On Thursday, we reported on a memo by Cleary Gottlieb, lawyers to Argentina in sovereign debt matters.
The memo suggested that the “best option” for its client would be to default upon its restructured bonds — then to immediately reroute their payments beyond the reach of US courts — should the US Supreme Court decline in the coming weeks to review an order requiring holdouts to be paid too. (Update: full memo here, as a Word doc.)
Which is rather extraordinary advice. The memo also emerged in the week Argentina supposedly showed good faith to the Paris Club. (And in fairness, the memo also considers settling with holdouts).
On Friday, the holdouts’ lawyers beat a path to the courthouse.
Waiting for them was the Hon. Thomas P. Griesa, federal judge for the Southern District of New York, and the original author of the order. For those interested in the pari passu saga — or simply in extraordinary lawyerly exchanges — we present the transcript, almost in full below (or see here for a complete copy)…
THE COURT: What is the problem that you have?
MR. COHEN: Your Honor, Robert Cohen from Dechert for NML.
Your Honor, we have a motion seeking an order.
THE COURT: What is the problem?
MR. COHEN: The problem, your Honor, is something that we think is a clear violation of your Honor’s orders prohibiting Argentina from evading your equal treatment injunction has occurred.
On May 23rd, we became aware — our client became aware of the publication in Argentina on our [sic?] web site of a memorandum that appears from Cleary Gottlieb authored by Mr. Blackman, Mr. Boccuzzi and another attorney at that firm to its client, a ministry of Argentina, in which, according to the excerpt published, Cleary Gottlieb is counseling Argentina about a plan as to how to evade the U.S. Court’s jurisdiction and restructure the bonds in the event –
THE COURT: You mean the exchange bonds?
MR. COHEN: The exchange bonds, your Honor.
– the Supreme Court denies certiorari. We think that requires the immediate attention of the Court, both because we have an ethical obligation to bring to your attention what we think are frauds on the Court and, also, because the Supreme Court may decide the petition for certiorari as early as June 16th, and we need to know what those plans are in order to be able to take steps to stop them by June 30th, which is the next interest on the exchange bonds. The information that we have is now widely disseminated on the Internet and in the Financial Times, newspapers in Argentina. It is well known–
THE COURT: What is that information? I have gotten some papers in the last few minutes which I really have not had a chance to absorb in any way. So what is the information?
MR. COHEN: The information, your Honor, is that a memorandum, a confidential memorandum, perhaps an attorney-client memorandum — I shouldn’t say “perhaps,” I think it was intended to be attorney-client communication between Cleary and Argentina dated May 2nd of this year in which Argentina is given advice with respect to its options should the Supreme Court deny certiorari. And among the advice that appears to have been given is that they should restructure the bonds outside of the jurisdiction of this Court so that the equal treatment injunction cannot be enforced…
So we are asking your Honor to find that that document is not privileged, that the advice that it gives is in violation of your Honor’s anti-evasion order and that Argentina be compelled to tell us within 72 hours what its plans are.
Your Honor, we also have some language in the proposed order that re-enforces and reiterates the prohibitions on the conduct that Argentina is entitled to engage in, the planning of a mechanism to avoid these courts. So we are asking for an order that includes all of those things for the reason that we have now got what may be the smoking gun…
There then follows some crowing by Mr Cohen that he always said Argentina must have a plan, and that the content of the Cleary memo is “simply outrageous”. Then we go to the Cleary response from Carmen Bocuzzi…
THE COURT: Mr. Boccuzzi.
MR. BOCCUZZI: There is no smoking gun and there is no plan. The Supreme Court has our cert petition and our reply cert petition and is expected to issue some ruling on July 16. [Sic - it's June 16]
In our reply cert petition, we make very clear that the Republic will comply with the pari passu orders, but what that means, given the fact that the Republic does not have the resources to pay all of the holdouts is that there will likely be a default, an across-the-board default. That is what we have said. That is what is going on. But there is no plan to evade. The status quo remains in effect.
