[Page 2608]
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. - - - - - - - - - - - - - - - - - - - - - - -x | ICSID Case No. UNCT/18/2 Volume 8 |
VIDEOCONFERENCE:
HEARING ON JURISDICTION, MERITS AND QUANTUM
Tuesday, November 17, 2020
The hearing in the above-entitled matter
came on at 8:00 a.m. (EDT) 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 2609]
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 2610]
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. ERIC TURQMAN
Debevoise & Plimpton, LLP
919 Third Avenue
New York, New York 10022
United States of AmericaMR. LUIS BEDOYA ESCURRA
MR. FRANCISCO CARDENAS PANTOJA
Rodrigo, Elias & Medrano
Av. San Felipe 758
Jesús María
Lima 15072
PerúRepresenting Gramercy Funds Management LLC:
MR. ROBERT KOENIGSBERGER
MR. JAMES TAYLOR
MR. GUSTAVO FERRARO
MR. BOB JOANNOU
MR. ROB LANAVA
MR. JOSH O'MELIA
MR. NICK PAOLAZZI
MR. THOMAS NORGAARD
[Page 2611]
APPEARANCES: (Continued)
On behalf of the Respondent:
MR. RICARDO AMPUERO
Republic of PerúMS. MONICA GUERRERO
Republic of PerúMR. SHANE MARTINEZ
Republic of PerúMR. JONATHAN C. HAMILTON
MS. ANDREA MENAKER
MR. RAFAEL LLANO
MR. FRANCISCO JIJÓN
MR. JONATHAN ULRICH
MR. JOHN DALEBROUX
MS. SOPHIA CASTILLERO
White & Case LLP
701 Thirteenth Street, NW
Washington, D.C. 20005-3807
United States of AmericaFor the United States of America:
MS. LISA J. GROSH
MR. JOHN D. DALEY
MS. NICOLE C. THORNTON
MS. MARGARET E.B. SEDGEWICK
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
[Page 2612]
APPEARANCES: (Continued)
MR. EDWARD RIVERA
U.S. Department of CommerceMR. KHALIL GHARBIEH
MS. AMANDA BLUNT
Office of the United States Trade
Representative
[Page 2613]
C O N T E N T S
PAGE
CLOSING ARGUMENTS
ON BEHALF OF THE CLAIMANTS:
QUESTIONS FROM THE TRIBUNAL. ... 2761
CONFIDENTIAL PORTION OF TRANSCRIPT. ... 2765-2780
[Page 2614]
P R O C E E D I N G S
PRESIDENT FERNÁNDEZ ARMESTO: Very good.
Good morning to you.
This is the Final Hearing in the ICSID
Case Number 18/2, UNCITRAL, Gramercy Funds Management
LLC and Gramercy Perú Holdings LLC against the
Republic of Perú.
On behalf of the Tribunal, I welcome you all:
the Claimants, the Respondents, the Court Reporters,
the Interpreters, and, of course, also the
representatives of the Non-Disputing Party.
Before we start, I think our Secretary will
give some explanations regarding confidentiality
because, as you know, this Hearing will then be put on
the website of ICSID and will be publicly available,
but we have special procedures in place should there
be confidential information.
Marisa, could I kindly ask you to explain and
remind the Parties exactly how it works.
SECRETARY PLANELLS-VALERO: Yes. Thank you,
Mr. President.
In accordance with Paragraph 33 of Procedural
[Page 2615]
Order Number 12, the Parties may orally alert the
Tribunal each time they intend to refer to protected
information and request that that part of the Hearing
be held in private. Following such a request, I will
be placing the representatives of the Non-Disputing
Party in the waiting room, and I will let the Parties
and the Tribunal know when that exercise has been
completed. The representatives of the Non-Disputing
Party will remain in the waiting room until the
confidential section of the presentation is over.
Then they will be placed back into the hearing room.
PRESIDENT FERNÁNDEZ ARMESTO: Excellent.
Mr. Friedman, can I kindly ask you if you
know whether we will today, since today you will be
the leading figure in the presentation, will you be
invoking confidentiality at any time?
MR. FRIEDMAN: Our plan is not to. We've
crafted today's arguments to try to avoid that
circumstance arising, so I could see it arising only
if there is a question from the Tribunal that takes us
into some of that evidence.
PRESIDENT FERNÁNDEZ ARMESTO: Excellent.
[Page 2616]
Excellent. So, we will also try to formulate our
questions in a way that we don't trigger this
complication.
Very good. Is there anything else
regarding--yes. I know.
That goes now basically for you,
Mr. Friedman, could you please speak slowly. You are
being interpreted into Spanish. There are two Court
Reporters pending on your very word, and we have time.
So, do speak slowly because otherwise it becomes very,
very difficult for our Court Reporters and the
Interpreters.
MR. FRIEDMAN: Yes. Thank you for that,
Mr. President. If, at any time, I or anybody else is
speaking too quickly, just give us a heads-up, and we
will slow down.
PRESIDENT FERNÁNDEZ ARMESTO: Yes. And the
Interpreters and the Court Reporters are welcome to
just shout in whenever they lose track of what is
happening because it is fundamental. Don't be shy.
It is fundamental that we have a good Transcript in
both languages, and it is fundamental that we do
[Page 2617]
things slowly. So, don't be shy if you need. Just
shout in. I had it recently in another hearing, and,
yes, I think it is the proper way.
Very good. Marisa, is there any--from the
point of view of the Secretariat, is there any other
issue you would like to raise before I give the floor
to the Parties?
SECRETARY PLANELLS-VALERO: Thank you,
Mr. President.
The Interpreters have asked if the Claimants
could circulate only to the Interpreters and the Court
Reporters the speaking points of today's presentation.
MS. BIRKLAND: We have done so.
SECRETARY PLANELLS-VALERO: Okay. Thank you
so much.
Also, just checking that everyone is able to
access the Transcript in Spanish and in English?
MR. FRIEDMAN: We are receiving it on
Claimants' end.
SECRETARY PLANELLS-VALERO: Thank you,
Mr. Friedman.
PRESIDENT FERNÁNDEZ ARMESTO: Mr. Hamilton,
[Page 2618]
are you also satisfied with the--that you are getting
the Transcript?
MR. HAMILTON: Thank you very much,
Mr. President. Perú has access to the English and
Spanish-language Transcripts. And good morning and
good afternoon to all the Members of the Tribunal.
PRESIDENT FERNÁNDEZ ARMESTO: Very good. If
we were in a room, which would, of course, be much
nicer and I would have very much preferred, I would
now give the floor to Mr. Friedman and then to
Mr. Hamilton to present who is in the room.
Mr. Friedman, are you still able to do that,
or would you prefer that the Secretariat just calls
the role?
MR. FRIEDMAN: We're in your hands. I do
have a list of the participants that I understand are
currently on today's meeting. I could read that, if
you'd like.
PRESIDENT FERNÁNDEZ ARMESTO: Yeah, why don't
you do that, and we then ask Mr. Hamilton to do the
same?
MR. FRIEDMAN: There is myself, Mark
[Page 2619]
Friedman; my colleagues: Ina Popova, Carl Riehl,
Floriane Lavaud, Berglind Birkland, Guilherme Recena
Costa, Sarah Lee, Duncan Pickard, Julio Rivera Rios,
Mary Grace McEvoy, Eric Turqman. Those are all from
Debevoise & Plimpton; from Estudio Rodrigo: Francisco
Cardenas Pantoja; also, from Gramercy: James Taylor,
Rob Lanava, Josh O'Melia, and Nick Paolazzi.
I don't know if I've missed anybody. If I
did, I would invite them to add their name. But I
believe that is who is attending right now from the
Claimants' side.
PRESIDENT FERNÁNDEZ ARMESTO: Very good.
Mr. Hamilton, do you keep a track record on
who is attending on your side, or do you prefer that
the Secretary calls the role?
MR. HAMILTON: Thank you, Mr. President.
I'll be glad to introduce the team of the
Republic of Perú.
I'm Jonathan Hamilton of White & Case, and
it's my pleasure to introduce various representatives
of the Republic of Perú who are connected. They are
from the Embassy of Perú, the Ministry of Foreign
[Page 2620]
Affairs of Perú, and the Ministry of Economy and
Finance of Perú, as well as representatives of the
Special Commission for the Defense of the Peruvian
State. The representatives of Perú include Ambassador
Hugo de Zela, Minister Giovanna Zanelli, Alberto Hart,
Oliver Valencia, Ricardo Ampuero, Monica Guerrero, and
Shane Martínez.
In addition, we are joined by Mr. Bruno
Marchese of Estudio Rubio in Lima and by the following
colleagues by White & Case: Andrea Menaker in London,
Rafael Llano in Mexico City, Francisco Jijón in
Washington, D.C.; and the following additional
colleagues in Washington, D.C., Jonathan Ulrich, John
Dalebroux, Sandra Huerta, Sophia Castillero, Antonio
Nittoli, and myself.
Thank you very much, Mr. President, and
Members of the Tribunal.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you.
Thank you, Mr. Hamilton.
And we have from the U.S. Department of
State--Marisa, we have some colleagues from the U.S.
Department of State. Do you know who is attending?
[Page 2621]
SECRETARY PLANELLS-VALERO: Thank you,
Mr. President.
I see Ms. Nicole Thornton from the U.S.
Department of State, Ms. Margaret Sedgewick from the
U.S. Department of State, Ms. Amanda Blunt from the
U.S. Department of State, Mr. Edward Rivera from the
U.S. Department of Commerce, Mr. John Daley from the
U.S. Department of State. I believe that's it at this
moment.
PRESIDENT FERNÁNDEZ ARMESTO: Very good. And
we have then our Court Reporters: Mr. Dante Rinaldi,
Ms. Dawn Larson. And we have the Interpreters:
Ms. Silvia Colla, Mr. Daniel Giglio, and Mr. Charles
Roberts. Thank you very much for helping us today.
So, is there any point of order before we can
give the floor to Mr. Friedman for his conclusions?
Mr. Friedman, is there any other issue? And
this is not an encouragement for you to bring up any
issue. Is there any issue which you would like to put
on the table before we start?
MR. FRIEDMAN: I'm very pleased to report to
you that there are no issues that we need to bring to
[Page 2622]
your attention at this time.
PRESIDENT FERNÁNDEZ ARMESTO: Very good.
Mr. Hamilton, what about you?
MR. HAMILTON: Thank you very much,
Mr. President.
The Republic of Perú wishes to welcome the
representatives of the Non-Disputing Party, the United
States of America, and hopes and anticipates that we
will have a rules-based proceeding, one that actually
follows the rules. Thank you very much.
PRESIDENT FERNÁNDEZ ARMESTO: As we have had
throughout all our Hearings. Mr. Hamilton, I hope you
agree with that.
Very good. So, Mr. Friedman, give us an
overview of how long your presentation will take, and
then let's speak about breaks.
MR. FRIEDMAN: Yes. I think we will take
close to the allotted time. We hope to be just a
little bit under it, and we have planned a break
partway through. Once I give the road map within the
framework of the speech that we have, I will indicate
to you when we expect to take a break. I would expect
[Page 2623]
that to be after about 90 minutes, if that's
acceptable to the Tribunal. We will--obviously, we
are in your hands.
PRESIDENT FERNÁNDEZ ARMESTO: No, no, no.
There are two points. First of all, this is more
tiring than being in a room for everyone and
especially also for Interpreters and Court Reporters.
So, we had made--we said maximum 150 minutes with a
15-minute break. So, whenever you feel that it is an
appropriate moment to make a break, you make a break.
If you even feel that you would like to make a second
break, that is perfectly acceptable, and I leave it in
your hands.
MR. FRIEDMAN: And, Mr. President, if the
Tribunal would prefer for us to have two breaks, we
could certainly structure it that way, but we really
are--I completely agree with you. This is more
difficult than being in person in many ways, and we
want to make sure that everybody is comfortable and
attentive. So, why don't we proceed as we had
planned, but if at any point you wish to indicate that
we should take and pause a little bit earlier than we
[Page 2624]
had anticipated, please just let us know and, of
course, we'll do that.
PRESIDENT FERNÁNDEZ ARMESTO: Very good.
Very good. And you have made a presentation, which I
think Ms. Birkland has sent to us, and we must give it
a numbering. And that would be H--who knows? Who is
faster?
Marisa, which H number do we have, or do we
have to look up?
SECRETARY PLANELLS-VALERO: Let me see.
PRESIDENT FERNÁNDEZ ARMESTO: We will say it
in the break.
SECRETARY PLANELLS-VALERO: Yes.
PRESIDENT FERNÁNDEZ ARMESTO: In the break we
will tell you exactly what.
MS. BAPTISTA: H-21, I think.
PRESIDENT FERNÁNDEZ ARMESTO: H-21. Very
good.
SECRETARY PLANELLS-VALERO: Yes. Thank you.
PRESIDENT FERNÁNDEZ ARMESTO: H-21. Very
good.
Mr. Friedman, you have the floor.
[Page 2625]
CLOSING STATEMENT BY COUNSEL FOR CLAIMANTS
MR. FRIEDMAN: Thank you very much,
Mr. President, it's very good to see you; also you,
Madam Stern and Mr. Drymer. On behalf of Gramercy and
our entire Debevoise team, we must start by expressing
our gratitude to all of you for your attentive,
professional, and responsive conduct of this
Arbitration.
And we also want to express our gratitude for
giving us the opportunity today to engage with you on
Oral Closing Submissions and your fortitude in doing
so, in making this work, despite the global pandemic
that has, of course, reshaped our world since the last
time we were all together in February, right before
all of this lockdown hit and it seemed that this virus
was something on the distant horizon.
PRESIDENT FERNÁNDEZ ARMESTO: It is amazing,
Mr. Friedman, how the world has changed since we last
met.
MR. FRIEDMAN: Yeah.
PRESIDENT FERNÁNDEZ ARMESTO: It is a really
surprising development, yes.
[Page 2626]
MR. FRIEDMAN: It is.
PRESIDENT FERNÁNDEZ ARMESTO: And so is the
fragility of many things we take for granted.
MR. FRIEDMAN: It does. And I remember the
sort of anxious conversations that we had outside the
hearing room about what was happening, and I don't
think any of us really could have anticipated we would
be in something this widespread, this deep, this sort
of affecting everybody in such the way that it is.
So, we really do appreciate everybody in the
international arbitration community and you getting on
with business and making it possible to continue to
progress cases.
For this case, as you know, Gramercy has
always considered it regrettable that Perú's obstinate
and unlawful conduct has made this Arbitration
necessary at all. Gramercy invested in Peruvian Bonds
because it believed in Perú. It believed in Perú's
renaissance. It admired how responsibly Perú had
worked with its creditors to resolve all other legacy
debt, pull its economy out of the abyss, rejoin the
international financial community, and attract foreign
[Page 2627]
capital like Gramercy's to return to the country.
Now, Gramercy understood that receiving
payment on the Bonds would likely take time and
effort. It might require consensus building and
compromise and, perhaps, even assertion of legal
rights associated with the Bonds. But as you heard
from Mr. Koenigsberger, Gramercy always expected that
Perú would ultimately pay this indisputable sovereign
obligation as Perú's Constitution and law require.
Perú has had countless opportunities over the
years to do so. Gramercy itself repeatedly proposed
to discuss a concessional arrangement that could have
benefited everyone, the Bondholders and State alike.
Even after the Constitutional Tribunal issued its
order in 2013, but before the Ministry promulgated the
value-destroying formulas that we will look at again
later, Mr. Koenigsberger wrote to Perú requesting
collaboration in the search for a solution to the
problem posed by the Land Reform Bonds and offering to
help broker a deal that would, in his words, "benefit
all parties involved and resolve the debt" while also,
in his words, "mitigating the impact of Perú's
[Page 2628]
immediate budgetary priorities."
And that is CE-185.
But Perú instead chose a different path. It
took measures to wipe out Gramercy's investment in
Peruvian sovereign Bonds through unlawful means,
including an arbitrary and irrational bondholder
process. Instead of fairly resolving the debt, Perú
breached the U.S.-Perú Trade Promotion Agreement.
In our time with you today, we will proceed
as follows: I will first summarize the evidence and
arguments proving that Gramercy had a clear legal
entitlement to be paid current value plus interest on
the Bonds and that Perú breached the Treaty by
refusing to do so and extinguishing the debt instead.
Mr. Recena Costa and Ms. Lavaud will contribute to
that argument. And I think, Mr. President, after that
segment we should propose to take a break.
Mr. Riehl will then explain why Gramercy
should be compensated based on the intrinsic value of
Gramercy's Land Bonds. That requires a payment of a
sum of at least $840 million as of May 2018, which, of
course, will be greater now because of the continued
[Page 2629]
accumulation of interest since that time.
Ms. Popova and Ms. Birkland will then show
why Perú's jurisdictional objections all fail, and I
will offer a few brief closing words.
Because our time is limited and we want to
speak slowly in a comprehensible rate for the
Tribunal, we will not today address every point we
presented in our written submissions. That does not
mean that we abandon those points; we do not. It
simply means that we are trying to focus today on
certain issues that we think will be most important to
you. We, of course, invite your questions. We are
here for you to make your job easier, so if something
is on your mind, please give us the opportunity to
address it, and we will.
So, I begin by establishing Gramercy's
entitlement. And it is clear that Gramercy had a
valuable asset when it bought Peruvian Land Bonds. In
fact, if there's a single central issue in this case,
it is this: that Gramercy's Land Bonds were highly
valuable sovereign obligations and not just worthless,
old and, even, as Perú has put it, "smelly pieces of
[Page 2630]
paper."
That is the central issue because it is at
the heart of both Parties' respective arguments.
Perú's primary defense is that Gramercy really has
nothing to complain about. Whatever crumbs the
Ministry offered it are better than nothing.
According to Perú, notwithstanding the
Constitutional Tribunal's 2001 Landmark Decision, the
Land Bonds were worthless when Gramercy bought them.
Perú's Valuation Experts similarly assumed that the
debt had no value other than its denuded face value,
such that offering anything more than $.20 for
Gramercy Bonds, $.20, was a hair extension for which
bondholders should basically say "thank you" and stop
complaining.
But if Gramercy is right on this point, and
the Bonds actually had significant value, then Perú
has really no defense. It is practically self-evident
that the Bondholder Process is expropriatory and
unlawful, that it imposed a massive haircut, and that
it simply is an elaborate mechanism for the State to
extinguish its significant obligation for a pittance.
