MEMORANDO PRESENTADO POR EL BCRA A PROPOSITO DEL EMBARGO SOBRE FONDOS DISPUESTO POR EL JUEZ GRIESA[13 de Enero de 2010]
La presentación que se publica es la contestación del Banco Central a una petición realizada el 7 de diciembre de 2009 por los fondos embargantes, solicitando la aplicación de la medida cautelar sobre la base de la doctrina del "alter ego", esto es 7 días antes del anuncio oficial de la Presidente sobre la creación del "Fondo del Bicentenario...", y de lo cual se le habría informado a Redrado (Pte. del Banco Central) media (1/2) hora antes de ese anuncio. Es decir, ahora se sabe que el gobierno o cuanto menos este último, sabían o debían saber de esta gravosa pretensión con anterioridad. Si no, queda flotanto la siguiente pregunta: ¿En la situación en que se encuentra el país puede el Gobierno tomar decisiones de esta naturaleza sin consulta al BCRA?
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
-------------------------------------------------------x
EM LTD.,
Plaintiff,
- against-
THE REPUBLIC OF ARGENTINA,
Defendant. [1]
--------------------------------------------------------x
NML CAPITAL, LTD.,
Plaintiff,
- against-
THE REPUBLIC OF ARGENTINA,
Defendant. [2]
______________________________________x
(Additional case captions on next page)
______________________________________x
BANCO CENTRAL DE LA REPÚBLICA ARGENTINA’S
SUPPLEMENTAL MEMORANDUM IN RESPONSE TO THE
DECEMBER 7, 2009 DECLARATION OF DENNIS HRANITZKY
Joseph E. Neuhaus (JN 4255)
Laurent S. Wiesel (LW 2154)
Michael J. Ushkow (MU 5680)
SULLIVAN & CROMWELL
LLP 125 Broad Street
New York, New York
10004-2498 (212) 558-4000
Attorneys for Banco Central
de la República Argentina
January 13, 2010
-------------------------------------------------------x
NML CAPITAL, LTD.,
Plaintiff,
- against-
THE REPUBLIC OF ARGENTINA,
Defendant. [3]
-------------------------------------------------------x
NML CAPITAL, LTD.,
Plaintiff,
- against-
THE REPUBLIC OF ARGENTINA,
Defendant. [4]
-------------------------------------------------------x
EM LTD. and NML CAPITAL, LTD.,
Plaintiff,
- against-
BANCO CENTRAL DE LA REPÚBLICA ARGENTINA and THE REPUBLIC OF ARGENTINA,
Defendants. [5]
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TABLE OF CONTENTS
PRELIMINARY STATEMENT
ARGUMENT
A. BCRA’s Purchases and Sales of U.S.-Dollar Reserves Do Not
Support a Finding that BCRA Is an Alter Ego ofthe Republic
1. The Record Shows that BCRA Accumulated Reserves
After 2003 for Sound Monetary Objectives
2. Plaintiffs’ Criticisms ofBCRA’s Policies As Economically
“Irrational” and “Inflationary” Are Unfounded
3. BCRA’s Sale ofDollars in the Summer of2008 Was Part
Of Worldwide Efforts to Counter a Temporary Appreciation
Of the U.S. Dollar
B. Many Govemments Around the World Have Long Used Central
Bank Reserves to Pay the Govemment’s Debts and the Steps to
Permit that to Which Plaintiffs Point (Not Yet Implemented) Are
Not Evidence of an Alter Ego Relationship
C. That a Central Bank Is Empowered to Lend Money to the
Govemment in Times of Crisis Is Common and Also Not Evidence
of an Alter Ego Relationship
D. Inconsistencies in the Record Should Be Resolved in BCRA’s
Favor
CONCLUSION
TABLE OF AUTHORITIES
CASES
EM Ltd. v. Rep. of Argentina,
473 F.3d 463 (2d Cir. 2007)
First City, Texas-Houston, NA. v. Rafidain Bank,
150 F.3d 172 (2d Cir. 1998)
First Nat’l City Bank v. Banco Para El Comercio Exterior de Cuba,
462 U.S. 611 (1983) (“Bancec”)
Gabay v. Mostazafan Found. of Iran,
151 F.R.D. 250 (S.D.N.Y. 1993)
Hereaire Int’l., Ine. v. Argentina,
821 F.2d 559 (11th Cir. 1987)
Kelly v. Syria Shell Petroleum Dev. B. V,
213 F.3d 841 (5th Cir. 2000)
Letelier v. Rep. of Chile,
748 F.2d 790 (2d Cir. 1984)
LNC Invs., Ine. v. Rep. Of Nicaragua,
115 F. Supp. 2d 358 (S.D.N.Y. 2000)
STATUTE
28 U.S.C. § 1611
Pursuant to the Court’s Order of December 15,2009, Banco Central de la República Argentina (“BCRA”) respectfully submits this response to the December 7, 2009 Declaration of Dennis Hranitzky (the “Hranitzky Declaration” or “Hranitzky Decl.”) and in particular to new evidentiary materials that plaintiffs EM Ud. and NML Capital, Ud. did not previously offer in support of their September 28, 2006 motions to attach BCRA’s reserves.
PRELIMINARY STATEMENT
Much of the Hranitzky Declaration simply rehashes issues previously addressed at length in the parties’ submissions, and we will not burden the Court with additional materials on these points. The Declaration includes 36 newly submitted materials that purport to provide “evidence” of conduct in the four years after BCRA’s reserves were frozen on December 30,2005 that plaintiffs claim supports their alter ego theory. Plaintiffs assert in their Second Amended Complaint (or “SAC”) that these new materials -- almost all of which are magazine and newspaper articles -- support two broad points:
New Materials in the Plaintiffs’ Allegation
Hranitzky Declaration
Exhibits 26, 29, 32, 35, 37 43, 50, 53 & 55-61: Plaintiffs say that the political branches of the Argentine Government, and in particular the Executive Branch (the “Government”), have exercised improper control over BCRA by directing it to accumulate or sell reserves for political reasons and without regard to sound monetary policy.
Exhibits 24, 25, 66-69, 80, 86, 88-90: Plaintiffs point, for example, to laws that loosen restrictions on BCRA’s ability to loan reserves to the Government or plans in 2008 (not implemented) to pay Argentina’s debts using central bank reserves.
Plaintiffs argue that the Government has provided itself the power to “seize” bank reserves at will for supposed “governmental” purposes as opposed to implementation of monetary policy.
The new materials that plaintiffs have offered in support of their alter ego theory stillleave the record far short of the standard that they must meet in order to overcome the presumption that “government instrumentalities established as juridical entities distinct and independent from their sovereign should normally be treated as such.” First Nat’l City Bank v. Banco Para El Comercio Exterior de Cuba, 462 U.S. 611, 626-27 (1983) (“Bancec”).
Plaintiffs’ excerpts from newspaper articles critical of the Argentine Government present a misleading and often simply wrong picture of events. As we demonstrate below:
BCRA’s policies with respect to reserves in the aftermath of Argentina’s financial crisis were based on sound monetary policy undertaken to protect against future crises and to manage the value of the Argentine peso in the context of Argentina’ s overall economic objectives. (See §§ A(l) and (A)(2), infra.)
BCRA’s temporary shift in 2008 to a policy of selling U.S.-dollar reserves reflected sound monetary policy in reaction to a temporary strengthening of the dollar and was mirrored by the central banks of other developing countries at precisely the same time. (See § A(3), infra.)
There are numerous examples of governments that have used central bank reserves to finance the repayment of State debts in the last few years, and the as yet unconsummated plans to use BCRA’s reserves for that purpose are not in the least bit out ofthe ordinary. (See § B, infra.)
The recent loosening ofrestrictions on BCRA’s ability to lend to the government are typical of measures taken by other countries and do not provide a basis for plaintiffs to argue that BCRA lacks independence. (See § C, infra.)
For these reasons, and those set forth in BCRA’s numerous other submissions in this case, the Court should deny the pending attachment motion.
