Valuation Testimony Provided by Analysis Group in Gramercy Funds Management’s Successful Securities-Based International Arbitration Claim
February 22, 2023
Analysis Group was retained by Debevoise & Plimpton on behalf of its client, Gramercy Funds Management LLC, the claimant in an international arbitration brought against the Republic of Peru. Analysis Group assisted its affiliated expert Professor Sebastian Edwards, who provided testimony on the bond valuation methodology that was at the heart of Gramercy’s successful claim against Peru.
In the matter, Gramercy Funds Management LLC and Gramercy Peru Holdings LLC v. Peru, Gramercy sought damages under the United States-Peru Trade Promotion Agreement, claiming Peru’s decision to alter the methodology it used for determining payments for defaulted land bonds that Gramercy had acquired was undertaken solely to devalue the bonds. The dispute had its roots in the 1970s, when the Peruvian government redistributed more than nine million hectares of land to rural farmers as part of its Land Reform Act and issued 10,000 agrarian land bonds as compensation to the original landowners. The government defaulted on the payment of the land bonds during Peru’s economic hardship in the 1980s, but the Peruvian economy rebounded strongly in the following decade. Peru’s highest court subsequently upheld the government’s obligation, but the government issued decrees to regulate the procedure for making payments using a formula that devalued the bonds.
In the ensuing arbitration before a three-member tribunal, an Analysis Group team led by Managing Principals Samuel Weglein and Richard Starfield, Vice Presidents Peter Fabbrucci, Chris Feige, and Xinyu Ji, and Manager Big Banternghansa assisted Professor Edwards, who provided testimony on the bond valuation methodology used by Peru’s Ministry of Economy and Finance (MEF). Professor Edwards found that the MEF model had no economic basis and that it yielded valuations that were arbitrarily low. Specifically, he opined that the MEF formula estimated a parity exchange rate that was “nonsensical and a mathematically and economically meaningless input that served only to artificially depress the updated value of a land bond.”
The arbitral tribunal ultimately held that Peru’s bondholder compensation was arbitrary and unjust, did not comply with the constitutional court’s instructions, and was designed to minimize payments. The tribunal also established that several aspects of the MEF’s payment formula had no reasonable justification, that Peru’s witnesses and experts could not explain key elements of its formula, and that Peru’s approach could only be explained by the improper goal of reducing the amounts that bondholders could receive. It awarded costs and damages plus interest to Gramercy.