[Page 2631]
Now, on the central issue, we submit to you,
Gramercy is right, overwhelmingly, and Perú simply
continues to fight a battle that the MEF lost nearly
two decades ago.
You have seen the evidence and heard now from
both Parties' Experts, and all of that shows that,
from 2001 at the latest, Peruvian law was clear: The
Land Bonds were not worthless, as they would have been
at their nominal or face value. To the contrary,
Perú's Constitutional Tribunal held in 2001 that Perú
could not pay the Land Bonds at nominal value. It had
to pay them at current value. It stated: despite the
fact that using the Bonds as a means of payment was
not unconstitutional, the payment system to which said
procedure was subject was, and continues to be,
unconstitutional.
So, there should be no doubt that the Land
Bonds are debts of value that, under Perú's
Constitution, must be paid at their current value.
Justice Revoredo, who was a member of the
Constitutional Tribunal in 2001, told you that. And
so did Professor Mario Castillo, Perú's foremost
[Page 2632]
Expert on the law of obligations, whose work even
Respondent's Expert had cited as authoritative. And
while Respondent's Expert Dr. Hundskopf had initially
said something else in his Report, on
cross-examination he agreed that the Land Bonds are
obligations of value under the Peruvian Constitution
and the Civil Code and that the Constitutional
Tribunal was correct to hold that they were.
So, when Perú tells you, even in its
Post-Hearing Brief, that the Land Bonds are examples
of debt to pay money, rather than debts of value, it
does so not only without the support of its own Legal
Expert, but in contradiction to that Expert's own
testimony on the stand.
Moreover--and this is very important--this
current value requirement was not empty and
meaningless, as Perú's arguments all imply. Perú
basically says: Okay, maybe we had to pay current
value, but it didn't really mean anything. You
couldn't attach any significance to it. It means only
what the Constitutional Tribunal in 2013 and the MEF
in its Supreme Decree said it means.
[Page 2633]
That is simply wrong. The idea of current
value, the principle of it, was and remains a
well-established principle rich with content. Its
basic idea--basic idea, is so straightforward that
even Minister Castilla acknowledged that it means
restoring the amount's original purchasing power.
That's the principle. And that's not abstract
or--there may be questions about means of doing so,
but it's not an empty concept.
Now, in addition to preserving the purchasing
power of the Land Bonds' principal, the legal
obligation to pay compensatory interest on those
amounts is equally straightforward and uncontroversial
in Peruvian law as it existed prior to the time
Gramercy invested. Again, as Dr. Hundskopf
acknowledged, the 2004 Constitutional Tribunal
Decision confirmed that the bondholders had a right to
payment of the updated debt plus interest.
As I will discuss at greater length also in a
few minutes, the Constitutional Tribunal, again, in
2013 and 2015, and the Supreme Court in multiple
Decisions since 2013, have likewise confirmed that the
[Page 2634]
entitlement to interest exists as well as and on top
of the updating.
Consequently, there can be no serious dispute
if you take seriously what Peruvian law was about the
two core components of Gramercy's legal entitlement:
An updated principal amount that restores the Bonds'
original purchasing power plus compensation for time
value of money in the form of interest. Current value
plus interest. That's what Perú's Constitution and
law plainly required and what Gramercy correctly
understood and legitimately expected at the time of
its investment.
Moreover, it was also evident what that
entitlement meant in practical terms. Again, not some
abstract, fluid concept that can mean anything. When
bondholders went to court to enforce their Land Bonds,
the Courts of Perú regularly updated the principal
using CPI, the Consumer Price Index, and then added
interest. Over a decade-long period following the
2001 Constitutional Tribunal Decision, the law was, in
fact, so clear that in 2011, the Peruvian Congress in
a formal report recognized a "uniform jurisprudence"
[Page 2635]
in this area. As Vice Minister Sotelo confirmed,
bondholders routinely obtained court judgments against
Perú reflecting precisely that uniform jurisprudence.
And you know what? It is no surprise that
the courts followed this approach. As Professor
Castillo explained, there must be a logical
correspondence between what we update and how we
update it. If you're trying to establish the current
value of a quantity of gold whose value must be
restored, you, of course, would look at the price of
gold and gold indices. Of course, it's the right
thing. You wouldn't look at the price of cattle. It
doesn't make any sense.
So, if you need to measure inflation, which
is the thing that had to be erased and updated for,
well, then you use an inflation index, which is, of
course, an index that is regularly published and
maintained by Perú's own authorities, and it's called
the Consumer Price Index, the CPI, as both Professor
Castillo and Justice Revoredo explained.
So, while CPI is not the only way of applying
the current value in the abstract, it wouldn't be the
[Page 2636]
right way of applying the current value--finding the
current value of a quantity of gold. It is the only
conceptually correct way of applying it to the Land
Bonds, and so, the value of the Land Bonds at current
value is legitimately the value of CPI updating.
Now, Perú, nevertheless, despite the evidence
even of its own Expert in these proceedings,
nevertheless contends that the whole situation was
plagued by massive uncertainty lasting over a decade
and that, therefore, Gramercy's rights or the rights
of any other bondholder were basically meaningless.
Now, in general, you know that argument must
be wrong. I mean, as we just saw, Perú's own courts
were able to apply the law consistently without
drowning in this alleged sea of uncertainty. They
didn't have problems figuring it out. But Perú's
argument is also wrong in each of its particulars.
None of the arguments establishes any genuine
uncertainty over Gramercy's fundamental rights or
expectations. So, let's look at those arguments Perú
makes on this point.
First, Perú says that some courts in Perú
[Page 2637]
apply different CPIs, such as regional CPIs or the
Central Bank Automatic Adjustment Index, but, as
Professor Castillo explained, all of these indices are
CPIs, including the Central Bank Index, which is
simply Lima CPI measured with one month's delay.
In contrast, Perú has not adduced a single
example, not a single example, of Peruvian Courts
applying a method other than CPI to the Land Bonds
before 2013. Not a single example. And they would
have been party to every case involving the Land
Bonds. Its Expert resisted giving a straight answer
initially but eventually accepted that he wasn't aware
of any such Decisions before 2013.
And Perú's disingenuous claim that some
courts had applied dollarization was short-lived
because, you will recall, Mr. President, that on
questions from the Tribunal, Counsel for Perú had to
concede that none of those cases that Perú invoked
involved the Land Bonds. Moreover, there was also no
uncertainty caused by the so-called "adjusted CPI."
That was an index that the Ministry of Economy and
Finance made up at some point along the way that was
[Page 2638]
never applied by anybody, never used in court, and
which Professor Castillo rightly called out as a
"cheeky" attempt to skip over hyperinflation to simply
reduce the debt. It was just a made-up way of getting
rid of the debt. So, there was no uncertainty at the
time, none, that, at least if you went to court, the
current value of the Land Bonds meant their CPI
adjusted value.
Second, Perú says that courts applied
different interest rates. In fact, the courts
routinely affirmed bondholders' right to interest at
the stated coupon rates at least, and it did so, in
many, many, many cases, overwhelmingly.
Now, Perú's Quantum Experts conceded that in
the few cases that were exceptions to that, when
courts, on occasion, departed from the face rate of
the coupons, they did so to award higher, not lower,
interest amounts. The Saavedra Court, for instance,
awarded interest at a legal rate that was as high as
300 percent at some points, which resulted in an
interest award 20 times greater than the principal.
And the Luna Judgment awarded additional default
[Page 2639]
interest, default interest of almost 4 percent on top
of compensatory interest at the 4 percent, 5 percent,
6 percent coupon rates. So, there was also no
uncertainty about interest, at least at the stated
coupon rates. None.
Third, Perú points to various legislative
bills that did not become law. And I want to comment
on this.
As Gramercy previously showed, with the
exception of one lone bill that never went anywhere
and the MEF's own efforts, the reports and bills that
Congress actually passed and studied carefully
actually converged on CPI updating. They all had CPI
updating in them and they provided, if anything,
further evidence supporting CPI updating plus
interest. But that's not the main point because, even
putting that fact completely aside, even if the bills
had been much more diverse and had methods like the
price of cattle as the updating method, it wouldn't
have mattered because these bills just don't support
Perú's uncertainty claim in this Arbitration.
All they show is that Perú did not succeed in
[Page 2640]
creating an administrative payment scheme that could
have provided an alternative to enforcing legal rights
in court. So, at most, they would show that there was
uncertainty about whether Perú would create such an
administrative scheme. That in no way diminishes the
certainty of the constitutional and legal rights
Gramercy had and that it could enforce in the court
system, as, Mr. Koenigsberger told you, Gramercy had
always expected.
And that is also why Vice Minister Sotelo had
to concede that, despite the failure of the
legislative and executive branches to enact a Land
Bond payment scheme, bondholders always had the
right--and this was the existing legal framework in
Perú, as she conceded--bondholders always had the
right to vindicate CPI-based current value plus
interest in court. So, the fact that none of the
bills became law also does not establish any
uncertainty about Gramercy's legal entitlement to CPI
updating plus interest.
Yes. May I pause for just a moment,
Mr. President, and just point out--yes. There we are.
[Page 2641]
Madam Stern, I'm sorry, the camera had fallen down and
was looking at your notes, which we saw you were
diligently taking, but we would rather see your face.
I briefly also just want to mention one other
minor point, I think, which Perú apparently has
abandoned. That is its misguided reliance on the
Constitutional Tribunal's 2004 Decision on--that's the
one that endorsed a voluntary dollarization scheme.
You remember that on cross-examination, Dr. Hundskopf,
who initially had put much emphasis on that, admitted
that after finally reading the Decision in depth,
which I guess he hadn't done before he wrote his
Report, he had realized that it had an important
qualification; namely, that the Tribunal's holding was
that the Emergency Decree's dollarization proposal was
constitutional because it was a "voluntary option,"
just as Gramercy and its Experts had said all along.
So, this voluntary option about another
proposal in no way, again, creates uncertainty about
Gramercy's legal entitlement.
And consequently--and that's it. Those are
Perú's arguments on this point. And if you really
[Page 2642]
read through them, what you see is the following:
That there was no existential uncertainty, as Perú
contends, and Gramercy's investment in the Land Bonds,
therefore, was not just some gamble or an option as
Perú now misleadingly attempts to characterize it. In
fact, Perú's Expert, Dr. Hundskopf, to whom the gamble
and option quotes trace back, actually walked back
that testimony on the stand. In his own words, he
conceded that that was not the most accurate way of
characterizing it. He admitted that there could, in
fact, be no doubt about Perú's obligation to pay the
Land Bonds and that, at least after the 2001 Decision,
any bondholder had a clear right to payment at current
value.
Therefore, while Gramercy could not be
certain about whether it would succeed in helping
forge the win-win global consensual restructuring that
it envisioned, it was right to be highly certain that,
either by some kind of negotiation or legislation or,
if necessary, litigation in Peruvian Court, it would
ultimately be paid current value and that this value
could be determined by using CPI and adding interest.
[Page 2643]
Now, having addressed you on Gramercy's legal
entitlement, we now turn to Perú's breaches of the
Treaty.
Perú's campaign to wipe out Gramercy's Land
Bonds for a tiny fraction of their true current value
violates four of Treaty's substantive protections.
First, it violates Article 10.7 through its unlawful
expropriation; second, it violates Article 10.5 by
failing to accord Gramercy the Minimum Standard of
Treatment under international law; third, it violates
Article 10.4, the Most Favored Nation obligation, by
depriving Gramercy of effective means to assert claims
and enforce rights; and, finally, it violated
Article 10.3 by according Gramercy treatment less
favorable than the treatment Perú accorded to Peruvian
nationals.
Now I want to discuss each of those in turn.
First, Perú has expropriated Gramercy's
investment. It is worth just refreshing ourselves on
what the Treaty actually says because Perú's arguments
are sort of penumbral extensions of it. Article 10.7
is pretty clear. It prohibits expropriation, either
[Page 2644]
direct or indirect, except when carried out for a
public purpose in a nondiscriminatory manner, with
prompt, adequate, and effective compensation, and in
accordance with due process of law. And then
Annex 10(b), which the Parties have focused on,
identifies three factors relevant to what is clearly a
fact-specific analysis of whether an indirect
expropriation has occurred.
Economic impact, interference with distinct,
reasonable, investment-backed expectations, and the
character of the Government action. All three factors
show that Perú expropriated Gramercy's investment.
I want to start with the economic impact
argument. Both Parties for this agree with and rely
on the Tza Yap Shum Tribunal's holding that a State
can commit an indirect expropriation when its measures
lead to a total or substantial deprivation of
value--total or substantial deprivation of value.
Here, that sort of deprivation is a mathematical
certainty under any iteration of the Ministry's
updating formulas, whether we look at the
February 2014 formula or the August 2017 one.
[Page 2645]
Now, the first one is pretty easy to
establish. Perú's own Quantum Experts called the
valuation in the first formula, miniscule, and they
were right. It returns a valuation of a grand total
of $861,000 for all of Gramercy's nearly 10,000 Land
Bonds. That is about one-tenth of 1 percent or less
than the total value of those Land Bonds under any of
the potential valuations that Mr. Riehl will discuss
later.
Now, let's pause for a moment, for a moment,
just to think about the implications of Perú's
admission that its first formula yielded this
miniscule valuation of about $861,000; but, first, it
must disprove Perú's contention that the Bonds were
worthless and that the bondholder process somehow
imparted value to the bonds, for, if that were true,
Perú could have simply stopped at the first formula
which would have provided the hair extension. It was
a lot more than $.20. And if that's really the
measure, then why bother to change it at all? But I
think even Perú recognized that they could not get
away with theft that brazen.
[Page 2646]
Second, the miniscule valuation was the only
offer that the Government had made by the time
Gramercy had to decide whether to exercise its Treaty
rights. That was the program in force. While Perú
appeared to offer something like current value, then,
in its February 2017 Supreme Decree, so much so that
another Gramercy fund invested in additional Land
Bonds, Perú then withdrew that offer, and so it came
off the table.
That brings us to the Ministry's August 2017
formula, and that still results in a deprivation of
value so substantial as to be expropriatory. The Tza
Yap Shum Tribunal found Perú liable for expropriation
when the challenged measures caused the investors' net
sales to fall by an equivalent of 96 percent. And
Perú's deprivation here is actually on the same order
of magnitude. The $34 million that Perú claims
Gramercy could have received through the bondholder
process is less than 2 percent of the $1.8 billion of
value that Professor Edwards showed and a mere
4 percent of the $840 million of value that Mr. Riehl
will present later.
[Page 2647]
Moreover, even taking Perú's case at its
highest, $34 million is not and never was a real
number. Perú never actually offered that amount to
Gramercy. It never said: "Here, you can have
$34 million." Instead, the "offer" on the table was
for Gramercy to commit to submitting all of its Land
Bonds to the unproven and dilatory Bondholder
Process--which we'll talk much more about later--in
which, just to give some highlights, the Ministry
would have near-total discretion in how and when to
pay whatever it chose to award and in which Gramercy
was the last in line to receive payment.
Gramercy would, therefore, have had to
subject its investment to the whim of a government
ministry that had shown great antipathy to bondholders
generally and to Gramercy, in particular, and had not
abided by the requirements of Peruvian law in creating
the process, and that was already on its third set of
economically indefensible valuation formulas, with no
promise new ones wouldn't come later. And to do so,
to do so, to take up that offer, Gramercy would have
had to at the outset waive in advance all of its
[Page 2648]
rights, including its rights under the Treaty. So, Perú's offer that Gramercy could submit to its process is not an offer of $34 million or any other amount of actual payment.
Furthermore, since Gramercy has exercised its Treaty rights, the fact is that Perú now offers no procedure through which Gramercy could receive any value on its Land Bonds, let alone current value. So, the value on the table right now for Gramercy is actually zero, even less than the original miniscule valuation.
As for the second factor of those Annex 10B factors, I already explained earlier--and it's in our papers--why Gramercy at the time of making the investment legitimately expected that Perú would eventually pay its Land Bonds at a value that reflected their original purchasing power plus interest. That was, after all, Perú's constitutional obligation, and I dealt with that in the legal entitlement section.
Now, the third Annex 10B factor looks at the nature of the Government action. When we get in a few
[Page 2649]
moments to the Minimum Standard of Treatment analysis, we will address at considerable length the arbitrary and unlawful character of the Government's conduct in creating and implementing the Bondholder Process. So, all of that is relevant to the expropriation analysis as well.
For the moment, I simply want to show how mistaken Perú is to rely on the Treaty's language about--saying that, for nondiscriminatory actions designed to protect legitimate public welfare objectives such as public health, safety, and the environment, those will rarely be indirect expropriations.
Now, on its face, that provision, of course, bars no claims. I think it acknowledges that even nondiscriminatory measures to protect public health, safety, and the environment can, in fact, be expropriatory, depending on the particular facts and circumstances of a case. Moreover, as we will show later, Perú's conduct did discriminate--it wasn't nondiscriminatory--against Gramercy.
Moreover, the objectives Perú invoke here are
[Page 2650]
not like those public health, safety, and the environment type objectives. Perú itself characterizes the aim of the Bondholder Process as resolving a long-standing domestic dispute, promoting the general welfare, providing basic services, and ensuring fiscal balance and sustainability. Those are its characterization of the purpose.
None of those are obviously public health or safety measures; but, even taken at face value, these fiscal objectives do not justify an expropriation. They are so general and broad that, if accepted, they would entirely swallow the rule against expropriation; right?
I mean, on Perú's view, a State could simply always state the self-evident conclusion that taking more money or value for the State will improve fiscal objectives of the State and ensure balance and--fiscal balance and sustainability. But that obviously can't excuse a taking. Tribunals like Siemens v. Argentina and others have expressly rejected that kind of claim.
Perú has effectively deprived Gramercy of all, or substantially all, at least, of the value of
[Page 2651]
the bonds through means that fall below the minimum standard with the sole aim of not paying bondholders what Perú's Constitution and law entitle them to receive. That is, under our Treaty, more than enough to constitute an unlawful expropriation.
So, I now turn to the Minimum Standard of Treatment. We have already explained in our Briefs what the Minimum Standard of Treatment requires, and I don't want to dwell on the Legal Arguments here.
Suffice it to say for today's purposes, the Minimum Standard of Treatment is a flexible and open-textured standard that often depends on the facts of a particular case, and it includes conduct that is, among other things, arbitrary, grossly unfair, unjust, idiosyncratic, completely lacking candor and transparency, and that frustrates investor reliance on State representations.
