Time to Clamp Down on Vulture Funds

A deadly and dangerous species of vulture is evolving. Policy experts are trying to trace the exact whereabouts of this new species because it has caused around $1 billion in damage to poor nations in recent years. These creatures have no feathers. They are predatory investors known as “vulture funds.”

The term “vulture fund” is the prevailing metaphor to describe how private investment firms and hedge funds prey on poor countries on the brink of debt relief.

Vulture funds buy up the debt of poor countries at a huge discount — usually for just pennies on the dollar — often immediately following their eligibility for debt cancellation from the World Bank or International Monetary Fund. Then they sue for the original amount of debt, frequently with interest and penalty fees added on top. This can mean reaping a massive profit.

Many countries attacked by vulture funds are participating in the Heavily Indebted Poor Countries (HIPC) program, which allows for the cancellation of debts owed to the IMF, World Bank, the African Development Bank, the Inter-American Development Bank, and Asian Development Bank, as well as its bilateral debts owed to G8 countries. Argentina, Angola, Burkina Faso, Cameroon, Honduras, Nicaragua, and Sierra Leone are just some of the nations vulture funds have attacked.

At present there are no laws that cap the amount of profit that a vulture fund can collect through litigating against poor countries to collect defaulted debt, nor are there regulatory structures that disclose who they are or how much they paid for this debt that was previously considered worthless.

In other words, it’s hard, if not impossible, to stop them.

FG Hemisphere Associates, LLC vs. the DRC

Targeted lawsuits involving vulture funds pit the already rich and wealthy against some of the world’s poorest and economically marginalized nations. Consider the case of the Democratic Republic of the Congo (DRC), a recent vulture-fund victim.

The Defendant: The Democratic Republic of the Congo

The DRC has suffered from decades of manipulation and exploitation by outside forces. The World Health Organization reports that as of December 2008, the DRC ranks 168th out of 177 nations on the UNDP Human Development Index scale. About 1.1 million of its people live with HIV/AIDS, of which almost 60% are women.

The Plaintiff: FG Hemisphere

According to its website, this firm (now known as FG Capital Management LTD) specializes in “uncovering, investigating, and managing alternative investment opportunities and special situations within the emerging markets.” Former Morgan Stanley consultants Peter Grossman and Keith R. Fogerty created the company.

Zaire, as the DRC used to be known, and the national electricity company of the country, Société Nationale d’Électricité, entered into a credit agreement in 1980 with Energoinvest, a company specializing in engineering activities. This agreement was to finance the construction a high-voltage electric power transmission line between the cities of Bukavu and Goma.

Zaire defaulted on the payments. In 1991 the government acknowledged the debt, but didn’t make any payments.

In March 2001, Energoinvest filed a motion for arbitration with the International Chamber of Commerce (ICC). Two years later, the ICC Court of Arbitration issued an award to Energoinvest for $11,725,000 plus 9% interest — in addition to the cost of arbitration.

After the ICC recognized Energoinvest’s claims, the firm filed a case in the United States to have the court order confirmed here. The U.S. district court for the District of Columbia confirmed the arbitral award in 2004. Energoinvest transferred its rights in the arbitration award to FG Hemisphere.

Due to the fact that the DRC failed to pay the court award, in 2005 FG Hemisphere filed a “plaintiff’s first requests for production,” in which it asked the court to order the DRC to locate any items worth more than $10,000, as well as documents to identify airplanes, boats, trucks, and cars worth more than $10,000 — and any gold, precious metals, works of art, or jewelry belonging to the government.

FG Hemisphere sent this legal document by courier to the DRC’s government. It arrived eight days after it was filed and only two days later, the district court ruled in favor of the vulture fund. The court gave the DRC 30 days to comply. However, at this point the document was still making way through bureaucratic rounds, and hadn’t yet been translated from English to French.

The DRC didn’t comply with the request, arguing that the order was a virtually impossible burden. Nevertheless, in May 2008 FG Hemisphere filed a motion in the U.S. district court for the District of Columbia to hold the DRC in contempt of court. The court granted that motion in March of this year.

The DRC had 30 days to produce the requested documents or could possibly incur a fine of $5,000 per week, which would double every four weeks until reaching a maximum of $80,000 per week. It would continue until the government produced all the documents that disclose the information FG Hemisphere sought.

The fines are currently mounting and could total more than $4 million per year.

Clipping Vulture Funds’ Wings

While there are no laws that currently limit the profit a company can collect from poor countries, this impunity could soon end. Advocacy organizations and debt relief campaigners have now offered a solution to vulture funds: Clip their wings.

Representative Maxine Waters (D-CA) recently introduced the Stop VULTURE Funds Act (H.R. 2932) in the House of Representatives. The legislation would limit the excessive profits that companies and hedge funds collect from poor countries by capping the interest amounts for which the companies could sue at 6% of the face value of defaulted debt. The legislation also increases transparency of these funds, requiring full disclosure from any investment operation that pursues vulture fund activity through the U.S. courts.

But several high-powered Washington, D.C. lobbyists, including the American Task Force Argentina (with only three degrees of separation from the Obama administration, the Senate Judiciary Committee, Edward Kennedy and other powerful players) have influenced Congress to also introduce The Judgment Evading Foreign States Accountability Act (H.R. 2493). This legislation, introduced in May, would prohibit all foreign countries access to the U.S. capital markets if they have U.S. court judgments against them. While this legislation exempts Heavily Indebted Poor Countries (HIPC), many impoverished countries that don’t currently qualify for HIPC status would be left vulnerable. This bill protects the rights of vulture funds and other predatory investors to reap profits from heavily indebted poor countries.

Developing countries have already spent billions of dollars repaying illegitimate debt to lenders. According to an International Monetary Fund report, in late 2007 vulture funds were seeking $1.47 billion from poor and middle-income countries like Bolivia, Nicaragua, and Zambia. Of these, 25 creditors had received court judgments amounting to about $1 billion on original claims of $427 million.

The appalling and immoral behavior by vulture funds has been condemned by the World Bank and IMF, U.S. Congress, U.S.-based and international advocacy organizations, and UK ministers and members of Parliament. The increasing criticism from such a diverse grouping of people builds momentum to the call that corporate abuse against the most impoverished people must end. The Stop VULTURE Funds Act can put an end to profiteering from poor countries and position poor countries to begin to invest in health, infrastructure and education.