In 1983, Peru was in dire economic straights, plighted by social turmoil and guerilla terrorism, and saddled with an unmanageable amount of external debt. The nation began a long process of negotiations with creditors, eventually restructuring its debts in 1996. Original loans were swapped for Brady Bonds, tradable bonds issued in the original amount of the loans.
Around the same time, Elliott Associates, a hedge fund run by Paul Singer and based in New York City, purchased $20.7 million worth of defaulted loans made to Peru for a deeply discounted $11.4 million. Elliott Associates, holding the only portion of Peru's debt remaining outside the restructure, immediately sued the nation and its Banco de la Nacion del Peru in a New York court for the original amount of the loan plus interest. Elliott won a $58 million settlement and made a $47 million profit - a 400% return.
Peru, wishing to honor its debt, but unable to pay the $58 million, continued to repay those creditors that held Brady Bonds before paying Elliot Associates. The hedge fund filed an injunction to prevent Peru from paying off its restructured debt without also paying Elliott. While Peru sought to honor its debts and repay its creditors, the vulture fund successful argued that Peru had violated the "pari passu" clause, which states that no creditor could be given preferential treatment. Even as Peru attempted to repay its creditors, the nation was further being punished by this vulture. Unable to make payments on its debt, Peru once again found itself facing default and was forced to settle with Elliott in order to continue honoring its debts and remain in good standing. Elliot pioneered this litigate-into-submission strategy that allows these vultures to collect astronomical profits on countries in economic stress.
Ellen Johnson Sirleaf, President of Liberia has spoken vehemently against vulture funds (www.telegraph.co.uk)
In 2009,two vulture funds sued Liberia in a London court for 30 year old, $6.5 million dollar loan. Originally taken out in 1978 from US based Chemical Bank, it was divided and sold on the secondary market to a number of buyers, including Hamsah Investments and Wall Capital, two vulture funds conveniently located in tax haven countries in the Caribbean. These companies saw Liberia and its debt as an opportunity to turn a profit.
Shortly after receiving these debts, Hamsah Investments and Wall Capital took Liberia to court. At the end of this process, Liberia owed $20 million dollars, a sum much larger than the initial $6.5 million dollars. Despite Liberia's claims that it did not have the capacity to repay the sum and despite the country's HIPC status meaning it was receiving debt cancellation from countries, private companies were not required to restructure loans and could seek to recover debts. With the majority of the population living in poverty, high rates of HIV/AIDS, and poor educational opportunities, it is clear that Liberia desperately needed to focus inward on infrastructure. More debt simply exacerbates the problems this impoverished nation faces, and perpetuates the constant cycle of inescapable debt. Hamsah Investments and Wall Capital had profit to gain, so regardless of the human impact such a suit would have, these companies went after it.
Ethiopia is currently in arbitration with two Vulture Fund companies, Kintex and YugoImport. This arbitration makes the situation especially problematic for Ethiopia because there are very few ways to dispute the outcome of cases. Kintex picked up a share of debt worth a sum of $8.7 million dollars. Currently, it is seeking to claim that amount, which Ethiopia will be required to pay. YugoImport held debt worth a total of $122 million and is now aiming to turn a large profit by seeking $178 million dollars, much more than the original worth of the debt. These sums add up to be much more than Ethiopia can afford to pay without severely damaging the lives of its people. Ethiopia already struggles to meet the needs of its people due to debt, and has long been impoverished. More than a third of its people live in poverty, and there is very little infrastructure. As a qualifying HIPC country, it has seen some of its debt cancelled by creditor countries, but these debt cancellation requirements do not govern private companies. As a result, Kintex and YugoImport can seek to claim whatever money they care to, turning a blind eye to the people who will suffer, starve, or die as a result.
Thirty years ago, Mobutu Sese Seko, dictator of what was then Zaire and is now the Democratic Republic of the Congo (DRC), borrowed $30 million from a Bosnian energy company for an unsuccessful development project. Mobutu was notorious for borrowing money from the West and funneling it into his own bank accounts and he ruled autocratically, factors that call into question the validity of the $30 million debt.