To quote Perú's Expert Professor Reisman in his academic writings, the Minimum Standard of Treatment "is an evolving concept whose contents overlap if they have not become congruent with the Fair and Equitable Treatment Standard." And many
[Page 2652]
Tribunals, including Biwater and CMS, have observed that the content of the Minimum Standard of Treatment is not materially different from the Fair and Equitable Treatment Standard; hence, the Minimum Standard of Treatment under our Treaty also includes the quintessential elements of fair and equitable treatment, such as protection of legitimate expectations, consistency, transparency, and rationality in decision-making.
Now, Perú's conduct fell below that minimum standard in at least the following five ways: First, the Ministry improperly interfered with the Constitutional Tribunal's decision-making process; second, the Ministry, in purporting to implement the 2013 Constitutional Tribunal Order, disregarded key provisions of that order; third, the Ministry adopted arbitrary and irrational valuation formulas in the Supreme Decrees themselves, all of them; fourth, the Ministry issued Supreme Decrees in violation of Perú's own administrative law; and, finally, the Ministry's bondholder process is, in its operation, arbitrary, discriminatory, and a failure.
[Page 2653]
So, let me begin with the Ministry's intervention in the Constitutional Tribunal's decision-making process. So, first let's consider this issue. And some basic facts of what happened in July of 2013 are well-established, and this set of facts, I believe, is undisputed. The Constitutional Tribunal had deliberated on this issue for about two years. In mid-July 2013, a four-Justice majority agreed on a decision confirming that the Land Bonds should be updated in the totally conventional way that courts had been using--that is, CPI plus interest.
But then there were some last-minute ex parte meetings with high-ranking members of the Executive. On the very day that the court was, again, meeting in plenary session to sign the CPI Decision, three Justices suddenly had a change of heart. A new opinion emerged, and three Justices signed this hastily prepared new opinion with dollarization.
Justice Mesia, who was one of the original four Justices, objected and invoked his right under the Court's rules to have 48 hours to prepare a dissent. But the Chief Justice overrode that right,
[Page 2654]
and he or someone else that day transformed the original majority opinion--which he hadn't written; Justice Eto had carriage of the issue until then--but transformed the original majority opinion into Justice Mesia's opinion by using whiteout, by whiting out signatures and typing in, instead of "This is the Decision of the Court," saying "This is my dissent," which then enabled the Chief Justice to declare a 3-3 tie and to use his casting vote to ram through this new Decision as the formal opinion of the Tribunal over three dissents.
That's an undisputed sequence of events, and it is shocking if you just step back. I don't want to lose sight of how shocking it is. We are not aware of a responsible judicial system that would tolerate the use of whiteout to falsely create a dissent at the apex court of the country and submit to you that that alone probably, once we know about the internal workings of it, is below the Minimum Standard of Treatment.
But there is much more than that too because the situation, as we've discovered it through the
[Page 2655]
arbitration, has turned out to be much more pernicious, where the evidence has also shown that this about-face in these last days by three Justices of the Constitutional Tribunal was the product of the Ministry peddling false information to the Constitutional Tribunal.
You will recall that in sworn testimony to Perú's Congress, Justice Eto, who was the person who had carriage of the issue for all of those years--he was the lead Justice on this case--testified to having, in those last days, a historic meeting in the Ministry during which The Ministry of Economy himself told the Justices that the debt, if updated using CPI plus interest, might reach the stratospheric amount of $18.5 billion.
And Justice Eto explained that that is the--that that fact moved the Justices to change their opinion because they were concerned, obviously, about the impact of $18 billion on Perú's budget.
Perú has denied that this kind of meeting happened. We submit to you that the weight of the evidence shows that it did, if you look at it
[Page 2656]
objectively, and we submit the following six points for you to consider.
First, there was no reason for Justice Eto to lie. This was not some casual story told at a dinner party or even to a reporter in a newspaper. This was sworn testimony in Congress in the presence of the other Justices. This is the last place where a Justice of the country's highest court would make up some fantastical story.
Second, Minister Castilla's hearing testimony about this episode was remarkably evasive. You'll recall that he kept insisting that he didn't have any official meetings with the plenary of the Justices. He eventually, and somewhat grudgingly, acknowledged that he did meet at the very least with Chief Justice Urviola during those last fateful days and that they probably discussed the land bonds as a topic.
Third, Minister Castilla's contemporaneous statements to the media actually confirmed that he had inside information about the outcome of the Decision. During the long deliberation period, the Minister was rigorous about taking a no-comment position as he did
[Page 2657]
repeatedly in the press, and we showed you one of those during the cross-examination.
Yet, in those last few days before the Constitutional Tribunal issued its Decision in the period of time in between the original majority opinion and the new opinion suddenly emerging, Min. Castilla was quoted in the press, in language he didn't deny, suddenly stating that he was confident that the Constitutional Tribunal would reach a decision consistent with the Constitutional concept of budgetary balance, confident.
And that, of course, is remarkable because it is exactly what the putative majority Decision said it was doing. Minister Castilla had been confident about the Justices' premise, their abandonment of the established legal framework of CPI plus interest on the need to balance the State's various budgetary obligations. That's the central idea animating the Decision and what Justice Eto told you made them change their mind.
Think about this for a second. Five days before the Constitutional Tribunal issued its Decision
[Page 2658]
and after the original Decision had already been written, Minister Castilla knew not only that the Court was about to issue a decision but he also said that he was confident about the specific principle upon which that Decision would be premised.
Fourth, the July 2013 Order clearly indicates that the Justices now understood that CPI plus interest would be so expensive as to threaten Perú's very fiscal stability. As the Order itself says: "Any CPI calculation will suppose an amount that is unaffordable for the debtor and would generate severe impacts on the budget of the Republic, to the point of making impracticable the very payment of the debt."
So, it was clear from what the Tribunal wrote in its Decision that it really was animated by some concern that paying the debt as it was really owed would somehow break the Bank of Perú and cause financial ruin. That really was on their minds, and you can see it in what they wrote.
Fifth, the Constitutional Tribunal adopted an approach in its Decision that include elements, and a combination of elements, that could only have come
[Page 2659]
from the Ministry. That's because there is a combination of elements that basically has the fingerprints of Professor Seminario's work. You'll recall he's the economist who the Ministry hired back in 2001, and he prepared a report that was supposed to be part of a draft bill. But you'll recall Minister Castillo's testimony in his Witness Statement which was that that bill never went anywhere, never made it outside the MEF. So, this was just within the MEF at that point. We think about it today, but at that time nobody had known about Professor Seminario's work.
But let's look at what--compare what's in Seminario to what's in the Constitutional Tribunal Decision. The first of these shared features is the erroneous belief that CPI is unreliable in times of hyperinflation. That idea was not unique, in fairness to Professor Seminario. It had been in the intellectual history of this before, but it certainly was a major and driving feature of his analysis, just as it was for the Constitutional Tribunal.
The next two elements though are a little bit more unique. The second shared feature was the use of
[Page 2660]
a parity exchange rate. And it's striking that both the Constitutional Tribunal order and the Seminario Report adopted precisely the same reasoning that the official rate didn't express Market Value. Parity exchange rate.
The third shared feature was that the Constitutional Tribunal and the Seminario Report both updated the value. Now, they're updating value here, which is an inflation adjustment, but they did it using U.S. Treasury bond yields. To the best of our knowledge, this unique combination of elements has no antecedent in the more than a decade of analysis and consideration on this issue. If it did not come from Professor Seminario's work, where did it come from?
One way or another, whether directly or indirectly, it must have come from the Ministry.
And, sixth, the Ministry's interference was affirmed not only by Justice Eto but also by his colleagues. Justice Urviola, for example, stated in the press that he met with Min. Castilla and Prime Minister Jimènez in the days immediately leading up to the Tribunal's Decision. On cross, Minister Castilla
[Page 2661]
said that he would not question that public statement.
Similarly Justice Alvarez in his testimony described in memorable terms how the Justices basically threw up their hands at the end and ceded authority to the Executive on this monetary point. He explained that the Justices were unsure of the consequences of the various updating methods and, thus, simply in his words "withdrew and Liquid Paper was used."
The weight of the evidence is clear, and Perú has no answer to most of those points and none to the combined weight of them. Instead, Perú's defenses purposely miss the point. First, they cite to select portions of Minister Castillo's testimony and of the Congressional testimony as alleged evidence that the MEF didn't have these communications, but the testimony Perú cites really addresses an entirely different allegation that has been cause célèbre in Perú, which is that the Ministry actually wrote the purported majority opinion. We are not submitting our case on that basis, but that is mostly what the testimony they cite in the Post-Hearing Brief responds
[Page 2662]
to.
Second, Perú cites to the Ministry's request for clarification after the 2013 CT Order as alleged evidence that the MEF did not agree with the Order. They might not have agreed with the Order in all its respects. None of those challenged the valuation method, and both of those were efforts to either tell the Constitutional Tribunal "don't make us do anything at all" or "give us a lot more time to do it." But none of them in any way undermine the story that we've just told you that they provided false information to the Court to make them move off of CPI plus interest as the basic rule.
Finally, Perú claims that the Constitutional Tribunal confirmed the validity of the July 2013 Resolution through subsequent resolutions later that year, but, of course, by that--later in that year and the next few months, they would have no reason to believe that the information they had been provided about the $18.5 billion figure was false. So, of course, they would have continued in the same vein.
In conclusion, this order came about because
[Page 2663]
of false information that arose through unilateral last-minute intervention that bondholders had no chance to rebut. So far as we can tell, nobody ever came to the bondholders and said, Hey, we've heard that your method will cost $18.5 billion. What do you say to that? Nobody believed that.
The Order was promulgated hastily in contravention of the Tribunal's own procedural rules and normal practices of apex courts. And it created a pretty important reversal of the existing legal framework about CPI plus interest engineered through these misrepresentations and scare tactics. And we submit that that, if that's what you find the facts to be, that clearly falls below the Minimum Standard of Treatment and is a breach the Treaty.
I now move on to our second point, that the Ministry didn't even comply with this 2013 Order, and it didn't do so in two really important respects.
First, the Ministry did not follow the Tribunal's balancing instruction. As we saw above, a central principle of the 2013 Order was balancing competing imperatives, and Min. Castilla conceded that
[Page 2664]
the Ministry had to carry out the implementation of that Order in a manner that would ensure there would not be a serious sacrifice of either element of the balance, paying the bondholders or fiscal sustainability.
So, you would think that what the Ministry should do with it, if Min. Castilla's testimony was accurate--we think it was--that they had to follow that in implementing it, that they would have thought about: What is this balance that the Constitutional Tribunal has directed us to do? They told us to use a method. We have discretion about how to carry it out. How do we do that? The MEF never did anything of the kind, and they didn't even try to.
For his part, Minister Castilla admitted that he didn't read the Order in detail and he dismissed the 2014 Supreme Decree that established the bondholder process as one of many Decrees that I would sign on a daily basis.
Okay. He was Minister, maybe he was busy, but that approach seems to have pervaded the whole Ministry. Minister Castilla and Vice Minister Sotelo
[Page 2665]
confirmed that the Ministry did not engage in any balancing analysis at all.
As the Tribunal will recall, Perú has also adduced no evidence to the contrary. It presented no analyses purporting to assess how much bondholders would receive, how that amount compared with the true current value of the outstanding debt, or what the impact on Perú's fiscal budget would be under any version of its formula or any alternative method.
Without doing any of that work, the Ministry simply couldn't have implemented the 2013 Order in the way that the Constitutional Tribunal intended and, importantly, the way that Minister Castilla acknowledged it was required to do.
Now, that's the kind of qualitative approach about the work that they didn't do, but I want to now talk about a very important second failure to carry out the Tribunal's order and that has a very material and specific identity. That is, that the Ministry failed to include payment of compensatory interest.
As we saw before, the Courts in Perú have always awarded bondholders compensatory interest in
[Page 2666]
addition to principal updating. And the 2013 Constitutional Tribunal Order itself reaffirmed that the Ministry should do the same, it should update the principal to bring it to current value and add the interest. "Plus the interest," they said. A 2015 Opinion of a CT Justice that sort of referenced this 2013 Order similarly observed that the Tribunal had ordered the Ministry to pay the full updated amount plus interest. And Perú's Supreme Court has confirmed that obligation to add interest on at least five occasions since the 2013 Order: in 2015, 2016, 2017, and twice in 2018.
And you will recall that Dr. Hundskopf himself submitted four of these Decisions into the record with his Rejoinder Report and a fifth one reaching the same conclusion is Exhibit CE-654.
The Tribunal will recall one of these cases, in particular, Cassation Appeal Number 1139/2016 from the year 2018, which the Parties discussed at the Hearing. In that case, the Supreme Court actually reversed the lower court's Decision precisely for the failure to add interest.
[Page 2667]
Dr. Hundskopf's endorsed that case as an example of how Peruvian Courts applied the 2013 Constitutional Tribunal Order. He agreed that after updating with the method determined by the Tribunal in July 2013, "in addition to this--in addition to this, compensatory interest is added." He also accepted that the compensatory interest owed is the interest rate preestablished on the bond, which, as the Supreme Court made clear, applies on top of treasury bond yield updating.
In fact, Dr. Hundskopf stated that this judgment "reflects the essence of the provisions of the Resolution in 2013 by applying dollarization and clearly interest," he said. And he declared that the result is "highly coherent" under Peruvian law.
Now, Perú has really no response to this evidence. It has even dodged the Tribunal's direct question in Procedural Order 11 about the legal consequences of the Supreme Court Decision. Perú devotes one sentence to the subject in its Post-Hearing Brief, and here's what it says because it really deserves some scrutiny. It says: "While some
[Page 2668]
local courts in Perú may have applied compensatory interest in this manner, the application of compensatory interest has been specifically rejected in other fora."
This is a remarkably misleading and dismissive statement for such an important point.
This is not some local court that we are talking about. This is the Peruvian Supreme Court, the highest court in the land on non-constitutional matters, and the other fora to which Perú refers is the futile internal appeal process to the MEF itself in its own bondholder process. Neither Dr. Hundskopf nor Perú has brought you a single case from a Court of Perú, at least after the Supreme Court Decisions, that held to the contrary.
The legal situation is, therefore, clear and unequivocal. The law of the land in Perú is that what the Constitutional Tribunal meant in 2013 was what it said, and that the Ministry was obligated to pay compensatory interest in addition to updating principal, update the principal plus the interest. However, despite bondholders' clear entitlement to
[Page 2669]
interest, the Ministry never included it in its formulas, not even with the last Supreme Decree of August 2017, which postdated two of the Supreme Court Decisions. It's simply not in there.
So, the Ministry just ignored the binding order of the Constitutional Tribunal and, in 2017, clear legal precedent of the Supreme Court. And, by doing so, it wrote off decades of interest, the single most important component of the compensation due to bondholders given the fact that this debt has been unpaid for 40 or 50 years.
And what's Perú's justification for this blatant omission? They initially seem to argue that, well, no, it is in there, compensatory interest is accounted for because it is somehow built into the U.S. Treasury Bonds. But that is both legally and economically wrong. Legally, as we just saw, that is obviously not what either the Constitutional Tribunal or the Supreme Court understand. The Constitutional Tribunal said use U.S. Treasuries to update plus interest, and the Supreme Court has confirmed that interest has to be put on top of the conversion using
[Page 2670]
the U.S. Treasury yields. So, it's not the law of Perú.
And, economically, it is wrong. The one-year U.S. Treasuries do not provide the compensatory interest required by Peruvian law. It is true that technically there is some real rate of interest embedded in a U.S. Treasury. It is not just inflation. There is a strip of interest above it.
But Professor Edwards showed that the treasury yield on the one-year bond that the Ministry uses--and, remember, they use a one-year treasury in their updating method--includes a real component of a mere 0.77 percent on average. That's 14 times less than the average Rate of Return on capital in Perú for this period.
Perú simply ignores this economic reality. Perú's Experts admitted that they did not even attempt to determine the real rate above inflation in the Treasuries. In their words, they had no idea. Hadn't even occurred to them to think about that.
Consequently, as Professor Edwards explained, the Ministry's use of a one-year U.S. Treasury for
[Page 2671]
these very long-term--updating these very long-term Peruvian obligations is essentially a proxy for inflation updating. It does not include the compensatory interest Peruvian law requires.
In its Post-Hearing Brief, Perú makes one other last-ditch attempt to respond. It cites the Quantum Expert's Opinion that the Ministry's formula was, as they put it, more than fair because the Treasury yields were 10 to 20 times higher than the stated coupon rates in the Bonds of 4, 5, or 6 percent.
But it's remarkable that they would rely on that testimony from their Experts' Report because you may remember that, during the Hearing, we cross-examined them on that, and Perú's Quantum Experts completely misunderstood how the Bonds work. And so on cross-examination, they admit--admitted that their assumptions and opinions about the Bonds' interest component were wrong, the effective annual interest rates were wrong, the principal discounts were wrong, and the effective face values were wrong. Perú obviously cannot rely on this completely
[Page 2672]
discredited report that its authors admitted was wrong in this very respect. But without that, Perú has nothing to rely on at all.
So, failing to carry out the core elements of the 2013 Constitutional Tribunal Order, engaging in a thoughtful balancing exercise and paying compensatory interest alone also show that the Ministry violated the Minimum Standard of Treatment. It didn't even comply with the mandate the Tribunal had given it.
But, as we will now see, the Ministry also acted arbitrarily and irrationally in many other ways as well.
With that, I want to turn to our third point, which is that the Ministry's formulas are irrational and arbitrary.
So, we just looked at what the Ministry did not do in implementing the 2013 Order, those failures of omission. Now let's look at some of their failures of commission. What they did do was promulgate three valuation formulas in as many years, each of which is arbitrary and irrational.
The Ministry's first attempt came with the
[Page 2673]
February 2014 Supreme Decree. Now, imagine for a second that you're a bondholder like Mr. S., 94-year-old man whose--had 10 children, his farm had been expropriated from him many years ago. He just heard about this great new compensation scheme that the Ministry has published and wants to figure out how much you are going to get paid. So, you pick up a copy of El Peruano and you see this.
Now, these complex equations with such seeming precision issued by the venerated Ministry of Economy and Finance to carry out a landmark decision of the Constitutional Tribunal. Even if you couldn't make sense of it, you would assume it was the product of careful consideration, thoughtful analysis, sound economic principle, and a commitment to doing justice.
