CRR)
B&B Reporters
529 14th Street, S.E.
Washington, D.C. 20003
United States of America
[email protected]
MR. PAUL PELISSIER
MR. DIONISIO RINALDI
D.R. Esteno
Colombres 566
Buenos Aires 1218ABE
Argentina
(5411) 4957-0083
Interpreters:
MS. SILVIA COLLA
MR. DANIEL GIGLIO
MR. CHARLES ROBERTS
[Page 2001]
APPEARANCES:
On behalf of the Claimant:
MR. MARK W. FRIEDMAN
MS. INA C. POPOVA
MR. CARL RIEHL
MS. FLORIANE LAVAUD
MS. BERGLIND HALLDORSDOTTIR BIRKLAND
MR. GUILHERME RECENA COSTA
MS. SARAH LEE
MR. DUNCAN PICKARD
MR. JULIO RIVERA RIOS
MS. MARY GRACE MCEVOY
MR. THOMAS G. MCINTYRE
Debevoise & Plimpton, LLP
919 Third Avenue
New York, New York 10022
United States of America
MR. LUIS BEDOYA
MR. FRANCISCO CARDENAS PANTOJA
Rodrigo, Elias & Medrano
Av. San Felipe 758
Jesús María
Lima 15072
Perú
Representing Gramercy Funds Management LLC:
MR. JAMES TAYLOR
MR. JOSHUA M. O'MELIA
MR. NICK PAOLAZZI
MR. THOMAS NORGAARD
[Page 2002]
APPEARANCES: (Continued)
On behalf of the Respondent:
AMBASSADOR HUGO DE ZELA
Republic of Perú
MR. RICARDO AMPUERO
Republic of Perú
MS. MONICA GUERRERO
Republic of Perú
MS. GIOVANNA ZANELLI
Republic of Perú
MR. ALBERTO HART
Republic of Perú
MR. JONATHAN C. HAMILTON
MS. ANDREA MENAKER
MR. RAFAEL LLANO
MR. FRANCISCO JIJÓN
MR. JONATHAN ULRICH
MR. FRANK PANOPOULOS
MR. JOHN DALEBROUX
MR. ALEJANDRO MARTINEZ DE HOZ
White & Case LLP
701 Thirteenth Street, NW
Washington, D.C. 20005-3807
United States of America
[Page 2003]
For the United States of America:
MS. LISA GROSH
MS. NICOLE THORNTON
MS. MARGARET SEDGEWICK
MR. JOHN DALEY
Attorney-Advisers
Office of International Claims and
Investment Disputes
Office of the Legal Adviser
U.S. Department of State
Suite 203, South Building
2430 E Street, N.W.
Washington, D.C. 20037-2800
United States of America
MS. AMY COLLINS
U.S. Department of Treasury
[Page 2004]
C O N T E N T S
PAGE
WITNESSES:
OSWALDO HUNDSKOPF
Direct examination by Mr. Jijón. ... 2006
Direct presentation. ... 2011
Questions from the Tribunal ... 2033
Cross-examination by Ms. Popova. ... 2037
Redirect examination by Mr. Jijón ... 2074
EDUARDO GARCÍA-GODOS
Direct examination by Mr. Jijón. ... 2077
Direct presentation. ... 2078
Cross-examination by Mr. Recena Costa. ... 2098
Redirect examination by Mr. Jijón. ... 2156
NORBERT WÜHLER
Direct examination by Mr. Hamilton. ... 2168
Direct presentation. ... 2168
Cross-examination by Ms. Lavaud. ... 2199
Redirect examination by Mr. Hamilton. ... 2259
PABLO GUIDOTTI
Direct examination by Mr. Hamilton. ... 2271
Direct presentation. ... 2271
Cross-examination by Mr. Friedman. ... 2293
Redirect examination by Mr. Hamilton. ... 2329
[Page 2005]
P R O C E E D I N G S
PRESIDENT FERNÁNDEZ ARMESTO: Good morning, everyone.
We begin this sixth day of Hearings in the Arbitration between Gramercy Funds Management LLC and Gramercy Perú Holdings LLC against the Republic of Perú.
And we do so, if there is no point of order. Mr. Friedman, nothing?
MR. FRIEDMAN: We can proceed. Thank you, Mr. President.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you.
And Mr. Hamilton?
MR. HAMILTON: Ready to proceed as well.
PRESIDENT FERNÁNDEZ ARMESTO: Very well.
Then we welcome Professor Hundskopf.
OSWALDO HUNDSKOPF, RESPONDENT'S WITNESS, CALLED
PRESIDENT FERNÁNDEZ ARMESTO: How are you, sir? I see you are already standing up.
We can all stand up, and if you would be so kind as to read out the declaration.
THE WITNESS: Thank you.
[Page 2006]
My name is Oswaldo Hundskopf, and I solemnly declare, upon my honor and conscience, that my statement will be in accordance with my sincere belief.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you very much, Professor Hundskopf. You are here as an Expert on behalf of the Republic of Perú, and I give Mr. Hamilton or Mr. Llano--no, it will be Mr. Jijón. It is Mr. Jijón who will put some initial questions to you.
MR. JIJÓN: Thank you very much, Mr. President, Members of the Tribunal.
DIRECT EXAMINATION
BY MR. JIJÓN:
Q. Good morning, Professor Hundskopf.
A. Good morning.
Q. First of all, could you briefly summarize for us your professional and academic history or background?
A. Yes, I'd be pleased to do. Soon it will be 48 years since I've been working as a lawyer. I have had the opportunity, the good luck, of studying at the
[Page 2007]
Universidad Católica, which is a major private university in Perú, the leading one at the time. I had class with many persons who were children of persons who'd been expropriated. This is an experience that I had at a very young age when I began university.
As a student--after being a student, I joined the largest corporate group. It was 44 companies from different economic sectors, and we underwent several expropriations: Of course, the agrarian expropriation in 1969; then the expropriation of fisheries in 1963; the expropriation of newspapers in 1974; and of one more sector in 1975. This is an experience that I had in Perú, because I began to work as an attorney. I was selected through a process, and I worked until 1992. This was an excellent opportunity, in addition to teaching in the university, because I had an opportunity, through an agreement that this group had with a son, to undertake a master's degree in foreign trade, a master's degree in law, and then a doctorate in law.
In addition, in the 1990s, when arbitration
[Page 2008]
began to develop in Perú with the special law, I had the opportunity to be a member of the first list of Arbitrators at the Arbitration Center of the Chamber of Commerce of Lima. At this time, I belonged to all--or rather, to the eight most important arbitration institutions in the country.
To summarize and conclude, notwithstanding this combination, which has made it possible for me to be a part of many working committees that have drawn applause, such as the Law on the Securities Commission, the Law on Incorporations, framework for business, and many others--and that was another law--despite having had many offers to serve in political positions, I never accepted such offers, because I prefer to maintain my independence and my professional practice combined with the academic world. And I never accepted a political position, though I have been close to many authorities for, obviously, professional reasons having to do with consulting and advising.
Thank you.
Q. Thank you very much, Professor Hundskopf.
[Page 2009]
And I'm calling you Professor Hundskopf, and you just mentioned the academic world. Could you briefly tell us what your academic history has been?
A. Yes. In 1974, Carlos Neuhaus stepped down for health reasons at the University of Lima, and his course was open. They were looking for a professor. I was quite young, and I had already graduated, and so I took it on. I began--that began the 45 years that I worked at the University of Lima.
At the same time, I was offered to join the Graduate School of San Marcos as a professor, where I worked for 15 years. It's a very large public university. And now that I've retired from the University of Lima, because unfortunately there a statute whose Rule 41 says that at age 70, one must step down or retire, my good fortune is that I had two significant offers to serve as Dean or Director of Master's Programs at other private universities.
Q. Thank you, Professor Hundskopf. And simply to clarify, I understand that you were Dean at the University of Lima?
A. For 14 years.
[Page 2010]
Q. What does that entail?
A. Dean is basically an academic position. In my case--well, this is what the authorities understood--I had to be there from 8:00 a.m. to 1:00 p.m., basically to look at the structuring of programs of study, selection of professors, development of the courses, and so on.
But the Rector gave me to understand--well, understood that I had a law firm and that I was engaged in professional practice and that I could not abandon that. So, I was never full-time in academia. I've always combined the two activities.
Q. Thank you very much. And one final question with respect to experience.
In your Report, I see that you say you are a member of--a full member of the Peruvian Academy of Law. What does it mean to be a full member?
A. Well, there are 30 who are called "miembros de número," or full members according to the statute of the academy, and, of course, there must be a proposal put forward and supported by five members of the academy. It is a very difficult, demanding
[Page 2011]
process. Everyone aspires to that, and clearly, from an academic standpoint, it is very gratifying.
And one of the reasons that comes into play a great deal is not only--they take into account not only one's teaching work, but also one's written work. I have had the opportunity to be the author of 23 books. Some are, say, a manual of corporate law in five different traditions.
Q. Thank you very much. I understand that you've prepared a presentation for the Tribunal.
A. Yes. No doubt about it. I simply wanted to say that I've been invited to prepare a report, 14 December 2018. I delivered it 14 months ago, in December--September 2019. These are two complete Reports that are in the record before the Distinguished Members of the Tribunal and everyone.
Nonetheless, since it is a very lengthy Report in the two parts, I have made a very brief presentation with respect to Agrarian Bonds.
DIRECT PRESENTATION
THE WITNESS: For me, it's important to clarify with respect to Legislative Degree 17716 of
[Page 2012]
1969, which was issued as one of the most important laws of the Peruvian military Government that was in place from 1968 to 1980, the main obligation was compensation for land expropriations.
These are not the first expropriations. The military Government came in in 1968, expropriating the refineries and the oil companies, IPC especially. The compensation was paid by distributing Agrarian Bonds.
Of course there was a process with respect to each of the properties, especially in the coast, excepting Casa Grande, which covered jungle regions, but there was anywhere from 50 hectares to 50,000 hectares. We're talking about 20,000 properties, and clearly it was a complicated process in which one had to designate an evaluation committee or assessment committee with respect to each property, and then, of course, issue the Bonds, and--as a final phase, after Ministerial Resolution.
Evidently, in the cases that I've become familiar with, the process takes one, two, three, or four years. I have persons very close to me who have received the Bonds in 1972 and 1973, and as
[Page 2013]
payment--final payment of the valuation, well, this was a debt and as a result of the Agrarian Reform. There were annual obligations. Once you knew the amount, you had to take Series A, Series B, or Series C. A was 20 years, B was 25 years, and C was 30 years. A, 6 percent interest, B with 5 percent annual interest, and Series C with 4 percent annual interest.
But the important thing is that the Bonds are constituted not only by the nominal amount, which could be 10,000, 20,000, 30,000, up to 500,000 soles, because, if my memory serves me well, some had coupons that would mature annually, and each coupon would incorporate the value that resulted from the division plus the interest rate, 6 percent, 5 percent, or 4 percent. It was a very large document. I have seen any number of such documents.
And the State had the obligation to pay each coupon on the maturity date. So, here, it's not a question of one having to pay the entirety of the Fair Market Price at the moment of the valuation or the payment of the debt. No, each coupon had to be paid
[Page 2014]
on its maturity date. And the maturities were annual.
Yesterday I had the opportunity to hear the presentation by Alfredo Bullard, a friend and colleague, who referred to a contract for assignment of rights related to the Bond. I don't want to explain the origin or the history of the Agrarian Development Bank. What is important is that the original Bonds of 1969 were personal obligations that were nontransferable. The Decree-Law 22749 which made the Bonds really transferable required that they be registered with the Bank of Agricultural Development, paid in 1992, which created--which was liquidated in 1992, which created the uncertainty. There's a very--assignment to contract cited by Bullard shows that it was not guaranteed that one could collect the payments for the goods, which is to say--or the property, which is to say the Bonds.
No, it's the possibility of collecting compensation stemming from this property constitutes an expectative right whose maturization is on account of and at the risk of the assignee.
So, what does this mean? It's a gamble.
[Page 2015]
It's an option. It is something that could be remotely possible, even. So, it is not like the circulation of securities in general. And in that regard, I want to be very clear. In Law 16587 of '67, there's two Articles. One is Article 210, which clearly says that securities issued by the State are governed by their own laws, and on a complementary basis by the law on the securities.
PRESIDENT FERNÁNDEZ ARMESTO: Excuse me, Professor, but you are being interpreted into English, and you are going very quickly.
THE WITNESS: Thank you very much. I apologize for that. I have tried to stay calm.
This presentation leads me to analyze the two securities laws that have been in force in the country.
PRESIDENT FERNÁNDEZ ARMESTO: Let me ask you a question, because I'm getting a bit lost, Professor. Is it your Opinion that the Peruvian State did not have an obligation to pay these Bonds and that it was an option? You use the word "option," clearly. So, did you understand that there was not an
[Page 2016]
obligation on the Peruvian State to pay?
THE WITNESS: No. Perhaps the word "option" was not the most accurate, and I apologize. I'd like to withdraw that.
Actually, it is no doubt an obligation of the State to pay the Bonds. There is no doubt about it. There is on obligation of the State to pay the Bonds, independent of the prior valuation that had been done of the properties.
And, recapitulating the legislative history, Decree-Law 22749, which is the second securities law of 2000, says in Article 275 that the securities issued by the central Government are governed by their own laws and--in all aspects not covered by the Law on Securities, which means that the Agrarian Reform Bonds are unique, exceptional securities. They are unique and they are exceptional.
PRESIDENT FERNÁNDEZ ARMESTO: But they are securities. And on a subsidiary basis, they are subject to the Law on Securities.
THE WITNESS: Exactly.
PRESIDENT FERNÁNDEZ ARMESTO: And you said
[Page 2017]
that there have been two securities laws?
THE WITNESS: Yes. One of 1967, which is 16587, which was in force--obviously, when the Agrarian Reform Law was issued in 1969, it was the applicable law. But later, there's an Article 210 that says that Bonds or securities issued by the Peruvian State evidently are governed by their own laws and, on a supplementary basis, by the securities law.
Same happens with Law 22287, the law of 2000, which--that is Article 275. It has three Articles that refer to those Bonds. It says the same thing, that the special provisions in respect of each of the Bonds apply, and, on a supplemental basis, the securities law.
PRESIDENT FERNÁNDEZ ARMESTO: Very well. Thank you very much.
THE WITNESS: Now, in the next overhead, I'm going to refer to the judgment of the Constitutional Court of 2001. Now, I want to clarify: This is the only Judgment, because the 2013 one is an order of enforcement of this Judgment.
[Page 2018]
This pronouncement by the CT began with a proceeding brought by the College of Engineers in 1986, and there was a great deal of uncertainty about the criteria to be used. That is why the Resolution of 2001, the Judgment of 2001, is so important. It constitutes the legal instrument of the greatest importance that inspires all others of lesser rank, which confirms that having used Agrarian Bonds as a means of payment was not unconstitutional. Quite to the contrary, it was perfectly constitutional and compatible with the 1933 Constitution at that time. When the Agrarian Reform law was handed down, the Constitution of 1933 was in force. It was then replaced in 1979, and subsequently in 1993, the one that is currently in force. I don't want to make a comparison as between them. The important thing is to refer to the 1933 Constitution. The ruling by the Constitutional Court found unconstitutional a claim that sought to have a nominal payment made by--because it granted inalterable treatment, unattached to the circumstances of time.
Well, that Judgment did not establish--and I
[Page 2019]
put this in my Report--how to determine the current value; for example, to apply a particular index or the data of which it should be updated. It doesn't say so, nor does it say with respect to a payment criterion--it didn't refer to the payment procedure.
So, I believe that the 2001 Judgment being of singular importance because it is the highest-level organ for interpretation of Peruvian legislation, well, the starting point after the Constitution for--in the whole legal structure, there's a lack of certainty, clarity, and precision. In my view, there is no legal provision that establishes that one must use solely and exclusively the Consumer Price Index for updating these obligations.
The current value principle is not a synonym of CPI. It does not mean that one must exclusively use the CPI. The Civil Code refers to the theory of current value in Article 1235. The title of the article says "valuation theory," "teoria valorista," which mentions different indicators, indices that are automatically adjusted set by the Central Bank, other currencies, or other merchandise.
[Page 2020]
Now, Article 1236 does not refer to indicators, nor does it keep the judge from deciding what is the appropriate indicator. In general, one could say that the current value theory is not 1234; rather, it is 1235 and 1236.
The 2001 Judgment, well, nor does it state the date as of which one should calculate the updated value of the Agrarian Bonds, leaving it open that--the possibility of choosing different dates. Now, this is one of the most important aspects of the 2001 Judgment that should be highlighted, because, obviously, there were different dates. The date of issue of the Bonds, the date of payment of the last Bond, the date of payment of the totality of the Bonds; there are all these different possibilities.
Foundation 25 of the 2013 rulings, which I will refer to subsequently, does say that it is to calculated from the last moment the last annual coupon ceased to be paid.
PRESIDENT FERNÁNDEZ ARMESTO: Who was president in 2001?
THE WITNESS: The President of Perú in 2000
[Page 2021]
was the third reelection of President Fujimori, and that was very much called into question. And then there was a whole scandal that I don't want to get into, but then there was a transition Government that began in November of 2000, and it led up to the 2001 elections. It was President Valentín Paniagua, the Caretaker-President.
PRESIDENT FERNÁNDEZ ARMESTO: So, when the Constitutional Tribunal handed down this Judgment, there was a transition administration?
THE WITNESS: Yes, March of 2001. Elections had been called, and then President Alejandro Toledo was elected in 2001.
PRESIDENT FERNÁNDEZ ARMESTO: One question, Professor: You were in academia at that time. What was the reaction on the part of the legal world when this Judgment was handed down? Was it a secondary issue that wasn't much discussed in society, or was it very much debated in society? Were there different political positions in respect of it? Tell me a bit about the sociology of the decision of the Constitutional Tribunal.
[Page 2022]
THE WITNESS: It's an excellent question, sir, and it will enable me to clarify that in the 1980s, from '80 to '85, the President was Belaúnde, and then in the last years, there was hyperinflation that reached 7,000 percent. The juncture, the economic and financial circumstances, were very difficult.
In 1990, President Fujimori came in to office. On 5 February 1992, he dissolved Congress. He convened a Constitutional Assembly which drew up the 1993 Constitution, and it's a very good regime--well, the good years were 1992 to 1997. And then from '97 to 2000, once again there were difficulties, various situations leading the situation in Perú to be very complicated; so much so that there was a debate about the famous reelection, whether Fujimori could or could not be reelected, and he ran for reelection. In my opinion he should not have done so, but he did so, and unfortunately, this brought about a major problem.
PRESIDENT FERNÁNDEZ ARMESTO: But with respect--no, but I was asking about the sociology
[Page 2023]
behind the Decision; in other words, how many landowners were expropriated?
THE WITNESS: I could not tell you an exact number, but around 20,000.
PRESIDENT FERNÁNDEZ ARMESTO: 20,000. And were they a pressure group? Were they protesting because their Bonds had been rendered worthless? Was it a peaceful situation? Was there--were there writings in the university circles? How did the legal doctrine come into play? The social background behind the Decision of the Constitutional Tribunal. First, the College of Engineers that raised the Constitutionality of this provision, upholding principle of nominal value, and then the position of the Constitutional Tribunal saying, "No, you have to apply the current value principle."
THE WITNESS: Thank you very much. In effect, in 1996, the College of Engineers brought the constitutional challenge. There was a new Constitutional Tribunal with a 1993 Constitution.
PRESIDENT FERNÁNDEZ ARMESTO: So, it took five years? From the time the legal action was
[Page 2024]
brought and the Judgment handed down, five years elapsed?
THE WITNESS: Yes. And from the 1969 Law, well, you can imagine--so many years that went by from '69 to '96. On the part of the persons who had been expropriated, there were many differences. Some were very obedient and submissive and they went through the procedures. Others raised issues. The Agrarian Tribunal, well, it no longer existed in Perú, but there one could go and call into question the valuation that was initially assigned.
So, some took their Bonds, picked them up in a timely fashion, within two, three, or four years, and I would say, with all due respect, there were some persons who never came and actually collected their Bond, never had their Bond.
PRESIDENT FERNÁNDEZ ARMESTO: And the Fujimori administration, in general, what was its position vis-à-vis this social problem? Was it one of maintaining the nominalist criterion, seek a solution? What was the political backdrop?
THE WITNESS: I think the 1984 Civil Code,
[Page 2025]
while in contrast to other provisions in other countries and the 1936 Code, well, as of 1980, there was a lot of talk about the current value principle in Perú, but there was no interpretation or--specific interpretation or application, and the opportunity to do so that was so great was the Agrarian Reform Bonds, which affected so many families. Who were the persons impacted? Individuals, successions--that is to say, heirs--or groups, partnerships of persons which had developed at that time, and the assignees, those who acquired the Bonds, that persons could do that as of 1979. But the discrepancies as of 1996 were of such a magnitude and the criteria were very much at odds with one another.
So, one could find rulings in one direction and in another, and I can say this based on my professional experience and supporting friends of mine who were not attorneys, and who nonetheless--well, and understood that there was definitely a problem. And so, the Judgment of the 2001 was of singular importance, because it incorporated the current value principle.
[Page 2026]
PRESIDENT FERNÁNDEZ ARMESTO: Very well. Thank you.
So, let's go to the ruling of 2013.
THE WITNESS: The Constitutional Tribunal determined that the 2001 Resolution does not specify what the criterion is for determining said valuation, and that, with the purpose of making possible implementation of the Judgment of 15 March 2001 and of actually making effective the obligation of the Peruvian State to pay the Agrarian Reform Debt, this Tribunal proceeded to establish the criterion of valuization and updated payment of the debt, as well as the procedure that the Executive should follow in order to make said payment effective.
I would like to highlight the case that led to this. It came from the same College of Engineers. It was 0022 of 1996. Now, the Constitutional Tribunal examined various methods for updating, all of them potentially valid, and concluded that one should use the dollarization method. That was the criterion imposed by the Order of 2013. The Decision of the Constitutional Tribunal is also based on the fact that
[Page 2027]
the method for conversion to dollars had its legal foundation in Emergency Decree 088 of 2000, and because other methods would entail grave impacts on the budget of the Republic. It is totally true that, in the wake of the development of the analysis that I had the opportunity to do of the 29 Foundations of the 2013 Order, I do--I noted that one takes into account as a basis for the Decision on dollarization a number of circumstances having to do.
PRESIDENT FERNÁNDEZ ARMESTO: If you could just go back a moment, please, to 6, this. Let's talk a little bit about the Emergency Decree of the year 2000. This is an Emergency Decree issued by the Fujimori administration?
THE WITNESS: Yes.
PRESIDENT FERNÁNDEZ ARMESTO: And it was handed down when the remedy pursued by the College of Engineers had already been in process or before the courts for four years?
THE WITNESS: Four years.
PRESIDENT FERNÁNDEZ ARMESTO: Would you say it was an effort on the part of the Fujimori
[Page 2028]
administration using an exceptional instrument, which is the Emergency Decree, to resolve this social problem?
THE WITNESS: Yes, that is right, sir. It was an effort; moreover, I know there's a history. President Fujimori was an agrarian engineer. He had been the President of Agrarian University, and he was very close to the issue. So, no doubt whatsoever, in one way or another he supported this initiative.
But I believe the issue went to sleep--that is to say, it wasn't implemented as it should have been done. Had that been done, then the 2001 Decision would not have been necessary.
PRESIDENT FERNÁNDEZ ARMESTO: So, the 2001 Decision ended up supplementing, so it was another basis.
Now, on this I would like to ask you here in this order handed down by the Constitutional Tribunal--you're very familiar with it?
THE WITNESS: Yes.
PRESIDENT FERNÁNDEZ ARMESTO: It analyzes various valuation systems, and it goes with
[Page 2029]
dollarization. Is there some other example in Peruvian law where the current value principle has been applied through the dollarization method, or is this an exceptional situation, and it has only happened with respect to the Agrarian Bonds?
THE WITNESS: Well, the analysis in the ruling includes different options, including, for example, the Consumer Price Index adjusted; yes, the family income, the impact on the budget.
PRESIDENT FERNÁNDEZ ARMESTO: But that's not my question. My question is--there must have been many situations in which this problem of hyperinflation has affected different persons' legal situations.
My question for you is the following: In this case Agrarian Bonds, did--the Constitutional Tribunal went with the method of dollarization. My question is: Are there other situation, other examples, where either the law or the courts have opted to apply the current value principle using dollarization?
THE WITNESS: Yes. If memory serves, in
[Page 2030]
2004, there was a Supreme Decree, and there were rulings by the Supreme Court that referred to the implication of dollarization as a method. There were so many cases, so many, and the rulings were so contradictory that it was necessary that--
PRESIDENT FERNÁNDEZ ARMESTO: You're not understanding what I'm asking, sir.
Excuse me. Excuse me for one moment. I forgot to turn this off. Yesterday, Mr. Hamilton had this issue, and now I have it.
Okay. My question is the following: We've seen that one of the ways in which we could apply the current value theory is the Consumer Price Index?
THE WITNESS: Yes.
PRESIDENT FERNÁNDEZ ARMESTO: And the other one is the adjusted Consumer Price Index.
THE WITNESS: Yes.
PRESIDENT FERNÁNDEZ ARMESTO: And the other one is dollarization. It is clear that the Constitutional Tribunal, in connection with the Land Bonds, said that they opted for the dollarization.
THE WITNESS: Yes, dollarization.
[Page 2031]
PRESIDENT FERNÁNDEZ ARMESTO: And, for example, in the case of urban leases or in the case of other matters in Peruvian law--I don't know about Peruvian law, you know it. But are there any other situations where the method to apply the current value theory was dollarization, or is dollarization only applicable in the realm of Land Bonds?
THE WITNESS: My personal opinion is that the Application and interpretation of 1235 of the Civil Code applies to all sectors, all activities, and there have been rulings, legal provisions that make reference to this, in one case dollarization, and the other cases in connection with the Consumer Price Index. So, there was a dispute. There was a little bit of a lack of settlement in this case. So, this didn't really have to do exclusively with the Land Reform. This was a general problem in Perú. The problem in Perú is multisectoral.
In connection with ruling of 2013 by the Constitutional Tribunal, there is a procedure for the updated payment. In this case, a Tribunal said that it is necessary to establish the procedure for the
[Page 2032]
payment of the land debt, and this must be established by the Executive. And a Supreme Decree needs to be issued regulating the procedure for registration, updating, and a payment form of the debt within the six months from this ruling.
Unlike the 2001 Ruling, this made it possible for the MEF to establish a payment procedure administratively. So, when the Constitutional Tribunal opted for dollarization, it said that dollarization had to be applied but also how it had to be applied.
So, there were studies that the Justices had at hand. They looked at them, and there were reasons in connection with financial equilibrium, budget balance, et cetera. So, from 26 to 29, the procedure is established, and it talks about the same terms that are included in the Supreme Decrees: Five years at a maximum, and then two years to obtain the valuation updating, and then eight years to collect on the debt. And then the Order offers alternatives. The most important thing, I think, is that it sets aside and rejects a new valuation of the lands, and that's very
[Page 2033]
important. This is Article 1 of the 2013 Ruling.
And, Number 2, we have dollarization, and the criteria for dollarization, and the most important thing is Article 3 that establishes the mechanism to be applied. And this establishes the guidelines set forth in the Supreme Decrees, and then we have a consolidative text of Decree 242 of 2017.
PRESIDENT FERNÁNDEZ ARMESTO: Very well. Thank you very much, Professor.
Mr. Jijón, any other questions--Mr. Drymer has a question, Professor Hundskopf.
ARBITRATOR DRYMER: Thank you, Professor.
QUESTIONS FROM THE TRIBUNAL
ARBITRATOR DRYMER: I'll speak English so I won't butcher the language of Cervantes.
On Slide 7, your last point, the second point on Slide 7, well, it says what it says. I won't read it. But it suggests that it was only in 2013, not in 2001, that the Ministry of Economy was enabled, "habilito," to establish a payment process. Is it your Opinion that the 2001 Decision of the Constitutional Tribunal did not empower the Ministry
[Page 2034]
to establish a procedure for payment?
THE WITNESS: Yes. With respect, I'm quite critical of the 2001 Ruling because it includes in its Resolution Foundation 6 and now Foundation 7. I think that the good thing about this ruling is that it established the guidelines, the mechanisms, procedures and timelines and the stages--specifically, the stages--registration, authentication, the Technical Experts' Opinion so that the MEF by different legal processes could put this into practice. And this had not happened in the 2001 Ruling.
ARBITRATOR DRYMER: With apologies, I won't stay long on this, but, perhaps, it's a translation issue or at least an understanding issue for me.
PRESIDENT FERNÁNDEZ ARMESTO: Can I clarify the question.
ARBITRATOR DRYMER: Please do. Please do.
PRESIDENT FERNÁNDEZ ARMESTO: Let me ask you because I know what Mr. Drymer is asking, and sometimes things are lost in translation.
One of the things that we have examined is the following: We have the 2001 Ruling, and it
[Page 2035]
entailed a development. There was a law that was drafted, but it was never passed in Congress?
THE WITNESS: Yes, there were bills, sir. Yes, there were bills.
PRESIDENT FERNÁNDEZ ARMESTO: Now, when you have a ruling, a 2013 Ruling, well, this is put into practice via a Supreme Decree. This means that no Congress action is necessary. My question, or, rather Mr. Drymer's question--my Co-Arbitrator--is the following: Couldn't we have passed a Supreme Decree in 2002, 2003, 2004, to implement the criteria put forth by the 2001 Judgment by the Constitutional Tribunal?
THE WITNESS: Your question is very interesting, but the breadth of the current value theory is so large that it admits a number of methodologies. A Supreme Decree is a lower-ranking provision, so what we needed was an enforcement judgment by the Constitutional Tribunal because this had to do with constitutional development of this judgment at that level, at the constitutional level, meaning at the Constitutional Tribunal level. I don't
[Page 2036]
think we could have done this via a Supreme Decree.
ARBITRATOR DRYMER: Right. And so, when you say in Slide 7 that (la diferencia de la sentencia) unlike in the 2001 Ruling, the 2013 Order "auto habilito", enabled the Ministry to act. I think you're--enabled the Ministry to act. It facilitated the Ministry's action. It didn't empower the Ministry to act.
The Ministry was equally empowered after the 2001 Decision; is that correct?
THE WITNESS: Yes. I insist. The 2001 Ruling was good, but it had legal lacuna. It had things that were not precise.
ARBITRATOR DRYMER: Thank you.
PRESIDENT FERNÁNDEZ ARMESTO: Very good. Mr. Jijón.
MR. JIJÓN: Thank you very much, Mr. President. We have no further questions at this time.
PRESIDENT FERNÁNDEZ ARMESTO: Very well. Mr. Costa, Ms. Popova, Mr. Friedman.
MR. FRIEDMAN: Ms. Popova. You will be glad
[Page 2037]
to know that Ms. Popova will be handling this Witness since it will be in Spanish.
PRESIDENT FERNÁNDEZ ARMESTO: Muy bien. Ms. Popova, you have the floor.
MS. POPOVA: Thank you, Mr. President.
CROSS-EXAMINATION
BY MS. POPOVA:
Q. Good morning, Professor Hundskopf.
I introduced myself before. I am representing Gramercy. I am Ms. Popova, and I'm going to have the honor of asking a number of questions on the Reports that you submitted and the Statements that you have made this morning.
I wanted to start by saying that you talked about your long academic experience. You said, in particular, that you had the opportunity of authoring 23 books and also some university courses that you took, and if I understand correctly, some of these books had to do with Constitutional Law; right?
A. Well, actually, if you allow me to answer the question, my books had to do with business law and corporate law.
[Page 2038]
Q. Of course, many of the issues have constitutional implications.
A. Yes, certainly. And I do mention this. There is a compendium of core decisions of the recordation court, where a number of issues are dealt with that have a constitutional impact. Many of the books are compilations of articles that have been published periodically in a number of journals in the University of Lima and in the Legal Gazette. Many have legal connotations.
Q. And have you ever taught a course in civil law and the law of obligations?
A. Well, in San Martín de Porres University, in 2019, I taught a course on the basis of private contracts. That was the first time that I left my specialty, which is corporate law, and I have taught that for a number of years, for many years. But because of my master's and the doctorate, I had the opportunity to study those issues and to participate in a number of events. I have been invited to the University of Buenos Aires at the master's level, to the University of Callao, and I have done lectures on
[Page 2039]
civil law.
Q. I'm not going to ask you to drop away from your area of expertise, but I'm going to ask you, the Land Bonds are securities; correct?
A. They are monetary securities--they are securities, yes, they are securities.
Q. And specifically, they are nominative securities.
A. Yes, that's right.
Q. You said this morning that one had to choose the Bonds, A, B, or C. There were three classes: Class A, Class B, Class C. Perhaps, your Statement was not quite precise because these Bonds had to be accepted compulsorily; correct?
A. Undoubtedly yes. The Bonds, as a means of payment, as an instrument of payment, yes.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. We are going to move ahead much faster. Please answer the question asked. It was posed by counsel. Because if we don't do that, we are going to be here for a long time.
THE WITNESS: Yes, of course, I will.
[Page 2040]
PRESIDENT FERNÁNDEZ ARMESTO: Don't forget that we have read your Reports and we know your--
THE WITNESS: Yes. It was a decision to opt for one of these classes: Class A, Class B, or Class C. It's a decision.
BY MS. POPOVA:
Q. You maintain that it is a decision of the party expropriated to opt for each one of these classes, A, B, or C?
A. Well, the Bonds that I have seen are 25-year bonds, Class C Bonds.
Q. You know that according to the Agrarian law, the different class of Bonds corresponded not to an option by the expropriated Party but the kind of land expropriated?
A. I am not sure about that, Counsel, with respect. The expropriated lands were rural lands or agricultural lands and they were located at different places and they were under different conditions and situations, so much so that--
PRESIDENT FERNÁNDEZ ARMESTO: Professor. Professor, excuse me for the interruption. We are
[Page 2041]
pressed for time, so what counsel is telling you--and that was my understanding as well--was that the determination of whether the Bonds were A, B, or C was not based on the option by the expropriated Party but the quality of the lands.
THE WITNESS: Personally I don't think so, sir.
BY MS. POPOVA:
Q. You have not read Article 167 of the Agrarian law.
A. I have followed a number of procedures, and I have had the opportunity to submit pleadings, and the aggrieved Party decides to opt for Class A, B, or C.
Q. Do you agree with me that the different classes of Bonds had to do with the productivity of the expropriated lands. You talked about the quality of the lands. Isn't it true that the more productive lands were compensated with Class A Bonds. Class A Bonds have the largest interest rates, and the lands that were of lower value were compensated with Class C Bonds?
A. In the cases that I have gained knowledge of,
[Page 2042]
the aggrieved Party had a plot of land that had a number of different kinds of land, excellent plots of lands, intermediate plots of lands, and low quality plots of lands. So, how can you give someone land like this if you think (in Spanish) haciendas like that?
How can you give a bond to people like that?
Q. You can do that by applying Article 177 of the Agrarian law. We can move on.
I understand that you are not familiar with that Article?
A. I am familiar with that Article.
MR. JIJÓN: We don't need that kind of comment and lack of respect of the Expert.
PRESIDENT FERNÁNDEZ ARMESTO: All right. Let's move on.
BY MS. POPOVA:
Q. Of course, I did not want to disrespect you in any way, Professor.
All right. Let's move on then.
(Comments off the record.)
Q. Let us go back to your area of expertise,
[Page 2043]
which is securities law. You agree with me that nominative securities law are transferred via an assignment of rights?
A. Yes.
Q. In your Reports, you talk about the legal framework applicable to these kinds of securities, specifically in connection with the transfer of Land Bonds; correct?
A. Yes.
Q. However, you do not issue any opinion in connection with the validity of the purchase of the Land Bonds by Gramercy?
A. That specific question was never posed to me.
Q. You never looked at the contracts whereby Gramercy acquired its Land Bonds.
A. I have had the greatest amount of information possible, and, undoubtedly, I have seen the evolution of the guarantees that one must have when one acquires Bonds, and this changes with time in Perú.
Now, the transfer has to identify the assignor and the assignee. Now, if there is reference to a registry or not, that's not important because the
[Page 2044]
most important thing here are the assignor and the assignee.
Q. One of the pieces of information that you've had is the Report by Dr. Bullard?
A. Yes.
Q. And you know that Mr. Bullard opined on the legal framework for the transfers and also for the application of that legal framework to the specific contracts that Gramercy entered into; correct?
A. Yes.
Q. But you issue no opinion in connection with this second point. You have not reviewed the contracts?
A. Yes. Yes. And I saw that in the presentation, and in my second slide, I talk about the clause related to the assignment of rights.
PRESIDENT FERNÁNDEZ ARMESTO: I think, Professor, what counsel is asking is whether you have any doubts that Gramercy is the legitimate acquirer of the securities.
THE WITNESS: I would have no doubts if there is an assignment of rights where the assignor and the
[Page 2045]
assignee are identified. Then I would have to doubts whatsoever.
BY MS. POPOVA:
Q. Thank you.
But instead of that, what you say in your Reports is that in 2006 there was uncertainty in connection with whether the Land Bonds could be validly transferred under Peruvian law; correct? That's what you say in your Reports.
A. Well, I'm not saying sure I'm saying that in those terms. One thing is a transfer that can be registered and then--well, we're not saying that a transfer in Perú constitutes rights. It is simply declaratory in nature. If I were the lawyer for Gramercy or any acquirer, any legal or juridical person, I would say, well, we need, of course, a Notary's deed, an authenticated signature, et cetera, but there was no specific registry at the time. It existed until 1992, but then there was none. The best way to do this was by doing this via a public deed for the assignment of rights. I agree with Mr. Bullard 100 percent in connection with that.
[Page 2046]
Q. One of the things you say in your Reports to support this opinion in the sense that there was uncertainty in connection with this matter is that the Land Bonds were obligations that were in express consideration of the person, intuitu personae?
A. The Bonds?
Q. Yes.
A. At the beginning?
Q. Yes.
A. When the expropriation took place in '69, yes, they were nontransferable securities.
Q. When you say at beginning they were, are you maintaining that the Land Bonds were intuitu personae obligations?
A. Until what time?
Q. Until 1979.
A. Okay. Each aggrieved Party, each one of the aggrieved Parties, received an official letter with a certain valuation and all the facilities needed to be extended to them. Personally, I'm saying that the relationship was an intuitu personae relationship, the aggrieved Party versus the State. It was an
[Page 2047]
obligation in express consideration of the person, and they received the Bonds in accordance with a certain procedure that they had to follow.
Q. Your conclusion is, then, that the obligation under the Land Bond was in the hands of the State?
A. Yes. The State was a debtor. The State had to pay.
Q. Oh, okay. The Statement was a debtor, and you maintain that the obligation by the State to pay as a debtor was an obligation that was intuitu personae?
A. Yes, until 1979, with the original aggrieved Party because these Bonds were nontransferable.
Q. When you say that this was an obligation in express consideration of the person, intuitu personae by nature, how was it possible that in the Constitution of July '79 declared that they were fully transferable?
A. Well, there was a transitory provision of the Constitution?
Q. Are you making reference to the Decree of November '79?
[Page 2048]
A. Yes. That was taken up by the Constitution of '79.
Q. This was a few months after the July Constitution?
A. Well, the July Constitution came into force in November, more or less about that time. What I'm saying is that the situation and the development of the country evolved notably. The military dictatorship was coming to an end, and I'm not going to give you details, but the situation of the country was very difficult.
Q. What I meant is that starting in 1979--
A. Yeah, '79.
Q. --the Bonds had no limitation whatsoever or any kind of agreement-related issue to transfer their property?
A. When they say that they are freely transferable, no limitations exist.
Q. Now, you mentioned this before. An assignment in 2006 of Land Bonds would be invalid because it couldn't have been registered with the Agrarian Bank.
[Page 2049]
Have you maintained that?
A. I have never said that ever. It is not invalid. It creates uncertainties. That's a very different thing. It creates an expectative right whether payment will be given or not, but I never said that its invalid.
Q. Okay. As you mentioned, the formalities in connection with registration are basically declaratory in nature, and they don't constitute rights. You did not identify any regulation in Peruvian law that requires the registration of the assignment of Land Bonds?
A. Specifically, no. There is none?
Q. There is no provision in the Peruvian law that says if there is no registration, the assignment would be invalid; right?
A. That's right. That doesn't exist. It is a risk that is run by the acquirer. It has to do with an investment and that he or she makes with other certainty of collecting anything. This is an expectative right. I said that.
Now, if we are talking about speculation of
[Page 2050]
securities, what you're doing is that you are purchasing something without knowing what you are going to recover, five times more or five times less. It is a risk-related investment.
Q. In that regard, that is not different from another securities.
A. Of course not.
Q. Now, Professor, you cite a number of authors in connection with the nominalistic and current value principle in Peruvian law. I have read all of them. They were very interesting. Thank you. One of the authors that you cited is Professor Mario Castillo; correct?
A. Yes, of course. And also Mr. Díaz Picaso. He's the most important for me.
Q. Well, perhaps, we disagree in this connection, but he also read the Report of former Justice Revoredo; correct?
A. Yes.
Q. She also cited Professor Osterling and Castillo in connection with the meaning of the current value principle; correct?
[Page 2051]
A. Yes.
Q. And also the Supreme Court of Perú. It has also cited Osterling and Castillo in connection with the meaning of the current value principle; correct?
A. Felipe Osterling, who was a very dear friend and a professor of two courses as well, he was the Chairman of the Commission in charge of reforming the Civil Code. Who better than him than to make comments in connection with the draft civil law process?
So, Mr. Castillo came to the University of Lima as a professor of the law on obligations. He was also the professor of law on obligations for 14 years when I was there.
Q. Okay. Perfect. But in your Report, you opine that Professor Castillo, who taught class at your university, is mistaken in connection with the whole theoretical construct applicable to Agrarian Bonds?
A. In my opinion, and with all respect to Professor Castillo--we have participated together in a number of academic events--I think he considers that the current value principle is synonymous with the
[Page 2052]
Consumer Price Index. And that's a mistake.
0. You also think, if I'm not mistaken--because you mentioned this--that the Land Bonds are a monetary debt?
A. They are a monetary debt because of the ruling of 2001, and the current value theory applies to them.
Q. In your opinion, because of their very nature, Land Bonds, are they subject to a nominalistic principle or not?
A. They were originally, but starting in 2001, no longer. In 2001, the current value theory applies to them.
Q. And, according to you, it is not related to their nature but because the Constitutional Tribunal ruled so?
A. Yes. That's right. Undoubtedly.
Q. But you consider that was a mistake.
A. What I do consider that's a mistake is to say that the current value theory is synonymous with the Consumer Price Index.
Q. I'm asking you something else. The CT made a
[Page 2053]
mistake, you think, in 2001, when it ruled that the Land Bonds are obligations of value?
A. No, not at all. I think that was correct. I think the country needed that kind of ruling.
PRESIDENT FERNÁNDEZ ARMESTO: So, it was a necessity given historical need for those people that have been expropriated?
THE WITNESS: Yes.
BY MS. POPOVA:
Q. And in spite of the fact that in your own opinion they should be debts of value.
A. But, once again, there have been four subsequent currencies. There was a devaluation, hyperinflation, and we had a combination of very serious events, so there was a need to assess the budgetary economic fiscal issues.
Q. And is that the reason why you think that your Judgment of 2001, the Constitutional Tribunal, based their Decision on equity and not on right or law?
A. Well, I think that there was a convergence of different factors, in the sense of justice based on
[Page 2054]
the famous compensation. The Bondholders had to be compensated in a way that they could actually recover value, and I don't think it was a mistake, and I think that--I think I have even said this in writing, that the Resolution of 2001, even though they didn't do it technically fine, because it is not indicated under the Resolution, but it is indicated under the "whereas" clauses.
PRESIDENT FERNÁNDEZ ARMESTO: So, if I bought a bond in 2002, would you agree with me the expectative right as a buyer, it would be clear to me that the Peruvian Government had the obligation to pay 400 soles oro of the principal for each of the coupons, two, that that figure needs to be subject to the current value theory based on a criterion that is not clear but it has to be readjusted based on the current value theory. Those two concepts were clear.
THE WITNESS: Yes.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you, Professor.
BY MS. POPOVA:
Q. So when you--rather, let me ask you this way.
[Page 2055]
Do you consider that this judgment of the CT in 2001 is not based on a specific legal standard but on equity considerations?
A. The Civil Code of 1984, at Articles 1234, refers to the nominalistic principle, and 1235 and 1236 refer to the current value principle, and that's where it is based.
Q. And it also went back to Article 7069 Constitution?
A. Yes, clearly. That is compensation due to expropriation, Article 70.
Q. Perfect.
Professor Hundskopf, to go back to a question by the President, in your two Expert Reports, you did not identify one single Decision by the Peruvian Court between the Judgment of the CT of 2001 and the Resolution of July 2013 that applies the nominalistic principle to Land Bonds; is that correct?
A. I could refer you to 500, 300 proceedings, but the positions were so contradictory that it was necessary, so much so that the Engineers Association in 2011 asked to implement the Resolution of 2011 in
[Page 2056]
the correct way, because there was uncertainty that was so significant that led to opposing positions within the Supreme Court.
Q. But that was before 2001.
A. Well, you asked me 2013, also before 2013.
Q. Let me repeat my question. So, you did not cite in your Report any Decision between March 2001 and July 2013, whereby the Peruvian Courts apply the nominalistic principle to the Land Bonds?
A. It was impossible because it didn't have the strength, Decision by the Supreme Court cannot oppose a Decision by the Constitutional Tribunal.
Q. And you did not identify a single Decision in this period that applied the dollarization to the Land Bonds?
A. Well, I mentioned Resolution 088 of 2000, Supreme Decree.
PRESIDENT FERNÁNDEZ ARMESTO: No. You are being asked whether there is any Judgment, any Resolution ruling by the Courts.
Let me ask the question, if there is any ruling after 2001 that provide for dollarization of
[Page 2057]
Land Bonds by applying dollarization.
THE WITNESS: I am convinced after my search that there were some, but I do not know them off the top of my head. But there were rulings that also applied a different methodology other than dollarization.
PRESIDENT FERNÁNDEZ ARMESTO: Off the top of my head, I think that Professor Castillo said that the Judgment you were quoting had a different legal linkage, but they were not Land Bond situations?
THE WITNESS: But they did have the application of the current value theory.
PRESIDENT FERNÁNDEZ ARMESTO: Yes.
THE WITNESS: And that was important, the application of the current value theory. That is to say that it was applied, but the situations were different.
PRESIDENT FERNÁNDEZ ARMESTO: I think that he said that if my car is destroyed and the spare parts need to be imported, I may request dollar-denominated compensation, so he mentioned these type of situations, but the current value theory as a
[Page 2058]
dollarization was not applied to Land Bonds.
Do you agree that for Land Bonds the Courts apply the CPI as a general rule?
THE WITNESS: Well, we could say that they had three options, and they apply one. Correct.
BY MS. POPOVA:
Q. When you said that they were three options, you also mentioned Article 275 of the Civil Code, but we also agree that this Article only applies upon agreement by the Parties.
A. Article 275 says "theory of valuation." That is the subtitle.
Q. Yes.
A. The text of the Article provides for that, but beyond the Agreement, we have the Resolutions by the CT.
Q. Yes. But when you are saying that there are three options, I think that we agree that the options at Article 275 only apply based on the Agreement of Parties.
A. As attorney of one of the Parties, I would probably discuss which one is best--
[Page 2059]
PRESIDENT FERNÁNDEZ ARMESTO: No. What counsel is asking you is that--is telling you that 275 requires agreement.
THE WITNESS: Yes, but above that you have the Resolution by the CT.
PRESIDENT FERNÁNDEZ ARMESTO: But 275 is enforced only upon agreement of the Parties.
THE WITNESS: That is what Mr. Castillo said.
PRESIDENT FERNÁNDEZ ARMESTO: Well, it seems that it is common sense.
THE WITNESS: Yes, this is stated in the body of the Rule.
BY MS. POPOVA:
Q. You said that you do not know off the top of your head if there were other rulings. The State as debtor of the Land Bonds is always a party to these processes to update and pay the Bonds; correct?
A. Yes.
Q. So, if there were rulings where the Courts applied dollarization to Land Bonds, the State would need to have a copy; right?
PRESIDENT FERNÁNDEZ ARMESTO: I imagine that
[Page 2060]
rulings are public in Perú; correct?
THE WITNESS: Yes, all of them.
PRESIDENT FERNÁNDEZ ARMESTO: I think that everyone has access to all of the rulings.
BY MS. POPOVA:
Q. But in this period, between March 2001 and July 2013, there were two other judgments by the CT; correct? And in connection with the Land Bonds?
A. Yes. Clearly, yes, but the Engineer's Association--
PRESIDENT FERNÁNDEZ ARMESTO: Yes, there were two. Now, let's go there.
BY MS. POPOVA:
Q. I am trying not to interrupt you, but I am going to ask you to answer my question.
PRESIDENT FERNÁNDEZ ARMESTO: I apologize, Professor, if I am interrupting you, but this is to make faster progress. Please go ahead.
BY MS. POPOVA:
Q. So, one these rulings was issued in August 2004, according to you?
A. Yes.
[Page 2061]
Q. And this ruling declared that the dollarization was appropriate and also compatible with the March 2001 Decision.
A. I said voluntary. Voluntary.
Q. Yes, that is an important qualification; correct?
A. Yes.
Q. And that is a qualification that you had not mentioned in your Report.
A. Well, this invitation led me to read the interventions in depth, and that's the reason why I can answer.
Q. And so, you agree with me that the CT declared that the dollarization would be constitutional only upon agreement of the Bondholders?
A. No. In 2001--
PRESIDENT FERNÁNDEZ ARMESTO: It is 2004. In 2004, whenever it is an option for the Bondholder, it is constitutional.
MR. JIJÓN: I apologize, but that is not a completely accurate interpretation, and we will make a comment later on.
[Page 2062]
PRESIDENT FERNÁNDEZ ARMESTO: If I have said it incorrectly, I do not want to misrepresent this. Please, Mr. Jijón, I apologize. Please, state it correctly.
MR. JIJÓN: If I am not wrong, and I do not have it in front of me, the ruling of 2004--and this is not an argument. This is based on an invitation by the President--has several sections, and one of the statements by the CT was that in that case the text of the--of Decree 88 did not impose something, but it was voluntary.
But it also recognized, and this is something that I cited--and maybe I went too fast in my Opening Argument. It also recognized that the dollarization principle was not foreign to the treatment of time, therefore it was consistent with the ruling of the CT in 2001, and that was a specific question that the CT was asked to answer, separate from the voluntary aspect.
PRESIDENT FERNÁNDEZ ARMESTO: All right. Ready. Let's move on.
MS. POPOVA: Thank you. Let me continue with
[Page 2063]
my questions. I just wanted to--
BY MS. POPOVA:
Q. So, you wanted to highlight one of the Parties, but it does not exclude the other one. So, in this ruling in 2004, the CT also addressed the application of interest in arrears to the Bonds?
A. Well, the application of the interest rate, I think it was about 5 percent of the--based on the U.S. dollar.
Q. Well, one of the unconstitutionality elements was that the Decree was not in accordance with the calculations contemplated under the Civil Code, and to that end, the CT decided that it was not against the Constitution because it was an option; correct?
A. It is clearly based on their position of 2001.
Q. During this period, March 2001 and July 2013, there were several other Decisions by the Supreme Court of Perú applying the current value principle to the Bonds. Do you agree?
A. Yes.
Q. In your Second Report, you state that there
[Page 2064]
are some rulings by the Supreme Court of Perú that apply the dollarization principle, and this in which--and this one applies dollarization to the Land Bonds.
Do you recall?
A. Well, you're talking 2013 onwards?
Q. Yes. 2013 onwards.
A. Yes. 2013 imposed the current value theory as mandatory, and there is another Decision of November 2013 that confirmed this.
Q. Yes. And the reason why this Judgment applied dollarization for the first time to the Land Bonds is because of the Decision of the CT in 2013 that decided that it was mandatory for application for all of the public branches.
And this was the basis for the rulings, four or five rulings that you cited; correct?
A. Yes.
Q. We do not have time to see all of them. I will be showing you one. And please look at 23, Tab 23 in your binder. And this is RA-394.
A. What Article?
[Page 2065]
Q. Let's look at 10.3.
A. This is a judgment on appeal, and it analyzes the application of Article 7, and the application of 1242, 1243 of the Civil Code. This is a judgment on appeal that was issued by a court that had some Decisions that had already been--this had to do with some Decision that were contradictory, so this Judgment is of 2018. 2018? The one you're mentioning is the Decision of 2018.
Q. Yes. This is the one after 2013 that you cited in your Report.
Do you recognize this?
A. Yes.
Q. Please look at 10.3. Here, and because of the text, of the regular text of Article 1242, it is stated that the interest will be compensatory when it is a consideration for the use of money or because of any other asset?
PRESIDENT FERNÁNDEZ ARMESTO: Why don't we wait to hear the question by counsel? Why don't you read it to yourself. If you read it aloud, we need to type it, it needs to be interpreted, and it is a very
[Page 2066]
significant effort.
BY MS. POPOVA:
Q. So, you read it, you are familiar with this. Do you agree with me that this is an example of what the Courts did in the application of the Judgment of 2013?
A. Yes. Because of that Judgment of 2013, there was a need to establish a difference between interest in arrears and in compensatory interest. The Civil Code had to be applied.
PRESIDENT FERNÁNDEZ ARMESTO: So, the Judgment said that the Bonds had to be reassessed by applying dollarization and then add interest.
THE WITNESS: Yeah.
BY MS. POPOVA:
Q. Well, we have two concepts here, we have the updating that is based on the method established by the CT in July. So, it is converted into dollars and then the interest rates are applied. This was the first part of what the Courts did, that is to update the amount of the debt; correct?
A. Well, there was the first updating and then
[Page 2067]
the compensatory interest, the second one, and after the updating with the method determined by the CT in July 2013, in addition to this, compensatory interest is added as established under the Civil Code; is that correct?
PRESIDENT FERNÁNDEZ ARMESTO: Let's have a brief pause.
MS. POPOVA: Just a minute.
PRESIDENT FERNÁNDEZ ARMESTO: We're going to have--
MS. POPOVA: I am okay. We are about to finish. Please give me a minute to talk to my colleagues.
PRESIDENT FERNÁNDEZ ARMESTO: And I have some questions. Do you want me to start asking the questions? Are you okay?
MS. POPOVA: Yes.
PRESIDENT FERNÁNDEZ ARMESTO: Let me ask you about this Judgment, or are you going to ask the Expert? I am interested in this Judgment. The truth of the matter is that I did not read it even though I should have read it, but there are so many. And could
[Page 2068]
you please start with 10.2. Just read it to yourself and then 10.3. And once you finish reading both, please let me know.
THE WITNESS: Yes.
PRESIDENT FERNÁNDEZ ARMESTO: It is important for you to look at the final Order. My question is the following: This Judgment is a little bit different from the Decision by the CT. Let's look at 10.2. You would recall that the CT Order in their Decision to revalue the principal of all of the coupons as of the date of the last unpaid coupon, and you would recall that it is going to be done at the Parity Exchange Rate.
THE WITNESS: Yes.
PRESIDENT FERNÁNDEZ ARMESTO: And here it says that it should be estimated based on the opportunity when those coupons were no longer paid and also in keeping with the Constitutional Tribunal criterion, the debt shall be converted into American dollars by applying the current exchange rate.
It doesn't say "parity" as of the date of expiry for each coupon because that is a time when
[Page 2069]
they were no longer paid for these Land Bonds, and in that case there should be an addition of the interest rate of the American--the U.S. Treasury Bonds.
So, it seems that it is reassessing by applying the U.S. Treasury Bond rate, interest rate, but then it appeals the Judgment of the First Instance Court because it says that there it has not--that Judgment has not granted the interest rate of 4 or 5 percent, so it means--the Judgment is appealed and then it says, if you look at the bottom of the Decision, it says towards the end, it says the Order that has the implementation of the Judgment, there will be liquidation of this compensatory interest based on the Judgment by implementing the dollarization as of the first date of nonpayment for the coupons of each Bond to which the addition of the U.S. Treasury Bonds as stated at 5.2 shall be implemented in addition to the payment of compensatory interest.
I just wanted to ask you if this is the interpretation as to how, under Peruvian law, the Judgment by the CT needs to be enforced, the Decision
[Page 2070]
by the CT needs to be enforced?
THE WITNESS: I think that this is a very interesting Judgment because it reflects the essence of the provisions of the Resolution in 2013 by the CT, by applying dollarization, and clearly interest as of the date the last coupon was paid, and I think it is highly coherent. But I think that the final Decision does not contradict--and I may be wrong--the Resolution of 2013.
PRESIDENT FERNÁNDEZ ARMESTO: So, you are saying it is not contradictory. You are saying that it is correct. Okay. Phenomenal.
Counsel, shall we continue? And we have the break very briefly.
MS. POPOVA: I think that I only have two questions left.
PRESIDENT FERNÁNDEZ ARMESTO: So, let's try to finish. So, you can do it?
MS. POPOVA: Yes. Thank you.
PRESIDENT FERNÁNDEZ ARMESTO: So, that we conclude with the professor's cross-examination.
BY MS. POPOVA:
[Page 2071]
Q. I just wanted to ask you whether this is what all of the judgments that you cited to--that is to say, judgments that are subsequent to the Decision by the CT of 2013?
A. Yes. At one point there was a forum in Lima as to how the Resolution of 2013 had impacted the Resolutions of the Court, and there were--there was a long list of resolutions, and I think that it was a consequence, and it was based on the Decision by the CT in 2013.
Q. And out of all of these judgments, the Court updated, by applying inflation, the U.S. Treasury Bonds, and in addition to that, they also order the payment of compensatory interest based on the Bond interest rate 4, 5, or 6 percent?
A. So, I think it is--you're talking about double compensatory interest. I think there should be only one.
Q. No, it's not double.
MR. JIJÓN: Well, Mr. President, I think that he has already answered the question.
PRESIDENT FERNÁNDEZ ARMESTO: No. This is
[Page 2072]
important. This is an important question. Counsel, please go ahead and put the question to the professor.
BY MS. POPOVA:
Q. No, I was not suggesting that double compensatory interest was being paid. What I was saying was that the Judgment--there is this Judgment and there are other examples of this in this and in others, what the Court does is orders the payment of compensatory interest based on the interest rate that's in the coupon of the Bond; correct?
A. Yes. The interest rate is preestablished on the Bond. Exactly.
Q. Thank you very much, Professor Hundskopf. I don't think I have any more questions for you. But let me just confirm. Yes, that is right.
PRESIDENT FERNÁNDEZ ARMESTO: Mr. Jijón, any question for the professor?
MR. JIJÓN: Could I take just one minute to go through my notes.
PRESIDENT FERNÁNDEZ ARMESTO: Of course. Or would you prefer that we take the break at this point? Because we have been going for some time now.
[Page 2073]
MR. JIJÓN: That's fine.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. Professor Hundskopf, we are going to take a 10-minute break. It is 10:30 right now, so we'll take a break until 10:40, and then there will be a couple of questions from Mr. Jijón, and then we'll conclude.
THE WITNESS: Fine, sir.
PRESIDENT FERNÁNDEZ ARMESTO: What I'm going to ask is that during this break, please don't speak with any of the counsel.
THE WITNESS: I'll stay right here.
PRESIDENT FERNÁNDEZ ARMESTO: No, I fully trust you. I'm just going to ask you not to engage in conversation with any of the counsel for the Republic of Perú. There is coffee. There is fruit. There is everything. Please.
THE WITNESS: Excellent.
(Brief recess.)
PRESIDENT FERNÁNDEZ ARMESTO: We resume the Hearing, and we give the floor to legal counsel for the Republic of Perú.
MR. JIJÓN: Thank you very much,
[Page 2074]
Mr. President.
REDIRECT EXAMINATION
BY MR. JIJÓN:
Q. Professor Hundskopf, at the end of the cross-examination, you were asked several questions related to a Judgment of Cassation handed down by the Supreme Court Standing Chamber of Constitutional and Social Law.
Do you recall that?
A. Yes, the 2018 one.
Q. Correct. I don't have questions about the content, but, rather, the source of this Decision. Could you please explain for us what the relationship of--what the hierarchical relationship is as between the Chamber of Constitutional and Social Law and the Constitutional Tribunal, and what does that suggest for what we must do in case of inconsistencies?
A. No doubt whatsoever, above the Constitutional Chamber of the Supreme Court is the Constitutional Tribunal, which is the highest level supreme organ for interpretation of the Constitution, and it is the one that prevails. It establishes the criteria
[Page 2075]
1 definitively.
