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From Securities Regulation Daily, September 29, 2014

Argentina held in contempt in battle with hedge funds

By Mark S. Nelson, J.D.

Argentina has been held in civil contempt of court for allegedly disobeying court orders related to the efforts of numerous hedge fund creditors to collect over the country’s soured bonds, said a federal judge in Manhattan. This latest development is an evolution in the case based on the Supreme Court’s opinion earlier this year that favored the hedge funds’ efforts to engage in post-judgment discovery of Argentina’s extraterritorial assets. Judge Thomas P. Griesa issued his contempt order late this afternoon following a hearing (NML Capital, Ltd. v. Republic of Argentina, September 24, 2014, Griesa, T.).

Argentina had urged the court to drop the contempt proceeding because holding a sovereign state in contempt goes against international law and U.S. law and because the country is incapable of taking the kind of action that would remove the contempt. The hedge fund plaintiffs, however, citing the Supreme Court’s opinionsaid a key US. law is the basis for courts making sovereign immunity decisions without any need to reference executive actions or international law.

Argentina cited the United Nations Charter generally for the view that sovereign states are equals. Argentina also noted that some countries adhere to principles stated in the United Nations Convention on Jurisdictional Immunities of States and Their Property, which denies courts the ability to fine sovereign states for their failure to comply with court orders. The hedge funds, by contrast, emphasized the convention’s lack of force and the absence of the U.S. as a signatory, key points Argentina had to admit in its brief.

The Foreign Sovereign Immunities Act (FSIA) also gives sovereigns cover, said lawyers for Argentina, arguing that FSIA alone governs jurisdiction and enforcement regarding foreign sovereigns. According to Argentina, the Fifth Circuit is the only court to have dealt with the FSIA in a similar context and it vacated a lower court’s ruling finding a sovereign state in contempt. But the hedge funds countered that the Fifth Circuit case involved a state law execution that was different in character from the attempt here to “coerce” Argentina to follow court orders.

Argentina also said its inability to comply is a defense to the proposed contempt order. Here, Argentina relied on its interpretation of “evasions” and various contractual terms that it said limit what it can pay. A fundamental principle of contempt proceedings, Argentina’s lawyers said, is the ability of someone held in contempt to do an act that will “purge” the contempt. Argentina said it could do nothing to remove the contempt, with the possible exception of a ratable payment, which may raise other issues.

Argentina also said holding it in contempt would be akin to a criminal, not a civil, penalty and that added Constitutional and procedural safeguards are needed. According to the hedge funds, though, Argentina failed to acknowledge the differences between imposing civil contempt sanctions and enforcing or executing them.

Moreover, Argentina repeatedly noted instances where the U.S. recently backed sovereign immunity in court filings. But the hedge funds said the U.S.’s position in these cases was more nuanced and had been rejected by some courts.

The case is No. 08 Civ. 6978.

Attorneys: Jonathan I. Blackman (Cleary Gottlieb Steen & Hamilton LLP) for The Republic of Argentina. Robert A. Cohen (Dechert LLP) for NML Capital, Ltd. Edward A. Friedman (Friedman Kaplan Seiler & Adelman LLP) and Lawrence S. Robbins (Robbins Russell Englert Orseck Untereiner & Sauber LLP) for Aurelius Capital Master, Ltd., Aurelius Opportunities Fund II, LLC, ACP Master, Ltd., Blue Angel Capital I LLC. Michael C. Spencer (Millberg LLP) for Pablo Alberto Varela. Robert D. Carroll (Goodwin Proctor LLP) for Olifant Fund, Ltd.

Companies: The Republic of Argentina; NML Capital, Ltd.; Aurelius Capital Master, Ltd.; Aurelius Opportunities Fund II, LLC; ACP Master, Ltd.; Blue Angel Capital I LLC; Olifant Fund, Ltd.

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