That is what the Ministry is supposed to do, not just rob bondholders who had had their land taken from them. But given the stakes, Gramercy and every other bondholder were right to expect no less than that.
But, in fact, it had none of those characteristics; far from it. The evidence exhibited in this Arbitration revealed that it was actually cut
[Page 2674]
and pasted from a desktop study that a local professor, Bruno Seminario, had prepared three years earlier over less than a week for the purpose basically of finding a way to pay less than current value that the Constitution required. That was his mandate.
Vice Minister Sotelo testified that no one at the Ministry critically reviewed Professor Seminario's work, and that, instead, the Ministry just accepted what he had concluded. Maybe that's because they rushed the job. The evidence showed that the Ministry waited until December, almost six months after the Order issued, to start working on the Supreme Decree to implement it, which it had to do by mid-January.
And it's a pity that no one at the Ministry actually reviewed this formula before dropping it into the Supreme Decree, or, remarkable idea, tested what effect it would have on actual bond values.
But, thankfully, you had Professor Edwards to do that. When he did, it became clear that it not only produces obscenely low values, but it is also total economic gibberish. I say that advisably. I'm
[Page 2675]
not making that up. It really is gibberish.
Among many, many other flaws, which we don't have time to talk about today, it reduces to the mathematical impossibility of X equals X squared.
Now, what could be more arbitrary than that, and, yet, this is the formula that the Ministry not only promulgated at the direction of the Constitutional Tribunal, it then vigorously defended this formula, despite robust criticism for the better part of three years.
Now, of course, both the Ministry and Perú's own Experts disown it. At the Hearing, Vice Minister Sotelo admitted that the formula was not correctly stated. Perú's Quantum Experts said they wouldn't carry out the formula and try to make sense of the result because doing so would be "nonsensical," nonsensical.
Pause on that for a minute. This nonsensical formula was the law of the land when Gramercy had to decide whether to assert its Treaty rights. And the Ministry never solved that problem. The February 2017 version at least offered the promise of much more
[Page 2676]
realistic values, which Gramercy initially took as a promising sign, based on that plus other information that they were hearing at the time from within Perú.
And those much higher values, including values of over $2 billion for Gramercy Bonds illustrate--and this is very important--how apparently minor changes to the equation's parameters can have a massive impact on value. The precisions themselves drove value from 861,000 to over $2 billion.
But the February 2017 formula also, frankly, included some fundamental irrationalities, such as saying that an index, Consumer Price Index, CPI, which is a number, should be expressed in a currency, soles de oro. Rather than clarify what it meant by that, the Ministry simply abandoned this formula too.
And that brings us to the August 2017 formula, which itself is arbitrary and irrational. A central element of this formula is, of course, the Parity Exchange Rate. We already saw that small changes in the equation can have big consequences on value. But the Ministry's Parity Exchange Rate, again, makes no sense.
[Page 2677]
First, the Ministry constructed the parity exchange rate in a way that contravenes the whole purpose of having a parity exchange rate in the first place.
As Professor Edwards explained, to do that, to make a parity exchange rate, you have to anchor the calculation to a base period when the two economies are in parity. That's why it's a parity exchange rate. To do so, economists typically use a long average of exchange rates over a long period during periods when the economies are actually in parity with each other and that becomes kind of the base.
Professor Edwards described this completely sensible idea as the basic rule of calculating parity exchange rates, and Mr. Kaczmarek admitted that he doesn't have the expertise to argue to the contrary. He said parity exchange rates aren't something he spends time thinking about.
The rule is so basic that even Professor Seminario, who got so much wrong, warned when he did his original Report--he said: "Don't use a single year during a turbulent time. Instead, use a parity
[Page 2678]
exchange rate rather than an actual exchange rate."
But the MEF then completely blew it. In their August 2017 Decree, they used to calculate the parity exchange rate--they used as the base period a single month in 1969 as the anchor period. That's obviously just one moment, not a long period, and it certainly is not a stable time when the economies of Perú and the United States were in parity.
There was massive instability in Perú, a coup, currency controls, and many other problems. And this is a big problem for the rationality of the formula. It makes the parity exchange rate much too high, 2.5 to 3 times too high compared to Professor Edwards' calculation of what a parity exchange rate could be. And a higher parity exchange rate makes the updated bond values much lower.
Second, the Ministry then made matters much worse by using this distorted parity exchange rate inconsistently. It used it to convert from soles into U.S. dollars in the first case, but then switched and used the actual exchange rate to convert back from U.S. dollars to soles. This inconsistent treatment
[Page 2679]
locks in artificially low bond values and led Professor Edwards to call it a "second expropriation."
Third, the Ministry's formula is tremendously hypocritical. Remember, the whole intellectual justification for dollarization instead of CPI was Professor Seminario's belief that CPI becomes unreliable during periods of hyperinflation.
Professor Edwards showed that that is simply not true if you use CPI correctly. His CPI calculations use CPI before and after the hyperinflationary period but not during it.
But one of the peculiarities of the August 2017 MEF formula is that it uses Peruvian CPI during the hyperinflationary period as part of its equation. That would seem to make it impossible for this formula to cure the purported disease that it led everyone down this misguided path in the first place.
Fourth, the August 2017 formula also converts to U.S. dollars, not at the date the debt was issued but at the date that somebody happened to clip their last coupon, which is irrational. It makes two Bonds that are exactly the same principal, issued exactly
[Page 2680]
the same day, of completely different values, and Professor Castillo explained that, given the nature of the obligation that had to be updated, that is about as sensible as updating from the date of the last solar eclipse.
So, what's the justification for these latest economically irrational and wrong Decisions? What is it that Perú and its Experts have told you about where they got all this from? Well, nobody knows.
If we are to believe Perú's document production, there are no work papers showing where this formula or the anchor date came from. It apparently just fell out of the sky. The Ministry apparently just made it up with no study, analysis, consultation, testing or validation. It does not even have the imprimatur of Professor Seminario or any other economist.
Perú tried to say they got the parity exchange rates from the Peruvian Central Bank. That is not true. The Bank provided some data that it does keep about real interest rates, which is a factor that goes into this equation, but it doesn't publish parity
[Page 2681]
exchange rates as such and it refused to provide them.
And in writing back to the Ministry, the Central Bank even cautioned the Ministry that a parity exchange rate would be sensitive to the anchor year chosen. Ministry obviously ignored that warning; hence, the Ministry's exchange with the Central Bank is not a defense of the August 2017 Decree. It is instead just one more confirmation of its arbitrariness and irrationality.
Now, Perú's frankly utter disregard for integrity and rationality with respect to the formulas is shocking. These formulas are not just some academic exercise. They really shouldn't be relegated to a $10,000 desktop study to generate some ideas.
They are the single most important element of the Supreme Decrees for Gramercy or any other Bondholder.
They determine Bondholders will, at long last, four or five decades after having their farmland expropriated, finally receive just compensation, or whether they will instead receive the kind of insulting and derisory amounts that the Bondholder Process has, in fact, been paying to many.
[Page 2682]
Yet, even now, after more than six years and three attempts and our hearing, Perú not only continues to rely on a formula that is nonsensical and upends basic economic principles, but it has not deigned to produce evidence that even attempts to explain why any of these formulas make sense, how the Ministry arrived at them, or what other alternatives or factors they even considered.
Just like we anticipated in our Hearing--in our Opening, the Hearing confirmed that Perú has offered no Witness who dares to defend any of formulas and indeed they all ran away from them whenever we asked them about it.
Lacking justification and contrary to basic economic principles, the formulas epitomize arbitrary decision-making.
With that, I would like to hand the floor to Dr. Recena Costa to address the Peruvian administrative law issues.
MR. RECENA COSTA: Mr. President, Members of the Tribunal, I will briefly address Perú's violations of its own laws, a matter that you will recall was the
[Page 2683]
subject of Expert Reports and testimony by Professor Bullard and Dr. García-Godos, and I will also talk about the relevance of those violations to this proceeding.
Now, having diligently reviewed the record that Perú describes in its Post-Hearing Brief as the voluminous file of documentation that supports the Supreme Decrees, Professor Bullard concluded that those Supreme Decrees violated--
(Interruption.)
MR. RECENA COSTA: Among other things, the MEF--yeah, the first baby of the Hearing.
Among other failures, the MEF.
PRESIDENT FERNÁNDEZ ARMESTO: We may have more. That is unavoidable in these hearings. I sometimes have a dog which starts barking. So, we must be patient with these minor mishaps. It's a miracle that we can all be together and seeing each other, so we have to live with these small difficulties.
MR. RECENA COSTA: Certainly, Mr. President, I'm a dog owner myself. I've been guilty as charged
[Page 2684]
many times on Zoom calls.
But just recapping, then, Professor Bullard concluded that these Supreme Decrees violated very basic principles of Peruvian Administrative Law.
Among other failures, the MEF skirted legal requirements including the obligation to pre-publish draft decrees for comment; second, it didn't justify or explain the various formulas in the manner in which it was legally required to do; and, third, it even went as far as to evade a mandatory external control mechanism that obligates the Executive Branch agencies and Ministries to submit Supreme Decrees for prior approval.
As a result, as Professor Bullard told you, the Supreme Decrees are illegal, unreasonable, and inapplicable.
Perú doesn't really deny any of these underlying facts, instead it asks the Tribunal to dismiss these transgressions as being somehow irrelevant because, in Perú's assessment, the core legal requirements that the MEF chose to ignore were nothing but "hyperformalisms." In other words, what
[Page 2685]
Perú tells you is that it really should just get away with it because it doesn't matter much at all. But that is wrong. And it's wrong as a matter both of domestic and international law.
Perú's Submission fundamentally ignores that the Peruvian Administrative Law and its central tenets of legality and reasonableness seek to guard against exactly the same sort of arbitrary conduct that is proscribed by the Treaty and, in fact, by the Minimum Standard of Treatment more generally, as the Tza Yap Shum Tribunal explained.
And tribunals--many tribunals, in fact, often considered the State's disregard for its own laws and its own procedures as indicative of arbitrary conduct in breach of Treaty obligations.
So, yes, while a treaty--while a domestic law violation doesn't automatically amount to a treaty breach, it may do so when domestic and international legal standards overlap as they do with respect to core values of the rule of law like transparency, reasonableness in decision-making and non-arbitrary conduct.
[Page 2686]
Perú's undisputed failure to pre-publish the draft Supreme Decrees for comment is actually highly illustrative of that very overlap. Remarkably, Perú continues to assert that the MEF did not need to pre-publish the Decrees because no law, in the very technical sense of a norm of a statutory rank required so.
But its Expert, Dr. García-Godos, conceded that the legal obligation to pre-publish actually arises pursuant to the U.S.-Perú Trade Promotion Agreement, so the very Treaty under which we are engaged, which, as an international treaty, was incorporated into Peruvian law with the force of a statute and, thus, supplies the requirement that Perú claims is missing.
The Supreme Decree that Perú, thus, seeks to downplay as inconsequential is actually just implementing legislation enacted precisely to give effect to the Treaty's objectives. So, here we see not only commonality of goals between domestic and international law but actual identity of obligations.
Moreover, the evidence shows that the many
[Page 2687]
other violations Professor Bullard identified, are not, as Perú alleges, trivial. The legal requirement to state reasons, for instance, is designed, in Dr. García-Godos's own words, "to ensure transparency so as to avoid arbitrariness," and these are goals that I think we can all agree are at the heart of the minimum standard of treatment.
Now, under Peruvian law, a legally compliant Statement of Reasons must contain a cost-benefit analysis, which, again, to quote Dr. García-Godos, is "a tool of the utmost importance." Perú says that what it did was sufficient, but, as Professor Bullard showed, the MEF's identically worded cost-benefit analyses, used indiscriminately for all of the Supreme Decrees, despite the fact that, as Mr. Friedman showed, each contained a very different valuation formula, were just boilerplate.
According to a normative guide that applies to the Executive Branch, they were literally a textbook example of what not to do, and Perú's own Ministry of Justice criticized them, but to no avail.
Indeed, a serious cost-benefit analysis could
[Page 2688]
not possibly have been done here because, as Ms. Sotelo confirmed, the MEF never ran the calculations that would have been required to support any serious quantitative analysis of that kind.
But Perú's determination in pushing through these Supreme Decrees at basically any cost goes even further. It is also undisputed that the MEF never submitted Reports for prior approval by what is called the "Multisectoral Commission," thus, bypassing a mandatory external control that Legislative Decree 1310 establishes as a condition of validity for the Supreme Decrees and administrative procedures.
Perú's justification for this basal failure hinges on a single argument that the Decrees were somehow not norms of a general character, and to back that up, Perú cites no authority other than a two-page legal Memorandum the MEF itself prepared.
As the Tribunal will recall, however, during the cross-examination of Dr. García-Godos that argument just fell apart. It became clear that it was contrary to Peruvian legislation and to secondary sources, including the sources Dr. García-Godos
[Page 2689]
himself had cited, and it was inconsistent even with Dr. García-Godos's own opinions on related matters.
The Hearing testimony also reviewed--also revealed that the MEF's self-serving legal Memorandum simply cannot be credited as anything but an ex post cover up.
So, what we have here, if we take a step back, is the situation where a Ministry thinks it can arrogate to itself the prerogative of choosing whether or not to comply with legal requirements, in fact, defeating the entire purpose of having a mandatory external control over its actions. This, we submit, is the very definition of arbitrary conduct. It is conduct that flouts the law, evades accountability and is based on whim or caprice.
To wrap up Perú's cumulative breaches of its own laws and its failure to follow even its own procedures, reveals the sort of systematic and utter disregard for the applicable rules that rises to the level of a breach of international law too. Rather than being insignificant or trivial as Perú portrays them, these facts provide further evidence of Perú's
[Page 2690]
violation of the Treaty's Minimum Standard of Treatment.
With that, I will cede the floor to my colleague, Ms. Lavaud.
MS. LAVAUD: Mr. President, Members of the Tribunal, I will discuss how the Bondholder process constitutes further evidence of Perú's violation of the Minimum Standard of Treatment under the Treaty. As the evidence shows, the process is not only arbitrary by design but also a massive failure in practice, including for the following six reasons.
First, Perú imposed the process on Bondholders with absolutely no consultation or transparency. Not once in any of Perú's multiple attempts to establish either the formula or the process did Perú offer any opportunity for Bondholders to be heard.
Second, this process requires Bondholders to blindly give up their right to obtain the current value of their Bonds in local courts without even knowing how much they will receive and how long it will take.
[Page 2691]
Third, it is a process that is unnecessarily complex and moves extremely slowly. In fact, based on Perú's own evidence, it takes on average over 4.5 years to obtain payment. And at the pace that it had been going, it would take decades to bring all pending claims to conclusion.
Fourth, this process leaves complete discretion to the MEF to decide when and how to pay Bondholders.
Fifth, it provides no effective recourse to Bondholders who are unhappy with the result, as it doesn't even allow them to challenge the MEF's formula.
And, finally, it pays practically nothing. As Vice Minister Sotelo testified, six years into the process, Perú had only paid in cash the equivalent of USD 300,000. Let me repeat that, USD 300,000. It is, therefore, not surprising that the Bondholder process has attracted only a tiny fraction of the outstanding Land Bond debt, and that it has only resolved so little of that debt.
As Professor Olivares-Caminal estimated, only
[Page 2692]
about 8.7 percent of the total outstanding principal had been submitted to the process, and only 0.3 had been resolved as of August 2019.
Now, I will submit that these numbers look very small, but they will look even smaller when you compare them to the fact that a successful bond resolution typically engages a 90 percent participation rate.
Now, at the Hearing, you will recall that Minister Castilla could not even bring himself to defend the results of the Bondholder process. Instead, he admitted that they are, and I quote, "disappointing." And he was not the only one.
Even Dr. Wühler, the Expert that Perú hired to rubber-stamp the Bondholder process as effective and functioning, also refused to validate the results of that process. He, indeed, conceded that most observers would consider the amount paid so far as a "pitiful result."
It is, therefore, also not surprising that the dropout rate has been so high, in fact, three out of five Bondholders chose not to request payment after
[Page 2693]
finding out how much they would receive from the MEF. In other words, those are Bondholders who went through the process for several years, and after having gone through that process decided not to request payment.
And if Perú had opted to cross-examine the Bondholders who submitted evidence in these proceedings, those who actually went through the process themselves, they too would have confirmed the unfair and arbitrary nature of the process.
For example, Mr. Friedman mentioned Mr. S. earlier, a 91-year-old twice-widowed father of ten. He would have explained that the process was, and I quote, an "insult" and a "joke" after he received USD 240 for the expropriation of 56 hectares of land some 45 years ago.
Ms. L., who received just USD 67 for her family's farm would have described the process for you as "a scam and a trap for Bondholders seeking to deprive them of fair compensation."
So, together, those two Bondholders received less than what Perú paid Dr. Wühler for just one hour of his time, one hour of his time. Sadly, the
[Page 2694]
experience of these Bondholders is not an anomaly but is illustrative of how the process works in practice. These results are simply appalling, and as Professor Olivares-Caminal testified, are unsurprising in light of the fundamental flaws in the design of the process.
Now, while certain elements of it, taken in isolation, may appear to have their own logic, the process as a whole completely fails to achieve the objective for which it was allegedly created. It contains none of the hallmarks of an effective process for resolving sovereign debt obligations.
So, what does Perú have to say in response to all of this? Well, Perú is asking that you turn a blind eye to this testimony and that you take at face value its claim--and I'm sure you will no doubt hear this tomorrow--that the process is advancing, that Bondholders are being paid, and that the process allegedly comports with some international norms.
But the results of the process are entirely inconsistent with Perú's claims. Even Dr. Wühler was incapable of articulating how the Bondholder complied with those international norms.
[Page 2695]
For example, he could not explain how the payment mechanism worked in practice. He also was not able to explain what the formula meant. In fact, you will recall that he admitted that he did not even consider the formula at all. He also admitted that he cited to the two Bondholder Witnesses, to which I referred earlier, as evidence that the process was functioning without giving any consideration at all as to the amount that they received from the MEF.
In other words, Dr. Wühler's testimony was entirely based on the existence of some kind of bureaucratic process, no matter how arbitrary, unreasonable and grossly unfair the results. But Perú's attempt to elevate form over substance fails.