2 There are two types of procedures in Perú:
3 Procedures challenging constitutionality, which is a
4 single jurisdiction straight before the Constitutional
5 Tribunal; there's another procedure which can go three
6 levels, an amparo proceeding, (in Spanish) proceeding,
7 and so on. So, above the judicial power is the--at
8 the top is the Constitutional Tribunal. That's the
9 best example.
10 Q. Now, thank you. In addition, at the
11 beginning of your cross-examination, you were asked
12 several questions about contracts for the assignment
13 of goods or property and expectative rights, and at
14 some point in time you were asked about investment in
15 such goods or property.
16 Just to confirm, you, in your Reports, are
17 you presenting any conclusion as regards the
18 conclusions of international law or the Free Trade
19 Treaty or Trade Promotion Agreement?
20 A. No.
21 MR. JIJÓN: Thank you very much.
22 PRESIDENT FERNÁNDEZ ARMESTO: Excellent.
[Page 2076]
1 Professor Stern?
2 ARBITRATOR DRYMER: No questions from me,
3 but, once again, it is thanks to the skill and
4 diligence of the counsel and the excellent questions,
5 always excellent questions, from the President.
6 PRESIDENT FERNÁNDEZ ARMESTO: The
7 interruptions. Very well. Actually, I did ask my
8 questions in the course of your presentation, so,
9 Professor, I thank you very much.
10 THE WITNESS: Thank you.
11 PRESIDENT FERNÁNDEZ ARMESTO: And I thank you
12 very much that after your retirement, that you
13 continue fighting for the labor continuity of those of
14 us who are getting to retirement age.
15 THE WITNESS: Thank you, sir.
16 (Witness steps down.)
17 PRESIDENT FERNÁNDEZ ARMESTO: Very well.
18 Then we will now call Mr. García-Godos.
19 (Comments off microphone.)
20 PRESIDENT FERNÁNDEZ ARMESTO: For the record,
21 the Report that we have received from Mr. Hundskopf is
22 H-10.
[Page 2077]
1 EDUARDO GARCÍA-GODOS, RESPONDENT'S WITNESS, CALLED
2 PRESIDENT FERNÁNDEZ ARMESTO: How are you,
3 Mr. García-Godos? Good morning.
4 You are here as an Expert and, therefore, the
5 first thing we need to do is take your declaration as
6 an Expert, if you would be so kind as to stand and
7 state the Declaration.
8 THE WITNESS: Good morning.
9 I solemnly declare, upon my honor and
10 conscience, that my statement will be in accordance
11 with my sincere belief.
12 PRESIDENT FERNÁNDEZ ARMESTO: Very well.
13 Thank you very much. Therefore, I give you the floor,
14 to Mr. Jijón.
15 MR. JIJÓN: Thank you very much,
16 Mr. President.
18 BY MR. JIJÓN:
19 Q. Good morning, Mr. García-Godos.
20 I understand that you have prepared a
21 presentation for the Tribunal?
22 A. That is correct.
[Page 2078]
1 Q. Please, go ahead.
2 A. Thank you very much.
3 PRESIDENT FERNÁNDEZ ARMESTO: We must give
4 this a number, your presentation. It is H-11. You
5 have the floor.
7 THE WITNESS: Thank you very much, first of
8 all. It's an honor for me to be here before the
9 Tribunal to set forth my arguments.
10 I was entrusted with undertaking an analysis
11 of the validity of the Supreme Decrees issued by the
12 Executive and the Ministry of Economy and Finance, and
13 as under the Resolution of the Constitutional Tribunal
14 to briefly introduce myself.
15 My name is Eduardo García-Godos. I'm a
16 lawyer with a degree from the Pontificia Universidad
17 Católica of Perú. I have a master's in international
18 economic law from the University of Warwick, and I
19 have done graduate studies at the University of Korea,
20 at the ITCUNECE in Geneva, and at the University of
21 Buenos Aires, and then I took a course in basic
22 economics at the von Mises Institute in Alabama.
[Page 2079]
1 In terms of my professional experience, I'm a
2 partner with the García-Godos & Lindley Russo Abogados
3 Law Firm, and I'm a founder of the Trade Facilitation
4 Institute, which is an entity that engages in coming
5 up with public policies that facilitate trade. I have
6 been a public official with the Ministry of Foreign
7 Trade. I was negotiator of the Trade Promotion
8 Agreement, the labor chapter between United States and
9 Chile. I was a member of the Committee for
10 Eliminating Bureaucratic Barriers at INDECOPI, and at
11 this time I'm also a university instructor. I'm a
12 visiting professor at the University of Puerto Rico.
13 Nonetheless, for 10 years I was a part-time professor
14 at two universities in Perú.
15 Very well. First of all, I wanted to mention
16 the scope of the ruling by the Constitutional Tribunal
17 of July 2013. I know that you have read this
18 repeatedly throughout this Hearing, but I would simply
19 like to highlight some aspects that should be useful
20 for guiding my arguments.
21 The Tribunal notes that one must establish a
22 criterion for valuation and up-to-date payment of the
[Page 2080]
1 debt, as well as the procedure that should be followed
2 by the Executive for making said payment effective.
3 No doubt this is an Order, and then it rounds out that
4 argument by indicating that it orders that the
5 Executive, within six months--it sets a time
6 frame--must issue a Supreme Decree regulating the
7 procedure for the registration, valuation, forms of
8 payment, of the debt of the Bonds in keeping with the
9 grounds set out by that Resolution.
10 And why is it important to begin with this?
11 Well, in light of our legal system, the Executive
12 Branch may only act on the basis of the competences
13 and authorities that it receives from the Legislative
14 Branch or a supreme organ. The Executive Branch
15 cannot discretionally attribute to itself a
16 competence, limit of liberty, or generate an
17 obligation, as we all know.
18 Having said this, parenthetically, yesterday
19 I found that it was very enlightening for us to all
20 see what is happening in Perú, and I go back to this
21 italicized expression. Perú has a sophisticated
22 regulatory system. This was said by Mr. Bullard. I
[Page 2081]
1 share this opinion with him, and this translates into
2 two aspects. I have seen many regulations in Latin
3 America--indeed, part of my work is to review
4 regulatory policies for trade facilitation in several
5 countries of Latin America--and Perú has some
6 particularities.
7 One of these is that there is this
8 administrative jurisdictional entity which is
9 INDECOPI. It is not a very conventional type of
10 institution. It's an organ of the public
11 administration that oversees the acts of the public
12 administration, and recently it has been empowered to
13 such a point that it can strike down or leave without
14 effect provisions with general effects, which, for
15 those of us who live in Perú, is very positive because
16 we have a good system of control, eliminating
17 bureaucratic barriers and limiting the powers of the
18 State.
19 The second is the analysis of regulatory
20 quality, which was also touched upon yesterday, and
21 which also constitutes progress within the oversight
22 policy of the State, insofar as what the system seeks
[Page 2082]
1 is for better-quality regulations to be issued.
2 Nonetheless, all of the branches of the Government and
3 all of the organs of the Executive Branch make efforts
4 to produce quality Regulations. What was done was to
5 create an additional organ that would also accompany
6 this oversight process. This was inspired by Perú's
7 effort to be accepted into the OECD. It required that
8 Perú increase or upgrade its levels of quality in
9 terms of Regulatory Framework.
10 Throughout my professional life, INDECOPI has
11 issued some 300 Resolutions assessing reasonableness
12 and legality. Multiplied by what I read in
13 five years--I have read more than 1,000 Resolutions--I
14 have, as a consultant, reviewed 200 administrative
15 procedures--more than 200--to see whether they do or
16 do not comply with regulatory impact analysis.
17 Indeed, I was the one who undertook the analysis of
18 regulatory quality of health procedures. It is as
19 though I were to review everything done by the FDA, to
20 cite one example. And I also have reviewed more than
21 300 administrative procedures related to foreign
22 trade.
[Page 2083]
1 Now, what are the grounds of validity of the
2 Supreme Decrees? No doubt it is the constitution and
3 the Organic Law of the Executive Branch. Now, I
4 believe that the--I don't know if the scope of the
5 organic law of the Executive has been discussed. This
6 has to do with how provisions entrusted to the
7 Executive are generated. It regulates statutes or
8 sectors, and the basic principles are competence,
9 transparency, and hierarchy. These all go together
10 with these provision, and they cannot either violate
11 or thwart the law.
12 Now, I've tried to organize schematically
13 Supreme Decrees in the following manner: These are
14 provisions of general application; they regulate laws,
15 legal provisions, in functional sector activities and
16 multisectoral, and they may or may not require a vote
17 of Council of Ministers, and they are affirmed by the
18 President of the Republic.
19 PRESIDENT FERNÁNDEZ ARMESTO: In this case,
20 there was no need to have agreement of Council of
21 Ministers?
22 THE WITNESS: No, I believe it was signed
[Page 2084]
1 only by the Ministry of Economy and Finance, which is
2 totally valid.
3 Now, in terms of legality, one must review
4 whether the entity is competent--that is to say, does
5 it have the powers as a matter of law to perform a
6 given function?--and other requirements or formalities
7 must also be abided by. Not all requirements or
8 formalities, if they are not abided by or not present,
9 will annul the norm. And reasonableness, which was
10 discussed by Mr. Bullard yesterday, comes from
11 evolution of the case law. And the positive part, I
12 believe, is in the INDECOPI provision on bureaucratic
13 barriers and 1256, and that there must be a component
14 of reasonableness, but in this case it doesn't
15 separate them out.
16 Now, in terms of the requirements for
17 validity and legality, I think there is agreement that
18 the Ministry of Economy and Finance did have the
19 competence to issue the Supreme Decrees and that, at
20 the same time, it had to abide by other formalities.
21 I don't believe there is any doubt but that the
22 instruction of the Constitutional Tribunal was that
[Page 2085]
1 the MEF should issue these Decrees. But not only
2 that, I want to anticipate my findings somewhat. What
3 the Constitutional Tribunal has done, I believe, is
4 something that I have not seen many times in Peruvian
5 legislation, insofar as it practically adopted a
6 rulemaking role--that is to say, the Ministry of
7 Economy and Finance or the Executive told it,
8 said--well, conceptually speaking, it describes who,
9 how much, how.
10 Normally, the how--that is to say, the
11 operational mechanics of payment and compliance with
12 obligations--is normally delegated to the authority
13 itself. In this case, I would think they went beyond
14 that, and in a positive way, because they mentioned
15 which department within the Ministry of Economy and
16 Finance had to take up the function of processing
17 payment of the debt. So, competence, no doubt about
18 it.
19 Now, let's look at other requirements or
20 formalities. There may be some discussion as to what
21 are requirements or what are formalities. Basically,
22 grosso modo, the signing of the Minister or Ministers
[Page 2086]
1 and publication, those are the essential formalities.
2 In my view, these are not essential--well, the manual
3 for economic and legal analysis of the MEF or
4 prepublication or the statement of grounds, none of
5 these are requirements or formalities. Why do I
6 mention these three? Because, in particular, it was
7 up to me to analyze the comments by Mr. Bullard, and
8 Mr. Bullard highlighted these three elements as
9 essential aspects, the absence of which was a serious
10 matter.
11 The economic and legal manual for producing
12 regulations of the MEF does not apply to matters of
13 indebtedness. I believe that the history of this
14 manual--well, I'm very familiar with it. It was an
15 effort to also improve the production of regulations
16 in the State generally, under a standard of analysis
17 of regulatory impact, which is a well-known worldwide
18 methodology where the MEF was precisely one of those
19 who was pushing the use of this methodology in Perú.
20 Nonetheless, this entails a certain complexity,
21 because there's a number of formalities and procedures
22 that not the entire State is able to use or in a
[Page 2087]
1 position to use. Nonetheless, the MEF did a pilot
2 experience--the Ministry of Labor as well; 2006--but
3 they limited the scope of this manual, and that is why
4 they excluded provisions from the system of
5 indebtedness, which is precisely where the dispute
6 before the Constitutional Tribunal arose.
7 Now, notwithstanding that it is not under an
8 obligation to follow this manual, indeed, its
9 guidelines, I believe, it generally follows. There
10 were meetings of the Working Group, presentation of a
11 proposal, deliberation among the areas involved, and
12 so on. One very important aspect is that this manual
13 was not approved exactly by a resolution or a
14 provision of adequate hierarchy. It's a Ministerial
15 Resolution. It's a provision of a lower rank, and,
16 therefore, it is almost a recommendation. Now,
17 fortunately, Mr. President, today this is changing,
18 and there are many privileges that are going to
19 require the Peruvian State, the Executive, to carry
20 this out.
21 Now, as regards the prepublication of
22 Regulations, I consider that this does not entail the
[Page 2088]
1 invalidity of this one, and that application of the
2 mandate of the CT makes prepublication unnecessary.
3 Let me go back to the ruling by the
4 Constitutional Tribunal.
5 Publication is based on the principles of
6 transparency and foreseeability. Normally the Opinion
7 of the people--well, that's important in the case of
8 prepublication, when there are certain doubts about
9 the scope of certain provisions, whether changes or
10 new points are going to be introduced, there's a
11 generic group of persons who might be impacted, and,
12 therefore, an opinion would be needed to prepare the
13 Parties, particularly when there may be major impact
14 on the normal course of transactions.
15 This comes from a judicial process as between
16 the Parties, where there was a specific pronouncement.
17 There was a plaintiff or several plaintiffs and a
18 Respondent, which in this case was the State, so what
19 was going to be prepublished and what for? And in
20 terms of the statement of grounds, I understand that
21 this may be something that could be discussed with
22 respect to how extensive the Statement of Grounds
[Page 2089]
1 should be, and I would hope that the entire Executive
2 were very scrupulous and were to undertake an economic
3 analysis or detailed supporting arguments about what
4 is set forth in the Resolutions, but I believe that,
5 in general, one is not seeking a level of
6 sophistication that is so scientific, but, rather,
7 that there should be an appearance of reasonableness
8 and responsibility at the time of issuing certain
9 Regulations. And I think that in this case, there may
10 be statements of purpose that are very concise, but no
11 one can deny that there have been reports as among the
12 various areas of the Ministry of Economy that reveal
13 that there's been a review of the regulatory formula
14 that was finally going to come out. And, finally,
15 these provisions rest on the judgment of the
16 Constitutional Tribunal.
17 Now, next I'm going to refer to
18 reasonableness, and I think this is one of the most
19 interesting aspects, because we cannot separate out
20 the analysis of reasonableness from the context of the
21 mandate by the Constitutional Tribunal, for, once
22 again, in my view, the Constitutional Tribunal gets
[Page 2090]
1 into an analysis of reasonableness on weighing what is
2 the most appropriate way to solve a specific problem.
3 When we ask ourselves about the standards of
4 reasonableness, we have to ask ourselves--we first
5 have to ask ourselves: What is the purpose of the
6 Resolution? This will shape my view of what is or is
7 not reasonableness. The purpose of the reasonableness
8 exercise was no doubt to come up with a methodology
9 for updating a debt and subsequent payment, and the
10 result, what was it? Well, it was to say that we need
11 to create an Administrative Procedure so that this
12 payment can actually be made. So, the reasonableness
13 analysis was to find that that administrative
14 procedure was the most adequate way to balance out the
15 interests and resolve a legal dispute.
16 Reasonableness has three expressions: Aim,
17 proportionality, and efficiency. Well, the aim, what
18 it seeks, is if there a problem, let us see whether
19 the solution that I'm giving is what is going to solve
20 this problem. Normally, when one analyzes
21 reasonableness in the abstract, what one always says
22 is: Shall we regulate or shall we not regulate? Is
[Page 2155]
1 BY MR. RECENA COSTA:
2 Q. Is it correct that you have done consulting
3 jobs for the National Port Authority, National
4 Competitiveness Counsel, Ministry of Economy and
5 Finance, Ministry of Foreign Trade and Tourism,
6 Peruvian National Port Authority.
7 PRESIDENT FERNÁNDEZ ARMESTO: What is the
8 question?
9 BY MR. RECENA COSTA:
10 Q. The question is, Mr. Godos, is since 2001,
11 considering your experience at INDECOPI, which is also
12 appointed by members of Peruvian Ministries, has there
13 been a single year in which you were neither an
14 officer nor a consultant acting on some form of work
15 for Perú?
16 A. I'm sorry. I haven't really been able to
17 follow you.
18 PRESIDENT FERNÁNDEZ ARMESTO: It's
19 irrelevant. It is clear that you've done this work.
20 It was a question as to whether each year you had or
21 had not had some administrative Contract. It is
22 really not relevant.
[Page 2156]
1 MR. RECENA COSTA: We have no further
2 questions, Mr. President.
3 PRESIDENT FERNÁNDEZ ARMESTO: Thank you,
4 Dr. Costa.
5 And now, Mr. Jijón, do you have any other
6 questions?
7 MR. JIJÓN: If you could give us just a
8 moment to consult.
9 PRESIDENT FERNÁNDEZ ARMESTO: Of course.
10 (Pause.)
11 MR. JIJÓN: Thank you, Mr. President.
12 PRESIDENT FERNÁNDEZ ARMESTO: You have the
13 floor, Mr. Jijón.
14 REDIRECT EXAMINATION
15 BY MR. JIJÓN:
16 Q. You were asked many questions, somewhat
17 fragmented, with respect to certain documents,
18 including Supreme Decree 001/2009JUS.
19 Do you recall that? If we could turn to the
20 document, I think that it is Tab 17 in your binder. I
21 don't know if we can get that on the screen.
22 ARBITRATOR DRYMER: Remind us, please, of the
[Page 2157]
1 RA. I think it was an RA number.
2 MR. JIJÓN: Por tiempo, voy a continuar.
3 ARBITRATOR DRYMER: Thank you.
4 MR. JIJÓN: Out of time considerations, I'm
5 going to continue. For the Tribunal, this is the
6 document that makes reference to Chapter 19 of the
7 Treaty. I have it here. It is CE-489.
8 ARBITRATOR DRYMER: Thank you.
9 BY MR. JIJÓN:
10 Q. And if you could turn to page--it's the fifth
11 page, it begins with Chapter 3 on the dissemination of
12 legal provisions. There you have Article 14,
13 dissemination of draft legal provisions, general in
14 nature.
15 Then after this you spoke of legal provisions
16 of general in nature.
17 Can you discuss what this suggests in the
18 context of this provision and whether you consider
19 that this has an impact on the application of these
20 requirements?
21 MR. RECENA COSTA: Objection. That's a very
22 leading question.
[Page 2158]
1 BY MR. JIJÓN:
2 Q. How does this impact on the requirements for
3 the Supreme Decrees?
4 A. Could you repeat the question, please?
5 Q. Of course. If you could focus on Article 14,
6 dissemination of draft legal provisions general in
7 nature, if you could please comment for us, what does
8 this suggest for the application of these requirements
9 to Supreme Decrees?
10 A. Well, as I had indicated, for me there is no
11 obligation to publish the drafts of such provisions in
12 light of what had been established by the
13 Constitutional Tribunal. For me, this provision does
14 not apply to the Supreme Decrees in question. I'm
15 talking about prepublication.
16 PRESIDENT FERNÁNDEZ ARMESTO: Mr. Jijón, if
17 what you are saying is if it is not a provision that
18 is general in nature, as the attorneys for the State
19 said in the documents we saw, then nor would it be in
20 respect of dissemination of legal provisions general
21 in nature.
22 MR. JIJÓN: We have seen it. Thank you very
[Page 2159]
1 much, Mr. President. I have no further questions.
2 PRESIDENT FERNÁNDEZ ARMESTO: Fine.
3 MR. RECENA COSTA: Nor do we, Mr. President.
4 ARBITRATOR DRYMER: No, thank you.
5 ARBITRATOR STERN: No, thank you.
6 PRESIDENT FERNÁNDEZ ARMESTO: Thank you very
7 much, sir. The world is complex and the effort being
8 undertaken by Perú to improve the quality of
9 legislation is very interesting. I would hope that
10 other countries would do the same, beginning with my
11 own. So, I must congratulate you all for the effort
12 to improve legislative quality.
13 (Witness steps down.)
14 PRESIDENT FERNÁNDEZ ARMESTO: Very well,
15 then.
16 MR. FRIEDMAN: May I raise two brief
17 housekeeping matters before we break.
18 PRESIDENT FERNÁNDEZ ARMESTO: Off the record.
19 (Comments off the record.)
20 PRESIDENT FERNÁNDEZ ARMESTO: We will now ask
21 the interpreters to rest while we are on the record.
22 MR. FRIEDMAN: There are just two
[Page 2160]
1 housekeeping matters that arose from issues on the
2 first day of the Hearing, and I wanted to make a
3 record here because I think it is--
4 PRESIDENT FERNÁNDEZ ARMESTO: No, es que no
5 Español.
6 MR. FRIEDMAN: I just--I think it is more
7 courteous than writing a letter about it, and we are
8 all together.
9 So, the first is about the physical Land
10 Bonds, the two physical Land Bonds that I showed
11 during Gramercy's opening.
12 PRESIDENT FERNÁNDEZ ARMESTO: They did not
13 give them back?
14 MR. FRIEDMAN: No, no. We have offered them
15 to them, they have never taken them up on us--us up on
16 the offer.
17 PRESIDENT FERNÁNDEZ ARMESTO: Okay.
18 MR. FRIEDMAN: And we wanted to make it clear
19 that they are available and if they would like to look
20 at them, time is just sort of running out a bit
21 because, after tomorrow, those will go back into
22 custody and to respond to any concerns. Those are
[Page 2161]
1 both Bonds of small enough amount under any valuation
2 that they violate no custom laws by moving them across
3 borders. So, that's fine.
4 Second, you will recall that we had questions
5 about this Document R-257 that had, where each side
6 had had some pages that the other side's copy didn't
7 have.
8 ARBITRATOR DRYMER: Yes. Yes.
9 PRESIDENT FERNÁNDEZ ARMESTO: Yeah. Agree.
10 MR. FRIEDMAN: We have been endeavoring since
11 the February 7 to just say, can we please agree on
12 this consolidated document and give it a new number,
13 and we just have not had a response yet.
14 So, I'm not asking for a very response right
15 now. I wanted to mention it before the lunch break,
16 so that perhaps we can have a response after the lunch
17 break to both of those issues. I just didn't want
18 there to be any ambiguity about it. Thank you.
19 PRESIDENT FERNÁNDEZ ARMESTO: Okay. R-257
20 was simply that you had the full text, but they had
21 the Annexes.
22 MR. FRIEDMAN: Perfect.
[Page 2162]
1 PRESIDENT FERNÁNDEZ ARMESTO: So, let's just
2 join them and we said that would be an H document, so
3 that that is clear. And the physical ones, if you
4 want to see them, provided you give them back. Don't
5 create us now the additional dispute whether they have
6 to be delivered back or not. Provided you deliver
7 them back, it is up to you.
8 MR. HAMILTON: Mr. President, thank you very
9 much. We are surprised by the comments here. We've
10 seen these stunts before. So, let me address each of
11 the two items mentioned.
12 The first issue was the fact that Gramercy
13 apparently carried certain documents from Perú to the
14 United States. We don't know the details of how they
15 did that. They have not provided their Bonds for
16 authentication. They have not submitted their Bonds
17 to the valid--Mr. President, I'm sorry, but he chose
18 to make a record of this.
19 PRESIDENT FERNÁNDEZ ARMESTO: I know. I
20 know.
21 MR. HAMILTON: So, you leave me no choice but
22 to comment.
[Page 2163]
1 PRESIDENT FERNÁNDEZ ARMESTO: If you want to
2 see them, you see them. If not--we know that they are
3 not authenticated.
4 MR. HAMILTON: I know. I know,
5 Mr. President. But, I'm sorry, because my colleague
6 specifically insisted that we go on the record to make
7 his little stunt. I will Reply on behalf of the
8 Sovereign, if I may. And I will be brief. I
9 appreciate it.
10 PRESIDENT FERNÁNDEZ ARMESTO: Of course. Of
11 course.
12 MR. HAMILTON: We see this over and over. As
13 a matter of fact, for years we've lived with stunts
14 and propaganda. It is too much. It has gone directly
15 to the heart of attorney-client relationship. It has
16 gone directly to the validity of this proceeding. It
17 is too much.
18 So, I will very briefly, just to conclude,
19 physical Land Bonds, the physical Land Bonds have
20 never been submitted to the valid Bondholder process,
21 duly established, all Peruvians with Bonds are able to
22 submit them. Gramercy was able to submit them. We do
[Page 2164]
1 not have present here technical Experts for the review
2 and authentication of Bonds, as is clear, so, to
3 repeatedly suggest, for example.
4 And let me give you one more example,
5 Mr. President. We were told on the first day of the
6 hearing, we offered them for inspection during lunch
7 and they made no effort. What we learned is that some
8 random member of their team, mentioned to a random
9 member--no offense--of our team, are you going inspect
10 them? As a matter of fact, I believe that someone
11 said it to Ms. Menaker as she came out of the
12 bathroom. And then it was represented that they
13 offered and we didn't respond.
14 Perú has made available the Bondholder
15 Process. They chose not to recover $34 million.
16 That's between them and their clients. So, they have
17 never put into this case an Expert Report that in any
18 way approaches the diligent process of review and
19 authentication of Bonds, that the State must go
20 through because the State doesn't just give away
21 money. That's number one.
22 Number two, R-257, again, this is a
[Page 2165]
1 distraction. It's already been sent to the Tribunal
2 last Friday. They have chosen to do this. They are
3 doing this over and over for reasons--we have no idea,
4 and the fundamental reality is we have been asking for
5 weeks where and when did you get this document?
6 And, again, as usual, they conceal it, they
7 will not answer, they refused to answer to the
8 President last Friday as well, it is already in the
9 record. And as I said on the first day, we are glad
10 to discuss this document, and we have discussed this
11 document, because it assists the case of Perú.
12 Finally--and I'll save this for further
13 comment tomorrow--all of this is camouflage for the
14 reality that we all now know, that side of the room
15 knowingly and intentionally hid a secret tranche of
16 Land Bonds, prevented us from understanding it,
17 assessing it, prevented the Tribunal from
18 understanding all of the implications that has for
19 jurisdictions, Merits, and compensation, and this all
20 camouflage.
21 I regret it, but there is nothing else to be
22 done about these two issues today. I'm sure we'll
[Page 2166]
1 discuss other issues tomorrow. Thank you very much,
2 and thank you for your patience, Mr. President, but
3 when my counterpart insists to go on the record, we
4 must respond. Thank you.
5 PRESIDENT FERNÁNDEZ ARMESTO: Very good.
6 MR. FRIEDMAN: I will obviously not rise to
7 that, simply saying I will treat that as confirmation
8 that we can simply assign a hearing number to R-257
9 and that, if you wish to see the two physical Land
10 Bonds, you are welcome to, but please let us know
11 after the lunch break.
12 PRESIDENT FERNÁNDEZ ARMESTO: Very good.
13 Lunch. 3:00. No, 2:00.
14 (Whereupon, at 1:00 p.m., the Hearing was
15 adjourned until 2:00 p.m., the same day.)
[Page 2167]
1 AFTERNOON SESSION
2 PRESIDENT FERNÁNDEZ ARMESTO: Thank you very
3 much for waiting.
4 We are going to resume the Hearing. We are
5 here to examine Dr. Wühler.
6 NORBERT WÜHLER, RESPONDENT'S WITNESS, CALLED
7 PRESIDENT FERNÁNDEZ ARMESTO: Thank you very
8 much for being here with us, Dr. Wühler. You are here
9 as an Expert. You know that, as an Expert, you are
10 requested to take your oath, so could I kindly ask you
11 to stand up and please take your oath?
12 THE WITNESS: I solemnly declare, upon my
13 honor and conscience, that my statement will be in
14 accordance with my sincere belief.
15 PRESIDENT FERNÁNDEZ ARMESTO: Thank you very
16 much, Dr. Wühler.
17 I will now give the floor to Mr. Hamilton.
18 Mr. Hamilton, please.
19 Before I do that, we did receive a handout,
20 and it is H-11--12. Sorry. H-12.
21 MR. HAMILTON: Thank you very much,
22 Mr. President.
[Page 2168]
1 On behalf of the Republic of Perú, it is my
2 pleasure to introduce Dr. Norbert Wühler, Expert for
3 the Republic of Perú.
4 Dr. Wühler has presented two Expert Reports
5 in this proceeding, and he has prepared a presentation
6 to share with the Tribunal today, which has just been
7 distributed to you.
8 DIRECT EXAMINATION
9 BY MR. HAMILTON:
10 Q. Mr. Wühler, welcome, and I invite you to take
11 the floor.
12 A. Thank you very much.
13 DIRECT PRESENTATION
14 THE WITNESS: Good afternoon to everybody.
15 I would first just make a few remarks about
16 my professional experience and the expertise I have
17 for the items on which I have delivered my Reports.
18 I am a lawyer by education and background. I
19 received my legal education in Germany, but I spent
20 most of my professional life outside of Germany in a
21 number of countries. The main stages of my
22 professional life were, first, the Iran-U.S. Claims
[Page 2169]
1 Tribunal, where I was the legal advisor to the
2 President and the Deputy Secretary-General. After
3 that, I was the Head of the Legal Service of the
4 United Nations Compensation Commission, and then
5 director of the Claims and Reparations Programs of the
6 International Organization for Migration.
7 That is all in the past. I am currently
8 chairman of the Kosovo Property Claims Commission. In
9 my CV, I said I was Chairman, and that was true at the
10 time I wrote that, which was in 2017 and '18, and the
11 Commission thought--we thought that we had completed
12 all the work in 2015, and then just a few months ago
13 we have been reactivated, because there were some
14 other things that came up and we have to complete some
15 further cases.
16 I have advised a number of governments and
17 international organizations on the establishment and
18 on the conduct of claims and compensation processes.
19 Appointments were, again, by different governments, by
20 international organizations, in one case--since we are
21 in the U.S., it may be of interest--in one case by a
22 federal U.S. judge, Presiding Judge Coleman of the
[Page 2170]
1 Eastern District of New York, because that particular
2 process was following a decision of the Court and the
3 implementation was given to my organization, and I was
4 in charge of that.
5 I was also chair and member of several
6 arbitral tribunals in international arbitrations, and
7 I was the Expert appointed by the Tribunal in the case
8 of Abaclat v. Argentine Republic.
9 You are aware, of course, that in my Reports
10 I concluded that the process established by Perú to
11 deal with the agrarian bonds and with the claims by
12 Bondholders is a claims and compensation process. So,
13 I would like, just for the context, to say a few words
14 about what is a claims and compensation process. And
15 I would like to say that for the context, but I think
16 also there have been some confusions about this.
17 At the basics, it is quite a simple process.
18 It is a process that allows people that think they
19 have a claim to put the Claim into that process. The
20 process takes the claims, it verifies them, it makes
21 decisions on them and if it's compensation on the
22 amounts payable, and it pays the claims that have been
[Page 2171]
1 found to be eligible, meaning that they comply with
2 the requirements.
3 I have assessed the Bondholder Process
4 established by Perú against this framework, and I have
5 compared it with other claims and compensation
6 procedures and the standards and the practice that is
7 applied in them, and I would like to note that this
8 comparison with these other procedures is the
9 appropriate comparison, because the Bondholder Process
10 has the same kind of features and characteristics, and
11 it must deal with the same challenges as these other
12 processes.
13 So, first, now, going directly into the
14 Bondholder Process, I'll first say something about
15 what I call the "Regulatory Framework." This is
16 really the beginning of these things, and it's the
17 foundation of the process. It establishes, if you
18 like, the basic architecture to then build the house,
19 the actual process based on that, build the structure
20 and develop the procedure that has to be followed in
21 the process.
22 So, in this case, this was done by the
[Page 2172]
1 Supreme Decrees which followed the Resolution of 2013
2 of the Constitutional Tribunal, and these Decrees were
3 that basis that created this basic architecture. Now,
4 I found quite appropriate a remark that Minister
5 Castilla made during this Hearing, where he used the
6 words--he talked about "un proceso gradual" that the
7 development of these Supreme Decrees constituted, and
8 I think that is a very good description, because there
9 was not just one; there were several of these Decrees.
10 It is--it happens quite often that the legal
11 framework, the legal basis, the Regulatory Framework
12 that is established for these processes is not just
13 done in one instrument. There are reasons for that.
14 They have to do mostly that one cannot foresee
15 everything at the beginning, and so adjustments are
16 made; sometimes before the process starts, sometimes
17 they are made even into process and quite far into the
18 process. So, again, something that you can see quite
19 frequently.
20 So, what do the Supreme Decrees do in
21 addition to building that framework? They allow the
22 Bondholders to understand how the process operates and
[Page 2173]
1 what requirements they need to fulfill and how they
2 can participate.
3 Now, the Supreme Decrees, of course, in a
4 certain language--some of the language is quite
5 technical, but what is very important is that, for the
6 people that want to participate, there are very simple
7 forms that are included in the Decrees and that are
8 available on the website of the Minister of Finance;
9 where available, the process is closed. They are
10 actually quite simple, and I have seen many, many
11 claim forms in my life. And these forms are certainly
12 among the simplest and easiest to fill out that I have
13 seen.
14 I just want to mention two additional points
15 that come out of this Regulatory Framework, the
16 Supreme Decrees. One concerns the prioritizations
17 that they provide for the Bondholder Process. They
18 create categories, different categories of Claimants,
19 of Bondholders, that would be served in a certain
20 sequence, and that's a practice that is very common in
21 claims and competition processes. And second, another
22 important aspect is what kind of due process exists in
[Page 2174]
1 the Bondholder Process. And, again, certainly
2 compared to other procedures of that type, there is
3 certainly sufficient, if not more than sufficient, due
4 process here, both within the process and outside the
5 procedure, including the ability to appeal,
6 reconsideration inside appeal, and have judicial
7 remedies outside and to exit the process and have them
8 outside.
9 So, the first aspect of the house, so to
10 speak, that then has been built is the institutional
11 framework. So, again, in a claims process, what is
12 the institutional framework that one looks for? Well,
13 there is no one single identical framework for every
14 situation, because the situations are different, so
15 different models are used in different circumstances.
16 What one does find is that in some other processes,
17 what I call the embedding in a Ministry has been used
18 as that institutional framework. This has been done
19 here as well. The choice of the Ministry of Economy
20 and Finance, I found appropriate, considering what
21 kind of functions the process has to perform and what
22 kind of tasks the procedure has to go through. So, it
[Page 2175]
1 made sense to put it into the Ministry of Economy and
2 Finance.
3 The Ministry then developed what the last
4 part of the house is, so to speak. They concluded
5 interinstitutional agreements that were necessary with
6 the National Bank, with the Ministry of Interior for
7 the National Police Unit that was doing the
8 authentication; they developed the internal mechanisms
9 and developed quite extensive SOPs, as they are called
10 sort of in the lingo of these mechanisms, standard
11 operating procedures, which are important. They are
12 internal, but they are important to, first, regulate
13 the actual work and, second, to keep consistency in
14 that work, because different people are working on
15 different claims. So, it's very important to have
16 these things set out so that there is consistency.
17 So, I now come to a part of the process that
18 I think everybody is quite familiar with, which is the
19 structure of the actual procedure. So, what are the
20 stages that the claims go through, and how do these
21 stages work in these kind of processes? Again, at a
22 basic level, it is quite simple: The claims have to
[Page 2176]
1 meet a certain threshold when they are submitted.
2 Then the Claimants' eligibility is determined,
3 meaning, is a particular Claimant entitled to be a
4 benefit of the right or the compensation that the
5 process offers? And that stage typically includes the
6 verification of one or more key documents, and then
7 where that applies, where valuation is an issue,
8 there's a valuation stage, and then payment is made to
9 the Claimants that are eligible, and the payment that
10 has been assessed, the amount that has been assessed,
11 is paid out. So, the four stages of the Bondholder
12 Process, they follow this standard. They are
13 necessary in the case of this process, and they are
14 structured in a reasonable manner.
15 Can we just go back a second? I won't go
16 into any details here. The one point that I wanted to
17 make is: There was a lot of talk already in the
18 Hearing, and it is in the documents, about
19 authentication. Where there was less detail was on
20 the registration. And to an outsider, it may seem
21 that registration is a very simple process. You take
22 a piece of paper, put a stamp, and the person is
[Page 2177]
1 registered as a legitimate Bondholder. Well, that's
2 not what this is all about.
3 For every Bondholder that comes into this
4 process, the entitlement with respect to every bond
5 has to be established, because the bond has been
6 issued to an individual. Maybe the individual is
7 still the same Bondholder; maybe the person has
8 deceased, the other Bondholders now. So, it's not
9 just with respect to a case that comes in that the
10 eligibility has to be established, but with respect to
11 each Bondholder--to each Bond. Sorry. That is then
12 also quite an involved process, and it's not just
13 putting a stamp on a piece of paper.
14 So, no more details on the other status.
15 BY MR. HAMILTON:
16 Q. Dr. Wühler, if we could stay on that slide if
17 a moment, you discuss in greater length in your two
18 Reports how this four-stage process works, and you
19 mentioned earlier the forms.
20 We have time, so why don't you take a few
21 more minutes and share some further comments?
22 A. Okay.
[Page 2178]
1 Q. I think on authentication--you've just
2 discussed registration, but perhaps on authentication,
3 and then apart from that, your views about this stage
4 process, why it's not that you rush in on one day and
5 the next day you walk out with cash or bonds or
6 whatever it might be?
7 A. Okay. I'll be happy to do that. On
8 authentication, I'm not commenting on what
9 authentication requirements might be under Peruvian
10 law. That's not my area. But I have compared it to
11 the same kinds of things that happen. It's a
12 verification of a document, the authenticity of a
13 document. In many, many of the processes that I have
14 been involved, I have looked at in detail what happens
15 at this stage in the Peruvian process. It is quite an
16 involved process. At that stage, people that are
17 specialized for that look at--I forget the exact
18 number, but something like maybe 15 items that are
19 checked for each of these Bond documents, and we are
20 speaking--because the process is closed, we know what
21 the numbers--we are speaking about 12,902 Bonds, but
22 they do not only look at the one-page Bond. They look
[Page 2179]
1 at the coupons, because the coupons are part of what
2 constitutes the legal entitlement and the same thing.
3 So, these items are checked for each of those coupons,
4 so some of the Bonds have maybe one coupon left; some
5 have none left; others still have 20 coupons. So,
6 when you look at these numbers, that is not just an
7 involved process, but it's a process that certainly
8 takes time.
9 Actualization--I have not commented on the
10 methodology of the evaluation on the value. That is
11 outside my assignment. But the same comment again:
12 Actualization has to happen for each bond. It is not
13 that a Bondholder, so to speak, is actualized and the
14 value that the Bondholder represents, but it has to be
15 done for each bond. So, again, not commenting on the
16 methodology, but it is an involved process that
17 requires time.
18 Payment, again, it is probably less of an
19 issue, but it is also not purely, it's a figure that
20 has now been calculated during actualization and now
21 that figure is being paid out, because the process
22 foresees that the Bondholder has choices at that
[Page 2180]
1 point, options for what kind of form of payment he or
2 she will opt, and the options are either cash or
3 Government bonds or Government land.
4 So, there is, sort of inside that stage,
5 another procedure where an option is put forward by
6 the Bondholder. If that is found to be agreeable and,
7 I guess, implementable, then that is what goes
8 forward. If not--
9 PRESIDENT FERNÁNDEZ ARMESTO: Can you repeat
10 that?
11 THE WITNESS: Sorry?
12 PRESIDENT FERNÁNDEZ ARMESTO: Repeat that
13 last phrase.
14 THE WITNESS: Okay. So, the Bondholder puts
15 forward his or her choice. Let's say they choose
16 cash. If then it is determined in the process that is
17 appropriate and there is cash and cash will be paid,
18 that's the end of it. Money is paid.
19 PRESIDENT FERNÁNDEZ ARMESTO: The impersonal
20 "it" is the Government?
21 THE WITNESS: It's the process. It is the
22 people running the process.
[Page 2181]
1 PRESIDENT FERNÁNDEZ ARMESTO: Civil servants.
2 The Ministry.
3 THE WITNESS: Yeah, whoever is in the
4 Ministry of Economy and Finance responsible for that.
5 PRESIDENT FERNÁNDEZ ARMESTO: So, at the end,
6 a payment depends on a decision of a civil servant in
7 the process?
8 THE WITNESS: It depends on what the process
9 has led to, and then at some point one person makes a
10 decision that that now is done.
11 PRESIDENT FERNÁNDEZ ARMESTO: Assume I say I
12 want cash.
13 THE WITNESS: Yes.
14 PRESIDENT FERNÁNDEZ ARMESTO: Can you then
15 explain to us exactly how it then develops? Because
16 there seems to be two alternatives: That I get the
17 cash or I don't get the cash.
18 THE WITNESS: Yes. Yes.
19 PRESIDENT FERNÁNDEZ ARMESTO: And I would
20 like you to explain who takes what decision, and if I
21 don't get the cash, what is the alternative?
22 THE WITNESS: Okay. The request is, "I want
[Page 2182]
1 cash." The area in the Ministry of Finance that is
2 managing this process that is responsible for that
3 phase of the process will decide, yes, cash is the
4 form of payment here. Then, I assume, there is some
5 procedure to have funds made available for that, and
6 then it is out of these funds that payment is made.
7 PRESIDENT FERNÁNDEZ ARMESTO: There must be
8 an appropriation in the budget?
9 THE WITNESS: Exactly.
10 PRESIDENT FERNÁNDEZ ARMESTO: Okay. And if
11 there isn't?
12 THE WITNESS: Then I don't know about that.
13 ARBITRATOR DRYMER: And what if the
14 Bondholder opts for cash and the authority decides,
15 no, that is not appropriate?
16 So, two questions: One--this may be the
17 simpler one; I don't know--is what happens; but,
18 second, on what basis is that decision made as to
19 appropriateness? Thank you.
20 THE WITNESS: Okay. On the first component,
21 what happens is the Bondholder can either choose
22 another form or, if he or she insists, there will be
[Page 2183]
1 another time, so to speak, when it would have to be
2 decided: Will it be cash or will it not be cash? So-
3 ARBITRATOR DRYMER: So, the authority won't
4 say, "Cash is inappropriate; I'm giving you a bond or
5 I'm giving you land"? They will simply decide thumbs
6 up or thumbs down?
7 THE WITNESS: Yeah.
8 ARBITRATOR DRYMER: And then the Bondholder
9 can accept that decision or challenge it, effectively?
10 THE WITNESS: It's not a formal challenge.
11 ARBITRATOR DRYMER: Please.
12 THE WITNESS: There's a next phase where the
13 Bondholder can then say, "Okay, I agree with land or
14 bonds" or "I still would like to have cash." And
15 there is another time period that is foreseen in the
16 Supreme Decrees, which is one month in that case, for
17 the Bondholder and the Ministry to agree on a payment
18 form. If they do agree, then that is the payment form
19 that goes forward. If they don't agree, then at that
20 final stage, so to speak, in the payment process, then
21 a decision is made which payment form is chosen by the
[Page 2184]
1 Ministry. So, there's sort of, like, two steps in
2 that to make the option operable, if you like.
3 ARBITRATOR DRYMER: And, of course, the
4 second part of my question was: On what basis is that
5 decision, the thumbs up or thumbs down decision, made?
6 THE WITNESS: Right. Right. That, I can't
7 comment on. I don't know what the basis is.
8 ARBITRATOR DRYMER: Presumably, there is a
9 basis in what would be an acceptable structure, in
10 your view.
11 THE WITNESS: Well, there is--I can't really
12 comment on that. I would have some guess of what it
13 means at that stage. I can't comment on that, because
14 I really don't know exactly how that part of--the last
15 step of that decision-making, how that works.
16 ARBITRATOR DRYMER: Yes. Just one more
17 question. Pardon me. Patience, all. In the other
18 claims processes that you're familiar with and that
19 you've compared this to--
20 THE WITNESS: Yep.
21 ARBITRATOR DRYMER: Are the criteria for that
22 sort of decision spelled out? Is that something one
[Page 2185]
1 would expect to see?
2 I'm not asking you to comment on the
3 appropriateness of the criteria; just the fact that
4 they should be--whether or not they are typically
5 spelled out as part of a process, a claims process.
6 THE WITNESS: What is spelled out or what is
7 available, typically, is one of two things, normally.
8 Either you have a fund that exists, and that is
9 sufficient to pay the claims as they run through the
10 process--
11 ARBITRATOR DRYMER: Such as the UNCC, but
12 perhaps that's not a good example.
13 THE WITNESS: I mean, at some point you
14 stated there wasn't enough, but then enough came in.
15 ARBITRATOR DRYMER: Right.
16 THE WITNESS: Or the alternative is you don't
17 have enough in the fund, and then it may take quite
18 some time until payments are made. Or, you know, at
19 some point--well, I have not really seen the process
20 where no payments were made, but what I have seen a
21 number of times is that the amounts that initially
22 were awarded--in other words, what the processor said
[Page 2186]
1 the people should get--they had to be reduced, because
2 there was not enough money either in the fund or
3 coming into the fund, or even, in some cases, certain
4 categories of Claimants did not receive any payments
5 because there was priority for others that were found
6 to be more deserving, so to speak.
7 ARBITRATOR DRYMER: Thank you. I'll come
8 back, if necessary, later on, but I'd like to hear you
9 further, and eventually to hear counsel.
10 THE WITNESS: Okay. So, I come now to the
11 last main point in my presentation, and that is: What
12 is the progress in the Bondholder Procedure?
13 And the first question I would really like to
14 emphasize here is: How is progress assessed in a
15 claims and compensation procedure? And why am I
16 emphasizing that? Different people have different
17 views on what the progress is, and that--again, if
18 you'd like me to expand on that, I can certainly do
19 that. But just to say that, if you look at the
20 viewpoint of an individual participant--in this case,
21 an individual Bondholder--that Bondholder would
22 certainly have a certain view on what the progress is
[Page 2187]
1 for his or her Bond, and we can all think about what
2 people think about progress for their particular case.
3 But that look doesn't answer the question: What is
4 the progress in the process as a whole? Because that
5 is the key parameter. So, you have to see what the
6 progress is overall, because the job of the process is
7 to resolve the claims that are coming in, to lead them
8 through the process and to lead them to a conclusion,
9 and that is what has to be determined when one
10 assesses the progress in the Bondholder Procedure.
11 Now, my first comment on that is progress in
12 the process is not measured by the amount paid. And
13 I'm saying this in two respects. It's not
14 measured--and I'm emphasizing again, "progress." It's
15 not measured for the individual, because the amount
16 paid, everybody will have a different view on what the
17 reasonableness of the amount is that is paid. So, I
18 just put that out, but I leave it aside.
19 For purposes of the Bondholder Process, I put
20 to you that the measure really is the number of Bonds
21 that are going through the process and that are
22 completed, and that is the equivalent of what a claim
[Page 2188]
1 for one amount in another process represents. If you
2 have a claims process where you have an amount that is
3 fixed and the person puts in a claim, once that claim
4 is processed, that determines what the process--the
5 progress is. In this case, what has to be processed
6 are the Bonds, as we looked at in the beginning.
7 It's not claim. Yes, the claim has to be
8 completed, but the real work is on the Bonds at every
9 stage of this process. So, that is what determines
10 how good and how effective the process is.
11 So, this happens at each stage process, and
12 all these stages have to be looked at, and then there
13 has to be sort of a comprehensive picture of that.
14 So, to do that, what we have available in the
15 record at the moment, are the statistics as of
16 August 2019, and I'm sure you're aware of this summary
17 chart. And this is the one I will use in the next
18 slide I would like to go through with you. Can we
19 just come back?
20 So, important point: This data as of
21 August 2019, of course, gives a snapshot at that point
22 in time. They can show what has happened up to that
[Page 2189]
1 time, but they don't show how the process continues,
2 and they certainly don't show what the eventual
3 outcome is.
4 So, when I look at this snapshot for the
5 different stages of the process, the progress is
6 comparable with experiences in other claims and
7 compensation processes at similar stages, because the
8 stages have a different progress rate, if you like.
9 The first stage in the Bondholder Process,
10 authentication, is by now practically completed. And
11 we will go through the numbers, if you bear with me,
12 in a moment.
13 What I also wanted to mention as a context is
14 the snapshot is as of August 2019. In her testimony,
15 Vice Minister Sotelo mentioned that more recent data
16 are available, and they do show further progress.
17 This is something that I can certainly--this is
18 something that is absolutely normal and natural. As
19 you progress in such a system, it is quite normal that
20 you start slow, that you get faster, that the numbers
21 of cases that you complete get higher, and in this
22 case that, again, the key measure, the number of bonds
[Page 2190]
1 that are completed gets higher.
2 So, if we can now go to the summary table, so
3 what I have done here is I have--
4 ARBITRATOR DRYMER: Excuse me, just apologies
5 again. Just so that I understand your point on that,
6 are you telling us in effect--and I'm making up
7 numbers--just because it might have taken two years to
8 register 500 bonds doesn't mean it will take another
9 two years to register another 500 bonds; in other
10 words, the pace will accelerate?
11 THE WITNESS: Well, that is the first point.
12 ARBITRATOR DRYMER: Yes.
13 THE WITNESS: But the second point is that--
14 ARBITRATOR DRYMER: Yes.
15 THE WITNESS: --may be the more important
16 point is--
17 ARBITRATOR DRYMER: Yes.
18 THE WITNESS: The fact that a bond had to
19 register were not in the registration on Day 1 of the
20 process.
21 ARBITRATOR DRYMER: Of course. Understood.
22 THE WITNESS: Because they first had to come
[Page 2191]
1 from the previous stages from authentication.
2 ARBITRATOR DRYMER: Understood.
3 THE WITNESS: And so, only those that come to
4 the next step can be processed as of the time that
5 they come in.
6 PRESIDENT FERNÁNDEZ ARMESTO: Yeah. I
7 understood Vice Minister Sotelo that the procedure was
8 now closed, and so the number of cases which entered
9 the procedure is closed. No new cases can come in.
10 THE WITNESS: That is correct. It is closed
11 as of January 2019.
12 (Overlapping speakers.)
13 PRESIDENT FERNÁNDEZ ARMESTO: Yeah. But they
14 eventually go through the procedure.
15 THE WITNESS: Yes.
16 PRESIDENT FERNÁNDEZ ARMESTO: Yeah.
17 THE WITNESS: But, actually, what she said
18 was, as they move through the process, when you look
19 at that over time, you can see that more cases have
20 gone to the next stages, away from the first stage.
21 So, the figures on this table, everything
22 except the red and blue arrows and numbers are on the
[Page 2192]
1 table that are in the record. The red and blue is
2 from me, and what I'm trying to show with that is
3 progress, and progress that can be expected further in
4 the process.
5 So, if you would first, please, look at the
6 numbers that are in the boxes. In the first Column A,
7 the 11,395 bonds, they represent 88 percent of all the
8 Bonds that came into authentication into that process.
9 So, in August 2019, 88 percent of those had been
10 authenticated, and I think there had been--everybody
11 agreed that by now practically all of them have been
12 authenticated.
13 In the second stage, there is the same type
14 of number, how many of these bonds have been
15 registered at this stage, and the same thing in
16 actualization.
17 So, what do these arrows and the percentages
18 mean? And I've added these to demonstrate that it's a
19 dynamic process and progress is dynamic. So, I've
20 calculated--it's a pure calculation. I have
21 calculated the number of bonds that move from
22 one--have moved from one stage to the next. And in
[Page 2193]
1 the first stage, the 53 percent means that, out of the
2 bonds that have been authenticated, 53 percent have
3 moved through registration, and the same for the other
4 parts of these processes.
5 And then--so, you see these numbers here. I
6 have to say I was not surprised generally that at this
7 point in time numbers were not 100 percent because,
8 again, it's a process that has a time factor and has a
9 resource factor. And I make this as a personal
10 observation. I was surprised about the first number
11 of 53 percent, that only basically half the people
12 whose bonds were authenticated actually asked to be
13 registered as legitimate Bondholders. I have no real
14 explanation for that, but personally I would have
15 expected that more people take that step as well
16 because it's a real simple step.
17 So, what the blue numbers and the blue arrows
18 are trying to show is the following: Again, this is a
19 snapshot as of August last year. When you try to look
20 into the future, so to speak, to determine what, based
21 on the data that you have can be expected for the
22 progress in the process, I took what I think was the
[Page 2194]
1 best measure for that. But, again, first, all of this
2 is on bonds because I think bonds are the measure for
3 this.
4 But, second, for this progression in the
5 stages, I took what you can see as the actual
6 percentage of bonds that have moved forward. Like
7 these red percentages, I've taken those and have
8 applied them to the cases still pending, which is in
9 pendientes, and I have calculated number of bonds that
10 are pending there. If you take that percentage, so
11 many move forward. And then you can see that based on
12 whatever views you may have, how many--will the
13 percentages be the same? Will they be lower? Will
14 they be higher? This is what will move further in the
15 process.
16 Now, there is another component, and I'll
17 stop there, I'm eating up a lot of time. So, these
18 numbers are just the blue numbers based on the
19 percentages in each stage. You actually would have to
20 make it like composite interest. You would have to
21 add those that are coming and the basis for that. But
22 let's forget about that. It is getting very
[Page 2195]
1 complicated. I think these simple numbers are easy to 2 understand.
3 PRESIDENT FERNÁNDEZ ARMESTO: Well, your 4 estimation is that payment eventually will reach 565, 5 plus 381 bonds. That is your estimation.
6 THE WITNESS: I'm not really estimating 7 eventually how many will. I'm saying, based on the 8 current rate of moving, these are the numbers here--
9 PRESIDENT FERNÁNDEZ ARMESTO: Yeah.
10 THE WITNESS: --pending still.
11 (Overlapping speakers.)
12 PRESIDENT FERNÁNDEZ ARMESTO: Okay. Assuming 13 that there is no change in the percentages, eventually 14 the number of bonds paid would be 565, which those are 15 already paid, plus 381, which will come into the 16 procedure from the actualization.
17 THE WITNESS: No. Because--
18 PRESIDENT FERNÁNDEZ ARMESTO: No. Then I 19 have misunderstood you. Thank you.
20 THE WITNESS: Sorry, because there would be 21 more than 381 still coming because more are coming 22 from the first stages before that. So, the 381 are
[Page 2196]
1 just the ones that came at this point from 2 actualization.
3 PRESIDENT FERNÁNDEZ ARMESTO: Okay. So, it 4 would be 381, plus 549, plus 83?
5 THE WITNESS: If that is the same rate, 6 that's correct. But based on my experience, the rate 7 will increase. Because once you have completed the 8 first stage, the rate will increase. Again, I know 9 that specific numbers of the next stages are not in 10 the process. But I know that Vice Minister Sotelo has 11 made the remark that more progress has been made, and 12 I really think, based on every experience I've seen in 13 these processes, one can expect that the numbers will 14 be higher.
15 Now, at some point, one can maybe look at 16 those numbers, but I understand that at this point in 17 time what I have done here can only be done in front 18 of you now as of August 2019.
19 BY MR. HAMILTON:
20 Q. Dr. Wühler, in the interest of time, one 21 question to conclude this table and lead you to your 22 conclusion: Why is the filter process indicated by
[Page 2197]
1 these reviews and the rechazados important for a state 2 institution allocating state funds?
3 A. Well, I think any state institution is bound 4 by the requirements to be diligent and careful with 5 how the money is spent for which that entity is 6 responsible, and that is sort of the simple answer to 7 the question. I mean, it's not--I mentioned in the 8 very beginning it's not just a process where you put 9 in a piece of paper and registration means you are 10 registered and then the payment is made. So, that's 11 in simple terms what the answer to the question is.
12 Q. Would you like to share your conclusions?
13 A. Yes, please.
14 So, the summary of my conclusions, the 15 Bondholder is a fair and effective process for the 16 resolution of the bonds, but also for the individual 17 Bondholders to seek the payment of the actualized 18 value of the bonds. So, it has these two components. 19 It is progressing according to two things, according 20 to the framework that it has and within that 21 framework, and according to the circumstances in which 22 this process operates, and it does provide for an
[Page 2198]
1 efficient resolution of the individual bonds submitted 2 to it.
3 That conclusion is based on my review of the 4 key features of the process, the Regulatory Framework, 5 the institutional framework, the House and the 6 procedure, as well as the practice and the outcomes 7 that we just went through on the occasion of this 8 table. And these conclusions are confirmed when this 9 Bondholder Process is compared with other claims and 10 compensation procedures and their practice and the 11 standards that are applied in them.
12 That concludes my introduction.
13 Thank you very much.
14 Q. Thank you, Dr. Wühler.
15 MR. HAMILTON: Thank you, Mr. President.
16 PRESIDENT FERNÁNDEZ ARMESTO: Thank you. So, 17 we will give now the floor to--is it Ms. or Doctor? I 18 don't want now to--
19 MS. LAVAUD: I would love to be called 20 doctor, but I do not want to mislead the President. 21 Señora will do. Thank you, Mr. President.
22 PRESIDENT FERNÁNDEZ ARMESTO: Thank you,
[Page 2199]
1 Ms. Lavaud.
2 CROSS-EXAMINATION
3 BY MS. LAVAUD:
4 Q. Good afternoon, Dr. Wühler.
5 A. Good afternoon.
6 Q. It's a pleasure to meet you. My name is 7 Floriane Lavaud, and I represent Gramercy in these 8 proceedings.
9 In the interest of time, I will be asking you 10 questions about the Reports that you submitted in this 11 arbitration. I will try to keep my questions as short 12 as possible, and I would be grateful if you could do 13 the same with your answer. And my learned friend, 14 Jonathan Hamilton, will, no doubt, give you an 15 opportunity to provide more information if you wish to 16 do so on redirect.
17 Dr. Wühler, you were retained by Perú to 18 assess the procedure established for the payment of 19 the Agrarian Reform Bonds; correct?
20 A. This is correct.
21 Q. And you refer to that procedure as the 22 "Bondholder Process."
[Page 2200]
1 A. That's correct.
2 Q. And your expertise is in national and 3 international claims programs; correct?
4 A. Claims and compensation programs.
5 Q. And those programs concern, for example, 6 losses suffered by victims of forced labor during the 7 Second World War?
8 A. Also, but not only. There were many other 9 types of processes coming out of many different 10 circumstances.
11 Q. That's why I said, for example. Umm-hmm.
12 And so, you compared in your Reports the 13 Bondholder Process to this kind of program; is that 14 right?
15 A. Yes.
16 Q. And, in fact, on direct--
17 A. Sorry. That's correct, that I first reviewed 18 it, and then I compared it to these programs.
19 Q. Right. Thank you.
20 And, in fact, you said on direct examination 21 that the Bondholder Process is a claims and 22 compensation process; correct?
[Page 2201]
1 A. Yes. That is correct.
2 Q. So, you are analogizing the Bondholders to 3 the victims of those programs; correct?
4 A. No. No. This is what I tried to say already 5 on the first question. The origins of these processes 6 are very different. You have war, you have human 7 rights violations, you have 9/11, you have 8 environmental damages. All kinds of different sources 9 can lead and events can lead to the setting up of 10 these processes.
11 Why I'm using this analogy is for the process 12 and the procedure. It's not for the source from which 13 they come.
14 Q. Thank you.
15 But would you agree with me that the original 16 landowners in this case were the victims of a mass 17 expropriation; correct?
18 A. I'm saying the landowners--no. I'm saying 19 the landowners are the participants in the process as 20 the process has been set up, and there are 21 participants with bonds.
22 Q. And you would agree with me that millions of
[Page 2202]
1 hectares of agricultural land were expropriated and 2 were distributed as part of the Agrarian Reform; is 3 that right?
4 A. I don't know all the details. Don't take me 5 on a number--
6 Q. Okay.
7 A. --but it goes back to that historic event, 8 obviously.
9 Q. I was just citing your Report. Those were 10 your words, Dr. Wühler.
11 A. Okay. Yeah.
12 Q. And you concluded that the Bondholder Process 13 is well within the standards of accepted practices for 14 claims processes; right?
15 A. Yes.
16 Q. And that the efficacy and efficiency of the 17 Bondholder Process are sound and consistent with 18 international practice; is that right?
19 A. Yes. Yes.
20 Q. Now, one of the factors that you considered 21 is transparency; is that right?
22 A. No.
[Page 2203]
1 Q. You didn't consider transparency?
2 A. Yes. Sorry, I take that back--
3 Q. Okay.
4 A. --transparency, but not transparency 5 generally, but transparency with respect to the 6 process.
7 Q. Okay. In fact, you say that the Bondholder 8 Process is transparent; is that right?
9 A. Yes. Yes.
10 MR. HAMILTON: Excuse me, can we just slow 11 down just a little bit?
12 MS. LAVAUD: Oh, absolutely. I'd be happy 13 to.
14 MR. HAMILTON: I'm trying to read the 15 transcription. And, also, if you're quoting his 16 Report, you can just tell him what you're citing to 17 and help him follow along with you. Thank you.
