The fight is over how much Argentina will pay to cover its 2001 default of $82 billion in sovereign debt. Thomas P. Griesa, a federal judge in Manhattan, has ordered Argentina to pay $1.3 billion to investors who hold the defaulted debt and who refused to participate in the country’s subsequent debt restructurings. Argentina has declined to pay.
A group of investment funds that hold Argentine debt created in the restructuring has filed briefs on behalf of the country.
They are led by Gramercy, a $3.4 billion hedge fund that specializes in emerging market investments and that is registered with the Securities and Exchange Commission as an investment adviser. While Gramercy is an advocate for Argentina in court, past legal problems at the firm are coming into focus. They relate to a number of tax problems experienced by clients of Gramercy Advisors, an affiliate that ceased operations in 2011.
According to federal and state court filings, Gramercy Advisors arranged deals involving distressed Brazilian debt that the Internal Revenue Service later ruled to be sham transactions.
Hundreds of millions of dollars in tax losses in these deals have been disallowed for Gramercy’s clients.
Sean F. O’Shea, a lawyer who represents Gramercy, called the tax cases against the firm “stale and meritless.” He added: “No court or regulator in over 10 years has found any merit whatsoever to any allegations raised against Gramercy in connection with these cases.”
Robert S. Koenigsberger, founder and chief investment officer of Gramercy Funds Management, was a principal at Gramercy Advisors, regulatory filings show. He declined to comment, but according to the firm’s Web site, he started Gramercy in 1998 and “led Gramercy’s efforts in conceiving, organizing and facilitating the successful restructuring of Argentina’s defaulted debt,” in 2010.
An article in The Financial Times that year said Gramercy was believed to be the largest investor in Argentine debt securities.
The Gramercy investments that created tax problems for its clients were known as Distressed Asset Debt deals or DADs. They involved the purchase of old and uncollected Brazilian consumer debt obligations belonging to several retailers. According to the I.R.S., the obligations were purchased by Gramercy clients at a price far in excess of their worth and at a value determined by Gramercy. When the debt was subsequently sold at market value — for pennies on the dollar — the clients using the investment strategy reported sizable tax losses.
The deals were made in the early 2000s. But after the I.R.S. ruled that the shelters did not have an economic purpose other than to generate a tax benefit, back taxes and penalties were levied. About 50 investors in the Gramercy Global Recovery Fund were affected.
Some of these clients have sued the firm. One complaint with fraud accusations was filed against Gramercy by two investors in New York State Supreme Court in September 2011.
Echoing the I.R.S.’s assessments, the investors contend that Gramercy’s investment strategy involved false valuations of worthless instruments; they also say the deals generated illegitimate profits to the firm. The judge heard arguments on a motion to dismiss the matter several weeks ago. She has not yet ruled.
The federal government also took action last year against Gramercy Advisors for failing to provide 1,300 pages of documents subpoenaed in a case related to dubious tax deals like those arranged by Gramercy.
“Gramercy was caught withholding relevant and responsive documents,” the government said in an April 2011 filing. “The transaction the United States is requesting documents for is not an ‘investment’ but an elaborate scheme to claim artificial tax losses for the sole purpose of avoiding large tax liabilities owed by its clients,” the government said.
J. Robert Young, Gramercy’s managing director for accounting, testified that the firm had “sold ‘tax solutions’ to multiple clients to generate approximately $700 million in false losses” for 2002 alone, the government’s filing noted.
Article source: http://www.nytimes.com/2012/12/19/business/gramercy-funds-in-middle-of-argentinas-debt-battle.html?partner=rss&emc=rss
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