Under international law, the mere existence of a process does not excuse injustice. In this case, the Bondholder process is not a defense of, but the very basis of Perú's violation of the Minimum Standard of Treatment.
Thank you for your kind attention. I now turn the floor back to Mr. Friedman.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you,
[Page 2696]
Ms. Lavaud.
MR. FRIEDMAN: I will now very briefly touch on effective means of national treatment, although we mostly refer you simply to our briefs on the subject.
First, with respect to effective means, I would just draw your attention to the fact that the Treaty MFN provision in Article 10.4 obviously applies to substantive protections, which is reinforced by carving out one procedural issue, which is other Dispute Resolution Clauses, and that Gramercy's case on this is actually fairly simply expressed as follows: That through the August 2013 Constitutional Tribunal resolution, the one that made the Bondholder process the MEF would create mandatory, and the Supreme Decrees, that what the Constitutional Tribunal and the MEF did was reverse what had previously been the case, that was optional mechanisms for dollarization from the 2014 Order and, instead, impose a solution that deprived Gramercy of the right that it had up till that moment to go to Peruvian Courts and get CPI plus interest, and, in that, which was an effective means, and then substituted for it an
[Page 2697]
ineffective means of the Bondholder process, what we've submitted on our papers on the other legal issues.
With respect to national treatment under Article 10.3, I simply want to point out to you that the evidence really has confirmed that there definitely was a discriminatory animus against Gramercy in this Bondholder process, and indeed in the treatment of the Bondholder issues. You'll recall that in the 2014 Supreme Decrees, Perú introduced a provision that places legal entities that bought the Bonds for so-called "speculative ends" very last in the queue for payment.
There was no evidence of where this came from or why from the Witnesses, neither Minister Castilla nor Vice Minister Sotelo had any explanation for it, and then when pressed--and when said, "well, look, you've called Gramercy a speculator many times before, this must be a provision about them. Is it about them or anybody else?
Vice Minister Sotelo resisted giving any further answer because she was under oath.
[Page 2698]
It is pretty plain from the evidence that this Decree and the treatment of Bondholders generally was motivated, at least in part, by animus against Gramercy. From the outset of this arbitration, Perú has accused Gramercy of being what it called a "hedge fund speculator," clearly putting Gramercy in that last payment priority bucket.
When Gramercy commenced this arbitration after years of seeking to reach a global consensual resolution of the Land Bond Debt, then-President of Perú, Pedro Pablo Kuczynski, publicly declared that, "I don't think we owe (Gramercy) anything."
Again, last year, then-chief Justice Urviola urged Congress not to pay anything to what he called the "vulture Gramercy." That was the Chief Justice of the Constitutional Tribunal. And in its Post-Hearing Brief, Perú reiterated that Gramercy is entitled to nothing. Nothing.
Accordingly, we suggest that although this is just about cash payment priorities, that and the other evidence in the case reveal a clear discriminatory animus in the treatment of the whole Bondholder issue
[Page 2699]
against Gramercy, which is forbidden by Article 10.3 of the Treaty.
And with that, Mr. President, we propose to conclude our submissions on merits and take a break before turning to quantum and jurisdiction. If that's acceptable to you.
PRESIDENT FERNÁNDEZ ARMESTO: Absolutely. If there is no question from my colleagues.
ARBITRATOR DRYMER: Not for me. Thank you, sir.
PRESIDENT FERNÁNDEZ ARMESTO: And from Professor Stern?
ARBITRATOR STERN: Maybe I wait for the end.
PRESIDENT FERNÁNDEZ ARMESTO: Very good.
ARBITRATOR STERN: I might have some questions.
PRESIDENT FERNÁNDEZ ARMESTO: Excellent.
So, it is now here in Spain 16:43. Shall we come back at 17:00 Spanish time, which should be--Marisa, can you help he?
ARBITRATOR DRYMER: 11:00 a.m. Eastern.
SECRETARY PLANELLS-VALERO: 11:00 a.m., yes.
[Page 2700]
PRESIDENT FERNÁNDEZ ARMESTO: 11:00 a.m. We will be back at 11:00 a.m. Thank you very much.
(Brief recess.)
PRESIDENT FERNÁNDEZ ARMESTO: Welcome back.
We resume the Hearing, and I now give the floor back to Claimant.
MR. RIEHL: Thank you, Mr. President. And good morning and good afternoon, Mr. President and Professor Stern and Mr. Drymer.
I will be addressing quantum. Quantum here is really quite straightforward. As Mr. Friedman described, the Land Bonds have an intrinsic legal value mandated by Perú's constitution and laws. Perú's Treaty breaches deprived Gramercy of that value, and so the obvious remedy and, in fact, the only remedy that will provide full reparation is to order Perú to pay Gramercy what it owes, namely, the full intrinsic value of Gramercy's Land Bonds under Peruvian law.
And if we could get our slides up, that would be good.
As Mr. Friedman described, that full
[Page 2701]
intrinsic value consists of value of the unpaid principal updated for inflation in today's currency plus compensatory interest on that updated principal. That full intrinsic value was that $841 million in May 2018; and, of course, it is even higher today because of accumulating interest. That's clearly the value if the Constitutional Tribunal's 2013 Order breached the Treaty and Gramercy is entitled to CPI updating from issuance, but it's also the value even if the 2013 Order was proper and the breach was limited to the MEF's arbitrary and irrational implementation of that order.
In my remarks today, I will first review why Gramercy is entitled to the full intrinsic value of its Bonds as a legal matter.
And could I have the next slide, please.
Then I will address why that value was at least $841 million, whether or not the 2013 CPI Order breached the Treaty.
To determine the proper measure of damages, the starting point is the applicable legal standard, and here that is undisputed. It is undisputed that
[Page 2702]
the full reparation standard applies. Within that context, though, Perú attempts two categories of Legal Arguments: first, that Gramercy has not met its burden of proof; and, second, that the measure of damages should be the Bonds' Market Value rather than their intrinsic legal value. Neither of Perú's arguments is right.
Perú's purported arguments about quantum legal standards actually just rehash Perú's merits arguments. If Perú is wrong on the merits, those arguments also fail, and that is clear right from the start of the damages section of Perú's Post-Hearing Brief.
Perú begins by arguing that Gramercy is seeking "more than is available under Peruvian law" and then it cites the Bondholder process as the authoritative determinant of Peruvian law. That is just a restatement of Perú's merits case. Perú's primary defense on the merits is that current value means whatever the MEF says it means, but that is simply not the case for the reasons that Mr. Friedman has described. But Perú's burden of proof arguments
[Page 2703]
just repeat that same claim over and over again in different guises.
As shown here, Perú's argument that Gramercy has not met its burden of proof with respect to damages is an obviously incorrect merits argument.
Perú argues that all it owes is the nominal value of the Bonds without any change to their terms, but that is exactly the argument the Constitutional Tribunal rejected in its 2001 Decision. So, it's not only a merits argument. It is an obviously incorrect merits argument. It does not cast any doubt on the certainty of Gramercy's proof of its damages if Gramercy is right on the merits.
Perú's causation argument is more of the same and fares no better. Perú again just repeats the obviously wrong claim that Perú is not required to pay more than the original nominal terms of the Bonds and then repeats its merits argument that the law is whatever the MEF says it is.
The bottom line on Perú's burden of proof and causation arguments is that they actually don't address either the burden of proof or causation at
[Page 2704]
all. In fact, Perú has not shown or even attempted to show any inaccuracies in Gramercy's computation of the damages if it is owed--I'm sorry, if Gramercy is right about the merits.
Perú's only actual quantum argument is this claim that Gramercy is entitled only to the Market Value of its Land Bonds and not their full intrinsic value. That is a damages argument, but it just doesn't make sense. What Gramercy has been deprived of is the full amount of money Perú is obligated to pay and not some lesser amount that Gramercy might be able to get it if sold its Bonds. If Gramercy has the legal right to be paid X, it would be irrational to award less than X based on Market Value.
Now, Perú's argument that intrinsic legal value is a quantification that is not recognized under international law is simply wrong. Gramercy has cited without rebuttal several cases in which international arbitral tribunals and courts have adopted the intrinsic value of debt obligations as the proper quantification of damages, and that includes landmark judgments by the Permanent Court of International
[Page 2705]
Justice that upheld gold clauses to preserve the value of inflation-eroded Bonds.
Tribunals only look to Market Value when you need to do that. That happens when the asset that was taken doesn't have an independent objective value, but, here, what was taken was a right to be paid a sum certain, a certain sum of money. These authorities and the additional authorities in our Briefs show that in that situation Tribunals and courts have not hesitated to award the full amount of obligation.
And that totally makes sense. Otherwise, sovereign debtors could unilaterally reduce the value of their obligations and stiff investors just by creating uncertainty about their willingness to pay in order to depress the market value of their Bonds.
So, in sum--
PRESIDENT FERNÁNDEZ ARMESTO: Mr. Riehl--
MR. RIEHL: Yes.
PRESIDENT FERNÁNDEZ ARMESTO: --I am getting urgent messages for you that you are going too fast.
MR. RIEHL: Ah, yes. Thank you.
Mr. President.
[Page 2706]
PRESIDENT FERNÁNDEZ ARMESTO: If you could please--let's give it now 10 seconds for the poor Interpreters and Court Reporters to catch breath again, and you must go slower.
MR. RIEHL: Yes. My apologies, Mr. President, and the Tribunal, to you, and to the Reporters. I will proceed at a slower pace.
Is it okay to proceed, Mr. President?
PRESIDENT FERNÁNDEZ ARMESTO: Of course, Mr. Riehl. Thank you.
MR. RIEHL: So, to sum up this point, in order for Gramercy to be restored to the same position it would have been in but for Perú's Treaty breaches, Gramercy must be awarded the full intrinsic legal value of the Land Bonds.
I'll turn now to what that full intrinsic value is. Gramercy's Bonds were worth at least $841 million in May 2018. That is undisputedly true if Perú breached the Treaty, either through the MEF's interference with the CT's deliberations and the whole 2013 Order dollarization scheme or by cutting off Gramercy's access to Perú's courts.
[Page 2707]
But it's also true if Gramercy is wrong about those breaches, and you instead find that the CT's 2013 Order and the MEF's intervention to procure it did not violate the Treaty. Let's look at each of those scenarios, in turn.
First, if Gramercy is right that the 2013 CT Order is invalid, we know what the but-for world would have been. In fact, this case is quite unique in that there's a document that specifically describes that but-for world. That is the original majority opinion before it was transformed with whiteout. But for the MEF's intervention, that opinion would have issued as the majority opinion and would have definitively stated Perú's legal obligations under the Land Bonds. Consistent with the 2001 CT Decision's interpretation of Perú's Constitution, the value of the Land Bonds under that original CT majority opinion would have been calculated by adjusting for inflation using CPI from issuance and then adding compensatory interest at the original coupon rates.
Professor Edwards presented the formula to do that, and that is shown on this slide. Perú has never
[Page 2708]
challenged the mathematical accuracy either of this formula or of Professor Edwards' computation that it would value Gramercy's Land Bond at $841 million as of May 31, 2018.
Now, we also know that Gramercy would have likely obtained that same value computed in exactly the same way in Perú's courts if the CT had not terminated its access to the courts by making the Bondholder process the exclusive remedy for Bondholders.
Perú's Quantum Experts confirmed at the Hearing that the operative Expert Report in the Pomalca Case valued Gramercy's Land Bonds at issue the same way as the CT's original majority opinion did. It used Perú's CPI to update for inflation from issuance and then added compensatory interest to that updated amount at the original coupon rate. Perú can't escape that Pomalca provides the best evidence of the value Gramercy would have received for its Land Bonds in court.
Perú tries to suggest that Gramercy was not actively pursuing litigation, but that is false.
[Page 2709]
Gramercy had submitted conciliation requests, which was a mandatory step prior to filing a lawsuit, for all of its Bonds, 100 percent. It was thus actively seeking judicial determination for its entire portfolio before Perú shut down that possibility.
There were only 44 Bonds, Gramercy Bonds, involved in the Pomalca Case, but those Bonds were big, and they represented more than a quarter of Gramercy's portfolio by value. And Gramercy had other active cases in addition to that case.
So, whether using CPI is based on the but-for world in which the illegal 2013 CT Order had not issued or, instead, on the value of Gramercy likely would have achieved in litigation, if Gramercy is right that the CPI method applies, it is undisputed that its Bonds were worth 840--I'm sorry--$841 million in May of 2018.
All right. Do I need to go even more slowly, Mr. President? I will try.
Let's look now at the other scenario, the one where we assume the 2013 CT Order did not breach the Treaty, notwithstanding the MEF's improper
[Page 2710]
intervention to procure it on false pretenses. Even in that scenario, the evidence at the Hearing established that Gramercy would have received about the same amount under the CT's 2013 Order as it would have under the CPI method if the MEF had implemented the 2013 Order in an economically reasonable manner. Unfortunately, that's not what the MEF did. As Mr. Friedman described earlier, the MEF instead imposed arbitrary, irrational, and expropriatory valuation formulas. Those formulas fell far short of what the 2013 CT Order required in two fundamental ways.
First, the MEF's arbitrary Parity Exchange Rate formulas produce irrationally high Parity Exchange Rates that strip the Land Bonds of much of their value. And the MEF compounded the effects of that error by illogically applying the Parity Exchange Rate to convert from soles to dollars before inflation updating, but then using the much lower nominal exchange rate to convert back from dollars to soles after the inflation updating. The second error is that the MEF's Supreme Decrees do not add the
[Page 2711]
compensatory interest that the CT's 2013 Order clearly mandates.
At the Hearing, Professor Edwards described how these two errors can be corrected to obtain a valuation that is consistent with the 2013 CT Order. The Parity Exchange Rate errors can be corrected in one of two ways: first, by using an economically rational Parity Exchange Rate formula; or, second, by using the MEF's formula consistently, applying it to both currency conversions instead of starting with the Parity Exchange Rate in one direction and then shifting to the lower nominal rate after the inflation updating to convert back. The omission of compensatory interest is, of course, easily corrected. You just add the compensatory interest in.
Professor Edwards calculated the values of Gramercy's Land Bonds under each of these two methods for fixing the MEF's Parity Exchange Rate errors. In each case, he calculated compensatory interest using the original coupon rates, which is what Perú's Supreme Court has done in its multiple Decisions implementing the 2013 CT Order.
[Page 2712]
The formulas that Professor Edwards used are shown here. It is a lot of math. Sorry about that. They were also included in Gramercy's Post-Hearing Briefs. Professor Edwards started with the formulas in the August 2017 Supreme Decree and then made the corrections that are shown here in red that corresponds to what I've described in words.
Perú has not disputed either the mathematical accuracy of these formulas or the valuations that Professor Edwards calculated using them. If there were any questions about that, though, the Tribunal could deal with that by asking both Parties' Experts to jointly corroborate these equations and their results.
So, what this all shows is that regardless of whether you find Perú's Treaty breach included the wider set of events, including the CT 2013 Decision, or you exempt that Decision and determine that Perú's Treaty breach was limited to the MEF's implementation of that Decision, either way, you come out with the same number, about $840 million as of May 2018.
Now, that $840 million is the amount Gramercy
[Page 2713]
would have received from Perú's courts or under a proper implementation of the 2013 Order, but it's actually not enough to effect full reparation.
Gramercy's Land Bonds are worth almost $1 billion more if compensatory interest is calculated at a rate that fully compensates Land Bondholders for the Actual Value of their lost opportunities. That is the 7.22 percent rate Professor Edwards estimated. The only difference between the $841 million number I've been describing and Professor Edwards' $1.8 billion valuation is using that 7.22 rate instead of the original coupon rate as the compensatory interest rate, which is the variable R in the CPI method formula shown here.
The interest rate has a very large impact on value, and that's really just what you would expect. Compensatory interest has been accumulating for several decades, up to 50 years or even more, for some of the Bonds.
Now, we understand that $1.8 billion is obviously a big number, but there's nothing exaggerated about it. There is nothing illegitimate
[Page 2714]
about it. The 7.22 percent rate used to calculate it is actually a conservative estimate of the actual historical Rate of Return in Perú. That's the Rate of Return that Peruvians, on average, actually earned on their investments in Perú during the time since the Land Bonds issued.
Professor Edwards used a well-established econometric method to estimate that Rate of Return. He made consistently conservative assumptions in his calculations. The MEF itself used exactly the same method in 2011 and reached a similar result. The MEF's 11.6 figure shown here is the estimate of the overall Return on Capital; whereas, Professor Edwards' 7.22 is the Return on Debt, which is typically lower than the Return on Capital overall.
You will likely recall Professor Edwards' testimony that he reached the higher 11 percent estimate of the Return on Capital but used the lower 7.22 to be conservative, the 7.22 Return on Debt.
So, the $1.8 billion obtained using that 7.22 percent rate is what would be required to effect full reparation. But even if you do not view full
[Page 2715]
reparation through that lens and you instead look to Gramercy's entitlement, either but for the 2013 CT Order or under economically rational implementation of that order, Gramercy's damages were at least $841 million as of May 2018.
Perú tries to evade this analysis by accusing Gramercy of advancing "inconsistent damages claims" and by suggesting that considering what the CT actually ordered in 2013, it would somehow deny Perú due process. Those claims are just not true. There is no inconsistency in the damages claims Gramercy has asserted. From the start of the Arbitration, Gramercy has always argued that it is entitled to an award of the full intrinsic legal value of its Land Bonds. Nor is there any inconsistency in Gramercy's arguments about the computation or amounts of that intrinsic legal value.
As shown here, in each of its Pleadings and in its Opening Argument at the Hearing, Gramercy has consistently argued that the intrinsic value consists of inflation updating using CPI from issuance and then adding interest to compensate for foregone
[Page 2716]
opportunities. And Gramercy has consistently asserted that the intrinsic value of its portfolio as of May 2018 was $1.8 billion if computed using the 7.22 percent rate, and $841 million using the original coupon rate.
Perú's attempt to paint Gramercy's claims as inconsistent center on Figure 1 from its merits and quantum Post-Hearing Brief, which is reproduced on the next slide.
This figure is misleading, but by in any event, it actually confirms that Gramercy has consistently argued for CPI updating plus compensatory interest. The Edwards I line shows CPI adjusting plus compensatory interest at the 7.22 percent rate. Gramercy has never claimed the damages shown in the Edwards II line. That was an illustration from Edwards' Report.