18 BY MS. LAVAUD:
19 Q. If he would like to obtain the specific 20 paragraphs I'm referring to--I would be more than 21 delighted to provide that to you, Dr. Wühler.
22 PRESIDENT FERNÁNDEZ ARMESTO: I think we were
[Page 2204]
1 doing very well. Let's do leave a second between 2 question and answer--
3 MS. LAVAUD: Absolutely. I would be happy 4 to. Thank you, Mr. President.
5 PRESIDENT FERNÁNDEZ ARMESTO: --so that our 6 Court Reporters can keep pace.
7 THE WITNESS: Okay.
8 BY MS. LAVAUD:
9 Q. Yeah. We have the pleasure of being able to 10 converse in English without at least translation 11 between the two of us.
12 So, I will--but I will try to slow down. We 13 obviously have the interpreters.
14 ARBITRATOR DRYMER: The Transcript is still 15 being translated. Bear that in mind as well.
16 MS. LAVAUD: Yes. Absolutely. Absolutely. 17 Thank you for the reminder, Mr. President and 18 Mr. Drymer.
19 BY MS. LAVAUD:
20 Q. And so, let's just go back.
21 You said that the Bondholder Process is 22 transparent, and I think your answer to that question
[Page 2205]
1 was yes?
2 A. I said the process is transparent, yes.
3 Q. Right.
4 And you said that it provides sufficient 5 information for Bondholders to make informed choices 6 about participation; is that right?
7 A. Is that a quote?
8 Q. It is in your Report. Yes, I would be happy 9 to point you to it if you'd like?
10 A. Yes.
11 Ω. And this information is contained, you said, 12 on the MEF website.
13 Do you remember that?
14 A. Yes.
15 Q. So, did you take a look at this--did you look 16 at this website?
17 A. It's a MEF website, and it's in the forms 18 that are made available.
19 Q. It's in the forms.
20 And the forms are on the MEF website; 21 correct?
22 A. Yes. Yes.
[Page 2206]
1 (Interruption.)
2 Q. I was just saying, for the record, that the 3 forms are on the MEF's website, and I believe you 4 answered to that question was yes.
5 So, did you look at this website, Dr. Wühler?
6 A. Yes. Yes.
7 PRESIDENT FERNÁNDEZ ARMESTO: You must wait. 8 You must wait for his answer, and you must wait for 9 the question because otherwise it becomes impossible.
10 (Comments off the record.)
11 BY MS. LAVAUD:
12 Q. So, because you have been on this website, 13 you know that when--if the Bondholder wants to know 14 how much he or she will be able--will receive as part 15 of the process, he's taken to--he or she is taken to 16 the part of the website that is called methodology.
17 Do you remember that?
18 A. Yes, I do.
19 Q. And when you click on that "methodology," 20 there is actually a button that--there's a link to the 21 August 2017 Supreme Decree.
22 Do you remember that?
[Page 2207]
1 A. Yes. There is a link to the methodology, to 2 the methodology as it is explained.
3 Q. Right. But there's--
4 A. But there is something else on the website. 5 There is a simpler explanation of the methodology 6 also.
7 Q. Okay. And you looked at that--
8 A. Yes.
9 Q. You looked at that?
10 A. Now, I have not looked at valuation and 11 valuation methodology because that was not part of my 12 assignment. I've looked whether these things are 13 there, but I haven't looked into them.
14 Q. So, let's just go back. You said that on the 15 website it actually takes you to the 2017 Supreme 16 Decree, and I believe your answer was yes.
17 A. If I remember correctly, yes.
18 Q. And those Decrees contains the formula to 19 update the value of the Bonds; correct?
20 A. The Decrees do contain the formula.
21 Q. Right. And, actually, when you click on that 22 link, you will see that what appears is under--if you
[Page 2208]
1 want to take a look under Tab 6?
2 PRESIDENT FERNÁNDEZ ARMESTO: 6?
3 MS. LAVAUD: 6. Yes. Of your binder.
4 PRESIDENT FERNÁNDEZ ARMESTO: What shall we 5 do?
6 MS. LAVAUD: So that is...
7 PRESIDENT FERNÁNDEZ ARMESTO: What shall we 8 do? Shall we go into the website of MEF?
9 MS. LAVAUD: Yes. I will give you a shortcut 10 for that. That is RA-23, please.
11 PRESIDENT FERNÁNDEZ ARMESTO: RA?
12 MS. LAVAUD: 23.
13 PRESIDENT FERNÁNDEZ ARMESTO: Okay. Thank 14 you.
15 MS. LAVAUD: And if you actually turn, you'll 16 see it has, a few pages in, it is Page 6.
17 PRESIDENT FERNÁNDEZ ARMESTO: No, no, no, no. 18 You have to go--you leave us. Please.
19 MS. LAVAUD: Do you want to put it on the 20 screen, RA-23?
21 ARBITRATOR DRYMER: This is the Supreme 22 Decree 242?
[Page 2209]
1 MS. LAVAUD: Yes.
2 ARBITRATOR DRYMER: All right.
3 BY MS. LAVAUD:
4 Q. And so, if you turn to Page 28, which I 5 believe is Page 6 of the PDF for the Tribunal. So, it 6 is Page 6 of the PDF and Page 28 of the document 7 itself.
8 (Comments off microphone.)
9 MS. LAVAUD: Tell me when you're ready, 10 Mr. President.
11 PRESIDENT FERNÁNDEZ ARMESTO: I have the 12 formula, yeah.
13 BY MS. LAVAUD:
14 Q. Do you have it in front of you, Dr. Wühler?
15 A. Yes.
16 Q. Do you see Page 28, it says "methodology for 17 actualization"--
18 (Interruption.)
19 MS. LAVAUD: Yes, of course, absolutely.
20 BY MS. LAVAUD:
21 Q. Do you see on Page 28, it says--and you speak 22 a little Spanish, Dr. Wühler, I understand?
[Page 2210]
1 A. Yes. I understand Spanish, yes.
2 Q. Okay. So, there's a methodology for 3 actualization?
4 A. Umm-hmm.
5 Q. So, now, Dr. Wühler, let's assume for a 6 second that you are a Bondholder, and that you had a 7 farm that was expropriated in Perú, say, in 1970, and 8 in return, you were given, say, 10 bonds, Class A, for 9 a face amount of 10,000 soles de oro, and that as of 10 today, you have half of your coupons that remain 11 unpaid.
12 Okay? Are you with me?
13 A. Umm-hmm. Umm-hmm.
14 Q. Now, because I mentioned that there were some 15 of the coupons that were clipped, you only have half 16 of them left--if you want to just look over to 17 Page 29, which is what the formula is for clipped 18 coupon bonds, can you just take a minute and just tell 19 me, if you can, tell me how much you think that you're 20 going to get under the Bondholder Process by looking 21 at the formula?
22 A. I don't need to take a minute--I'll slow it
[Page 2211]
1 down. I don't need to take a minute because I can't 2 tell you because I haven't looked at that, but I also 3 think that what you're asking me is whether--no. I 4 stop there. So, I can't tell you.
5 Q. Okay. You said you haven't looked at it. I 6 understand. So, if you look at it now--
7 A. I haven't look at anything to do with the 8 method and the numbers of valuation.
9 Q. I see. But you testified just now, but also 10 in your Report, that "the process is transparent and 11 provides sufficient information for Bondholders to 12 make informed choices about participation."
13 So, you don't know how much the process 14 offers to Bondholders?
15 A. Well, this is a situation that you have in 16 many, many claims processes where compensation comes 17 out at the end. You have no idea how much you will be 18 compensated for. Actually, you have nothing to have 19 any parameters in the beginning because the decision 20 is made in the process, and you don't know what the 21 outcome for your individual case is.
22 So, it's not unusual that there is a process
[Page 2212]
1 where you have to make a choice if you are going--you 2 know, it would be great if you knew what is coming out 3 at the end, but you don't necessarily know, and then 4 you have to make the choice "am I taking what will 5 come out or not?"
6 Q. Would you agree with me that in this 7 particular case, the Bondholder is sitting--being in 8 your situation would be very interested to know how 9 much he or she is going to get as a decision to make 10 to decide to submit his or her bonds into the process? 11 Would you agree with me or not?
12 A. I think every participant in the claims 13 process would definitely like to know how much they 14 can expect from the process and how much they will 15 receive on their individual claim. But many times 16 that is not the case, and many times people have gone 17 into these processes with requests for a specific 18 amount of money because they think that is what is 19 owed to them. And the process has come out very 20 differently. But there have been many other times 21 where the process has told people "don't tell us how 22 much you want because the process has criteria to
[Page 2213]
1 decide that, and this is what will come out. We don't 2 want you to be disappointed, so don't put that in 3 even."
4 Q. So, just to be clear, a Bondholder before 5 participating in the process would not be able to know 6 how much he or she is going to get as part of the 7 process. Is that your testimony?
8 A. I don't know. I don't know.
9 Q. You don't know.
10 A. Because I assume that there are people who 11 will know and who will understand, but I don't know.
12 Q. Instead, the Bondholder, that same 13 Bondholder, would have to go through the 14 authentication stage. You talked about that during 15 your direct. And then the registration stage and then 16 the third stage you actually know how much he or she 17 will get through the process; is that right?
18 A. In the particular case?
19 Q. Umm-hmm.
20 A. Yes.
21 Q. And that process--
22 A. Again, they could know before because I
[Page 2214]
1 assume that people, they will understand the 2 methodology. And those people would know.
3 Q. And who are "those people"?
4 A. I don't know. I have not looked into 5 valuation, into the methodology. I have not spoken to 6 people who are participating, but I would assume that 7 there are people who understand it.
8 Q. So, you're saying that people would 9 understand it, but you don't know for a fact?
10 A. Yes.
11 Q. Now, we talked about the stages, 12 authentication, registration, actualization.
13 ARBITRATOR DRYMER: Pardon me. Pardon me, 14 Counsel, are you moving on from this?
15 MS. LAVAUD: No, I'm still--
16 ARBITRATOR DRYMER: All right. I'll let 17 you--
18 MS. LAVAUD: Please, Mr. Drymer, because it's 19 a related point, but I don't want to move too quickly.
20 ARBITRATOR DRYMER: All right. I understand 21 full well the idea that many claims processes don't 22 tell you what the outcome will be. That's the nature
[Page 2215]
1 of a process, any more than this process is telling 2 anybody what the outcome is going to be at this stage.
3 It seems here though that the Regulation, the 4 Supreme Decree in question, purports to tell people 5 what the outcome will be. And maybe that's an 6 incorrect characterization but to the extent it's 7 correct, is that unusual? I have only some 8 familiarity with some of the processes that you know 9 closely, but this seems to me unusual in that respect 10 compared to the others, which are more legal in nature 11 than technical, financial.
12 THE WITNESS: There are compensation 13 processes that say something about the criteria, which 14 are used to--in the valuations. They have to make 15 valuations, and they say something about the criteria.
16 ARBITRATOR DRYMER: But they are not usually 17 formulas such as this?
18 THE WITNESS: I could not say that I have 19 been in a process where there has been a formula like 20 this upfront. There have been formulas in the 21 process, certainly, and there have been very complex 22 formulas. Like in corporate claims, in the UNCC, they
[Page 2216]
1 were very complex calculations, methodologies, but I 2 haven't seen this type of formula upfront.
3 ARBITRATOR DRYMER: Thank you.
4 MS. LAVAUD: Thank you for your question, 5 Mr. Drymer.
6 BY MS. LAVAUD:
7 Q. So, going back to the stages that we 8 discussed earlier, you're aware that it takes 9 sometimes--well, it actually takes years for 10 Bondholders generally to find out how much they are 11 going to get paid; is that right?
12 A. Well, it takes the time it takes for them to 13 get their claim through the process, through the 14 stages of the process.
15 Q. Are you aware that, based on the data 16 provided by the MEF as of August 31, 2019, it takes an 17 average 4.1 years for Bondholders just to know how 18 much the MEF is offering?
19 A. I don't think this is a correct statement 20 because what it does, it takes one Bondholder, it 21 calculates the time that it has taken that one 22 Bondholder, and it takes it as the average. That is
[Page 2217]
1 not a correct conclusion, I think.
2 Q. No. That is based on the data that was 3 provided by the MEF, and the way this is calculated is 4 just to take a look at the number of bonds that 5 were--or Bondholders that entered the process, and the 6 numbers and just calculate the--how long it takes on 7 average for those Bondholders to get through 8 actualization. And that's just based on the data that 9 you attached to your Report, which is R-1062.
10 A. Can you take me through that calculation? 11 Because I didn't understand it.
12 Q. I would be happy to, but I don't think that 13 it's a very good use of the Tribunal's time. I'm 14 happy to represent--if there is any question about the 15 way that this average is calculated, we're happy to 16 answer any questions.
17 A. I think it's the wrong--
18 MR. HAMILTON: If I could, for a procedural 19 matter, are you citing to an expert report or 20 calculation or this is a free-style number that you're 21 presenting?
22 MS. LAVAUD: I wouldn't call it free style.
[Page 2218]
1 MR. HAMILTON: Because the Witness--the 2 Witness is saying he's never been given this 3 information before.
4 MS. LAVAUD: Well, I am relying, just for the 5 record, on R-1062, which is a document that Dr. Wühler 6 was citing to in his Report.
7 And the calculation is very simple. You just 8 look at how long it takes from the date that the 9 Forms A have been submitted, through the notification 10 of the Form C, and you calculate the average--just the 11 average and the amount of time that it takes.
12 If the Republic of Perú has any doubts about 13 this calculations, feel free. I just don't think that 14 it's a good use of the time that we go through this 15 calculations, but, Mr. President, I'm in your hands.
16 PRESIDENT FERNÁNDEZ ARMESTO: No. Just 17 represent to the Expert that you say it is for 18 four years for the Stages A, B, and C.
19 MS. LAVAUD: Correct.
20 PRESIDENT FERNÁNDEZ ARMESTO: It's a 21 representation. It's a statement from counsel. What 22 is your reaction?
[Page 2219]
1 THE WITNESS: Well, my answer was it is both 2 a wrong calculation and it has the wrong parameters.
3 It's a wrong calculation because it takes the 4 beginning of the process and it purports to say this 5 is when the claims that are paid at the end of the 6 process came in.
7 Now, I haven't looked at the particular 8 claims that you're referring to that are in this chart 9 that have actually been paid out, at what time they 10 have come into the process because the process has 11 been open until January 2019. So, to say I take the 12 first day when the process opened and it has taken 13 these people to get their payment 4.5 years later 14 doesn't tell you anything about the average time it 15 takes to process.
16 BY MS. LAVAUD:
17 Q. So, I will just clarify one thing for the 18 record. I think you understood, Mr. President, 19 Mr. Drymer, that this actually just covered only the 20 first three phases. So, it doesn't cover the date, 21 which actually would render the average even longer if 22 we were to take into account the date on which those
[Page 2220]
1 Bondholders were paid. My calculation is just based 2 on the date from the filing of the Form A to the date 3 of the notification of the actualization.
4 In other words, how long does it take on 5 average for Bondholders to know how much they are 6 going to get paid out of the process. That's the only 7 point.
8 (Overlapping speakers.)
9 A. Again, I say it is the wrong calculation. 10 It's the wrong calculation.
11 PRESIDENT FERNÁNDEZ ARMESTO: Sorry.
12 MR. HAMILTON: We would simply like the 13 record to show that the Expert has never seen these 14 free-style numbers before. That's the problem with 15 free-style numbers thrown in a witness' face.
16 PRESIDENT FERNÁNDEZ ARMESTO: Okay.
17 MS. LAVAUD: Should I move on?
18 THE WITNESS: It's a wrong calculation.
19 PRESIDENT FERNÁNDEZ ARMESTO: Yes. It is 20 quite a--I mean, you will agree, whatever four 21 year--we are now 2020 and the process started 2014. 22 It has not been a huge amount of activity in the
[Page 2221]
1 process?
2 THE WITNESS: I don't agree. There has been 3 a lot of activity. Well, let's say the majority--the 4 vast majority of all the Bonds in the process--and I 5 really think it is important not just to think about 6 number of cases. The Bonds in the process, the vast 7 majority, have been authenticated. That was a very 8 involved process. If you have looked at what the 9 results Report of the National Police is to the 10 Ministry of Economy and Finance for a particular case 11 with all the Bonds attached there and the kind of 12 examinations they make, the kind of details they 13 attach to that, that is a very involved process.
14 One also has to keep in mind every claims 15 process that you enter into, you don't start on Day 16 Number 1 to process claims. So, in this case, my 17 understanding is that it has taken quite some time to 18 get the institutional arrangements concluded, to get 19 this unit or the part of that unit that then is 20 devoted to this process--it's not the only work they 21 are doing--to get set up and equipped and so on, and 22 that time, of course, you can say this is what the
[Page 2222]
1 process takes in the end overall, but these are all 2 considerations that you have to keep in mind when you 3 talk about the progress.
4 PRESIDENT FERNÁNDEZ ARMESTO: I asked--I 5 don't know if you have been with us before, and you 6 heard Professor Hundskopf.
7 THE WITNESS: Professor Hundskopf, I haven't 8 heard. I'm sorry. I have heard others but not him.
9 PRESIDENT FERNÁNDEZ ARMESTO: He's an expert. 10 He was the Dean of the Faculty of Law in Lima, and 11 he's a highly respected jurist, and he said he had had 12 personal experience because of his age and his 13 university with a number of cases and he had been 14 involved directly in the procedure. They asked him 15 how many persons had been expropriated and he said it 16 was approximately 20,000. That was his number. I 17 don't represent to you whether it's true or not, it's 18 just his number.
19 But it struck me that if there have been 20 20,000, probably a lot have died, disappeared, but 21 still it was a number in the thousands, that only 443 22 landowners have actually gone into the process.
[Page 2223]
1 I don't know if that--if you have--let me ask 2 you: What is for you, for a procedure to be 3 successful, what would be the threshold of percentage 4 of entitled persons who actually make use of the 5 process? When would you start to speak of the 6 success?
7 THE WITNESS: I really think it is impossible 8 to give a general answer to that. I'm not avoiding to 9 try to give an answer. It really is impossible 10 because there are so many different factors that 11 impact that.
12 I have been personally in processes where the 13 trend was that--and in processes where the origins of 14 what cause the processes also went back 50, 60 years. 15 In those situations, quite often, you had two sort of 16 conflicting trends. One was you had people originally 17 affected that were old by that time, quite old, that, 18 on the one hand, were very attached to what they had 19 lost, so to speak. And that was the case, for 20 instance, in situations where they were displaced from 21 property or other things were taken, and they were 22 quite attached to that.
[Page 2224]
1 I have been personally in a situation where 2 such an old Claimant took me to a place where a house 3 had been. It wasn't there anymore, so it was just a 4 question of money. And she took me with a key in her 5 hand that she had kept for 50 years of that house.
6 There was another aspect, then, in those kind 7 of situations where the next or the second-next 8 generation, the younger people, who were not so close 9 to the facts that had given rise to these kind of 10 processes, they were much more detached from them.
11 Now, there were two conflicting trends even 12 in that population, if you like, of potential 13 participants. In some cases, they were very 14 aggressive, much more aggressive than their parents or 15 grandparents, in pursuing these things and also being 16 aggressive about the little outcome and things like 17 that. In some other cases, it was the opposite, 18 because they said, I have a life of my own now, you 19 know. This is long gone. I have gone on with my 20 life, I'm going to go on with my life. I'm not going 21 into this, not, you know, because I don't think it's 22 worth trying to do something, but I'm just at a
[Page 2225]
1 different stage of life, and I'm not doing this.
2 I'm saying this not to say that this is every 3 time the situation. I'm saying it's very difficult to 4 make a general statement about why people participate 5 or do not participate and how many should participate 6 because also the base from which you estimate that you 7 mentioned this statement by Professor Hundskopf, which 8 I haven't heard, but I cannot comment on those 9 numbers. I'm just giving considerations.
10 ARBITRATOR DRYMER: I'm sorry but I'm glad 11 you raised a question, and I'm glad, Dr. Wühler, 12 you're talking about this because one of things that 13 strikes me, and I wonder whether it's related to this 14 phenomena, is the percentage of bonds that move to the 15 next stage in your picture here.
16 First of all, did I understand you correctly 17 earlier to say that--you said you were surprised at 18 the 53 percent number of bonds. And you said that, 19 you know, that the holders of only 53 percent of the 20 bonds asked that they be registered. So, in other 21 words, it is up to the Bondholder to take the step to 22 go to the next stage?
[Page 2226]
1 THE WITNESS: Yes.
2 ARBITRATOR DRYMER: And have you got a 3 comment as to why it's only roughly half that chooses 4 to go to the next stage at each of these stages? 5 Again, not half the owners, but the owners of half the 6 Bonds that finish in one stage and choose to go to the 7 next?
8 THE WITNESS: I think you have to even be a 9 bit more concrete and detailed because it is not half 10 the people that own bonds.
11 ARBITRATOR DRYMER: Please. That's what I'm 12 saying. The owners of half--
13 THE WITNESS: No, it is half the number of 14 bonds--
15 ARBITRATOR DRYMER: Half the number of bonds.
16 THE WITNESS: --can be moved to the next 17 stage.
18 ARBITRATOR DRYMER: All right.
19 THE WITNESS: And just to put that in 20 perspective again, in the first year--actually in the 21 first half year, there was one particular claim that 22 was filed by one person that comprised 1,875 bonds.
[Page 2227]
1 That claim along would have a very big impact on all 2 these things in the process. It's about 15 percent of 3 the whole caseload--sorry--yeah, 15 percent of the 4 whole caseload, so to speak.
5 There were other cases that were filed in the 6 first year where one particular Claimant had hundreds 7 of bonds. Actually, over all, about 75 percent of all 8 the Bonds were submitted into the process in the first 9 year. Half of them in the first half year, number of 10 bonds.
11 I'm digressing. But that goes, again, to the 12 progress because you have a very, very big bottleneck 13 in the beginning, which you always have in these 14 programs because Claims come in quickly. You're not 15 yet equipped to start, people are very angry about no 16 progress. I've personally had that many times, and 17 you have to work down that pool that is sitting there 18 in the beginning. And here, it was a very great pool 19 in the very beginning.
20 ARBITRATOR DRYMER: Right. And, you know 21 what, if counsel realizes I'm misunderstanding, I'm 22 going to let you clear things up afterwards, but
[Page 2228]
1 still, a couple years in, for example, once we get to 2 the actualization stage, just for example, still only 3 41 percent of the Bonds--of the number of Bonds have 4 progressed--have been asked to be progressed to the 5 payment stage. Why so low? Why only 40 percent?
6 THE WITNESS: The number is correct.
7 ARBITRATOR DRYMER: Yes.
8 THE WITNESS: It's the number I calculated. 9 I really don't know. I can't speak for the people 10 there. I can speak for experiences for these other 11 stages that I'm familiar with.
12 ARBITRATOR DRYMER: Yes.
13 THE WITNESS: But I can't speak about that 14 one.
15 PRESIDENT FERNÁNDEZ ARMESTO: But there could 16 be--I mean, the logical explanation is that they are 17 unhappy with the outcome of the first payments or that 18 they think that the payment is--that they are 19 unsatisfied with the payment or with the expectation 20 of the payment. If they were very satisfied with the 21 expectation, they would go forward amass.
22 ARBITRATOR DRYMER: Or it's a generational
[Page 2229]
1 thing, as you explained?
2 THE WITNESS: It could be any of those.
3 PRESIDENT FERNÁNDEZ ARMESTO: It could be a 4 generational thing.
5 MR. HAMILTON: It could be a propaganda 6 campaign.
7 MS. LAVAUD: Objection. That is 8 inappropriate.
9 PRESIDENT FERNÁNDEZ ARMESTO: Yeah. Thank 10 you.
11 BY MS. LAVAUD:
12 Q. Now, another factor that you looked at is 13 participation, right, Dr. Wühler, the participation 14 rate?
15 A. Can you point me to where I made statements 16 about the participation rate?
17 Q. Yes. It is your--I think you talked about 18 that in both of your Reports, but I will point you to 19 your Second Report, which is under Tab 2. For the 20 record, that is RER-9.
21 And I will point you to Page 6, for example. 22 And here you say: "The rates of participation in the
[Page 2230]
1 Bondholder Process are reasonable."
2 Do you see that?
3 A. At 6?
4 Q. Page 6, yes. The top of Page 6. The 5 penultimate sentence of this first paragraph.
6 A. Yes. Yes, I see that.
7 Q. And so, your conclusion, just to be clear, is 8 based on the number of cases and the number of bonds 9 that were submitted in the Bondholder Process; 10 correct?
11 A. Well, I'm saying that they are proceeding at 12 a reasonable pace.
13 Q. I'm talking about the rates of participation. 14 So, when you talk about participation, are you talking 15 about the number of cases and the number of bonds that 16 were submitted to the Bondholder Process? Is that 17 what you're referring to?
18 A. Well, again, it's the participation in the 19 process, but what you read out about reasonableness, 20 that's the rate of processing. It's the pace that 21 each will proceed.
22 Q. Okay. And just to be clear, Dr. Wühler, you
[Page 2231]
1 did not--for purposes of assessing this rate, you 2 didn't look at the number of the Bondholders or the 3 number of bonds that were not submitted in the 4 process; correct?
5 A. That did not enter into the process in the 6 first place.
7 Q. That's right. That's my question.
8 A. I did not look at those. They were not in 9 the process.
10 Q. Right. So, you don't know whether the--you 11 don't know whether the bonds, the number of bonds, for 12 example, that were submitted in the Bondholder Process 13 represent 1 percent, 5 percent, 10 percent, of the 14 entire universe of bonds, you wouldn't know that; 15 correct?
16 A. I wouldn't know, but that is not what I'm 17 speaking about here. I'm talking about if you look at 18 the first line on Page 6, participation at each stage 19 I'm not talking about participation over all in the 20 process.
21 Q. So, just to be clear, for purposes of your 22 analysis, when you speak about "participation," you
[Page 2232]
1 never took into account how many bonds the number--how 2 many bonds are currently outstanding, did you?
3 A. Excuse me. How many bonds were?
4 Q. Are currently outstanding? That is not 5 something that you considered for purposes of your 6 analysis?
7 A. Currently outstanding?
8 Q. Correct.
9 A. I don't have numbers on that, so I couldn't 10 take that into account.
11 PRESIDENT FERNÁNDEZ ARMESTO: That was my 12 question to you with the number of Professor 13 Hundskopf.
14 THE WITNESS: Yeah.
15 BY MS. LAVAUD:
16 Q. Now, you also looked at what you called the 17 success rate of the process.
18 Do you remember that?
19 A. Where was that?
20 Q. Paragraph 44. Still in the same Report, 21 Page 19 for the Tribunal of the PDF. 22 Paragraph 44, and it says: "The Bondholder
[Page 2233]
1 Process as a whole--in the Bondholder Process as a 2 whole, the success rate has been quite high."
3 Do you see that?
4 A. Yes.
5 Q. And so, in this paragraph to assess the 6 success rate, you compared the number of bonds that 7 were submitted for authentication and the number of 8 bonds that were actually authenticated; is that right?
9 And you do the same for registration?
10 A. Yeah.
11 Q. Please take a minute, if you want to just 12 take a look at this paragraph, Dr. Wühler.
13 A. Well, I talk in this particular paragraph 14 about the number of claims and the bonds in those 15 claims, but if you go to the actual number of bonds, 16 as I have in my table, that's the numbers that I'm 17 speaking about. And as I said before, those movements 18 in the stages are reasonable and are comparable.
19 Q. Right. And now, if you stay in your Second 20 Report and just go back two pages before, Page 17, you 21 will see on--in Paragraph 39, that you basically--all 22 this data is basically the data that we looked at
[Page 2234]
1 during your direct examination; is that right, 2 Dr. Wühler?
3 A. It's the August 2019, yes.
4 Q. Right. So, that's the data that is on Page 9 5 of the Slides. Okay.
6 And so that data, as we said, was provided by 7 the MEF; correct?
8 A. Correct.
9 Q. And I believe you said that the data provided 10 by the MEF demonstrated the effectiveness of the 11 procedure as a whole; is that right?
12 A. As a whole, yes.
13 Q. Now, let's take a look at this data. So, as 14 of August 31, 2019, there were 377 cases in which the 15 bond had been authenticated; is that right?
16 You can look at the Slides or--
17 A. That is correct. Yeah.
18 Q. --paragraph. Yeah.
19 A. That is correct.
20 Q. Either way, I have no preference.
21 A. Yeah.
22 Q. And out of those, 13 had been paid; is that
[Page 2235]
1 correct?
2 A. No. That's not correct.
3 Q. It's not correct?
4 A. No. Because I don't know which ones that
5 were in that first stage have gone on to payment. I
6 don't know. I can't say that.
7 If I may explain it again, we were over that
8 again before. You cannot say because so many Bonds
9 were in that process and authenticated, the Bonds that
10 were paid went through that process. We know that
11 some of them haven't moved to the next stages, and
12 again, I don't know when they were filed. So, that is
13 not information that these statistics give you.
14 Q. Okay. If we look--just by looking at the
15 chart that you provided for the Tribunal, would you
16 agree with me that it says that there were 13 cases
17 that were paid?
18 Would you agree with me on that? That is
19 Column D.
20 A. Yes.
21 Q. Pago.
22 A. Yes.
[Page 2236]
1 Q. And it says "concluidos." And that's 13
2 "pagados."
3 Do you see that?
4 A. Yes. Yes.
5 Q. Okay. And you also agree that there were 377
6 cases, whose bond had been authenticated by then;
7 right? So, even if you don't agree with me that those
8 were the same bonds, if we do simple math--and that's
9 13 out of 377, that's 3.4 percent; correct?
10 That is simple math. And I represent you
11 that mathematically it is correct, but, obviously, if
12 Mr.--my learned friend has any correction to make to
13 the math, obviously I welcome any comments.
14 ARBITRATOR DRYMER: Or the less learned
15 arbitrator. Is it correct to say that of 377 Bonds
16 authenticated--
17 (Overlapping speakers.)
18 ARBITRATOR DRYMER: Of 377 authenticated
19 casos, cases, casos, excuse me, 13 casos have been
20 paid. Whatever the percentage is.
21 MR. HAMILTON: A case is not number of
22 Bondholders.
[Page 2237]
1 ARBITRATOR DRYMER: Understood.
2 MR. HAMILTON: It's a file.
3 ARBITRATOR DRYMER: Understood.
4 MR. HAMILTON: And the file of 16 cases
5 doesn't mean 16 Bondholders.
6 ARBITRATOR DRYMER: Understood.
7 MR. HAMILTON: There is--sometimes multiple
8 people have interest. So, I'm simply stating as a
9 factual matter, there's a confusion with the data that
10 is being thrown around on the fly.
11 PRESIDENT FERNÁNDEZ ARMESTO: No. No. No.
12 But, Mr. Drymer's data is correct, because he's
13 comparing apples to apples. Out of 377 cases--and we
14 have discussed that with the Vice Minister that there
15 could be various persons who own one bond because
16 there could be--
17 MS. LAVAUD: We have.
18 PRESIDENT FERNÁNDEZ ARMESTO: --heirs and/or
19 co-owners and situations like that. But out of these
20 377 cases, it's a fact that, as of that date, 13 had
21 been finalized.
22 THE WITNESS: Mathematically, that's correct.
[Page 2238]
1 But other--but other things have happened on the way.
2 ARBITRATOR DRYMER: Yes.
3 THE WITNESS: Because if you take--and,
4 again, I invite you to look at Bonds, because Bonds is
5 what the work is here.
6 PRESIDENT FERNÁNDEZ ARMESTO: Okay.
7 THE WITNESS: So, if we look at the--
8 PRESIDENT FERNÁNDEZ ARMESTO: It's the same.
9 THE WITNESS: Yeah. If you look at 11,395
10 that had been authenticated.
11 ARBITRATOR DRYMER: Yes. Yes.
12 THE WITNESS: The first thing that you have
13 to take out from what I would call the baseline
14 against which to look is those that have been rejected
15 at that stage because they could never move forward,
16 and that is not a problem of the process. That is
17 because they don't fulfill their requirements. They
18 have been dealt with in the process, but they can't
19 move to payment. So, you can't take them as a
20 baseline. That is the 196 in this particular table of
21 the column A.
22 ARBITRATOR DRYMER: Yes.
[Page 2239]
1 THE WITNESS: Right? So, those are
2 rejections. And then--right?
3 ARBITRATOR DRYMER: Yes.
4 THE WITNESS: Then a number--and that was my
5 whole point about these arrows and what is moving
6 forward. A number of the cases don't move forward.
7 So, if you say isn't that a very low figure and it's
8 very slow, which is--
9 ARBITRATOR DRYMER: Well, just to be clear,
10 I'm not saying it's low figure or slow. I was simply
11 trying to get away from making--adding--coming up with
12 percentages and just simply speaking--
13 THE WITNESS: Right. Yeah.
14 ARBITRATOR DRYMER: --of hard numbers. Of
15 11,395 bonds that have gone through the process
16 through which there are many stages and people choose
17 not to go forward.
18 THE WITNESS: Umm-hmm.
19 ARBITRATOR DRYMER: There are rejections at
20 each stage. It turns out, for whatever reason, that
21 413 bonds have been paid. That's all. I'm not adding
22 a value statement to that.
[Page 2240]
1 THE WITNESS: That is correct. But what I am
2 saying is, it is not sufficient to look at that number
3 precisely for what you said.
4 ARBITRATOR DRYMER: For the reasons.
5 THE WITNESS: Others have been rejected and
6 others have moved forward, so for me the baseline is
7 not that baseline. That's what I'm saying.
8 ARBITRATOR DRYMER: Yes. One my maxims is
9 beware the "helpful arbitrator." I was trying to be
10 helpful. It seems as though I haven't been, so.
11 MS. LAVAUD: You were very helpful, thank
12 you, Mr. Drymer. And if I may add, I think that my
13 colleague Jonathan Hamilton raised a very good point
14 at that--let's take a look at number of bonds and see
15 how they compare.
16 BY MS. LAVAUD:
17 Q. So you see that, based on the chart again, if
18 you look at the number of bonds that have been paid,
19 that's 152, and the number of bonds that had been
20 authenticated by then, by the MEF itself, was 11,395.
21 Do you see that, Dr. Wühler?
22 A. Yes, I do see that.
[Page 2241]
1 Q. And if we do--I hate to do math, but it's
2 very simple. That will be 1.33 percent?
3 MR. HAMILTON: We object. They could have
4 put in an Expert Report on all of this.
5 MS. LAVAUD: You don't need an Expert Report,
6 I think, to do this simple math, Mr. Hamilton. Thank
7 you.
8 MR. HAMILTON: We disagree.
9 PRESIDENT FERNÁNDEZ ARMESTO: Well, I was
10 doing maths myself.
11 So, what is your point?
12 BY MS. LAVAUD:
13 Q. And so, the point is that five years and a
14 half, which is when we are looking at the data in
15 August 2019, only 1.33 percent of the Bonds that had
16 been authenticated at that point in time had been
17 paid; is that right, Dr. Wühler?
18 MR. HAMILTON: Objection. Mr. President.
19 They should have put in an Expert and we would have
20 been pleased to cross an Expert on this. They have no
21 Expert on these issues. That's why this is
22 inappropriate.
[Page 2242]
1 MS. LAVAUD: Professor Olivares-Caminal
2 provided also this information.
3 PRESIDENT FERNÁNDEZ ARMESTO: Yeah, I don't
4 think it takes us much longer. We understand that
5 mathematically--let's look at it. Bonds, 413 Bonds
6 out of 11,395, but of these 11,395, only half
7 proceeded voluntarily to the next, only half proceeded
8 voluntarily to the next, and only half proceeded
9 voluntarily to the next.
10 And so, if out of those, I could do the
11 maths, and it's probably whatever. It's 1,000
12 something. Out of those, 13 have been paid. Still,
13 it's a low. It's a low. It's a low payment
14 percentage.
15 THE WITNESS: It's what it is, but if you
16 take that kind of calculation and--again, I think it's
17 the wrong kind of calculation because it takes the
18 wrong base, if--just if, as a hypothetical--if out of
19 the 11,395 bonds, 11,000 would not have reached the
20 stage of payment for two reasons: Either because they
21 would have been rejected--
22 ARBITRATOR DRYMER: Right.
[Page 2243]
1 THE WITNESS: --or they would have decided
2 not to move forward.
3 ARBITRATOR DRYMER: Yeah.
4 THE WITNESS: You would have a result, at the
5 end, at the very end of the process, that only 152
6 would have been paid in this process. You would say
7 that is a pitiful result, but you would have to see
8 why they have not reached that stage and haven't been
9 paid. That's what I'm trying to say.
10 ARBITRATOR DRYMER: That is well understood
11 by myself, at least, and I'm sure by counsel even
12 better.
13 PRESIDENT FERNÁNDEZ ARMESTO: Ms. Lavaud.
14 BY MS. LAVAUD:
15 Q. Just one final question on that particular
16 point.
17 You say that, Dr. Wühler, this pace is
18 reasonable, but you haven't really provided any
19 objective basis for calculating that pace, have you?
20 A. Is that in the same area of the Report?
21 Q. No, that's just a question to you,
22 Dr. Wühler.
[Page 2244]
1 A. I understand. Reasonable, I mean, where is
2 that, that it was reasonable?
3 Q. No, I said you haven't provided any basis for
4 believing that this pace was reasonable. I think
5 that's what you were explaining to the Tribunal, that
6 this was a reasonable pace?
7 A. Well, you just said I said in my Report. I
8 mean, I gave a number of considerations for the pace.
9 That's the whole reason why I put up this chart now to
10 put more meat to that.
11 PRESIDENT FERNÁNDEZ ARMESTO: I think we can
12 move forward. Is there any other--
13 MS. LAVAUD: Happy to, yes.
14 PRESIDENT FERNÁNDEZ ARMESTO: --question to
15 Dr. Wühler?
16 MS. LAVAUD: There is, indeed, but I will try
17 to be very short and efficient.
18 BY MS. LAVAUD:
19 Q. Let's take a look at the results of the
20 Bondholder Process, Dr. Wühler. And we looked at the
21 results of the Bondholder Process; correct?
22 A. What do you mean by "results?"
[Page 2245]
1 Q. I'm just looking at your Expert Report,
2 Second Report. Second Report, you talk about
3 "progress, pace, and results."
4 So, you looked at the results; correct?
5 A. Yes.
6 Q. Because the--
7 MR. HAMILTON: Which paragraph are we citing
8 here?
9 MS. LAVAUD: I'm just looking at--actually,
10 it's a heading--
11 MR. HAMILTON: What page?
12 MS. LAVAUD: --of Doctor--Page 16 of his
13 Second Report. And I believe he talks about the
14 results in the First Reports as well, Mr. Hamilton.
15 MR. HAMILTON: Okay. Second Report.
16 Page 16.
17 MS. LAVAUD: You see this heading that is
18 called "progress, pace, and result," Mr. Hamilton?
19 MR. HAMILTON: Yeah. I do. Now, I see.
20 BY MS. LAVAUD:
21 Q. Now, you looked at the results because the
22 process is designed to provide compensation to
[Page 2246]
1 legitimate Bondholders; right?
2 A. I look at the results because at this stage I
3 can only look at progress pace, and what that tells
4 you about the results as of this stage.
5 Q. Do you agree with me, Dr. Wühler, that the
6 process is designed to provide compensation to
7 legitimate Bondholders?
8 A. Yes.
9 Q. And would you agree with me that calculation
10 of current value is a key stage in compensation
11 processes?
12 A. No, not generally. I mean, there are
13 compensation processes that have no calculation of
14 value. They are for fixed amounts. There are others
15 that have simple calculations, so there are--as far as
16 value is concerned, they are different types.
17 Q. Can I take you to your Second Report, please,
18 Page 8, Paragraph 11. You see there are a few bullet
19 points here and one is called "actualization."
20 Do you see that, Dr. Wühler?
21 A. On Page 8.
22 Q. Correct.
[Page 2247]
1 A. Yes. Yes.
2 Q. And that's your Second Report, just to be
3 clear.
4 A. Umm-hmm.
5 Q. Do you see it says--I was basically just
6 quoting your Report here where you say: "Calculation
7 of current value is a key stage in compensation
8 processes." Do you see that?
9 Those are your words; correct?
10 A. Well, you have to continue the sentence
11 Q. Okay.
12 A. Can I read it?
13 Q. Absolutely. You can.
14 A. It says: "Calculation of current value"--so,
15 not just the fact that value is in compensation, but
16 "calculation of the current value is a key stage in
17 compensation processes that are dealing with claims
18 arising out of situations reaching back a considerable
19 length of time." Because there's a time aspect you
20 have to factor in.
21 Q. Right. And that's the case here, too;
22 correct?
[Page 2248]
1 A. Sorry?
2 Q. We also have to go back in time here, is that
3 not right?
4 A. This is a statement about--it's a feature of
5 compensation programs. It doesn't talk about
6 methodology. It talks about the fact that--
7 PRESIDENT FERNÁNDEZ ARMESTO: Let's go on.
8 Because counsel was building up a question, and we
9 have not reached the climax of the question.
10 BY MS. LAVAUD:
11 Q. Now, the next sentence actually says
12 that--well, it refers back to the calculation of
13 current value, and I think it says "this principle is
14 generally recognized."
15 Do you agree with that, Dr. Wühler?
16 A. That's what I'm saying here.
17 Q. Umm-hmm. Now, here you didn't actually look
18 at whether the Bondholder Process provides current
19 value in this case did you?
20 A. I did not.
21 Q. You express no view on the formulas contained
22 in Supreme Decrees. I think you said that before.
[Page 2249]
1 A. Not on anything concerning valuation.
2 Q. So, Dr. Wühler, let me ask you, if somebody
3 went through this process for a few years and only
4 received, say, a dollar for his or her bonds, would
5 you still say that this process complies with
6 established practices?
7 MR. HAMILTON: Objection. He's made it clear
8 that he's not focused on those calculations.
9 PRESIDENT FERNÁNDEZ ARMESTO: Oh, no. But
10 that is a reasonable question, because what she's
11 asking you, you don't know what the valuation is. But
12 counsel is asking is if the end result is that I am a
13 Bondholder, I've gone through two, three years of
14 process through these various stages, and at the end I
15 get one dollar, is that still--what was your
16 adjective? "Reasonable."
17 MS. LAVAUD: Whether it complies with
18 established practices, which is what Dr. Wühler has
19 tried to do in his Report, I believe.
20 THE WITNESS: That is not something I can
21 comment about, whether $1 as an outcome in the
22 Bondholder Process complies with accepted standards.
[Page 2250]
1 MS. LAVAUD: So, your testimony--
2 THE WITNESS: You said in the beginning
3 is--excuse me, I didn't mean to interrupt you.
4 BY MS. LAVAUD:
5 Q. No, please go ahead.
6 A. You said whether that particular Bondholder
7 will be happy with $1. That I can compare to other
8 processes, but not whether the $1 is appropriate in
9 this situation because I haven't--not been dealing
10 with figures of value in this situation.
11 Q. So, your testimony to this Tribunal is that
12 this process complies with the established so long as
13 it doesn't--so, long as it provides a compensation
14 that is not zero?
15 A. No. No. I've been in processes where, out
16 of 130,000 claims, 129,000 were rejected in the
17 process. After they had been let into the process.
18 So, you can see all kinds of outcomes in these
19 processes.
20 Q. So, let's take a look at what the Bondholder
21 Process offered, actually offered to two Bondholders
22 who submitted Witness Statements in this arbitration,
[Page 2251]
1 and I will refer to their initial just to protect
2 their identity.
3 Are you aware that Perú has decided not to
4 call those Bondholders to tell their story before this
5 Tribunal?
6 A. Am I aware of what? Excuse me?
7 Q. That Perú has decided not to call those
8 Bondholders to tell their story before this Tribunal.
9 A. I'm not aware of that.
10 Q. But you've seen their record of
11 participation; right?
12 A. The documents in their files?
13 Q. Umm-hmm.
14 A. Yes.
15 Q. And you concluded, based on this review, that
16 these records, what you say demonstrate that the
17 Bondholder Process is functioning; is that right?
18 A. Can you point me to that?
19 Q. Umm-hmm. Paragraph 43 of your Second Report,
20 Page 9.
21 A. Yes, I see it.
22 Q. Now, you also note in your Report that the
[Page 2252]
1 MEF has assessed a current value of the bonds of those
2 Bondholders; right? That's Paragraph 42, third bullet
3 point. It's basically the last sentence on Page 18,
4 just to make it easier for everyone. You see--
5 A. Yes. Yes.
6 Q. Okay. But you did not include that value in
7 your Report, did you?
8 A. No.
9 Q. So, you know that Mrs. L.--she's the first
10 Bondholder--submitted bonds that her father and her
11 grandfather received when their families' farm was
12 expropriated in 1973; correct?
13 A. I think I recall that it was grandparents,
14 yeah.
15 Q. And that was quite a large farm; right? It
16 was 148 hectares.
17 A. I didn't look at those details.
18 Q. And when she submitted her bonds, nearly half
19 of, I think, her coupons remained unpaid.
20 Do you remember that?
21 A. I don't remember that.
22 Q. And more than three years later, the MEF
[Page 2253]
1 assessed the value of her bonds to the equivalent
2 of $67.
3 Do you remember that?
4 A. I didn't look at values. I looked at the
5 processes.
6 Q. So, you don't know that she--that the MEF
7 assessed a value of her bonds to $67.
8 A. I don't recall that figure because I didn't
9 look at those figures.
10 ARBITRATOR DRYMER: I'm sorry to exercise the
11 President's prerogative, but he said that now several
12 times.
13 MS. LAVAUD: Right. Just for the record,
14 Mr. Drymer, if I may, he does talk about those two
15 Bondholders in his Expert Report, his second one, and
16 he does mention that he's reviewed the file. So, I
17 just wanted to--
18 ARBITRATOR DRYMER: I'm just saying, that
19 question you asked three times. He said the same
20 thing three times.
21 BY MS. LAVAUD:
22 Q. So, there's another Bondholder as well who
[Page 2254]
1 also submitted his Witness Statement in these
2 proceedings, and he submitted Bonds following the
3 expropriation of a 56-hectare farm that took place
4 in 1975.
5 Do you remember that?
6 A. Again, I did not look at numbers.
7 Q. Okay.
8 A. So, I don't recall those numbers.
9 Q. So, you wouldn't know that, 3.5 years into
10 process, the MEF assessed a value of his bonds
11 to $240? That doesn't sound familiar?
12 A. I looked at the process, and I look at the
13 stages that these claims went through, but I didn't
14 look at those numbers. I don't recall those numbers.
15 Q. So, these two Bondholders together received a
16 little more than $300 just for the expropriation of
17 their farm. Now, Dr. Wühler, you dedicated, I think,
18 what is it--30 years of your career to claims
19 processes; correct?
20 A. Umm-hmm.
21 Q. And during your career, you gave a voice to
22 millions of victims; is that right?
[Page 2255]
1 A. That's correct.
2 Q. Including in your role in the United Nations
3 Compensation Commission, which had over, I think,
4 2.6 million claims; is that right?
5 A. That is correct.
6 Q. Now, when you consider the Bondholder Process
7 as a whole, including in light of what those two
8 Bondholders were offered, does that look like justice
9 to you, Dr. Wühler?
10 A. I'm sorry, I have to repeat myself: I'm not
11 making--I'm not giving an Opinion on the monetary
12 outcome, on the amounts, on the methodologies there.
13 I have been in compensation processes where, not only
14 were a lot of people rejected completely, but where
15 payments were made that, if you look at it as an
16 outsider and not look at how the process is structured
17 and what the basis is, you would probably come to the
18 same conclusion. And I have to give you an example to
19 show you why I'm making this statement.
20 MS. LAVAUD: I think that might be on the
21 Respondent's time, an example.
22 PRESIDENT FERNÁNDEZ ARMESTO: Let the Expert
[Page 2256]
1 continue.
2 THE WITNESS: Because I have to explain why
3 I'm saying this because you pointed to my 35 years and
4 what I have done in those 35 years. In the German
5 Forced Labor Compensation Program, to which I referred
6 many times, because it has a number of features that
7 are compared and I thought appropriate to compare,
8 someone who was for five years in a concentration camp
9 in Germany or somewhere during the Nazi regime would
10 receive something like EUR 4,000 for five years in a
11 concentration camp.
12 Not only were those people--unhappy is the
13 wrong word. They thought that was an insult. Some of
14 them brought cases through German courts to have
15 Courts find that that was a process that was totally
16 insufficient and inappropriate, but that was the
17 framework of that process.
18 So, I cannot comment on something that is
19 purely based on a number. Because it's always
20 context.
21 BY MS. LAVAUD:
22 Q. Now, can I just ask you one final question,
[Page 2257]
1 Dr. Wühler?
2 PRESIDENT FERNÁNDEZ ARMESTO: Of course. But
3 I think you must get closer to the microphone.
4 MS. LAVAUD: And I will do so, with great
5 pleasure.
6 BY MS. LAVAUD:
7 Q. Dr. Wühler, you are being paid to testify
8 today; right?
9 A. Yes.
10 Q. And may I ask what's your hourly rate?
11 PRESIDENT FERNÁNDEZ ARMESTO: If you
12 remember. If you don't remember, don't worry.
13 THE WITNESS: No.
14 BY MS. LAVAUD:
15 Q. Is it a daily?
16 A. It's an hourly rate.
17 Q. Okay. Can I ask you what the rate is,
18 please?
19 A. Well, you say--am I being paid for testifying
20 here? I have a cap on my Contract, and the cap has
21 expired, I think, the first day that the Hearing
22 started. So, I'm not being paid for today.
[Page 2258]
1 Q. So, let me ask you how much--what's your
2 hourly rate, normally?
3 A. I think it was 400. You would have to--I
4 don't--I think it was 400.
5 MS. LAVAUD: So, 400--
6 MR. HAMILTON: You know he's not paid in Land
7 Bonds.
8 MS. LAVAUD: Okay. Well, that's good to
9 know.
10 BY MS. LAVAUD:
11 Q. So, in one hour of testimony, you will be
12 paid, or you're paid more money than those two
13 Bondholders were offered by the MEF; is that right?
14 MR. HAMILTON: Objection. Mr. President.
15 PRESIDENT FERNÁNDEZ ARMESTO: That is for
16 conclusions, Dr. Wühler.
17 Any redirect?
18 MR. HAMILTON: Yes, sir. Could we have just
19 a moment, please, to organize.
20 Mr. President, if we took the break now, I
21 could be a lot shorter. Because I can take a few
22 minutes and narrow down.
[Page 2259]
1 (Overlapping speakers.)
2 ARBITRATOR DRYMER: Call an offer that you
3 cannot refuse?
4 PRESIDENT FERNÁNDEZ ARMESTO: This is what it
5 is called an offer which I cannot refuse. We will be
6 back at 4:15, 4:20? What do you prefer? I'll now
7 give you the option, 4:15 or 4:20.
8 MS. LAVAUD: I'm happy with either,
9 Mr. President.
10 PRESIDENT FERNÁNDEZ ARMESTO: No, you choose.
11 MS. LAVAUD: I'll take 4:15.
12 PRESIDENT FERNÁNDEZ ARMESTO: 4:15.
13 Dr. Wühler, can I kindly ask you not to speak
14 to counsel, to the Republic during the break? As you
15 know, there is coffee and refreshments.
16 (Brief recess.)
17 PRESIDENT FERNÁNDEZ ARMESTO: We resume the
18 Hearing. We continue the examination of Dr. Wühler,
19 and I give the floor to the Republic of Perú.
20 MR. HAMILTON: Thank you, very much,
21 Mr. President.
22 REDIRECT EXAMINATION
[Page 2260]
1 BY MR. HAMILTON:
2 Q. Thank you, Dr. Wühler, for your comments.
3 Now, Dr. Wühler, you were asked about the
4 website of the Ministry of Economy and Finance, the
5 Ministerio, of the Republic of Perú.
6 Do you remember that?
7 A. Yes, I do.
8 Q. Okay. But you did not have a chance to look
9 at the website when you were asked to comment on it,
10 so with permission, Mr. President, we will take a look
11 at the website.
12 So, let the record indicate that we are
13 demonstrating on the screen the website of the
14 Ministry of Economy and Finance--
15 ARBITRATOR DRYMER: As of today, or these are
16 screenshots?
17 MR. HAMILTON: This is as of today.
18 ARBITRATOR DRYMER: Very good. You are live.
19 MR. HAMILTON: This is the portal on their
20 intention for the payment of the Land Bonds.
21 PRESIDENT FERNÁNDEZ ARMESTO: This is not for
22 the record. We are now here live in the web?
[Page 2261]
1 MR. HAMILTON: Both are correct, sir. In the
2 record at R-382 are impressions of this website. And
3 we are also live and in color.
4 PRESIDENT FERNÁNDEZ ARMESTO: Okay. Thank
5 you.
6 MR. HAMILTON: Okay. So, this website, Dr.
7 Wühler, of course, I will not go through all of the
8 different sections. It has different information
9 about the Bonds, the legal framework, the procedures,
10 the actualization of value and, of course, the classic
11 "preguntas frecuentes," and you were asked, in
12 particular, about "actualización del valor."
13 So, let's click down on that, and it was
14 mentioned to you the methodology. Let's click. This
15 is what you were asked about. Okay. And so, you saw
16 here the methodology. And that links, as you can see,
17 to the relevant Decree, so that there is transparent
18 access to the Decree, and then if you go back up,
19 "actualización del valor."
20 So, for instance, on "calculo," down below.
21 Okay. And then there's an explanation, of course, of
22 how the calculation is made.
[Page 2262]
1 So, Dr. Wühler, you've heard in this case
2 that Gramercy did its own calculation of the amount
3 of--available to it through the Bondholder Process,
4 and you also mentioned in your answers regarding the
5 steps in the process that there is a phase for
6 advising Bondholders of the amount available to them.
7 How do those steps work in terms of advising
8 Bondholders of the amount available to them?
9 THE WITNESS: Sorry. I don't understand the
10 question. I'm sorry.
11 BY MR. HAMILTON:
12 Q. Sure. Sure. You mentioned in response to my
13 counterpart that there was a stage in the process
14 where Bondholders learned the amount available to
15 them. How does that work?
16 A. Well, they learn it at the actualization
17 stage.
18 Q. Please feel free to explain further why--the
19 actualization stage, how does that step work as part
20 of a Bondholder Process?
21 A. Because that is--if you have a process that
22 requires calculation based on data coming from a
[Page 2263]
1 claim, which is the situation here, you have a Bond
2 with certain characteristics, you have coupons. These
3 factors go into a methodology and a calculation and
4 that happens at the stage of actualization. And then,
5 at the end of that, a value has been calculated.
6 Q. Okay. And, Dr. Wühler, you also
7 mentioned--you also mention that Bondholders can exit
8 the process if they don't like it. In other words,
9 once they learn about the amount, they still have the
10 option to leave if they don't like the amount?
11 A. That is correct.
12 Q. Okay. Now, so, in your view, just to
13 conclude on this point, is there a way for a
14 Bondholder to learn the amount available and decide
15 about their ultimate participation in that context,
16 and what does that tell us about the effectiveness of
17 this process for Bondholders?
18 A. Well, they learn about the specific amount
19 for them at the actualization stage, when it is
20 completed, and they can make a Decision, and we see
21 that they do make Decisions at that point, whether
22 they continue or not, because some people have elected
[Page 2264]
1 not to continue and some have elected to continue.
2 Q. Okay.
3 PRESIDENT FERNÁNDEZ ARMESTO: Does the web
4 state that the procedure is closed? Because I didn't
5 see that. I mean, quickly, to be very frank, I had
6 not been to the web, but quickly, it looked as if you
7 could register.
8 MR. HAMILTON: I believe the answer is that,
9 at least on a brochure, I haven't checked every page
10 of this, as well as in relevant materials, the date is
11 indicated.
12 PRESIDENT FERNÁNDEZ ARMESTO: Because this is
13 not any longer available. The position of the
14 Republic is that this procedure has been closed in
15 January 2019, and it is not--if I am a Bondholder, the
16 window has closed.
17 MR. HAMILTON: Correct. And that was
18 publicly known, including to Gramercy.
19 PRESIDENT FERNÁNDEZ ARMESTO: Yes. Yeah. It
20 didn't look on the web page, but maybe it's hidden
21 somewhere.
22 MR. HAMILTON: No, I think it's not hidden.
[Page 2265]
1 I think it's there, but it's a little difficult for me
2 to navigate to it at the moment because I don't recall
3 offhand. Okay.
4 Now, next question--by the way, we see here
5 photographs of the authentication process on the
6 website.
7 PRESIDENT FERNÁNDEZ ARMESTO: Yeah.
8 BY MR. HAMILTON:
9 Q. Okay. Next, Mr. Wühler, let's go to the
10 table that you were asked many questions about. And
11 we can put this table back up on the page.
12 While we're waiting for that graphic to come
13 up, I just wanted to--housekeeping item. You were
14 asked some compound questions.
15 Just to be clear, you're not opining on the
16 meaning of "current value;" right?
17 A. No, I'm not.
18 Q. Thank you.
19 Can we get that table up?
20 Okay. Now, Dr. Wühler, you were asked
21 various questions about the pace of the Bondholder
22 procedure, and we heard calculations which we've never
[Page 2266]
1 seen in writing, but we heard calculations dating back
2 to--I'm not sure exactly what date.
3 You mention in your answer that there's a
4 process of designing the architecture, building the
5 house, the machine, a startup phase.
6 How does that fit into the overall assessment
7 of the pace of this process?
8 A. Well, that's a common stage in processes like
9 that, and it does take time. How much, every single
10 step of building that house has taken, I don't know.
11 But, I mean, it certainly has taken time, and--and
12 again, that happens in every process that has to be
13 built and created, because these processes don't
14 exist. They have to be created.
15 Q. Okay. Thank you very much, Mr. Wühler.
16 You were asked questions relating to the
17 amount available to Bondholders, and you were given
18 hypothetical examples, and you were given some
19 references to examples that are in a binder that we
20 heard about but didn't look at.
21 If there is a Bondholder, for example, I
22 represent to you that one of the Bonds that Gramercy
[Page 2267]
1 presented to this Tribunal in Opening Arguments, in
2 fact, that Bond would be worth--that Bond would be
3 worth twice as much through this Bondholder Process
4 than what Gramercy paid for it.
5 Does that tell you anything about the
6 efficacy of this Bondholder Process compared to
7 Gramercy's treatment of Bondholders?
8 A. Well, it would certainly say something about
9 the efficacy because it would have one claim going all
10 the way through the process and through valuation and
11 actualization. Again, I didn't make comments on the
12 actual amounts or the values, but it would tell you
13 that that claim would have gone through that process,
14 and that is a process that is available.
15 Q. Thank you, Dr. Wühler.
16 You were asked various questions about the
17 reason for participation rates or Decisions by
18 Bondholders to continue to subsequent phases or not.
19 As you've heard during the course of this Hearing, it
20 turns out that Gramercy acquired over the past couple
21 of years, two or three years, acquired additional Land
22 Bonds.
[Page 2268]
1 If a Party acquires bonds and keeps them out
2 of a process, would that be one reason for reduced
3 participation rates?
4 A. I mean it wouldn't be a reason, it would be
5 an objective fact. Because, I mean, if they don't go
6 into the process, they can't be used for the baseline.
7 Q. Dr. Wühler, just before the break, you gave
8 comments about your profound experience handling
9 compensation procedures, and mentioned that sometimes
10 people are happy and sometimes they aren't.
11 Looking at the totality of this compensation
12 procedure for Bondholders of the Agrarian debt, what
13 are your conclusions regarding whether this is an
14 effective procedure to resolve the issue of the
15 Agrarian debt?
16 A. My conclusion was, and I said that, in my
17 concluding points at the introduction, that it is an
18 effective process. Whether each individual Bondholder
19 will see it that way, that's a different question, but
20 that was not my assignment.
21 Q. And in conclusion, Dr. Wühler, looking at the
22 totality of the progress to date and your
[Page 2269]
1 understanding of the ongoing progress, what is your
2 conclusion regarding the overall efficacy of this
3 process?
4 A. Overall, as I said, it's effective. And it's
5 effective in the circumstances that it has. We went
6 through all these stages, we went reasons, why these
7 stages are where they are. It is effective, and it's
8 effective compared to other processes comparing to the
9 different stages that they have.