ARGUMENT
In opposing plaintiffs’ motion, BCRA has submitted substantial evidence regarding its implementation of monetary policy and relationship with the Argentine Government. This evidence includes, among other things, official records identifying and explaining BCRA’s policies and targets; sworn statements from present and former BCRA officials describing BCRA’s operations and interactions with the Government; and declarations from central banking and Argentine law experts providing additional context to the evidentiary record. There is nothing in these materials from which to infer that the Government exercises control over BCRA’s day-to-day operations, and much in the way of evidence that BCRA controls its operations without interference from the Government.
Plaintiffs, on the other hand, attempt to support their alter ego theory with expert declarations and newspaper and magazine articles, and still more articles, that at most support three conclusions: (1) that the Argentine Government is involved in setting monetary policy; (2) that there are grounds to disagree with the policies and plans that BCRA and the Argentine Government have pursued or attempted to pursue; and (3) that there are legal mechanisms that allow BCRA to transfer a portion of its liquid assets to the Government. These propositions provide no basis for plaintiffs’ assertion that the Argentine Government “has completely dominated the day-to-day functions of the Central Bank since at least 2001, and continues to do so today.” SAC 27. Plaintiffs’ evidentiary materials at most paint a picture of a typical central bank in a modern democracy in which national monetary policy is the subject of intense discussion among politicians and newspapers.
The global economic crisis of 2008-2009 highlights how governments and central banks around the world have worked together to address the needs of their countries. It is more evident now than it has ever been that plaintiffs’ approach would make alter ego s out ofthe majority ofthe world’s central banks and undermine the special immunity from attachment accorded to foreign reserves under the Foreign Sovereign Immunities Act of 1976 (the “FSIA”), 28 U.S.C. § 1611(b)(1).
A. BCRA’s Purchases and Sales of U.S.-Dollar Reserves Do Not Support a Finding that BCRA Is an Alter Ego of the Republic.
Plaintiffs attempt to show that the Government exercises control over BCRA’s formulation and day-to-day implementation ofmonetary policy by pointing to new materials that they claim show that BCRA (1) pursued a policy of accumulating reserves at the Government’s direction, beginning in late 2004, for “purely political reasons”; and (2) “reversed course” in the Summer of 2008, again for supposedly political reasons. Speculation by members of the Argentine press and inadmissible hearsay notwithstanding, the record of official policy statements of the bank and official third-party sources shows that the Bank’s policies have furthered sound monetary policy, an area fully within the traditional functions of a central bank.
1. The Record Shows that BCRA Accumulated Reserves After 2003 for Sound Monetary Objectives.
Plaintiffs assert that the policy of accumulation of reserves -- by acquiring U.S. dollars, mainly through foreign exchange transactions -- had two principal purposes:
(1) keeping down the value ofthe Argentine peso relative to the U.S. dollar, thereby increasing worldwide demand for Argentine exports and creating a “piggy bank” of export taxes, and (2) financing the government’s debts. See Hranitzky Decl., Exs. 29, 32, 35-36; SAC 42-46. That is not what the record shows.
Rather, BCRA accumulated reserves beginning in 2003 (not 2004) in order to cushion against external shocks to the Argentine economy, prevent or minimize another financial crisis, and protect the value ofthe currency. This policy was set forth in BCRA’s statements of official policy submitted to the Argentine Congress. See, e.g., BCRA’s REpORT TO THE NATIONAL CONGRESS 2004, at 3 (Suppl. Ushkow Decl., Ex. 1) (BCRA’s “primary and fundamental mission” of”preserv[ing] the value ofthe currency” includes putting into practice “prudent strategies to reduce external vulnerability (such as the accumulation ofinternational reserves)”); see also May 15,2009 Aizenman Decl. 7-8,12,13-20,31-34; May 15,2009 Basco Decl. 5, 25; Oct. 25, 2006 Basco Decl. 19.
After the repayment of IMF debt in January 2006, BCRA’s presentation of the 2006 Monetary Program to the National Congress highlighted “the need for a certain amount of foreign exchange liquidity to meet foreign liabilities” and “the role that international reserve accumulation plays in generating a safe and reliable insurance mechanism for developing economies.” BCRA ‘s Presentation ofthe Monetary Program for 2006, at 3 (Suppl. Ushkow Decl., Ex. 2). During this period, Argentina, like many other emerging-market economies, sought to self-insure, particularly in the absence of lenders oflast resort. See INTERNATIONAL RELATIONS COMMITTEE TASK FORCE, THE ACCUMULATION OF FOREIGN RESERVES (European Central Bank Occasional Paper Series No. 43, 2006) (“IRC TASK FORCE”), at 13 (Suppl. Ushkow Decl., Ex. 3).[6]
2. Plaintiffs’ Criticisms of BCRA’s Policies As Economically “Irrational” and “Inflationary” Are Unfounded.
Plaintiffs further rely on numerous press articles that take issue with BCRA’s accumulation ofreserves from a policy perspective, and on that basis argue that BCRA’s actions must be controlled by the Govemment. For example, plaintiffs assert that BCRA’s policy of accumulating reserves required it to issue bonds that yielded 11 % interest, while the BCRA’s investment in dollars yielded only 6% interest -- that is, that BCRA’s policy of accumulating reserves was not cost-free. See Hranitzky Decl., Ex. 29; SAC 43.
Plaintiffs’ assertions regarding the cost of accumulating reserves could be said about the central bank of any emerging-market economy. Borrowing in the currency of an emerging-market economy generally costs more than a similar deposit in U.S. dollars will eam because of country risk. See, e.g., Luis Catáo and Sandeep Kapur, Volatility and the Debt-Intolerance Paradox 195 (2006) (Suppl. Ushkow Decl. Ex. 4).
Nothing in the record suggests that BCRA’s costs were out ofline with the costs incurred by other emerging-market central banks when they accumulate reserves. IRC TASK FORCE II, 16-17 (Suppl. Ushkow Decl. Ex. 3) (South Korea and India hold among the largest pools of intemational reserves despite high sterilization costs due to country risk).
Plaintiffs further lambast BCRA’s reserve-accumulation policy as inflationary, and suggest that an independent central bank would never pursue such a policy.[7] As previously shown, however, BCRA employs a process of “sterilization” and uses various tools for combating inflation and minimizing the impact of accumulating reserves on inflation. See, e.g., Oct. 25, 2009 Basco Decl. 16-30; Oct. 25, 2009 D’ Amato Decl. 13. Whether BCRA could or should have used these tools more or less at any given point is a classic policy judgment that this Court should not second guess and that has no bearing on BCRA’s separate legal identity under the FSIA and Bancec.
3. BCRA’s Sale of Dollars in the Summer of 2008 Was Part of Worldwide Efforts to Counter a Temporary Appreciation ofthe U.S. Dollar.
Plaintiffs also allege, relying on numerous newly submitted materials, that BCRA’s sale ofU.S.-dollar reserves in the Summer of 2008 was carried out at the behest of Mr. Kirchner in order to punish political opponents in the agricultural sector. See Hranitzky Decl., Exs. 37-42; SAC 47-48. But again plaintiffs rely on triple hearsay, at best, as to the former President’s desires’.[8]
More fundamentally, plaintiffs ignore the economic realities during the Summer of 2008, which provide a readily ascertainable monetary policy rationale for BCRA’s sale ofU.S.-dollar reserves.
The U.S. dollar was depreciating relative to other international currencies, from August 2007 through mid-2008, but stabilized and began to appreciate in value during the summer of2008. See Federal Reserve Board of Governors, Historical Nominal Broad Dollar Index (Suppl. Ushkow Decl., Ex. 5) (The Federal Reserve reports that the weighted value ofthe U.S.-dollar declined from 103.3318 in August 2007, to 95.4757 in April2008, but stabilized and by June 2008 increased to 96.0884 in relative value); Emily Kaiser, Firm Dollar Also Brings New Risks, INT’L HERALD TRIBUNE, Aug. 25,2008 (Suppl. Ushkow Decl., Ex. 6) (“The dollar is enjoying its strongest rally in three years.”). All other things equal, a stronger U.S. dollar relative to the Argentine peso means a higher exchange rate or more pesos to buy a dollar, and a weaker dollar means the opposite.
BCRA employs a managed floating exchange rate regime: it seeks to avoid wild swings in the external value ofthe peso, by among other things, selling U.S. dollars in exchange for Argentine pesos when doing so will help stabilize the exchange rateo See May 15,2009 Aizenman Decl. 39-42; May 15,2009 Basco Decl. 25. BCRA also utilizes foreign exchange policy as a tool to control domestic inflation by controlling the supply ofpesos in circulation. See May 15, 2009 Aizenman Decl. 39.