Alternatives 1, 2, and 3 are all actually the same computation. As clearly shown in the figure itself, all three update for inflation using CPI, all three update from issuance, all three use Lima CPI, and all three apply compensatory interest at the
[Page 2717]
original coupon rates. That's because, as Gramercy described in its Brief, all three of these purported alternatives were computed using exactly the same CPI method formula. They are different alternatives only in the sense that the same approach was used both in the CT's original majority opinion and by the expert in Pomalca. And Gramercy discussed both of those in its Reply.
And then in its Post-Hearing Briefs, it corrected the valuation they produced to incorporate a minor correction that Professor Edwards identified during his hearing testimony.
Now, I want to pause briefly on the method from the CT's original majority opinion. Perú, as you see here, lists that method in its Figure 1 as something that Gramercy argued in its Reply. But then elsewhere in its Post-Hearing Brief, Perú claims that method is inadmissible based on the false allegation that Gramercy's reliance on the CT's original majority opinion is "an entirely new damages claim that Gramercy allegedly introduced for the first time in its Post-Hearing Brief." That is just not true.
[Page 2718]
As shown on the next slide, Gramercy explained and relied on this approach in its Reply, and Professor Edwards computed and presented the value of Gramercy's Land Bonds under this approach in his Second Expert Report, which Gramercy submitted with its Reply prior to the Hearing.
Returning back to Perú's Figure 1, the last two valuations are Alternatives 4 and 5. Those are just the two different ways I have described that Professor Edwards corrected the arbitrary aspects of the MEF's Supreme Decrees to eliminate their inconsistencies with the CT's 2013 Order.
Alternative 4 uses Professor Edwards Parity Exchange Rate formula, and Alternative 5 applies the MEF Parity Exchange Rate consistently. Those are not damages calculations that Gramercy has asserted as part of its Case-in-Chief, and they do not show any inconsistency in the damages claims Gramercy has asserted as part of that case. Rather, they show what the value of Gramercy's Bonds would be if you were to find that the CT's 2013 Order did not breach the Treaty but under an economically rational
[Page 2719]
implementation of that order.
Perú also tries to argue that it was procedurally improper for Gramercy to introduce those calculations in its Post-Hearing Brief. Perú characterizes them as "belated submissions of alternative Damages Claims." But that is also just inaccurate. They are actually directly responsive to evidence Peru submitted for the first time with its Rejoinder and to a question that the Tribunal asked the Parties to answer based on that evidence and testimony about it at the Hearing.
In an expert report that Perú submitted with its Rejoinder, Dr. Hundskopf introduced and relied on a number of Supreme Court cases applying the 2013 CT Order that had not previously been in the record.
At the Hearing, Dr. Hundskopf testified that those cases applied the 2013 Order correctly. In its Post-Hearing questions, the Tribunal invited the Parties to address the legal consequences of one of those cases, and in response to that question, but in any event, in light of Perú's new evidence, it was entirely appropriate for Gramercy to provide the
[Page 2720]
Tribunal with computations to the value of its portfolio under the 2013 CT Order, as informed by those later Supreme Court cases.
Moreover, even without Dr. Hundskopf's late-breaking evidence, it would have been appropriate for Gramercy to submit these calculations. If you were to conclude, based on the evidence at the Hearing, that the 2013 CT Order did not breach the Treaty but the MEF's implementation did, you would have to figure out damages under that scenario; and those damages would equal the intrinsic legal value of Gramercy's Bonds under a proper implementation of the 2013 CT Order.
It would be well within the scope of your discretion in that circumstance to order the very computations Gramercy has submitted. When Gramercy submitted these computations, it did not include--I'm sorry, it did not introduce any new evidence. It merely applied math to the existing evidence.
It, thus, did no violence to Peru's procedural rights for Gramercy to present those computations in its Post-Hearing Brief in a manner
[Page 2721]
that gave Perú ample opportunity to review them and to contest their accuracy if it had chosen to do so.
In short, Perú's efforts to tar Gramercy's damages claims as inconsistent or procedurally improper are grounded in misrepresentations of the record and in no way undermine the legitimacy of those claims.
I would like to close out the damages presentation with the observation that none of the damages methodologies I've been discussing would generate the severe budget impacts that the CT worried about in its 2013 Order, even if they were applied generally to all of the Land Bonds that are still outstanding.
In Procedural Order 11, you reminded the Parties of your interest in knowing the amount of Land Bond debt that remains outstanding. The best evidence in the record suggests that the total outstanding unpaid principal is $2.52 billion soles de oro. Remarkably, it was Gramercy and not Perú that has assisted the Tribunal in ascertaining that number. This slide shows Professor Olivares-Caminal's estimate
[Page 2722]
based on documents in the record.
For its part, Perú continues to claim that there is no record of the outstanding Bonds, and it says that such records "disappeared." But Perú has not disputed the accuracy of Professor Olivares-Caminal's calculation. Even if none of the coupons supporting that 2.52 billion have been lost or destroyed, which is a very conservative assumption, paying the full updated value of that entire unpaid principal will not have any severe effect on Perú's budget.
Professor Edwards estimated that the full updated value all of the outstanding principal would be about $5.6 billion if it were updated using the dollarization method specified in the 2013 Order, but with the parity exchange rates that Professor Edwards calculated and compensatory interest at the original coupon rates. The figure would be very similar using the CPI method from the CT's original Majority Opinion in the Pomalca Case, since the value of Gramercy's portfolio is very similar using that method.
It is undisputed that Perú could easily pay
[Page 2723]
that amount, and that has been independently confirmed by the Moody's rating agency, which Minister Castilla testified is one of the ratings that--ratings agencies that Perú itself pays to rate its sovereign debt. Moody's estimated the total outstanding debt to be $5.1 billion as of the end of 2014 and expressed confidence that Perú could finance that level of payout in a way that would not materially affect its fiscal dynamics or creditworthiness.
Now, the potential impact on Perú's budget if the determination here were applied more generally is not, strictly speaking, relevant to damages. But the Tribunal can nevertheless take comfort that Gramercy is not seeking a level of damages that would place Perú in dire straits if the same valuation were applied to all Land Bondholders.
Gramercy has amply demonstrated that Perú was obligated to pay at least $841 million on its Land Bonds whether or not the 2013 CT Order breached the Treaty. The MEF's Supreme Decrees would have paid only about 4 percent of that amount at most. They clearly breached the Treaty. Under the full
[Page 2724]
reparation standard, Perú must now, at long last, be compelled to pay what it owes.
And with that, I'll turn things over to Ms. Popova to address jurisdiction.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you, Mr. Riehl.
And now we will give the floor to Ms. Popova.
MS. POPOVA: Thank you, Mr. President. Good afternoon, Mr. President, Members of the Tribunal. Ms. Birkland and I will keep our remarks short, because the last Brief on Jurisdiction was Gramercy's Post-Hearing Brief, and we haven't yet heard Perú's Closing on its own jurisdictional objections. But we will, of course, be happy to answer any questions that you have for us tomorrow.
What's remarkable, though, is that the Hearing so thoroughly undermined Perú's objections that the whole house of cards has now collapsed. Faced with testimony that, across the board, destroys every single one of its objections, Perú has ended up pivoting to two admissibility objections whose very premise is that jurisdiction otherwise exists: First,
[Page 2725]
denial of benefits and, second, abuse of process.
Now, neither of those can help Perú, but it goes to show that Perú's manifold jurisdictional objections are not really based on a principled interpretation of the clear terms of the Treaty. Time and again, Perú either ignores or mischaracterizes the key legal issues and evidence.
Underlying all of Perú's arguments on jurisdiction is, instead, a thinly veiled ideological proposition that investment management firms and the financial products in which they invest do not deserve Treaty protection. But nothing in international law compels such a result, and under this particular Treaty, with its express terms, its structure, and its specific historical circumstances, nothing could allow such a result.
For good order, we will deal first with Perú's objections as they have been and then briefly with denial of benefits and abuse of process.
Now, in the interest of time, I will skip temporal jurisdiction. There is really no question that you have jurisdiction over breaches occurring
[Page 2726]
several years after the Treaty came into force, and I would refer you to our Briefs on that point.
So, beginning, first, with the material jurisdiction, the Hearing confirmed that Gramercy made a covered investment. In the extensive evidence that you heard from both Parties' Treaty negotiators, as well as a documentary record of the Treaty's negotiation and the context and purpose of the Andean FTA from which it arose, that whole rich tapestry of evidence about what the State Parties here intended to achieve, you will not find a single thread that says that this kind of bond, this kind of public debt, this kind of restructuring of a long-stagnant State debt in the interest of both the State and the whole class of bondholders, that this was somehow silently excluded from the open-ended and deliberately broad coverage of all forms of public debt except state-to-state loans.
First, Perú had originally argued at some length that the Land Bonds were not debt, that they were not Bonds in the first place, that they didn't have the same features as other kinds of sovereign bonds.
[Page 2727]
Well, that fell apart at the Hearing. An immediate giveaway for that is that, in its Post-Hearing Brief, all that Perú says about this is one single sentence to the effect that: "The fact remains that they are not Bonds or debt," with no citation. And that's because nothing in the Hearing testimony supports that view.
Perú's Witness Vice Minister Sotelo readily admitted that the Land Bonds are internal domestic public debt. Perú's Expert Professor Guidotti readily admitted that they met his Expert definition of the essential characteristics of a bond, and both he and Professor Olivares-Caminal destroyed Perú's argument that these bonds were somehow radically different in nature from all other kinds of State-issued Bonds. As Professor Olivares-Caminal put it, a 1969 Chevy Camaro is still a car, even though it has no airbag like a Tesla does.
So, instead, Perú turns to Professor Reisman, who, of course, is not an expert on sovereign finance. In his Reports, Professor Reisman had disputed the fact that the Bonds were public debt, based on what he
[Page 2728]
called "the common understanding of public debt in the investment context," he said, and also what he called "the U.S. understanding."
But he admitted on cross-examination that, of course, one would also have to look to Perú's understanding of whether the Bonds were public debt, not just the United States, and that he had not done that. And, instead, what he had done is to turn to things like the mission statement for a now-defunct U.S. internal agency, or a paper that he wrongly attributed to the IMF, or the caption to a table about GDP, produced, again, by the United States' CIA or, of course, the website www.economicsdiscussion.net.
Now, you remember we looked at that together, and I'll spare us from looking at it again. But Professor Reisman admitted, among other things, that it was essentially a platform for people to upload their own papers, which has no academic affiliation or peer review of any kind, and that the text that he'd relied on was written by somebody whose identity or credentials he didn't know and which merely popped up on the internet late at night. And he ultimately
[Page 2729]
admitted, of course, that one should not in fact rely on sources of this kind in interpreting the U.S.-Perú Treaty.
Moreover, Perú has never attempted to distinguish this case and this Treaty from all of the other cases in which Tribunals have found that Government Bonds and other forms of State debt are, indeed, investments; cases likes FedEx, Abaclat, Alemanni, Ambiente Ufficio. There is even another recent Decision to that effect earlier this year.
Conversely, Perú has not denied that the U.S.-Perú Treaty is radically different in its text from the Treaty at issue in Poštová, which is the only case in the record to find that Government Bonds were not a covered investment.
Now, indeed, Perú's suggestion that the Bonds and Gramercy's investment in them did not have the characteristics of an investment also fell apart at the Hearing. Now, of course, an asset only qualifies for protection if it has those characteristics. The Treaty essentially says an investment is every kind of asset that is an investment as long as it's owned or
[Page 2730]
controlled by an investor. And this Treaty's use of "all," not "and," means that no particular characteristic of investment is actually required.
And Ambassador Allgeier, you'll remember, told you that the reason that they had done it that way, the whole point is to make the Treaty purposefully broad and flexible over time.
The assets on the Treaty's illustrative list, like Bonds, like debt instruments, are the ones that the State parties agreed are more likely to have those characteristics. They are presumed to have them, and as he put it in the context of the Bonds, in some cases it is more obvious than in others.
Now, State-issued Bonds fall into the "more obvious" category. That's why States issue Bonds in the first place. That is why Footnote 12 of this Treaty confirms that Bonds are the kind of debt instrument that is more likely to be protected.
That's why Annex 10F and Footnote 13 of this Treaty confirm that public debt is protected. That's why this Treaty covers not just Bonds issued by a company or debt instruments between private parties but,
[Page 2731]
effectively, all kinds of Peruvian State debt owned by private investors.
And that makes perfect sense. Long-term debt is a quintessential form of investment, and long-term debt issued by a State is a quintessential form of investment in the State. If you stop Madam Lander on the street, whether it be Main Street or Wall Street, and you ask her: "What's an investment?" She would likely say, "You know, stocks and bonds." That's the ordinary meaning of the term which, after all, is the whole point of the treaty interpretation exercise in the first place.
And what's more, here we are not just dealing with a passive investment and a handful of financial instruments or a couple of shares in a company. We are dealing with a considered strategy to leverage Gramercy's unique expertise and proven track record in order to resolve a whole category of stagnant debt to improve Perú's credit ratings, to attract more foreign direct investment, to create a secondary market, to bring liquidity to thousands of individual bondholders, as Gramercy had successfully done in many
[Page 2732]
other emerging markets.
So, there is really no dispute, again, that in making that investment with that strategy in mind, Gramercy committed capital or other resources. In fact, it did both. Gramercy didn't only commit $33 million in capital but also significant other resources over the years to develop and implement its reverse inquiry bond swap proposal, which Mr. Koenigsberger testified about at length and which Perú has essentially completely ignored.
Of course, in developing that strategy, Gramercy believed it would make a profit, not just for itself, but for all bondholders, in catalyzing a consensual restructuring, as Mr. Koenigsberger explained; and, if that principal strategy did not work, Gramercy believed it could always have the safety net of recovering the current value of its Bonds through the Peruvian Courts. And, of course, like any investment management firm, it stood to gain management and performance fees on its investment.
Now, the flip side of that is that Gramercy also assumed risk. As Mr. Herrera confirmed and the
[Page 2733]
Treaty says, buying State debt entails commercial risk, and Gramercy took noncommercial risks, too, such as opportunity costs, reputational risks, loss of fees, and Perú didn't really cross-examine any of Gramercy's executives about that testimony on that front.
And, finally, although this is actually irrelevant as a legal matter, Gramercy's investments in the Bonds also have the characteristic of contributing to Perú's economic development, that long-lost fourth prong of Salini.
Now, here, too, I refer you to our Briefs for the doctrinal point: Perú cannot use the preamble as a proverbial red pen to write this additional requirement into the Treaty in this UNCITRAL Arbitration, contrary to cardinal principles of public international law, to Ambassador Allgeier's testimony, to decades of arbitral jurisprudence, and even, as you'll remember, to Professor Reisman's own academic writings, as I explored with him on cross.
In any event, on the facts, that requirement doesn't help Perú, either. Again, Mr. Koenigsberger
[Page 2734]
explained how Gramercy's investment in the Land Bonds would help Perú achieve what he called "a virtuous circle of creditworthiness, the end of the era of default for Perú, better ratings than they might have had otherwise, and foreign direct investment that is mutually beneficial." He says, "I've been doing this 32 years. It is always beneficial to the State." And he gave you some specific examples of that, which Perú, again, did not challenge. He describes how Gramercy has had great success working consensually with states to resolve claims that seemed otherwise unable to be resolved.
And, consistent with that strategy, Gramercy sent Perú several proposals for exactly that, for a reverse inquiry debt swap proposal that explained the benefits of the proposal for Perú and proposed a reinvestment program. You see here a passage from a presentation that Gramercy sent to President García outlining those benefits.
Now, Professor Olivares-Caminal corroborated those macro- and microeconomic benefits. He testified about how Gramercy's investment created a secondary
[Page 2735]
market, injected new foreign direct investment, had a multiplier effect, and would have catalyzed a hugely beneficial restructuring, had Perú not stubbornly refused to even talk to Gramercy about that. And Perú did not challenge, did not even want to hear, Mrs. G's firsthand account of the microeconomic benefits that Gramercy's infusion of capital had for her and all of the other bondholders that sold to Gramercy.
Now, Mr. Herrera, who, remember, was the former Head of Perú's investment promotion agency Proinversión, he readily agreed that bond swaps and productive restructurings are beneficial for Perú, and that is exactly what Gramercy was proposing.
Finally, Perú's suggestion that this particular kind of bond or bond restructuring was nevertheless somehow intended to be excluded also fell apart at the Hearing.
Now, of course both Treaty negotiators, and even Professor Reisman, agreed that what defines the coverage is, of course, the text--it certainly can't be the silence--of Perú's own negotiating minutes, as Mr. Herrera had suggested in his statement. And the
[Page 2736]
contrary approach, you'll remember, would make Hegel blush, Professors Reisman said.
Now, the Treaty negotiators agreed that, after extensive negotiations, the only kind of State debt here that was excluded was state-to-state loans. In fact, both Treaty negotiators specifically confirmed that the Land Bonds were not excluded from the Treaty's scope.
The Parties didn't put the Bonds on the negative list. Mr. Herrera agreed that the Treaty protects assets unless a reservation is expressly stipulated, and there is no such express exclusion for the Bonds. He even agreed that sui generis kinds of Bonds, like the Brady Bonds, those were covered under the Treaty, even though they, too, like the Land Bonds, were not expressly mentioned either in the Treaty or the negotiating minutes.
And Ambassador Allgeier said that nowhere in the Agreement is there an express exclusion of the kind that would have been required. Perú could easily have carved out the Bonds from the Treaty's broad coverage the way that it did other forms of public
[Page 2737]
debt, or other kinds of assets, or other kinds of State measures that it found particularly politically sensitive; things like bullfighting or tuna fishing for the U.S. There was a mechanism in the Treaty to do that, and the State Parties here did not.
And what's more, Perú did not do that for the Land Bonds, not because it couldn't have anticipated that, at some later point in the future, there would be this form of investment that was the Land Bonds. It didn't do that in a context in which it knew--as Mr. Herrera and Dr. Hundskopf conceded, it knew that the Bonds could be acquired by U.S. investors, and that disputes could arise about them.
In fact, disputes did had arisen about them, some of which were so important that Professor-- Ambassador Allgeier, who is the senior U.S. official personally dealing with this political issue at the time, he described them as "the proverbial Damocles sword" over the whole enterprise. And what's more, Perú did not exclude them, even though the treaty's coverage of all forms of public debt except U.S.-Perú state-to-state loans got the blessing of Perú's own
[Page 2738]
agency dealing with internal public debt, the DGETP, the very same body within the MEF that was responsible for the Land Bonds.