In terms of this memorandum that he is talking about, there is a memorandum authored by Cleary Gottlieb. It was not voluntarily waived as to privilege by the Republic of Argentina. It is not clear how some unauthorized individual was able to get it on to a web site somewhere in Argentina, but if I am allowed I would like — and if the plaintiffs are going to push this issue — the opportunity to brief the attorney-client portion of this motion. I think the privilege remains in place and that is privileged material.
But the important thing is that the status quo which your Honor was worried about was that, pending the appeals here, Argentina would figure out some other way to pay the performing debt so that if your Honor’s orders were ultimately affirmed, it would be able to keep pay the performing debt and not pay the defaulted bondholders — that has nowhere been said. There is no plan to do that. I am not sure a plan could exist to do that…
At this point, Judge Griesa recalls a statement to the Second Circuit by Mr Blackman last year — one that drew gasps among courtroom spectators as it was made, and has since become priceless lobbying material for NML — that Argentina “would not voluntarily obey such an order”:
THE COURT: Let’s get to basics.
If the Republic of Argentina, indeed, is in a financial condition that it cannot pay all of these obligations, what does anybody in good faith do? They come to the Court and there is some negotiation. Nothing like that has ever been offered. Nothing like that has ever been suggested. All that has ever been done by the Republic is to refuse to pay its just obligations. Obviously, there is no need to talk about catastrophe. There is no need for any such talk — I am repeating myself.
If the Republic would turn around and act in good faith, there could be a negotiation of any such issue. It is done every day in the courts of this land. And that is the way it can be done here. And so there is no need to talk about the kind of thing you are talking about.
MR. BOCCUZZI: But the key point, your Honor, is that there is nothing surreptitious going on. There is no secret plan to evade. We have been very upfront in our public filings with the courts and including, most recently, with the Supreme Court, saying what our position is and what our economic condition is.
We are still hopeful that the Supreme Court will grant cert. There have been many parties supporting the grant of cert, but we make clear that the consequences — and that is part of the review of the orders — if cert is denied, that we simply cannot pay everybody across the board, and we point out that the result of that is a very likely imminent default.
So that is out there, your Honor. But what is not in existence is a scheme to evade by just ignoring what this Court has said and saying, fine, exchange bondholders, you want to get paid, here is your money, and we are just not going to pay these folks. That is not what has appeared anywhere. That is not what is even in their briefs.
THE COURT: Isn’t that suggested by this memorandum?
MR. BOCCUZZI: No, your Honor. Again, I really don’t want to end up waiving the attorney-client privilege because I don’t think it’s been waived. But to be clear, that is not the upshot of the memo. The memo goes through different scenarios of what could happen, including possible settlement scenarios — the things your Honor was talking about — and then also points out, when one has a default, then one may have to face an attempt to restructure those defaulted obligations and to query whether that can be done consistent with the outstanding pari passu orders. But there is no — and there has never been and we have never advised a client just to turn their nose up to the Court’s orders and to evade them.
And I think the proof is in the last few years, your Honor’s anti-evasion injunction has been in place since 2012, for two years. And for two years, everybody has been status quo. And why that would suddenly change at the very end when we are waiting to see what the Supreme Court will do is just not happening. And as your Honor said –
THE COURT: It will be a very important development if the Supreme Court denies cert. Then, presumably, the stay issued by the Second Circuit will be vacated and the matter will be back in the District Court regarding enforcement — something which Mr. Blackman told the Second Circuit would not be carried out. Now, if you don’t think that is a problem, then you don’t know what the English language says.
And on that note, Judge Griesa took his papers home for the weekend.
NB – Some context. Whether “for two years, everybody has been status quo” or not, there has also been rife speculation for the last two years about Argentina’s options if it loses the pari passu case — including bond payments rerouting. Also, Judge Griesa’s “anti-evasion” order requires “agents” of Argentina (including its lawyers) not to aid the republic in obstructing it. If you were in any doubt that the pari passu case is really about enforcing sovereign debt through third parties…
Anyway — we’ll keep you posted on what Judge Griesa says.