BCRA’s sale of U.S. dollars in June and July 2008, in the face of a weakening peso relative to the U.S. do llar, was thus entirely consistent with its traditional central banking function of maintaining the value of the currency.
Indeed, and significantly, during precisely those same months, the central banks of other developing countries, including Pero, Costa Rica, South Korea, India, Thailand, Indonesia and the Philippines, also so Id U.S. dollars in order to strengthen or maintain the value oftheir respective currencies.[9]
B. Many Governments Around the World Have Long Used Central Bank Reserves to Pay the Government’s Debts and the Steps to Permit that to Which Plaintiffs Point (Not Yet Implemented) Are Not Evidence of an Alter Ego Relationship.
Plaintiffs have supplemented the record with materials relating to Executive Decrees from September 2008 requesting that BCRA finance the repayment of the Republic’s debts to the Paris Club, by transferring liquid reserves to the National Treasury in exchange for a govemment note, and a June 2008 “white paper” evaluating the possible use of reserves to meet other debt payments coming due. See Hranitzky Decl., Exs. 80-86, 88-90; SAC 58, 62-66,71-77. At the outset, plaintiffs’ continued focus on the Republic’s ability to obtain financing from BCRA for the repayment of foreign debt flies directly in the face of the Second Circuit’ s holdings on this issue:
Bancec forecloses any argument that all of BCRA’s $26.8 billion in reserves are “attachable interests” of the Republic merely because the Republic hypothetically could have ordered (but in the Decrees did not order) BCRA to assign or transfer the FRBNY Funds. See Letelier [v. Rep. Of Chile], 748 F.2d [790,] 794 [(2d Cir. 1984)] (findings that assets and facilities of Chile’s instrumentality LAN “were under the direct control of Chile, which had the power to use them; [and that] Chile could have decreed LAN’s dissolution and taken over property interests held in LAN’s name” did not support allowing creditor to attach LAN’s assets in order to satisfy judgment against Chile).
EM Ltd. v. Rep. of Argentina, 473 F.3d 466,480 (2d Cir. 2007) (emphasis in original).
The Court observed further that:
[P]laintiffs , theory could expose to attachment the assets of a majority of the world’s central banks because national governments customarily retain the ability to direct their central banks to take actions with respect to the central banks ‘ foreign exchange reserves. Under plaintiffs’ theory, for example, all ofthe assets ofthe United States Federal Reserve system would be treated as attachable interests ofthe United States (absent otherwise-applicable sovereign immunity protections) because the United States has exercised the power to direct the Federal Reserve Banks to transfer their “surplus funds” to the U.S. Treasury for use by the federal government.
473 F.3d at 476 n.12 (citations omitted) (emphasis added).
As the Second Circuit found, plaintiffs’ assertion that BCRA’s ability to “seize billions of dollars of Central Bank assets for its own use” evidences “Argentina’s complete control over the Central Bank,” SAC ~ 58, reflects a fundamental misunderstanding of the relationship of a central bank and its parent government. Indeed, it is not in the least bit unusual for a central bank to transfer reserves to its parent government outright or sell reserves to the government in exchange for a note. Below are just a few recent examples of central banks transferring or selling reserves to their parent governments, often in particular in order to pay offthe State’s foreign debts:
Brazil. In 2006, Brazil tapped its international reserves to pay down part of its debt; and in 2008, the Brazilian central bank announced that the government will use the country’s reserves to increase export financing [10]
Colombia. In 2005, the Colombian bank so Id reserves to the government, for use to pay off debt and for its cash needs.[11]
Mexico. In 2005, the Mexican government “bought” $2.88 billion of central bank reserves in order to meet payments on all foreign debt coming due in 2006 and 2007; and in 2006, it tapped into its reserves to prepay $7 billion in loans from the World Bank and the Inter-American Development Bank.[12]
Singapore. The Singapore constitution allows the government to use central bank reserves for fiscal stimulus. [13]
Ukraine. In 2009, Ukraine’ s Naftogaz energy company relied on central bank credits to finance its payments to Moscow.[14]
C. That a Central Bank Is Empowered to Lend Money to the Government in Times of Crisis Is Common and Also Not Evidence of an Alter Ego Relationship.
Plaintiffs have submitted new materials purporting to show that BCRA has loosened restrictions on the Government’s ability to borrow BCRA’s liquid reserves, and plaintiffs have argued that this provides a power to “seize” BCRA reserves at will. See Hranitzky Decl., Exs. 12,66,67; SAC 59-60,69. Here again, plaintiffs ignore economic realities and the conduct of other central banks, including the Federal Reserve. As discussed aboye, many central banks transfer reserves to their parent governments in good times and bad. Furthermore, increased financial assistance from the central bank to the government to combat or avoid a deeper economic crisis is within the central bank’s traditional function oflender oflast resort. The Federal Reserve played just this role in the United States in 2008 and 2009. For example, “[o]n March 18, [2009,] the Federal Reserve announced plans to purchase up to $300 billion oflonger-term Treasury securities,” an immense financing of the government’ s budget deficit.[15] See also Jon Hilsenrath et al., Crisis Threatens to Curb Central Banks, WALL ST J., Jan. 12, 2010 (Ushkow Decl., Ex. 25), at A8 (in connection with governrnent-led efforts to rescue the global economy, “[t]he Federal Reserve bought mortgage-backed securities and took complex derivatives as collateral for loans. The Bank of England essentially printed money when it bought swaths of government bonds. The European Central Bank, the Bank of Japan and others took similar steps”).
The fact that in times of economic stress the Argentine Government has provided BCRA with increased power to lend money to the Argentine Treasury cannot be deemed evidence of an alter ego relationship anymore than the Federal Reserve Board would be deemed to be an alter ego of the United States Government.
More generally, plaintiffs’ assertion that it is evidence of an alter ego relationship for the Argentine Government to have any role or say in the use of BCRA reserves is misplaced. Central banks and national governments have separate but interrelated roles in the management of monetary policy, and the relationship naturally becomes more intense in times of stress. Indeed, Time Magazine recently profiled Ben Bernanke, Chairman ofthe Federal Reserve, and highlighted “his aggressive steps to avert doomsday[,] and his unusually close partnerships with Bush and Obama Treasury Secretaries Henry Paulson and Timothy Geithner” which “have exposed him and his institution to criticism from all directions.” Michael Grunwald, Ben Bernanke - Person ofthe Year 2009, TIME, Dec. 28, 2009 (Suppl. Ushkow Decl., Ex. 26).
D. Inconsistencies in the Record Should Be Resolved in BCRA’s Favor.
BCRA submits that, on any fair view of the evidence, plaintiffs have not come close to carrying their burden on the alter ego issue on this motion. The evidence shows that BCRA implements monetary policy on a day-to-day basis without interference from the Government.[16] But even if there are conflicts on any particular question or fact between the newspaper articles submitted by plaintiffs and the evidence submitted by BCRA, the conflict or inconsistency should be resolved in BCRA’s favor, for three reasons:
First, under the FSIA, BCRA is presumed to be distinct and independent of the Republic. See Baneee, 462 U.S. at 626-27; Hereaire Int’l, Ine. v. Argentina, 821 F.2d 559,565 (11th Cir. 1987); Letelier v. Rep. ofChile, 748 F.2d 790, 795 (2d Cir. 1984). As a matter oflaw, none ofplaintiffs’ allegations about monetary policy and lending to the Govemment satisfy the standard for overcoming that presumption, but in any event, on questions of fact, a tie goes to BCRA.