And as we saw in this timeline, and Mr. Herrera and Dr. Hundskopf confirmed, all of that was unfolding against efforts by these very same Peruvian agencies to come up with an administrative process for finally resolving the Land Bonds debt, and all of this was unfolding while the Constitutional Tribunal issued several more high-profile Decisions reminding the Government that it had to clean up its internal public debt that it still hadn't paid, that it had to pay the Land Bonds at their full current value and to allow the bondholders to access the Courts in order to do that.
There is no dispute about those facts. And for those reasons, the Hearing confirmed that this Treaty covers the Land Bonds and Gramercy's investment in them.
With that, I will turn to Ms. Birkland to address why Gramercy is, indeed, the U.S. investor who made that investment.
[Page 2739]
MS. BIRKLAND: Thank you, Ms. Popova.
Members of the Tribunal, I'll be brief because here, again, the Treaty language is clear.
All the Treaty requires is that the investor be a U.S. national that made an investment in Perú.
And the ordinary meaning of "to make" is simply to cause something to exist or to give rise to something, and covered investments are ones that an investor owns or controls, directly or indirectly.
GPH and GFM clearly meet this test. They are both indisputably U.S. companies, there is no serious dispute that they, in fact, own and control the Bonds, and they undoubtedly made an investment when they developed a strategy to resolve Perú's agrarian reform debt and bought millions of dollars' worth of Bonds as part of that strategy.
Either ownership or control is enough. The Treaty requires nothing more. It doesn't require an active contribution or some alternative test of a contribution of one's own or some other misreading of the Treaty, although Gramercy would, of course, meet all those tests if they did apply.
[Page 2740]
Ambassador Allgeier confirmed this, and he wasn't crossed on it. And in its Post-Hearing Brief, all Perú can muster is to continue to rely on cases that we have already said are inapposite, and one of which has, in fact, been annulled, precisely because it misread the Treaty in the way Perú urges.
Let's consider each Claimant in turn. First, GPH. The Hearing testimony confirmed that GPH owns the Bonds. Professor Bullard and Perú's Expert Dr. Hundskopf agreed that GPH validly acquired title to the Bonds as a matter of Peruvian law, and Mr. Koenigsberger testified that GPH has owned the Bonds since Day 1 and has done so continuously ever since.
As Mr. Lanava explained, GPH financed the Bond purchases through its own capitalization. Gramercy's clients subscribed to equity and funds with interest in GPH, and those funds were equitized through capital contributions to GPH. After capitalization, GPH had a running balance which it used to buy the Bonds. There's nothing unusual about any of that.
[Page 2741]
(Interruption.)
I was just muted by the host. And that background noise was not on my end. Sorry.
(Audio interference.)
ARBITRATOR DRYMER: A second baby during this Hearing, maybe.
MS. BIRKLAND: Yeah, none of them are mine. Not so far, anyway. We'll hope it continues that way.
All right. So, that was GPH. Let's turn to GFM now.
The Hearing testimony confirmed that GFM controls the Bonds through its control of GPH.
Mr. Koenigsberger and Mr. Lanava testified about how GFM makes investment decisions about the Bonds, about their monetization and distributions. Consistent with GPH's Operating Agreement, any monetization of the Bonds will flow exclusively to GPH, and GFM exclusively decides whether and when to make distributions to upstream stakeholders. Those distributions are not automatic.
As Mr. Koenigsberger testified--and I'll quote him--"Gramercy is the only entity that owns and
[Page 2742]
controls." He continued: "So, it's Gramercy, through the investment manager GFM, that is the only one that can make all the decisions relative to the Bonds. And it's a Gramercy vehicle"--and by that, of course, he meant GPH--"that owns the Bonds and has title, and, therefore, it's the only owner and the only one that can make ownership decisions."
So, not only did the testimony confirm that Gramercy owns and controls the Bonds, but also that it is the only one who owns and controls them.
With that, I turn the floor back to Ms. Popova. Thank you.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you very much.
Ms. Popova?
MS. POPOVA: Thank you, Mr. President.
Now, I want to open a parenthesis here to briefly mention denial of benefits. For the very first time, in Perú's Post-Hearing Brief on Jurisdiction, Perú sought to deny the benefits of the Treaty to Gramercy under Article 10.12. Now, we addressed this at Paragraphs 47-49 of our Post-Hearing
[Page 2743]
Brief. In sum, this objection is simply precluded under both the UNCITRAL Rules and your Procedural Order Number 1; and, as a result, you cannot consider it, because Gramercy has not been afforded an opportunity to respond to it or to lead any evidence to rebut it. And that's no doubt the reason why Perú only raised it now. It's because it knows that this argument is meritless, because Gramercy's nationality, its U.S. nationality, is not one of convenience.
Gramercy is based in Connecticut. It does all of its business there, and, as Mr. Lanava told you, its beneficial owners are overwhelmingly millions of U.S. pensions.
So, we don't know what Perú will say about this tomorrow, but it's never denied that it's procedurally improper to bring a threshold jurisdictional admissibility objection two years after the deadline in the UNCITRAL Rules and five months after the end of the evidentiary Hearing. Instead, adding insult to injury, Perú claimed that we shouldn't even be allowed to tell you that their objection is precluded and meritless, and they seek to
[Page 2744]
strike our response and the associated Authorities about that.
Now, you have the Parties' letters about this, and all I will say here is that Perú's remarkable approach is really symptomatic of the lengths to which it has to go to avoid the fact that Gramercy is an investor that made an investment and both are protected by the Treaty.
So, that leaves Perú's kitchen sink objections about consent and abuse of process. Now, I will deal with waiver and timeliness of claims together because they are only relevant together.
First, Perú has conceded, finally, that it has no time bar or waiver objection with respect to GFM. So, if you agree that GFM is a covered investor with a covered investment, then Perú's waiver and time-bar objections become completely irrelevant, because they have no effect on any of the issues that you need to decide.
Second, Perú's residual time-bar objection to just GPH's claims depends on when GPH's claims are deemed to have been submitted to arbitration for
[Page 2745]
purposes of the three-year time bar in Article 10.18.1.
And the answer to that question is June 2, 2016, for the reasons that we explained in our Briefs, and there are two independent analyses that lead to the same outcome on this question. First, a qualified waiver is perfectly consistent with the Treaty; and, second, even if it weren't, an imperfect waiver is still enough to stop the clock on the time bar. And either one of these approaches means that all of GPH's claims are timely.
Now, Perú has no answer to either of those arguments. Again, it has objected to putting into the record a decision, just months ago, on this very question under this very Treaty against Perú itself and even argued by the same Counsel. And, again, that just goes to show that their only defense strategy is not to address the substance of the issues but to dodge them and try to prevent you from considering them.
And, third, even if you reject both of these analyses and nevertheless conclude that June 2--the
[Page 2746]
June 2 submission of Claimants did not stop the clock, Perú's time-bar objection still fails because it doesn't actually affect any of GPH's claims.
Now, again, Perú hasn't actually done the claim-by-claim analysis that Article 10.18.(1) of the Treaty requires. Instead, it claims that GPH knew or should have known that both a breach had occurred and that it had suffered loss from that breach by no later than 16 July of 2013 with respect to all of its claims. But that is not actually true with respect to any of GPH's claims. And you can see that on the next timeline.
Now, in August--in July 2013, GPH didn't know about the August 13 Constitutional Tribunal Resolution. It didn't know that this resolution foreclosed access to the Courts that had existed for decades in which the Constitutional Tribunal itself had protected in its 2004 Decision. It didn't know about the January 2014 Supreme Decrees issued six months later or, for that matter, the February and August 2017 Decrees, about four years later. It didn't know about the arbitrary formulas in those
[Page 2747]
Decrees. It didn't know that the process they created would be Byzantine and confiscatory. It didn't know that they would put Gramercy and Gramercy alone last in the line for payment.
And it didn't know that the MEF, in issuing those Decrees, defied its own basic rules of legality and reasonableness, facts that were only discovered in the course of this arbitration. And it didn't know that the July CT Order itself had been doctored to turn the majority opinion into a dissent with whiteout and based on false pretenses, a fact that Gramercy didn't learn until the scandal broke in 2015. And it didn't know about the MEF's Eleventh-hour interference with that Decision or the testimony of the CT Justices themselves years later in an investigation that continues to this day.
Again, there is no dispute about any of those facts, and they mean that none of GPH's claims are time-barred. As the recent Decisions in Mobil and Resolute Forest Products confirm, which Perú does not address, knowledge of breach for an expropriation cannot possibly occur until there has actually been a
[Page 2748]
substantial deprivation of value. It's an integral element of the breach itself. And here there was no such deprivation until the MEF issued its Supreme Decrees with their value destroying formulas at the earliest.
And GPH's other claims, Minimum Standard of Treatment, National Treatment, Most Favored Nation, all arise out of conduct that occurred or was discovered only later.
Now, that's the right analysis as a legal matter and at the Hearing, Mr. Koenigsberger's evidence about what he and other Gramercy executives actually understood and believed at the time resoundingly confirmed that analysis.
And so, too, does the documentary record which we, again, address in our Briefs and which, again, Perú ignores. For example, Mr. Koenigsberger's testified that Gramercy only appreciated that something had gone awry, sometime after analyzing the formulas in the January Decrees. Now, sure, when the July 16, 2013, Order was issued, Gramercy was surprised, as Mr. Koenigsberger explained. So, was
[Page 2749]
everyone else. Gramercy, like everyone else, expected the CT Order--the CT to confirm the 2001 Decision.
Now, it understood that what the CT had ordered in July 2013 was something different.
It understood it might have an adverse impact on its investment, but the extent of that impact wouldn't become clear until months later. The Order itself said that the MEF had to implement it within six months. And for that reason, as Mr. Koenigsberger explained, of course, without waiving legal privilege, he believed it would have been premature to commence arbitration at that point. In fact, two years later, in 2015, the CT itself said that a bondholder challenge to the order was premature because the MEF had not yet implemented the relevant Decrees.
And, moreover, until the later resolutions, Gramercy believed it could still get relief from the national courts. So, in fact, it is probably indicative of Gramercy's world view that Mr. Koenigsberger believed that the CT Order actually created what he called in his December 2013 letter "a historic opportunity for the MEF to actually put in
[Page 2750]
place the kind of global resolution that Gramercy had been urging for years."
And consider also Perú's own conduct. We've not heard a peep about that, but the Hearing exposed that not even Perú apparently had the crystal ball that it says Gramercy had on the 16th of July in 2013. Perú itself issued five different formulas purportedly implementing one and the same Decision, formulas that Professor Edwards showed you could be interpreted about a dozen different ways. Even the two highest-ranking members of the MEF didn't understand those formulas, couldn't explain to you how they related to the CT Order. Even Perú's Economic Experts, who Perú hired presumably to defend those formulas, told you they were nonsense.
And even the Supreme Court had a different view from the MEF about what the CT Order actually mandated. Because, as you know, the Supreme Court repeatedly awarded compensatory interest at the coupon rates, even after the CT Order Decision. And we know that that interest is a highly valuable component of these 40-year old Bonds.
[Page 2751]
And when I crossed Dr. Hundskopf about those Decisions, he readily agreed that they were perfectly consistent. He said there'd been a forum, they were just an example, and that all of the Decisions went that way.
So, not only were the consequences of the CT Order patently unclear from its face, but the way in which the MEF later implemented that Order was itself unpredictable, arbitrary, and irrational. And that is something--that cannot be something that Gramercy knew or should have known standing months and years earlier. So as a result, Perú's waiver and time-bar objections with respect to GPH, are both pointless and meritless.
Now, this leads Perú's argument of last resort, bad faith. In its Post-Hearing Brief, this is being promoted to Perú's first argument under the cloak of abuse of process.
Mr. Koenigsberger's evidence was the nail in the coffin for that theory. Let's come back to basics for a moment. Perú's attempts to dilute the high threshold that it must meet to succeed on this
[Page 2752]
argument cannot work. It remains one of bad faith. That is the underlying doctrinal, conceptual justification for this clause échappatoire this theory that could disqualify Gramercy from exercising rights it undoubtedly has and which the State Parties, in this Treaty, nowhere contemplated as a defense in the express text, and bad-faith is and must be an exceedingly high and fact-based standard. Perú surely would agree, it's very, very rarely applied. And in its Briefs, it relies on the Phoenix Action Decision, with which, of course, Professor Stern will be quite familiar, and which found it was abusive to internally reorganize the Claimant after the breaches had already occurred and after the damage had already occurred, and only for the purpose of bringing litigation rather than any legitimate economic reason.
And even Professor Reisman said that, in his view, there must be a high threshold of near certainty that there was a reorganization for the purpose of benefiting from Treaty protection.
Now, his opinion on whether or not the partial facts that he was instructed by Perú to assume
[Page 2753]
meet that standard is really neither here nor there. But, however, you look at it, none of the various articulations of abuse of process can possibly be met on the facts of this case. There is no evidence on the record that Gramercy invested in Perú in 2006 so as to bring a treaty arbitration 10 years later arising out of events that only occurred seven years later.
Perú does not even try to show you that its breaches were remotely foreseeable, let alone near certain, back in 2006 and 2008 when Gramercy invested, and Perú has not even attempted to establish that Gramercy invested in Perú and spent months finding Bonds and paid $33 million for them because it saw all of those things coming and it thought, gee, I better add a U.S. investor into the mix.
Perú does none of that. Instead, Perú now claims in its Post-Hearing Brief that Gramercy was "a third-party funder," it says, "for a dispute that had already arisen," and it cites a 2006 email that contains the word "claims."
Mr. Koenigsberger told you that just means
[Page 2754]
the Bonds themselves, claims to payment of current value under Peruvian law. Now, that's obvious from the document itself if you read it, as well as from all of the other documents, again, discussed in our Briefs. And Mr. Koenigsberger, in fact, strongly rejected the notion that there was any uncertainty or dispute affecting the entitlement under the Bonds at the time that Gramercy invested. There was no question that Perú was bound to pay them. No doubt, as Dr. Hundskopf put it when he was pressed to retract his gamble comment.
So, Perú's argument seems merely to be that Perú hadn't yet paid the Bonds in 2006 when Gramercy invested. And that's both obvious and irrelevant. Perú's abuse of process argument is really derivative of its misguided defense on the merits that the Bonds' value was uncertain, that Gramercy's investment was, therefore, speculative, and that that is somehow the reason why Gramercy's claims are now abusive.
And Perú continues to ignore the extensive evidence of the real reasons why Gramercy invested, which Mr. Koenigsberger has explained at length and on
[Page 2755]
which, again, he was not meaningfully crossed. Perú did not put a dent in his testimony that Gramercy invested because it saw an opportunity to resolve the Land Bonds' debt in a consensual and mutually beneficial way. It didn't cross him on why he believed that a reverse inquiry credit swap would be beneficial for Perú. It didn't meaningfully cross him on his belief that the time was right to do that for Perú, about how he had watched Perú's success story, and he had seen how Perú had restructured its Paris Club obligations and the Brady Bond debt, or about how the 2001 and 2004 Constitutional Tribunal Decisions meant that this was the time for Perú to finally clean up this Land Bonds debt, except to try to challenge the accuracy of Gramercy's due diligence memorandum which, as you'll remember, fell apart when it became clear that Perú was itself confused about the dates of its Decisions.
And it did not cross Mr. Koenigsberger on the wealth of contemporaneous documents proving how Gramercy actually put that strategy into practice over the long term. That is what Gramercy told its
[Page 2756]
investors back in 2008. That's what it proposed to the Peruvian Government in May and June 2009, and again in December 2013 and again in April 2014 and as late as September 2017 after the 2014 Supreme Decrees.
Perú's abuse of process claim cannot succeed because it requires you to find that all of these contemporaneous proposals to Perú were disingenuous. It requires you to find that Gramercy misled its investors about what its investment strategy was for the better part of a decade. And it requires you to find that Mr. Koenigsberger was lying on the stand, that he was lying, not just about what Gramercy's strategy was when he decided to invest in Perú in 2006, not just about the efforts that Gramercy deployed over the 14 years since then, but also when he said that a consensual resolution to the Land Bonds' debt remains Gramercy's hope even today.
Mr. Koenigsberger still extends his hand to Perú. He still hopes that Perú will do the right thing for all bondholders. Regrettably, it may now take your award to that make that happen.
Thank you for your attention. I will now
[Page 2757]
return the floor to Mr. Friedman to briefly conclude.
MR. FRIEDMAN: In concluding, I wish only to make the briefest remarks but to amplify some of the themes that Ms. Popova was just developing and address head on the underlying motif of Perú's entire case, namely, that Gramercy, this investor, is nothing more than a rapacious hedge fund speculator, a vulture, and consequently deserves neither your sympathy nor an award in its favor.
But that kind of base prejudicial demagoguery could not be more wrong or hypocritical. In principle, there is absolutely nothing wrong, dirty, immoral, illegal, or otherwise disabling about the fact that Gramercy is an asset manager and that it invests seeking profits. All investors do. It is how states attract foreign capital and why they sign investment treaties in the first place. And our Treaty even has a whole section encouraging trade and investment by U.S. financial services firms.
So, trying to demonize Gramercy because it is in the business of investing for profit, gets Perú nowhere.
[Page 2758]
But more importantly even than that, this whole vulture narrative could not be more inapt given the facts of this particular case and this particular asset manager. The labels imply trying to take unfair advantage of another's misfortune. That is not remotely what Gramercy did. As Ms. Popova just described, it is that Gramercy had a completely different motive.
Now, it is true that Gramercy bought Bonds at a discount to their intrinsic value from bondholders who had received nothing for decades, but Gramercy was always up front with them, and you even had evidence from one of them who explained that she was satisfied with what Gramercy had done, considered they were honest, and put the money to good productive use. The Sellers agreed to sell to Gramercy because Gramercy paid them fairly, tens of millions of dollars, when the Government had done nothing but rebuff them for decades.
And then Gramercy sought the most amicable and consensual solution, with the stated goals that they wanted to help create a solution that benefited
[Page 2759]
everyone, all the bondholders equally, not just Gramercy, and even Perú itself at a time when that kind of validation could have sped its economic recovery. This is not the conduct of a vulture.