10 Q. Thank you, Dr. Wühler.
11 MR. HAMILTON: No further questions,
12 Mr. President.
13 MS. LAVAUD: No further questions from the
14 Claimants. Thank you, Mr. President.
15 ARBITRATOR STERN: No questions.
16 ARBITRATOR DRYMER: No questions. Thank you,
17 Doctor.
18 PRESIDENT FERNÁNDEZ ARMESTO: Thank you very
19 much, Dr. Wühler, for--you have made the effort of
20 coming from Germany to help us. Thank you very much.
21 And with that we finalize your examination.
22 THE WITNESS: Thank you, Mr. President.
[Page 2270]
1 (Witness steps down.)
2 PRESIDENT FERNÁNDEZ ARMESTO: And now, shall
3 we break for five minutes and before we call our next,
4 Dr. Guidotti. So, five minutes' break.
5 (Brief recess.)
6 PABLO GUIDOTTI, RESPONDENT'S WITNESS, CALLED
7 PRESIDENT FERNÁNDEZ ARMESTO: Are you going
8 to give your statement in Spanish or English?
9 THE WITNESS: In English.
10 PRESIDENT FERNÁNDEZ ARMESTO: And would you
11 prefer to make the declaration in English?
12 THE WITNESS: It's the same to me.
13 PRESIDENT FERNÁNDEZ ARMESTO: You're
14 Argentine?
15 THE WITNESS: Yes, I'm Argentine.
16 PRESIDENT FERNÁNDEZ ARMESTO: Professor
17 Guidotti, thank you very much for being here with us.
18 THE WITNESS: Thank you.
19 PRESIDENT FERNÁNDEZ ARMESTO: As a first
20 step, we must take your oath as an expert.
21 THE WITNESS: Yes.
22 I solemnly declare, upon my honor and
[Page 2271]
1 conscience, that my statement will be in accordance
2 with my sincere belief.
3 PRESIDENT FERNÁNDEZ ARMESTO: Thank you.
4 Thank you very much, Professor Guidotti. Thank you
5 for being here with us, and I give the floor now to
6 Respondent.
7 MR. HAMILTON: Thank you very much,
8 Mr. President, Members of the Tribunal.
9 We'll take a moment to pass out our
10 presentation.
11 PRESIDENT FERNÁNDEZ ARMESTO: And we have to
12 give it a number. That will be H-13.
13 DIRECT EXAMINATION
14 BY MR. HAMILTON:
15 Q. Very well. Mr. President, on behalf of the
16 Republic of Perú, I would like to introduce Professor
17 Pablo Guidotti, Expert, and he has prepared a
18 presentation for you, and I will invite him to speak
19 directly to the Tribunal.
20 PRESIDENT FERNÁNDEZ ARMESTO: Professor
21 Guidotti.
22 DIRECT PRESENTATION
[Page 2272]
1 THE WITNESS: Thank you. Good afternoon,
2 Members of the Tribunal, Mr. President. I have eight
3 Slides, including the qualification, so I will try to
4 be efficient in the use of time.
5 So, let me first put up this slide
6 summarizing my qualifications.
7 I am an economist. I hold a Ph.D. in
8 economics from the University of Chicago.
9 (Comments off the record.)
10 THE WITNESS: I'm currently a professor and
11 member of the Board of Directors of Universidad
12 Torcuato Di Tella in Argentina, which is one of the
13 leading research universities in Latin America, and I
14 was founding dean at that university in the past.
15 So, instead of going through these bullets, I
16 will simply add some complementary information.
17 When I was on the Board of Directors of
18 Argentina Central Bank, and I was second Vice
19 President, I led the adoption by Argentina of modern
20 international standards of banking relation and
21 banking supervision, and I was very much involved in
22 the successful management of a banking crisis that
[Page 2273]
1 occurred in '95 in Argentina after the devaluation of
2 the México peso in November 1994.
3 As Treasury-Secretary and Deputy Minister of
4 the Economy, I had responsibility over the three major
5 areas of public finance: Expenditure, tax policy, and
6 debt management. Also in that capacity, I
7 participated actively in the international discussions
8 about the international financial architecture in the
9 context of the Group of 22, which was the predecessor
10 of the Group of 20. And in those discussions, I was
11 co-chairman, jointly, with Mario Draghi, the former
12 ECB president. I was co-chairman of one of the
13 Working Groups that dealt with strengthening financial
14 systems, but I also participated in the other Working
15 Group on sovereignty crisis and crisis resolutions.
16 Let me--in terms of my academic work, I
17 published several scientific papers dealing on issues
18 such as Government debt, fiscal policy, monetary
19 policy, and issues on international finance.
20 So, let me go now to the next slide and start
21 dealing with the main points, the main conclusions
22 that I reach in my two Expert Reports.
[Page 2274]
1 The first one is that Perú displays today,
2 and has displayed for over two decades, a very sound
3 economic and fiscal management. As we have discussed,
4 Perú suffered serious economic and political
5 instabilities that led eventually, between 1988 and
6 1990, to a hyperinflation, and at that time the GDP of
7 Perú collapsed by a cumulative--even more than
8 25 percent. So, it was a megacrisis, and Perú was
9 also part of the many developing countries that
10 restructured its debt within the context of the Brady
11 Plan.
12 Since the mid-1990s, Perú has implemented a
13 very sound economic management and has become a
14 success story in Latin America and emerging markets in
15 general. Between, for instance, 2002 and present, the
16 GDP of Perú has increased by a cumulative 140 percent.
17 During all these years, inflation has been on average
18 2.8 percent a year, so half of what has been the level
19 in other emerging markets, and if we can summarize the
20 fiscal responsibility of Perú, that can be summarized
21 in the fact that today, it has one of the lowest
22 debt-to-GDP--public debt-to-GDP ratios, at 26 percent.
[Page 2275]
1 This track record, which spans different
2 administrations over these almost 25 years, has been
3 clearly recognized by international organizations such
4 as the IMF, the OECD, and by international credit
5 rating agencies. The major credit rating agencies,
6 Standard & Poor's, Fitch, and Moody's, rated
7 investment grade Perú in 2008, and since then have
8 upgraded further Perú to the levels of BBB-plus, for
9 Standard & Poor's and Fitch, and A3 by Moody's.
10 As part of this story of fiscal
11 responsibility, Perú has developed a very
12 sophisticated and transparent debt management--public
13 debt management strategy, anchored on a very solid
14 institution--institutional infrastructure. Perú has
15 accessed international capital markets with a
16 placement of Global Bonds. It has issued 24 Global
17 Bonds in dollars, raising about $14.5 billion, and it
18 has issued three Global Bonds denominated in euros,
19 raising about $2.75 billion.
20 In addition to the development of this
21 international program, Perú has developed a domestic
22 market anchored on structural reforms, such as, for
[Page 2276]
1 instance, the privatization of the Social Security
2 system, which, as in the case of Chile, also allowed
3 the development of pension funds and institutional
4 investors. In fact, in recent years, Perú has tried
5 to develop more the domestic bond market with the
6 issue of "bonos soberanos" that are modern sovereign
7 bonds denominated in a Peruvian currency, and
8 substitute--reduce the dependence on external
9 financing. And this is why, when we look at the
10 market for bonos soberanos, in 2013 it was about
11 6.5 percent of GDP and has now reached a number of
12 12.5 percent currently. So, there has been this
13 substitution.
14 The debt strategy of Perú is very
15 transparent. It has a medium-term projection, and the
16 documents that describe the objectives and what they
17 are doing are published on the website.
18 Let me finally simply, based on my experience
19 as Treasury-Secretary, when we talk about fiscal
20 responsibility, it's not a theoretical term. Fiscal
21 responsibility is not easily attained, and it's not
22 easily maintained consistently during 25 years. For
[Page 2277]
1 that, you need to develop institutions to have a very
2 good budgetary process in place, have careful debt
3 management, and have respect for the legal framework
4 of your country. And I think that Perú's handling of
5 the Agrarian Reform Bonds actually shows precisely it
6 is totally consistent with this notion of fiscal
7 responsibility.
8 Let me now move to a second area that I refer
9 to in my Reports, in which I show that Agrarian Reform
10 Bonds are very different from modern sovereign bonds.
11 And in this comparison, I want to focus on issues of
12 substance, not on, you know, characteristics that may
13 not be really important. And this is why I focus on
14 three main areas that go directly to the nature of
15 bonds and to the risks that investors take when they
16 hold these bonds, as well as the market infrastructure
17 of how they are traded and settled.
18 So, these three areas are basically the
19 purpose for the issuance of bonds, the trading in
20 secondary market, and the risk protection, which have
21 to do with whether, for instance, bonds are protected
22 against inflation or not, whether they are rated by a
[Page 2278]
1 credit rating agency, and also, of course, the
2 governing law and courts that apply to these
3 contracts.
4 So, the following table is actually one that
5 compares Peruvian Agrarian Reform Bonds to Global
6 Bonds, the type of bonds that were the subject of the
7 Abaclat v. The Republic of Argentina Case. I will
8 talk a little bit in detail on this table, and then
9 more generally in the comparisons with bonos soberanos
10 and other sovereign bonds that are analyzed in detail
11 in the Report, but I don't want to bore you with a lot
12 of information.
13 So, when we compare the Agrarian Reform Bonds
14 to the Global Bonds in terms of why they were issued,
15 well, we know that the Agrarian Reform Bonds were
16 given as compensation for land expropriation. They
17 were never sold to investors; namely, the acquirer or
18 the person that holds these Bonds typically,
19 originally, didn't do it voluntarily. They didn't
20 buy. Okay? And I think that the involuntary nature
21 of the Agrarian Reform Bonds is precisely at the basis
22 of why the Constitutional Tribunal then decides to
[Page 2279]
1 update the value of these bonds, something that did
2 not, with many other contracts in the economy that
3 also were nominal and were subject to the risk of
4 inflation, which, if you voluntarily buy a contract
5 which has that characteristics, you are assuming the
6 risk of inflation.
7 So, when we look at the Global Bonds, the
8 nature is totally different. Global Bonds are issued
9 to investors that are institutional investors, that
10 can be retail investors, and they are typically issued
11 through the use of underwriters, large financial
12 institutions that intervene in the primary market and
13 then also in developing the secondary market. They
14 are marketed through roadshows, for instance, so it is
15 a totally different origin of these two securities.
16 If we go to the market infrastructure to what
17 allows a secondary market to exist, we note that the
18 Agrarian Reform Bonds which are issued in physical
19 form, bearer form, they were never registered with
20 depositories--
21 PRESIDENT FERNÁNDEZ ARMESTO: Nominative.
22 Not bearer. They were never bearer Bonds.
[Page 2280]
1 THE WITNESS: Okay.
2 PRESIDENT FERNÁNDEZ ARMESTO: Nominal Bonds.
3 THE WITNESS: They were never listed on the
4 Stock Exchanges. They were not registered with
5 central depository institutions. So, they didn't have
6 the characteristics that allowed the development of a
7 secondary market, and in fact, there is no secondary
8 market for Agrarian Reform Bonds, and they are
9 illiquid assets.
10 In fact, I saw in the declaration or in the
11 testimony of Professor Olivares-Caminal that there was
12 shown a document that was called vademecum bursatil
13 (in Spanish), and if one analyzes the table that
14 refers to this negotiated volume in this extrabursatil
15 mesa de negociación (in Spanish), that were 200,000 in
16 effective value of nominal terms, in that same
17 document there is an indication of the exchange rate.
18 At that time, that was one soles de oro--actually, one
19 dollar was equivalent to 2,2065.5 soles de oro, so if
20 we divide 200,000 by that exchange rate, one sees that
21 the total amount negotiated of a "bonos de deuda
22 Agraria" in 1983 was $88. Okay? So, simply
[Page 2281]
1 nonexistent.
2 If we go to the Global Bonds, they are issued
3 in electronic form. They are listed on foreign
4 exchange markets. They are registered with
5 international depository institutions, such as DTC,
6 Clearstream, Euroclear. Their trade is electronical.
7 Their settlement is electronic, and sometimes
8 investors hold these bonds through security
9 entitlements. So, this infrastructure is what allows
10 for the existence of a liquid bond market where there
11 is continuous trading, many investors are
12 participating in it, and transparency in the sense
13 that investors have continuously the prices, know the
14 prices of these securities.
15 BY MR. HAMILTON:
16 Q. Professor Guidotti, in your Reports, you
17 discuss the purpose of contemporary bond issuances
18 underlying these different characteristics--
19 A. Yes.
20 Q. --based on your firsthand experience as the
21 former Treasury-Secretary of Argentina who helped
22 pioneer such issuances?
[Page 2282]
1 A. Yes.
2 Q. What role do those kind of issuances play
3 with respect to the contribution to the economic
4 development of a country, and how does that compare to
5 these old agrarian debt bonds?
6 A. Yes. Certainly the objective--the primary
7 objective of the issuance of all of these modern
8 Sovereign or Government Bonds is really to finance
9 budgetary needs. In some cases, they can be used in
10 operations that simply manage the profile of debt, the
11 Government debt, with the objective of reducing risks,
12 reducing the vulnerability to capital market
13 volatility, and so on.
14 So, let me go, then, to the third aspect,
15 which corresponds to the comparison of these risk
16 characteristics. Well, first of all, we know that
17 Agrarian Reform Bonds were nominative, were issued in
18 nominal terms with fixed coupons; no protection for
19 inflation whatsoever. So, they were not indexed.
20 They were issued in soles de oro, the old Peruvian
21 currency, and they are governed by Peruvian law and
22 subject to the exclusive jurisdiction of Peruvian
[Page 2283]
1 courts.
2 Instead, the Global Bonds are issued in
3 foreign currency. So, they have a protection against
4 devaluation and, implicitly, inflation. They are
5 normally issued according to foreign law, and the
6 issuer submits to the jurisdiction of foreign courts.
7 So, the summary of these characteristics is
8 that, really, Agrarian Reform Bonds are completely
9 different from Global Bonds. I do the same
10 explanation, very similar characteristics, with
11 respect to the bonos soberanos that are issued in the
12 domestic market. Okay? And I also compare the
13 Agrarian Reform Bonds to the U.S. Treasuries. Okay?
14 You could ask: Why on earth would you
15 compare Agrarian Reform Bonds to U.S. Treasuries?
16 Okay? I simply do it because there was a claim in
17 Professor Olivares-Caminal's Report that Agrarian
18 Reform Bonds were similar to U.S. Treasuries because
19 they were issued in domestic currency and that they
20 had long maturities. But, of course, that is really,
21 in my view, a very superficial analysis, because we
22 all know that the U.S. dollar is very different than
[Page 2284]
1 other currencies. It is what is called a reserve
2 currency, a currency in which most international
3 reserves are held on. It is the currency in which
4 most international trade is denominated, commodities
5 are priced in, and often is referred to as a "dominant
6 currency."
7 Moreover, the U.S. Treasury market is the
8 largest and most liquid market in the world, with a
9 volume of over $16 trillion. Many foreigners, foreign
10 institutional investors, hold U.S. Treasures,
11 including central banks, as precisely international
12 reserves. U.S. Treasuries, moreover, are the
13 risk-free asset by excellence, and it's the asset that
14 is used as a benchmark to price all other bonds issued
15 in dollars. And they have a particular behavior also,
16 because, for instance, if there is capital market
17 volatility or uncertainty, prices of bonds would tend
18 to fall, but the price of Treasuries would go up with
19 a phenomenon that is always called "flight to
20 quality."
21 Let me now move to the following point--
22 Q. Professor, just to note, we may need to pick
[Page 2285]
1 up the rhythm just a little bit for timing purposes.
2 A. Yes. Let me move to this point, which is:
3 Essentially, what I argue is that Agrarian Reform
4 Bonds do not fall into the commonly held category of
5 public debt. To do that is not a matter of going to a
6 dictionary and finding what the word means. Okay?
7 Here, we need to understand what is the meaning and
8 usefulness of an economic aggregate like public debt,
9 and how governments and international organizations
10 define it.
11 Okay. And this implies that, for instance,
12 it is composed by assets that are comparable, that are
13 homogeneous, so that it allows, for instance, to
14 evaluate whether the fiscal policy of a country is
15 sound, whether a country is subject to external
16 shocks, to capital market volatility. This does not
17 mean that there does not exist other liabilities in
18 the Government.
19 For instance, liabilities such as pensions
20 from the Social Security are not part of public debt.
21 Okay. Because if we would include like mixing apples
22 and oranges, then we would have an aggregate that
[Page 2286]
1 suddenly we want to evaluate what is the vulnerability
2 to capital market uncertainty. And while we know that
3 there can be a run on bonds on the market, on the bond
4 market, there will never be a run on pensions; right?
5 And there never will be a run on Agrarian Reform Bonds
6 that have no secondary market whatsoever.
7 Secondly, if we look at what is in the IMF
8 Government and Finance Statistics Manual, "public
9 debt" does not include contingent liabilities, which
10 are liabilities whose value or whose existence depends
11 on some event that occurs in the future.
12 Well, Agrarian Reform Bonds are contingent on
13 liabilities. Their value is determined once we go
14 through the Bondholder Process, that we have heard in
15 the previous examination, and well, of course,
16 initially, people go and try to collect and ask for a
17 collection of these bonds. This is totally consistent
18 with the testimonies of Vice Minister Sotelo and
19 Minister Castilla, okay, because essentially what they
20 pointed out--and there is an item in other internal
21 debt that is valued at 1 cent. Certainly, that 1 cent
22 is not the updated value of that these bonds, and the
[Page 2287]
1 bonds now are--essentially, what one sees is a
2 description of the process that--of collection of
3 this.
4 Let me now move to the following page, where
5 simply I state my opinion on the contribution, alleged
6 contribution of Gramercy to the Peruvian economy.
7 First, the size of the purchase, which was
8 $33 million, represents only 0.03 percent of Perú's
9 GDP at the time, which was about 100 billion. So, the
10 number is really so small to think that it has a
11 significant impact on the economy.
12 Moreover, we really don't know what was done
13 with the proceeds of the sales of the individuals that
14 sold the bonds, so we don't really have basis to argue
15 that they have a contribution.
16 Also, it is clear that Gramercy did not
17 provide liquidity to Peruvian markets. Again,
18 isolated transactions of 33 million do not create a
19 secondary market. The secondary market is a different
20 thing, and if Perú markets are liquid, it is because
21 Perú has been fiscally responsible and has a low
22 public debt to GDP ratio and has a modern debt
[Page 2288]
1 strategy, not because of these transactions.
2 Let me go now to the next statement, which
3 has to do with the alleged analogy between bond
4 restructuring and the term "debt restructuring" with a
5 Bondholder Process.
6 I said that I was part of the international
7 discussion on the international financial architecture
8 where these issues were discussed, so I know exactly
9 what this means. So, when we talk about the debt
10 restructuring, we are typically talking about three
11 items, three big characteristics.
12 First of all, in a debt restructuring, the
13 debtor has inability to pay. Often it's in default or
14 it is close to default. Okay. If we say is this what
15 happens in Perú with the Agrarian Reform Bonds, no.
16 The Agrarian Reform Bonds, as far as I know, have
17 never been defaulted upon. They just simply lost
18 value because of hyperinflation, but there has not
19 been a breach of the original contractual terms of
20 these bonds.
21 Moreover, Perú is actually paying, has
22 willingness to pay and has ability to pay, and it's
[Page 2289]
1 demonstrating through the Bondholder Process that it's
2 paying and has fiscal responsibility.
3 So, analogies to Perú, to Argentina or Greek
4 defaults, I think, is totally far out. Anybody
5 modestly familiar with Perú knows that in Perú there
6 is no sovereign debt crisis. There is no need to have
7 a restructuring.
8 The second aspect is that in a debt
9 restructuring, you talk about a reduction of value
10 relative to the contractual terms, and this is why
11 debtors and creditors negotiate. In the case of the
12 Agrarian Reform Bonds--sorry, I go fast--in the case
13 of the Agrarian Reform Bonds, really the procedure
14 that was decided by the Constitutional Tribunal adds
15 value to the original contractual terms of these
16 bonds. So, there is no reduction in value. If
17 anything, there is an increase in value. And this is
18 why there is no analogy to the debt restructuring.
19 Third is the point of fair and equal
20 treatment. In debt restructurings, typically some
21 investors, foreign investors, fear to be treated, to
22 be discriminated against, and, therefore, this is an
[Page 2290]
1 important principle.
2 In the case of the Agrarian Reform Bonds, the
3 Bondholder process and the decision of the
4 Constitutional Tribunal applies to everybody. So,
5 there is very equitable treatment. And I would say
6 that as a former policymaker, I would find a worrisome
7 precedent if, in these proceedings, Gramercy were
8 allowed to obtain a more favorable treatment than that
9 available to Peruvian citizen. It would be sort of a
10 reverse discrimination, a discrimination against
11 domestic citizens, and I would find that inconsistent
12 with the policy objectives that countries seek when
13 they sign bilateral investment treaties.
14 Bilateral investment treaties are meant to
15 provide assurances to foreign investors that they will
16 be treated fairly as a way to promote foreign direct
17 investment and as a way to promote development and a
18 growth in developing country. It would be really
19 surprising that a bilateral investment treaty would
20 now be used to obtain a windfall gain, a commercial
21 gain in a way in which it is not available to domestic
22 citizens. Okay. So, this is simply my conclusion.
[Page 2291]
1 Thanks.
2 MR. HAMILTON: Mr. President, just one
3 question to conclude.
4 BY MR. HAMILTON:
5 Q. Dr. Guidotti, following on the lines of what
6 you just mentioned, in your First Report, you have a
7 section at the end, it's called "The Impugnation of
8 Perú's Reputation for Fiscal Responsibility," and you
9 say at the end: "Gramercy has engaged in efforts to
10 impugn Perú's well-deserved reputation for fiscal
11 responsibility as a way to damage Perú, force a
12 windfall and/or suppress a Bondholder procedure and
13 give cover to its own risky speculative conduct."
14 What do you mean by that, Dr. Guidotti?
15 A. Well, I have analyzed especially two
16 documents that essentially tried to argue that Perú is
17 not meeting the IMF standards, which is wrong, and
18 also that it doesn't deserve entering as a member to
19 the OECD. I have also seen, which is also incorrect,
20 and I have statements by "Angel Gurria" that exactly
21 say to the States to the opposite. And I have also
22 seen a paper which is used as the basis of why some
[Page 2292]
1 Experts, including Edwards, talk about default, a
2 paper by Arturo Porzecanski which simply has no basis.
3 They have "default" in the title, but the word
4 "default" is simply a word in the introduction with no
5 justification, no reference whatsoever. And then this
6 is used as well as Arturo Porzecanski said, but you go
7 to Arturo Porzecanski, and there is nothing. Okay.
8 So I think in this sense, I think I have seen
9 these documents that actually put Perú in a bad light
10 when actually Perú should be praised, and it is
11 praised around the region as a country that turned its
12 economy around, and now is really a star in terms of
13 economic performance, even more so after the whole
14 political situation that arose in Chile, where Chile
15 was, by definition, the standard.
16 PRESIDENT FERNÁNDEZ ARMESTO: Was the product
17 of your University?
18 THE WITNESS: In Chicago?
19 PRESIDENT FERNÁNDEZ ARMESTO: In Chicago.
20 Was Chicago a school of economy--
21 (Overlapping speakers.)
22 THE WITNESS: Yes.
[Page 2293]
1 PRESIDENT FERNÁNDEZ ARMESTO: --had
2 importance?
3 THE WITNESS: Yes. Yes, has important members
4 but--
5 PRESIDENT FERNÁNDEZ ARMESTO: Members in the
6 Chilean Government or not?
7 THE WITNESS: It was--
8 PRESIDENT FERNÁNDEZ ARMESTO: Or you knew
9 this--
10 THE WITNESS: I would say that it was
11 overestimated, but certainly--
12 PRESIDENT FERNÁNDEZ ARMESTO: Okay.
13 THE WITNESS: --there are good economies in
14 Chile, and (in Spanish) from Chicago also.
15 MR. HAMILTON: No further questions,
16 Mr. President.
17 MR. FRIEDMAN: Thank you, Mr. President.
18 PRESIDENT FERNÁNDEZ ARMESTO: Mr. Friedman.
19 CROSS-EXAMINATION
20 BY MR. FRIEDMAN:
21 Q. Good afternoon, Professor Guidotti.
22 A. Good afternoon.
[Page 2294]
1 Q. My name is Mark Friedman. I'll be asking you
2 a few questions.
3 A. Yes.
4 Q. You understand, of course, your duty is as an
5 independent expert; correct?
6 A. Yes.
7 Q. And you're being compensated for your time, I
8 assume.
9 A. Yes.
10 Q. What's your rate at which you are being
11 compensated?
12 A. The Contract has a cap, so I'm in the same
13 position as Dr. Wühler, but now we are working free in
14 this testimony.
15 Q. Umm-hmm. Yes. Until you were working free,
16 what was your hourly rate?
17 A. It was 850.
18 Q. $850 an hour?
19 A. Yeah. Umm-hmm.
20 Q. Okay. And I know that have you worked with
21 White & Case and this team before; right?
22 A. Yes. I was Expert in the
[Page 2295]
1 Abaclat v. Argentina Case.
2 Q. Yes. And have you worked with them in any
3 other cases?
4 A. No.
5 Q. Okay. And you coauthored an article with
6 Mr. Hamilton, I believe; right?
7 A. Yes. Actually, that was a great
8 collaboration between an economist and a lawyer, so it
9 was very satisfying. And, actually, that came out
10 from the experience of not only Abaclat, but the
11 experience of Argentina. At that time--
12 Q. Okay. And so you haven't--
13 A. --as a rogue nation in the capital market,
14 against retail Italian investors, almost the opposite
15 as here.
16 Q. Yes. And you haven't worked with White &
17 Case since that time; is that right?
18 A. I haven't.
19 Q. Okay. Now, you were asked, as I understand
20 it, based on your First Report, to provide an expert
21 report on considerations of sovereign debt and the
22 Agrarian Reform Bonds that are at issue in this
[Page 2296]
1 arbitration. That was your mandate? It's in the
2 first paragraph of your First Report, if you want to
3 take a look at it.
4 A. I'm looking at the Argentine version.
5 Q. Sure. Your First Report, Paragraph 1.
6 A. These are the Argentine--the Spanish
7 translations.
8 Q. Oh. Would you like the--we have the English
9 ones. Would you like them?
10 A. Yeah, it says "considerations about sovereign
11 debt"--thank you--and the Agrarian Reform Bonds,"
12 right.
13 Q. Yes. Right.
14 And your background, of course, is an
15 economist; right?
16 A. Yes.
17 Q. Now, the last conclusion that we just saw on
18 your Slides was that: "As a former policymaker, my
19 Expert Conclusion is that it would set a worrisome
20 precedent if in these proceedings Gramercy were
21 allowed to obtain more favorable treatment than that
22 available to Peruvian citizens."
[Page 2297]
1 You are not holding yourself out as an Expert
2 on bilateral investment treaties, are you?
3 A. No. No, no. For that reason, I clarified
4 that this is a statement as a foreign policymaker, and
5 I talk about policy objectives, and I'm not a lawyer
6 so I will not enter into a legal discussion about--
7 Q. I see.
8 So, as a policymaker, you would simply resist
9 countries entering into bilateral investment treaties,
10 I guess.
11 A. No, I have not said that.
12 Q. Well, you are aware that bilateral investment
13 treaties have as a normal feature of them that they
14 provide rights to foreign investors that may not be
15 available to domestic citizens. You're aware of that;
16 right?
17 A. I'm not aware that they provide the
18 possibility of having a better treatment than domestic
19 citizens.
20 Q. You're not aware--
21 A. I think that they provide assurances, but,
22 again, this a legal issue, and I'm not going to be
[Page 2298]
1 talking about that.
2 Q. And so, you weren't aware that many treaties
3 provide in addition to national treatment provisions,
4 they also provide other rights? I guess you weren't
5 aware--
6 (Interruption.)
7 PRESIDENT FERNÁNDEZ ARMESTO: Yeah. You must
8 leave a second between the question and the answer
9 because otherwise it is impossible.
10 THE WITNESS: Sure.
11 Yeah. I'm not familiar with all the
12 treaties, and so I'm not really providing a legal
13 opinion.
14 BY MR. FRIEDMAN:
15 Q. Yeah. So, all of those, the--those features
16 are beyond your expertise; correct?
17 A. Yes.
18 Q. Okay. And so, the opinion you gave wasn't
19 based on an actual understanding of the nature,
20 structure, or rights associated with most bilateral
21 investment treaties; correct?
22 A. It was based on the understanding a
[Page 2299]
1 policymaker has on the role of bilateral investment
2 treaties in the fostering of Foreign Direct Investment
3 and economic growth.
4 Q. Yeah. But I'm not going to let you off so
5 easily because isn't it the case that the whole reason
6 that bilateral investment treaties work to attract
7 investment to less developed countries or countries
8 with less developed rule of law is because they
9 provide rights that are better than those provided by
10 the domestic economy? Otherwise, they would be
11 unnecessary.
12 A. Again, I think that this is a legal question.
13 I can tell you simply my reasonable answer without
14 entering into reasonable discussions--with legal
15 discussions. I think that treaties provide assurances
16 that investors are not going to be discriminated
17 against. Okay. But they do not provide privilege to
18 foreign investments vis-à-vis domestic investments.
19 Now, the specifics of how this assurances
20 translate in the letter of the law, I'm not an expert,
21 and I cannot give an opinion and this is why I think
22 there is an important task for the Tribunal; right?
[Page 2300]
1 Q. I take it you are not responsibility for
2 Argentina's entry into bilateral investment treaties?
3 A. No. No, they were previous to my arrival to
4 Argentina.
5 Q. So, your policy-making experience did not
6 include considerations actually undertaken by states
7 and entering into bilateral investment treaties--
8 A. Not in negotiations, no.
9 Q. Okay. Now, I next to want turn to another
10 topic in your Report, and you talked about it again
11 today, which is drawing distinctions between the
12 Agrarian Land Bonds, on the one hand, and what you
13 call "global contemporary bonds"; right?
14 A. Yes.
15 Q. And you say they are not comparable, and you
16 gave us a chart in your presentation today because
17 Land Bonds are physical instruments. For example,
18 while Global Bonds trade on electronic clearing
19 houses, they are different currencies, different laws,
20 different ways of having been marketed, and all that;
21 right?
22 A. Yes. These have very significant--
[Page 2301]
1 Q. Yeah.
2 A. --differences that go exactly to the nature
3 of these different instruments.
4 Q. Yes. And so, the instruments are different;
5 right?
6 A. Yes.
7 Q. You don't, in your Report, express any
8 particular conclusion that you draw from the fact
9 other than observing that these differences exist;
10 right?
11 A. No. Especially this is what I was asked, and
12 my conclusion is that Agrarian Reform Bonds are unique
13 in nature because of their historical origin, and they
14 are very different--
15 Q. Sure.
16 A. --to other modern government bonds and to
17 some other bonds that have been introduced.
18 Q. Right. But you're not saying, and you don't
19 opine, that the Agrarian Land Reform Bonds are not
20 bonds; right?
21 A. They are called bonds.
22 Q. They clearly are bonds; right?
[Page 2302]
1 A. They are called bonds.
2 Q. Yes.
3 A. And so, on that topic, really what I say is
4 that they are not included in the definition of
5 "public debt." Okay. And I would say more that even
6 if they are called bonds, what the Agrarian Reform
7 Bonds, they really are an implementation of a specific
8 expenditure that is the land compensation but, of
9 course, through time.
10 Q. Yes. But you agree with me they are bonds?
11 A. They are called bonds. So, if you want to.
12 Q. They're not just called bonds; they are
13 bonds; right?
14 A. I don't know how you are using the word
15 "bond."
16 Q. Do you know what a bond is?
17 A. Yes.
18 Q. What is a bond?
19 A. And this is why I'm saying the bonds are
20 instruments that are sold to investors, that raise
21 funds.
22 (Overlapping speakers.)
[Page 2303]
1 Q. So you are saying--
2 PRESIDENT FERNÁNDEZ ARMESTO: Mr. Friedman--
3 Q. We will come to public debt--
4 MR. HAMILTON: Give him a respectful chance
5 to hear and answer.
6 (Overlapping speakers.)
7 PRESIDENT FERNÁNDEZ ARMESTO: You are really
8 as fast as Ms. Lavaud, and we must go slower because
9 it is impossible to transcribe your exchanges.
10 MR. FRIEDMAN: Yes.
11 THE WITNESS: Yes.
12 BY MR. FRIEDMAN:
13 Q. Professor, let's separate out if we can for a
14 minute the discussion of public debt. I'm going to
15 come to that. Okay?
16 I, first, just want to talk about what a
17 bond--right?--because can you have bonds that aren't
18 any part of public debt; right? You can have private
19 bonds?
20 A. Yes.
21 Q. And those would still be bonds; right?
22 A. Yes.
[Page 2304]
1 Q. Okay. And you're going to tell me, I think,
2 what's a bond? What is a definition of a bond?
3 A. It's a contract that essentially provides a
4 schedule of payments, sometimes with coupons,
5 sometimes with not, and that has certain
6 characteristics, and it is issued in exchange for
7 resources.
8 Q. Okay. And what are the essential
9 characteristics that make something a bond as opposed
10 to a note or something else?
11 A. I have already described the characteristics
12 of modern bonds.
13 Q. No. I wasn't asking about modern Global
14 Bonds, I understand what those are. I'm asking you, a
15 much simpler, what's a bond? What are the essential
16 characteristics of a bond?
17 A. I already said. It's a contract that
18 specifies a number of payments over time and these
19 payments typically are associated with the principal
20 and some interest that is manifested as coupons.
21 Q. Okay. And you'd agree with me that Land
22 Bonds meet that definition; right?
[Page 2305]
1 A. That they are payments over time, yes.
2 Q. Okay. And, of course, if--you're familiar
3 with private bond placements; right?
4 A. Yes. I'm not particularly familiar with
5 private bond placement, but, yes, I know what they
6 are.
7 Q. But you know about them; right?
8 A. Yeah.
9 Q. So, for example, if a Peruvian business
10 wanted to borrow money by a bond issuance to its
11 shareholders, family members, something like that, and
12 it created a domestic law governed instrument that
13 would be subject to Peruvian Courts, and--but it
14 acknowledged the debt with a stream of payments, it
15 was in paper and written down, and six of the
16 Bondholders were associated with the organization
17 became Bondholders, would you agree with me that,
18 although that lacks many of the features of a modern
19 Global Bond, it is still a bond; right?
20 A. Well, there are many forms in which
21 obligations to pay over time take. You have also
22 loans, for instance.
[Page 2306]
1 PRESIDENT FERNÁNDEZ ARMESTO: No, but the
2 question is not that. The question is whether--
3 (Overlapping speakers.)
4 THE WITNESS: So, it is whether--
5 PRESIDENT FERNÁNDEZ ARMESTO: The question is
6 whether--Professor, the question is whether that
7 private bond, which has been described by
8 Mr. Friedman, in your economic analysis would qualify
9 as a bond, not in a legal analysis.
10 THE WITNESS: Yes. It would qualify.
11 BY MR. FRIEDMAN:
12 Q. Okay. And with our Agrarian Reform Bonds
13 that we're talking about in this case you already
14 acknowledged, of course, they say bond on their face.
15 They acknowledge a debt of the State; correct?
16 PRESIDENT FERNÁNDEZ ARMESTO: I think he has
17 said yes to both.
18 BY MR. FRIEDMAN
19 Q. I don't know that he said they acknowledge a
20 debt.
21 A. They acknowledge an obligation of the State
22 of making a payment over time of compensation for land
[Page 2307]
1 expropriation.
2 Q. Right. And you were aware, of course, that
3 the Government guaranteed that debt obligation with no
4 reservation whatsoever?
5 A. All government debt is typically warranted by
6 a State.
7 Q. And that includes, of course, the bonds in
8 this case; right?
9 A. I would assume so.
10 Q. Okay. Now, I did promise that we would come
11 and talk about public debt--
12 A. Yes.
13 Q. --which is something that you testify about.
14 And I would like to take you to Paragraph 22
15 of your Second Report, if you wouldn't mind. That's
16 at Page 13 of your Second Report.
17 A. Which paragraph?
18 Q. It is Paragraph 22. It appears on Page 13.
19 A. Okay.
20 Q. Now, we see it here. It is in Section II.3,
21 and it's this one paragraph, 22. Now, am I right that
22 you express no opinion in your First Report about
[Page 2308]
1 this? This was new in your Second Report--that is any
2 comment on public debt?
3 A. I don't recall if I treat this
4 particular--probably this is--counts as a response of
5 something that I--that was in the--in one of your
6 Expert Reports.
7 Q. Yeah. If it would help, we may just take a
8 moment and look at the Table of Contents of the two
9 Reports and I think you'll see that this is kind a new
10 chapter.
11 Do you accept that?
12 A. Well, possibly.
13 Q. Okay. And were you asked--
14 A. Actually, I talk about this when I talk about
15 Mr. Jaramillo's paper where also I say what I said in
16 the--in my introduction, where I specify that Agrarian
17 Reform Bonds are contingent liabilities and they are
18 not part of the public debt, and I cite the IMF
19 government statistic manual, all of that is in the
20 First Report.
21 Q. Well, maybe you can take us back to that on
22 redirect because I don't remember it being discussed
[Page 2309]
1 in that way.
2 But in any event, let's look at the first
3 sentence of 22. It says: "In an investment context,
4 the Agrarian Reform Bonds are not within the commonly
5 understood definition of 'public debt' because they
6 were not issued in connection with government
7 financing."
8 Do you see that?
9 A. Yes.
10 Q. Now, here, you--this is--the entirety of your
11 opinion in this Report is based on this one paragraph;
12 right? That's the full explanation for your point;
13 correct?
14 A. There are two parts that I described in my
15 presentation. One is the fact that they were not
16 issued in connection with Government financing. They
17 were given as compensation, and then there is the
18 issue that they implement--this is in this
19 paragraph--contingent government expenditure that is
20 essentially the compensation, and that because of
21 that--and this is what I discuss in the First
22 Report--Agrarian Reform Bonds are not part of the
[Page 2310]
1 commonly understood definition. Not only commonly
2 understood, but what the IMF and international
3 standards of how you present a Government statistics
4 actually tell.
5 Q. So, am I right this is the entirety of your
6 reasoning in the Second Report?
7 A. Yep.
8 Q. Okay. And there are no citations here. You
9 mention the IMF Report. So, we should go to that in a
10 bit, but there are no other citations that you cite;
11 correct?
12 A. Well, this is a conclusion of--well, I have
13 discussed all of the very different characteristics of
14 the Agrarian Reform Bonds in relation to other modern
15 bonds.
16 So, here I talk about public debt, and,
17 therefore, this is a reference and--
18 Q. But, Professor--
19 A. --it's a little bit--
20 PRESIDENT FERNÁNDEZ ARMESTO: The question is
21 different.
22 BY MR. FRIEDMAN:
[Page 2311]
1 Q. Yeah. Professor, surely you know--surely you
2 know that public debt includes more than just global
3 sovereign bonds; right?
4 A. What I am saying and what I say in the First
5 Report is that public debt does not include contingent
6 liabilities and that Agrarian Reform Bonds are
7 contingent liabilities. And I said before, of course,
8 the notion of "public debt" does not include all of
9 the liabilities of a State. And this is why I said,
10 for instance, pensions are not included. If you have
11 lawsuits that are pending, those are not included.
12 And they are--in the recommendation of the IMF, they
13 should be treated as memo items.
14 Q. So, am I right that public debt includes more
15 than just global sovereign bonds?
16 A. They include--yes.
17 Q. Yes. Right. So, the other portions of your
18 Report, just talking about modern global sovereign
19 bonds, don't address whether or not the definition of
20 public debt.
21 Would you agree with that?
22 A. Could you repeat?
[Page 2312]
1 Q. Yeah. What I'm saying is, the full
2 explanation for your analysis about public debt is
3 here in this one paragraph with no citations; right?
4 A. I have said that there is another part where
5 I touch on this same subject that is in the First
6 Report.
7 Q. Okay. Well, we will talk--
8 A. Here there is no citation in this particular
9 paragraph.
10 Q. Now, are you aware that Perú itself
11 classifies Land Bonds as public debt?
12 A. I said exactly that based on the testimony by
13 Vice Minister Sotelo and Minister Castillo.
14 Q. Yes. So, they said--
15 A. That there is a line on the Agrarian debt
16 under other internal debt and in the documents, in the
17 informe de deuda (in Spanish), it appears jointly with
18 contingent liabilities and the only thing that it says
19 is essentially the legal statutes or the process for
20 paying these bonds.
21 And as the Vice Minister and the former
22 Minister testified, they are registered for 1 cent.
[Page 2313]
1 So, they clearly refer to the original contractual
2 values.
3 In Perú's publication, the same paragraph
4 that appears in the "informé de deuda" is also
5 included in another document that is called "informé"
6 de contingencias explicitas (in Spanish). It's all on
7 the web.
8 Q. Sorry. That was a very long answer.
9 A. Yes.
10 Q. So, I think you are saying that you don't
11 believe that they--that Perú treats the debt as public
12 debt?
13 A. I said that Agrarian Reform Bonds are not
14 included--
15 PRESIDENT FERNÁNDEZ ARMESTO: No.
16 (Comments off microphone.)
17 BY MR. FRIEDMAN:
18 Q. Professor, would you agree with me
19 that--would you agree with me that really the public
20 debt is the debt of a State and its distinguished from
21 private debt? That's the reason we call it public
22 debt?
[Page 2314]
1 A. Yes, the distinction between public and
2 private has to do with the issuer, one is the
3 Government and the other is private entity.
4 Q. Right. And you heard the testimony of
5 Ms. Sotelo where she described the Bonds as part of
6 the internal domestic public debt of the country.
7 That was her testimony--
8 A. Yes, this is what I say.
9 Q. --on day 3?
10 A. She also says that it is registered for
11 1 cent and it is registered, as she said in the
12 testimony, as other internal debt.
13 So, what I'm saying here in this paragraph
14 and what is in the First Report is that in the
15 definition of public debt that is used by governments
16 and is used, for instance, by the International
17 Monetary Fund, public debt does not include government
18 contingent liabilities, does not include pensions.
19 This does not imply that they are--pensions are not an
20 obligation of the State, you know. This is a
21 different matter. This, we are talking about a
22 definition of "public debt."
[Page 2315]
Q. Right. So, that IMF guide was set up to be a guideline so that states could have common accounting standards amongst each other; right?
A. Yep.
Q. Okay. And the definition in there of "public debt" is--the gross definition is all debts of a Government; right?
A. It is specified that Government debt should not include contingent liabilities. So, it is not all of the debt--all of the obligations that the State has, and this is why I, in particular, mention the obligations related to Social Security because they are very large. And let me tell you, you can have economists that maybe would like to compute those liabilities as part of the debt statistics, but, in fact, the standards that countries agree and under the International Monetary Fund do not include them into the definition of "public debt."
Q. So, when--
PRESIDENT FERNÁNDEZ ARMESTO: Mr. Friedman, at some stage we should move on.
MR. FRIEDMAN: Move on. I understand.
[Page 2316]
BY MR. FRIEDMAN:
Q. Let's see. One--so, there are these two distinctions that you say--you say in an investment context it is not public debt, and I was wondering--that's your testimony. I was wondering whether would you agree with me that the investment chapter of the United States-Perú Trade Promotion Agreement and its annexes would be a good place to look for how that term "public debt" is used in an investment context?
A. I don't know because I'm not a lawyer.
Q. So, you have not looked at Annex 10F of the Treaty?
A. No.
Q. So, you're not familiar that it says in the annex--
A. I have not seen it because it was not my assignment. There are other Experts that have and have testified.
Q. I understand. But in thinking about the--
PRESIDENT FERNÁNDEZ ARMESTO: He has not, Mr. Friedman.
[Page 2317]
BY MR. FRIEDMAN:
Q. Yes. So, you're not aware that that says that public debt is debts issued by a party; right?
MR. HAMILTON: He's responded to your question.
THE WITNESS: I have not seen the Treaty.
ARBITRATOR DRYMER: May I ask a question on that point? I did not understand what you meant by the words in Paragraph 22 "in an investment context." What did you mean by that? And I'm not talking about the Treaty because you are not talking about the Treaty, I gather.
THE WITNESS: No. I'm not talking about the Treaty.
ARBITRATOR DRYMER: So, what do you mean by that?
THE WITNESS: That essentially public debt, all of the public debt instruments, are issued to raise funds for Government purposes in this sense.
ARBITRATOR DRYMER: Yes.
THE WITNESS: While the Agrarian Reform Bonds are really involuntary. People have these bonds
[Page 2318]
because they were given by the State. They didn't choose.
PRESIDENT FERNÁNDEZ ARMESTO: I don't think that that was an answer to the question because the question was why do you start your Paragraph 22 in "in an investment context."
THE WITNESS: Because I'm referring to bonds as essentially issued to investors. So, this is essentially the meaning. And I see a substantive difference with Agrarian Reform Bonds, which is an issue that I discuss throughout, actually, the two Reports.
BY MR. FRIEDMAN:
Q. Yes. You do say here that the Land Reform Bonds were not issued in connection with Government financing.
A. Yes.
Q. You've studied a number of the authorities, including the original Supreme Decree, that authorize 15 billion soles de oro placement of bonds; right? That's at Footnote 8, by the way, of your First Report.
[Page 2319]
A. Umm-hmm. Yep.
Q. Could you turn to that please? It is in Tab 3, RA-233. We can put it up on the screen.
A. Which is the tab?
Q. Tab 3. This is the 1969 Decree that authorized the placement of the Land Bonds, and if you look in that right column, the first full paragraph in the right column.
A. Yes. Okay.
Q. And, of course, you are fluent in Spanish.
A. Yeah.
Q. But--forgive me if I get it wrong, but it's--you want to just read out that first sentence?
A. "Autoriza." It authorizes?
Q. Yes. Okay. Yes.
Q. So, that it's necessary to finance the Agrarian Land Reform; right? That's the reason these bonds were placed?
A. The Article--which one is the--because the Article first--
Q. "Que siendo necesario."
ARBITRATOR DRYMER: First full paragraph on
[Page 2320]
the right side.
THE WITNESS: I think that I would interpret that this--what is necessary to be financed is the compensation, is the execution of the Agrarian Reform, namely, you know--
BY MR. FRIEDMAN:
Q. Placing the Bonds.
A. No, this is not placing the Bonds. This is actually a document that says, we are going to compensate a Landowner over 20 years, 25 years, and this is the document that tells you how you are going to receive the payments. So, in this sense, the--this is the way in which I read "necesario financiar la ejecucion," namely, that the execution of the Agrarian reform will be implemented or will be financed, the compensation will be paid through this "bonos de deuda Agraria."
Q. Exactly.
A. In fact, at that point I think for more than 10 years they were not even transferable. So, it was a document that said you are going to get these payments.
[Page 2321]
Q. Exactly. The Bonds--the Land Bonds financed the Agrarian Reform; right?
A. No. They didn't finance. They simply instrumented the compensation at that time of the Agrarian--of the--not the Agrarian Reform, but the expropriation of land.
Q. It seems sort of obvious, but if the Government didn't pay for those expropriations with the Bonds, they would have had to pay by some other means; right?
A. Probably.
Q. So, instead of using cash on hand, they used Bonds; right?
A. Yeah. Yes, but--
Q. So, you're saying that if they floated--the point is clear. Okay.
(Interruption.)
PRESIDENT FERNÁNDEZ ARMESTO: I think the point is sufficiently discussed, and--
BY MR. FRIEDMAN:
Q. Thank you. I want to turn to one other.
MR. HAMILTON: For the record the answer was
[Page 2322]
"yes, but."
BY MR. FRIEDMAN:
Q. Okay. That's fine. I want to turn to one other topic. In your--sorry, give me just one second. Yes. In your First Report, could I take you to Paragraph 62. This is where you talk about Gramercy's expectations.
A. Yes.
Q. Okay. At the beginning of 62, you say that "as a sophisticated investor in distressed assets Gramercy knew perfectly well the legal and economic status of the Agrarian Reform Bonds at the time of purchase."
Do you see that?
A. Yes.
Q. Then, am I right that at the time of your Reports, you had not studied the records as to Gramercy's knowledge about the legal and economic status of the Land Bonds at the time of purchase?
A. I have not studied those documents, but anyone would assume that, if Gramercy purchased Bonds, they knew the legal status and they knew the risks
[Page 2323]
they were incurring as a sophisticated investor.
Q. Okay. And you, of course, are not an Expert on Gramercy; right?
A. No.
Q. And you then claim that "seeking to adopt methodologies for determining the current value of the Agrarian Reform Bonds that are different from those mandated by Peruvian law, would be illegitimate and inconsistent with the reasonable expectation a sophisticated speculative investor such as Gramercy would have at the time of its investment."
Do you see that?
A. Yes. Yes. And I agree exactly with that statement.
Q. Yes.
A. I think that in any democratic country, once the Supreme Court, or the Supreme Tribunal, decides something, that's the law. And this is essentially what I am saying.
Q. Right. Once the Constitutional Tribunal decides something, that's the law; right?
A. Yeah.
[Page 2324]
Q. Yes. And am I right that it would be legitimate and consistent with reasonable expectations for a sophisticated investor to expect to receive returns on its investment that are mandated by Peruvian law; right?
A. Yes, but the Peruvian law, in what I know is the Resolution of 2013, the Constitutional Tribunal and the August Decree by the MEF.
Q. Right. Yeah. Yeah. And that would be true even if those returns were high; right? The investor would still be entitled to receive them if that's what the law provided; correct?
A. Yes.
Q. There's nothing wrong or illegitimate about buying low and selling high; right?
A. No.
Q. Okay. Now, the basis of your Opinion about Gramercy's expectations is actually kind of interesting because it is here, I think in Paragraph 60. And I just want to take a look at it. You say--
A. Which paragraph?
[Page 2325]
PRESIDENT FERNÁNDEZ ARMESTO: Of the first.
BY MR. FRIEDMAN:
Q. 60, of the same Report. The First Report. We're in the same Report. It's just the page before, Page 24.
A. Okay.
Q. And I just want to focus on the language here, because it's quite important.
It says: "Gramercy's expectations must reflect the fact that, unlike modern sovereign bonds, Agrarian Reform Bonds were originally denominated in Peruvian currency with fixed coupons and tenors determined by class and subject to Peruvian law. According to their original Contract terms, reasonable expectations of repayment for such nominal Contracts were that they would be repaid in local currency with no indexation whatsoever."
Do you see that? That was the assumption that you had about Gramercy's perspective at the time; right?
A. This simply states that, at the time in which Gramercy purchased these bonds, the Contract had--the
[Page 2326]
Bonds, the Agrarian Bonds had a contractual term, which was nominal, and which was--will have--with no indexation and with fixed coupons. So, that is what Gramercy bought. I don't know why they--Gramercy bought these bonds.
Q. Right.
A. Nor how they valued at that time and what expectations Gramercy had.
Q. Right.
A. I don't know.
PRESIDENT FERNÁNDEZ ARMESTO: I do not think that the Expert can help us with this.
BY MR. FRIEDMAN:
Q. If I could just--
PRESIDENT FERNÁNDEZ ARMESTO: Yeah. But it is not--it is a statement, but it is really for us to establish what the expectations were, if at all, and whether they were legitimate and whether they have any impact.
MR. FRIEDMAN: Yes. If I could, because I think it goes a little bit further. If I may, just for a second.
[Page 2327]
BY MR. FRIEDMAN:
Q. And I note that you make this reference to the original contractual terms many times throughout this--the course of your Report.
A. Yes.
Q. And we've excerpted a few of those on a slide.
Now, what I want to ask about, though, is that I take it that at the time you wrote your Reports, you were not aware of the Decision of the Constitutional Tribunal issued on March 15, 2001; correct?
A. I didn't analyze the history, the legal history. I simply based my Reports on the existing legal framework, which is the 2013 Ruling by the Constitutional Tribunal, and the--August 2017--
Q. Forgive me, I'm just sort of wondering. I think you did base it on the legal history because you have 48 pages of Expert testimony, and by my count you cite approximately 20 different Peruvian laws, Decree laws, and Supreme Decrees, but you did not--but you did not even once mention the 2001 Constitutional
[Page 2328]
Tribunal Decision?
A. Because it was a--superseded by the July 2013 Resolution. In fact, I look at the 2001, and it says essentially in the Resolution it declares two Articles of a law unconstitutional. And I believe that essentially it declares one of these Articles was stating that Bonds had to be paid in nominal value.
But so, I'm not--I do not--in fact, I was surprised given all the importance that has been given to this 2001 Resolution and that they imply that the use of CPI and interest, I went and looked at it, there is no mention of CPI in that resolution. So, it is quite plain by me that it results that two Articles of a law are unconstitutional.
But really what matters for my analysis is the July 2013, not the--I have not gone through all the legal evolution, and I'm not really the person qualified to speak about the 2001 Resolution. You have Experts on these matters.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah, I think it's clear.
MR. FRIEDMAN: I think that is.
[Page 2329]
PRESIDENT FERNÁNDEZ ARMESTO: It's as far as it can.
MR. FRIEDMAN: Thank you. No further question.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you. Thank you.
Is there any redirect?
MR. HAMILTON: Yes, Mr. President.
PRESIDENT FERNÁNDEZ ARMESTO: Okay.
MR. HAMILTON: Thank you very much.
REDIRECT EXAMINATION
BY MR. HAMILTON:
Q. Thank you, Professor Guidotti for your patience.
PRESIDENT FERNÁNDEZ ARMESTO: Shall I give you a time check first?
MR. HAMILTON: Sure.
PRESIDENT FERNÁNDEZ ARMESTO: Why don't we get a time check, so you know where you stand?
MR. HAMILTON: Thank you.
SECRETARY PLANELLS-VALERO: Respondent has 56 minutes left, and Claimants have 1 hour and
[Page 2330]
52 minutes left.
PRESIDENT FERNÁNDEZ ARMESTO: So, if you want tomorrow, let's be economical with your time now.
(Comments off microphone.)
MR. HAMILTON: I will be glad to, and I invite you, sir, to be economical as well, if I might.
THE WITNESS: Yes, I will try to.
BY MR. HAMILTON:
Q. Okay. First question: You were repeatedly asked about comparisons between Land Bonds and contemporary bonds. Do you mind if I--we're not going to go into the details of them, but the Land Bond, for instance, CE-120, Global Bond, for instance, CE-08. And--
PRESIDENT FERNÁNDEZ ARMESTO: The position of the Republic and of the Expert are quite clear on this issue.
MR. HAMILTON: Thank you, sir. I will be economical as I promised.
PRESIDENT FERNÁNDEZ ARMESTO: Please.
BY MR. HAMILTON:
Q. So, you were asked questions about the
[Page 2331]
objectives of the Agrarian Reform Law. You were directed there, and you said "Yes, but." So, how do we understand the different characteristics of these two bonds: The Land Bond and the other kind of contemporary Global Bond?
A. I explained many characteristics, but certainly these were issued as compensation for expropriations. They have a name, a specific name, that is the beneficiary. And they were not issued to raise funds for the Government, and all of these offering memorandum have a section that actually specifies the purpose and the use of funds.
Q. Thank you, Dr. Guidotti.
You were asked various questions about the characterization of public debt, and you repeatedly said that you discussed related issues in your First Report?
A. Yes.
Q. And you repeatedly made reference to your First Report where you discussed various other sources and Experts?
A. Yes.
[Page 2332]
Q. May I direct your attention to that section, which is in Guidotti 1, for example, on Page 17?
A. Yes.
Q. And of these sources that you mention, you cite here, for example, to Moody's?
A. Yes.
Q. And Moody's Report related to the "bonos de deuda Agraria" is in the record as R-531.
Do you have comments on what Moody's has to say about the difference between these kinds of bonds that you discuss in your Report?
A. Moody's essentially analyzes the reform--the Agrarian Reform Bonds in the context of the rating of the other Bonds of the Republic. They actually state clearly that the Agrarian Reform Bonds, given the original contractual terms, have not been defaulted, that inflation risk is not a risk that is associated with a definition of "default," and therefore, that the credit rating of Perú is totally separated from the situation of the Agrarian Reform Bonds.
Q. Thank you, Professor Guidotti. And you were asked at the outset about the Abaclat Case. Can you
[Page 2333]
summarize very briefly for us, how are the characteristics of the bonds in the Abaclat Case distinct from the Land Bonds?
A. Well, the Bonds--the Global Bonds issued by Argentina that were subject of the Abaclat proceedings were essentially Global Bonds, and they were bonds issued in various currencies--in Italian litas, in U.S. dollars, I think, and in Euros--and they had exactly the characteristics that I showed in this table. And so, in this sense, they are totally different from the Agrarian Reform Bonds and, in particular, they all were Bonds subject to foreign law.
Q. Thank you. And you were also asked about your conclusion that the relief or the payments that Gramercy seeks would be inappropriate as a policymaker, you said.
As an economist, why do you think giving the amounts that Gramercy seeks would be inappropriate?
A. I cannot really enter into the valuation issues. What I see is that you have an investment of 33 million, and then you have a pretended valuation of
[Page 2334]
1.8 billion, which sounds quite outrageous.
Q. Thank you, Professor Guidotti.
MR. HAMILTON: No further questions.
PRESIDENT FERNÁNDEZ ARMESTO: Very good. Very good. So, thank you very much.
THE WITNESS: Thank you.
PRESIDENT FERNÁNDEZ ARMESTO: You have come from Buenos Aires to be here with us.
THE WITNESS: Sí.
PRESIDENT FERNÁNDEZ ARMESTO: So, thank you for making the effort. And with that, the examination has finished and, to the absolute surprise of everyone in this room, we have finished 7 minutes before our time. And, with that, we close the Transcript for today.
(Witness steps down.)
PRESIDENT FERNÁNDEZ ARMESTO: We then will reconvene at 9:00 a.m. tomorrow.
(Whereupon, at 5:53 p.m., the Hearing was adjourned until 9:00 a.m. the following day.)
[Page 2335]
CERTIFICATE OF REPORTER
I, Dawn K. Larson, RDR-CRR, Court Reporter, do hereby certify that the foregoing proceedings were stenographically recorded by me and thereafter reduced to typewritten form by computer-assisted transcription under my direction and supervision; and that the foregoing transcript is a true and accurate record of the proceedings.
I further certify that I am neither counsel for, related to, nor employed by any of the parties to this action in this proceeding, nor financially or otherwise interested in the outcome of this litigation.
Signature
Dawn K. Larson
[Page 2336]
INTERNATIONAL CENTRE FOR THE SETTLEMENT OF INVESTMENT DISPUTES
-X
| In the matter of Arbitration between: | : |
| : | |
| GRAMERCY FUNDS MANAGEMENT LLC AND | : |
| GRAMERCY PERU HOLDINGS LLC, | : |
| : | |
| Claimants, | : ICSID Case No. |
| : UNCT/18/2 | |
| and | : |
| REPUBLIC OF PERÚ, | : |
| : | |
| Respondent. | : |
-X Volume 7
HEARING ON JURISDICTION, MERITS AND QUANTUM
Thursday, February 14, 2020
The World Bank Group
1225 Connecticut Avenue, N.W.
C Building
Conference Room C1-450
Washington, D.C.
The hearing in the above-entitled matter came on at 9:00 a.m. before:
PROFESSOR JUAN FERNÁNDEZ ARMESTO, President
MR. STEPHEN L. DRYMER, Co-Arbitrator
PROFESSOR BRIGITTE STERN, Co-Arbitrator
In the case of discrepancy, the audio recording in the original language will prevail.
[Page 2337]
ALSO PRESENT:
On behalf of ICSID:
MS. MARISA PLANELLS-VALERO
Secretary of the Tribunal
MS. KRYSTLE M. BAPTISTA
Assistant to the President of the Tribunal
Realtime Stenographers:
MS. DAWN K. LARSON
Registered Diplomate Reporter (RDR)
Certified Realtime Reporter (CRR)
B&B Reporters
529 14th Street, S.E.