Second, BCRA is also presumptively immune specifically from discovery and plaintiffs are required to establish their entitlement to any discovery with a detailed showing of specific need. See Kelly v. Syria Shell Petroleum Dev. B. V, 213 F .3d 841, 849 (5th Cir. 2000) (“FSIA immunity is immunity not only from liability, but also from the costs, in time and expense, and other disruptions attendant to litigation.”); First City, Texas-Houston, NA. v. Rafidain Bank, 150 F.3d 172, 176-77 (2d Cir. 1998) (plaintiffs may only take discovery of specific facts “crucial” to resolving immunity issues); Gabay v. Mostazafan Found of Iran, 151 F.R.D. 250, 257 (S.D.N.Y. 1993) (requiring plaintiff to set forth “with specificity the factual allegations he hopes to prove and the method by which he proposes to do so”). As a consequence, plaintiffs should not be permitted to proceed beyond this attachment motion if they have not met that test, as we submit is the case here. Plaintiffs have advanced no reasoned basis, for example, to conclude that BCRA does not engage in the day-to-day operations set forth in the October 25,2006 Basco Declaration, or that the govemment interferes in those operations.
Third, the Court should properly weigh the quality of the “evidence” that each side has submitted. We have previously pointed out that another Court in this District has held that hearsay in newspaper articles is inadmissible on an attachment motion under the FSIA. See LNC Invs., Ine. v. Rep. Of Nicaragua, 115 F. Supp. 2d 358, 366 (S.D.N.Y. 2000) (in rejecting plaintiff’s alter ego argument, the Court found LNC’s reliance on “statements attributed to the General Manager of the Central Bank that appeared in a Nicaraguan newspaper ... inadmissible hearsay”). Even ifthis Court determines to depart from this precedent, the numerous newspaper articles upon which plaintiffs case entirely rests, and in particular the often unattributed hearsay contained within them, are less reliable than the evidence upon which BCRA’s case rests. This is not just a case of the difference between newspaper hearsay and official publications of a sovereign entity, but the difference between newspaper hearsay and, for example, widely reported foreign exchange rates, which amply explain why BCRA purchased dollars in the Summer of 2008, or the irrefutable s economic realities underlying the supposedly suspicious costs ofbuilding reserves. Plaintiffs have long had access to such economically meaningful data, but have not supported their newspaper hearsay with any hard facts.
CONCLUSION
The Court should deny plaintiffs’ motions for attachment and restraint.
Dated:
New York, N ew York January 13, 2010
/s/Joseph E. Neuhaus
Joseph E. Neuhaus (JN 4255)
Laurent S. Wiesel (LW 2154) Michael
J. Ushkow (MU 5680)
SULLIVAN & CROMWELL LLP
125 Broad Street
New York, New York 10004
Tel.: (212) 558-4000
Attorneys for Banco Central de la
República Argentina
[1] 03 Civ. 2507 (TPG)
[2] 03 Civ. 8845 (TPG)
[3] 05 Civ. 2434 (TPG)
[4] 06 Civ. 6466 (TPG)
[5] 06 Civ. 7792 (TPG)
[6] The new materials that plaintiffs have submitted to support their allegation that the Kirchners have been behind BCRA’ s policy of accumulating reserves for political reasons, though rife with baseless speculation, themselves recognize the benefits of maintaining a high level ofreserves. Exhibit 35 to the Hranitzky Declaration, for example, posits that “record high” reserve levels in March 2008 “w[ ould] help cushion the impact of extemal crises,” and Exhibit 38 credits BCRA and its reserves accumulation policy for successfully combating “a variety ofturbulent scenarios, such as the subprime mortgage crisis in the United States.”
[7] Plaintiffs have submitted several new materials supposedly showing that the Republic understates its official inflation statistics. See Hranitzky Decl., Ex. 53, 55-61; SAC 52-57. BCRA and INDEC, the Argentine govemment agency that calculates and reports official inflation numbers, are wholly unrelated, just as the Federal Reserve and the Bureau of Labor Statistics, which calculates and reports inflation statistics for this country, are unrelated. That BCRA’s official publications refer to the official inflation figures disseminated by INDEC has nothing to do with whether BCRA is the alter ego of the Republic.
[8] Plaintiffs, for example, allege that “former President Nestór Kirchner ordered the Central Bank to begin selling dollars.” SAC 47. Their source is a press report, attached as Exhibit 37 to the Hranitzky Declaration, which neither purports to quote the former president nor reports any sort of “order” or “directive.” Similarly, the article attached as Exhibit 38 to the Hranitzky Declaration quotes an unnamed “full-fledged Patagonian” -that is the extent of how the speaker is identified -- for its source as to the former president’s desired exchanged rateo Not a single source even purports to be a direct quote from the former President.
[9] See Peru Cenbank Sells Dollars to Ease Sol ‘s Retreat, REUTERS, June 23, 2008 (Suppl. Ushkow Decl., Ex. 7); Central Bank of Costa Rica Sells 600Million Dollars from its Reserves, NOTICIAS FINANCIERAS, July 4,2008 (Suppl. Ushkow Decl., Ex. 8); RPT-Asia Ex-Japan Funds Hit By More Redemptions - EPFR, REUTERS, July 14,2008 (Suppl. Ushkow Decl., Ex. 9); Anurag Joshi, Indian Rupee Eases As Record Oil, Stocks Weigh, REUTERS, June 27, 2008 (Suppl. Ushkow Decl., Ex. 10); Philippine C.bank Eend-May Currency Swaps at $6.3 Bln, REUTERS, July 1,2008 (Suppl. Ushkow Decl., Ex. 11) (“Asian central banks, including South Korea, India, Thailand, and Indonesia have been regularly intervening in the market in recent weeks to prop up their currencies”); Reuben Carder, UPDATE: Bank Indonesia Gov: Jul On-Yr CPI Rise May Easy From Jun[e}, Dow JONES INT’L, July 9, 2008 (Suppl. Ushkow Decl., Ex. 12) (“The central bank has been also actively selling dollars to prop up the rupiah in order to reduce imported inflation.“).
[10] Brazil’s Foreign Reserves Rise to $70 Billion, REUTERS, Aug. 18,2006 (Suppl. Ushkow Decl., Ex. 13); Government To Use Foreign Reserves to Increase Export Financing, Bus. NEWS AMS., Oct. 6,2008 (Suppl. Ushkow Decl., Ex. 14); Standard Chartered Sees Opportunities in Crisisfor Expansion, Bus. NEWS AMS., Nov. 18,2008 (Suppl. Ushkow Decl., Ex. 15)
[11] Colombian Foreign Reserves Fall During Week, REUTERS, Oct. 3,2005 (Suppl. Ushkow Decl., Ex. 16); Colombia Finance Minister Outlines 2006 Financial Plans, Dow JONES INT’L, Oct. 26, 2005 (Suppl. Ushkow Decl., Ex. 17)
[12] UPDATE: Emerging Mkt Debt Falls as Bonds Seek Direction, Dow JONES INT’L, June 22,2006 (Suppl. Ushkow Decl., Ex. 18); Mexican Government Buys $2 os. 88 Billion of Central Bank International Reserves, NOTICIAS FINANCIERAS, July 15,2005 (Suppl. Ushkow Decl., Ex. 19)
[13] P.R. Venkat, FOCUS: January Singapore Budget To Focus On Tax, Projects, Dow JONES INT’L, Nov. 17,2008 (Suppl. Ushkow Decl., Ex. 20); DJ Singapore Govt To Change Rule to Use More From Reserves-Report, Dow JONES CHINESE FINANCIAL WIRE, Oct. 21, 2008 (Suppl. Ushkow Decl., Ex. 21)
[14] Gregory Feifer, Experts Downplay Fears over Ukraine-Russia Gas Crisis, UKRAINIAN WEEKLY, Nov. 15,2009 (Suppl. Ushkow Decl., Ex. 22); Andrew Neff, Naftogaz Ukrainy Completes Restructuring of$1.US.6 Bil. in Foreign Debt, GLOBAL INSIGHT, Nov. 6, 2009 (Suppl. Ushkow Decl., Ex. 23)
[15] See The Federal Reserve’s Response to the Crisis, http://federalreserve.gov/ monetarypolicy/bst_crisisresponse.htm (Suppl. Ushkow Decl., Ex. 24). The Federal Reserve describes its purchase ofU.S. government debt -- including $200 billion of government-sponsored enterprise debt and 1.25 million ofmortgage-backed securities, in addition to the $300 billion of Treasuries -- during the 2009 economic crisis as one of its three “tools” used in response to the current financial crisis (along with “the provision of short-term liquidity to banks” and other depository and financial institutions, and the pro vis ion of liquidity directly to borrowers and investors through programs such as the Term Asset-Backed Securities Loan Facility). Id.
