coming into focus

Gramercy Funds in Middle of Argentina’s Debt Battle

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

Fair Game: A Foreclosure Settlement That Wouldn’t Sting

While the exact terms remain under wraps, some aspects of this agreement — between banks on one side, and the federal government and a raft of state attorneys general on the other — are coming into focus.

Things could change, of course, and the deal could go by the boards. But here’s the state of play, according to people who have been briefed on the negotiations but were not authorized to discuss them publicly.

Cutting to the chase: if you thought this was the deal that would hold banks accountable for filing phony documents in courts, foreclosing without showing they had the legal right to do so and generally running roughshod over anyone who opposed them, you are likely to be disappointed.

This may not qualify as a shock. Accountability has been mostly A.W.O.L. in the aftermath of the 2008 financial crisis. A handful of state attorneys general became so troubled by the direction this deal was taking that they dropped out of the talks. Officials from Delaware, New York, Massachusetts and Nevada feared that the settlement would preclude further investigations, and would wind up being a gift to the banks.

It looks as if they were right to worry. As things stand, the settlement, said to total about $25 billion, would cost banks very little in actual cash — $3.5 billion to $5 billion. A dozen or so financial companies would contribute that money.

The rest — an estimated $20 billion — would consist of credits to banks that agree to reduce a predetermined dollar amount of principal owed on mortgages that they own or service for private investors. How many credits would accrue to a bank is unclear, but the amount would be based on a formula agreed to by the negotiators. A bank that writes down a second lien, for example, would receive a different amount from one that writes down a first lien.

Sure, $5 billion in cash isn’t nada. But government officials have held out this deal as the penalty for years of what they saw as unlawful foreclosure practices. A few billion spread among a dozen or so institutions wouldn’t seem a heavy burden, especially when considering the harm that was done.

The banks contend that they have seen no evidence that they evicted homeowners who were paying their mortgages. Then again, state and federal officials conducted few, if any, in-depth investigations before sitting down to cut a deal.

Shaun Donovan, secretary of Housing and Urban Development, said the settlement, which is still being worked out, would hold banks accountable. “We continue to make progress toward the key goals of the settlement, which are to establish strong protections for homeowners in the way their loans are serviced across every type of loan and to ensure real relief for homeowners, including the most substantial principal writedown that has occurred throughout this crisis.”

Still, a mountain of troubled mortgages would not be covered by this deal. Borrowers with loans held by Fannie Mae and Freddie Mac would be excluded, for example. Only loans that the banks hold on their books or that they service for investors would be involved.

One of the oddest terms is that the banks would give $1,500 to any borrower who lost his or her home to foreclosure since September 2008. For people whose foreclosures were done properly, this would be a windfall. For those wrongfully evicted, it would be pathetic. Roughly $1.5 billion in cash is expected to go into this pot.

The rest of the cash that would be paid by the banks is expected to be split this way: the federal government would get about $750 million, state bank regulators about $90 million. Participating states would share about $2.7 billion. That money is expected to finance legal aid programs, housing counselors and other borrower support. If 45 states participated, that would work out to about $60 million apiece.

Article source: http://feeds.nytimes.com/click.phdo?i=a4d2c8d4c0369136b1651afdd98360f5

Gramercy Funds in Middle of Argentina’s Debt Battle

Fair Game: A Foreclosure Settlement That Wouldn’t Sting

Recent News

Partners