Washington, D.C. 20003
United States of America
[email protected]
MR. PAUL PELISSIER
MR. DIONISIO RINALDI
D.R. Esteno
Colombres 566
Buenos Aires 1218ABE
Argentina
(5411) 4957-0083
Interpreters:
MS. SILVIA COLLA
MR. DANIEL GIGLIO
MR. CHARLES ROBERTS
[Page 2338]
APPEARANCES:
On behalf of the Claimant:
MR. MARK W. FRIEDMAN
MS. INA C. POPOVA
MR. CARL RIEHL
MS. FLORIANE LAVAUD
MS. BERGLIND HALLDORSDOTTIR BIRKLAND
MR. GUILHERME RECENA COSTA
MS. SARAH LEE
MR. DUNCAN PICKARD
MR. JULIO RIVERA RIOS
MS. MARY GRACE MCEVOY
MR. THOMAS G. MCINTYRE
Debevoise & Plimpton, LLP
919 Third Avenue
New York, New York 10022
United States of America
MR. LUIS BEDOYA
MR. FRANCISCO CARDENAS PANTOJA
Rodrigo, Elias & Medrano
Av. San Felipe 758
Jesús María
Lima 15072
Perú
Representing Gramercy Funds Management LLC:
MR. JAMES TAYLOR
MR. JOSHUA M. O'MELIA
MR. NICK PAOLAZZI
MR. THOMAS NORGAARD
[Page 2339]
APPEARANCES: (Continued)
On behalf of the Respondent:
AMBASSADOR HUGO DE ZELA
Republic of Perú
MR. RICARDO AMPUERO
Republic of Perú
MS. MONICA GUERRERO
Republic of Perú
MS. GIOVANNA ZANELLI
Republic of Perú
MR. ALBERTO HART
Republic of Perú
MR. JONATHAN C. HAMILTON
MS. ANDREA MENAKER
MR. RAFAEL LLANO
MR. FRANCISCO JIJÓN
MR. JONATHAN ULRICH
MR. FRANK PANOPOULOS
MR. JOHN DALEBROUX
MR. ALEJANDRO MARTINEZ DE HOZ
White & Case LLP
701 Thirteenth Street, NW
Washington, D.C. 20005-3807
United States of America
[Page 2340]
For the United States of America:
MS. LISA GROSH
MS. NICOLE THORNTON
MS. MARGARET SEDGEWICK
MR. JOHN DALEY
Attorney-Advisers
Office of International Claims and
Investment Disputes
Office of the Legal Adviser
U.S. Department of State
Suite 203, South Building
2430 E Street, N.W.
Washington, D.C. 20037-2800
United States of America
MS. AMY COLLINS
U.S. Department of Treasury
[Page 2341]
CONTENTS
| PAGE | |
| WITNESSES: | |
| BRENT KACZMAREK and ISABEL KUNSMAN | |
| Direct examination by Mr. Hamilton... | .2344 |
| Direct presentation... | .2345 |
| Cross-examination by Mr. Riehl... | .2433 |
| Redirect examination by Mr. Hamilton... | .2535 |
| Recross-exam. by Mr. Riehl... | .2538 |
| SEBASTIAN EDWARDS | |
| Questions from the Tribunal... | .2548 |
| CONFIDENTIAL PORTIONS: | |
| 1... | ..2425-2426 |
| 2... | .2428-2430 |
[Page 2342]
PROCEEDINGS
PRESIDENT FERNÁNDEZ ARMESTO: We now start this last day in our Hearing, and we do so in order to examine the Experts, Mr. Kaczmarek and Ms. Kunsman.
BRENT KACZMAREK AND ISABEL KUNSMAN,
RESPONDENT'S WITNESSES, CALLED
PRESIDENT FERNÁNDEZ ARMESTO: Good morning to both of you. Good morning, Ms. Kunsman.
THE WITNESS: (Ms. Kunsman) Good morning.
THE WITNESS: (Mr. Kaczmarek) Good morning.
PRESIDENT FERNÁNDEZ ARMESTO: Before we do anything else, we have to take your oath.
Could I kindly ask you to stand up? And Ms. Kunsman, you may wish to start.
THE WITNESS: (Ms. Kunsman) I solemnly declare, upon my honor and conscience, that I shall speak the truth, the whole truth, and nothing but the truth.
THE WITNESS: (Mr. Kaczmarek) I solemnly declare, upon my honor and conscience, that my statement will be in accordance with my sincere
[Page 2343]
belief.
PRESIDENT FERNÁNDEZ ARMESTO: I think, Ms. Kunsman, you read the declaration for witnesses.
THE WITNESS: (Ms. Kunsman) I solemnly declare, upon my honor and conscience, that my statement will be in accordance with my sincere belief.
PRESIDENT FERNÁNDEZ ARMESTO: Yes. I do not think that Experts have to adhere to the truth. It is to your sincerely held belief.
Mr. Kaczmarek, and Ms. Kunsman, how you will be dividing your presentation and then the answers to the questions?
THE WITNESS: (Mr. Kaczmarek) In terms of the presentation, we basically have divided it into two primary sections; Ms. Kunsman will go through the first. I will go through the second, and then very briefly wrap up. In terms of questions, I think the Parties had discussed the question will be put to us, one of us will answer. If it assists, I'll kind of act as the gatekeeper, but we have agreed we will not gang up, both of us answering the same questions and
[Page 2344]
jumping in. Just one Expert per question.
PRESIDENT FERNÁNDEZ ARMESTO: Especially don't try not to antagonize each other and give different opinions.
THE WITNESS: (Mr. Kaczmarek) Rule number one.
PRESIDENT FERNÁNDEZ ARMESTO: That makes it much more difficult for the Tribunal to follow your advice. Very good.
Mr. Hamilton, would you lead the direct examination?
MR. HAMILTON: Thank you.
DIRECT EXAMINATION
BY MR. HAMILTON:
Q. Mr. President, Members of the Tribunal, good morning.
Thank you, again, for your attention and patience as we reach the seventh day of this Hearing in the Gramercy v. Perú matter.
On behalf of the Republic of Perú, it is my pleasure to introduce Mr. Kaczmarek and Ms. Kunsman. They have deep experience acting as Quantum Experts
[Page 2345]
in the context of investment treaty disputes which, of course, we consider to be a particularly important element of the assessment here.
We are going to ask them to please go directly to their presentation for the benefit of the Tribunal. Thank you.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you. Just so that we know, I will ask the Secretary--I think Professor Edwards took approximately an hour?
SECRETARY PLANELLS-VALERO: A little bit.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. So, we have the same time for you.
DIRECT PRESENTATION
THE WITNESS: (Mr. Kaczmarek) Perfect. I know everyone has flights, and I don't want to be in the way of that, so we will try to still stick with the 45 minutes, but as usual, please feel free to interrupt. It is often better to address an issue that arises during the presentation than to lose it as we progress.
So, again, I'll have my colleague start with the first section, the background section, and some
[Page 2346]
of this you've heard, and so we will try to point out things that maybe are a little bit different that you haven't heard of, and then I'll primarily be addressing the calculations presented by Professor Edwards.
THE WITNESS: (Ms. Kunsman) Okay. So, as has been discussed, the Agrarian Bonds originated from the 1969 Agrarian Reform Law, and they were issued as compensation for land which had been valued based on the previously declared value of the land by the Owner for tax purposes.
The Bonds had different classes, terms, and Coupons. The Bond Coupons were based on a nominal rate, so both an inflation component and a real interest rate was included, but they weren't based on market pricing. And this is evident because, as the term of the Bond increases, the Bond Coupon decreases.
Next slide, please.
So, there were yearly issuances from 1969 to 1982, and at any time the Bonds could be exchanged for the remaining full value, full face value for
[Page 2347]
industrial promotion shares, as long as the Bondholder also purchased an equal amount in cash.
As has been discussed, in the event of default, the Agrarian Bonds were not subject to acceleration clauses that would force the early repayment of the outstanding Coupons, and they didn't state an alternative legal rate or how that rate would be applied to unpaid interest and/or principal in default. And then the Bondholders could not take back ownership of the expropriated land, so the Bonds were not mortgages.
In our First Report, we described the way that the Coupon amounts were calculated. There was a principal component that was the face value of the Bond amortized over the term of the Bond, and then an interest component that decreased over time, because it was applied based on the outstanding principal.
We described it differently in our Second Report than we did in our First Report, but we are in complete agreement with Mr. Edwards that this is how the Bonds work, the Coupons.
PRESIDENT FERNÁNDEZ ARMESTO: So, you do
[Page 2348]
agree that they actually accrue at 5, 4 percent Coupon on the outstanding principal?
THE WITNESS: (Ms. Kunsman) Correct. Yes.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you.
THE WITNESS: (Ms. Kunsman) So, upfront, the Coupon payments were fixed from issuance. The Bondholder knew exactly what they would get for each Coupon, and while the Coupon rate had an inflation component because it was a nominal rate, the Bond was not perfectly hedged for inflation. If inflation ended up being higher than that component, again, the Bondholder would not be hedged.
Also, the Bondholder was not protected against the devaluation of the currency against another currency, or the value of the Bond was not--of the outstanding Coupons were not adjusted for future growth prices--property prices.
One unique item of the Coupons is that there was a cap as to how much cash the Bondholder could receive for each Coupon, which was 150 times the monthly living wage in Lima.
Just to be clear, the subject of this
[Page 2349]
Arbitration relates to the unclipped coupons. It is agreed by the Party that the Coupons that have been clipped are settled debts.
This is a picture of one of the Gramercy Bonds, the unclipped coupons, and on the next page, we just want to point out that in our First Quantum Report, we reviewed the Gramercy Purchase Contracts, the Bond scans, and the Gramercy structure, something that is not addressed by Edwards in his Reports.
So, now I'm going to go into what happened after the Bonds were issued. So, as has been discussed, there was significant inflation and a period of hyperinflation after the Bonds were issued. They were--there were two redenominations of the currency, and at some point the Agrarian Bank was liquidated.
I know this came up during the Hearing earlier as to whether holders of Coupons were still presenting them up to 1992. So, what we did is we looked at the Coupons that could have been presented in each year, and we saw--which is represented by the blue bars in this chart--that Bondholders were taking
[Page 2350]
their Coupons to be redeemed, even though at some point we know they became nearly worthless. So, this was up to 1992.
PRESIDENT FERNÁNDEZ ARMESTO: Can we just have a look?
THE WITNESS: (Ms. Kunsman) Right.
PRESIDENT FERNÁNDEZ ARMESTO: The blue is the clipped Coupons?
THE WITNESS: (Ms. Kunsman) Correct.
PRESIDENT FERNÁNDEZ ARMESTO: Now, how do you know how many clipped Coupons there are? I thought one of the biggest unknown-unknowns, if I may use that Rumsfeldian term, is how many Coupons, how many Bonds there are?
THE WITNESS: (Ms. Kunsman) This is just for the Gramercy Bonds, not the entire universe.
PRESIDENT FERNÁNDEZ ARMESTO: Oh. Okay. This is only for Gramercy. Okay.
I can see that your number of clipped Coupons--this is just, you took all the Bonds, and then for each year just added up how many unclipped coupons there are.
[Page 2351]
THE WITNESS: That could have been clipped that year.
PRESIDENT FERNÁNDEZ ARMESTO: That year.
THE WITNESS: (Ms. Kunsman) So, for example, if in 1976 there were 8,000 Coupons that could have been presented that year for payment, we figured how many were--what were clipped and how many remain unclipped. So, in the earlier years, you see that most of the Coupons were clipped.
ARBITRATOR DRYMER: Each year.
THE WITNESS: (Ms. Kunsman) Each year, yeah.
PRESIDENT FERNÁNDEZ ARMESTO: But here--I mean, the total number here in 1991 and '92, it's an optical illusion. The number of Coupons is always the same, because these were 20-year Bonds.
THE WITNESS: (Ms. Kunsman) Right. But I'm just showing the ones that could have been presented that specific year.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah. But is the number in--is the total column in 1991 less than in 1990? The total column? I mean, at least to me, it looks like there's a decline.
[Page 2352]
THE WITNESS: (Ms. Kunsman) Yes, there is.
THE WITNESS: (Mr. Kaczmarek) Yes.
PRESIDENT FERNÁNDEZ ARMESTO: And why?
THE WITNESS: (Mr. Kaczmarek) So, if I could add: So, the total you see in the graph is the total Coupons that could have been presented each year, not the total Coupons over the life of the entire set of Bonds. So, it starts to flatten out, because the number of Bonds at issue is the same in those years. So, a little more than 9,000, around 9,500 Coupons, could have been presented, for example, in 1992; right? We were talking about 9,500 Bonds, roughly. And so, what this says is roughly for--a little less than 4,000 were clipped, and about 5,500 were unclipped.
ARBITRATOR DRYMER: That's because some of the Bonds were 20-year terms.
PRESIDENT FERNÁNDEZ ARMESTO: Exactly.
ARBITRATOR DRYMER: Some were 25. Some were longer. So, as of 1970, 20 years later, the amount was decreased.
PRESIDENT FERNÁNDEZ ARMESTO: It starts to
[Page 2353]
decrease.
THE WITNESS: (Ms. Kunsman) Yes. And they were not all issued at the same time. They were issued over time.
ARBITRATOR DRYMER: Right. Of course.
PRESIDENT FERNÁNDEZ ARMESTO: And after 1992, there is no clipping.
THE WITNESS: (Ms. Kunsman) We saw a couple, but those must have been lost, but there weren't many.
THE WITNESS: (Mr. Kaczmarek) Yes. As we know, the bank closed, so no possibility to redeem a coupon.
THE WITNESS: (Ms. Kunsman) So, as we explained in our Reports, Perú didn't default on the Agrarian Bonds; the Coupons became nearly worthless on their own terms because of the hyperinflation. So, in 1992, when the Agrarian Bank closed, Perú could have called in, accelerated all of the unclipped coupons, and paid them for less than $1.
PRESIDENT FERNÁNDEZ ARMESTO: You have to go back to the--sorry for that--to the previous chart.
[Page 2354]
THE WITNESS: (Ms. Kunsman) Yeah.
PRESIDENT FERNÁNDEZ ARMESTO: And then you have here on the--the line is a yearly inflation, and it's a logarithmic in this case.
THE WITNESS: (Ms. Kunsman) Yeah.
PRESIDENT FERNÁNDEZ ARMESTO: And when I look here, it says year-over-year-change in CPI. It is not the CPI, what you are showing. It is only the increase in the CPI you are showing.
THE WITNESS: (Ms. Kunsman) Year-over-year, yes.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. Thank you. It's not really the yearly inflation; it is the evolution, the changes in the yearly inflation?
THE WITNESS: (Ms. Kunsman) Yes.
THE WITNESS: (Mr. Kaczmarek) Correct, on a logarithmic scale, in order to not have it jump off the page. I think the takeaway is really that, as you see the change in inflation increase, the number of clipped Coupons is decreasing. It would seem natural.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. Thank
[Page 2355]
you.
THE WITNESS: (Ms. Kunsman) Okay. So, as I've said, Perú could have called in all of the unclipped coupons for less than $1. We looked at it from a different way.
The next slide, please.
The Fair Market Value of the unclipped--Gramercy's unclipped coupons as of the closure of the Agrarian Bank was 38 cents. The only difference between the two calculations is that, in this one, the Coupons with the payment dates after May 1992 are discounted back to May 1992. So, as has been discussed, there is no dispute between the Experts that the unclipped coupons were virtually worthless as of 1992.
Now we'll go into the timeline with the select Decisions and a summary of what happened between the hyperinflation period and Professor Edwards' calculations.
So, between 1990 to 2000, the unclipped coupons remain virtually worthless. In 2000, the Peruvian Government provided for an adjustment to the
[Page 2356]
unclipped coupons that was going to be paid out with the issuance of 30-year interest-free Bonds, and for those Bonds, the principal would not be paid until maturity. So, the adjustment wouldn't be received until 2030. And the Bondholders were only allowed to take advantage of this option for 30 days.
PRESIDENT FERNÁNDEZ ARMESTO: I'm lost. Where are you now?
THE WITNESS: (Ms. Kunsman) I am in 2000. There is--below the timeline, it says: "Decree 088/2000". So, that is the Decree that came up earlier that used the dollarization method, but I wanted to clarify that payment of that adjustment was in issuance of interest-free Bonds not to be paid until 2030.
PRESIDENT FERNÁNDEZ ARMESTO: Okay.
THE WITNESS: (Ms. Kunsman) Okay. Then you have the 2001 CT Decision that says that the unclipped coupons can't be paid at their nominal value. They have to be paid based on the Current Value Principle, but this doesn't define the parameters of the Current Value Principle, so this
[Page 2357]
creates a period of uncertainty, and as Mr. Kaczmarek will later discuss, the Current Value Principle, it's not a universally recognized term.
So, then, between 2001 and 2013, there were several domestic court rulings, many proposed legislations, that all used different interpretation of the parameters to calculate the Current Value Principle. Some used simple interest; some went back only to the last clipped-Coupon date; some used the legal interest rate, the Coupon-stated rates. And there was one bill that did pass in 2006, which was partially based on the 2004 Agrarian Commission Report, and that was vetoed, so the uncertainty remained.
It was during this period of uncertainty that then Gramercy purchased the Bonds, between 2006 and 2008, for USD 33.2 million. It wasn't until 2013 that the Constitutional Tribunal provided the parameters to calculate the Current Value Principle, and then the Executive, through the MEF, implemented that principle.
There was in one of the initial Decrees a
[Page 2358]
typo that someone noticed, and that was corrected, and by 2017, there was a consolidated formula. So, at this point, both Experts agreed that the value of the Gramercy Bonds results in a 33.6 million adjustment, had the Gramercy Bonds gone through the Bondholder process, had been properly authenticated and their ownership verified.
ARBITRATOR DRYMER: On that--and I'm looking at your chart, and I'm drawing vertical lines--it's hard to tell where you believe the value uncertainty ends. Does it end with--in July 2013, on the CT Decision? Or does it end later on, when the Supreme Decrees started coming out?
THE WITNESS: (Ms. Kunsman) In the 2013 CT Decision.
ARBITRATOR DRYMER: I see. As of that moment, uncertainty ended from an economic perspective?
THE WITNESS: (Ms. Kunsman) Right.
ARBITRATOR DRYMER: Thank you.
PRESIDENT FERNÁNDEZ ARMESTO: You will, of course, at some stage go into a detailed explanation
[Page 2359]
of the 33.57, how you calculate that?
THE WITNESS: (Ms. Kunsman) Yes.
THE WITNESS: (Mr. Kaczmarek) Absolutely.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. So, I will not ask about that.
THE WITNESS: (Ms. Kunsman) So, next page, please.
So, Claimants don't advance the typical expropriation case. So, in your typical expropriation case, you have something of value that is taken away because of the measures, and then Claimant will ask for compensation, the Fair Market Value of the investment just prior to the Measures.
In this case, though, Claimants' investment had virtually zero value prior to the Measures. It is only because of the Measures that some value is added to that investment. What Claimant claims, though, is that you didn't add enough value. 33.6 million is not enough; we want 1.8 billion. That's the value that you should have added.
Now Mr. Kaczmarek will go into our response to Professor Edwards.
[Page 2360]
THE WITNESS: (Mr. Kaczmarek) Okay. I'm on Slide 19.
So, I think you've heard from Claimants, at least through their written reports, that they prefer to look at this as a debt restructuring, and Perú has taken a different view. They say it's a claims process, although I think you've heard from some of Claimants' Witnesses who say it is not exactly like a restructuring this past week, but we entertained this notion of a restructuring in any event in our Second Report. And we said, fine, let's look at it through that lens. I think it is somewhat helpful to understand the formulas, which I'll walk through with you.
So, like Professor Edwards did, I have a hypothetical Bond here, the Coupon booklet at the top, a coupon with blue and yellow portions--yellow being interest, blue being principal, and the white being a clipped Coupon. This Bond issued in 1980 for 25 years, you see clipped up until 1989; you see two Coupons after that that could have been presented, but weren't, and then the remaining Coupons until
[Page 2361]
2005. And again, by 1992, we generally all agree, worth roughly a cent.
So, let me walk through on Slide 21 Professor Edwards' calculation, and I'll describe it in--slightly differently than his, but we have an exact understanding of the calculation. So, what he does is, he takes the principal portion of all unclipped coupons, and he accelerates that, basically adds them all up and brings it back to the issuance date. That's the Step 1. He then inflation-adjusts those Coupons to the last clipped Coupon date using the Lima CPI, and in Step 3, he applies a nominal interest rate, which is Lima CPI, plus a real rate of 7.22 percent.
I think he talked about in his presentation how he goes from issuance date to 2018 with inflation, and last clipped Coupon to 2018 with a real rate. Mathematically that's the same way--it yields the same result as the way I'm explaining it, that it is just explanation to last clipped Coupon and then a nominal interest rate until 2018. I think in comparing this, which I will do later to Perú's
[Page 2362]
formula, this is a helpful way to explain it.
PRESIDENT FERNÁNDEZ ARMESTO: I'm not 100 percent--I will explain to you whether we are speaking of the same thing or not. The way I understood Professor Edwards was, he took the principal and he accelerated--he added up all the outstanding principals, had an amount in soles oro, then he revalued them from the date of issuance until 2018 using CPI, and that gave him a principal amount, and then he calculated interest from at the rate 7.22 from the last clipped Coupon. So, in his--the interest started at a different rate than the valuation.
Are we on the same wavelength, or did I misunderstand something?
THE WITNESS: (Mr. Kaczmarek) You understood exactly correctly. So, what I'm trying to describe here is another way you can look at his calculation, is just inflation-adjusting principal from issuance date to last clipped Coupon.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah.
THE WITNESS: (Mr. Kaczmarek) And there, two
[Page 2363]
rates apply going forward.
(Overlapping speakers.)
PRESIDENT FERNÁNDEZ ARMESTO: Yeah. Yeah. Because you multiply. It's the same--that's multiplying, you can change the order of the factors.
THE WITNESS: (Mr. Kaczmarek) Mathematically it is exactly the same. Okay. And so, you'll see when I show you the Perú calculation, this is just a better way of making a comparison.
PRESIDENT FERNÁNDEZ ARMESTO: Okay.
THE WITNESS: (Mr. Kaczmarek) Okay. So, for the dollarization, basically the exact--
PRESIDENT FERNÁNDEZ ARMESTO: Mr. Kaczmarek, at some stage--I think we have Professor Edwards somewhere. Yeah, there he is.
Professor Edwards, good morning.
THE WITNESS: (Mr. Edwards) Good morning.
PRESIDENT FERNÁNDEZ ARMESTO: He had a graph which showed--and he made the following argument. I just make the argument, you address it whenever it suits you, but it is an argument I would like you to address. And he basically said that by the time of
[Page 2364]
the last clipped Coupon, there had already been such an inflation that the 400 soles nominal value had, in fact, only become 2 percent, 3 percent of that. And he said it is--I understood him to say, it is deeply unfair if you exclude that period of inflation because, by the unclipped dates, these Bonds were already basically worthless. Do address it at some stage, please, whenever it--not now, but whenever it suits you.
THE WITNESS: (Mr. Kaczmarek) Yes. I absolutely will, and as my colleague indicated, we tried to put numbers to the "virtually worthless," 48 cents is the number Perú could have simply paid if all the Coupons had been brought in that Gramercy holds today, in 1992. That's our calculation.
So, back to the dollarization, the only intermediate step here, a new step too, is after acceleration, a conversion to dollars using parity rates observed from '99 to 2018, then using U.S. CPI to inflate to the last clipped Coupon, and then a nominal rate of U.S. CPI, plus 7.22 percent forward. Okay?
[Page 2365]
PRESIDENT FERNÁNDEZ ARMESTO: Umm-hmm.
THE WITNESS: (Mr. Kaczmarek) So, you have seen in our Second Report, we talk about some flaws we believe that are in his approach, and I'll touch on them throughout the next few slides, but the first one being the acceleration to issuance date.
As we know, there is no claim for Coupons that were being paid--right?--but he's starting not when the apparent nonpayment started, the bank closure, but going all the way back to the beginning. If you think of this like in a damages context that we usually think, when there's a bad event that happens or a measure, you create a but-for scenario to eliminate that, and that starts on the date of the Measure. You can't start it any earlier than when the Measure occurred. And in my mind, this is exactly what he's doing, is he's creating a scenario in which really the default occurred from the very beginning of the issuance of the Bonds and it--readjusting those Bonds. And I have an example to show how that works. So, this is partly already touching on your question, Mr. President.
[Page 2366]
The second area we pointed out was, he's using parity rates from '99 until 2018 as a basis to set parity back at issuance, and if we're simulating a bond restructuring back in time, obviously none of this data was known and could have been accomplished at the time. So, this is using some ex post information to simulate an ex ante exchange.
So, here again is sort of the other problem of the acceleration to issuance date. By starting over, you're effectively saying all of the clipped Coupons themselves would have been different. He would be computing a new face value for every clipped Coupon and every unclipped coupon for the principal. Even though we recognize that if it was clipped, it was paid at the amount paid on the actual Coupon; right? So, he's creating, again, sort a but-for scenario for during a period of time in which there was no problem.
As you put it, he wants to solve the hyperinflation as though Perú has a responsibility to do that, and that is a conceptual difference between the calculations in this case. What is Perú
[Page 2367]
responsible for solving here? Do they have to go back and redo the Bonds from the very beginning with new terms, new interest rates, inflation-adjusted principal, or are they solving nonpayment of Coupons when nonpayment began. That is a key conceptual issue that I'll continue to touch on in the Slides.
And you'll see from our Second Report, this is just a good example. Here's a bond, 8615, that has some clipped Coupons with the principal amount of 400 soles oro. By going back to issuance date, he's really saying in 1973 the real face value should have been 456, not 400. In 1984, it should have been 79,619, not 400, and then you get to the first clipped Coupon. Now, Perú didn't pay the 400; right? And this is 1985, so this is somebody who didn't come and present. So, of course, they couldn't pay.
But what his calculation does is say Perú effectively is responsible, not just for not paying the 400, but for not paying 161,204 soles oro for that Coupon. That is the nonpayment event for this Bond the way he's treating it. As I said, he's reprinting the face value from the very beginning and
[Page 2368]
saying that is the Coupon they didn't pay, even though that Coupon never existed.
PRESIDENT FERNÁNDEZ ARMESTO: So, let me say it in my words. Professor Edwards says in November '85, which is the date of the first unclipped coupon, 400 soles oro, the CPI of Perú was such that what had been 400 soles in 1973 equaled 161,000 soles in 1985.
THE WITNESS: (Mr. Kaczmarek) Correct.
PRESIDENT FERNÁNDEZ ARMESTO: And he then takes this 161,204 and brings it forward to 2018 using CPI.
(Comments off microphone.)
THE WITNESS: (Mr. Kaczmarek) With 7.22.
PRESIDENT FERNÁNDEZ ARMESTO: Of course. Of course. I am not looking at the interest now. Of course. Plus 7.22--plus compounded interest of 7.22. I fully understand, and the impact of interest on the calculation.
While you say these Coupons--the historic Coupons are settled debt. They have been paid, and we should not look back to them, and we should then
[Page 2369]
take the 400 soles de oro, bring those forward to 2018 at whatever CPI, dollar, whatever adjustment is appropriate?
THE WITNESS: (Mr. Kaczmarek) That is what the MEF formulas do, yes. They convert the 400 to dollars and apply a one-year U.S. Treasury, a bill rate from that period forward. Precisely.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah.
No, that was not quite my question. My question to you is whether, as an economist--I know exactly what--I think I know what the MEF formulas do, and what I need is your opinion, or of both of you as economists, as Experts, whether this is the proper financial analysis. So, the proper financial analysis is to say that you should start with 400 and not with 161,204. That is your professional Opinion?
THE WITNESS: (Mr. Kaczmarek) From our perspective, yes, that is absolutely the correct way because there was no issue about paying all of these Coupons at their face value as they were printed up until 1985; right?
So, again, why are we creating a but-for
[Page 2370]
scenario, in effect, layered on top of an Actual Scenario when there is no complaint that Perú has done anything wrong? This, again, comes back to this idea that I think Professor Edwards is solving a different problem. He's saying we have to go back--once Perú stops paying, we have to go back and we have to redo all the Bonds from the very beginning, except if you came in and asked for payment, well, that's settled, but we redo the Bonds from the beginning.
We're saying that doesn't make sense because everything was fine until the nonpayment occurred; and, at that point, there's an obligation, even though they could have paid them off for 48 cents. There's an obligation to still go ahead and pay them off today, and what is that number.
PRESIDENT FERNÁNDEZ ARMESTO: At the end it's--and I think this is for counsel--this is a somewhat legal question; namely, whether the previous Coupons which had been paid had been legally extinguished or not. There is--I see the economic component, but there is also a legal component too.
[Page 2371]
MR. RIEHL: Yes, we agree with that, Mr. President.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you, Mr. Riehl.
ARBITRATOR DRYMER: Forgive me. I want to say off the record, but I won't, only because I'm sure this question will seem foolish, and maybe it is.
PRESIDENT FERNÁNDEZ ARMESTO: Nothing from you can be foolish.
ARBITRATOR DRYMER: Yeah, well, that's very kind, but I haven't embarked in an economic discussion yet, so let's see.
Would your view change if you were to assume that as of Day 1--it's an assumption, a hypothesis--the Bonds were subject to the Current Value Principle, whatever that might be?
THE WITNESS: (Mr. Kaczmarek) That is the perfect qualification to your question, yes.
ARBITRATOR DRYMER: Well, but it would change to some Decree; right?
THE WITNESS: (Mr. Kaczmarek) So, let me
[Page 2372]
just postulate a scenario--
ARBITRATOR DRYMER: Thank you.
THE WITNESS: (Mr. Kaczmarek) --where if Current Value Principle means that these Bonds had to be inflation-adjusted from the very beginning and that they were deficient from Day 1--I understand your hypothetical--and then one could say, "Well, sure then, they need to be redone."
Of course, my only comment in that regard would be fixed Coupon Bonds are pretty standard types of Bonds. If we all went out to buy a U.S. Treasury, 30-year U.S. Treasury today, you would get about 2 percent. If inflation goes to 8 percent in 10 years in the United States, well, we all lose money on that Bond. That is a principle risk factor in a fixed Coupon Bond. But, yes, if they are somehow with a Current Value Principle being in effect void ab initio, as I think you say, yes, one could maybe say they would need to be fixed from the beginning.
ARBITRATOR DRYMER: Thank you. And I realize that verges on a legal issue, and I
[Page 2373]
deliberately stopped where I did in my question because I don't want to take you there. That will be an issue for counsel to address in due course.
THE WITNESS: (Ms. Kunsman) Right.
PRESIDENT FERNÁNDEZ ARMESTO: And before--if we have time at the end. Off the record.
(Comments off the record.)
PRESIDENT FERNÁNDEZ ARMESTO: We are back on the record.
THE WITNESS: (Ms. Kunsman) So, going back to your questions, there are securities that look like that, the TIPS, that they are inflation-adjusted, but you have the clauses when they are issued, and you know exactly what's going to happen. What's unusual about applying what you're saying, your scenario, is that then you might think that your debts are settled, but they are not, you are reopening them. And that's hard from an economic perspective to accept.
ARBITRATOR DRYMER: I appreciate that. I appreciate that. As I say, with the characterization of the Bonds will be--
[Page 2374]
THE WITNESS: (Ms. Kunsman) Yeah.
ARBITRATOR DRYMER: --and the payment principals will be a legal issue, but thank you for clarifying that, both of you. Thanks.
THE WITNESS: (Mr. Kaczmarek) Okay. So we are now on Slide 26. This is part of what we would call a waterfall chart or a bridge between the calculations done by the MEF and Professor Edwards.
So, I'm going to focus on the first set of numbers, and the first line--this is the MEF formulas or the Bondholder Process. This is what applying the formula to Gramercy's Bonds gives you at last clipped Coupon date. It gives you a sum nearly $3.4 million. Okay. What we then did is we say--
PRESIDENT FERNÁNDEZ ARMESTO: No, no, no. No, I'm sorry. I cannot follow. Can you start again, please?
THE WITNESS: (Mr. Kaczmarek) Yes.
So, first column of numbers, principal at last clipped Coupon--
PRESIDENT FERNÁNDEZ ARMESTO: Yes.
THE WITNESS: (Mr. Kaczmarek) --first line,
[Page 2375]
this first line is applying the MEF formulas to Gramercy's Bonds. And step 1 is the acceleration, remember?
PRESIDENT FERNÁNDEZ ARMESTO: We are now in the MEF formula?
THE WITNESS: (Mr. Kaczmarek) Yes.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. That was my problem.
THE WITNESS: (Mr. Kaczmarek) I'll get into it in more detail, but I just wanted to show you right now the effect of the two issues I've described that Edwards is doing on the MEF formula.
So, the MEF starts. When they accelerate, they accelerate to last clipped Coupon.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah.
THE WITNESS: (Mr. Kaczmarek) And they come up with a number that is $3.385 million for the Gramercy Bonds. And then they apply interest at the one-year U.S. Treasury rate going forward. That's the second column. You see 33.6 million.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah, but we have a huge problem here with the Parity Exchange
[Page 2376]
Rate.
THE WITNESS: (Mr. Kaczmarek) Ah, that's the second line.
(Comments off microphone.)
PRESIDENT FERNÁNDEZ ARMESTO: Okay.
THE WITNESS: (Mr. Kaczmarek) That is the second line. So, if I change the MEF formula and I use a Parity Exchange Rate like Professor Edwards suggests, you get, at least clipped Coupon, almost $7.5 million. These are all in dollars because the MEF has done a dollarization approach, and I'm comparing Professor Edwards' dollarization approach. It's the easiest way to compare the two.
PRESIDENT FERNÁNDEZ ARMESTO: Umm-hmm.
THE WITNESS: (Mr. Kaczmarek) Okay. So, that gets from you 3.4 to 7.5, and then if I do the retroactive adjustment of CPI to issuance date to the MEF formula, then I get an amount of almost 36 million at last clipped Coupon. Okay. So, that's the effect of those first two differences in the formulas before interest is applied.
PRESIDENT FERNÁNDEZ ARMESTO: Wait one
[Page 2377]
second. Sorry. I must make a note; otherwise, I will never remember.
THE WITNESS: (Mr. Kaczmarek) I think--and I'll return to this table again in the presentation, but I do think this is critical in understanding the impact.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah.
THE WITNESS: (Mr. Kaczmarek)--of the different assumptions being applied in the formulas.
MR. HAMILTON: Mr. President.
PRESIDENT FERNÁNDEZ ARMESTO: Yes, of course, Mr. Hamilton.
MR. HAMILTON: I simply wanted to confirm the understanding that the third column here, "Principal at Last Clipped Coupon Date, Edwards' Adjustment for Retroactive CPI," this is the manifestation of--
MR. RIEHL: Mr. President, I don't think it is appropriate for lawyers to be explaining this material.
PRESIDENT FERNÁNDEZ ARMESTO: I think Mr. Kaczmarek is quite good at explaining his
[Page 2378]
position.
MR. HAMILTON: I simply want to ask if it's the manifestation of what he described earlier.
PRESIDENT FERNÁNDEZ ARMESTO: Okay.
MR. RIEHL: Mr. President, he'll have an opportunity for redirect.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. Please.
So, I will put here the following: Between the MEF formula and Professor Edwards' formula, there are two factors. One is the Parity Exchange Rate on which I will hear more from you, and the other is whether we start on the issuance--start the valuation on the issuance date or on the late date of the last Coupon. And what you have done here--which is very helpful and thank you--is you have put value to that.
THE WITNESS: (Mr. Kaczmarek) Correct.
PRESIDENT FERNÁNDEZ ARMESTO: And if the 33.5 is the calculation we saw by just using the MEF formula?
THE WITNESS: (Mr. Kaczmarek) Absolutely. Yes.
PRESIDENT FERNÁNDEZ ARMESTO: And if we
[Page 2379]
change the parity rate to the one preferred by Professor Edwards, that adds $40 million?
THE WITNESS: (Mr. Kaczmarek) Correct.
PRESIDENT FERNÁNDEZ ARMESTO: And if we then take the calculation from the beginning, that adds 90 million dollars?
THE WITNESS: (Mr. Kaczmarek) Correct.
PRESIDENT FERNÁNDEZ ARMESTO: And that is all before interest?
THE WITNESS: (Mr. Kaczmarek) Well, it is with interest at the MEF rate.
ARBITRATOR DRYMER: Right.
THE WITNESS: (Mr. Kaczmarek) I will come to the last part of my waterfall, there will be one more row I'm going to add with the difference in the interest rate.
PRESIDENT FERNÁNDEZ ARMESTO: Because I thought, I was very surprised here because the 33.5 number must have interest.
ARBITRATOR DRYMER: Yeah. Yeah.
THE WITNESS: (Mr. Kaczmarek) It does. That column says calculation at 31 May 2018, so, of
[Page 2380]
course, yes, that brings it forward with interest.
The column that says "at last clipped Coupon," we can't assign a date because the last clipped Coupon date is different for every bond.
ARBITRATOR DRYMER: Right. And the last stage of your waterfall will presumably take Professor Edwards up to 1.8 billion.
THE WITNESS: (Mr. Kaczmarek) Indeed, it will.
ARBITRATOR DRYMER: Right.
PRESIDENT FERNÁNDEZ ARMESTO: So, these are not really Professor Edwards' numbers, these are Professor Edwards' numbers, plus interest at the one-year Treasury Bond bills from the date of the last Coupon?
THE WITNESS: (Mr. Kaczmarek) Correct. To say it in slightly different words, the last line here is Professor Edwards' complete approach in dollarization, except a difference in the interest rate from last clipped Coupon forward.
PRESIDENT FERNÁNDEZ ARMESTO: Oh, but that is not my question. Because my question is whether
[Page 2381]
you are comparing apples and apples. Because the first line is the MEF calculation, 2017.
THE WITNESS: (Mr. Kaczmarek) Yes.
PRESIDENT FERNÁNDEZ ARMESTO: And correct me if I'm wrong, but I thought that the 33.5 million number includes interest at the one-year Treasury Bond rate.
THE WITNESS: (Mr. Kaczmarek) Yes. Every interest calculation in this second column of numbers is interest at the one-year U.S. Treasury Bill rate.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. So, you have added--you have done something which Professor Edwards has not done. You have added to his calculation the interest rate at the MEF formula?
THE WITNESS: (Mr. Kaczmarek) Yes. So, what I'm doing is, I'm starting with the MEF formula as my base, that's the Line 1, and then I'm making the adjustments Professor Edwards says should be made step by step to get to his number. So, I first change the parity rate, Line 2, then I change the CPI adjustment from issuance date--that's the third line--and then in a couple of slides, I'll show you
[Page 2382]
the last change, which is the interest rate, and we will bridge the entire gap between the two.
PRESIDENT FERNÁNDEZ ARMESTO: I still have one question. Does the number 74 million, does it have interest or not?
THE WITNESS: (Mr. Kaczmarek) Yes. It has interest at one year U.S. Treasury Bill rate.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. Okay. I have understood it. Yes. Very good.
THE WITNESS: (Mr. Kaczmarek) So, now I'm going to bridge that last gap. You've seen what Professor Edwards is doing, as he described the other day. He has this CPI, plus 7.22 percent. His 7.22 percent rate, he says, is the average lending rate on assets in the economy. It is basically--it's not calculated maybe like you have seen it before. It's GDP, elements of GDP divided by all assets in the economy, I think we heard--roads, bridges, buildings--basically, the assets that generate income for the whole country. He comes up with that figure. It is like 10.97 percent.
That is like, Professor, your Weighted
[Page 2383]
Average Cost of Capital for economy.
ARBITRATOR DRYMER: Yes.
THE WITNESS: (Mr. Kaczmarek) He then breaks it down into Cost of Equity and Cost of Debt. The Cost of Debt, he says, is 7.22 percent. This is a lending rate that someone would get if you lent to people who construct all of the assets in the economy.
What we have said is, besides some issues we have with data, it's a very theoretical rate. There is no instrument anyone could possibly invest in to replicate this. You can't be a partial lender to every asset in the economy.
So, when we talk about opportunity costs, this is purely a conceptual issue he's applying here, unlike a Treasury Bill rate, which is an instrument--yes, maybe you need to fly to the U.S., but you can still invest in it. This is uninvestable, and that is one of the problems that we have with it.
So, now I will, on Slide 28, finish the
[Page 2384]
waterfall and bridge the gap. So, the first three lines of this table are precisely the same as two slides ago. And now I've added the fourth line, and here now in the second column of numbers, I've circled the 1.7 billion number. I've now replaced in the MEF formulas the one-year U.S. Treasury Bill rate with Professor Edwards' preferred rate.
And this is what gets you to 1.7. It's not quite the 1.8 because there is a little difference between his CPI and dollarization, but this explains in three steps, three different parameter differences in the formulas, how you get from one to the other and the impact.
PRESIDENT FERNÁNDEZ ARMESTO: There is, of course, an intermediate step, which we could do, which is we could say, instead of--and maybe you do it later on. If you do it later on, let's not come back. But I could take one-year Treasury Bills, I could take five-year Treasury Bonds. I could take 20-year Treasury Bonds, and depending on what I take, I assume there is some intermediate calculations.
THE WITNESS: (Mr. Kaczmarek) Yes.
[Page 2385]
Certainly, we would say there's discretion. There's no rules saying which rate to use in this process. There is, you know, not one rate. I think Professor Edwards has somewhat intimated that his rate is the only legitimate rate, even though we know there are other calculations presented by--in other matters in Perú using different rates.
But this one is quite subjective. I think I'll leave it to counsel for Perú to articulate. I think they might say, well, if you were to change a rate, you are really saying that by using a one-year T-Bill rate, it's a breach of the Treaty. It is so ridiculous. It is so arbitrary that you have to use something else.
I think they would put the case as this is reasonable and doesn't fall into the area of being so arbitrary as to rise to a breach of the Treaty by using the Treasury Bill rate. I would point to them.
PRESIDENT FERNÁNDEZ ARMESTO: Are you coming back to the 2013 Resolution of the Constitutional Court where it says it should add--interest should be added at the rate of Bonds, U.S. Treasury Bonds, I
[Page 2386]
think it says? And we had a discussion whether it would be--the appropriate would be one-year Treasury Bills or longer-period Treasury Bills. Will you come back to that, or shall I ask you about that now?
THE WITNESS: (Mr. Kaczmarek) I'm fine to address it now. Our read is just financial and economic professionals. It's a bit ambiguous, and so even if you were to say, let's match duration; right? You run into a problem, again, then these Treasury Bonds are fixed.
Let's say it's a rate of--the Bill's average, we say 5.2 percent, but let's say it's 7 percent. Okay?
What do you do after the first year? Do you assume they sell the whole Bond and buy a whole new 30-year Bond, or do we assume they purchase and hold for the whole period such that only the Coupon interest in this case for a Treasury Bill, just the interest piece, is reinvested? Do you do that route, buy and hold? Or do you purchase one 30-year in the first year, sell it in the second year, buy the new 30-year and with the new rate, which means you may
[Page 2387]
lose some money on that first year, you may gain some money, depending upon how rates move.
There are different ways that one could do the calculation; right? And as you move closer to today, do you start to change the maturity, so, do you start to move to 10-year Bonds? Do you start to move to five-year Bonds? You run into decisions here. It's open.
All I'll say at this point, with the one-year Treasury, one benefit of it is, it's reinvested every year. And so it's always taking the market rate.
PRESIDENT FERNÁNDEZ ARMESTO: But what is the average rate? I seem to remember Professor Edwards said something like 0.7.
THE WITNESS: (Mr. Kaczmarek) Right. So two points about that: We have done our calculation and showed you it's about 5.2 percent, and I will actually get to that in a slide.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. If you get to--no, no. Follow your--at some stage, we have to discuss, if you apply one year, what it actually
[Page 2388]
means.
THE WITNESS: (Mr. Kaczmarek) Yes. Let me come back to that when I get to the graph because I think it will be helpful at that stage.
PRESIDENT FERNÁNDEZ ARMESTO: Okay.
THE WITNESS: (Mr. Kaczmarek) So I'll put a marker down for that.
Slide 29, my comments here would just be Professor Edwards has acknowledged that he believes CPI method and dollarization are both consistent with Current Value Principle. That's his view. I know he said I have a preference for CPI because it is simpler, but I think it's been a position that dollarization is a backup, but, in general, he's positioning them as both equally valid, one being more simple than the other. We could debate whether the dollarization is really that more complicated.
But one of the premises that he advances that we've had a difficult time with is he has advanced this notion, as my colleague alluded to at the beginning, that there's just one way to do this Current Value Principle and application of interest,
[Page 2389]
and any other way is really wrong. And the MEF formulas are wrong.
So Slide 30, you'll see we've commented on this, and as my colleague said--
MR. HAMILTON: Excuse me. I just have a follow-up question.
I'm sorry, please don't interrupt.
Procedurally, this is my direct examination, and you don't get to control it. I'm being very limited in my interventions, and I'm able to ask a question.
PRESIDENT FERNÁNDEZ ARMESTO: What is your question, Mr. Hamilton?
BY MR. HAMILTON:
Q. You were asked by the President about U.S. Treasury Bonds and if there were other options. How does the interest rate on the one-year U.S. T-Bills compare with the stated rate on the Land Bonds?
A. (Mr. Kaczmarek) Yes, as I'll show from a graph in our Report, 5.2 is the average we calculated for T-Bill rates, which is just above the average of 4, 5, and 6. So, it's in the range of the same types of rates that had been originally offered.
[Page 2390]
PRESIDENT FERNÁNDEZ ARMESTO: We'll get there. Yeah.
THE WITNESS: (Mr. Kaczmarek) And I want to touch on the 77, which you raised. Absolutely.
So, here, Slide 30, we are just articulating--and it doesn't appear to be disagreed. There is no recognized Current Value Principle. It was put in the 2001 Constitutional Tribunal Decision. Frankly, in my experience, it's not the first time legislation has come out with a term that's undefined. We're all familiar with Fair Market Value. That happened in 1916 when U.S. Congress passed the Revenue Act. They used the term and never defined it. It went 50 years being undefined.
And so he's only pointed in his Second Report to some what I'll call very vague parameters from Mr. Castillo as to how it should be implemented. But even if we take Mr. Castillo's guidance, it's so, in our view, broad that it still leaves open lots of questions as to its implementation in a proper way, particularly in the context of these Bonds where
[Page 2391]
we're trying to bring something that wasn't paid, that was virtually worthless forward to today.
So, there is definitely a disagreement between the two of us on that point.
So, let me now turn to the MEF calculation in the same way I described Professor Edwards' calculation. I'm on Slide 33.
MR. HAMILTON: Could we get a time check because I'm not quite sure--we are good? Thanks.
PRESIDENT FERNÁNDEZ ARMESTO: We have made so many questions that it is--I don't know what the Secretary says.
SECRETARY PLANELLS-VALERO: The Tribunal has used 30 minutes in questions, and the Respondent has 24 minutes left.
MR. HAMILTON: Thank you.
THE WITNESS: (Mr. Kaczmarek) We are very safe to finish within that time period.
PRESIDENT FERNÁNDEZ ARMESTO: We may wish to ask on some of these calculations now, or at a later stage, Professor Edwards also, to say whether he agrees that these calculations are appropriate
[Page 2392]
because we want to have the right numbers in front of us.
THE WITNESS: (Mr. Kaczmarek) Absolutely.
So, here's the MEF formula. As I indicated, there's an acceleration to the last clipped Coupon of the unpaid principal, conversion at a parity rate. They used 1969 as the base, something that would have been known if we are simulating a bond restructuring. Then, as we've been discussing, one-year U.S. Treasury Bill rate moving forward.
So, Slide 34, we have discussed in our Second Report some favorable aspects of this calculation for Bondholders, and one of those very favorable aspects is depicted here. You could say, look, each Coupon has a maturity, and we should be calculating the amount on each Coupon from the maturity date plus interest to today. That's what we should be doing because that is when the nonpayment actually occurred. There was no obligation to make any payment before maturity date of a coupon.
Now, if we did that and applied that strict economic parameter, the amount would be derisory.
[Page 2393]
Let's take--I've said 48 cents; right? Let's call it 50 cents at bank closure. We'll use Professor Edwards' "Rule of 72." We're at almost 30 years since bank closure.
So, after the first ten, it doubles; the next ten, quadruple; the next ten, eight times at 7.2 percent interest. If I apply that 7.2 percent interest for 30 years, I get 8 times the 50 percent, $4. You heard that number.
It's hard to take a very worthless amount and convert it to something worth very much today, even over 30 years. Okay? But that is not what the Supreme--or the Constitutional Tribunal required Perú to do. It said accelerate to last clipped Coupon date.
So, it is basically holding Perú responsible for all Coupons that weren't presented, including ones Bondholders never made an attempt to present. From the very beginning, there are Bonds that never had a clipped Coupon, and apparently that is Perú's fault, and that is what their calculation does, which we believe is quite favorable. It gives a new Coupon
[Page 2394]
for that Bondholder who decided "I don't want to go in and make the effort to get paid for this Coupon."
And so, I'm now on Slide 35. What we have said is--again, looking at it, this is through the lens of a restructuring. We had Bonds, we say, with a Fair Market Value of 38 cents at bank closure. But the formula that the MEF has been required to implement turns those Bonds into Bonds worth 3.4 million at last clipped Coupon by going back in time, restoring value to those, even though they were happy to continue to pay up until they were worth 38 cents. Right?
So, very favorable conversion, and I'll come back to that in the context of a restructuring. But other favorable aspects, we've said, the conversion to dollars, protects against exchange rate risk, interest is compounded. So that's not in dispute. And, again, here's my average one-year U.S. Treasury Bill rate, we say, is 5.2 percent.
PRESIDENT FERNÁNDEZ ARMESTO: The average is the average. You have taken each year and divided by the number of years?
[Page 2395]
THE WITNESS: (Mr. Kaczmarek) Yes. So you see this graph.
PRESIDENT FERNÁNDEZ ARMESTO: Okay.
THE WITNESS: (Mr. Kaczmarek) This is the comparison. So you have the stated or effective rates of the Bonds at issue, 4, 5, and 6. Those are the flat lines. And then you add the one-year Treasury rate over time.
So, very high at certain points, over 14 percent, and then, yes, we all know rates have been low as of late because of the effects of the financial crisis.
The only problem I have--
PRESIDENT FERNÁNDEZ ARMESTO: And your average is the average of each year? You are taking each year and making an average?
THE WITNESS: (Mr. Kaczmarek) Yes.
PRESIDENT FERNÁNDEZ ARMESTO: Why are you doing some tricks to these statistics?
THE WITNESS: (Mr. Kaczmarek) No tricks to the statistics. This is the effective average annual rate over time that you would get.
[Page 2396]
PRESIDENT FERNÁNDEZ ARMESTO: And you will now speak about the Parity Exchange Rate, or that will come later?
THE WITNESS: (Mr. Kaczmarek) I'm going to touch on your question of the .77 that Professor Edwards brought up.
He did his calculation from 1982--or 1988--I think it was '88, almost certain it was '88. We can check his presentation. To present day. I'm not sure why he did that and started in '88, as opposed to going back to 1970, because we know there are Bonds that have unclipped coupons going all the way back to issuance date. That's why we started with 1970.
So, by starting later in 1988, he's missing this big spike you see in the graph. If you go earlier in time, which his 7.22 calculation does, the .77 is really higher. We haven't done the calculation. It is--I think a fair number would be around 2 percent. If you just think of inflation as 3, and our nominal rate is 5, it's 2, 2.2.
So, I think, in all fairness, the .77 is a
[Page 2397]
bit low because of his constrained time period that he measured it over.
PRESIDENT FERNÁNDEZ ARMESTO: But the point here is, of course, that this huge spike, which was 14 percent, only catches a couple of Bonds.
THE WITNESS: (Mr. Kaczmarek) Well, I think it captures a number of Bonds. I don't know the statistics of how many Bonds had unclipped coupons back before then. But, again, why people weren't bringing their Bonds in or their Coupons in to be paid during this period of time, that's for their account, but, nevertheless, if they didn't bring them in, the formulas hold Perú responsible for that action.
PRESIDENT FERNÁNDEZ ARMESTO: Parity Exchange Rate.
THE WITNESS: (Mr. Kaczmarek) Let's see if I--
PRESIDENT FERNÁNDEZ ARMESTO: Or will this come--or do you have a special slide on that?
THE WITNESS: (Mr. Kaczmarek) I actually don't think we have much more.
[Page 2398]
PRESIDENT FERNÁNDEZ ARMESTO: On parity. So then we must discuss Parity Exchange Rate.
Professor Edwards made an argument I would like your position on. He says the formula--the MEF formula calculates the Parity Exchange Rate taking as the base 1969, just one month. And he says that is not proper because you should not take one month, you should take a longer period because--a longer period where the economy is in a normal situation, no deficit, no revolution, what the official exchange rate really matches--represents the true equilibrium. And then you move either forward or backwards adjusting by the CPI of the United States and Perú.
Do you agree if I have to write an exam on economy--are you also from the University of Chicago or not?
THE WITNESS: (Mr. Kaczmarek) No. Proudly the University of Virginia.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. Proudly the University of Virginia. If I would describe Parity Exchange Rate as this, is this a correct way of expressing what it means?
[Page 2399]
ARBITRATOR DRYMER: What grade would you give this student?
THE WITNESS: (Mr. Kaczmarek) So, I don't think there's a dispute about what "parity" means. The problem is the application of it in this context.
So, what Professor Edwards has done is he says, well, look, I believe since the economy between 1999 and 2018 was more stable and the currency was more free-floating and not fixed, this more represents parity and so I'll use that.
That may be correct. That may be incorrect. I think he said he could get a roomful of economists to generally agree. I think most of us would say that's the opposite of what we think of a roomful of economists. They would all disagree as to this.
But our only real problem with this is, again, he's using data all the way up to today and to then retroactively go back.
If you were looking at doing this at the time, none of that data would be available, and so you would say, well, let's put that constraint on the analysis.
[Page 2400]
How would you determine parity back in last clipped Coupon or 1992 or 1969? And that date is not available. How do you solve that problem? You'd have to use other data. Historically, you wouldn't have this information available to you.
PRESIDENT FERNÁNDEZ ARMESTO: Let me ask you my second concern. He makes a point. He says, when you convert the soles de oro into dollars, you use a Parity Exchange Rate.
Now, if you run this formula for the Parity Exchange Rate to today and he had--he had--do you remember--were you here when he was there? Do you remember? He had two graphs. One was the parity exchange and then the other was the real exchange, and on the real exchange, his own parity calculation, which were pretty close.
And his argument is when the MEF formula calculates the dollars--the historic dollars, you use a Parity Exchange Rate based on 1969. When you convert them, today's dollars into Nuevos Soles, then you do not use the same formula of Parity Exchange Rate. You use the market price, and there was a huge
[Page 2401]
gap. I mean, let me show you.
ARBITRATOR DRYMER: I think he called it--maybe I'm wrong--a second expropriation or something like that.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah.
ARBITRATOR DRYMER: Those are his words, not mine. I want to be clear.
PRESIDENT FERNÁNDEZ ARMESTO: He said that that was--expropriatory had a very significant impact.
ARBITRATOR DRYMER: Do you recall that?
THE WITNESS: (Ms. Kunsman) Yeah, I believe that the graph that he showed, that exchange rate was not referring to the final 2017 Decree, Supreme Decree, but to the earlier ones, the one that had a typo.
And then another issue on the exchange rate is that let's say Perú, instead of paying compensation for the lands through the issuance of Bonds it had paid cash, and that cash had been converted into U.S. dollars, they would have used the official exchange rate.
[Page 2402]
Professor Edwards would say, no, it should have been converted at this Parity Exchange Rate, which results in almost twice the amount of dollars. So, it makes sense to start with 1969 because that's when the Land Reform Bill was passed.
PRESIDENT FERNÁNDEZ ARMESTO: Yes, but my worry is--my question to you is--or the worry which was raised by Professor Edwards' argument--here it is.
Can you go to Page 29 of his Report, of his handout which is H--
THE WITNESS: (Mr. Kaczmarek) If you'll just excuse me. I have a copy, if I can get up--
PRESIDENT FERNÁNDEZ ARMESTO: Maybe can someone give it to--
ARBITRATOR DRYMER: H-8.
PRESIDENT FERNÁNDEZ ARMESTO: H-8. Can we get, for the Experts, one? Or can we blow it up? H-8, Page 29. Thank you.
(Comments off the record.)
PRESIDENT FERNÁNDEZ ARMESTO: If you can blow it up, that's fine.
[Page 2403]
THE WITNESS: (Ms. Kunsman) What page was it?
ARBITRATOR DRYMER: 29, Slide 29.
THE WITNESS: (Ms. Kunsman) Right.
PRESIDENT FERNÁNDEZ ARMESTO: So you remember that.
THE WITNESS: (Ms. Kunsman) Yeah. It is the 2014 MEF Parity Exchange Rate, not the one that is used to calculate the 33.6 million.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. Okay.
THE WITNESS: (Mr. Kaczmarek) So this was fixed in 2017, the error. He's describing an error that happened temporarily and then got fixed by the MEF.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. Is it your opinion now that if I use the present formula, the 2017 Parity Exchange Rate, which is now based on the bank--the Central Bank of Perú on the--because the way I understand it is that in 2017, the Parity Exchange Rate is now based on data which were requested from the Central Bank of Perú, which are in the web page of the Central Bank of Perú.
[Page 2404]
There is a formula, and with that formula and those data, you calculate the Parity Exchange Rate, and it is based on a January 1969--it's assuming that in January 1969 there was equilibrium. And it basically does--to make it very simple, what it basically does, I think, or the way I understood it is that assuming that 1969 is an equilibrium, it calculates the Parity Exchange Rates towards the future, adjusting by the CPI in the United States in Perú.
THE WITNESS: (Ms. Kunsman) That's correct.
PRESIDENT FERNÁNDEZ ARMESTO: That's correct.
THE WITNESS: (Ms. Kunsman) Yes.
PRESIDENT FERNÁNDEZ ARMESTO: So, my question to you is the following: I would like to see the graph, and maybe I can--we can ask then Professor Edwards to make this graph also with a 2017 formula because that is apparently the one which is being used.
THE WITNESS: (Ms. Kunsman) Right.
PRESIDENT FERNÁNDEZ ARMESTO: But his
[Page 2405]
argument was the following: That the Bonds were being calculated at--the original dollar amount of the Bonds was being calculated using a Parity Exchange Rate which was much higher than his Parity Exchange Rate and the official rate, and that when they are reconverted into Nuevos Soles as of 2018, a completely different exchange rate is used, namely not the Parity Exchange Rate but the Market Exchange Rate, and that there is a gap between the market exchange rate, which is used to reconvert into Nuevos Soles, and the Parity Exchange Rate for 2018, which would result from the formula.
And that this is an elegant way of putting the money--the hand into the pocket of the investor. That was making a summary of what I understood his--I think Mr. Drymer said that it was expropriatory, or he used some strong words. I would really like your opinion of that.
THE WITNESS: (Ms. Kunsman) Right. Two things: First, in Professor Edwards' dollarization method, he uses the Parity Exchange Rate to convert the principal of the unclipped coupons, but once he
[Page 2406]
takes it to the date of his calculation, he uses the official exchange rate to convert it into soles to show the calculation. So, he is also using--
PRESIDENT FERNÁNDEZ ARMESTO: But he says that in his calculation--because he uses the equilibrium as of now. He says that in 2018, his parity and the--his parity and his market rates are the same.
THE WITNESS: (Mr. Kaczmarek) That should be logical because he starts with the assumption that they are at parity today, so he goes back to readjust the exchange rate historically to figure out what parity would be historically so that you can do the calculation to get to parity today. So, it's designed to achieve that very outcome.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah. And his point is that the formula of the MEF does not achieve that outcome. Do we agree on that?
THE WITNESS: (Ms. Kunsman) Right. What the MEF formula does is we're going to use the base of 1969 because that's when the--well, they don't say that's when the Agrarian Law was passed, but that is
[Page 2407]
when the Agrarian Law was passed.
If you use a different rate, you would be rewriting the terms of the Bonds and saying these Bonds can be exchanged for U.S. dollars at a different rate in 1969, when the law was passed, and that doesn't make sense.
PRESIDENT FERNÁNDEZ ARMESTO: Well, we had the argument. Let me put this to you.
You remember the argument, which I fully understand. You say that a valuation, we should not go to the date of expropriation or issuance; that a valuation, we should do it as of the last Coupon.
But now, for the basic exchange rate, we are now going back to the date of issuance of the Bonds, expropriation. You see what I mean? For one thing, we go back; for the other, we do not go back.
THE WITNESS: (Mr. Kaczmarek) Right. And just to break that and untangle it, I think they are going back to 1969 because it was more economically stable at that point in time, and I think there's agreement in concept that you should use a period of time to estimate parity using more economic stability
[Page 2408]
than instability.
So '92, when there was--the nonpayment event, would not be, I think we would all agree, inappropriate to try to establish parity.
PRESIDENT FERNÁNDEZ ARMESTO: But do you agree with the argument? That was your question, no?