The Vulture Fund FG Hemisphere, run by American Peter Grossman, bought DRC's debt for just over $3 million, and then sued the DRC in court in 2010 for $100 million, which is the amount of the original loan plus interest. It is estimated that in the DRC, which ranked dead last in the UN's 2011 Human Development Index, $100 million could purchase enough clean water to save the lives of 200,000 children.
What makes this particular case extraordinary is that the sale of the debt may have been illegal. The former Prime Minister of Bosnia, Nedzad Brankovic, has been charged with corruption in the case for selling DRC's debt to FG Hemisphere without proper authorization; adding to the outrage is the role played by a second notorious Vulture Capitalist, Michael Sheehan of Donegal International, in brokering the illegal sale. This situation raises the specter of corrupt officials selling sovereign debt to vulture funds for personal gain, as Brankovic is accused of doing.
In 2011, FG Hemisphere was awarded $100 million by a court in the Jersey Islands, and is attempting to compel payment by the DRC through numerous legal channels. Jubilee USA Network, along with our partners at the Jubilee Debt Campaign in the UK are attempting to persuade the Jersey Islands to outlaw Vulture Funds, as was done in the UK.
Red Mountain & Others
In the late 1990's, American Vulture Fund Red Mountain Finance bought $8 million worth of debt owed by the DRC to the London Club, and sued the impoverished country for $27 million. Red Mountain paid just $800,000 to the London Club for the debt. A court ruled in favor of Red Mountain, and when the DRC appealed the case, another court ordered the DRC not to make any other debt repayments without paying Red Mountain a proportionate share. Failure to pay off other debts would have been disastrous for the DRC, which promptly settled with Red Mountain out of court for more than $8 million in 2002.
As noted above, the DRC ranked last in the United Nations' 2011 Human Development Index, and badly needs money to fight domestic poverty and to rebuild a country ravaged by years of civil war and exploitation. In addition, the DRC was sued by Israeli Vulture Fund Frans Edward Prins Rootman for $43.5 million (the fund was awarded $12.5 million by the courts) and in 2009, the DRC was sued by American Vulture Fund Themis Capital for almost $80 million related to a credit agreement from 1980, when Mobutu was at the peak of his power.
"All these amounts claimed reduce resources available to the country and undermine its economic development and all actions for regional integration," said African Legal Support Facility Acting Director Mamoudou Deme. "The successful defense of these matters would represent an important message to vulture funds activities on the continent."
Cameroon is being pursued by multiple vulture funds, including Grace Church Capital (Cayman Islands), Antwerp (UK Virgin Islands), Sconset Limited (UK Virgin Islands) and Winslow Bank (Bahamas). Each of these cases follows fairly typical vulture fund storylines. Grace Church Capital bought Cameroonian debt for $9.5 million and then sued for nearly $40 million, while Sconset bought its share for $15 million and sued for $67 million. Antwerp also bought its debt for about $15 million, but is claiming an astounding $196 million from a country that ranks 150th on the United Nations' Human Development Index (HDI) and has a GDP of just $22 billion. Winslow Bank, meanwhile, sued for nearly $50 million for just $9 million worth of debt, and attempted to seize Cameroonian assets abroad as a means of enforcing its victory in court.
In 1999, a vulture fund called Donegal International bought a debt owed by Zambia for a knock-down price of $3.3 million. The debt was originally worth $15 million, but was valued at about $30 million.
Six years later, Zambia's debt was cancelled and the country began saving $40 million a year by not having to repay loans to the World Bank and International Monetary Fund.
Donegal sued Zambia for the full amount, plus what they claim to be interest and costs, resulting in a staggering total of over $55 million. On February 15, 2007, a London court rejected the size of Donegal's claim, but said that under law it is still entitled to something from Zambia. In April 2007, the court ruled that Zambia must pay $15.4 million plus a share of legal costs to Donegal International.