[16] Among the many day-to-day activities in which BCRA engages -- as to which nothing plaintiffs have submitted suggests any govemment involvement -- are acting as a “market-maker” in the foreign exchange market and futures market (i.e., trading currency futures); conducting a weekly public auction at which BCRA instruments are sold to Argentine financial entities; and making short-term adjustments in monetary targets in response to intemational or domestic developments. Oct. 25, 2006 Basco Decl. 16-31.
SOUTHERN DISTRICT OF NEW YORK
-------------------------------------------------------x
EM LTD.,
Plaintiff,
- against-
THE REPUBLIC OF ARGENTINA,
Defendant. [1]
--------------------------------------------------------x
NML CAPITAL, LTD.,
Plaintiff,
- against-
THE REPUBLIC OF ARGENTINA,
Defendant. [2]
______________________________________x
(Additional case captions on next page)
______________________________________x
BANCO CENTRAL DE LA REPÚBLICA ARGENTINA’S
SUPPLEMENTAL MEMORANDUM IN RESPONSE TO THE
DECEMBER 7, 2009 DECLARATION OF DENNIS HRANITZKY
Joseph E. Neuhaus (JN 4255)
Laurent S. Wiesel (LW 2154)
Michael J. Ushkow (MU 5680)
SULLIVAN & CROMWELL
LLP 125 Broad Street
New York, New York
10004-2498 (212) 558-4000
Attorneys for Banco Central
de la República Argentina
January 13, 2010
-------------------------------------------------------x
NML CAPITAL, LTD.,
Plaintiff,
- against-
THE REPUBLIC OF ARGENTINA,
Defendant. [3]
-------------------------------------------------------x
NML CAPITAL, LTD.,
Plaintiff,
- against-
THE REPUBLIC OF ARGENTINA,
Defendant. [4]
-------------------------------------------------------x
EM LTD. and NML CAPITAL, LTD.,
Plaintiff,
- against-
BANCO CENTRAL DE LA REPÚBLICA ARGENTINA and THE REPUBLIC OF ARGENTINA,
Defendants. [5]
-------------------------------------------------------x
TABLE OF CONTENTS
PRELIMINARY STATEMENT
ARGUMENT
A. BCRA’s Purchases and Sales of U.S.-Dollar Reserves Do Not
Support a Finding that BCRA Is an Alter Ego ofthe Republic
1. The Record Shows that BCRA Accumulated Reserves
After 2003 for Sound Monetary Objectives
2. Plaintiffs’ Criticisms ofBCRA’s Policies As Economically
“Irrational” and “Inflationary” Are Unfounded
3. BCRA’s Sale ofDollars in the Summer of2008 Was Part
Of Worldwide Efforts to Counter a Temporary Appreciation
Of the U.S. Dollar
B. Many Govemments Around the World Have Long Used Central
Bank Reserves to Pay the Govemment’s Debts and the Steps to
Permit that to Which Plaintiffs Point (Not Yet Implemented) Are
Not Evidence of an Alter Ego Relationship
C. That a Central Bank Is Empowered to Lend Money to the
Govemment in Times of Crisis Is Common and Also Not Evidence
of an Alter Ego Relationship
D. Inconsistencies in the Record Should Be Resolved in BCRA’s
Favor
CONCLUSION
TABLE OF AUTHORITIES
CASES
EM Ltd. v. Rep. of Argentina,
473 F.3d 463 (2d Cir. 2007)
First City, Texas-Houston, NA. v. Rafidain Bank,
150 F.3d 172 (2d Cir. 1998)
First Nat’l City Bank v. Banco Para El Comercio Exterior de Cuba,
462 U.S. 611 (1983) (“Bancec”)
Gabay v. Mostazafan Found. of Iran,
151 F.R.D. 250 (S.D.N.Y. 1993)
Hereaire Int’l., Ine. v. Argentina,
821 F.2d 559 (11th Cir. 1987)
Kelly v. Syria Shell Petroleum Dev. B. V,
213 F.3d 841 (5th Cir. 2000)
Letelier v. Rep. of Chile,
748 F.2d 790 (2d Cir. 1984)
LNC Invs., Ine. v. Rep. Of Nicaragua,
115 F. Supp. 2d 358 (S.D.N.Y. 2000)
STATUTE
28 U.S.C. § 1611
Pursuant to the Court’s Order of December 15,2009, Banco Central de la República Argentina (“BCRA”) respectfully submits this response to the December 7, 2009 Declaration of Dennis Hranitzky (the “Hranitzky Declaration” or “Hranitzky Decl.”) and in particular to new evidentiary materials that plaintiffs EM Ud. and NML Capital, Ud. did not previously offer in support of their September 28, 2006 motions to attach BCRA’s reserves.
PRELIMINARY STATEMENT
Much of the Hranitzky Declaration simply rehashes issues previously addressed at length in the parties’ submissions, and we will not burden the Court with additional materials on these points. The Declaration includes 36 newly submitted materials that purport to provide “evidence” of conduct in the four years after BCRA’s reserves were frozen on December 30,2005 that plaintiffs claim supports their alter ego theory. Plaintiffs assert in their Second Amended Complaint (or “SAC”) that these new materials -- almost all of which are magazine and newspaper articles -- support two broad points:
New Materials in the Plaintiffs’ Allegation
Hranitzky Declaration
Exhibits 26, 29, 32, 35, 37 43, 50, 53 & 55-61: Plaintiffs say that the political branches of the Argentine Government, and in particular the Executive Branch (the “Government”), have exercised improper control over BCRA by directing it to accumulate or sell reserves for political reasons and without regard to sound monetary policy.
Exhibits 24, 25, 66-69, 80, 86, 88-90: Plaintiffs point, for example, to laws that loosen restrictions on BCRA’s ability to loan reserves to the Government or plans in 2008 (not implemented) to pay Argentina’s debts using central bank reserves.
Plaintiffs argue that the Government has provided itself the power to “seize” bank reserves at will for supposed “governmental” purposes as opposed to implementation of monetary policy.
The new materials that plaintiffs have offered in support of their alter ego theory stillleave the record far short of the standard that they must meet in order to overcome the presumption that “government instrumentalities established as juridical entities distinct and independent from their sovereign should normally be treated as such.” First Nat’l City Bank v. Banco Para El Comercio Exterior de Cuba, 462 U.S. 611, 626-27 (1983) (“Bancec”).
Plaintiffs’ excerpts from newspaper articles critical of the Argentine Government present a misleading and often simply wrong picture of events. As we demonstrate below:
BCRA’s policies with respect to reserves in the aftermath of Argentina’s financial crisis were based on sound monetary policy undertaken to protect against future crises and to manage the value of the Argentine peso in the context of Argentina’ s overall economic objectives. (See §§ A(l) and (A)(2), infra.)
BCRA’s temporary shift in 2008 to a policy of selling U.S.-dollar reserves reflected sound monetary policy in reaction to a temporary strengthening of the dollar and was mirrored by the central banks of other developing countries at precisely the same time. (See § A(3), infra.)
There are numerous examples of governments that have used central bank reserves to finance the repayment of State debts in the last few years, and the as yet unconsummated plans to use BCRA’s reserves for that purpose are not in the least bit out ofthe ordinary. (See § B, infra.)
The recent loosening ofrestrictions on BCRA’s ability to lend to the government are typical of measures taken by other countries and do not provide a basis for plaintiffs to argue that BCRA lacks independence. (See § C, infra.)
For these reasons, and those set forth in BCRA’s numerous other submissions in this case, the Court should deny the pending attachment motion.
ARGUMENT
In opposing plaintiffs’ motion, BCRA has submitted substantial evidence regarding its implementation of monetary policy and relationship with the Argentine Government. This evidence includes, among other things, official records identifying and explaining BCRA’s policies and targets; sworn statements from present and former BCRA officials describing BCRA’s operations and interactions with the Government; and declarations from central banking and Argentine law experts providing additional context to the evidentiary record. There is nothing in these materials from which to infer that the Government exercises control over BCRA’s day-to-day operations, and much in the way of evidence that BCRA controls its operations without interference from the Government.