Do you agree with the basic argument that whatever Parity Exchange Rate we use, it must result, as of 2018, in the same exchange rate which is being applied to bring back the Bonds into Nuevos Soles?
THE WITNESS: (Mr. Kaczmarek) No, and the reason why is because, as my colleague indicated, there were real-world constraints on exchange rates back at that time.
So, to put it in Professor Edwards' terms, the word "constraint," what are you constrained by? If you say you are completely unconstrained in terms of exchange rates, this is what he's doing. If you're unconstrained and looking forward to data that wasn't available, sure, you can do this calculation.
The question is, what constraints or parameters are reasonable to put around the
[Page 2409]
calculation? Is it okay to use an official exchange rate that wasn't at parity to do this conversion? Why not? Why not? What says--in any of the laws or Decrees, what says you can't?
I don't see any specificity--again, this is the problem we've encountered with the Current Value Principle. It doesn't tell you all of these different ways in which things could be done.
So, it's open to interpretation. Lots of people could do it very differently. You can get very different numbers from this process, and I think, as I put it, what it comes down to, as I understand Gramercy's case--they will certainly tell me if I'm wrong--they're saying the formula is so bad that it's--when it came out, the 2013 Constitutional Tribunal in the formulas, this is so bad that--
PRESIDENT FERNÁNDEZ ARMESTO: It is one specific point. It is a very highly technical point, namely whether the calculation of the Parity Exchange Rate should--that the formula for the Parity Exchange Rate should be used, should be able to justify the two exchange rates which are being used in the
[Page 2410]
formula, the exchange rate when you move into dollars on the date of the last clipped Coupon, and when you move out of dollars. You see? Because there is a very simple solution to this, namely to--yeah.
THE WITNESS: (Mr. Kaczmarek) I'm all ears.
PRESIDENT FERNÁNDEZ ARMESTO: To write the amount in dollars. If I don't go back to Nuevos Soles, this problem should not--or am I saying something which is not right? Would this problem be solved if the compensation is established in dollars?
THE WITNESS: (Mr. Kaczmarek) So, we think there are advantages to doing it in dollars. The wrinkle, I think we will agree, is the exchange rates, which we're wrestling with. So, let me make two points to just--besides what I just said before, which is we could get a roomful of economists and I believe everybody would do it differently, frankly. So, I'm on Slide 35.
PRESIDENT FERNÁNDEZ ARMESTO: Okay.
THE WITNESS: (Mr. Kaczmarek) Let's just put it in numbers. About 4.1 million is the impact, as of last clipped Coupon of using Professor Edwards'
[Page 2411]
approach on parity versus the MEF formulas. Okay.
PRESIDENT FERNÁNDEZ ARMESTO: Right.
THE WITNESS: (Mr. Kaczmarek) So, that's what we're talking about as of last clipped Coupon. 4.1.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah. But the impact is huge.
THE WITNESS: (Mr. Kaczmarek) When you apply an interest to that amount, it can--
PRESIDENT FERNÁNDEZ ARMESTO: It's huge.
THE WITNESS: (Mr. Kaczmarek) Right. So, if we use the Treasury bill rate, it goes to 75 million; right?
PRESIDENT FERNÁNDEZ ARMESTO: Yeah.
THE WITNESS: (Mr. Kaczmarek) So, yes, it's a small impact back in time, but small impacts magnify, of course, over time. So, one, I hope that helps to at least orient yourself as to magnitude, these tables. The other thing is--I think we've been touching upon is, what you're doing--and my colleague I think has tried to articulate.
When you are using a parity rate back and
[Page 2412]
converting this, which was not available to anyone, you're effectively granting compensation to people, to Bondholders, for an undervalued soles oro. You're saying that this is part of the problem. We have an exchange rate regime that doesn't float. It is fixed.
It was not uncommon at the time, and since we have this fixed exchange rate, we have to compensate you because we've been keeping the soles oro undervalued. We need to give you, as part of this process, compensation for that as part of the formula.
Now, I don't know. I don't know if that's correct or not. This is our issue with Current Value Principle. What is, legally, are they entitled to? As I said, I could strictly give you a calculation, absolutely 100 percent economically defensible, that would say these Coupons in this case deserve $4. That's it. We are at those extremes. We are at those extremes in this case because it is so open to interpretation as to the implementing factors.
PRESIDENT FERNÁNDEZ ARMESTO: Let's go on.
[Page 2413]
THE WITNESS: (Mr. Kaczmarek) We're on Slide 38. I just wanted to comment here. What I've done is--I hope this is evident now. You see a formula in the middle of the slide. The T-Bill rate, it has two components: Inflation and a real rate. We've gone over that. There is no doubt in the case between the Experts here. The T-bill rate includes inflation.
We've heard, I think, from the Gramercy folks: "We just wanted inflation and interest, this is what we wanted." They are getting inflation. There is no dispute by the Experts, that is being compensated. You are getting interest. There is a dispute about how big that real rate ought to be.
PRESIDENT FERNÁNDEZ ARMESTO: This is one of the questions I wanted to put to you. I don't think you were here yesterday when Professor Hundskopf deposed, and but Professor Hundskopf was led to a supreme--supreme, not constitutional--Supreme Court judgment in 2018, so after the 2013 Constitutional Court Resolution. So, it's a lower court.
And they are applying on existing procedures
[Page 2414]
the doctrine of the Constitutional Court, and what they basically did is they took first this Supreme Court, so it's the Supreme High Court, a High Civil Court in Perú. And what they did is they used the U.S. one-year T-bill rate, but then they added as "interés compensatorios," as compensatory interest, the 4 percent of the Bond.
So, they used both, so they said--they interpreted the Constitutional Court--and I stand to be corrected if what I'm summarizing, because I'm summarizing a deposition, but they--this Peruvian Court applied the U.S. Treasury Bill rate plus 4 percent as an economist, not as a lawyer, as an economist.
Do you think that that is proper, that it is correct?
THE WITNESS: (Mr. Kaczmarek) Problem with that, as there are in some other calculations purporting to adhere to Current Value Principle. They are double-counting inflation. As my colleague went through, the 4, 5, and 6 percent rates applied to these Bonds were nominal rates.
[Page 2415]
PRESIDENT FERNÁNDEZ ARMESTO: Yes.
THE WITNESS: (Mr. Kaczmarek) So, if you are taking a T-bill rate, which has inflation, and then adding another nominal--that's a nominal rate--and then adding another nominal rate, you are double-counting the inflation portion. You are including it twice. So, I think that would be hard for me to imagine that Professor Edwards and ourselves wouldn't agree on that. Adding two nominal rates together is double-counting inflation.
PRESIDENT FERNÁNDEZ ARMESTO: Very good. Thank you.
THE WITNESS: (Mr. Kaczmarek) Okay.
Slide 39, I'll see if I can move us along.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah.
THE WITNESS: (Mr. Kaczmarek) Again, context of a restructuring, I won't go through these formulas. We talk about "haircuts" and sovereign debt restructurings; right? It is typical that the sovereign enters a crisis, can't afford to pay its debt, it seeks a reduction.
If the old debt is 100, the new debt is 80,
[Page 2416]
your haircut is 20 percent. Right? Fairly straightforward. So, we said, well, let's apply that here. And I'm on Slide 40.
ARBITRATOR DRYMER: Hair extension.
THE WITNESS: (Mr. Kaczmarek) You get the hair extension, a big one.
Again, 38 cents, Fair Market Value at bank closure, when no possibility of getting paid occurred. What did they do? As we said, the formulas that have come out require Perú to go back in time and reestablish higher values for these Bonds. And they say, although, yes, Fair Market Value is 38 cents, we're going to give you $3.4 million for these Bonds worth 38 cents. A 900 million percent hair extension. Probably you've never seen anything of this nature, nor have I. Never heard of it at all.
Slide 41. We've done the same calculation for Professor Edwards. This comes from our waterfall chart. His parity, his retroactive CPI gets you that 36 million number at last clipped Coupon date. He would ask for a hair extension of almost
[Page 2417]
10 billion percent. This, again, illustrates, I think, what my colleague has said. This is really a case about how much more is Perú obligated to pay for something that was worthless in '92.
So, I'm wrapping up my section, we are almost to the end. I know we've had lots of questions. I hope it has been helpful, but, again, just the waterfall chart. And I think it is pretty clear.
My point I wanted to make here is, you know, the numbers earlier in time are important because if you start with 38 cents or 48 cents, the interest rate isn't really going to do much to make that number anything of value today because, as we all agree, inflation doesn't add value, it preserves value, and if you add another real component on something small, it doesn't do anything.
So, the numbers, you have to make these Bonds worth something for--to have substance in a payment that would be made today, and the formulas that came out, as I said, I believe have done that, have treated the Bondholders quite favorably by
[Page 2418]
saying we will pretend Perú is responsible for any clipped Coupon that wasn't presented.
From the earliest point in time, if you had a bond and you said, I'm not going to collect a single Coupon from this Bond, from 1970, 20-year Bond, you could have presented all 20 Coupons; right? It would have been done by 1990. Could have presented them all, then paid. The Bondholder said, no, I'm not going to do it. It is this formula is treating Perú as being responsible for not paying every one of those Coupons from Day 1.
PRESIDENT FERNÁNDEZ ARMESTO: It's clear.
THE WITNESS: (Mr. Kaczmarek) Thank you.
THE WITNESS: (Ms. Kunsman) Okay. So, up to the Reply, the initial claim presented by Gramercy was just that there is one way to calculate the value of the Bonds, just one way. But then in their Reply, they present two more options which, in our view, just demonstrate that the Current Value Principle was undefined and its inputs subjective up to the 2013 Constitutional Tribunal Decision.
And the alternative claims are
[Page 2419]
nonalternative claims, in our view. They are no more reasonable than the original claims.
So, the first alternative--nonalternative claim is, based on a calculation Professor Edwards performs, and this calculation relates to the Gramercy/Pomalca case that they filed for 44 Class A Bonds, and these Bonds had no Coupons clipped. So, they were the full booklet. And I believe they are now part of this arbitration. This case was never decided.
But in that case there were two Expert Reports issued, and both Experts applied the CPI adjustment from the issuance date, but that was the only choice they had because the Bonds had no clipped Coupons. Then one Expert applied simple interest based on the stated coupon rate, and the other Expert-applied compound interest, and yearly compounded also based on stated Coupon rate.
PRESIDENT FERNÁNDEZ ARMESTO: And also compounded?
THE WITNESS: (Ms. Kunsman) One simple and one annually compounded.
[Page 2420]
PRESIDENT FERNÁNDEZ ARMESTO: Okay. And always the Coupon rate.
THE WITNESS: (Ms. Kunsman) But always the stated coupon rate, yes. Edwards, in his calculation, though, of the 842
PRESIDENT FERNÁNDEZ ARMESTO: And they used CPI?
THE WITNESS: (Ms. Kunsman) They used Lima CPI, yes.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah. Very good.
THE WITNESS: (Ms. Kunsman) So, Edwards interprets this calculation very favorably because he assumes that Gramercy would have been able to present Bonds with clipped Coupons, and those Coupons would have been adjusted from the issuance date, but that's not what the Experts in the Pomalca Case did. They were never presented with that alternative--with that option.
ARBITRATOR DRYMER: With clipped Coupons, with clipped Coupons, you mean? It wasn't before.
THE WITNESS: (Ms. Kunsman) Right. With
[Page 2421]
Bonds with clipped Coupons. Right. It wasn't before then. It was only Bonds with all the Coupons intact. So, Gramercy presents this calculation as the monetary damages equal to the value that Gramercy would have likely obtained at a minimum. But, as I explained previously, there were several domestic Decisions that applied--that parameters to the interpretation of Current Value Principle that were completely different.
You had the Laredo Case, and in that case they had did have Coupons--they did have Bonds with clipped Coupons, and they did use the last clipped Coupon date and not the issuance date. And then they also used Lima CPI, and they used interest based on simple interest from at the Bonds stated Coupon rate.
PRESIDENT FERNÁNDEZ ARMESTO: Have you made the calculation because, of course, this case is based on a completely different valuation methodology, which is based on CPI?
THE WITNESS: (Ms. Kunsman) Right. And the reason why we didn't make that--oh, sorry.
PRESIDENT FERNÁNDEZ ARMESTO: My question to
[Page 2422]
you is, have you made the calculation, use simple interest rate on the Bonds or compounded annually? It has a significant impact whether you compound annually or not. So, one or the other, but using, say, CPI from the date of the last Coupon, and have you made a calculation of how much that value would represent?
THE WITNESS: (Ms. Kunsman) No. We don't present that calculation in our Reports, and the reason why we don't is because we would then need to apply a real interest rate to the CPI-adjusted principal, and we wouldn't know what rate to use.
So, we would just be offering an additional alternative, an interpretation of the Current Value Principle, and in our view, that is not for us to do, it is for the Constitutional Tribunal and then through the MEF Decrees. It would just complicate things even further.
PRESIDENT FERNÁNDEZ ARMESTO: But would you agree with me that if instead of the system of the Constitutional Court in 2013 of going back at Parity Exchange Rate to dollars and then adding the T-bills,
[Page 2423]
which is their--basically their system, if I had--if the system had been CPI plus the stated interest on the Bonds, either compounded yearly or simple interest, that the numbers would have been significantly higher?
THE WITNESS: (Ms. Kunsman) Well, but you would be applying a nominal rate to a nominal--to an inflation-adjusted principal, so you would be double-counting for inflation.
PRESIDENT FERNÁNDEZ ARMESTO: You would be double-counting for inflation.
You would just--you would, as the Pomalca Experts did, you just take the Bond, say I recalculate the principal and I just leave the interest because that's the interest on the Bond without making any further economical analysis?
THE WITNESS: (Ms. Kunsman) Oh. Okay. No. We have not performed that calculation.
PRESIDENT FERNÁNDEZ ARMESTO: But it is significantly more than $30 million? I mean, the amount would result in much higher amount?
THE WITNESS: (Ms. Kunsman) I don't know. I
[Page 2424]
would need to run the numbers.
PRESIDENT FERNÁNDEZ ARMESTO: Okay.
ARBITRATOR DRYMER: You can't ask an economist to agree with much.
PRESIDENT FERNÁNDEZ ARMESTO: Yes. Because I think--because Professor Edwards' 842 number is he brings--what he does is he takes--he starts the revaluation always at the date of issuance?
THE WITNESS: (Ms. Kunsman) Right. And we have calculated just the CPI portion without applying any interest, and it comes out, I think, to about 40 million.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. Okay. But still, we may wish to have that calculation.
THE WITNESS: (Ms. Kunsman) Okay.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you. Sorry to have interrupted you.
THE WITNESS: (Ms. Kunsman) So, then--
(End of open session. Attorneys' Eyes Only information follows.)
[Page 2425]
CONFIDENTIAL SESSION
[Redacted]
[Page 2426]
[Redacted]
(End of Attorneys' Eyes Only session.)
[Page 2427]
OPEN SESSION
THE WITNESS: (Ms. Kunsman) The auditors could have been fine with the 34 million or 400 or 300. All they can check, really, is the math, but what they can do, though, is insert warnings in financial statements saying: "When you analyze these financial statements, be aware," and that's what they did in this case.
In their letter attached--confidential again, sorry.
(End of open session. Attorneys' Eyes Only information follows.)
[Page 2428]
CONFIDENTIAL SESSION
[Redacted]
[Page 2429]
[Redacted]
[Page 2430]
[Redacted]
(End of Attorneys' Eyes Only session.)
[Page 2431]
OPEN SESSION
THE WITNESS: (Mr. Kaczmarek) And I'll just wrap up, exceptionally briefly here. You've heard, I think, Current Value Principle, our view is not defined, open to a wide range of interpretations. You've seen many wide range of interpretations from various Parties.
The principal difference, I think, here, is Gramercy and Professor Edwards look at it as "we've got to redo the Bonds from the very beginning, except if you've collected a coupon, that's out, but we're starting over, we are going to redo the Bonds from the issuance date with inflation adjustments and a different interest rate altogether that's much higher than the stated rates that were ever in the Bonds."
The MEF formulas are far more closely aligned with simply paying the unclipped coupons but provide, as I've said this, favorable approach in treating the last clipped Coupon as sort of the nonpayment event.
Now, we can talk about interest rates, and we can talk about exchange rates and all this stuff,
[Page 2432]
but what can't get lost in all--I think, all of the details is still this very favorable aspect of the MEF formula, of moving away from the real nonpayment date in 1992 and treating Bondholders with clipped Coupons that they just decided not to go get paid and treating it as though Perú refused payment at those earlier dates.
That is a very favorable aspect of the calculation for the Bondholders that really should not be lost when we start getting into other--other, I won't call it minutiae, but fine-tuning in terms of interest rates and exchange rates.
Thank you.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you. Thank you, Ms. Kunsman and Mr. Kaczmarek.
It is 11:00. We will come back at 11:15.
(Brief recess.)
PRESIDENT FERNÁNDEZ ARMESTO: Very good. We resume the Hearing.
We will ask the Secretary for a time check, please.
SECRETARY PLANELLS-VALERO: Mr. Kaczmarek
[Page 2433]
used 46 minutes, and Ms. Kunsman, on their presentation, and Respondent now has five minutes left.
PRESIDENT FERNÁNDEZ ARMESTO: Very good.
Mr. Riehl, will you be leading the cross-examination?
MR. RIEHL: Yes, Mr. President.
PRESIDENT FERNÁNDEZ ARMESTO: Please.
CROSS-EXAMINATION
BY MR. RIEHL:
Q. Good morning, Mr. Kaczmarek and Ms. Kunsman. How are you?
A. (Mr. Kaczmarek) Good morning.
A. (Ms. Kunsman) Good morning.
Q. If Perú paid the amount stated on each of the Coupons, that would be paying the nominal value of the outstanding Coupons; right?
A. (Mr. Kaczmarek) Yes, that's--we refer to the face value, nominal value, same amount.
Q. And that's the value that the Constitutional Tribunal said in 2001 would be unconstitutional; right?
[Page 2434]
A. (Mr. Kaczmarek) To pay that amount as of a present day, that would be unconstitutional.
Q. Right. So, a necessary implication of the 2001 Decision is that at least some form of updating of that value had to occur; right?
A. (Mr. Kaczmarek) Agreed.
Q. Now, I'd like to present to you a hypothetical. It's going to take me a little while to describe it, so please bear with me.
For the hypothetical, I'm going to ask you to consider two bonds. One of them is one you are all very familiar with; you and Professor Edwards both cite it in your Reports. There's an image of it at Tab 4 in the binder. This is CE-120, and this is Bond 008615. We'll have an image of that on the screen in a moment.
PRESIDENT FERNÁNDEZ ARMESTO: It's not this one.
MR. RIEHL: I don't know which one that is, Mr. President.
PRESIDENT FERNÁNDEZ ARMESTO: I think that's from the first day from Claimants.
[Page 2435]
MR. RIEHL: I believe it is not. But I don't know which Bond that is. I'm sorry.
PRESIDENT FERNÁNDEZ ARMESTO: Okay. So, we go to CE-120.
BY MR. RIEHL:
Q. Now, Mr. Kaczmarek, as you accurately describe in your First Report, this Bond was issued on November 28, 1972; it had a face amount of 10,000 soles oro, a term of 25 years, and an interest rate of 5 percent?
PRESIDENT FERNÁNDEZ ARMESTO: It is the same.
MR. RIEHL: Wonderful.
ARBITRATOR DRYMER: 8615.
MR. RIEHL: 8615, yes.
PRESIDENT FERNÁNDEZ ARMESTO: Excellent.
BY MR. RIEHL:
Q. And 12 of the Bonds' 25 Coupons are clipped, leaving 13 unclipped Coupons.
Do you have that so far?
A. (Ms. Kunsman) Yes. I'm going to go ahead and answer this one.
[Page 2436]
Q. Great. The second bond I would like you to consider is a hypothetical bond. Let's call it Bond X, and Bond X is exactly identical to Bond 8615, except that none of its Coupons have been clipped. So, it has the same issuance date, face amount, term, and interest rate as Bond 8615.
Do you have the hypothetical?
A. (Ms. Kunsman) I do.
Q. Now, since Bond 8615 and Bond X have identical terms, their Coupons are also identical; right?
A. (Ms. Kunsman) Right.
Q. I'd like to look at one particular Coupon from these Bonds, and that's the November 1985 Coupon, and the screen is showing that Coupon from Bond 8615.
What I'd like to explore first is how the MEF's Bondholder Process updates the value of the principal from these two particular identical Coupons.
So, the Bondholder process updates unpaid principal for inflation starting from the date of the
[Page 2437]
last clipped Coupon; right?
A. (Ms. Kunsman) Right.
Q. So, the Bondholder Process would update all of Bond 8615's Coupons for inflation from November 28, 1984; right?
A. (Ms. Kunsman) The unpaid principal, yes.
Q. But, for Bond X, the Bondholder process would update all of Bond X's Coupons for inflation from the issuance date of November 28, 1972; right?
A. (Ms. Kunsman) Right.
Q. Okay. Now, looking at this November 1985 Coupon, the principal that came due in November 1985 was 400 soles oro; right?
A. (Ms. Kunsman) Yes.
Q. And the MEF's Bondholder Process would update that particular 400 soles oro, starting from November 28, 1984, yes?
A. (Ms. Kunsman) If this is the last clipped Coupon, yes. You said it was? Okay. Yeah.
Q. Yes. But for Bond X, that 400 soles oro principal would get updated starting from 1972 in the Bondholder process; right?
[Page 2438]
A. (Ms. Kunsman) Right.
Q. Now, there was quite a bit of inflation in Perú between 1972 and 1984; right?
A. (Ms. Kunsman) Yes.
Q. In fact, there was so much inflation that the MEF's Bondholder Process would value the Coupon from Bond X more than 230 times higher than the identical Coupon from Bond 8615; right?
A. (Ms. Kunsman) I haven't run the numbers, but yes, I trust that, yeah.
Q. That sounds about right to you?
A. (Ms. Kunsman) Yeah.
Q. And that would also be true, that ratio, for each of the other unclipped Coupons in these two Bonds; right?
A. (Ms. Kunsman) Right.
Q. And, more generally, anytime there are two Bonds that are identical except for the number of clipped Coupons, the MEF's Bondholder Process updates one Bond's Coupons for inflation from an earlier date than the other Bond; right?
A. (Ms. Kunsman) Right.
[Page 2439]
Q. And that means the MEF values one Bond's Coupons more highly than identical Coupons from the other Bonds; right?
A. (Ms. Kunsman) Well, they have different left clipped Coupon dates, but yes.
Q. Yes.
A. (Ms. Kunsman) Yes.
Q. So, going back to Bond X and Bond 8615, we were just looking at the November 1985 Coupon. I want to go one year earlier and look at the November 1984 Coupon.
Now, I can't put it on the screen, obviously, because it was a clipped Coupon from Bond 8615, but this would be an unclipped Coupon in Bond X; are you with me?
A. (Ms. Kunsman) Yeah.
Q. So, the Bondholder of Bond 8615 was presumably paid 400 soles oro of principal in November 1984 or later; right?
A. (Ms. Kunsman) Correct.
Q. And in 1984, 400 soles oro was practically worthless; right?
[Page 2440]
A. (Ms. Kunsman) Correct.
Q. I'll represent to you, using the Official Exchange Rate, the value would have been 12 U.S. cents. Does that sound about right to you?
A. (Ms. Kunsman) 1984, yeah.
Q. But if you look at Bond X, under the MEF'S Bondholder Process, that principal from the November 1984 Coupon would still be updated for inflation starting in 1972; right?
A. (Ms. Kunsman) Sorry, would you mind--I was opening the presentation to--repeating that question?
Q. Yeah. Sure. Sure. So, turning back to Bond X, still looking at the November 1984 Coupon?
A. (Ms. Kunsman) Yes.
Q. Under the MEF's Bondholder Process, the November 1984 Coupon from Bond X would be updated for inflation starting in 1972; right?
A. (Ms. Kunsman) Right.
Q. And I'll represent to you that for the period from 1972 to November of 1984, if you do that process, you get a value of about 30 1984 U.S. dollars. Does that sound about right to you?
[Page 2441]
A. (Ms. Kunsman) Sure. It just shows that the MEF Bondholder process was favorable to Bondholders with unclipped Coupons.
Q. Well, I know you've testified to that, but it also shows, doesn't it, that Bondholder 8615 was undercompensated for the effects of inflation during that period? Right?
A. (Mr. Kaczmarek) I wouldn't say "undercompensated" whatsoever. I would say they are both overcompensated, because going back to last clipped Coupon already itself is a favorable aspect of the calculation.
Q. Now, using the same hypothetical, I'd like to look at what happens if CPI is used to update for inflation from the issuance date. And so, I'd like to start again with the November 1985 Coupon from these Bonds. And starting with Bond 8615, if the November 1985 Coupon were updated for inflation from the issuance date using CPI, the 400 soles oro principal from each Coupon would be updated from November 1972; right?
A. (Ms. Kunsman) Right.
[Page 2442]
Q. And that would be the same for the Coupon from Bond X; right?
A. (Ms. Kunsman) Right.
Q. So, in each case, that 400 soles oro of principal would be multiplied by the ratio of Perú's CPI divided by--I'm sorry, at the payment date divided by Perú's CPI in November of 1972; right?
A. (Ms. Kunsman) Right.
Q. And, after that inflation updating, the 400 soles oro principal from each of the two Coupons would be worth the same amount; right?
A. (Ms. Kunsman) Right.
Q. And that holds true for each of the other unclipped Coupons in these two Bonds--I'm sorry, in Bond 8615; right?
A. (Ms. Kunsman) Right.
Q. And more generally, when Bonds are updated for inflation from the issuance date, additional unclipped--let me start over. Sorry.
More generally, when Bonds are updated for inflation from the issuance date, identical unclipped Coupons from identical Bonds will always have the
[Page 2443]
same inflation-adjusted value; right?
A. (Ms. Kunsman) Right, because it goes to the issuance date. Yeah.
Q. Yeah. And that's true regardless of how many Coupons have been clipped in each of the Bonds; right?
A. (Ms. Kunsman) Right. They are accelerated.
PRESIDENT FERNÁNDEZ ARMESTO: So, as of today, whoever clipped a Coupon did the very bad business.
THE WITNESS: (Ms. Kunsman) Yeah. Very bad.
BY MR. RIEHL:
Q. So, the situation here, right, is that if you update for inflation from issuance, each--the principal from each Coupon is treated the same regardless of clipping or unclipping, but under the MEF Bondholder Process, a Bondholder who has clipped Coupons gets less value?
A. (Ms. Kunsman) Yes. The value will change whether you have some clipped Coupons or some unclipped Coupons, yes.
Q. Okay. Now, your view, as I understand
[Page 2444]
it--and you'll correct me if I'm wrong--but your view is that it would have been consistent with the 2001 Constitutional Tribunal Decision for the MEF to update the outstanding principal starting from 1992, when Perú closed the Agrarian Bank; is that right?
A. What we're saying is that the 2001 Constitutional Tribunal Decision was unclear, that all it said was you have to update the Bonds based on the Current Value Principle; didn't define that principle, but that there were several Bonds--Coupons that could have been presented prior to 1992, and they were not presented. And so, Perú was not in default on those Coupons, because they could have been presented and they could have called them all in for 40 cents.
Q. Well, your view is that a method that updates from a day before 1992 is a conservative method; right?
A. (Ms. Kunsman) Our view is that we don't know what the Tribunal meant with the Current Value Principle, so--no, our view is we don't know.
Q. Right. So, is it or is it not consistent
[Page 2445]
with the 2001 opinion to update starting from 1992, in your opinion?
A. (Mr. Kaczmarek) I'll address this, since I did in the presentation. I think it would be entirely consistent to use 1992, because, as we said, that is the date nonpayment started. That is technically the problem, and so, going back at any other date earlier is a favorable position for Bondholders.
They could have very easily started from bank closure, no earlier than that, and no later than maturity date for each Coupon, when each Coupon matured and should have been paid. That would be completely economically sound.
Q. And going back to our hypothetical Bonds, under that system, each of those Bonds, the totality of those Bonds, would be worth far below 1 cent; right?
A. (Mr. Kaczmarek) Correct, because that's--the issue here--like I said, I think the Parties are trying to solve different problems. The MEF is solving a problem of unpaid paper; right?
[Page 2446]
As of '92, we all--I thought we all had agreed--and we can check this--that, if we paid a piece of paper, it is done. We are not dealing with it anymore; it's a discharged obligation. So, if Perú had just kept paying beyond 1992 and paid them off, apparently we wouldn't be here.
So, that starts the problem. The problem doesn't start at the issuance date of the Bonds, or at the last clipped Coupon, necessarily.
Q. And so, to be perfectly clear, that payment of far less than a cent on each of these Bonds, in your opinion, is something that would have been entirely consistent with the 2001 CT Decision; is that right?
A. (Mr. Kaczmarek) I think the 2001 CT Decision is obviously a legal document for the lawyers to interpret. When we look at it, it is ambiguous. It leaves open a lot of interpretation, and what I've tried to say is the interpretation that has come out--we said this is favorable if the objective is to pay off the paper, and obviously Gramercy is taking a very different view, that it's not to pay off unpaid
[Page 2447]
Coupons, but it's to go back and redo the Bonds from the very beginning and change the terms, and it's to remedy underpayment for expropriated lands, essentially.
Q. Well, Mr. Kaczmarek, that's all very interesting, but I would like an answer to my question, which is: That payment of far less than 1 cent on each of these Bonds was, in your opinion, something that would have been entirely consistent with the 2001 CT Decision; is that correct?
A. (Mr. Kaczmarek) No, because the CT decision has certain parameters in it which--I believe last clipped Coupon was a parameter. So, you have to apply the parameters of that Decision.
Q. I'm sorry. It is possible you misunderstood my question. I was referring to the 2001 CT decision. Is it your understanding that that Decision has parameters?
A. (Mr. Kaczmarek) Oh, 2001. That Decision has no parameters, so almost anything goes at that point. I could not make a calculation with the information contained in that Decision.
[Page 2448]
Q. Right. So, if almost anything goes, in your opinion, I take it you agree that payment of far less than 1 cent for the entirety of Bond 8615 and Bond X was consistent with the 2001 CT Decision; is that right?
A. (Mr. Kaczmarek) If you interpret the 2001 CT Decision to just grant inflation off of 1 cent, you have the equivalent of 1 cent today. That would be consistent then, yes.
Q. I think you added a qualifier to that. The answer to my question is yes; right?
A. (Mr. Kaczmarek) Yes. 1 cent back then, the equivalent of 1 cent today, would satisfy the objective of that Decision, in my view.
Q. And according to your calculations, the Fair Market Value of Gramercy's Land Bonds in May 1992 was 20 cents; right?
A. (Ms. Kunsman) Yes.
Q. And that's the base value you use when you say that the MEF's Bondholder Process would give Gramercy a hair extension; right?
A. (Ms. Kunsman) Yes. That is the denominator.
[Page 2449]
Q. So, when you say "hair extension," all you mean by that is that Gramercy gets something more than 20 cents for all of its Land Bonds; right?
A. (Ms. Kunsman) For the unclipped Coupons, yeah.
Q. I'd like you to turn, please, to Tab 2, which is RER-11, the second Quantum Expert Report, and in particular to Page 11. And there's a table on that page, Table 3.
A. (Ms. Kunsman) Which tab?
Q. Tab 2.
A. (Ms. Kunsman) Oh. Sorry.
(Comments off microphone.)
MR. RIEHL: The Second Quantum Report, yes.
BY MR. RIEHL:
Q. So, Table 3 is a table in which you show purported effective annual interest rates and principal discounts for each class of Bonds; right?
A. (Ms. Kunsman) Right.
Q. The effective annual interest rates you presented in this table are wrong, aren't they?
A. (Ms. Kunsman) They are. They should be 6,
[Page 2450]
5, and 4. That's what I clarified in the Hearing, in the presentation, yeah.
PRESIDENT FERNÁNDEZ ARMESTO: And I was also at some stage--this is the adding, and then--adding the interest and dividing by the years, that's not the way it works?
THE WITNESS: (Ms. Kunsman) It is not. We described it correctly in our First Report, then looking--at looking at a Bond image that was blurry, we thought we had made a mistake and clarified it, but it was correct in our First Report. So, it is 6, 5, and 4.
BY MR. RIEHL:
Q. And the principal discounts shown here are also wrong; right?
A. (Ms. Kunsman) No, those should be correct. Oh, they were? Okay.
Yeah, those are wrong as well.
MR. RIEHL: Mr. President, I don't know if the rules laid down allow consultation like that between the Experts.
PRESIDENT FERNÁNDEZ ARMESTO: It is
[Page 2451]
important that they are here to consult, which--the important thing is that we get one answer. But, I mean, you also consult with Mr. Friedman from time to time, so--
MR. RIEHL: Fair enough. Thank you. He's very wise.
BY MR. RIEHL:
Q. And just to make sure we have a clean record, Paragraphs 44, 45, and 46, which rely on those figures, are also wrong; is that right?
A. (Ms. Kunsman) Yeah. Those would need to be amended, but it is all related to the same issue.
Q. Great. Now, I want to turn to a slide from your Opening Presentation. I apologize, it's going to take me a minute to find it.
If you happen to know where it is, it's the one where you show the interest rates of the U.S. Treasuries.
(Comments off microphone.)
Q. I have it. It is Slide 37.
PRESIDENT FERNÁNDEZ ARMESTO: Yes, the graph.
[Page 2452]
BY MR. RIEHL:
Q. Now, in your Opening Presentation, Mr. Kaczmarek raised a point about the range of dates of Professor Edwards' calculation of the real interest rate on Treasuries, and--so, my first question, though: You raised a question about the range of dates, but his computation on that range of dates was accurate; right?
A. (Mr. Kaczmarek) We haven't checked it. I think that's the first time we saw the number, but it doesn't surprise me as being out of order, any order of magnitude, to be incorrect.
Q. And it doesn't surprise you because the one-year Treasury Rate is generally only slightly higher than the expected Inflation Rate at any point in time; right?
A. (Mr. Kaczmarek) That depends upon monetary policy of the Federal Reserve.
Q. But it's not surprising that that would be within a range of 1 percent?
A. (Mr. Kaczmarek) Sometimes it can be. Sometimes it can be much higher than 1 percent.
[Page 2453]
I'm--I haven't broken out the inflation, for example, in 1979 or '80, where you see the one-year T-bill rate was over 14 percent. So, I don't know the components.
But, again, the Federal Reserve doesn't set inflation. Inflation is a result of economic conditions. The Federal Reserve changes rates, which is affecting real interest rates, and it will push rates up and tighten when it deems appropriate, so the spread can be more than 1 percent.
Q. Now, Mr. Kaczmarek, I don't know if you, like me, lived through the late '70s in the U.S. in the way that you remember, but I assume you know that economists, when they think about U.S. inflation during the late '70s, the first thing that pops into their mind is the term "stagflation"; right?
A. (Mr. Kaczmarek) Possibly. This is not a period of time I studied for this particular assignment in this case.
Q. Well, you've heard the term "stagflation" before, haven't you?
A. (Mr. Kaczmarek) Certainly.
[Page 2454]
Q. And the term comes from U.S. inflation rates in the late '70s; right?
A. (Mr. Kaczmarek) Again, I haven't studied up on this particular issue, because it's not a topic we addressed in the Report.
Q. So, in your general expertise, that's not the type of thing you would know?
A. (Mr. Kaczmarek) I am generally regarded as knowing a lot of things people probably don't want to know, but that is not something I keep in my back pocket and converse with people over coffee regularly.
Q. Well, do you understand that what "stagflation" refers to is a period in which inflation is very high, but economic growth is low?
A. (Mr. Kaczmarek) I would say that's a fair characterization.
Q. In fact, in the late '70s, and even into the early '80s, inflation in the United States was very high by historical standards, wasn't it?
A. (Mr. Kaczmarek) Depends upon how far back you go in history, but again, this is nothing I've
[Page 2455]
commented on. It has no bearing on any of my opinions in this case.
Q. Well, you did mention the spike that's shown on Slide 37. What I'll put to you is that that spike is the result of stagflation; isn't that correct?
A. (Mr. Kaczmarek) Again, I have not looked at the underlying details between the real rate and the Inflation Rate specifically in that year.
Q. But I assume it wouldn't surprise you to learn--and I'm not making a representation, because I have not looked at it--but I assume it would not surprise you to learn that the Inflation Rate at that time was very close to the one-year Treasury Rate as well?
A. (Mr. Kaczmarek) I have no idea. I haven't looked at the data.
Q. Okay. As part of your work on this matter, you looked at some court proceedings in which Peruvian Courts valued Land Bonds; right?
A. (Ms. Kunsman) Correct.
Q. And in particular in your Reports, you describe four cases that occurred after the
[Page 2456]
Constitutional Tribunal's 2001 Decision in which Peruvian Courts relied on Expert Reports that calculated Land Bond values; is that right?
A. (Ms. Kunsman) That's correct. I'm just going to get my Report.
Q. Sure. It's in the binders at Tabs 1 and 2.
A. (Ms. Kunsman) Okay.
Q. If you're--are you looking for Appendix 13 to your Report?
A. (Ms. Kunsman) I am.
Q. Yeah, that is Tab 16. And, for the record, this is Appendix 13 to the Second Quantum Report.
Now, in each of these four cases, the Court used CPI to update the unpaid principal for inflation; right?
A. (Ms. Kunsman) In three of them, it used Lima CPI. In another one, it was a combination of Lima and Trujillo CPI, and the--you said in these four cases, the Court--well, the Pomalca Case was never decided, I understand, so in three cases the Court issued its Decision relying on a CPI. Depends on which case.
[Page 2457]
Q. Right. In the Pomalca Case, both the Expert Reports you referred to earlier used CPI to update the unpaid principal for inflation; right?
A. (Ms. Kunsman) Yeah. Lima CPI, yes.
Q. You just mentioned the Trujillo--sorry, Trujillo CPI. I apologize for my terrible Spanish pronunciation.
Trujillo is a city in Perú; right?
A. (Ms. Kunsman) Yes. My recollection is that Trujillo was where the land was located, but it didn't have CPI for the entire period, so the Expert in that Report had to use a combination.
Q. And what "Trujillo CPI" means is the Consumer Price Index measured in the City of Trujillo; right?
A. (Ms. Kunsman) Correct. I don't know if it's the city or the Province, yes.
Q. So, that is another CPI index?
A. (Ms. Kunsman) It is.
Q. Now, one of those cases, the Luna Case, was a case that involved bonds in which 14 coupons had been clipped from each bond; right?
[Page 2458]
A. (Ms. Kunsman) Right.
Q. In that case, the Court actually made an award in which it updated using CPI from the placement date; right?
A. (Ms. Kunsman) Right.
Q. And you mentioned a case in which--I believe, in which CPI updating was done from the date of the last clipped Coupon. That was the Laredo Case; right?
A. (Ms. Kunsman) Right.
Ω. And in that case, there were 25 Bonds at issue; right?
A. (Ms. Kunsman) Yes.
Q. And each of those Bonds had 20 Coupons; right?
A. (Ms. Kunsman) I believe so. I might need to look at--
Q. Yes. If it helps you--it may help you to look at Tab 18, which is CE-119. And there is--in the tab there is--separated by blue pages, there's the original, and there is a translation, but I believe it's a partial translation.
[Page 2459]
A. (Ms. Kunsman) No. That's fine. I can look at the original. That's the one that I looked at.
Q. And that document, CE-119, is the Expert Report that was submitted in the Laredo Case that was used to value the Bonds; right?
A. (Ms. Kunsman) Yeah. In going back to your earlier question, yes. 25 Bonds, 20 coupons, yeah.
Q. And each of those Bonds had 20 coupons; right?
A. (Ms. Kunsman) Originally issued, some of them were clipped.
Q. Good point. Thank you.
A. (Ms. Kunsman) Right.
Q. In particular, a total, among those Bonds, a total of five coupons total were clipped; right?
A. (Ms. Kunsman) There were five Bonds that had one coupon clipped each, so five unclipped coupons for those Bonds.
Q. Right. So, to make sure we're all on the same page--
A. (Ms. Kunsman) Yes.
Q. --there were 20 Bonds that were totally
[Page 2460]
unclipped, and then there were five Bonds, each of which had one coupon clipped out of 20?
A. (Ms. Kunsman) Correct.
Q. Okay. In that case, the choice of updating from placement or updating from the date of the last clipped coupon had very little effect on value; right?
A. (Ms. Kunsman) It was one year difference. Yep.
Q. Yeah. And I have done the calculation. I'll represent to you that what I get is--
A. (Ms. Kunsman) Okay.
Q. --that the value would have been about 2 percent higher if they had gone from issuance. Does that sound about right to you?
A. (Ms. Kunsman) It was the year--yeah, that sounds about right.
Q. Okay. And, again, putting aside the date from which the inflation updating was done, in all of the cases you look at, CPI was used to do inflation updating; right?
A. (Ms. Kunsman) CPI, yeah.
[Page 2461]
Q. Okay. Now, the President has asked us to use Spanish terms for Peruvian legal principles. I assume you're comfortable with that, yes?
A. (Ms. Kunsman) I'm comfortable with Spanish. I'm not sure I'm comfortable with Peruvian legal principles.
Q. I won't ask you about anything you didn't talk about in your Report.
A. (Ms. Kunsman) Okay.
Q. And, again, I apologize for my horrible pronunciation. But it's fair to say, isn't it, that the Courts in the cases you reviewed understood el principio valorista as applied in the 2001 Constitutional Tribunal Decision to include updating for inflation using CPI?
A. (Ms. Kunsman) When reviewing those cases, I focused on the calculations, not on the actual Decisions, so I would need to review every single one to be able to respond to that question. So, I'm not sure.
Q. Well, you don't think a court would have valued in the manner it did if that isn't what it
[Page 2462]
thought was legally required, do you?
A. (Ms. Kunsman) I don't know. That's a legal question. I don't know.
Q. Okay.
ARBITRATOR DRYMER: Is the point simply whether or not these Courts used CPI?
MR. RIEHL: No. I think--I'll move on, I think. Yeah.
ARBITRATOR DRYMER: All right.
PRESIDENT FERNÁNDEZ ARMESTO: But we agree that the Experts designated by the Court, because I think there is a difference--
ARBITRATOR DRYMER: Yes.
PRESIDENT FERNÁNDEZ ARMESTO: --here between what the Experts designated by the Court said and what the Court said.
MR. RIEHL: Right. Yeah, I'll be happy to clear that up.
(Overlapping speakers.)
PRESIDENT FERNÁNDEZ ARMESTO: What Ms. Kunsman is saying--I don't know what the Court said.
[Page 2463]
MR. RIEHL: Right.
PRESIDENT FERNÁNDEZ ARMESTO: I know what the Expert said.
And is it true that the Experts used CPI?
THE WITNESS: (Ms. Kunsman) Yes, they used CPI.
BY MR. RIEHL:
Q. Okay. And in three of those four cases, the Court then entered the calculation that the Experts had made using CPI; right?
A. (Ms. Kunsman) Correct.
Q. And the one case where that didn't happen, was the Pomalca Case; right?
A. (Ms. Kunsman) Correct.
Q. Now, you mentioned earlier that there were two different Expert Reports in the Pomalca Case; right?
A. (Ms. Kunsman) Yeah. Actually, there were three--we reviewed three--but, yes, two are the ones that have come up.
Q. Okay. And I'd like to focus on the two that you did mention. Is that okay with you?
[Page 2464]
A. (Ms. Kunsman) Yes.
Q. Great.
And there was chronological sequence here. One of those reports was earlier in time in that case than the other; right?
A. (Ms. Kunsman) Right.
Q. And the First Expert Report that was submitted in that case is the one that used simple interest; right?
A. (Ms. Kunsman) Right.
Q. And then the parties in that case filed objections with the Court to that Expert Report; right?
A. (Ms. Kunsman) Gramercy did, yes.
Q. Yeah. And then the Court rejected that Report and appointed a new Expert; right?
A. (Ms. Kunsman) Again, that was part of the legal decision, so what I did was look at the two Reports. I didn't look at the Decision behind rejecting one or the other, and I don't know how the process works either in Perú, how a court does that.
Q. Sure. And I don't expect you to have legal
[Page 2465]
knowledge. You're not a Peruvian lawyer; right?
A. (Ms. Kunsman) No.
Q. Or an expert in Peruvian law?
A. (Ms. Kunsman) No.
Q. All right. So, you don't know, one way or the other, why the next Expert Report came about procedurally?
A. (Ms. Kunsman) Right. No, I don't know. One used simple, one used compounded. The one that used simple was before the one that used compounded.
Q. Right. And so, the Report that used compound interest was the last of the Expert Reports, that you were aware of, in that case; right?
A. (Ms. Kunsman) Yeah.
Q. And the First Report in that case, even though it was simple interest, it calculated interest using the original coupon interest rates; right?
A. (Ms. Kunsman) Yeah. The stated coupon rates.
Q. Yeah. And, in fact, in each of four cases you looked at the--I'm sorry, scratch that.
In each of the four cases you looked at,
[Page 2466]
after the Courts updated for inflation, they awarded interest on that updated amount; right?
A. (Ms. Kunsman) Right. Not always using the stated coupon rates. I think it was the Saavedra Case that used the legal rate.
Q. Yeah. Well, and that's a very interesting case. Let's take a closer look at it. The legal interest rate that the Expert applied, and then the Court issued an award on that basis, the legal interest rate varied over time during the updating period; right?
A. (Ms. Kunsman) Yes.
Q. And it was as high as 300 percent for part of that time; right?
A. (Ms. Kunsman) I don't recall exactly.
Q. Well, let's take a look. If you would look, please, at Tab 60 of your binder, that is CE-1342, and I will direct you to Annex 2.
A. (Ms. Kunsman) It's Tab 60, so it's in the--
Q. Tab 6-0, yes.
A. (Ms. Kunsman) Okay.
Q. And, again, in the tab, there is a partial
[Page 2467]
English translation. I believe the table, the Annex 2 that I'm referring to, is only in the Spanish in the tab.
A. (Ms. Kunsman) Okay.
(Comments off microphone.)
MR. RIEHL: Well, if you look at Annex 2, I think it's on the bottom, it says Page 9. That's where Annex 2 starts.
(Comments off microphone.)
BY MR. RIEHL:
Q. So, let me ask first, just so we know what we're looking at, this is the Expert Report in the Saavedra Case that you referred to; right?
A. (Ms. Kunsman) Yeah, it's the one that--what's the C number?--C-148.
Q. I'm sorry, C-142.
(Overlapping speakers.)
Q. Yeah. I was saying CE-142, I believe, is the Expert Report, and then CE-148 is the Opinion in that case; is that right?
A. (Ms. Kunsman) Correct.
Q. Yeah. And the Opinion awards the amount
[Page 2468]
that is described in the Expert Report; right?
A. (Ms. Kunsman) Correct.
Q. Yeah. And so, Annex 2 starts on Page 9 and goes through Page 14. This shows the Expert's interest calculation in that case; right?
A. (Ms. Kunsman) Yeah. It's a calculation of the simple interest, yeah.
Q. Yeah. And so, if you--sort of just looking at the top, going from left to right, first the Expert looks at particular periods in time and goes through those periods sequentially; is that right?
A. (Ms. Kunsman) Right.
Q. And then has the "días vigentes" the number of days in each period; is that right?
A. (Ms. Kunsman) Yeah, "días vigentes."
Q. And then there's the legal interest rate; right?
A. (Ms. Kunsman) "Tasa interés legal," yeah.
Q. Yeah. And so, that's the interest rate that actually gets applied for that number of days of that period; right?
A. (Ms. Kunsman) Correct. On a simple basis.
[Page 2469]
Q. Yeah. And that gets you to--all the way over on the right--"interés legal" is the amount of interest for each of those periods; right?
A. (Ms. Kunsman) Yes.
Q. And then when you flip over to Page 13, on the bottom right, there is a "total interés legalis"--I'm sorry for pronunciation again--of 9.4 million Nuevo Soles; right?
A. (Ms. Kunsman) Yes.
Q. Now, and if you go back to Page 9, if you look at the row for the period from September 1 of '88 through November 30 of '88, the legal interest rate that the Expert applied for that period was 300 percent; right?
A. (Ms. Kunsman) Can you repeat?
PRESIDENT FERNÁNDEZ ARMESTO: To make it simple, this is, to me, the standard calculation of in our legal systems of legal interest, which is a changing rate which you apply flat.
MR. RIEHL: Yes.
PRESIDENT FERNÁNDEZ ARMESTO: Based by whatever the law tells you you have to apply, and the
[Page 2470]
law changes. When there is inflation, it went up.
MR. RIEHL: Right. I won't linger much longer here, Mr. President. I do want to look very briefly at what these rates actually were because I think it is pertinent.
PRESIDENT FERNÁNDEZ ARMESTO: No. But because it is interesting to me, I was not aware, it seems that what the judge was just applying--or what the Expert was applying is just the legal interest rate for the quoted amounts, for unpaid amounts.
BY MR. RIEHL:
Q. Is that your understanding?
A. (Ms. Kunsman) On a simple basis.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah, yeah, yeah. This is the way I think on the Peruvian law this is applied?
THE WITNESS: (Ms. Kunsman) Yes.
MR. RIEHL: Yeah.
PRESIDENT FERNÁNDEZ ARMESTO: Just coming from other legal systems where the legal interest rate is always applied as a simple interest rate.
THE WITNESS: (Mr. Kaczmarek) I'll just add
[Page 2471]
that I have dealt with legal interest rates in many jurisdictions, it has always been my experience is that they are always applied simple.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah.
THE WITNESS: (Mr. Kaczmarek) They are always higher than rates that are compounded, but they are always simple.
BY MR. RIEHL:
Q. And now that you've looked at this, you would agree that, for part of this period, the rate that was applied was 300 percent; right?
(Comments off microphone.)
PRESIDENT FERNÁNDEZ ARMESTO: Clearly, yes.
BY MR. RIEHL:
Q. Okay. And that rate was applied to principal that had already been updated for inflation; right?
A. (Ms. Kunsman) Right.
Q. And if you look over the rates, they were roughly speaking in the double digits during the '80s--
A. (Ms. Kunsman) Yes.
[Page 2472]
1 Q. --and then they dropped for a little while
2 in the early '90s and then they were back up into the
3 double digits in the late '90s.
4 Is that generally accurate?
5 A. (Ms. Kunsman) Yes.
6 PRESIDENT FERNÁNDEZ ARMESTO: The thought of
7 the Expert is there was--I recalculate the principal,
8 and then the proper interest rate to apply is the
9 legal interest rate, not the bond interest rate, nor
10 the American interest rate. He takes what the normal
11 default interest rate under Peruvian law.
12 MR. RIEHL: Right.
13 PRESIDENT FERNÁNDEZ ARMESTO: I think that's
14 the calculation, no?
15 THE WITNESS: (Ms. Kunsman) Correct.
16 BY MR. RIEHL:
17 Q. Okay. Yeah. And then what I want to
18 explore with you is how the effect of that compared
19 to the other ways of doing it. In sort of cutting to
20 the chase, the interest that the Expert calculated
21 and that the Court awarded in the Saavedra Case was
22 more than 20 times the updated principle that the
[Page 2473]
1 Court awarded; right?
2 A. (Ms. Kunsman) I haven't made the
3 calculation, but that looks right.
4 Q. Yes. And if you go back to--this might
5 help--within Tab 60, CE-142, the page that has the
6 number "7" on the bottom, Section 4, "Conclusiones."
7 A. (Ms. Kunsman) Yes.
8 Q. All right. That says in 4.2 that the amount
9 of 422,000 Nuevos Soles is the Award for the
10 principal component; is that right?
11 A. (Ms. Kunsman) Correct.
12 Q. And then the Award for the interest in the
13 next paragraph is 9.4 million Nuevos Soles?
14 A. (Ms. Kunsman) Correct.
15 Q. And then the Court actually awarded those
16 amounts; right?
17 A. (Ms. Kunsman) Yes.
18 Q. Now, in Professor Edwards' computation of
19 the value of Gramercy's Land Bonds, using the
20 7.22 percent interest rate, interest is only about
21 91 percent of the updated principal; right? If it
22 helps, in Tab 1 is your First Report.
[Page 2474]
1 A. (Ms. Kunsman) Okay.
2 Q. And if you turn to Page 41.
3 PRESIDENT FERNÁNDEZ ARMESTO: Can we break
4 for one minute?
5 (Pause.)
6 PRESIDENT FERNÁNDEZ ARMESTO: Sorry.
7 MR. RIEHL: May I proceed, Mr. President.
8 BY MR. RIEHL:
9 Q. So, having looked at that, does that refresh
10 your recollection that in Professor Edwards'
11 computation of the value of the Gramercy's Land
12 Bonds, using the 7.22 percent interest rate, interest
13 is only about 91 percent of the updated principal?
14 A. (Ms. Kunsman) The real interest because he
15 is supposedly--he says he's using a real interest
16 rate.
17 Q. Well, the--in Saavedra--
18 A. (Ms. Kunsman) Yes.
19 Q. --the interest rates they applied were also
20 on a real basis; right?
21 A. (Ms. Kunsman) Yes, you're right.
22 Q. Yeah. And it's just a fact--right?--that
[Page 2475]
1 interest was about 91 percent of Professor Edwards'
2 calculation?
3 A. (Ms. Kunsman) Yes.
4 Q. And it was about 98 percent of the Award in
5 Saavedra?
6 A. (Ms. Kunsman) Yes.
7 Q. And I do want to look at interest in one of
8 the other cases, and that's the Luna Case?
9 PRESIDENT FERNÁNDEZ ARMESTO: Your point is
10 here it is 91 and here it is 75 percent?
11 ARBITRATOR DRYMER: 98.
12 MR. RIEHL: 98 percent, Mr. President.
13 ARBITRATOR DRYMER: Of the total value of
14 the Award, I believe, is the point.
15 MR. RIEHL: It's--
16 PRESIDENT FERNÁNDEZ ARMESTO: I lost this
17 point because, if I look at this calculation, it is
18 approximately 80 percent.
19 MR. RIEHL: I'm sorry, Mr. President, which
20 calculation are you looking at?
21 PRESIDENT FERNÁNDEZ ARMESTO: I'm still in
22 CE-142, Page 13. That is where you started.
[Page 2476]
1 MR. RIEHL: Yes.
2 PRESIDENT FERNÁNDEZ ARMESTO: And there we
3 see that the capital is 421 million and the total
4 interest is 9 billion, no?
5 (Comments off microphone.)
6 MR. RIEHL: I'm sorry. Can you say that
7 again, Mr. President. I didn't have it right in
8 front of me.
9 PRESIDENT FERNÁNDEZ ARMESTO: Okay. This is
10 for the Experts, really, but I understand that what
11 this means is that the capital--that the valued
12 capital is 421 million and on that you must add
13 9 billion interest.
14 MR. RIEHL: I believe the units are off. I
15 believe the numbers on the page are 421,000 and
16 9.4 million.
17 THE WITNESS: (Ms. Kunsman) On Page 7.
18 ARBITRATOR DRYMER: Are you--
19 PRESIDENT FERNÁNDEZ ARMESTO: Okay. These
20 are in thousands, not in millions. So, it is 421,000
21 versus 9,393,000?
22 MR. RIEHL: Those are the numbers on the
[Page 2477]
1 page I was asking about, yes.
2 THE WITNESS: (Ms. Kunsman) Yes.
3 PRESIDENT FERNÁNDEZ ARMESTO: Yes. So, it's
4 a huge amount of interest and the very small amount
5 of capital?
6 MR. RIEHL: Right.
7 THE WITNESS: (Ms. Kunsman) Yes.
8 BY MR. RIEHL:
9 Q. And, in fact, Ms. Kunsman, of the total
10 award, if you add them together, the interest
11 component is about 98 percent; right?
12 A. (Ms. Kunsman) I haven't made the
13 calculation.
14 ARBITRATOR DRYMER: You're suggesting to us
15 that the 9.4 million of interest is about 98 percent
16 of the 9.8 million total value awarded?
17 MR. RIEHL: That is correct. And I'll make
18 that as a representation. I have done the
19 calculation.
20 PRESIDENT FERNÁNDEZ ARMESTO: Okay. And now
21 say--you compared it to Professor Edwards'
22 calculation, and you say, well, the percentages are
[Page 2478]
1 similar?
2 MR. RIEHL: Actually, I'm saying that the
3 percentage in Edwards' is 91 percent, which is lower.
4 PRESIDENT FERNÁNDEZ ARMESTO: Okay. Now I
5 understand the argument.
6 Do you have any comment to that?
7 THE WITNESS: (Ms. Kunsman) No.
8 BY MR. RIEHL:
9 Q. All right. Let's take a look, and I think
10 this will be quicker, at the Luna Case.
11 So, with respect to interest, in
12 Luna--actually scratch that.
13 In the Luna Case, what the Expert calculated
14 and then what the Court awarded was first updating
15 for inflation using CPI and then adding compound
16 interest at the original coupon rate and then
17 additionally adding a second piece of interest on top
18 at a 3.915 percent compound rate; right?
19 A. (Ms. Kunsman) Right. Yeah.
20 Q. So, to be clear, the interest award on an
21 inflation updated amount--so on a real basis--was the
22 coupon rate plus close to 4 percent; right?
[Page 2479]
1 A. (Ms. Kunsman) Right, which economically
2 doesn't make sense because you're applying a nominal
3 rate to an inflation-adjusted base.
4 Q. But that's what a court in Perú actually
5 awarded to a Bondholder; right?
6 A. (Ms. Kunsman) Yes. Yes.
7 Q. And it's fair to say that in all four of
8 these cases that you looked at--sorry, I'll amend
9 that.
10 It's fair to say in the three cases in which
11 there was an entered Decision, the Courts understood
12 Perú's obligation under the Land Bonds to include
13 paying interest on the outstanding principal; right?
14 A. (Ms. Kunsman) The calculations all applied
15 interest, yes.
16 Q. Yeah. And they all applied interest at a
17 rate that was at least equal to the original coupon
18 interest rate in real terms, and in two of the cases
19 it was higher; right?
20 A. (Ms. Kunsman) One was--the Saavedra Case was
21 the legal, and then the other two with the stated
22 coupon rates.
[Page 2480]
1 Q. Right. And so, the answer to my question is
2 yes?
3 A. (Ms. Kunsman) Yes. Well, I don't know if
4 the legal interest rate--if it's exactly comparable
5 to the coupon stated rates because they changed over
6 time, but that's why I made the qualifier.
7 Q. Right. But you would agree, wouldn't you,
8 that the interest awarded in Saavedra was much, much
9 higher than would have been awarded using the coupon
10 rate on the compound basis; right?
11 A. (Ms. Kunsman) Saavedra was simple basis. I
12 don't know. I would need to check.
13 Q. So, you don't know whether awarding interest
14 that's 20 times as much as the principal is more or
15 less than awarding interest at the original coupon
16 rate?
17 A. (Ms. Kunsman) One is on a simple basis and
18 the other is on a compound basis.
19 Q. You can look at the total amount awarded
20 though; right?
21 A. (Ms. Kunsman) Well, I would need to run both
22 calculations from the adjusted date and then see
[Page 2481]
1 which one comes up. They are two different cases.
2 You are comparing two different cases.
3 Q. Okay. But so, you don't know one way or the
4 other.
5 A. (Ms. Kunsman) That's what I said, that I
6 would need to run the calculation.
7 Q. In your Reports, you expressed some opinions
8 about the Constitutional Tribunal's 2013 Order, and
9 I'd like to turn to those. If you look at Tab 1,
10 it's the First Quantum Expert Report, RER-5, and I'll
11 direct you to Paragraph 57.
12 A. (Ms. Kunsman) I'm there.
13 Q. So, in this paragraph, you're referring to
14 the Constitutional Tribunal's 2013 Order; right?
15 A. (Ms. Kunsman) Decision, yes.
16 Q. And you believe that the Constitutional
17 Tribunal's reasons for rejecting the CPI method were
18 reasonable from an economic perspective; right?
19 A. (Ms. Kunsman) Right.
20 Q. One of the Constitutional Tribunal's reasons
21 was that the basket of goods used to calculate CPI
22 might fail to take into account certain things that
[Page 2482]
1 might happen during times of hyperinflation; right?
2 A. (Mr. Kaczmarek) Yes. They expressed some
3 concern about that.
4 Q. So, the idea here is that Perú's official
5 CPI statistics might be inaccurate during the
6 hyperinflation period?
7 A. (Mr. Kaczmarek) That it wouldn't properly
8 measure the--how prices of goods and services had
9 increased, given how, as we've discussed during the
10 Hearing, people tend to switch to consume different
11 things in hyperinflationary periods.
