Tony Llaveria, a technology consultant who lives near Atlanta, is a board member of Peruvian-American Bondholders for Justice. Llaveria’s great-great-grandfather was a silver miner who left money that his two sons used to buy land in the early 1830s, not long after Peruvian independence from Spain. It was later seized in a leftist land redistribution program. His retains the land bonds his family was given. (JOSE ANTONIO LLAVERIA )

Why has a Greenwich, Conn., hedge fund taken an interest in a leftist land redistribution program a military regime carried out in Peru half a century ago?

The prospect of a blockbuster payday.

The hedge fund, Gramercy Funds Management, which specializes in emerging markets, bought about 20 percent of the bond issued to Peruvian landowners as compensation for land seizures beginning in 1969. But although Gramercy says its stake is worth about $1.6 billion, Peru’s new president says the bonds could be worthless.

In a turn of gamesmanship, Gramercy has tried to make this a Washington story as much as a Peruvian one, lifting the curtain on how the capital’s legal lobbying complex works. Gramercy has enlisted lobbying heavyweights such as the Podesta Group, the Daschle Group and McLarty Associates.

The hedge fund has also filed for arbitration by an international tribunal under the U.S.-Peru Trade Promotion Agreement. The firm has secured a supportive opinion from a Columbia Law School professor, John C. Coffee, and retained a veteran litigator at Debevoise & Plimpton.

The Peruvian government has followed suit, hiring the prominent law firm White & Case.

Gramercy had hoped that Peru’s new president, Pedro Pablo Kuczynski — a former finance minister, prime minister, World Bank official and investment banker — might take a more sympathetic position than his predecessor. But last month, Kuczynski said in an interview with the publication Latin Finance, “I don’t think we owe them anything.” He added, “It’s that simple.”

Gramercy contends that its case is better than that. It notes that Peru’s own courts and Congress have recognized the legitimacy of the bonds and the importance of the government’s making fair payment.

Gramercy also says the Peruvian government must pay up to maintain its credibility in global credit markets. Gramercy has tried, with limited success, to focus the attention of the World Bank and International Monetary Fund on the issue.

“Peru’s machinations to evade paying its Land Bond debt flout fairness, due process and the rule of law,” Gramercy says in a filing made to commence arbitration.

But Peru, which has cultivated a solid investment grade credit rating, setting itself apart from less reliable South American governments, says this bond is different. Gramercy is playing the role of vulture fund and waging “a desperate smear campaign,” Peru says, and the hedge fund and hundreds of other holders of the old land bonds don’t deserve much, if anything.

Peru’s attorneys have argued that Gramercy, which manages about $6 billion in assets and specializes in distressed emerging market debt, was able to buy the bonds at deep discounts precisely because of their uncertain status. Peru’s response to Gramercy’s filing says that the U.S.-Peru trade treaty “does not provide for such speculative expropriation claims or demands for preferential, not equal, treatment.” Gramercy has not divulged the cost of its stake.

“It is a stretch to argue that Peru’s current democratic government should be responsible for claims from 40 years ago on bonds issued by a military regime,” Cynthia McClintock, professor of international affairs at George Washington University, said in a publication of the Inter-American Dialogue, a nonprofit group in Washington. “If there were no statutes of limitations on such claims, Peru’s indigenous peoples could argue that they were not fairly compensated for the land taken from them by Spanish colonizers.”


Bonds in the possession of Tony Llaveria. A hedge fund owns about 20 percent of the bonds issued. Most of the rest are thought to belong to Peruvians like Llaveria. (JOSE ANTONIO LLAVERIA )
Like Argentina, but different

The dispute bears some resemblance to a fight over bonds issued by Argentina. In that case, foreign hedge funds, including Gramercy, fought for years to reach a settlement while the country’s debt rating suffered. Gramercy settled its claims in two agreements, in 2010 and 2013. And earlier this year, Argentina agreed to pay other hedge funds $4.65 billion on 15-year-old bonds. Elliot Management, for instance, got a whopping 369 percent return on its investment.

Yet Peru’s bond flap has very different roots.

The leftist dictator Juan Velasco Alvarado launched a land reform program that over 10 years led to the seizure of about 23 million acres. (ASSOCIATED PRESS)

The story in Peru begins in 1969 when the leftist dictator Juan Velasco Alvarado launched a land reform program that over 10 years led to the seizure of about 23 million acres — an area the size of Indiana — from 15,826 wealthy and middle-class landowners to be redistributed to small-scale farmers and cooperatives.

One expropriated farm belonged to the family of Tony Llaveria, a technology consultant and naturalized U.S. citizen who now lives in the Atlanta area and is a board member of Peruvian-American Bondholders for Justice, a group backed by and including Gramercy. Llaveria’s great-great-grandfather was a silver miner who left money that his two sons used to buy land at an auction in the early 1830s, not long after Peruvian independence from Spain.

Llaveria’s great-grandfather was a senator and his grandfather a mayor of Tarma, the town closest to the farm. One day, soldiers arrived in a truck and seized the farm to turn it over to “the people.”

Another farm belonged to the Yep family, whose patriarch came by boat at age 16 from China in the middle of the 20th century. He opened a shop that sold odds and ends from China and then rented about 260 acres to grow sugar cane outside the town of Chiclayo.