Plaintiffs, on the other hand, attempt to support their alter ego theory with expert declarations and newspaper and magazine articles, and still more articles, that at most support three conclusions: (1) that the Argentine Government is involved in setting monetary policy; (2) that there are grounds to disagree with the policies and plans that BCRA and the Argentine Government have pursued or attempted to pursue; and (3) that there are legal mechanisms that allow BCRA to transfer a portion of its liquid assets to the Government. These propositions provide no basis for plaintiffs’ assertion that the Argentine Government “has completely dominated the day-to-day functions of the Central Bank since at least 2001, and continues to do so today.” SAC 27. Plaintiffs’ evidentiary materials at most paint a picture of a typical central bank in a modern democracy in which national monetary policy is the subject of intense discussion among politicians and newspapers.
The global economic crisis of 2008-2009 highlights how governments and central banks around the world have worked together to address the needs of their countries. It is more evident now than it has ever been that plaintiffs’ approach would make alter ego s out ofthe majority ofthe world’s central banks and undermine the special immunity from attachment accorded to foreign reserves under the Foreign Sovereign Immunities Act of 1976 (the “FSIA”), 28 U.S.C. § 1611(b)(1).
A. BCRA’s Purchases and Sales of U.S.-Dollar Reserves Do Not Support a Finding that BCRA Is an Alter Ego of the Republic.
Plaintiffs attempt to show that the Government exercises control over BCRA’s formulation and day-to-day implementation ofmonetary policy by pointing to new materials that they claim show that BCRA (1) pursued a policy of accumulating reserves at the Government’s direction, beginning in late 2004, for “purely political reasons”; and (2) “reversed course” in the Summer of 2008, again for supposedly political reasons. Speculation by members of the Argentine press and inadmissible hearsay notwithstanding, the record of official policy statements of the bank and official third-party sources shows that the Bank’s policies have furthered sound monetary policy, an area fully within the traditional functions of a central bank.
1. The Record Shows that BCRA Accumulated Reserves After 2003 for Sound Monetary Objectives.
Plaintiffs assert that the policy of accumulation of reserves -- by acquiring U.S. dollars, mainly through foreign exchange transactions -- had two principal purposes:
(1) keeping down the value ofthe Argentine peso relative to the U.S. dollar, thereby increasing worldwide demand for Argentine exports and creating a “piggy bank” of export taxes, and (2) financing the government’s debts. See Hranitzky Decl., Exs. 29, 32, 35-36; SAC 42-46. That is not what the record shows.
Rather, BCRA accumulated reserves beginning in 2003 (not 2004) in order to cushion against external shocks to the Argentine economy, prevent or minimize another financial crisis, and protect the value ofthe currency. This policy was set forth in BCRA’s statements of official policy submitted to the Argentine Congress. See, e.g., BCRA’s REpORT TO THE NATIONAL CONGRESS 2004, at 3 (Suppl. Ushkow Decl., Ex. 1) (BCRA’s “primary and fundamental mission” of”preserv[ing] the value ofthe currency” includes putting into practice “prudent strategies to reduce external vulnerability (such as the accumulation ofinternational reserves)”); see also May 15,2009 Aizenman Decl. 7-8,12,13-20,31-34; May 15,2009 Basco Decl. 5, 25; Oct. 25, 2006 Basco Decl. 19.
After the repayment of IMF debt in January 2006, BCRA’s presentation of the 2006 Monetary Program to the National Congress highlighted “the need for a certain amount of foreign exchange liquidity to meet foreign liabilities” and “the role that international reserve accumulation plays in generating a safe and reliable insurance mechanism for developing economies.” BCRA ‘s Presentation ofthe Monetary Program for 2006, at 3 (Suppl. Ushkow Decl., Ex. 2). During this period, Argentina, like many other emerging-market economies, sought to self-insure, particularly in the absence of lenders oflast resort. See INTERNATIONAL RELATIONS COMMITTEE TASK FORCE, THE ACCUMULATION OF FOREIGN RESERVES (European Central Bank Occasional Paper Series No. 43, 2006) (“IRC TASK FORCE”), at 13 (Suppl. Ushkow Decl., Ex. 3).[6]
2. Plaintiffs’ Criticisms of BCRA’s Policies As Economically “Irrational” and “Inflationary” Are Unfounded.
Plaintiffs further rely on numerous press articles that take issue with BCRA’s accumulation ofreserves from a policy perspective, and on that basis argue that BCRA’s actions must be controlled by the Govemment. For example, plaintiffs assert that BCRA’s policy of accumulating reserves required it to issue bonds that yielded 11 % interest, while the BCRA’s investment in dollars yielded only 6% interest -- that is, that BCRA’s policy of accumulating reserves was not cost-free. See Hranitzky Decl., Ex. 29; SAC 43.
Plaintiffs’ assertions regarding the cost of accumulating reserves could be said about the central bank of any emerging-market economy. Borrowing in the currency of an emerging-market economy generally costs more than a similar deposit in U.S. dollars will eam because of country risk. See, e.g., Luis Catáo and Sandeep Kapur, Volatility and the Debt-Intolerance Paradox 195 (2006) (Suppl. Ushkow Decl. Ex. 4).
Nothing in the record suggests that BCRA’s costs were out ofline with the costs incurred by other emerging-market central banks when they accumulate reserves. IRC TASK FORCE II, 16-17 (Suppl. Ushkow Decl. Ex. 3) (South Korea and India hold among the largest pools of intemational reserves despite high sterilization costs due to country risk).
Plaintiffs further lambast BCRA’s reserve-accumulation policy as inflationary, and suggest that an independent central bank would never pursue such a policy.[7] As previously shown, however, BCRA employs a process of “sterilization” and uses various tools for combating inflation and minimizing the impact of accumulating reserves on inflation. See, e.g., Oct. 25, 2009 Basco Decl. 16-30; Oct. 25, 2009 D’ Amato Decl. 13. Whether BCRA could or should have used these tools more or less at any given point is a classic policy judgment that this Court should not second guess and that has no bearing on BCRA’s separate legal identity under the FSIA and Bancec.
3. BCRA’s Sale of Dollars in the Summer of 2008 Was Part of Worldwide Efforts to Counter a Temporary Appreciation ofthe U.S. Dollar.
Plaintiffs also allege, relying on numerous newly submitted materials, that BCRA’s sale ofU.S.-dollar reserves in the Summer of 2008 was carried out at the behest of Mr. Kirchner in order to punish political opponents in the agricultural sector. See Hranitzky Decl., Exs. 37-42; SAC 47-48. But again plaintiffs rely on triple hearsay, at best, as to the former President’s desires’.[8]
More fundamentally, plaintiffs ignore the economic realities during the Summer of 2008, which provide a readily ascertainable monetary policy rationale for BCRA’s sale ofU.S.-dollar reserves.
The U.S. dollar was depreciating relative to other international currencies, from August 2007 through mid-2008, but stabilized and began to appreciate in value during the summer of2008. See Federal Reserve Board of Governors, Historical Nominal Broad Dollar Index (Suppl. Ushkow Decl., Ex. 5) (The Federal Reserve reports that the weighted value ofthe U.S.-dollar declined from 103.3318 in August 2007, to 95.4757 in April2008, but stabilized and by June 2008 increased to 96.0884 in relative value); Emily Kaiser, Firm Dollar Also Brings New Risks, INT’L HERALD TRIBUNE, Aug. 25,2008 (Suppl. Ushkow Decl., Ex. 6) (“The dollar is enjoying its strongest rally in three years.”). All other things equal, a stronger U.S. dollar relative to the Argentine peso means a higher exchange rate or more pesos to buy a dollar, and a weaker dollar means the opposite.
BCRA employs a managed floating exchange rate regime: it seeks to avoid wild swings in the external value ofthe peso, by among other things, selling U.S. dollars in exchange for Argentine pesos when doing so will help stabilize the exchange rateo See May 15,2009 Aizenman Decl. 39-42; May 15,2009 Basco Decl. 25. BCRA also utilizes foreign exchange policy as a tool to control domestic inflation by controlling the supply ofpesos in circulation. See May 15, 2009 Aizenman Decl. 39.
BCRA’s sale of U.S. dollars in June and July 2008, in the face of a weakening peso relative to the U.S. do llar, was thus entirely consistent with its traditional central banking function of maintaining the value of the currency.