In contrast, who can defend the conduct of the Peruvian Government in this whole affair? It was the Government that confiscated land the size of Portugal and did not pay for it. It was the Government that drove the economy into the ground and initially undercut the value of debt. It was the Government that refused to make good on the debt even after the Constitutional Tribunal held that it had to be paid at current value. It was the Government that manipulated the Constitutional Tribunal, ignored its own laws, and created a bondholder process with arbitrary and irrational payment formulas. It is the Government that is paying Mr. S and Ms. L and other bondholders just like them absolutely trivial amounts of money of which the society should be ashamed. And it is the Government that says, even today, that it owes Gramercy nothing, nothing, on its nearly 10,000 Land Bonds. The Government is just trying to, at long
[Page 2760]
last, get away with and get your vindication of what must be one of the largest uncompensated expropriations in history.
Fortunately, international law protects against that kind of manifest injustice and under our Treaty, it will now be in your hands to apply that law. For obvious reasons, Gramercy is the only bondholder that is a party to this arbitration and the only Party for whom you can order relief. But the Decision you make here will undoubtedly have reverberations in Perú and be looked to by all bondholders seeking at last some kind of justice.
And so, it should be; for that is precisely the kind of righting the balance pursuant to international principles that International Investment Law should always aspire to achieve.
With that, Mr. President, Members of the Tribunal, we conclude our submissions for today and thank you for your careful attention.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you, Mr. Friedman. Let me get a time check from the Secretary first.
[Page 2761]
SECRETARY PLANELLS-VALERO: Thank you, Mr. President. The Claimants have used two hours and 33 minutes.
PRESIDENT FERNÁNDEZ ARMESTO: So, perfectly within time. Thank you for adhering to the time slot.
Let me now see if my esteemed colleagues have some questions, and shall I turn first to--I see Mr. Drymer making himself ready to put some question or to say that he has no question.
ARBITRATOR DRYMER: It was rather the latter. I just wanted to be sure that my microphone was on.
No, nothing for the moment. Thank you.
PRESIDENT FERNÁNDEZ ARMESTO: Professor Stern.
ARBITRATOR STERN: I have a few questions.
ARBITRATOR STERN: I have a few questions on what we heard today, but, before all that, I would like to clear up my mind on our two Claimants. In the Claimant Third Amendment and Statement of Claim in Paragraph 28 and 29, it is stated that GFM is a limited liability company, organized under the law of
[Page 2762]
the United--of the State of Delaware, United States; and, 29, GPH is a limited liability company organized under the law of the State of Delaware, United States.
Now, I have been looking, trying to understand because it is a little complicated, Document C-703, which is Perú's structure charts of Gramercy.
[Redacted]
[Page 2763]
[Redacted]
[Page 2764]
[Redacted]
[Page 2765]
[Redacted]
[Page 2766]
[Redacted]
[Page 2767]
[Redacted]
[Page 2768]
[Redacted]
[Page 2769]
[Redacted]
[Page 2770]
[Redacted]
[Page 2771]
[Redacted]
[Page 2772]
[Redacted]
[Page 2773]
[Redacted]
[Page 2774]
[Redacted]
PRESIDENT FERNÁNDEZ ARMESTO: Thank you.
Thank you, Mr. Friedman.
I give back the floor to Professor Stern.
ARBITRATOR STERN: Thank you. So, my first
question is to you to, Mark Friedman, we know that
Gramercy bought the Land Bonds between 2006 and 2008,
I mean the one which we are concerned here. And in
[Page 2775]
your presentation, you said that CPI was a general
rule before 2013, as well as the payment of interest.
And I cite you--you say there was no uncertainty at
the time, none at least if you went to call the
current value of the Land Bond and it did so in many,
many, many, cases overwhelming. And then you added
there was also no uncertainty about interest, at least
at the stated coupon rates. None.
And what you complain about is precisely not
to have received the value based on CPI and interest,
but why didn't you go to court before 2013? Because
you say yourself in Slide 48--43 of your Statement
that in the Peruvian Court you would have obtained
841 million, which is what you ask alternatively in
your Statement of Reply, in the alternative of the
1.8 billion, you ask 842 million. So, why didn't you
go to the Courts?
MR. FRIEDMAN: Gramercy did go to the Courts.
So, let me just--
ARBITRATOR STERN: Just for a few, but, I
mean, for 44 Bonds.
MR. FRIEDMAN: 44 Bonds that represented
[Page 2776]
a--but there were 44 by number, but by value, they
represented more than 25 percent of the value of
Gramercy's portfolio. I think to fully answer that
question, I think it would credit and take seriously
Mr. Koenigsberger's testimony that the whole idea of
Gramercy investing was not simply to "let's buy low,
then run off to court and enforce our legal rights."
Instead, the idea was, let's invest and let's
build this virtual circle whereby we create a global
solution for everybody that will enhance the
creditworthiness of the Country, bring in the other
Bondholders, and that will be a more durable solution
than just trying to pick off our Bonds and go into
court.
And that's what they diligently pursued for
several years, but there was the financial crisis in
2008 in which people were focused on other things, and
I think Gramercy was clear about that. So, it wasn't
thinking about this investment especially hard in the
period of 2008 to 2009. But then when other efforts
at trying to create that global solution weren't
gaining the traction, that came very close on a couple
[Page 2777]
of occasions, but then got vetoed by the Executive and
died at the last pitch.
And at that point in 2011, Gramercy submitted
those conciliation requests to the Peruvian Ministry
of Economy and Finance. Now, those conciliation
requests you will recall are all those documents that
Mr. Hamilton brought to the Hearing last time and said
that Gramercy was hiding all of the Bonds. In fact,
it provided all of those documents, copies of all of
the Bonds and all of the acquisition documents to the
Peruvian Government in 2011 as part of this
conciliation process.
The conciliation process is a necessary prior
step to being able to assert litigation over the
Bonds. But it put 100 percent of the Bonds into the
conciliation process. Conciliation was obviously
rejected by the Peruvian Government, and then Gramercy
sought to do at least a test case by saying, look, we
think we'll get to a global solution, eventually.
But we'd like to have that so, you know, but
it seems we need to get some attention paid to us.
Let us bring a lawsuit and enforce our legal rights in
[Page 2778]
courts, which had never been their primary objective
in--primary method of trying to realize recovery. And
that was the Pomalca case. And so, it's not
surprising that in that case--and these cases are
broken down based on the original land acquisitions.
That's why there are 44 Bonds in that case.
It is because that related to a particular
parcel of land for which the Government had given
those 44 Bonds. Those 44 Bonds, because of their
characteristics, happened to be really good and
valuable Bonds. They were basically no-clipped
coupons, and they were, from an early time, and they
had an appropriate interest rate. And so, Gramercy
said, well, this is a good place for us to litigate.
So, why don't we litigate over these. They are very
substantial amount by value of our portfolio.
And then there was the--from 2011 to 2013,
the Engineers Bar Association in Perú brought the
Claim at the Constitutional Tribunal. Nobody thought
that process would take two years. People were
optimistic that because of the clarity of the 2001
Constitutional Tribunal Decision, that this new, this
[Page 2779]
revived case, it was actually an Application from the
2001 case that the engineers brought, and what they
were seeking was not a new Claim.
They were just seeking to have the
Constitutional Tribunal issue an enforcement judgment
on the 2001 case because it hadn't--they hadn't done
anything in a decade.
And it was--I think the entire society and
all the Bondholders at that point had some
considerable hope that the Constitutional Tribunal,
which it had been protective of Bondholder rights,
would continue to be and would issue some kind of
binding order that would eliminate the need for
everybody to bring their own individual cases and
hundreds or thousands of cases in dozens or hundreds
of courts all across the country. And so, Gramercy
shows--yes.
PRESIDENT FERNÁNDEZ ARMESTO: Can I--the
Secretary is asking me, there is no objection, I would
assume, for the United States to come back into the
room.
MR. FRIEDMAN: Correct.
[Page 2780]
SECRETARY PLANELLS-VALERO: Thank you.
(End of Attorneys' Eyes Only session.)
[Page 2781]
OPEN SESSION
MR. FRIEDMAN: So, I think that the answer to
your question is if you are asking about--
(Overlapping speakers.)
MR. HAMILTON: I would suggest we actually
wait for the United States Government to come back in
the room, Perú doesn't agree with their exclusion,
but, in any event, let's give them a chance to return.
And thank you for the observation, Mr. President.
SECRETARY PLANELLS-VALERO: They are back in
the room. Thank you.
MR. FRIEDMAN: So, I just--
PRESIDENT FERNÁNDEZ ARMESTO: Let us welcome
them back. Thank you for your patience, and
Mr. Friedman has the floor.
MR. FRIEDMAN: Yes. So, Professor Stern, I
think that there is--your question is sort of a
historical one, why did Gramercy make certain
Decisions about litigating at the time that it did,
and on the Bonds that it did, and not about the others
in that sequence.
And I hope I have provided for you some of
[Page 2782]
the context about which Gramercy--that informed
Gramercy's view about how and when to assert those
legal rights in Peruvian Courts that they always
thought that they had. But I think if you look at it,
they were patient and tried to pursue their investment
hypothesis for a while.
When that wasn't moving forward, they did
take the step necessary for all of their Bonds to be
able to revive cases and move them forward in courts.
They then did take a quarter of the value of the Bonds
and pursue it actively, getting favorable opinions
from the Court-appointed Experts in that case that was
consistent with the Decisions in almost all of the--in
all of the other cases and core principles, while
waiting for the Constitutional Tribunal to render its
Decision, which it ultimately did in July 2013.
So, I think it's the implication of your
question was that Gramercy was somehow neglectful or
negligent, I just--I don't think that that can be
justified on the facts.
ARBITRATOR STERN: I was not saying that you
were negligent, I was wondering why you did not take
[Page 2783]
this opportunity to go to the Court and, in fact,
waiting for the law to change, and not using the law
as it was. But maybe my next question is for Mr. Carl
Riehl. I don't see him. Does he hear me?
MR. RIEHL: Yes, here I am.
ARBITRATOR STERN: Yeah. Okay. Now I see
you.
You spoke a lot about the intrinsic value of
the Bonds. I would like to understand in which world
you find this intrinsic value for the 1.8 billion,
then the 840 million. How do you reconcile, I mean,
these figures in particular?
How do you reconcile these figures with what
Mr. Koenigsberger stated in his Second Amended Witness
Statement in Paragraph 21, which is the face value of
Land Bonds as denominated in Soles de Oro was
worthless even in 2005?
MR. RIEHL: Yes, thank you, Professor Stern.
The operative phrase there is the face value. Right?
So, that was a reference to the face value or the
nominal value, which is explicitly the value that the
Constitutional Tribunal in 2001 explicitly said would
[Page 2784]
be a constitutional violation to pay that value.
ARBITRATOR STERN: Okay. And how do you
reconcile these figures with what you paid for the
Bonds, the intrinsic value?
MR. RIEHL: Yes. Professor Edwards has given
testimony about that, and there is other evidence in
the record. At the time of purchase, there was
considerable uncertainty as to whether Perú would pay
the Bonds fully, and would pay their full value, and
there was considerable uncertainty about the timing of
that value.
Professor Edwards gave testimony that, as the
uncertainty diminishes the--that value reduced for the
risk of payment that was not full or prompt, would
converge to the intrinsic value, and you may recall as
well, there was an exhibit in Professor Edwards'
presentation at the Hearing showing how that intrinsic
value has increased over time.
So, even to the extent you want to hold up
the intrinsic value in comparison to the value at some
other prior point in time, $841 million was in 2018,
which is a decade or more later. And the intrinsic
[Page 2785]
value had grown during that time.
ARBITRATOR STERN: And the 1.8 billion, where
does that come from?
MR. RIEHL: That also includes compensatory
interest, is a substantial part of that. The
difference between the 1.8 and the 841 million is
entirely a result of what interest rate is applied.
So, the 1.8 billion uses the 7.22 percent, which is
based on the actual historical Rate of Return.
Peruvians have actually seen everyone who had
money in their pocket in Perú to invest was able to
invest it and received that rate or more; whereas, the
Bondholders obviously didn't have the money, and that
interest continued to accumulate. The 841 million is
calculated using the lower original coupon rates.
ARBITRATOR STERN: Okay. Well, thank you for
all the clarification.
Well, maybe I have also a question or two for
Ms. Popova. Okay? Yes.
You were dealing with the definition of
"investment," and you said, well, if you ask in the
street, whether it's Wall Street or an ordinary
[Page 2786]
street, you will have an answer.
Well, I'm a little surprised by such a
comment from a sophisticated lawyer, and also, I am
not sure that you read completely the definition,
because you said "investment" means every asset, and
that, as there is a reference to all assets--well, it
was "every" and "all"--it means there are no
characteristics of investments, but you didn't read
the rest, "including such characteristics." So, I
just couldn't follow you.
MS. POPOVA: So, we've never disputed that an
asset must have the characteristics of an investment
in order to be covered by the Treaty. I don't think
there is any dispute between the Parties about that.
I think what is undisputed, though, and it's also
clear from the text of the Treaty, is that those
characteristics that are identified in the Treaty are
not mandatory and they are not cumulative.
And the other thing that is clear, and on
which all of the Experts and Mr. Herrera also agreed,
is that the list of forms that an investment may take
are the kinds of assets that the State Parties
[Page 2787]
contemplated would, in fact, have the characteristics
of an investment. And at the end of the day, if we go
back to the interpretation of the Treaty, we must
begin with the ordinary meaning of its terms, read in
good faith and in context.
ARBITRATOR STERN: Well, I mean, if they say
"including such characteristics," it does not
necessarily mean that they do all include it, then. I
mean, I think you have read, as I did, Note 12, which
means that some might be an investment and some might
not be. So, I think you were a little bit quick on
that definition. But let's go--okay.
MS. POPOVA: Sorry. Footnote 12 says that
some forms of debt are more likely to be investments,
and it specifically calls out Bonds.
ARBITRATOR STERN: Okay. But if they have
the characteristic, which means that not all of them
have it. Okay.
MS. POPOVA: Absolutely. But, in this case,
the Bonds had all of the ones that are listed and
more.
ARBITRATOR STERN: Okay. And at one point
[Page 2788]
you mentioned, quite rightly, that in Annex 10(f) it
is stated that a public debt entails commercial risk.
This is absolutely correct. This citation is correct,
contrary to the other one. And I wonder whether you
simulate the commercial risk with an investment risk,
which can be called an operational risk.
For me, a commercial risk is a risk inherent,
in the fact that one of the Parties might default on
its obligation. But you know that an operational risk
is a risk coming from an economic operation whose
result is unknown. So, do you make a difference
between commercial risk and investment risk as some,
you know, cases do, which you probably know?
MS. POPOVA: I think in this case, Professor
Stern, there is no difference, because there
is--however you want to define the risk, it existed
here. And if you take the view that a financial
investment, like a debt or--let's take even a share,
share ownership in a company, or futures, options,
derivatives, other debt instruments that this Treaty
protects, if you take the view that they don't carry
risks, then they would never be protected under this
[Page 2789]
kind of Treaty, and we know that that can't be true.
ARBITRATOR STERN: But the value of the share
depends on the results and the profits made by the
Company, which is very different.
MS. POPOVA: But the shareholder is not
necessarily the one that drives that performance. And
here, Gramercy did invest, not just to passively hold
debt instruments, but actually to realize the real
value, the inherent value, of not just its own
instruments, but also those of all the other
bondholders in Perú, and we have unchallenged
testimony about that.
ARBITRATOR STERN: But could you give me a
definition of the investment operation in which
Gramercy entered . . .
MS. POPOVA: Absolutely.
ARBITRATOR STERN: . . . to create value
MS. POPOVA: I think Mr. Koenigsberger has
given several definitions that are probably much
better than the ones I can give here. But what
Gramercy invested in is the hope and the expectation
that it would be able to help Perú resolve its
[Page 2790]
stagnant Land Bonds debt, and that in doing so, it
would not only achieve the current value of the debt
instruments that it itself held, but also that it
would achieve the benefits that it had seen that it
could achieve for other countries over time.
And I really--I don't think that there's the
requirement of sort of this--some particular
qualification of the risk, of the kind of risk that is
required for an asset to qualify as an investment.
I'm not sure that calling it operational or defining
that in any particular way is particularly helpful,
frankly. And, again, as I say, on the facts of this
case, those kinds of distinctions don't help us.
ARBITRATOR STERN: Okay. Life is a risk
inherently. Okay.
So, I think I have finished my questions.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you.
Thank you, Professor Stern.
I do have some questions, but I think we
have--for tomorrow after the presentation by
Respondent we have scheduled some time. And I would
rather hear the position of Respondent and then maybe
[Page 2791]
we can have--it is more meaningful to have the
questions then. So, I will postpone them for
tomorrow.
So, assuming that there is no further
business for the day, Mr. Hamilton?
MR. HAMILTON: Mr. President, thank you very
much for the attention of the Tribunal.
Just a brief note for the record that the
Republic of Perú reiterates its objection to
references to materials that are not in the record and
that have not been addressed by the Republic of Perú,
nor by the Non-Disputing Party, the United States
Government, which is also pertinent. We also
reiterate our objection to the exclusion of the United
States Government from any of the components of this
proceeding, and we also maintain an objection related
to the characterization of the presentation of
Gramercy documents that were withheld over time, and
we will address that in due course.
Simply note that for the record, and
otherwise, I look forward to everyone having a night
of sleep, being able to emerge, like emerging from the
[Page 2792]
wardrobe, leaving the fantastical world of Narnia and
coming back to reality. And we will address--we will
address many issues tomorrow.
Thank you for your attention.
PRESIDENT FERNÁNDEZ ARMESTO: Thank you,
Mr. Hamilton.
Mr. Friedman, do you have any comments?
MR. FRIEDMAN: No. Thank you. We just, once
again, want to express our thanks to the Tribunal.
PRESIDENT FERNÁNDEZ ARMESTO: Very good. So,
we will be meeting tomorrow at the same time as today.
I thank the Interpreters and the Court
Reporters. It must have been a difficult day for them
because there were quite some substantial
presentations. But now we have all some time to rest
and come fresh again tomorrow.
So, thank you very much to all of you, and we
meet tomorrow.
MR. FRIEDMAN: Thank you.
MR. HAMILTON: Thank you very much.
SECRETARY PLANELLS-VALERO: Thank you,
Mr. President.
[Page 2793]
(Whereupon, at 12:47 p.m., (EDT) the Hearing
was adjourned until 9:00 a.m. the following day.)
[Page 2794]
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