Respondent's Statement of Defense
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In the matter of Gramercy Funds Management LLC Gramercy Peru Holdings LLC Claimants v. The Republic of Peru Respondent (UNCT/18/2) Statement of Defense of the Republic of Peru 14 December 2018 RUBIO LEGUÍA NORMAND Lima Washington, D.C. Gramercy Funds Management LLC and Gramercy Peru Holdings LLC v. The Republic of Peru Statement of Defense of the Republic of Peru Master Index Statement of Defense Appendix A: Chronology of Events Witness Statements Vice Minister Betty Sotelo (RWS-1) Ambassador Luis Miguel Castilla (RWS-2) Expert Reports Michael Reisman, International law (RER-1) Oswaldo Hundskopf, Peruvian law (RER-2) Norbert Wühler, Claims process (RER-3) Pablo Guidotti, Sovereign debt (RER-4) Brent Kaczmarek and Isabel Kunsman, Economics and compensation (RER-5) Fact Exhibits Legal Authorities Gramercy Funds Management LLC and Gramercy Peru Holdings LLC v. The Republic of Peru Statement of Defense of the Republic of Peru Table of Contents I. OVERVIEW......................................................................................... 1 II. FACTS ................................................................................................ 4 A. A Fiscally Responsible Sovereign ..................................................... 4 B. The Unique History of the Agrarian Reform Bonds.............................. 7 1. Origins .......................................................................... 7 2. Characteristics ................................................................ 9 3. Uncertainties at the Time of Gramercy’s Alleged Purchases......................................................................11 C. Gramercy and the Alleged Purchases of the Bonds .............................15 1. Gramercy and Distressed Debt Speculation ........................16 2. Gramercy’s Assessment of the Legal Status .......................17 3. The Alleged Acquisitions ................................................19 4. The Gramercy Bonds ......................................................20 5. The Missing Contracts for Acquisition of the Bonds...........................................................................22 6. The Implications of Ongoing Uncertainties ........................23 7. Further Failed Attempts to Change Peruvian Law ...............25 D. The Legal Resolution .....................................................................26 1. The Constitutional Tribunal Resolution .............................27 2. The Validity and Confirmation of the Resolution ................29 3. The Confirmation of the July 2013 Resolution ....................32 E. The Bondholder Process .................................................................33 1. Legal Framework ...........................................................33 2. Procedure .....................................................................36 3. Implementation and Payment ...........................................37 4. The Potential Recovery That Was Available to Gramercy......................................................................38 F. Gramercy Conduct.........................................................................39 1. The Gramercy Attack Campaign against Peru.....................39 2. The Attack on Peruvian Sovereign Finance ........................51 3. The Treaty Consultations and Arbitration Process ...............54 III. JURISDICTION AND ADMISSIBILITY ................................................60 A. Burden Of Proof, Due Process, And Integrity Of The Proceeding..........60 B. Object And Purpose Of The Treaty ..................................................62 ii C. Gramercy Did Not Comply With Mandatory Preconditions To Arbitration....................................................................................63 1. Failure To Waive Local Litigation Proceedings ..................63 2. Failure To Observe Temporal Limitations..........................67 D. Gramercy Abuses The Treaty Arbitration Mechanism .........................71 E. Gramercy Did Not Make An “Investment” Under The Treaty...............74 1. Treaty Language In Context.............................................75 2. Jurisprudence On “Investment” ........................................77 3. Jurisprudence On Contemporary Sovereign Debt ................79 F. Gramercy Is Not An “Investor” Under The Treaty ..............................81 IV. MERITS .............................................................................................82 A. Peru Did Not Expropriate Gramercy’s Alleged Investment ..................82 1. Peru Did Not Substantially Deprive Gramercy Of The Value Of Its Alleged Investment ................................83 2. Gramercy Had No Legitimate Expectations........................86 