Indeed, and significantly, during precisely those same months, the central banks of other developing countries, including Pero, Costa Rica, South Korea, India, Thailand, Indonesia and the Philippines, also so Id U.S. dollars in order to strengthen or maintain the value oftheir respective currencies.[9]
B. Many Governments Around the World Have Long Used Central Bank Reserves to Pay the Government’s Debts and the Steps to Permit that to Which Plaintiffs Point (Not Yet Implemented) Are Not Evidence of an Alter Ego Relationship.
Plaintiffs have supplemented the record with materials relating to Executive Decrees from September 2008 requesting that BCRA finance the repayment of the Republic’s debts to the Paris Club, by transferring liquid reserves to the National Treasury in exchange for a govemment note, and a June 2008 “white paper” evaluating the possible use of reserves to meet other debt payments coming due. See Hranitzky Decl., Exs. 80-86, 88-90; SAC 58, 62-66,71-77. At the outset, plaintiffs’ continued focus on the Republic’s ability to obtain financing from BCRA for the repayment of foreign debt flies directly in the face of the Second Circuit’ s holdings on this issue:
Bancec forecloses any argument that all of BCRA’s $26.8 billion in reserves are “attachable interests” of the Republic merely because the Republic hypothetically could have ordered (but in the Decrees did not order) BCRA to assign or transfer the FRBNY Funds. See Letelier [v. Rep. Of Chile], 748 F.2d [790,] 794 [(2d Cir. 1984)] (findings that assets and facilities of Chile’s instrumentality LAN “were under the direct control of Chile, which had the power to use them; [and that] Chile could have decreed LAN’s dissolution and taken over property interests held in LAN’s name” did not support allowing creditor to attach LAN’s assets in order to satisfy judgment against Chile).
EM Ltd. v. Rep. of Argentina, 473 F.3d 466,480 (2d Cir. 2007) (emphasis in original).
The Court observed further that:
[P]laintiffs , theory could expose to attachment the assets of a majority of the world’s central banks because national governments customarily retain the ability to direct their central banks to take actions with respect to the central banks ‘ foreign exchange reserves. Under plaintiffs’ theory, for example, all ofthe assets ofthe United States Federal Reserve system would be treated as attachable interests ofthe United States (absent otherwise-applicable sovereign immunity protections) because the United States has exercised the power to direct the Federal Reserve Banks to transfer their “surplus funds” to the U.S. Treasury for use by the federal government.
473 F.3d at 476 n.12 (citations omitted) (emphasis added).
As the Second Circuit found, plaintiffs’ assertion that BCRA’s ability to “seize billions of dollars of Central Bank assets for its own use” evidences “Argentina’s complete control over the Central Bank,” SAC ~ 58, reflects a fundamental misunderstanding of the relationship of a central bank and its parent government. Indeed, it is not in the least bit unusual for a central bank to transfer reserves to its parent government outright or sell reserves to the government in exchange for a note. Below are just a few recent examples of central banks transferring or selling reserves to their parent governments, often in particular in order to pay offthe State’s foreign debts:
Brazil. In 2006, Brazil tapped its international reserves to pay down part of its debt; and in 2008, the Brazilian central bank announced that the government will use the country’s reserves to increase export financing [10]
Colombia. In 2005, the Colombian bank so Id reserves to the government, for use to pay off debt and for its cash needs.[11]
Mexico. In 2005, the Mexican government “bought” $2.88 billion of central bank reserves in order to meet payments on all foreign debt coming due in 2006 and 2007; and in 2006, it tapped into its reserves to prepay $7 billion in loans from the World Bank and the Inter-American Development Bank.[12]
Singapore. The Singapore constitution allows the government to use central bank reserves for fiscal stimulus. [13]
Ukraine. In 2009, Ukraine’ s Naftogaz energy company relied on central bank credits to finance its payments to Moscow.[14]
C. That a Central Bank Is Empowered to Lend Money to the Government in Times of Crisis Is Common and Also Not Evidence of an Alter Ego Relationship.
Plaintiffs have submitted new materials purporting to show that BCRA has loosened restrictions on the Government’s ability to borrow BCRA’s liquid reserves, and plaintiffs have argued that this provides a power to “seize” BCRA reserves at will. See Hranitzky Decl., Exs. 12,66,67; SAC 59-60,69. Here again, plaintiffs ignore economic realities and the conduct of other central banks, including the Federal Reserve. As discussed aboye, many central banks transfer reserves to their parent governments in good times and bad. Furthermore, increased financial assistance from the central bank to the government to combat or avoid a deeper economic crisis is within the central bank’s traditional function oflender oflast resort. The Federal Reserve played just this role in the United States in 2008 and 2009. For example, “[o]n March 18, [2009,] the Federal Reserve announced plans to purchase up to $300 billion oflonger-term Treasury securities,” an immense financing of the government’ s budget deficit.[15] See also Jon Hilsenrath et al., Crisis Threatens to Curb Central Banks, WALL ST J., Jan. 12, 2010 (Ushkow Decl., Ex. 25), at A8 (in connection with governrnent-led efforts to rescue the global economy, “[t]he Federal Reserve bought mortgage-backed securities and took complex derivatives as collateral for loans. The Bank of England essentially printed money when it bought swaths of government bonds. The European Central Bank, the Bank of Japan and others took similar steps”).
The fact that in times of economic stress the Argentine Government has provided BCRA with increased power to lend money to the Argentine Treasury cannot be deemed evidence of an alter ego relationship anymore than the Federal Reserve Board would be deemed to be an alter ego of the United States Government.
More generally, plaintiffs’ assertion that it is evidence of an alter ego relationship for the Argentine Government to have any role or say in the use of BCRA reserves is misplaced. Central banks and national governments have separate but interrelated roles in the management of monetary policy, and the relationship naturally becomes more intense in times of stress. Indeed, Time Magazine recently profiled Ben Bernanke, Chairman ofthe Federal Reserve, and highlighted “his aggressive steps to avert doomsday[,] and his unusually close partnerships with Bush and Obama Treasury Secretaries Henry Paulson and Timothy Geithner” which “have exposed him and his institution to criticism from all directions.” Michael Grunwald, Ben Bernanke - Person ofthe Year 2009, TIME, Dec. 28, 2009 (Suppl. Ushkow Decl., Ex. 26).
D. Inconsistencies in the Record Should Be Resolved in BCRA’s Favor.
BCRA submits that, on any fair view of the evidence, plaintiffs have not come close to carrying their burden on the alter ego issue on this motion. The evidence shows that BCRA implements monetary policy on a day-to-day basis without interference from the Government.[16] But even if there are conflicts on any particular question or fact between the newspaper articles submitted by plaintiffs and the evidence submitted by BCRA, the conflict or inconsistency should be resolved in BCRA’s favor, for three reasons:
First, under the FSIA, BCRA is presumed to be distinct and independent of the Republic. See Baneee, 462 U.S. at 626-27; Hereaire Int’l, Ine. v. Argentina, 821 F.2d 559,565 (11th Cir. 1987); Letelier v. Rep. ofChile, 748 F.2d 790, 795 (2d Cir. 1984). As a matter oflaw, none ofplaintiffs’ allegations about monetary policy and lending to the Govemment satisfy the standard for overcoming that presumption, but in any event, on questions of fact, a tie goes to BCRA.
Second, BCRA is also presumptively immune specifically from discovery and plaintiffs are required to establish their entitlement to any discovery with a detailed showing of specific need. See Kelly v. Syria Shell Petroleum Dev. B. V, 213 F .3d 841, 849 (5th Cir. 2000) (“FSIA immunity is immunity not only from liability, but also from the costs, in time and expense, and other disruptions attendant to litigation.”); First City, Texas-Houston, NA. v. Rafidain Bank, 150 F.3d 172, 176-77 (2d Cir. 1998) (plaintiffs may only take discovery of specific facts “crucial” to resolving immunity issues); Gabay v. Mostazafan Found of Iran, 151 F.R.D. 250, 257 (S.D.N.Y. 1993) (requiring plaintiff to set forth “with specificity the factual allegations he hopes to prove and the method by which he proposes to do so”). As a consequence, plaintiffs should not be permitted to proceed beyond this attachment motion if they have not met that test, as we submit is the case here. Plaintiffs have advanced no reasoned basis, for example, to conclude that BCRA does not engage in the day-to-day operations set forth in the October 25,2006 Basco Declaration, or that the govemment interferes in those operations.