12 Q. And if that actually happened, the necessary
13 consequences that Perú's official CPI statistics are
14 inaccurate for that period; right?
15 A. (Mr. Kaczmarek) They could be inaccurate or
16 just not the best measure to accomplish the task that
17 they are trying to accomplish.
18 Q. Well, if the CPI statistics are accurate,
19 they could be used to update for inflation
20 accurately, couldn't they?
21 A. (Mr. Kaczmarek) When you say "accurate,"
22 again, mathematical accuracy or--you know, I think
[Page 2483]
1 they are not suggesting there's a mathematical
2 problem. They are suggesting--because of how the
3 baskets are changing, they are expressing some doubts
4 about whether the math truly reflects how much more
5 money it would cost a person to consume an average
6 basket from period to period. So, it's not really a
7 matter of accuracy in math, but an accuracy in terms
8 of behavioral consumption patterns.
9 Q. The CPI statistic at a particular point in
10 time is a measurement; right?
11 A. (Mr. Kaczmarek) Yes.
12 Q. In particular, it's a measurement of the
13 prices that existed at that time; right?
14 A. (Mr. Kaczmarek) It's an index measuring how
15 the average basket of goods and services is changing
16 from period to period.
17 Q. But at any point in time, it's a measurement
18 at that time; right?
19 A. (Mr. Kaczmarek) Yes. Yeah.
20 Q. And so, that measurement is either accurate
21 or inaccurate; right?
22 A. (Mr. Kaczmarek) Mathematically? It can be
[Page 2484]
1 accurate. Whether it measures appropriately the
2 consumption that--the increased price of the
3 consumption of goods and services that an average
4 citizen is consuming? Maybe not.
5 Q. Well, if it measured that inappropriately,
6 the result would not accurately show how prices had
7 changed; right?
8 A. (Mr. Kaczmarek) I'm just having a hard time
9 with "accurate"--
10 PRESIDENT FERNÁNDEZ ARMESTO: Yeah. But it
11 seems it can be wrong. I mean, the CPI can be wrong.
12 It cannot reflect the real inflation. We all agree.
13 THE WITNESS: (Mr. Kaczmarek) I think so,
14 yeah.
15 PRESIDENT FERNÁNDEZ ARMESTO: Even
16 economists must agree that sometimes their statistics
17 are wrong. It could be wrong, yeah.
18 BY MR. RIEHL:
19 Q. So, is it your view that Perú's official
20 statistics for CPI during the hyperinflation period
21 are wrong?
22 MR. HAMILTON: Objection.
[Page 2485]
1 THE WITNESS: (Mr. Kaczmarek) I don't think
2 we've taken any such view. We just--here we observed
3 that the Constitutional Tribunal expressed some
4 concern. We say, okay, yeah, there's some validity
5 to have some concern, and they ultimately chose a
6 dollarization approach, which, you know, alleviates
7 the concern, and we say that that's economically
8 justified, in our view.
9 BY MR. RIEHL:
10 Q. And the concern that the Constitutional
11 Tribunal expressed was that the official CPI
12 statistics might be wrong; right?
13 A. (Mr. Kaczmarek) Not that they might be
14 wrong, but that the measurement, again, may not
15 accurately reflect the basket that a citizen consumes
16 of goods and services.
17 PRESIDENT FERNÁNDEZ ARMESTO: The inflation.
18 THE WITNESS: (Mr. Kaczmarek) Right. The
19 real inflation that they are experiencing in real
20 life.
21 PRESIDENT FERNÁNDEZ ARMESTO: Yeah. The
22 IPC--the CPI in English, is the measurement of
[Page 2486]
1 inflation. We all have heard about governments
2 changing the basket in order to reduce the official
3 inflation, so you--by changing the basket,
4 calculating improperly the basket, you can, of
5 course--and Governments do--affect inflation.
6 But my question to you--I think the relevant
7 question here is the following: Do you agree, as an
8 economist, or do economists agree that in times of
9 hyperinflation, the CPI methodology does not reflect
10 the true inflation? That is the question.
11 THE WITNESS: (Mr. Kaczmarek) I would say
12 that it can. It becomes much more difficult to
13 measure the CPI during those particular periods of
14 time.
15 PRESIDENT FERNÁNDEZ ARMESTO: So, you agree
16 with the--you agree with the argument of the
17 Constitutional Court.
18 THE WITNESS: (Mr. Kaczmarek) Yes. I think
19 they are expressing it--counsel is expressing it as
20 they believe there's inaccuracy. I'm not sure I
21 would agree with it. That was their concern, that
22 there's some mathematical inaccuracy, but that it
[Page 2487]
1 really probably may not capture the essence of how
2 much prices were going up that a consumer of--goods
3 and services consumers consumed.
4 That's the way we kind of interpret it. We
5 said, sure, that during hyperinflation, it is really
6 hard to measure these things. One way around that is
7 dollarization approach.
8 BY MR. RIEHL:
9 Q. There's a terminological issue that I'm
10 hoping I can clear up quickly. You testified a
11 little bit ago that CPI, at a particular point in
12 time, is a measurement of prices at that time; right?
13 A. (Mr. Kaczmarek) Yes.
14 Q. And to calculate inflation, you have to
15 compare that measurement of prices at a particular
16 time with a prior measurement of prices at a previous
17 time; right?
18 A. (Mr. Kaczmarek) Correct.
19 Q. So the CPI statistic at any point in time by
20 itself is not a measure of inflation; right?
21 PRESIDENT FERNÁNDEZ ARMESTO: No.
22 THE WITNESS: (Mr. Kaczmarek) No. The
[Page 2488]
1 inflation is a percentage. It's a rate. It's a rate
2 of change from one period to the next.
3 PRESIDENT FERNÁNDEZ ARMESTO: Of course. I
4 have spoken simplified, of course, that inflation is
5 the difference between two indices.
6 BY MR. RIEHL:
7 Q. Thank you. Now, the concern about the
8 accuracy of CPI that the Constitutional Tribunal
9 expressed in its 2013 Order was that people might
10 trade or barter or buy cheaper substitutes, therefore
11 making the official CPI statistics too high; right?
12 A. (Mr. Kaczmarek) True. I think, if I can
13 simplify it, the concern raised was that the previous
14 basket may not reflect the basket that the average
15 consumer would consume in hyperinflationary times.
16 Q. But the--I'm sorry. Were you finished?
17 A. (Mr. Kaczmarek) Yes.
18 Q. But the particular concern the
19 Constitutional Tribunal had was that the statistics
20 might be too high, not just that they might be
21 inaccurate; right?
22 A. (Mr. Kaczmarek) That may be.
[Page 2489]
1 Q. Well, let's look at that a little more
2 closely.
3 PRESIDENT FERNÁNDEZ ARMESTO: Yeah. I think
4 it is too high. I mean, because if it's too low,
5 they pay less and they would not be concerned.
6 MR. RIEHL: I'll move on.
7 PRESIDENT FERNÁNDEZ ARMESTO: Are you going
8 to the second, because I really would like to explore
9 with the Expert the second reason.
10 MR. RIEHL: I am. I would really like to
11 explore this one, as well, if I may.
12 PRESIDENT FERNÁNDEZ ARMESTO: Okay. If you
13 are, you take the lead.
14 BY MR. RIEHL:
15 Q. So, other than during times of
16 hyperinflation, I assume you have no reason to doubt
17 Perú's official CPI statistics, do you?
18 A. (Mr. Kaczmarek) We haven't undertaken any
19 study to verify the accuracy or inaccuracy of CPI
20 statistics.
21 Q. And Perú's economists, I take it, do a
22 thorough and careful job to measure CPI accurately?
[Page 2490]
1 A. (Mr. Kaczmarek) It's not something I have
2 studied or can render an opinion on.
3 Q. Okay. The period of hyperinflation in Perú
4 that we're talking about was in the late '80s; right?
5 A. (Mr. Kaczmarek) I think that's fair to
6 characterize it at that time, yes.
7 Q. Okay. And I think we just established that
8 CPI in 2018, it's a measurement as of 2018; right?
9 A. (Mr. Kaczmarek) It's an index value as of
10 2018.
11 Q. So, the particular value of the CPI
12 statistic in 2018 is unaffected by anything that
13 happened previously; right?
14 A. (Mr. Kaczmarek) I don't know all of
15 measurement techniques being used, if they go back
16 and relook at it--obviously, sometimes CPI statistics
17 can be revised historically, after they have been
18 reported, so sometimes, yeah, sure, you can go back
19 several years and remeasure and re-report.
20 Again, I have not studied any of these
21 calculations and the mechanisms of how they have been
22 performed.
[Page 2491]
1 Q. So--but if the CPI measurement in 2018 were
2 not affected by things that happened before, since
3 it's just a price measurement, and the CPI in 1992
4 was also a measurement of prices at that time, when
5 you compare those values, the inflation you get for
6 the intervening period is not affected by the CPI
7 measurements in the intervening period; right?
8 A. (Mr. Kaczmarek) If there's a change in the
9 basket, perhaps. It's a series. I think the series
10 itself is important. I wouldn't, per se, want to
11 look at one and the other and not know what happened
12 in between.
13 ARBITRATOR DRYMER: I think the question is,
14 does it matter to know what happened before, not in
15 between '92 and 2018?
16 THE WITNESS: (Mr. Kaczmarek) Does it matter
17 what happened before 1992? I would think so. I'd
18 think you want to understand the derivation of the
19 buildup of the series and how it changed, yes.
20 MR. RIEHL: Okay. Mr. President, I will
21 address the second point.
22 PRESIDENT FERNÁNDEZ ARMESTO: Of course.
[Page 2492]
1 BY MR. RIEHL:
2 Q. In Paragraph 57, you have a characterization
3 of a second reason that the Constitutional Tribunal
4 gave. You say that the Constitutional Tribunal was
5 concerned that using the CPI method would yield such
6 a large value that it would jeopardize the
7 Government's ability to finance its other obligations
8 and promote the general welfare of the country;
9 right?
10 A. (Mr. Kaczmarek) This is apparently what they
11 said, yes.
12 Q. Okay. Well, you gave an opinion that that
13 was an economically reasonable thing to say, didn't
14 you?
15 A. (Mr. Kaczmarek) We gave reason for rejecting
16 the CPI method. We didn't say that this particular
17 issue was, per se, an economically justifiable
18 reason, although obviously, in any payment of debt,
19 the Government considers how much it can actually
20 afford. It doesn't like to issue debt it knows it's
21 going to default on immediately.
22 PRESIDENT FERNÁNDEZ ARMESTO: Because my
[Page 2493]
1 question to you is, you have not made any calculation
2 of that.
3 THE WITNESS: (Mr. Kaczmarek) We have not.
4 I mean, obviously these are jurists. I don't know
5 how much of a grasp they had of what--how some of
6 these calculations would turn out. I think I would
7 treat this as a statement of that we want to be
8 concerned that something doesn't--we don't set a debt
9 that suddenly the Government is going to immediately
10 default on. That would be a problem. I have not
11 done the calculation.
12 PRESIDENT FERNÁNDEZ ARMESTO: Yeah. My
13 question is, in your point of view, do you have any
14 good data, being the Expert from the Republic of
15 Perú, what the likely outstanding principal amount of
16 Bonds is? How many Bondholders are there in the
17 world, and how many Bonds do they hold, do you know?
18 THE WITNESS: (Mr. Kaczmarek) I don't think
19 we've done any calculations of total issuance. We've
20 given you in this Report credit ratings.
21 PRESIDENT FERNÁNDEZ ARMESTO: No, not the
22 total. How many Land Bonds are still outstanding?
[Page 2494]
1 Do you know?
2 THE WITNESS: (Ms. Kunsman) We do not.
3 THE WITNESS: (Mr. Kaczmarek) Yeah, I don't
4 think we know. We only know the details related to
5 the Gramercy Bonds.
6 PRESIDENT FERNÁNDEZ ARMESTO: So, you never
7 made--and you don't know if there is any place
8 where--you have not found any--in the papers or in
9 the documents of the Peruvian Ministry of Finance,
10 you have not been given any estimation, calculation,
11 of how many Bonds are outstanding?
12 Because to make this statement that the CPI
13 is dangerous--jeopardizes--I think is the verb--the
14 fiscal stability, you, of course, must know two
15 things: A, how many Bonds there are, and, B, how
16 much it will cost to repay all of them.
17 And have you ever seen a calculation of
18 that?
19 THE WITNESS: (Mr. Kaczmarek) Not to my
20 knowledge, no.
21 PRESIDENT FERNÁNDEZ ARMESTO: And you also
22 have not seen any calculation of how much it will
[Page 2495]
1 cost to repay all the Bonds with the MEF formula?
2 THE WITNESS: (Mr. Kaczmarek) No. Only
3 applying the MEF formula to the Bonds in this case.
4 PRESIDENT FERNÁNDEZ ARMESTO: Yeah.
5 THE WITNESS: (Mr. Kaczmarek) So we don't
6 have a universe to know what the total would be.
7 THE WITNESS: (Ms. Kunsman) There were some
8 calculations on the Agrarian Report bills, but we
9 don't know how they were calculated, and we couldn't
10 tell what they represented, if it was the total or
11 just the unclipped. We didn't have any detail.
12 PRESIDENT FERNÁNDEZ ARMESTO: But you have
13 not had access to any internal calculations made by
14 The Ministry of Finance?
15 THE WITNESS: (Mr. Kaczmarek) As far as I
16 know, no records were kept or were available, at
17 least, of all the Bonds that were issued and still
18 remained outstanding.
19 I think we're in this period of some
20 probably got lost, some may have gotten thrown away,
21 some were redeemed.
22 PRESIDENT FERNÁNDEZ ARMESTO: It's clear.
[Page 2496]
1 But you could make--the maximum is 15 billion, and
2 the minimum is what Gramercy holds, and in between
3 you can make estimations.
4 And I'm just curious that no one seems to
5 have made an estimation using different assumptions
6 and different calculations to double-check that what
7 the Constitutional Court says or how the
8 Constitutional Court got to this opinion that
9 revaluing it at CPI would be dangerous and doing it
10 at--with using the dollar is much less money.
11 I just--as an economist, when you like
12 figures and amounts and alternatives, and more
13 likely, less likely, and suddenly in this, to me, is
14 an important point. And it's an important point for
15 the Tribunal evidently.
16 I mean, if we decide that this is worth, as
17 Claimant says, 1.8 billion, we have no idea what the
18 impact would be for the whole outstanding
19 Bondholders. We could be bankrupting Perú if the
20 outstanding amount is very significant.
21 And I'm surprised that I find no numbers on
22 that. I have asked a number of people. You were my
[Page 2497]
1 last hope that you would have some numbers, and you
2 tell me no.
3 THE WITNESS: (Mr. Kaczmarek) Unfortunately,
4 no. We haven't seen any calculations that the
5 Constitutional Tribunal did.
6 PRESIDENT FERNÁNDEZ ARMESTO: Okay. Or the
7 Ministry of Finance? You never saw any papers of
8 Ministry of Finance with these calculations.
9 THE WITNESS: (Mr. Kaczmarek) No.
10 PRESIDENT FERNÁNDEZ ARMESTO: Very good.
11 BY MR. RIEHL:
12 Q. And have you ever seen any estimates of the
13 total value of the outstanding Land Bonds under any
14 of the MEF compensation formulas?
15 A. (Ms. Kunsman) Professor Seminario did run
16 some numbers based on different scenarios, but it--
17 PRESIDENT FERNÁNDEZ ARMESTO: Professor
18 Seminario did? I'm not aware.
19 Do we have--okay. Can you at some stage
20 look up whether it is in the record? Ms. Kunsman,
21 can you at some stage look up whether it is in the
22 record?
[Page 2498]
1 THE WITNESS: (Ms. Kunsman) Yeah, I can
2 check, yes.
3 PRESIDENT FERNÁNDEZ ARMESTO: Because we
4 know that Professor Seminario was asked to do that.
5 We saw his contract, but I don't know--or I don't
6 remember having seen where he actually answered.
7 So, if you--if in the next break or so, if
8 you can--or afterwards, tell us if they are in the
9 record, that would be helpful.
10 THE WITNESS: (Ms. Kunsman) Yeah.
11 BY MR. RIEHL:
12 Q. So, other than the Seminario Report in the
13 course of your work on this matter, have you at any
14 point seen any other documents estimating or
15 calculating or showing the total outstanding
16 principal of Land Bonds?
17 A. (Ms. Kunsman) In the Gramercy due diligence,
18 there were some references to the--I think the
19 President claiming that the Agrarian debt can be
20 settled, and there were different amounts in there.
21 But specific calculations? No. That would
22 show this is outstanding, this is what we would need
[Page 2499]
1 to pay specifically, no.
2 Q. Okay. And including general estimates and
3 focusing on not Gramercy documents, have you seen any
4 documents from the MEF or any agency of Perú or
5 otherwise from Perú that estimate or calculate the
6 total outstanding principal amount?
7 A. (Ms. Kunsman) No.
8 Q. Have you seen any documents that estimate or
9 calculate what might be owed in total to Bondholders
10 under any of the MEF compensation formulas?
11 A. (Ms. Kunsman) MEF, no.
12 Q. There's one hopefully tiny technical thing I
13 can clear up.
14 The President asked a question this morning
15 about if one wanted to use a long Bond rate within
16 Bondholder process type of formula, how would that be
17 done. And I'm really trying to get this accurate.
18 You can tell me if I got your answer wrong.
19 I think you said what the MEF currently does
20 is they use the one-year rate for a year and then
21 they effectively roll it over into the next one-year
22 rate and so forth.
[Page 2500]
1 Is that right, what you testified?
2 A. (Mr. Kaczmarek) They roll the whole
3 principal and the interest over into a brand-new
4 bond.
5 Q. But doing that one year at a time, I
6 believe, is what you testified; right?
7 A. (Mr. Kaczmarek) Right. And I explained,
8 well, if you do a 30-year, what's the assumption? Is
9 it buy and hold and reinvest the interest, or is it
10 buy and sell after a year and reinvest at the new
11 30-year? And then as you move closer to today, do
12 you switch durations to 10? 5? There's lots of
13 possibilities to do the calculations.
14 Q. Okay. Well, I'd like to--
15 PRESIDENT FERNÁNDEZ ARMESTO: But it would
16 be more? What is clear to us, if you look back at
17 the yield curve of the United States in the last
18 30 years, long-term bonds have yielded more than
19 short-term bonds, no?
20 THE WITNESS: (Mr. Kaczmarek) That is
21 generally the case for most of the time, that's true.
22 BY MR. RIEHL:
[Page 2501]
1 Q. But I think to try to cut to the chase and
2 do this briefly, the answer to the President's
3 question, I take it you would agree, is there are
4 various different approaches one could take to doing
5 that. There are ways to deal with the problem that
6 he identified; is that right?
7 A. (Mr. Kaczmarek) Yes, because it wasn't--that
8 parameter, it was helpful, but it wasn't as specific
9 as it could have been, so it required some
10 interpretation.
11 Q. Let's turn to looking at some of the MEF
12 formulas. In your Reports, you argue that the wide
13 range of results in the MEF's approaches is evidence
14 that the Current Value Principle was uncertain;
15 right?
16 A. (Mr. Kaczmarek) I think that's fair.
17 Q. Okay. But here today you said that the 2014
18 formula had a typo, and I believe at one point you
19 characterized it as wrong. That formula was wrong;
20 right?
21 A. (Mr. Kaczmarek) I think we pointed that out
22 in our First Report, yes.
[Page 2502]
1 Q. So, the fact that it produced a different
2 value does not suggest anything about uncertainty,
3 does it?
4 A. (Mr. Kaczmarek) No. I mean, if a formula
5 has got an error, I wouldn't carry out the formula
6 and try to make sense of the result.
7 Q. And you heard Professor Edwards'
8 presentation about the attempted clarifications in
9 the February 2017 Supreme Decree; right?
10 A. (Mr. Kaczmarek) I've read his description of
11 the clarification process.
12 Q. And do you agree with him that those
13 clarifications actually did not clarify?
14 A. (Mr. Kaczmarek) Well, I think there was, at
15 least from my understanding, two issues he complained
16 about in his review, and he tried to make sense of
17 how the formulas could make sense, when they're
18 really either just typos or errors. And I don't
19 understand the purpose of trying to make sense of a
20 typo or an error.
21 It's a typo or an error, and it just needs
22 to be fixed. At the end of the day, it was fixed and
[Page 2503]
1 there's typos or errors remaining.
2 Q. And when you say "at the end of the day, it
3 was fixed," I assume you're referring to the
4 August 2017 Supreme Decree; is that right?
5 A. (Mr. Kaczmarek) Exactly.
6 Q. You would agree, wouldn't you, that after
7 the February 2017 Decree, reasonable attempts to
8 interpret what was going on could have produced a
9 very wide range of values?
10 A. (Mr. Kaczmarek) Well, again, if those
11 formulas have an error, then I don't understand why
12 one would want to implement a formula that has an
13 error and try to make sense of the results. It just
14 seems like a nonsensical exercise to undertake.
15 Q. Well, you do understand, don't you, that
16 Bondholders would have been very interested in
17 knowing how much their Bonds were worth, in, say,
18 March 2017? Isn't that right?
19 A. (Mr. Kaczmarek) Some may have. Some never
20 went to get a Coupon collected. May not have been.
21 I don't know. I can't testify to every Bondholder.
22 Q. And if a Bondholder was interested in
[Page 2504]
1 knowing in March of 2017 what their Bonds were worth,
2 and they looked at the Supreme Decrees that had been
3 issued at that point, they would have concluded that
4 there was a very wide range of values that might be
5 among what were intended; right?
6 A. (Mr. Kaczmarek) Well, at any one point in
7 time, I think there was just one Decree issued with a
8 formula, which then was fixed over time.
9 Q. Can you answer my question, please?
10 A. (Mr. Kaczmarek) I'm confused by the
11 question. If you could clarify for me.
12 Q. Sure. There was a Supreme Decree--two
13 Supreme Decrees, actually, issued in 2014; right?
14 A. (Mr. Kaczmarek) Yes.
15 Q. And then a Supreme Decree issued in
16 February 2017 that had corrections; right?
17 A. (Mr. Kaczmarek) Yes.
18 Q. I'll represent to you that there was not a
19 formula in that Decree, but the document speaks for
20 itself.
21 If a Bondholder in March of 2017 was
22 attempting to understand what their Bonds were worth
[Page 2505]
1 based on the Supreme Decrees that had been issued up
2 to that point, they would have reasonably thought
3 there might be a very wide range of values that were
4 intended; right?
5 A. (Ms. Kunsman) Not as wide as Professor
6 Edwards indicates in his Report, but it is something
7 we didn't address just because that formula was never
8 applied to any Bondholder, so--and the initial
9 formula, if you applied it, resulted in a miniscule
10 value.
11 So, it was clear that it was low and that it
12 was a typo that was corrected. But I think Professor
13 Edwards presents more interpretations that I think
14 are reasonable to present based on reading the
15 first--the DS34.
16 Q. And in the August 2017 Supreme Decree, there
17 was a new formula for calculating the Parity Exchange
18 Rate; right?
19 A. (Ms. Kunsman) Right.
20 PRESIDENT FERNÁNDEZ ARMESTO: A new formula
21 for?
22 MR. RIEHL: For calculating the Parity
[Page 2506]
1 Exchange Rate.
2 PRESIDENT FERNÁNDEZ ARMESTO: Yeah. So
3 there is a change.
4 THE WITNESS: (Ms. Kunsman) There is. Yes.
5 PRESIDENT FERNÁNDEZ ARMESTO: That is
6 important, yeah.
7 BY MR. RIEHL:
8 Q. Yeah. And in his Reports, Professor Edwards
9 applies some Algebra to the equations and restates
10 them in a way that he says shows that basically what
11 that formula does is uses the January exchange rate,
12 assumes that's in parity and then calculates Parity
13 Exchange Rates at other points in line with that
14 base.
15 Do you agree with that?
16 A. (Ms. Kunsman) It uses the 1967 official
17 exchange rate and then applies the--did I say 1967?
18 No, 1969, January 1969 exchange rate and applies the
19 differential and inflation between the U.S. and
20 Perú's CPI.
21 Q. And in January of 1969, you agree, don't
22 you, that Perú's currency was pegged to the dollar?
[Page 2507]
1 A. (Ms. Kunsman) Yes.
2 Q. So the official exchange rate at that point
3 was 38.7 soles oro to the dollar?
4 A. (Ms. Kunsman) Yes. I believe that's what it
5 was, yeah.
6 Q. And it was at that exact same rate from
7 January of 1967 through August of 1975; right?
8 A. I looked at that. I trust that's right,
9 yeah.
10 Q. And 38.7 soles oro per dollar was just as
11 likely to be in parity at any point in that time
12 range as any other point; right?
13 A. (Ms. Kunsman) Yeah. But, again,
14 parity--there are many different interpretations of
15 parity. It all depends on the base period, what do
16 you think the correct base period is. And like it
17 was brought up, you can't just look at an index and
18 say this is what the Perú parity rate is. This is
19 what the U.S. parity rate is. No, it is subjective
20 because of the base period.
21 Q. Right. And assigning 38.7 as the parity
22 rate in January of 1967 has a--
[Page 2508]
1 A. (Ms. Kunsman) '69.
2 Q. No. I'm sorry. I'm talking about '67
3 because it was pegged from January '67 through August
4 1975.
5 A. (Ms. Kunsman) Oh, okay.
6 (Overlapping speakers.)
7 Q. The point in time within that range at which
8 you choose to decide you were in parity has a
9 substantial effect on value, doesn't it?
10 A. (Ms. Kunsman) On what value?
11 Q. When you use that exchange rate to convert
12 to dollars, on the number of dollars that you get.
13 A. (Ms. Kunsman) Okay. Can you repeat the
14 question, please?
15 Q. Sure. The point in time between January of
16 1967 and August 1975 during the currency peg, when
17 you choose to say the exchange rates in parity at
18 this point in time, that has a significant effect on
19 the number of dollars you get when you use that rate
20 to convert; right?
21 PRESIDENT FERNÁNDEZ ARMESTO: When you use
22 that rate?
[Page 2509]
1 BY MR. RIEHL:
2 Q. When you use that as your Parity Exchange
3 Rate to convert to dollars.
4 A. (Ms. Kunsman) You're saying that when you
5 use that rate to create your base to calculate the
6 Parity Exchange Rate?
7 Q. Yes.
8 A. (Ms. Kunsman) Okay. If it's the same rate,
9 the 19--if it's the same rate, it shouldn't affect
10 then the value that you get as your Parity Exchange
11 Rate because all you're doing then is just taking the
12 differential in inflation, so it shouldn't have an
13 impact. But maybe I'm not understanding your
14 question.
15 Q. I'll represent to you that the real exchange
16 rate--do you understand what I mean by "real exchange
17 rate"?
18 A. (Ms. Kunsman) Official.
19 Q. No.
20 A. (Ms. Kunsman) Oh.
21 Q. So, do you understand that a real exchange
22 rate means an exchange rate adjusted for inflation at
[Page 2510]
1 some base period?
2 A. (Ms. Kunsman) Yes.
3 Q. And if I represent to you that the real
4 exchange rate in January 1967 was 20 percent higher
5 than the real exchange rate in January 1969, does
6 that sound about right to you?
7 A. (Ms. Kunsman) I didn't look at those numbers
8 exactly.
9 Q. Okay. But if that is correct, then choosing
10 January 1967 as your base period for the Parity
11 Exchange Rate would lower the values you get by
12 20 percent, wouldn't it?
13 A. (Ms. Kunsman) As your Parity Exchange Rate,
14 not as the base for the calculation, yes.
15 Q. Well, actually that is not what I'm asking,
16 because the Parity Exchange Rate formula uses--in the
17 MEF's Order uses January 1969 as a base; right?
18 A. (Ms. Kunsman) Right.
19 Q. And then it calculates the Parity Exchange
20 Rate at other points in time with reference to that
21 base; right?
22 A. (Ms. Kunsman) Correct.
[Page 2511]
1 Q. And what's important in that calculation is
2 what the rate was in real terms in the base period;
3 right?
4 A. (Ms. Kunsman) It uses the official exchange
5 rate in 1969, and then multiplies it by the Perú CPI
6 divided by the U.S. CPI at whichever date you're
7 trying to calculate the Parity Exchange Rate.
8 PRESIDENT FERNÁNDEZ ARMESTO: And the
9 official--what you have said is that the official
10 rate was the same from '67 to '75.
11 MR. RIEHL: Yes.
12 BY MR. RIEHL:
13 Q. But what I'm getting at is, as inflation
14 varied over that time, the real exchange rate varied
15 from January 1967 through August 1975; right?
16 A. (Ms. Kunsman) Yes.
17 Q. Yeah.
18 PRESIDENT FERNÁNDEZ ARMESTO: Although the
19 State never changed the official rate, that is your
20 point.
21 MR. RIEHL: My point is actually--my point
22 is actually that the real exchange rate varied quite
[Page 2512]
1 a bit during this time period.
2 PRESIDENT FERNÁNDEZ ARMESTO: Yeah. Yeah.
3 Yeah. The real changed while the official remained
4 the same.
5 MR. RIEHL: Right. Right.
6 BY MR. RIEHL:
7 Q. And the--if the real--so, if the real
8 exchange rate were higher in 1967 than in
9 1969--right?--if that real exchange rate is used as
10 the base in your Parity Exchange Rate question, all
11 of your parity exchange rates are higher; right?
12 A. (Ms. Kunsman) Now, I get your question.
13 Yes. If you use it, yes.
14 Q. And that means--and that means the dollar
15 values you get when you convert them are lower;
16 right?
17 A. (Ms. Kunsman) Right.
18 Q. And if the real exchange rate was 20 percent
19 higher in January of 1967 than in January of 1969,
20 using January of 1967 as the base rate would lower
21 the dollar values by 20 percent; right?
22 A. (Ms. Kunsman) If you used the real--yes, the
[Page 2513]
1 real exchange rate, yeah.
2 Q. Okay. And--yeah. And I'll represent to you
3 that the real exchange rate in August of 1975 was
4 25 percent lower than in January 1969.
5 Does that sound about right?
6 PRESIDENT FERNÁNDEZ ARMESTO: '65?
7 MR. RIEHL: August '75 is the end of the peg
8 period.
9 PRESIDENT FERNÁNDEZ ARMESTO: '75.
10 MR. RIEHL: Yes. Yeah.
11 PRESIDENT FERNÁNDEZ ARMESTO: Okay. Sorry.
12 '75.
13 MR. RIEHL: Yes.
14 BY MR. RIEHL:
15 MR. RIEHL: And so, I'll represent to you
16 that the real exchange rate in August 1975 was
17 25 percent lower than in January of 1969.
18 Does that sound about right?
19 A. (Ms. Kunsman) Okay. You're representing it
20 to me. Okay.
21 PRESIDENT FERNÁNDEZ ARMESTO: That
22 means--sorry. So, you are going very fast. That
[Page 2514]
1 means there had been 25 percent more inflation in
2 Perú than in the United States?
3 MR. RIEHL: Yes. I--yeah.
4 PRESIDENT FERNÁNDEZ ARMESTO: Yeah.
5 MR. RIEHL: Yeah.
6 THE WITNESS: (Ms. Kunsman) Relative.
7 PRESIDENT FERNÁNDEZ ARMESTO: Is that--that
8 relative?
9 THE WITNESS: Relative inflation, yeah.
10 PRESIDENT FERNÁNDEZ ARMESTO: Of course.
11 BY MR. RIEHL:
12 Q. And so, if that's true, then if the MEF had
13 used August 1975 instead of January 1969, its dollar
14 valuations would be 25 percent higher; right?
15 A. (Ms. Kunsman) Right. I mean, you are saying
16 the MEF would have used the real exchange rate and
17 not the Official Exchange Rate.
18 PRESIDENT FERNÁNDEZ ARMESTO: Yeah. The
19 problem which counsel is bringing up seems very
20 simple. If you have a long-term peg with very--
21 THE WITNESS: Yeah.
22 PRESIDENT FERNÁNDEZ ARMESTO: With different
[Page 2515]
1 inflation rates in the United States and Perú,
2 depending on which date within the peg you choose has
3 an impact on the outcome. I think that was your
4 point.
5 MR. RIEHL: Mr. President, as usual you have
6 seen it exactly.
7 THE WITNESS: (Ms. Kunsman) Yes.
8 PRESIDENT FERNÁNDEZ ARMESTO: And that it
9 would--it would be better for investors. Let me say,
10 in that way, it would be better for investors if the
11 base had been '75 and not '69.
12 THE WITNESS: (Ms. Kunsman) Right.
13 (Comments off the microphone.)
14 PRESIDENT FERNÁNDEZ ARMESTO: Or is it the
15 contrary?
16 MR. RIEHL: I'm sorry.
17 PRESIDENT FERNÁNDEZ ARMESTO: It would have
18 been better for investors if the base used to
19 calculate the Parity Exchange Rate had been '75?
20 MR. RIEHL: That's right.
21 PRESIDENT FERNÁNDEZ ARMESTO: 75. Yeah.
22 Rather than '69.
[Page 2516]
1 MR. RIEHL: That's correct.
2 PRESIDENT FERNÁNDEZ ARMESTO: So, the closer
3 you get to '67, the worse for investors. The closer
4 you get to '75, the better for investors.
5 MR. RIEHL: It's not quite that linear. The
6 real exchange rate had some fluctuations that I
7 heard.
8 PRESIDENT FERNÁNDEZ ARMESTO: Okay. Okay.
9 And we do not have any--do you have any good reason,
10 any economic reason why '69 was chosen? What is the
11 explanation? Is there any explanation in the MEF
12 Decrees why they have choose '69? Have you seen any
13 internal documents saying, we have chosen '69 because
14 they have--because, really, at this stage it was
15 really the moment of equilibrium?
16 THE WITNESS: (Mr. Kaczmarek) All we've seen
17 I think is that it corresponds to when the Land
18 Reform program and the Bond program was--took effect.
19 So, at the start of the program. So, you know, they
20 were using official rates at the time. That's what
21 people could exchange currency for. That was a
22 real-world constraint, and then they adjust for
[Page 2517]
1 inflation from that point forward. That's what they
2 are doing.
3 So, is that economically justified? Sure.
4 I mean, if you're going to apply a real-world
5 constraint that existed, which is that Official
6 Exchange Rate, why wouldn't that be justified.
7 PRESIDENT FERNÁNDEZ ARMESTO: So, the
8 argument is that '69 is the start of the program.
9 That is really the--your argument.
10 THE WITNESS: (Mr. Kaczmarek) Yes.
11 BY MR. RIEHL:
12 Q. But you didn't do any study about whether
13 that would provide a--the type of Parity Exchange
14 Rate that economists would agree on; right?
15 A. (Mr. Kaczmarek) Well, we didn't because,
16 frankly, nobody says parity has to be used to begin
17 with or how parity has to be used. One could
18 introduce parity. One could have just used official
19 exchange rates. That's--sort of all this was open to
20 interpretation and implementation.
21 Q. But you have done no study of whether that
22 was an economically reasonable choice, have you?
[Page 2518]
1 A. (Mr. Kaczmarek) Of using the '69?
2 Q. Correct.
3 A. (Mr. Kaczmarek) When you say an
4 "economically reasonable," it suggests as opposed to
5 something else. And that really depends upon what
6 your objective is.
7 Q. You've used the phrase "economically
8 reasonable" in your own Report. Do you have an
9 understanding of what that phrase means?
10 A. (Mr. Kaczmarek) Yes, meaning there is
11 nothing unsound about it.
12 Q. And you have done no study--
13 A. (Mr. Kaczmarek) Nothing irrational.
14 Q. You have done no study of the economic
15 circumstances that would inform the choice of a base
16 period for the Parity Exchange Rate, have you?
17 A. (Mr. Kaczmarek) Other than knowing that that
18 was the start of the program, no. But there is
19 nothing economically unsound about it.
20 PRESIDENT FERNÁNDEZ ARMESTO: Well, can I
21 make one question. When did the Peruvian--when was
22 there an efficient market to calculate the exchange
[Page 2519]
1 rate? Because a good test, I would say, for a
2 parity, you run it into a period when there is--when
3 the market gives you a good real exchange rate, and
4 you see where the model leads you into reality
5 correctly. If the model leads you into a nonreality,
6 then I would no longer submit to you that this parity
7 is--exchange rate had not been properly calculated.
8 Would that make sense?
9 THE WITNESS: (Mr. Kaczmarek) If I
10 understand the question, and I think, again, this
11 goes back to something my colleague has said, the
12 more years you expand this and the more you observe,
13 you are going to get different answers; right? If
14 you look at a window that's this small, and look at
15 the data in terms of years and exchange rates, you'll
16 get one answer.
17 If you expand that, you're going to get
18 another answer. If you expand it 100 years, 200
19 years, you're going to get different answers, because
20 the base period is really what matters; right?
21 That's why it's so hard to say one is right and one
22 is wrong. You have to say, well, what is the
[Page 2520]
1 objective? What are we really trying to do? What's
2 the problem we are trying to solve?
3 ARBITRATOR DRYMER: And what was the problem
4 that the MEF was trying to solve here, in your view,
5 that renders that Decision reasonable from an
6 economic perspective?
7 THE WITNESS: (Mr. Kaczmarek) My view is the
8 MEF is trying to solve--at least this is what the
9 Constitutional Tribunal's formula indicates--paying
10 off Coupons that were not paid. Not going back to
11 the beginning of the Bond and redoing the Bonds,
12 paying off the Coupons. Is what they have done in
13 terms of exchange rates reasonable? Sure, yes.
14 Absolutely.
15 PRESIDENT FERNÁNDEZ ARMESTO: Because parity
16 comes from the Constitutional Court.
17 THE WITNESS: (Mr. Kaczmarek) Yeah.
18 PRESIDENT FERNÁNDEZ ARMESTO: It is the
19 Constitutional Court which says Parity Exchange Rate.
20 And this is why it is important to us to understand
21 what they meant by "Parity Exchange Rate" and how you
22 calculated Parity Exchange Rate and what is the
[Page 2521]
1 proper way of doing that.
2 THE WITNESS: (Mr. Kaczmarek) And I can only
3 say, again, it depends upon your constraints. If
4 you're trying to, without sort of hindsight bias
5 affecting what you're doing, because here we
6 are--right?--in 2013 doing an ex post what is--what
7 should we do like for interest rates, I don't think
8 you want to a bias that let's pick the best Rate of
9 Return, the highest Rate of Return, if they had been
10 the smartest people back in 1992 and invested the
11 money; right?
12 So, if you're simulating something of what
13 would have been a reasonable exchange back at the
14 time, using information known at the time, I think
15 the MEF formula is perfectly valid. If you take
16 Professor Edwards' view that, no, no, we are not
17 limited to information knowable at the time. If we
18 are going to open up the door to later rates, okay.
19 But that's just applying different constraints and
20 we've showed you what the impact of that is; right?
21 ARBITRATOR DRYMER: May I ask a further
22 question or two? I don't know the answer to this
[Page 2522]
1 question. Have you looked at--were you provided and
2 have you looked at the supporting documentation that
3 came along with the Supreme Decrees? The Statement
4 of Reasons, all of that that we've discussed with
5 other Witnesses over the last couple of days?
6 THE WITNESS: (Ms. Kunsman) We were provided
7 some internal memorandums, yes.
8 ARBITRATOR DRYMER: Did you see an analysis
9 along these lines? In other words, if the formula,
10 including the parity rate mechanism is reasonable in
11 accordance with an objective, did you see any
12 analysis of that in those documents?
13 THE WITNESS: (Ms. Kunsman) Regarding using
14 the 1969 as a base?
15 ARBITRATOR DRYMER: Yes.
16 THE WITNESS: (Ms. Kunsman) No.
17 PRESIDENT FERNÁNDEZ ARMESTO: But you said
18 there had been one parity rate before, one
19 calculation, and then it was changed in 2017.
20 Do you remember that?
21 THE WITNESS: (Ms. Kunsman) Yes.
22 PRESIDENT FERNÁNDEZ ARMESTO: Now, can you
[Page 2523]
1 explain to me what was changed and have you seen any
2 justification what it--why it was changed?
3 THE WITNESS: (Ms. Kunsman) So, what was
4 changed was the base period, the base period was
5 originally from 1950 to 1982, being 1982 when the
6 last Bond was--Agrarian Bond was issued. So, that
7 was the first period used and then it changed. And
8 the 1969, I don't know the reasoning why.
9 PRESIDENT FERNÁNDEZ ARMESTO: So, the
10 original period was not one month. It was 32 years.
11 THE WITNESS: (Ms. Kunsman) Correct.
12 PRESIDENT FERNÁNDEZ ARMESTO: And that was
13 then changed to one month. This is the only change
14 from one system to the other.
15 THE WITNESS: (Ms. Kunsman) There was
16 another change. There was the first one was 1950 to
17 1982, then there was a subsequent one of 1950 to
18 2013, which was the--or, no. 2014. I don't remember
19 exactly. It was the issuance of that specific
20 Decree, and then it was changed in 1969, and the
21 original period was based on Professor
22 Seminario's--an economist that apparently doesn't
[Page 2524]
1 agree with other economists on the period, and--but
2 had used another period.
3 PRESIDENT FERNÁNDEZ ARMESTO: Okay. But to
4 get it clear, initially the base period was 1950
5 to 1982.
6 THE WITNESS: (Ms. Kunsman) Yes.
7 PRESIDENT FERNÁNDEZ ARMESTO: And then it
8 was changed to one month in 1969?
9 THE WITNESS: (Ms. Kunsman) Ultimately.
10 There was another change in between, yes.
11 PRESIDENT FERNÁNDEZ ARMESTO: Yeah. In
12 between.
13 THE WITNESS: (Ms. Kunsman) Yes.
14 PRESIDENT FERNÁNDEZ ARMESTO: You have not
15 seen any justification.
16 THE WITNESS: (Ms. Kunsman) No.
17 PRESIDENT FERNÁNDEZ ARMESTO: And have you
18 run the numbers? I mean, would the numbers come out
19 very differently if you apply one period--one method
20 of calculation or the other?
21 THE WITNESS: (Ms. Kunsman) They wouldn't
22 change the numbers that much because, as we showed in
[Page 2525]
1 our calculation, using a different Parity Exchange
2 Rate doesn't have that much of an impact in the
3 calculation.
4 PRESIDENT FERNÁNDEZ ARMESTO: Well, it took
5 us 40 million, no. It was 40 million--
6 THE WITNESS: (Ms. Kunsman) 40 million. But
7 the difference would have been less. I know it was
8 significantly less than 40 million, because the most
9 aggressive rate--the most aggressive parity rate was
10 the one Edwards presented.
11 PRESIDENT FERNÁNDEZ ARMESTO: But in any
12 case, the change of methodology reduced the
13 reparation to the Bondholders?
14 THE WITNESS: (Ms. Kunsman) Yes.
15 MR. HAMILTON: Mr. President, if I could. I
16 won't object, I simply will note that you are asking
17 them a question for a reason that is beyond the scope
18 of their Report. They weren't asked to review
19 every--look for any reasoning in MEF.
20 ARBITRATOR DRYMER: Understood.
21 MR. HAMILTON: So, I'm taking note, if it
22 were--if the question had been raised by the other
[Page 2526]
1 side, I would have raised an objection because the
2 question goes to other issues, and they may not
3 realize what other issues you're aiming for, and I
4 don't want to read in a Post-Hearing Brief that
5 they've made some admission because they haven't.
6 Thank you.
7 PRESIDENT FERNÁNDEZ ARMESTO: To get your
8 objection. What is it exactly--that you--to
9 what--so, that I do not commit the mistake you are
10 drawing my attention to, but what is--exactly what
11 they had not analyzed?
12 MR. HAMILTON: Sure. They were asked about
13 looking at all the internal MEF documents, what
14 analysis have they seen or not seen. Their task is
15 the task set out in their Reports, and that is what
16 has been explained here, and so their response is not
17 that responsive necessarily to the question that you
18 might be asking. That's my comment. Thank you.
19 PRESIDENT FERNÁNDEZ ARMESTO: Yeah. It is
20 just that they--I'm sure they have spoken with
21 representatives of Perú and might have had access to
22 some information. If they haven't, it was not their
[Page 2527]
1 job, so--
2 THE WITNESS: (Ms. Kunsman) No, we did not
3 do that.
4 PRESIDENT FERNÁNDEZ ARMESTO: You never
5 spoke with any civil servant of Perú?
6 THE WITNESS: (Ms. Kunsman) No.
7 PRESIDENT FERNÁNDEZ ARMESTO: Then you could
8 not have access.
9 BY MR. RIEHL:
10 Q. Do you recall in Professor Edwards'
11 testimony that he mentioned there are other methods
12 that could be used to calculate Parity Exchange
13 Rates?
14 A. (Mr. Kaczmarek) If you could refer us to
15 that section, that would be helpful.
16 Q. Okay. I was just asking if you remember.
17 That's fine.
18 Are you aware of whether or not there are
19 other methods that could be used to calculate Parity
20 Exchange Rates?
21 A. (Mr. Kaczmarek) Other--certainly starting
22 with other base periods, yes, but I think it's agreed
[Page 2528]
1 that, once you have your base period and you feel you
2 are at parity, it is inflation differentials between
3 the two countries.
4 Q. And aside from methods that would use a base
5 period like this, are you aware of whether or not
6 there are other ways to calculate Parity Exchange
7 Rates?
8 A. (Mr. Kaczmarek) No. That is--inflation
9 differentials are principally the methodology we use
10 to calculate parity rates.
11 Q. And in your work on this case, you didn't go
12 out looking to see if there are other ways that
13 economists do that? Is that correct?
14 A. (Mr. Kaczmarek) No. That--inflation
15 differentials are the way I do it all the time in my
16 Valuation Models.
17 Q. And in your work on this case did you review
18 any articles about Parity Exchange Rates?
19 A. (Mr. Kaczmarek) No.
20 Q. And you're aware, aren't you, that there is
21 a field of economics in which economists study Parity
22 Exchange Rates and how to calculate them; is that
[Page 2529]
1 right?
2 A. (Mr. Kaczmarek) I'm sure, yes. I'm sure
3 there is.
4 Q. And it sounds from that answer is, though,
5 you haven't really had exposure to that work, though.
6 Is that accurate?
7 A. (Mr. Kaczmarek) It's not a deep-dive topic I
8 like to spend a lot of time on. Like I said, in
9 valuation, which is my profession, purchasing power,
10 parity assumptions, inflation differential is the
11 principal assumption we use.
12 Q. And is it fair to say you have not spoken
13 with economists about how they calculate Parity
14 Exchange Rates?
15 A. (Mr. Kaczmarek) For purposes of this case,
16 no, I have not.
17 Q. You express a view in your Report that a
18 room of economists would likely all reach different
19 conclusions as to which year or period best reflects
20 the Parity Exchange Rate.
21 Do you remember that?
22 A. (Mr. Kaczmarek) Did we say this in our
[Page 2530]
1 Report?
2 Q. Yes.
3 A. (Mr. Kaczmarek) It's probably true then.
4 Q. I take it that statement was not informed by
5 any actual discussions with actual economists about
6 that point; is that right?
7 A. (Mr. Kaczmarek) No. I'd say it is our
8 general experience, and I would think most of the
9 Tribunal's experience of getting Quantum Experts in a
10 room. It is difficult for us all to agree on
11 everything.
12 MR. RIEHL: Mr. President, I don't have a
13 whole lot more, but I do have a bit, and I--you know,
14 I'm conscious that the Witnesses have been on for a
15 while. I'm in your hands.
16 PRESIDENT FERNÁNDEZ ARMESTO: How long do
17 you have to go, Mr. Riehl?
18 MR. RIEHL: Obviously, I need to consult
19 with the wise Mr. Friedman, among others. I think it
20 will be in the neighborhood of 10 or 15 minutes.
21 PRESIDENT FERNÁNDEZ ARMESTO: Yeah. Yeah.
22 Because I do have still--have a couple questions, and
[Page 2531]
1 there may be some redirect, also. But I do have a
2 couple of questions which I would like to put to the
3 Experts. So, what you were proposing that we have a
4 break?
5 MR. RIEHL: I think potentially, yes, and
6 I'm just mindful that Witnesses, when they are going
7 for a while. And it would help me to organize my
8 thoughts, maybe pare down the remainder as well.
9 PRESIDENT FERNÁNDEZ ARMESTO: Very good.
10 Shall we come back then at 1:10? In 8 minutes?
11 MR. RIEHL: Yes. That would be great.
12 PRESIDENT FERNÁNDEZ ARMESTO: 8 minutes.
13 (Brief recess.)
14 PRESIDENT FERNÁNDEZ ARMESTO: We resume the
15 Hearing.
16 Mr. Riehl?
17 MR. RIEHL: Yes, Mr. President. I
18 fortunately can report I will be, I think, very
19 brief.
20 PRESIDENT FERNÁNDEZ ARMESTO: Very good.
21 MR. RIEHL: There is one quick point I need
22 to note, though.
[Page 2532]
1 You had expressed an interest, potentially,
2 in hearing further from Professor Edwards. He has
3 travel reservations that require him to leave by 2:30
4 today, so I wanted to make you--
5 PRESIDENT FERNÁNDEZ ARMESTO: We are all on
6 reasonably the same wavelength.
7 MR. RIEHL: Very good.
8 PRESIDENT FERNÁNDEZ ARMESTO: So, it's now a
9 quarter past 1:00. We will go an hour.
10 MR. RIEHL: Yes.
11 BY MR. RIEHL:
12 Q. So, I'd like to ask you to turn, please, to
13 Tab 3. This is the Amended Expert Report of
14 Professor Edwards from July 2018, CER-4. And I'd
15 like you to turn, please, to Appendix P of that
16 Report.
17 And this, Mr. President, is the chart that
18 you asked for, a comparison of the Official Exchange
19 Rate, the parity rate that Professor Edwards
20 calculated and the Parity Exchange Rate used in the
21 August 2017 MEF formula.
22 Is it your understanding that that is what
[Page 2533]
1 this diagram shows?
2 A. (Ms. Kunsman) Yes.
3 Q. Would you agree this is using a logarithmic
4 scale?
5 A. (Ms. Kunsman) Yeah.
6 Q. If you look for the period from, very
7 roughly, about 1994 through 2018, what this shows is
8 that the MEF's Parity Exchange Rate from the 2017
9 August formula is on the order of about 2.5 or
10 3 times as high as the Official Exchange Rate during
11 that period.
12 Is that roughly correct?
13 A. (Ms. Kunsman) Yes.
14 Q. And so, if you used the Parity Exchange Rate
15 that the MEF uses on the way in when you're
16 converting back at the end, that would roughly
17 increase values by about 2.5 or 3 times; is that
18 right?
19 A. (Mr. Kaczmarek) As compared to what?
20 Q. As compared to what is currently in the MEF
21 Bondholder Process.
22 A. (Mr. Kaczmarek) So, again, using the
[Page 2534]
1 preferred method of Professor Edwards, I think, as I
2 showed, last clipped Coupon, the MEF formulas give
3 3.4 million. If we implement his approach--
4 Q. You might not understand the question. The
5 question is much simpler than that.
6 If you use the formulas in the August 2017
7 MEF Supreme Decree, but the only change you made was
8 to use the Parity Exchange Rate that the MEF uses
9 when you convert back to soles, that would
10 roughly--that would increase the value by about 2.5
11 or 3 times; is that right?
12 A. (Mr. Kaczmarek) I have no idea. We didn't
13 do that calculation.
14 PRESIDENT FERNÁNDEZ ARMESTO: Because,
15 although it looks very small, this is
16 logarithmic--this is your argument, and it is, in
17 fact, quite a lot.
18 MR. RIEHL: I have no further questions,
19 Mr. President.
20 PRESIDENT FERNÁNDEZ ARMESTO: Thank you.
21 Any redirect? It is you? Yes.
22 Mr. Hamilton?
[Page 2535]
1 REDIRECT EXAMINATION
2 BY MR. HAMILTON:
3 Q. Thank you, Mr. President and Members of the
4 Tribunal.
5 We have very limited time, so I will be
6 brief and invite you to do the same.
7 Mr. Kaczmarek, why does it make economic
8 sense to pick one-year rates for this retrospective
9 calculation instead of long bond rates?
10 A. (Mr. Kaczmarek) As I think I touched upon,
11 the benefit of using one-year rates, although
12 generally smaller, because the yield curve is
13 upward-sloping, you are reinvesting that each year at
14 the market rate. Obviously, using a longer-term rate
15 has higher interest rate risk exposure, so if
16 inflation happened to go up during that period of
17 time, it would erode the value of bond.
18 If we knew inflation rates had
19 increased--this is my ex post bias concern--we would
20 say, "Oh, no, no, no, let's not use the longer-term
21 bond, because it would erode in value. Let's use
22 short-term. Oh, inflation didn't go up sharply after
[Page 2536]
1 this time. Ah, now we are safe; we can use the
2 long-term bond." This is the problem of the ex post
3 bias, in my view.
4 Q. Thank you. And you also were given a
5 somewhat messy hypothetical comparing different
6 bonds, including Bond 8615.
7 Do you remember that?
8 A. (Mr. Kaczmarek) Yes.
9 Q. And in response to questions from my
10 counterpart, you said both Bondholders are
11 overcompensated.
12 What did you mean by that, and what does it
13 tell us about the fairness and reasonableness of the
14 MEF approach?
15 A. (Mr. Kaczmarek) Right. This was the Bond
16 that was actually on Page 25 of our presentation this
17 morning. And the example, and what I meant by my
18 answer, was: The formula goes back to last clipped
19 coupon, which already holds Perú responsible for a
20 nonpayment event simply because somebody didn't
21 decide go in and ask for payment.
22 So, it is, by definition, already very
[Page 2537]
1 favorable, in my view. And I think the suggestion
2 and the questions to us were: Well, if somebody had
3 the same Bond and didn't clip any of them, they would
4 get a better deal. True. I don't think that means
5 that we have to make everybody get the best deal out
6 of this. My view would be, if we're going to fix it,
7 let's fix it and move back to the bank closure date.
8 Basically, we don't give out three cherries
9 and no cherries. If you're going to have
10 equilibrium, no cherries for everybody. In my view,
11 that would be the proper way to do it.
12 Q. And correspondingly, the second half of my
13 question: What does this tell us about the overall
14 MEF approach?
15 A. (Mr. Kaczmarek) I think the formula imposed
16 upon the MEF to utilize is beneficial. As I said, if
17 we started with bank closure, or maturity date of a
18 coupon, we are not going to get--nobody is going to
19 get any money out of this process. It is not worth
20 going through, period.
21 So, the formulas that were imposed on it by
22 going back to last clipped coupon is beneficial,
[Page 2538]
1 because it does restore value to the Bonds when the
2 nonpayment event starts. So, it's a very beneficial
3 process, in my view.
4 Q. Thank you, Mr. Kaczmarek.
5 MR. HAMILTON: No further questions,
6 Mr. President.
7 MR. RIEHL: If I could--I apologize. I do
8 have just one very brief thing.
9 PRESIDENT FERNÁNDEZ ARMESTO: Of course.
10 RECROSS-EXAMINATION
11 BY MR. RIEHL:
12 Q. And it relates to the questions about the
13 one-year Treasury Rate. I'd like you to turn,
14 Mr. Kaczmarek, in your First Report, which is
15 Tab 1--this is RER-5--to Page 24, footnote--
16 PRESIDENT FERNÁNDEZ ARMESTO: Page?
17 MR. RIEHL: 24.
18 PRESIDENT FERNÁNDEZ ARMESTO: Yes.
19 MR. RIEHL: Footnote 110. And this is a
20 very technical footnote. I promise I'm not going to
21 ask technical questions about it. But please read it
22 first.
[Page 2539]
1 MR. HAMILTON: Mr. President, excuse me. I
2 didn't ask about this on redirect.
3 PRESIDENT FERNÁNDEZ ARMESTO: You did ask
4 on--did you ask on short-term versus long-term bonds,
5 and he says--your colleague says that this has some
6 relevance. Yeah. I have read it. Very complex,
7 yes.
8 BY MR. RIEHL:
9 Q. Mr. Kaczmarek, what that footnote says is
10 what the MEF actually does is not to apply the U.S.
11 Treasury Bill Rate one year at a time, but instead
12 uses a daily rate which is based on averaging that
13 one-year rate; is that right?
14 A. (Ms. Kunsman) Yes, correct, daily rates.
15 Q. Yeah. And if one wanted to apply long bond
16 rates, they could apply a similar method which would
17 take into account inflation as it was changing day by
18 day; right?
19 A. (Mr. Kaczmarek) As I indicated, there are
20 hundreds of ways one could do the interest rate
21 calculation, yes. That could be one of them.
22 Q. That is one of the ways that could be done;
[Page 2540]
1 right?
2 A. (Mr. Kaczmarek) Certainly.
3 Q. And that would address the problem you
4 identified during your redirect examination; right?
5 A. (Mr. Kaczmarek) I don't think I was
6 addressing a problem. I mean, I think, again, the
7 Tribunal has to first start with, in my view, that
8 this is--the methodology used by the MEF is so out of
9 bounds and so wrong that it needs to be fixed. And I
10 just don't view it as being so wrong that it needs to
11 be fixed.
12 Q. Okay.
13 MR. RIEHL: I have no further questions.
14 PRESIDENT FERNÁNDEZ ARMESTO: Very good.
15 Thank you.
16 Professor Stern?
17 ARBITRATOR STERN: No questions.
18 PRESIDENT FERNÁNDEZ ARMESTO: Mr. Drymer?
19 ARBITRATOR DRYMER: Oh, my turn? No, thank
20 you. Again, my questions were addressed earlier,
21 either by myself, by you, or by counsel. So, thank
22 you.
[Page 2541]
1 PRESIDENT FERNÁNDEZ ARMESTO: I have just
2 one question--that is the good news--and it relates
3 to something which we have really addressed very
4 little. Only Professor Edwards spoke very briefly
5 about it, and that is the formula of the Ministry
6 does not actually lead to payment in cash. It
7 leads--only for small amounts. For bigger amounts,
8 it leads to payment with Bonds. And I remember
9 Professor Edwards made a calculation, and he then
10 said, if all existing Bondholders--he took some
11 numbers, and then he said, if these Bondholders are
12 all paid and they are all paid with a 30-year bond,
13 then the impact on the budget is de minimis, is
14 small.
15 You have not addressed at all the issue of
16 payment with bonds and how you would calculate bond
17 value to be equivalent to cash value, and you have
18 not addressed at all that the MEF Decree actually
19 results in payment with--I think it says "a menu of
20 bonds."
21 Do you have any comment on this?
22 THE WITNESS: (Ms. Kunsman) I think what
[Page 2542]
1 Professor Edwards was referring to was to the
2 Emergency Decree in 2000, that it would be paid with
3 a 30-year bond that would--yes, that has a huge
4 impact on the calculation, because that bond did not
5 have interest. It was interest-free and the
6 principal would not be paid until 2030.
7 However, in this case, the MEF way, I
8 understand, that they could be paid with bonds,
9 currently market-traded bonds that would be based on
10 market rates, not a newly created bond just for this
11 purpose.
12 But, yes, you're right, it makes a
13 difference. But we haven't calculated it, because we
14 don't know what bond they would pick out of all
15 those.
16 PRESIDENT FERNÁNDEZ ARMESTO: Because you
17 have--have you looked at the 2017 Decree?
18 THE WITNESS: (Ms. Kunsman) Yes.
19 PRESIDENT FERNÁNDEZ ARMESTO: Can I take you
20 to Article 16?
21 THE WITNESS: (Ms. Kunsman) Yeah. What tab
22 is it?
[Page 2543]
1 PRESIDENT FERNÁNDEZ ARMESTO: It is the TUA,
2 the text unificado (in Spanish).
3 THE WITNESS: (Ms. Kunsman) Yes, but where?
4 PRESIDENT FERNÁNDEZ ARMESTO: It was
5 prepared by--maybe someone can blow it up. I don't
6 have the reference.
7 MR. RIEHL: It is Tab 43. Document CE-275.
8 PRESIDENT FERNÁNDEZ ARMESTO: Article 16,
9 Ms. Kunsman.
10 THE WITNESS: (Ms. Kunsman) Article 16.
11 Yes, I'm there.
12 PRESIDENT FERNÁNDEZ ARMESTO: Why don't you
13 read it first, and then--
14 THE WITNESS: (Ms. Kunsman) Payment with
15 sovereign bonds--
16 PRESIDENT FERNÁNDEZ ARMESTO: Paragraph 16
17 says: "Payment in cash up to the maximum amount of
18 100 soles." The amount is irrelevant. I mean,
19 100,000 soles for this Arbitration is irrelevant. It
20 may be important for small bondholders.
