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Vulture Fund Case Studies

Below is a list of vulture fund case studies.


Peru

Peruvian flag

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 that is at the center of the current high-profile Argentina debt dispute, 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.

Elliot then filed an injunction to prevent Peru from paying off its restructured debt without also paying Elliott, successfully arguing that Peru had violated the "pari passu" clause, which states that no creditor could be given preferential treatment. 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 international standing. Elliot pioneered this litigate-into-submission strategy that allows these vultures to collect astronomical profits on countries in economic stress, and as seen with Argentina, has managed to continually capitalize on the strategy’s success.

Liberia

Liberian flag
Ellen Johnson Sirleaf, President of Liberia, has spoken vehemently against vulture funds (www.telegraph.co.uk)

In 2010, Liberia was awarded $4.6 billion in debt relief from the IMF and the World Bank under the Heavily Indebted Poor Countries initiative. As IMF First Deputy Managing Director John Lipsky stated, "Debt relief would allow Liberia to secure additional financing...to help deliver critically needed services and infrastructure necessary for Liberia’s future prosperity.” In 2010, with 63.8% of the population living in poverty, a 42.9% adult literacy rate, and a life expectancy of only 58.9 years (according to the World Bank), Liberia needed to focus inward, on infrastructure, health and education. At the same time, however, Liberia was forced to focus on vulture fund litigation.

In 2009, the year before Liberia received the debt relief, two vulture funds sued Liberia in a London court for a 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 located in tax haven countries in the Caribbean.  

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, and equal to about 5% of the national budget. In 2010, Liberia was able to reach a settlement with the vulture funds, agreeing to pay just over 3% of the $43 million the sum had purportedly climbed to. Although Liberia was able to negotiate with the Vulture Funds, the mounting legal fees and energy the country spent throughout the litigation process was significant. Liberia was forced to direct funds away from development in a time of dire need. 

DRC (Democratic Republic of Congo)

DRC flag

FG Hemisphere

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

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. 

Themis Capital & Des Moines Investments Ltd.

Beginning in the summer of 2008, Themis Capital and Des Moines Investments Ltd. acquired roughly $18 million of Congolese debt from Citibank and various other creditors. This debt dates back to the early 1980’s and the corrupt regime of former dictator Mobutu Sese Seko. In February 2009, Themis and Des Moines filed a lawsuit against the DRC, suing the nation for the principal $18 million plus decades of interest. In July 2014, after unsuccessful settlement negotiations, US District Judge Judge Paul A. Engelmayer ruled the DRC must pay the hedge funds roughly $70 million in principal and interest. This ruling is an unfortunate event for a country that needs money for development. Only 29% of the rural population has access to quality water sources in the DRC, a country ranked second to last in the United Nations 2013 Human Development Index.

"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

Cameroonian flag

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.

 

 

Zambia

Zambian flag

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.

 

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