New York Democrats push bills to stop sovereign debt ‘vulture funds’

A group of New York state Democrats is pushing proposals to prevent so-called “vulture funds” from trading in distressed sovereign debt for profit.

The two bills in the New York Legislature would block hedge funds from purchasing sovereign debt for the purpose of litigating debt renegotiations and would create bankruptcy-like protections for sovereign debt emitters.

“The fact that in New York state we govern most of these contracts around purchasing sovereign debt, we have an opportunity to exercise some power and dignity for a lot of these islands and sovereign nations that are facing these vulture fund playbook moves that put them in extreme debt and force austerity measures on their land and their people,” said Assemblymember Jessica González-Rojas (D).

Global sovereign debt is mainly traded in New York and London, with each financial center accounting for about half of that market.

But New York has a direct connection to Puerto Rico, a U.S. territory that endured expensive litigation against hedge funds to renegotiate its debt after its government stopped paying some of its bond debts in 2016.

“I am a Latina of Puerto Rican descent, and given what’s been happening in Puerto Rico around the vulture funds, buying up debt in Puerto Rico and then forcing austerity measures on the island, when folks came to me about this bill, I was really happy to take it because it felt very personally important,” said González-Rojas.

The bill, introduced by González-Rojas in the Assembly and Finance Committee Chairwoman Liz Kreuger (D) in the state Senate, would repeal a 2004 state law that eliminated the champerty doctrine for transactions over $500,000.

“The champerty doctrine is really old English law language that essentially prohibits the purchase of securities or other financial instruments for the sole purpose of litigation,” said González-Rojas.

The champerty defense, say the bill’s promoters, would prevent hedge funds from buying distressed debt at a discount with the purpose of clogging up restructuring talks to make a profit.

In 2004, New York passed a champerty exception for operations larger than $500,000.

When the state passed the 2004 exception, legislators reasoned that debtors overused the champerty defense, creating a glut of legislation and harming the bond market overall.

“Markets have developed for the purchase and sale of claims, including claims that are in default. The ability to collect on these claims with-out fear of champerty litigation is essential to the fluidity of commerce in New York,” wrote the 2004 bill’s promoters in a memo supporting the legislation.

A separate bill in the Legislature based on a model law devised by Duke University professor Steven Schwarcz would create bankruptcy-like protections for sovereign debt holders, essentially creating a roadmap for debtors to pay their creditors without exposing themselves to predatory practices.

That bill was introduced by state Sen. Gustavo Rivera (D) and Assemblymember Maritza Davila (D).

According to a 2021 report published by Hedge Clippers, a group that highlights the relationships between billionaires and governments, countries like Peru, Argentina and Ecuador, as well as Puerto Rico, have seen their debt restructuring plans derailed by speculators.

Perhaps the most notorious case of “vulture fund” litigation was the 15-year battle between Argentina and Elliot Management, a hedge fund led by Paul Singer.

The company purchased $117 million of Argentine debt following the country’s 2001 default and fought its way to the Supreme Court for an eventual $2.4 billion payout in 2016.

The Argentine government was especially incensed because Singer and a minority of debt holders stopped an agreement reached with 93 percent of debt holders.

“Both the [Argentine] Republic and a majority of debt holders of the Republic who in good faith had accepted a significant cut amid voluntary debt restructuring suffered due to the actions of these funds,” said Jorge Argüello, the Argentine ambassador to the United States, who also held that post from 2011 to 2013.

“As ambassador during my first experience in Washington, more than 10 years ago, I suffered that situation, and I still have that vivid memory,” added Argüello.

The fight between Argentina and Elliott Management became a prime example of the risks of trading in sovereign debt for profit, and it solidified Singer’s image as a bogeyman for opponents of the practice.

The Hill has reached out to Elliott Management for comment.

“The battle against vulture funds was very damaging to the Argentine Republic, and it even negatively affected the bilateral relationship with the United States at the time,” said Argüello.

“Vulture funds use, as part of their business plan, a demonization campaign against the governments who are victims of their unscrupulous actions and their propaganda,” he added.