21 THE WITNESS: (Ms. Kunsman) Right. But here
22 it says "freely transferable."
[Page 2544]
1 (Interruption.)
2 THE WITNESS: (Ms. Kunsman) Sorry. I'll
3 stay in English.
4 PRESIDENT FERNÁNDEZ ARMESTO: I'll put you
5 the question, because it says if they should be--they
6 can be paid with sovereign bonds, freely
7 transferable, similar conditions of other bonds, and
8 then comes this very strange phrase, or a very--"el
9 menú." "Menú" in Spanish is normally the menu you
10 get in a restaurant, so "el menú de los bonos" of the
11 bonds to be delivered would be defined by the
12 Ministry, by the Ministry. And then that is
13 basically what it says.
14 So, have you studied what this menu is,
15 whether--how these bonds are valued?
16 THE WITNESS: (Ms. Kunsman) No, we have not.
17 We have just taken it from here that they would be
18 freely tradable market bonds that you could sell.
19 PRESIDENT FERNÁNDEZ ARMESTO: For the same--
20 that you could sell for the same amount as the cash?
21 THE WITNESS: (Ms. Kunsman) As the cash,
22 yes.
[Page 2545]
1 PRESIDENT FERNÁNDEZ ARMESTO: So from an
2 economic point of view, the proper way of
3 interpreting this is bonds which can be--which have
4 the same Market Value as the cash component.
5 THE WITNESS: (Ms. Kunsman) Yeah.
6 PRESIDENT FERNÁNDEZ ARMESTO: Ms. Kunsman,
7 thank you very much.
8 THE WITNESS: (Ms. Kunsman) You're welcome.
9 PRESIDENT FERNÁNDEZ ARMESTO: Mr. Kaczmarek,
10 thank you very much. We have now finalized your
11 examination, and you are free to stay with us or to
12 leave.
13 (Witnesses step down.)
14 PRESIDENT FERNÁNDEZ ARMESTO: And that now,
15 I think, takes us to the end of our Hearing and to
16 the wrapping up.
17 Have you been--you have not been able to
18 speak to each other, have you? No, to confer.
19 Very good. So, what you have basically
20 agreed, I think, is--do you have an idea? Let me ask
21 you this question, Mr. Friedman: What would be your
22 preferred solution? One single written Post-Hearing
[Page 2546]
1 Brief?
2 MR. FRIEDMAN: Thank you, Mr. President.
3 We believe, obviously, Post-Hearing Briefs
4 are something that would be very helpful to the
5 Tribunal, and I think the Parties need the
6 opportunity to sort of summarize their cases at this
7 point.
8 I think we believe that two rounds would be
9 more effective. I think we would like the
10 opportunity to--sometimes in Post-Hearing Briefs,
11 things get characterized.
12 PRESIDENT FERNÁNDEZ ARMESTO: Can I
13 interrupt you?
14 MR. FRIEDMAN: Yes.
15 PRESIDENT FERNÁNDEZ ARMESTO: I forgot
16 Professor Edwards. Sorry. And he's leaving. Sorry
17 to be so rude to interrupt you, but I think we should
18 deal with Professor Edwards first.
19 Professor Edwards, you have seen--why don't
20 you sit down anywhere near a microphone.
21 MR. HAMILTON: Simply a procedural question:
22 Are Experts still sitting here?
[Page 2547]
1 PRESIDENT FERNÁNDEZ ARMESTO: Yeah, yeah.
2 MR. HAMILTON: I don't know where this is
3 headed, so I simply--
4 PRESIDENT FERNÁNDEZ ARMESTO: No, no, no.
5 I'm just asking that he confirm certain calculations,
6 but I would like Mr. Kaczmarek to be around. Is he
7 there? And Ms. Kunsman? Is Ms. Kunsman still there?
8 (Comments off microphone.)
9 PRESIDENT FERNÁNDEZ ARMESTO: Shall we wait
10 for her?
11 (Comments off the record.)
12 SEBASTIAN EDWARDS, CLAIMANTS' WITNESS, RECALLED
13 PRESIDENT FERNÁNDEZ ARMESTO: I think that
14 there are a couple of--how would you call it? The
15 cascade?
16 ARBITRATOR DRYMER: Waterfall.
17 PRESIDENT FERNÁNDEZ ARMESTO: The waterfall.
18 ARBITRATOR DRYMER: That wasn't my term.
19 That was Mr. Kaczmarek's term.
20 PRESIDENT FERNÁNDEZ ARMESTO: I just wanted,
21 now that you--at some stage, I think it would be
22 fair, Mr. Hamilton, that we have the confirmation
[Page 2548]
1 from Mr.--from Professor Edwards that the cascade,
2 which is--the waterfall, which is in Page 26--
3 ARBITRATOR DRYMER: "Cascade" is a good word
4 as well.
5 PRESIDENT FERNÁNDEZ ARMESTO: Okay. 26, 28,
6 35, and 35, I think it is basically. That
7 these--okay. Ms. Kunsman is now with us, so we can
8 continue.
9 QUESTIONS FROM THE TRIBUNAL
10 PRESIDENT FERNÁNDEZ ARMESTO: Whether these
11 numbers--the numbers are correct, and you have heard
12 what they are said to represent.
13 So my question--I would kindly ask you not
14 to argue on these numbers, just whether they are
15 mathematically correct or not or you would like to
16 redo the math to see if they are correct.
17 THE WITNESS: Mr. President, this is the
18 first time I see this cascade or waterfall, so I
19 would have to do the math to answer that question.
20 PRESIDENT FERNÁNDEZ ARMESTO: Okay. Could
21 we agree--how long would you need, Professor?
22 THE WITNESS: Five minutes.
[Page 2549]
1 PRESIDENT FERNÁNDEZ ARMESTO: Five minutes.
2 No. We have to do this--I mean, one week?
3 MR. HAMILTON: Mr. President, I'm sorry.
4 This was directly from the Quantum Expert Report.
5 This was from the Quantum Expert Report 2 submitted
6 last September. Nobody has been surprised by this
7 information. We would be surprised if he gets to put
8 in a bonus Report.
9 PRESIDENT FERNÁNDEZ ARMESTO: A what?
10 MR. HAMILTON: Bonus comments on this issue.
11 It was already provided in September.
12 PRESIDENT FERNÁNDEZ ARMESTO: It is--my only
13 point is I want to be sure that these numbers are
14 agreed among between the Experts.
15 THE WITNESS: I would assume that they are.
16 I assume that we will agree, but I would like to
17 check them, and that's why I said five minutes. But
18 a week. A week would be perfect.
19 PRESIDENT FERNÁNDEZ ARMESTO: Okay.
20 THE WITNESS: Five days.
21 PRESIDENT FERNÁNDEZ ARMESTO: Let's not,
22 please--I hear--you have heard Mr. Hamilton. We
[Page 2550]
1 don't want a new Report. We want just one single
2 letter from you saying the numbers are fine or my
3 numbers are the following. And you put your numbers,
4 and please let's not get into more discussion.
5 If we need some further discussion, we will
6 come back to both Experts, but at this stage, please
7 only--hopefully, you will confirm these numbers are
8 correctly done. Okay?
9 THE WITNESS: Yes, sir.
10 PRESIDENT FERNÁNDEZ ARMESTO: And in a
11 week's time.
12 THE WITNESS: Yes, sir.
13 PRESIDENT FERNÁNDEZ ARMESTO: Very good.
14 And let's adhere to that so that we don't have a
15 procedural incident with this.
16 THE WITNESS: Yes, sir.
17 PRESIDENT FERNÁNDEZ ARMESTO: If we feel
18 that we need certain additional information, we will
19 go to both Experts. Okay.
20 Professor Edwards, we wish you a safe trip
21 home.
22 THE WITNESS: Thank you, sir. Likewise.
[Page 2551]
1 (Witness steps down.)
2 PRESIDENT FERNÁNDEZ ARMESTO: Very good.
3 So, sorry for that interruption, but I now
4 have Professor Edwards off my conscience, and his
5 trip is--and we have solved that.
6 Sorry for that. Now, I give you back the
7 floor.
8 You were saying that you would like one long
9 and then a very short Post-Hearing Brief.
10 MR. FRIEDMAN: Yes. If I may make just a
11 comment arising out of what you just asked Professor
12 Edwards.
13 It's obvious that the Experts from both
14 sides, I think, would be able to develop scenarios,
15 so to the extent that the Tribunal in its questions
16 comes up with questions relating to what would it
17 look like if this had been the state of the world or
18 something, I'm highly confident that the Experts
19 could, in consultation with each other, answer those
20 questions.
21 PRESIDENT FERNÁNDEZ ARMESTO: I'm sure they
22 could, but that requires some deliberation by the
[Page 2552]
1 Tribunal, and we will see where we stand.
2 But I just wanted to be sure that these
3 numbers are. Since they purport to refer to
4 Professor Edwards, I think it is fair to give him the
5 opportunity to confirm that they are his numbers.
6 MR. FRIEDMAN: Yes. I think they are on a
7 different basis than Professor Edwards calculated
8 because of the assumption of the one year U.S. T-bill
9 rate, so they are kind of a mix and match, I believe,
10 but--
11 PRESIDENT FERNÁNDEZ ARMESTO: I know. But
12 we heard it, and with that change, because it's not a
13 7.22 rate--
14 MR. FRIEDMAN: Right.
15 PRESIDENT FERNÁNDEZ ARMESTO: --but with
16 that change, to be sure, that Ms. Kunsman and
17 Mr. Kaczmarek have done the right thing.
18 MR. FRIEDMAN: So what we would like to
19 propose is to have two rounds of Briefs and then an
20 oral argument where we set aside a meaningful amount
21 of time. That request arises out of the sense that
22 there are a number of complicated issues and that the
[Page 2553]
1 Tribunal has shown a great deal of curiosity, which
2 we applaud.
3 PRESIDENT FERNÁNDEZ ARMESTO: You know we
4 are curious.
5 MR. FRIEDMAN: Yeah.
6 PRESIDENT FERNÁNDEZ ARMESTO: You cannot
7 survive a week here if you are not curious about
8 many, many things, Peruvian law, financial aspects.
9 MR. FRIEDMAN: Well, we think that the
10 Tribunal may benefit from having the opportunity to
11 interact in more realtime rather than just reading
12 briefs.
13 The briefs obviously are essential because
14 it's a big record and things need to be distilled,
15 but it does seem that it could be material in this
16 case in a way it's not in every case.
17 PRESIDENT FERNÁNDEZ ARMESTO: So, you would
18 say one long brief, a very short rebuttal brief, and
19 then a day?
20 MR. FRIEDMAN: Yes. Forgive me for being
21 very pushy on this. I would want--I would actually
22 propose two days because I felt that we were pressed
[Page 2554]
1 in this Hearing. No, no, at the beginning, on Day 1,
2 I felt that everybody was rushing to get in.
3 We do have jurisdiction, merits, and quantum
4 all in a single hearing.
5 PRESIDENT FERNÁNDEZ ARMESTO: Two days.
6 MR. FRIEDMAN: That's not always the case.
7 So, our proposal would be two days, which
8 would give us and the Tribunal, most importantly,
9 reasonable amount of time to speak with the lawyers.
10 PRESIDENT FERNÁNDEZ ARMESTO: If I come, and
11 Professor Stern, if we come--well, you are also far
12 away--if we come to Washington, it is the same to
13 stay for a day or for two days. So, two days is
14 fine.
15 Mr. Hamilton, you look stern, not like
16 Professor Stern, but you do not seem to be happy with
17 this proposal.
18 MR. HAMILTON: Thank you very much. And I
19 have no Hermes today, so I do have some comments,
20 Mr. President.
21 As a starting point, the proposal we just
22 heard was proposed to the Tribunal and rejected in
[Page 2555]
1 October--proposed and rejected in October--proposed
2 and insisted because that is the way that Gramercy
3 conducts itself.
4 That's the way it's conducted itself with
5 these Bonds forever and that's the way it conducts
6 itself with this Tribunal is it pushes, pushes,
7 pushes until it gets what it wants.
8 So, that's the starting point for this
9 discussion. We, of course, want to hear the
10 Tribunal's perspective on what would assist the
11 Tribunal in post-hearing elements.
12 Second, before reaching the issue of
13 specific Briefs and Oral Arguments, we would like to
14 confirm the scope of what will be addressed. Now, we
15 understand that there will be freedom to make
16 comments, plus there will be guidance from the
17 Tribunal with questions for identification of some
18 issues, a process which is starting to unfold and
19 will be communicated to us.
20 Beyond that, we want to confirm our
21 understanding about the scope of the record.
22 Now, along those lines, for some reason, we
[Page 2556]
1 do not understand--we repeatedly have been hearing
2 about an Exhibit R-257. We have no idea why it's
3 continually raised. Nothing substantive has come out
4 of this issue. If there is something that Gramercy
5 wishes to raise about this, it should have already
6 told us by now.
7 But we don't want any more surprises or
8 issues over that document, which the Tribunal chose
9 to accept into the record.
10 The second thing--
11 PRESIDENT FERNÁNDEZ ARMESTO: Sorry. Let me
12 ask the Secretary.
13 Do we now have as an H-number document 257
14 plus the annex, Madam Secretary?
15 SECRETARY PLANELLS-VALERO: Not to my
16 knowledge.
17 PRESIDENT FERNÁNDEZ ARMESTO: If you don't
18 have it, it doesn't exist.
19 MR. HAMILTON: It was submitted last Friday.
20 I'm simply saying--
21 PRESIDENT FERNÁNDEZ ARMESTO: We don't have
22 it.
[Page 2557]
1 MR. HAMILTON: --we have no idea what the
2 drama is about this document. We consider it grossly
3 unacceptable not to know when and where they got this
4 document. We think the Tribunal should simply ask
5 them to answer that question.
6 We put our documents in with Witness
7 Statements long ago, and then right at Hearing time,
8 they have repeatedly declined to tell us that. We
9 don't know and we don't want to find further
10 surprises about this issue.
11 The document was submitted by Gramercy last
12 Friday. The Tribunal has already had it. So, that
13 logistic was taken care of a week ago. So, we simply
14 don't consider it fair that they haven't disclosed
15 when and how they got that document because it is
16 material to procedural considerations.
17 PRESIDENT FERNÁNDEZ ARMESTO: Mr. Hamilton,
18 if you want to make--if that is really something
19 which you think is really important, please make a
20 submission to the Tribunal. We will discuss it, and
21 then we will let the other Party react and we will
22 decide.
[Page 2558]
1 I have--that is one issue, so you are
2 welcome at any stage. But let's then do it, please,
3 in writing. Send us a letter. We will then give the
4 floor to Claimant, and we will take a solution.
5 MR. FRIEDMAN: May I just try to clear this
6 up?
7 MR. HAMILTON: Yeah, we're confused.
8 MR. FRIEDMAN: What we--well, okay. What we
9 sent on Friday was the version of R-257 that we had
10 discovered. What we proposed, and what the Tribunal
11 requested, was that the Parties attempt to agree on
12 sort of a composite document that could be submitted
13 as a hearing exhibit.
14 We sent what we believe is an accurate
15 composite document to counsel for Respondent days
16 ago, and we have continually sort of asked, "Is this
17 okay? Do you have any comments about this particular
18 compilation of pages so we can give it to the
19 Tribunal?"
20 We are still waiting for a response about
21 whether they--we haven't tried to do anything
22 secretive. We've tried to give them the document as
[Page 2559]
1 we understand it. So, we would be grateful for that,
2 but I'm sure it could be done if they could just
3 respond to us. If they have any comments, I'm sure
4 we'll work them out, and then we can give it to the
5 secretary and it can be given the Hearing number. I
6 don't think there is any drama about it, and I do
7 think that, to the extent that people have had
8 arguments so far or put issues to Witnesses, they
9 have used the materials from in 257, so it's not like
10 there is any new material other than what the
11 Tribunal already has, but currently in two documents
12 rather than one.
13 PRESIDENT FERNÁNDEZ ARMESTO: Okay. We have
14 already taken two Decisions on this. Decision one is
15 we incorporate it as an H number, R-257, with the
16 full pages, because some pages were missing, and with
17 the annex. And we will do this, putting together
18 Claimants' and Respondent's copy. That is first
19 point. This is a Decision, and we have taken the
20 Decision, and the Secretary is now in charge of doing
21 that.
22 Second question is--yes, yes, yes. I'm
[Page 2560]
1 coming to this.
2 The second point is that, Mr. Hamilton, you
3 now have a completely separate question; namely, you
4 ask: How is it that Claimant has a full copy of
5 R-257, while in the record there is a noncomplete
6 copy of R-257? This a completely separate question,
7 which you are, of course, perfectly entitled to put,
8 send us a letter with this question, and we will give
9 it to Claimant and we will take a Decision.
10 There is no--these are the two problems, but
11 they are unrelated.
12 MR. HAMILTON: That's the question we have
13 been asking for weeks. That is my point.
14 PRESIDENT FERNÁNDEZ ARMESTO: Okay. So, put
15 us a short letter from someone from your team, and we
16 will run it and take it.
17 MR. HAMILTON: I'll keep going, if I might,
18 through a couple more items, because what I want to
19 do is--I heard the Tribunal well that--you expressed
20 to us last month that you're not interested in waves
21 of letters. We want to help you focus on
22 post-hearing issues.
[Page 2561]
1 PRESIDENT FERNÁNDEZ ARMESTO: I'm not
2 encouraging--
3 MR. HAMILTON: I'm trying to assist in that
4 way. So, that is the issue of R-257.
5 PRESIDENT FERNÁNDEZ ARMESTO: Mr. Hamilton.
6 I'm not encouraging you to send a letter. I just
7 say, it is--you are perfectly entitled, and if you
8 feel strongly about it, please do it. And I
9 understand, if it is important to the Republic, it is
10 a question which we will address.
11 MR. HAMILTON: Okay. All right. That is
12 R-257.
13 The second item I wanted to mention is that
14 there were at least two different areas of Perú
15 documents that came up along the way, one related to
16 Bondholder Process status--and Ms. Sotelo mentioned
17 it; Dr. Wühler mentioned it. My counterpart seemed
18 not interested in having an update.
19 We are at your disposition. We are not
20 going to insist or resist. If you want--if it would
21 assist the Tribunal, we can provide an update of that
22 table. I understand that my counterpart--I
[Page 2562]
1 understand their comments, so I'm flagging this.
2 You also have asked at various times about,
3 there must be some data inside the Government about
4 the number of outstanding Bonds. Now, just to be
5 clear, we've given thousands of pages. Our view, of
6 course, is that Perú, even from the very First
7 Submission that it made, provided much more
8 transparency and openness than Claimant did.
9 So, there is various information across
10 many years of time. There is not a single magic
11 clear understanding of the total number of
12 outstanding Bonds and correspondingly, their face
13 value, for all the different reasons that we have
14 heard about, but I hear you asking this issue. We
15 will take a look at what is already in the record,
16 because there are various things in the record, and
17 we will address it in our Post-Hearing Brief.
18 But, again, I'm just being--taking note of
19 your questions. And each side can say what they have
20 to say. I'm not aware of any other magic document
21 that there is. We have tried to be very forthcoming.
22 PRESIDENT FERNÁNDEZ ARMESTO: No, I think
[Page 2563]
1 there are two things which we asked all Witnesses
2 about. One is: Do you have any idea about how many
3 Bonds are outstanding? And then the other thing is:
4 What is the impact of the different--what is the
5 budgetary impact of the various alternatives? We
6 have actually not seen any calculation of saying, if
7 we recalculate the value at CPI, then it would be
8 this, or if we do it with the first formula, with
9 the--you will remember the first parity in 1950,
10 19--the first parity exchange formula, then it would
11 be so-and-so-much with the second.
12 What I have not seen--normally, there would
13 be some calculations made by some statisticians or
14 economists at the Ministry looking into this. It
15 would have been sent to the President when the
16 Supreme Decrees were submitted. We just have not
17 seen it. Maybe it does not exist. Maybe it was
18 impossible to do it, and it does not exist.
19 MR. HAMILTON: In the case of Global Bonds,
20 you would simply look at the registry and understand
21 the outstanding Bonds, and here--I won't reiterate.
22 We all know the complexities of history that we are
[Page 2564]
1 dealing with and we have heard about.
2 So, the uncertainty of the number of
3 outstanding Bonds is precisely part of the concern of
4 impact of something that you cannot calculate with
5 precision, and why--Dr. Wühler explains how a fund
6 works, that you don't necessarily know all the
7 numbers in advance. So, I'm just noting the
8 question, and we will try to address.
9 PRESIDENT FERNÁNDEZ ARMESTO: Yeah. Because
10 on the other side, if we get--I mean, we have no idea
11 if we have jurisdiction. We have a number of issues
12 on jurisdiction, and I have no idea, and we have not
13 decided anything on jurisdiction, and we have not
14 decided anything on merits, but if we ever--if we get
15 to the merits stage--which is unknown; it's a total
16 unknown--it would be irresponsible for this Tribunal
17 to take a Decision which may have an impact on the
18 wider Peruvian economy without--no one having looked
19 into what the impact would be. You see what I mean?
20 MR. HAMILTON: The uncertainty is the risk.
21 I agree that that would be a highly risky and unusual
22 step for a Tribunal to take.
[Page 2565]
1 PRESIDENT FERNÁNDEZ ARMESTO: Exactly.
2 Exactly. Exactly this is why. Yeah. If there is
3 some information, it would be helpful.
4 MR. HAMILTON: If there is anything new,
5 we'll let you know.
6 Third and final item in terms of scope of
7 the record--and I will really try to be brief and
8 straightforward--the Republic of Perú was very
9 surprised by the information that came forth during
10 the testimony of Mr. Koenigsberger and Gramercy's
11 Witnesses regarding 2017 acquisitions of Land Bonds.
12 We haven't seen these documents. We don't
13 know their impact. We have been left in the dark.
14 We would say, you know, one further thing, which is:
15 It is difficult--impossible--for us not to understand
16 this as a very intentional decision not to share
17 information with the Tribunal, with Perú, with the
18 U.S. Government, for that matter.
19 As a matter of fact, we've gone back and
20 looked at our document request, and one of the most
21 notable things in our document request which
22 post-dated these developments is that we identified a
[Page 2566]
1 time period related to the Land Bonds, and it said
2 specifically on the front of our document request
3 that we understand that the acquisition period runs
4 from 2005-'6 to 2008, based on representations of
5 Gramercy.
6 We then the stated that, if that
7 understanding or those representations are incorrect,
8 then, for example, we specified, instead of asking
9 for documents through 2008, our request means
10 documents through the last date of any acquisitions.
11 We had concerns. We expressed them in the
12 document requests, and we now see that, in fact,
13 there are other document requests. We actually think
14 that this is relevant to a whole series of document
15 requests that we raised.
16 Now, on the one hand, we can look at
17 situations where Tribunals react in a very aggressive
18 manner to a scenario like this. I was sitting in the
19 room during the first Fraport case where Professor
20 Reisman was sitting at this table and the Tribunal,
21 Mr. Fortier, immediately ordered the production of
22 documents that came up through testimony that had
[Page 2567]
1 been previously unproduced. It was an immediate act
2 by the Tribunal.
3 We also note that Fraport I was ultimately
4 annulled, not because of those documents that were
5 provided, but because the Claimant wanted more
6 documents down the road. And so, we recognize that
7 there are--this new information presents procedural
8 challenges. We also consider it risky for Respondent
9 not to have known any of this. It makes it a
10 difficult situation any way you look at it.
11 So, we have a couple of options here. One
12 is that there is a briefing process where they say
13 what they have to say about the situation as part of
14 the Post-Hearing Briefs, and we will respond
15 accordingly. The other would be more in the vein of
16 a revisitation of document production, but, again,
17 the mere fact that these documents exist at the end
18 of the Hearing--we're talking about this after all of
19 the Witness testimony and all--is already a difficult
20 and potentially prejudicial situation.
21 So, all of that said, one option of how we
22 could deal with this is by sequencing the
[Page 2568]
1 Post-Hearing Briefs so that they can say whatever
2 they have to say about the--for post-hearing
3 purposes, including on this issue, and then we can
4 respond, having seen what they have to say about it,
5 including--I've got a note that once the issue came
6 out, we then saw an effort happening live and in
7 color before our eyes to characterize these things in
8 ways that we had not heard before.
9 Now, I'm trying to lay this on the table.
10 It is tempting to become quite exorcized about the
11 issue, but I'm trying to simply lay the procedural
12 situation on the table so that we can discuss it in a
13 calm manner and have guidance from the Tribunal as
14 well.
15 PRESIDENT FERNÁNDEZ ARMESTO: Mr. Friedman?
16 MR. FRIEDMAN: May I, Mr. President?
17 PRESIDENT FERNÁNDEZ ARMESTO: Of course.
18 MR. FRIEDMAN: First of all, this case
19 concerns a particular investment that Gramercy made
20 and GPH and GFM made in Land Bonds that it acquired
21 from 2006 to 2008. That's always been the entire
22 scope of the claim and the only thing that is
[Page 2569]
1 relevant and at issue as part of the investment that
2 Gramercy is claiming here. It's not claiming relief
3 for anything else, any other investment of any kind.
4 Consequently, second, Gramercy has complied
5 in good faith with all of the document requests that
6 were put to it and has presented all the documents
7 that it could. I'm not aware of any failure on
8 Gramercy's part to comply with the requests as they
9 were issued and concerning the investment in this
10 case.
11 Third, if we're going to get into aspersions
12 about what wasn't produced, I do think that you have
13 to take in mind also that you have asked many
14 times--and we are equally surprised, Mr. President,
15 that, astonishingly, apparently nowhere within the
16 Ministry have there been any projections,
17 understandings, expectations ever about any of these
18 Land Bonds other than Seminario's Report, and you
19 heard Minister Castilla testify both at different
20 times--this was my interpretation of his
21 testimony--was both that, "yes, of course we had
22 projections," and, also, "we didn't have
[Page 2570]
1 projections."
2 I will tell you that, to the best of our
3 knowledge, in looking through the entire document
4 production of Perú, we haven't seen them, other than
5 documents that we have already brought to your
6 attention.
7 So, consequently, I don't think it's quite
8 fair to talk about hiding documents, withholding, not
9 complying with discovery requests. We raise this
10 particular issue about these particular kinds of
11 documents because we knew they would be important to
12 the Tribunal in this Arbitration, in an earlier
13 procedural conference, and the Republic of Perú
14 represented "that's all we have," and the Tribunal
15 said, "Well, if that's all you have, that's all you
16 have."
17 Fourth, in terms of what to do with it--I
18 mean, I think we have a record. You have the
19 evidence that the Witnesses gave, and that's it. We
20 don't believe that any of these additional Tranche 2
21 documents are relevant to any issue that you have to
22 decide. If Respondent believes otherwise, they can
[Page 2571]
1 argue it, or if they have some further relief, they
2 can make an application. But I don't think we have
3 much to say about it right now until we've heard a
4 position.
5 And so, consequently, we couldn't accept
6 sort of the proposal that they make. I believe that
7 what you can do is decide on the record that you have
8 about the investment that this case concerns.
9 MR. HAMILTON: Mr. President, I will be very
10 brief.
11 PRESIDENT FERNÁNDEZ ARMESTO: Yes,
12 Mr. Hamilton.
13 MR. HAMILTON: I will be very brief. And,
14 again, I frankly am under pressure to be less brief
15 and more vocal, so I'm really trying to show
16 restraint on this issue.
17 First of all, this is not a scenario where
18 we have a claim on a contract. For example, Perú
19 recently had two different cases related to Bonds
20 from 150 years ago: One in federal court in New
21 York, one in federal court in Los Angeles.
22 $12 billion in claims: One case related to one set
[Page 2572]
1 of bonds, one case related to another set of bonds.
2 Contract claims, total victory for Perú, $12 billion
3 claims thrown out.
4 Here, we're dealing with a treaty case, and
5 in a treaty case, the expectations of the investor,
6 the due diligence of the investor, contemporaneous
7 valuations, all of these issues are relevant and
8 material. They are relevant and material to
9 jurisdiction, they are relevant and material to the
10 merits.
11 I asked Mr. Koenigsberger: "Did you
12 consider it a good idea to buy Land Bonds in 2017,"
13 and he said "yes." That is relevant for you to know
14 and understand because these are not contract claims.
15 Yeah, this is one set of claims and here is another.
16 Imagine if you had a case relating to an
17 airport project, and you went through a whole hearing
18 about an airport project, and during the Hearing you
19 found out we had a second airport project at the same
20 time that occurred during the claim on the first
21 airport project in Country X, and all that that
22 implies in terms of expectations, valuation, as well
[Page 2573]
1 as jurisdictional implications.
2 We would say, as well as the fact that here,
3 Perú considers that Gramercy bought claims and keeps
4 buying claims and keeps using this case as part of a
5 master strategy of creating as much pressure as
6 possible until it forces a resolution that
7 sufficiently satisfies it as part of a master scheme
8 of pressure.
9 So, I think to say it would certainly not be
10 plausible to say this is totally different. That
11 could be plausible, if you had two different contract
12 claims in two different cases, but certainly not in a
13 treaty case. So, I leave it at that.
14 And then to put the shoe on us and say we
15 have to come and brief this, when it is clear that
16 they have all been sitting here, going through this
17 case with knowledge of this situation while they are
18 engaged in a propaganda campaign that Perú won't pay
19 Bonds, and they are buying more Bonds, it is deeply
20 troubling. It is deeply troubling. So, something
21 needs to be done.
22 There's two different options. One option
[Page 2574]
1 is we brief it. If that's the case, we are simply
2 going to brief it as it is, and they don't want to
3 share this, then they can say what they think about
4 it; we will respond. Why should the Respondent have
5 to go first, when we're not the ones who
6 intentionally withheld those documents?
7 The other option is document production, and
8 we would have to raise this issue. We are inviting
9 some guidance from the Tribunal. If the Tribunal
10 wishes to consider this issue and give some guidance,
11 of course, reserving the possibility that we may each
12 have further comments.
13 Finally, the last issue, I'm sorry, is
14 camouflage. They have been trying to drum up the
15 suggestion during the course of this week that there
16 is some other documents of the Ministry because they
17 knew this moment was coming, that we have already
18 said throughout the Hearing, the Witnesses have been
19 forthcoming, there are many different things in the
20 file already on this, and we've already said that
21 we'll recheck in good faith.
22 So, I'm sorry, that is just sort of an
[Page 2575]
1 inflated issue and a distraction. So, really I'm
2 inviting the Tribunal that you may wish to consider,
3 and we will all consider the implications of this
4 situation, but it certainly affects the Post-Hearing
5 Brief and timing scenarios.
6 I will pause there.
7 PRESIDENT FERNÁNDEZ ARMESTO: Yes. Let me
8 see. I mean, you are not alleging that there is any
9 falsehood in any of the submissions of Claimant.
10 MR. HAMILTON: I haven't said that. I'm
11 unable to say that at this time.
12 PRESIDENT FERNÁNDEZ ARMESTO: Okay. What
13 you are saying is that in the--the Witnesses brought
14 up a fact which was unknown, which was not in--had
15 not--was not mentioned maybe that they had bought
16 additional Bonds. The point is this is very
17 difficult to solve this issue orally--orally because
18 this is a complex issue. One would have to review
19 the whole--everything which has been written. My
20 tendency is always to say, if you have some issue, it
21 is for you to raise it.
22 I mean, if you now say Claimant has made
[Page 2576]
1 falsehoods in their submissions, or this has an
2 impact on valuation, or I need some more documents
3 because the document production was erroneous, I
4 mean, the question is fairly simple--I mean, do you
5 want to make any submission on this issue or make any
6 document--do you want to make a submission on the
7 additional Bonds, the Tranche 2 Bonds?
8 MR. FRIEDMAN: A submission in the sense of
9 submitting them as a claim?
10 PRESIDENT FERNÁNDEZ ARMESTO: No, as
11 submitting--or adding them as claim or just making a
12 statement on how--on what has happened.
13 Do you want to make any submission?
14 MR. FRIEDMAN: I think we will argue
15 from--we are prepared to just argue from the current
16 record, and I believe--in Post-Hearing Briefs. If
17 Respondent's counsel believes that there are
18 implications of that, then they can raise those
19 implications. If they believe that something else
20 needs to be done, then they should make an
21 application for it. But right now, our position is
22 that it has very little, if any, relevance to the
[Page 2577]
1 Claim that Claimant has brought.
2 PRESIDENT FERNÁNDEZ ARMESTO: But that is
3 argument. You don't want to make any specific
4 submission on this. You are not asking the Tribunal
5 for the right to make an additional factual
6 submission on these Bonds.
7 MR. FRIEDMAN: No.
8 PRESIDENT FERNÁNDEZ ARMESTO: Okay. They
9 are not. They think it is irrelevant. You think
10 they are very relevant. It is for you to argue that.
11 There is no--I don't see--if they say it is
12 irrelevant for my case, and you say it is very
13 relevant for my case, you must argue it. And it is,
14 of course, your right to argue it, and argue it with
15 the consequences you think which are relevant, which
16 may be whatever it is.
17 If you think that you need some additional
18 documents and that we need an additional document
19 production, of course. But if Claimant--I mean, this
20 case could lead either to the Claimant taking the
21 lead or, if the Claimant does not want to take the
22 lead in saying anything about it, then it is for you
[Page 2578]
1 to argue it.
2 MR. FRIEDMAN: Yes. I just think we need
3 something more concrete. If there is otherwise we
4 have the record that we have.
5 PRESIDENT FERNÁNDEZ ARMESTO: Yeah.
6 MR. HAMILTON: Respondent will consider it,
7 and we all know that neither the Tribunal nor
8 Respondent were told during the course of this case
9 that they were secretly buying Bonds. So, we will
10 consider and determine what further steps.
11 Now, then we come back to the concrete
12 issues--
13 PRESIDENT FERNÁNDEZ ARMESTO: Can you look
14 at it in, say, two weeks?
15 MR. HAMILTON: Sure. Sure. Yes.
16 PRESIDENT FERNÁNDEZ ARMESTO: To close
17 windows, because otherwise I would not like this to
18 come up in six months' time.
19 MR. HAMILTON: Yes. Yes. Yes.
20 PRESIDENT FERNÁNDEZ ARMESTO: Can you look
21 at it--would two weeks be reasonable?
22 MR. HAMILTON: Yes, sir. Two weeks.
[Page 2579]
1 ARBITRATOR DRYMER: And that is effectively
2 to submit an Application, if you choose to do so.
3 I'm not sure what we're asking for within two weeks.
4 (Overlapping speakers.)
5 MR. HAMILTON: It comes back to the entire
6 Post-Hearing Schedule.
7 ARBITRATOR DRYMER: Yes. Yes.
8 MR. HAMILTON: Now, there is one thing I
9 want to mention on Post-Hearing Schedule.
10 PRESIDENT FERNÁNDEZ ARMESTO: Let's close
11 this one. Can you, in two weeks' time, if you have
12 any reaction to the fact, to the statement made by
13 Gramercy's Witnesses that they had bought a Tranche 2
14 of the Bonds, any Application with regard to that new
15 fact, can you please present it in two weeks' time,
16 so that we can get it--hear the other Party and then
17 solve it in a reasonable period of time?
18 MR. HAMILTON: My only comment,
19 Mr. President, is I think this needs to be considered
20 as part of an overall plan for post-hearing.
21 PRESIDENT FERNÁNDEZ ARMESTO: Of course.
22 (Overlapping speakers.)
[Page 2580]
1 MR. HAMILTON: Because we, as Respondent,
2 they are the ones who held these documents, and we
3 are the ones who then have to--we must submit
4 something first.
5 (Overlapping speakers.)
6 MR. HAMILTON: They have the documents. We
7 don't. We then are being asked to file the first
8 post-hearing document. That's my concern.
9 PRESIDENT FERNÁNDEZ ARMESTO: No, you are
10 not being asked. If you want--if you want, you file
11 it. If you think that it is relevant for your case,
12 you file it. We will address it. If you think it is
13 not, then don't. I just want to put--I just want to
14 put some sort of timeline.
15 Okay. Yeah. Can we break for five minutes.
16 MR. HAMILTON: Sure. Thank you.
17 (Brief recess.)
18 PRESIDENT FERNÁNDEZ ARMESTO: Very good.
19 Let's do the following:
20 After having thought through the various
21 alternatives, we would say in a period of time, which
22 you stated two weeks seems reasonable, if you want to
[Page 2581]
1 make an application to the Tribunal regarding these
2 new facts, this Tranche 2 of the Bonds, please do it
3 within this period of time. And then please do
4 submit exactly what type of relief--procedural relief
5 you are asking for.
6 If--I mean, so that we know exactly what you
7 are expecting us--how you are expecting us to react.
8 And if that is that way, we will then pass the
9 Submission on to Claimants, and we will give
10 Claimants two weeks also to react, and then we will
11 take whatever Decision is appropriate.
12 I think that would be--that is a
13 procedurally reasonable way of doing this, because it
14 is for you really to establish what relief you want,
15 and we have been discussing who should go first.
16 Since at the end we have to decide on a
17 specific relief, I think it is for you to define
18 exactly what you want.
19 ARBITRATOR DRYMER: Presumably--excuse me,
20 presumably on the basis of the views you've expressed
21 and will express more fully as to the impact and
22 relevance of the evidence or further submissions or
[Page 2582]
1 whatever it may be you will be seeking--you may be
2 seeking by way of procedural relief.
3 MR. HAMILTON: Mr. President, thank you for
4 the comments of the Tribunal.
5 What would be the former--the further views
6 of the Tribunal in terms of the Post-Hearing
7 approach? Obviously, you will have to determine--we
8 have to consider some issues. Our friends may have
9 to consider how they respond, and we may have to see.
10 Do you wish to go ahead and discuss further
11 Post-Hearing steps at this time? I've heard a
12 proposal. I do have one observation, which is that
13 we understand that you're each extremely busy. We
14 understand that these cases are not simple in terms
15 of the volume of information, et cetera.
16 We also are mindful--and I can't help but
17 observe--that there are elections in Perú next year.
18 Every time there have been elections in Perú, this
19 has been yet another round--it's written in their
20 first due diligence memo--where they clearly have
21 plans for pushing Claims and Settlement in that
22 context.
[Page 2583]
1 So, we want to have a reasonable period of
2 time for Post-Hearing, meaning let's do what needs to
3 be done and then let the Tribunal get its job done.
4 PRESIDENT FERNÁNDEZ ARMESTO: Okay.
5 Mr. Hamilton, let me--I don't think we can today
6 establish deadlines because this problem--I think we
7 should--having lived through this procedure, that it
8 is likely that you will submit something in two
9 weeks' time, and it is likely then you will have to
10 react, and it's likely that we'll have to take a
11 Decision, and we don't have the slightest idea.
12 So, the only thing that we can really at
13 this stage agree--or try to agree is would you prefer
14 one single round or two rounds? And I know you
15 didn't like the idea of oral conclusions at all.
16 That is correct? Just give me a feeling, and we will
17 have--we will take a Decision at some stage, because
18 I see it is not easy for you to get to an agreement.
19 But I would like to know how you feel.
20 ARBITRATOR DRYMER: Might it relate directly
21 to the outcome of this initial procedure--application
22 and resolution of that application? I don't know.
[Page 2584]
1 MR. HAMILTON: It might. It might. Thank
2 you for the comment, Mr. Drymer.
3 Yes, in fact, look, we're talking--what's
4 been put on the table by Gramercy is two written
5 submissions, plus an oral submission, so basically
6 three submissions.
7 Right now, we obviously have some procedural
8 concerns that we reasonably need to consult with the
9 Republic, and so it makes it a little bit difficult
10 right now.
11 What we don't want to do is spend six months
12 in a Post-Hearing phase, followed by six years to
13 reach a Decision and things like that, because the
14 reality is this case exists not only as a pending
15 Treaty dispute, but it exists as part of a broader
16 apparently multidimensional game of chess that
17 includes press aggravation and all of these different
18 ongoing factors.
19 So, we want to give you what you need to
20 make your Decision and reach a conclusion here.
21 PRESIDENT FERNÁNDEZ ARMESTO: Let me see.
22 Instinctively, I say three rounds is too much.
[Page 2585]
1 One written round is unavoidable. And then
2 we should have either an oral presentation or a short
3 written second round. I mean, three rounds, I think
4 it is overkill.
5 MR. HAMILTON: And two days I would say is
6 overkill, as well. I mean, we love to hear each
7 other speak, but...
8 PRESIDENT FERNÁNDEZ ARMESTO: Okay. Two
9 days may be overkill, but the point here is that--the
10 only advantage I see is, very frankly speaking, on
11 having an oral submission, is it gives--the Tribunal
12 has not had as much time as it would have liked to
13 deliberate because we have had very long hearings.
14 So, it is an added opportunity to
15 immediately after your Post-Hearing Brief--
16 Post-Hearing oral presentation, be it one or
17 two days, at the end, once we make the effort of
18 coming to Washington, staying one day or two days is
19 de minimis of having deliberation. So, that is the
20 advantage I see.
21 On the other side, I am perfectly aware of
22 the cost, and you know that I am very cost-conscious,
[Page 2586]
1 I think, and especially for States that the economics
2 with the cost is fundamental. So, we have to wait.
3 I have to speak with my co-arbitrators.
4 MR. FRIEDMAN: If I may, Mr. President, we
5 appreciate all of those comments, and we are also
6 obviously very sensitive to the costs and the time
7 that it will take.
8 I think it is wise to think of it as two
9 instead of three, that we accept that completely. I
10 do think that--I do want to sort of--I don't think
11 it's overkill to have a two-day oral argument.
12 The Tribunal has raised a number of
13 questions about what's the information about the
14 universe of outstanding bonds, for example. And
15 there is evidence in the record that bears on that.
16 The evidence has some nuance about it, and we'll
17 write about it in our papers.
18 But I do think it's the kind of thing where
19 everybody might benefit if we had an opportunity to
20 have an exchanges and say, here is what we think of
21 the record is, here's why we disagree with the
22 position that the other side is taking about the
[Page 2587]
1 characterization of it.
2 And I think by that time, we will be down to
3 a number of discrete points that will really matter
4 to you and be able to focus on those in a way that it
5 was hard to do when you start out and do opening
6 arguments.
7 But at the same time, I would really urge
8 not to try to compress it into too little time. I
9 think it is a false economy to say not two days. It
10 makes it not as valid.
11 PRESIDENT FERNÁNDEZ ARMESTO: If we do it--I
12 see your point.
13 MR. FRIEDMAN: Yes.
14 PRESIDENT FERNÁNDEZ ARMESTO: If we do it,
15 we make it one morning and then the next day. It is
16 an advantage for Respondent, if you have the second
17 day to respond. You have at least the afternoon and
18 the night to think.
19 Very good.
20 So, summary. Summary. Summary is we--from
21 Professor Edwards, we will get in a week's time this
22 short confirmation. In two weeks' time, you tell us
[Page 2588]
1 whether you think that this information is relevant
2 and the procedural relief you are requesting. We
3 will give you then the possibility to react.
4 We will take a Decision, and depending on
5 how we come out, we will then--at some stage, we will
6 deliberate and see whether we need one--whether we do
7 the second round of Post-Hearing Briefs in writing or
8 orally.
9 And I really have to speak with my
10 colleagues. And we will send you a letter next week
11 with the ideas of our interest.
12 That would be my wrapping up of the Hearing.
13 MR. HAMILTON: I have one detailed point and
14 one more item to discuss, if I might.
15 One is for the Briefs, we would be
16 interested in exploring parameters--reasonable
17 parameters. The first case under the U.S.-Perú
18 Treaty had a final Post-Hearing Brief where the
19 Claimant put in a Brief that--I can't remember--but
20 it was very long, and we submitted one page. We
21 still won the case, but there was a huge difference
22 in approach. So, some reasonable parameters.
[Page 2589]
1 (Comments off the microphone).
2 MR. HAMILTON: We can sort that out.
3 MR. FRIEDMAN: That sounds like a good
4 procedure to follow. So we'll write a lengthy brief,
5 and they can write a page.
6 MR. HAMILTON: In other words, we can try to
7 sort that--I'm sorry, I do need to stay on the
8 record.
9 So, I just want to flag that as an issue to
10 explore.
11 The final thing that I want to raise,
12 Mr. President, and I will try to be brief, but the
13 Republic very much would like to be able to move
14 through the remainder of this Treaty proceeding with
15 greater calm than we've gone through it until now.
16 I know that the issue of aggravation of the
17 proceeding may not be the first priority of the
18 Tribunal, however, here the Tribunal chose to go
19 through an entire phase at the start of this case
20 about aggravation of the proceeding. The Tribunal
21 has repeatedly reiterated its Orders with respect to
22 nonaggravation.
[Page 2590]
1 And it is the Republic's view that we now
2 see that aggravation is not only something that is a
3 distraction to the sanctity of the Treaty proceeding,
4 but we believe reflects their entire Claims strategy
5 from the very beginning.
6 And we are all here together.
7 Mr. Koenigsberger is here. We are here trying to
8 show goodwill, and this is an opportunity for us to
9 speak frankly and try to put a little order to the
10 situation.
11 I will not repeat all of the information
12 that is in the record. We talked about it during our
13 opening arguments. We even talked about things that
14 were happening in 2017, billboards, letters leaked to
15 the press on behalf of pension funds and American
16 workers, and, of course, we've learned many things
17 during the course of this hearing.
18 But I will just give you one example, an
19 example of something that I think is a good example
20 of aggravation of the proceeding that simply should
21 not be tolerated. And the Tribunal even has ruled
22 that there should not be unnecessary aggravation. We
[Page 2591]
1 already know that this is an issue that attracts
2 emotion.
3 But, as one example--and I will be reserved
4 in how I convey the example. I received a call last
5 year, unexpectedly, from the office of a level
6 individual on Capitol Hill in the U.S. Government.
7 I was told that Lobbyist X had come to visit
8 that office for the third time. Now, Lobbyist X is
9 retained by the entity set up by Gramercy through
10 Debevoise and Gramercy. Lobbyist X is--throughout
11 the record, connections to Lobbyist X. The lobbying
12 regulation forms are before the Tribunal, continuing
13 after all of the different discussions we've had and
14 pleadings we've had related to aggravation.
15 And I was told, "are you Jonathan Hamilton?"
16 "Yes." I get all sorts of random calls within the
17 City of Washington or from different parts of the
18 City.
19 "Yes, I am." "I'm calling you because
20 Lobbyist X has come for the third time. Lobbyist X
21 has said that you are personally blocking the
22 Republic of Perú from paying billions of dollars to
[Page 2592]
1 American workers and interfering with their freedom
2 of speech under the Constitution. And I wanted to
3 let you know that this concerns us."
4 Now, we know where this is coming from
5 because we've given you a broad, incredible colorful
6 cartoonist record of the lobbying structure,
7 et cetera. We even have--and I refer you to
8 Exhibit R-242, for example--emails where someone
9 personally connected to said lobbyist is in an email,
10 and it's copying Mr. Koenigsberger as the Office of
11 the Presidency of Perú--this dates back two years
12 ago--responds and says, "please direct your attention
13 to Jonathan Hamilton."
14 Now, we understand that there's a desire to
15 generate propaganda about this issue. That's clear.
16 But we're inside the stadium now. Perú ratified a
17 Treaty to create a rules-based system to resolve
18 problems like this. Perú does not choose to give
19 what it considers would be a windfall to Gramercy in
20 violation of Peruvian law.
21 Perú has been willing to speak. We have
22 found those efforts difficult. I'm sure everybody
[Page 2593]
1 has found those efforts difficult. We don't have to
2 go into it.
3 But we have to have a little bit of order,
4 and we have to avoid a situation--and the record is
5 also replete with other examples where the
6 attorney-client relationship is affected and
7 interfered with as well. We even believe, frankly,
8 involving issues of trying to blackball our firm in
9 connection with totally unrelated issues in unrelated
10 parts of the world.
11 So, I would like to invite Gramercy, on
12 behalf of the Republic of Perú, let's have a little
13 bit of order here. Let's put down the lobbying
14 process that has persisted despite the Tribunal
15 Orders.
16 I also say, respectfully, it's not a simple
17 matter for the Tribunal. All of these different
18 issues are complicated, but we are here acting in
19 good faith--not all States do that--having a Hearing,
20 providing documents, participating in this case, and
21 let's treat each other respectfully. Let's treat
22 each other reasonably. Let's finish this case.
[Page 2594]
1 Let's let the Tribunal do its job, but, really, these
2 examples of aggravation, again, they are too far.
3 They are too far.
4 There is even a random thing in the
5 newspaper already today, and it doesn't have
6 Gramercy's name on it, but it says, "Peruvian State
7 might lose major arbitration; Government of Peru has
8 used false arguments."
9 I don't know if this--it doesn't have
10 Gramercy's name on it. There are many things that
11 are clearly connected to Gramercy, and we've proven
12 that.
13 So, I'm inviting you, please, let's be
14 grownups here. We're in a treaty proceeding. The
15 United States Government has been present. We are
16 sitting before an esteemed Tribunal. They are going
17 to make Decisions, and that is where we need to be
18 directing our attention, not other places.
19 I am in the hands of Tribunal. Thank you.
20 PRESIDENT FERNÁNDEZ ARMESTO: Thank you.
21 Thank you, Mr. Hamilton. You know the Decisions, the
22 interim Decisions, what the Tribunal has taken.
[Page 2595]
1 Mr. Friedman?
2 MR. FRIEDMAN: We also are aware of and have
3 abided by the Orders of the Tribunal. I was frankly
4 not aware of what Mr. Hamilton has described about
5 the phone call that he received until today. I don't
6 know when that occurred or what the circumstances
7 were, so that is new information that I will have to
8 vet, I suppose.
9 But I believe that we are in a situation
10 where we are dealing with--and I think we've been
11 very clear about this all along. We do respect and
12 have abided by the Tribunal's Orders, and to the same
13 extent, I suppose, that the Republic of Perú has.
14 And we have pointed that they have made comments on
15 their website, and they continue to engage in a wide
16 variety of public statements that Gramercy considers
17 to be false, inaccurate, and whatever. We don't have
18 to revisit everything that was in the papers, but
19 there are very much two sides to this story.
20 And I believe that both Parties have, since
21 the Tribunal's Orders, abided by what the Tribunal
22 had indicated, which is: Don't take steps that are
[Page 2596]
1 aggravating. But, as we've always said, this is a
2 matter of public concern, in the United States as
3 well as in Perú, and it's not just about Gramercy.
4 And Gramercy also is not disabled from its rights to
5 speak publicly on these issues simply because it is
6 also pursuing a dispute resolution mechanism through
7 this Arbitration.
8 And especially in an arbitration system that
9 is--encourages and requires transparency, it is
10 just--it is--it would be completely irresponsible,
11 and there is no basis, for the Tribunal to impose the
12 kind of gag order that I believe the Republic of Perú
13 has continually sought to have, and the Tribunal has
14 taken a much more balanced approach.
15 So, if there's a particular allegation about
16 interference with Mr. Hamilton's relationship with
17 his client, I take that seriously, and that is
18 something that we do need to take on board, and I
19 will investigate that. But otherwise, I think this
20 is a matter of public concern, and it is perfectly
21 appropriate for the Parties to comment on it as they
22 will.
[Page 2597]
1 And, you know, we can't pretend that this
2 doesn't have wider and political implications. It
3 does, and this proceeding needs to have integrity,
4 and the Tribunal needs to be free to do its job, but
5 otherwise, I really think we need to let this issue
6 go.
7 MR. HAMILTON: Mr. President, I will be
8 brief. I know they want to let this issue go,
9 because there is no balance whatsoever in terms of
10 the conduct of the Parties here. As a matter of
11 fact, the call that I mentioned, I said, "That matter
12 is pending in a case before a Tribunal. You can read
13 that information"--and I was very respectful, and I
14 ended it. That is not the way they have conducted
15 themselves.
16 We have shown you billboards parked in front
17 of the United States Congress, parked in the front of
18 the Peruvian Embassy, totally unimpressive. And,
19 Mr. President, it is interesting to hear the phrase
20 "gag order." And the reason it is interesting to
21 hear the phrase "gag order" is because a series of
22 consecutive Peruvian Ambassadors here in Washington
[Page 2598]
1 have been contacted by certain individuals in the
2 United States Government stating that Jonathan
3 Hamilton of Perú is forcing American citizens to be
4 subject to "gag orders," which is false, and wrong,
5 and an interference with Perú, a disrespect to this
6 Tribunal, and an interference with our
7 attorney-client relationship.
8 The issue that I raised is not a surprise
9 issue. We raised it in correspondence last year. I
10 tried to be respectful to all, including, quite
11 frankly, to Gramercy, including to other individuals
12 in this city who are involved. We respect in the
13 utmost the bilateral relationship that Perú has with
14 the United States Government, but this has simply
15 gone too far.
16 This is all on the record. I've already
17 raised the exact issue, but I'm trying to not to
18 unnecessarily overshare and give everybody a chance
19 to try to do the right thing.
20 Perú has been very reserved, very reserved,
21 including in all dealings with the United States
22 Government, where we try to be as limited as
[Page 2599]
1 possible. So, I will leave it at that.
2 We consider this literally to impact the
3 validity of this proceeding. It has gone too far.
4 We invite cooperation. Is it not assisting in
5 resolving things with Perú. Frankly, it's done the
6 opposite, because it has specifically been a tactical
7 blunder of interacting with problem-solvers in the
8 wrong way.
9 So, I invite you to please consider--I
10 invite the Tribunal to keep in mind its orders. We
11 need to finish this case better than it has happened
12 to date, and we look forward to cooperating to do
13 that. Thank you.
14 MR. FRIEDMAN: And I will just add that
15 Gramercy, for--as the record has shown, for more than
16 10 years has offered its hand to try to resolve the
17 issue cooperatively. And that--it remains very
18 willing to do so if that is something--if it is
19 sincere that Perú wants to deal with the issues
20 cooperatively.
21 PRESIDENT FERNÁNDEZ ARMESTO: Okay.
22 MR. HAMILTON: Perú doesn't pay when it
[Page 2600]
1 doesn't have a duty to pay. So, let's be reasonable
2 here. Just because you don't get what you want
3 doesn't mean you can bully in the wrong way.
4 Thank you, Mr. President.
5 PRESIDENT FERNÁNDEZ ARMESTO: Let me just
6 make a couple of arguments, because one thing is the
7 interference in the relationship between a lawyer and
8 his client. That is totally wrong, and I think there
9 is nothing--I don't think anyone around this room
10 will--to try to advance one's case trying to
11 interfere in the relationship between another lawyer
12 and his client is false, and the Tribunal has
13 forcefully said that and expects that this will not
14 happen. This will not happen. This is totally,
15 totally unacceptable. First point.
16 Second point, I do think that, at this
17 stage, spending money--because these lobbyists do
18 charge money--is senseless, because we are here in
19 the middle of a legal procedure which will lead in a
20 reasonable period of time to an outcome. And I don't
21 think that lobbying in the U.S. Congress or whatever
22 has any merit, and it will not improve anyone's
[Page 2601]
1 chances of the outcome, regarding the outcome of this
2 case. This is a legal case. And so, I would--I
3 think that lobbying should not continue. I don't
4 think that that adds any value to Claimants' case.
5 Third point is this is an open procedure
6 because, under the Laws and the Rules, it is
7 obligatory. We are now in the internet, so anyone
8 who is interested can follow it. Journalists can
9 follow it. It may have a political impact in Perú.
10 The next step is then for Parties to try to
11 influence the press, and we all know that there may
12 be some temptation to influence the press. I would
13 totally discourage that the Parties engage in trying
14 to push the press to support its case.
15 And the reason is, it is irrelevant. It
16 will not help the case, because we do not read the
17 Peruvian press or American press. If we see it, it
18 is probably--whatever they write is totally unrelated
19 to the truth, and so, it is wasted effort. It is
20 wasted effort. And so, I can only repeat what we
21 have already said: Let's all focus on this case. It
22 is complicated enough. Let's fight it in the proper
[Page 2602]
1 arena, which is the arena of the law of justice, and
2 treat this as the proper way of solving this problem.
3 And I had some hope--or I always have the
4 hope that there may be some possibility of finding
5 that the Parties, among themselves, find some sort of
6 settlement. I hear Mr. Hamilton saying here that,
7 for the Peruvian State, it is difficult because there
8 are rules and laws, and they would have to
9 change--approve laws. It is, in general, difficult
10 for States. For example, for the Spanish State, it
11 is practically impossible to reach a settlement
12 because the internal hurdles are so high that it is
13 very difficult.
14 That said, nothing would make the Tribunal
15 more content than to see that this problem and the
16 problem of all the other Bondholders is solved, but I
17 don't think that this is now a realistic possibility.
18 I think we have to go through this procedure, and the
19 best way to go along this procedure is just keeping
20 no--not speaking to the press, not making press
21 releases, no lobbying, and certainly that--I say with
22 absolute emphasis--is no interference in the
[Page 2603]
1 relationship between a law firm and its clients.
2 That is manifestly improper.
3 MR. FRIEDMAN: Yes, I think that we accept
4 that there should be no interference in this process,
5 but I really do have to put down a reservation that
6 this is a wider political matter that has dimensions
7 beyond these walls, and that is the reality, and it
8 will continue to be the reality.
9 PRESIDENT FERNÁNDEZ ARMESTO: But let's not
10 put oil on the fire. Let's not put oil on the fire.
11 It does not help the case.
12 I mean, the case--each Party's case is
13 helped by good legal arguments and good legal
14 drafting. It is really the only thing which helps.
15 Very good. Gentlemen--
16 MR. HAMILTON: So, in two weeks, we will
17 submit or not submit something and determine from
18 there. And we understand that any potentially
19 relevant and material documents will be preserved in
20 the meantime, and not affected, and we will see where
21 we go from there. Thank you.
22 PRESIDENT FERNÁNDEZ ARMESTO: And so, I come
[Page 2604]
1 to my last question: Is there any breach of due
2 process to which you would like to draw the
3 Tribunal's attention at this stage?
4 Mr. Friedman, any breach on your side?
5 MR. FRIEDMAN: No. In fact, while we did
6 feel pressed for time sometimes--I think we all
7 experienced it--I would like to express our gratitude
8 for the Tribunal's attention, including late into the
9 night, and for the support of everybody else--the
10 Secretariat, the Secretariat to the Tribunal, the
11 Court Reporters, the Interpreters--in helping us get
12 through a very substantial amount of information over
13 the course of these days. We really do appreciate
14 the efforts that you went to to extend yourself to
15 make it possible. So, we have no objections as to
16 how this Hearing has been conducted.
17 PRESIDENT FERNÁNDEZ ARMESTO: Thank you.
18 And on the Republic of Perú, Mr. Hamilton,
19 is there any worry about due process?
20 MR. HAMILTON: Thank you very much,
21 Mr. President. Perú, as we've expressed, has a lot
22 of concerns about this case, but we very much
[Page 2605]
1 appreciate your good disposition during the course of
2 this Hearing to manage the pressure. Your attention
3 to detail through long hours, each one of you, is
4 very much appreciated, and good humor as well,
5 including--because I think that we are all part of
6 the same curious type of creature who finds it
7 interesting to go through these intense processes.
8 Thank you very much to each Member of the Tribunal,
9 and to my counterparts.
10 PRESIDENT FERNÁNDEZ ARMESTO: "Curiosity" is
11 the expression.
12 So, I think I have--I would like to--the
13 Interpreters to come out. Can I ask the interpreters
14 to step out to say hello to them? Can the
15 interpreters come out?
16 THE INTERPRETER: The interpreters are
17 interpreting.
18 PRESIDENT FERNÁNDEZ ARMESTO: We would like
19 to ask that they stop interpreting and they should
20 all step out.
21 THE INTERPRETER: It's not within our remit.
22 Sorry.
[Page 2606]
1 PRESIDENT FERNÁNDEZ ARMESTO: I just want to
2 put a face to them, because they are the faceless
3 people, and I think they have done an amazing job,
4 and they do not seem--this is off the record now.
5 (Comments off the record.)
6 PRESIDENT FERNÁNDEZ ARMESTO: All right. We
7 are finished.
8 (Whereupon, at 2:50 p.m., the Hearing was
9 concluded.)
[Page 2607]
I, Dawn Κ. Larson, RDR-CRR, Court
Reporter, do hereby certify that the foregoing
proceedings were stenographically recorded by me
and thereafter reduced to typewritten form by
computer-assisted transcription under my
direction and supervision; and that the
foregoing transcript is a true and accurate
record of the proceedings.
I further certify that I am neither
counsel for, related to, nor employed by any of
the parties to this action in this proceeding,
nor financially or otherwise interested in the
outcome of this litigation.
Signature
Dawn K. Larson