Javier Yep, who was born in 1967 and was a small child when the land was expropriated, now evaluates businesses for accounting purposes in Lima. He has vague memories of the farm. But his uncle, an agrarian engineer who had made the farm his life’s work, ended up selling flashlights, mosquito repellent and other cheap Chinese-made articles in his father’s shop.

As compensation for the seizures, the military government issued land bonds with annual interest rates of 4 percent to 6 percent, with repayment scheduled over 20 to 30 years. But the government’s economic mismanagement triggered hyperinflation that reached 7,481.7 percent in 1990. The devalued currency was twice scrapped and replaced. The currency in which the bonds were issued, the sol de oro, is worth one-billionth of the sol used today.

By the mid-1980s the payments were essentially worthless. By the early 1990s, the government stopped making land bond payments altogether.

In 2001, Peru’s Constitutional Tribunal ruled that Peru had to pay off the bonds at a value equivalent to the value they had when they were issued. But it didn’t say how to calculate that. Over the next dozen years, Peru’s civil courts, Supreme Court and Congress reaffirmed the need to redeem the bonds, but they weren’t clear about how.

That was a green light to Gramercy, which over that decade bought up about 10,000 individual land bonds. Because the bonds were “bearer bonds” and never traded on electronic markets, the hedge fund has dealt with many individuals and groups to collect physical certificates. Gramercy says that all of those transactions took place in Peru and all the money Gramercy invested was paid in Peru — a key part of its argument that it qualifies as an investor entitled to protection under the trade treaty. Peru’s attorneys say buying pieces of paper of dubious value doesn’t count.

With a change in government and more outward looking economic policies, Peru’s economy boomed. Its GDP quadrupled from 2000 to 2014, and foreign direct investment in Peru soared.

Then, in 2013, the Constitutional Tribunal balked at a big payout for the bonds.

The ruling, however, led to charges of corruption. One justice said his draft majority opinion was somehow changed into a dissent after he submitted it. Portions of the opinion were clumsily erased using white-out and a typewriter. The altered opinion produced a tie vote, which, in turn, led to a new majority decision and a new calculation method — one that began by indexing the bonds in U.S. dollars and that effectively wiped out most of the debt.

Mark Friedman, a partner at Debevoise & Plimpton and Gramercy’s lead counsel, said the government was using a method that was “the product of a forgery which is now the subject of an ongoing criminal proceeding.”

Meanwhile, the Yeps have petitioned the Inter-American Commission on Human Rights for assistance, saying Peru’s laws “do not ensure legal due process.”

There are many ways to calculate the value of the bonds. Based on the face value of the bonds in the original currency, they are essentially worthless. Based on the fair market value of the land, as the Constitutional Tribunal ordered in 2001, the bonds could be worth tens of billions of dollars. A method based on the consumer price index would yield an estimated value of $5.1 billion. And another dollar-based method could make them worth about $500 million, according to Moody’s.

Gramercy says in its notice of arbitration that the government’s formulas “have fundamental errors that make them nonsensical, basically economic gibberish.” Moreover, the firm says, even the larger figures are well within Peru’s ability to pay. In 2015, the country had a gross domestic product of $192 billion and a modest debt load.


Peru’s new President Pedro Pablo Kuczynski says the land bonds have no value. “These folks think they can buy something for a cent and make 100,” he said. “It doesn’t work that way.” (ERNESTO BENAVIDES/AFP/Getty Images)
Making their cases

Gramercy has worked hard to make its case outside the courts. Over the summer, McLarty reached out to the top economic advisers to both presidential candidates in the Peruvian elections.

“Our principal task has been to help make sure the new [Peruvian] administration, whichever party it was, was aware of this issue and was baking it into their going forward plans,” said Nelson Cunningham, president of McLarty Associates.

Peru has “to deal with this because Gramercy is a foreign investor but also because Peruvians had their land taken and, under the government’s calculation, they would lose 99.5 percent of the value of the bonds,” he said. “If the United States did that, we’d be appalled.”

The Peruvians who hold as much as 80 percent of the bonds have no standing and cannot get anything from arbitration under the U.S.-Peru trade pact, so they must rely on their own negotiations.

“Peru has a strong case,” McClintock said. “Peru’s bonds were issued in a currency that is now defunct, without a provision for inflation; subsequently, Peru suffered bouts of hyperinflation.”

Argentina’s bonds, in contrast, were issued in dollars, reviewed by U.S. regulators and traded internationally.

Kuczynski has also taken a tough stance against Gramercy.

“These land reform bonds were issued in the 1970s. They’re under Peruvian law, not internationally recognized bonds. And we have a very good team of lawyers,” Kuczynski told Latin Finance. “These folks think they can buy something for a cent and make 100. It doesn’t work that way.”

Will the land bond dispute tarnish Peru’s credit in world markets? Peru floated global bond issues last year that were heavily oversubscribed, and it raised a billion euros this year.

Moody’s appeared to discount the land bonds’ effect on other government debt. “In our view, the current legal and valuation disputes on the [land bonds] do not alter the government’s willingness and ability to remain current on its foreign and domestic market debt,” Moody’s said in note to investors Dec. 15, 2015.

The agency maintains a healthy A3 credit rating on Peru’s other debt, and in August Standard & Poor’s reaffirmed Peru’s investment grade, citing its “track record of pragmatic and predictable policies.”

“We are not stupid. We know what to do,” Kuczynski said. “We will face the music — if there is music.”