A secret memo between the government of Argentina and their US based attorneys may be advising Argentina to disobey a US Supreme Court ruling, according to documents recently unearthed. On May 8, shortly after the memo in question was written, ValueWalk reported that Argentina might ignore US court rulings.  Today’s memo appears to confirm that reporting.

Argentina

Argentina’s “best option” is to default, restructure outside US legal jurisdiction

The May 2, 2014 memo from the New York office of Cleary Gottlieb Steen and Hamilton LLP to the government of Argentina, marked PRIVILEGED AND CONFIDENTIAL ATTORNEY CLIENT COMMUNICATION, says the “best option for the Republic” is to default on the bonds and restructure the debt so the issue will “remain outside the reach of the US Courts.”  In Supreme Court testimony the government of Argentina had previously said it would abide by the court’s ruling and not default on bondholders.

“If the Supreme Court does not decide to review the lower court ruling, the best option for the Republic is to allow the Supreme Court to force a default,” the confidential memo advising Argentina reads, “and then immediately restructure all its external bonds in such a way that the payment mechanism and other related aspects remain outside the reach of the US courts.”

Legal tactic would be a “gravy train” for lawyers

The memo, written in Spanish and authored by Jonathan Blackman, Carmine Bocuzzi and Carmen Correa, advises the government of Argentina to blaze a confrontational trail with the US Judicial system.

Responding to the issue, a Cleary Gottlieb spokesperson provided an unsigned document from the court that says the court assumes that Cleary Gottlieb did not intend to release the memorandum and concludes that “the memorandum is clearly privileged” and “the court will make no use of it.”  In court on May 30 Cleary Gottlieb lawyer Carmine D Boccuzzi said “there is no smoking gun and there is no plan (to evade US Supreme Court rulings.” Boccuzzi went on to say that, due to limited resources, Argentina is likely to default on all bondholders if the holdouts prevail, not just default on the holdouts.

Before U.S. District Court Judge Thomas Griesa on June 3, Argentina’s legal team acknowledged authoring the memo, according to reprots. Judge Griesa then strongly chastised the legal advice, implying that it was done to create a “gravy train for the lawyers, but would create havoc for the country’s debt and the rule of law.”

As previously reported in ValueWalk on multiple occasions, at issue is a default by Argentina of its bonds purchased by investors. Eventually almost 93% of the investors have accepted payment of approximately 30% of the amount owed to them and have forgiven the other 70%, according to the Bloomberg report.  However, aggressive investors, some of whom purchased the claims of previous bondholders, have held out for more.

The memo in question addresses negotiations that Argentina might be having with holdout hedge fund managers, such as Elliott Management, and provides a review of the various options for valuation and payment.  In the so-called “Gramercy Proposal” the lawyers appear to recommend a SWAP transaction as a component of the deal.

Argentina wants to keep paying its debts, the memo urges, but then bemoans that the courts “have placed (Argentina) in a terrible position. (A) position that, unless it is reviewed by the Supreme Court, would seem to be obligating Argentina to default, because none of the intermediate agreement options resolve the dilemma created by the courts when they gave each one of the holdouts the right to interrupt payment to the rest.”