3. Peru’s Measures Serve A Legitimate Public Interest And Apply Without Discrimination To All Bondholders.............................................................89 A. Peru Did Not Violate The Obligation To Accord The Minimum Standard Of Treatment ...................................................................92 1. Gramercy Had No Legitimate Expectations........................93 2. Gramercy Did Not Suffer A Denial of Justice .....................95 3. Peru’s Measures Were Non-Arbitrary, Just, And In Accordance With Due Process......................................98 B. Peru Did Not Accord Gramercy Less Favorable Treatment Than It Accorded National Investors ......................................................... 103 1. Gramercy Is Not “In Like Circumstances” With All Peruvian Holders Of Agrarian Reform Bonds.............. 103 2. Peru Did Not Accord Gramercy Less Favorable Treatment ................................................................... 106 C. Peru Accorded Gramercy Effective Means to Enforce Its Alleged Rights, And Continues To Do So ................................................... 106 V. COMPENSATION ............................................................................. 109 A. Gramercy’s Damages Are Speculative and Were Not Caused by Peru109 B. Gramercy Is Not Entitled To Interest .............................................. 113 C. Peru Is Entitled To Full Arbitration Costs And Expenses ................... 114 VI. RELIEF REQUESTED ....................................................................... 115 iii Gramercy Funds Management LLC and Gramercy Peru Holdings LLC v. The Republic of Peru Statement of Defense of the Republic of Peru 1. The Republic of Peru (“Peru”) hereby submits its Statement of Defense in accordance with Procedural Order No. 1 in this proceeding under the Peru-United States Trade Promotion Agreement (the “Treaty”) and UNCITRAL Arbitration Rules (the “Rules”). I. Overview 2. The Republic of Peru respectfully requests that this proceeding be dismissed forthwith pursuant to the Peru-United States Trade Promotion Agreement (the “Treaty”) and UNCITRAL Arbitration Rules (the “Rules”). Peru is a diligent participant in investment arbitration proceedings, a reliable partner of the United States and a fiscally responsible sovereign that has established a functioning process for the historic and lawful resolution of Peruvian agrarian reform bonds (the “Agrarian Reform Bonds”), for the benefit of all legitimate bondholders. 3. The case presented by Gramercy Funds Management LLC (“Gramercy Management”) and Gramercy Peru Holdings LLC (“Gramercy Holdings,” and together w ith Gramercy Management, “Claimants” or “Gramercy”) fails to comply with the Treaty, demonstrate an entitlement to the benefits derived therefrom or prove any breach by Peru. Indeed, the Third Amended Notice of Arbitration and Statement of Claim dated 13 July 2018 (“Third Amended Notice”) only underscores that Gramercy has violated the Treaty, disregarded the integrity of this proceeding, willfully withheld relevant and material evidence and disgraced the field of investment treaty disputes. It is Gramercy, not Peru, that has violated the object, purpose and requirements of the Treaty. 4. Instead of participating in a lawful bondholder process that is paying bondholders and which would allow Gramercy a significant recovery, Gramercy has engaged in a propaganda campaign that has prejudiced Peru, its people, other bondholders and the bilateral relationship with the United States, all in an effort to obtain returns to which Gramercy has no right, and could never have expected when it made its dubious decision to acquire these instruments. The profoundly speculative nature of Gramercy’s conduct is evident in its contemporaneous admissions regarding the uncertain legal status and value of the bonds. The record reveals that Gramercy relied from the beginning on the hope that it could lobby its way to a change in law, or bully its way to a resolution in violation of applicable law. 5. Gramercy Fails to Reveal Relevant Facts and Evidence. Gramercy seeks US$1.8 billion based on mere scans of decades-old bearer bonds governed by and subject to Peruvian law, courts and authentication procedures, but it continues to hide evidence and evade the facts. Among other things, and as set out in Section II below: . Gramercy fails to rebut the reality that the Agrarian Reform Bonds have unique historical origins that pre-date the Treaty by decades. They are old bearer instruments provided decades ago as compensation for land in Peru, in local 1 currency and subject to Peruvian law and jurisdiction. They were not offered publicly, listed on an exchange or issued into the U.S. market, and are not comparable to contemporary sovereign bonds. Years of currency