Third, the Court should properly weigh the quality of the “evidence” that each side has submitted. We have previously pointed out that another Court in this District has held that hearsay in newspaper articles is inadmissible on an attachment motion under the FSIA. See LNC Invs., Ine. v. Rep. Of Nicaragua, 115 F. Supp. 2d 358, 366 (S.D.N.Y. 2000) (in rejecting plaintiff’s alter ego argument, the Court found LNC’s reliance on “statements attributed to the General Manager of the Central Bank that appeared in a Nicaraguan newspaper ... inadmissible hearsay”). Even ifthis Court determines to depart from this precedent, the numerous newspaper articles upon which plaintiffs case entirely rests, and in particular the often unattributed hearsay contained within them, are less reliable than the evidence upon which BCRA’s case rests. This is not just a case of the difference between newspaper hearsay and official publications of a sovereign entity, but the difference between newspaper hearsay and, for example, widely reported foreign exchange rates, which amply explain why BCRA purchased dollars in the Summer of 2008, or the irrefutable s economic realities underlying the supposedly suspicious costs ofbuilding reserves. Plaintiffs have long had access to such economically meaningful data, but have not supported their newspaper hearsay with any hard facts.
CONCLUSION
The Court should deny plaintiffs’ motions for attachment and restraint.
Dated:
New York, N ew York January 13, 2010
/s/Joseph E. Neuhaus
Joseph E. Neuhaus (JN 4255)
Laurent S. Wiesel (LW 2154) Michael
J. Ushkow (MU 5680)
SULLIVAN & CROMWELL LLP
125 Broad Street
New York, New York 10004
Tel.: (212) 558-4000
Attorneys for Banco Central de la
República Argentina
[1] 03 Civ. 2507 (TPG)
[2] 03 Civ. 8845 (TPG)
[3] 05 Civ. 2434 (TPG)
[4] 06 Civ. 6466 (TPG)
[5] 06 Civ. 7792 (TPG)
[6] The new materials that plaintiffs have submitted to support their allegation that the Kirchners have been behind BCRA’ s policy of accumulating reserves for political reasons, though rife with baseless speculation, themselves recognize the benefits of maintaining a high level ofreserves. Exhibit 35 to the Hranitzky Declaration, for example, posits that “record high” reserve levels in March 2008 “w[ ould] help cushion the impact of extemal crises,” and Exhibit 38 credits BCRA and its reserves accumulation policy for successfully combating “a variety ofturbulent scenarios, such as the subprime mortgage crisis in the United States.”
[7] Plaintiffs have submitted several new materials supposedly showing that the Republic understates its official inflation statistics. See Hranitzky Decl., Ex. 53, 55-61; SAC 52-57. BCRA and INDEC, the Argentine govemment agency that calculates and reports official inflation numbers, are wholly unrelated, just as the Federal Reserve and the Bureau of Labor Statistics, which calculates and reports inflation statistics for this country, are unrelated. That BCRA’s official publications refer to the official inflation figures disseminated by INDEC has nothing to do with whether BCRA is the alter ego of the Republic.
[8] Plaintiffs, for example, allege that “former President Nestór Kirchner ordered the Central Bank to begin selling dollars.” SAC 47. Their source is a press report, attached as Exhibit 37 to the Hranitzky Declaration, which neither purports to quote the former president nor reports any sort of “order” or “directive.” Similarly, the article attached as Exhibit 38 to the Hranitzky Declaration quotes an unnamed “full-fledged Patagonian” -that is the extent of how the speaker is identified -- for its source as to the former president’s desired exchanged rateo Not a single source even purports to be a direct quote from the former President.
[9] See Peru Cenbank Sells Dollars to Ease Sol ‘s Retreat, REUTERS, June 23, 2008 (Suppl. Ushkow Decl., Ex. 7); Central Bank of Costa Rica Sells 600Million Dollars from its Reserves, NOTICIAS FINANCIERAS, July 4,2008 (Suppl. Ushkow Decl., Ex. 8); RPT-Asia Ex-Japan Funds Hit By More Redemptions - EPFR, REUTERS, July 14,2008 (Suppl. Ushkow Decl., Ex. 9); Anurag Joshi, Indian Rupee Eases As Record Oil, Stocks Weigh, REUTERS, June 27, 2008 (Suppl. Ushkow Decl., Ex. 10); Philippine C.bank Eend-May Currency Swaps at $6.3 Bln, REUTERS, July 1,2008 (Suppl. Ushkow Decl., Ex. 11) (“Asian central banks, including South Korea, India, Thailand, and Indonesia have been regularly intervening in the market in recent weeks to prop up their currencies”); Reuben Carder, UPDATE: Bank Indonesia Gov: Jul On-Yr CPI Rise May Easy From Jun[e}, Dow JONES INT’L, July 9, 2008 (Suppl. Ushkow Decl., Ex. 12) (“The central bank has been also actively selling dollars to prop up the rupiah in order to reduce imported inflation.“).
[10] Brazil’s Foreign Reserves Rise to $70 Billion, REUTERS, Aug. 18,2006 (Suppl. Ushkow Decl., Ex. 13); Government To Use Foreign Reserves to Increase Export Financing, Bus. NEWS AMS., Oct. 6,2008 (Suppl. Ushkow Decl., Ex. 14); Standard Chartered Sees Opportunities in Crisisfor Expansion, Bus. NEWS AMS., Nov. 18,2008 (Suppl. Ushkow Decl., Ex. 15)
[11] Colombian Foreign Reserves Fall During Week, REUTERS, Oct. 3,2005 (Suppl. Ushkow Decl., Ex. 16); Colombia Finance Minister Outlines 2006 Financial Plans, Dow JONES INT’L, Oct. 26, 2005 (Suppl. Ushkow Decl., Ex. 17)
[12] UPDATE: Emerging Mkt Debt Falls as Bonds Seek Direction, Dow JONES INT’L, June 22,2006 (Suppl. Ushkow Decl., Ex. 18); Mexican Government Buys $2 os. 88 Billion of Central Bank International Reserves, NOTICIAS FINANCIERAS, July 15,2005 (Suppl. Ushkow Decl., Ex. 19)
[13] P.R. Venkat, FOCUS: January Singapore Budget To Focus On Tax, Projects, Dow JONES INT’L, Nov. 17,2008 (Suppl. Ushkow Decl., Ex. 20); DJ Singapore Govt To Change Rule to Use More From Reserves-Report, Dow JONES CHINESE FINANCIAL WIRE, Oct. 21, 2008 (Suppl. Ushkow Decl., Ex. 21)
[14] Gregory Feifer, Experts Downplay Fears over Ukraine-Russia Gas Crisis, UKRAINIAN WEEKLY, Nov. 15,2009 (Suppl. Ushkow Decl., Ex. 22); Andrew Neff, Naftogaz Ukrainy Completes Restructuring of$1.US.6 Bil. in Foreign Debt, GLOBAL INSIGHT, Nov. 6, 2009 (Suppl. Ushkow Decl., Ex. 23)
[15] See The Federal Reserve’s Response to the Crisis, http://federalreserve.gov/ monetarypolicy/bst_crisisresponse.htm (Suppl. Ushkow Decl., Ex. 24). The Federal Reserve describes its purchase ofU.S. government debt -- including $200 billion of government-sponsored enterprise debt and 1.25 million ofmortgage-backed securities, in addition to the $300 billion of Treasuries -- during the 2009 economic crisis as one of its three “tools” used in response to the current financial crisis (along with “the provision of short-term liquidity to banks” and other depository and financial institutions, and the pro vis ion of liquidity directly to borrowers and investors through programs such as the Term Asset-Backed Securities Loan Facility). Id.
[16] Among the many day-to-day activities in which BCRA engages -- as to which nothing plaintiffs have submitted suggests any govemment involvement -- are acting as a “market-maker” in the foreign exchange market and futures market (i.e., trading currency futures); conducting a weekly public auction at which BCRA instruments are sold to Argentine financial entities; and making short-term adjustments in monetary targets in response to intemational or domestic developments. Oct. 25, 2006 Basco Decl. 16-31.
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