Judge Sara Cockerill of the commercial division of England’s High Court will have to decide in the coming weeks whether the investment fund CRF I Limited has standing to collect from the Cuban National Bank (BNC) and the state of Cuba. The legal dispute involves the fund, which is based in a tax haven and acquired Cuban debt securities in 2019, and, on the other side, the Cuban government itself, which accuses the alleged creditor of bad faith.
The magistrate’s decision will respond to the lawsuit initiated by CRF I Ltd. in February 2020 in the London courts against the Cuban state. The court case ended its oral phase in early February this year, after both parties had presented their submissions.
The litigation is being fought because the plaintiff CRF I Ltd. claims to hold two financial instruments of Cuban public debt contracted in 1984, after having acquired some of its securities in 2019. Meanwhile, the BNC and the State of Cuba maintain that this investment fund is not, and never has been, a creditor of the island, and that it is actually a vulture fund that is trying to legitimize its position as a creditor to demand that the country pay a debt that it does not own.
Due to the complexity of the case, once the hearings are over, Cockerill warned that the decision will take time to evaluate and sentence. Once the judgment is handed down, there is a possibility that it could be appealed by one of the parties, taking the case to a second round of trial. Thus, it can take a long time for a final decision to be made.
There are few precedents for cases involving the international, Cuban, and British legal frameworks. Therefore, the decision, if it becomes final, may set a precedent for future litigation in London courts, prompting experts in the field from around the world to follow the case closely.
“What is being discussed in the lawsuit is not whether Cuba has to pay. Because Cuba does not fail to recognize that it has to pay that debt. What is being discussed is whether the CRF I entity, as the vulture fund is called, is a valid creditor. If the court decides that it is a valid creditor, then we have to go to another trial where the merits of the case will be debated. That is, Cuba’s duty to pay the debt, and that Cuba has not met the deadlines,” says Ernesto Moreira, a law professor at the University of Havana, in an interview with Brasil de Fato.
Currently, according to the latest report published by the International Monetary Fund (IMF) and the Institute of International Finance, the volume of debt issued by all countries is around 350% of the world GDP. According to the same report, this situation in the current context of economic recession could trigger a new global debt crisis.
What is CRF I Ltd. and what does it claim?
CRF I Ltd. is an offshore investment fund incorporated in 2009 in the Cayman Islands, a a British overseas territory in the Caribbean, famous for being a tax haven. The fund’s chairman is David Charters and it is currently part of the London Club, an informal group for private international lenders.
This investment fund claims that in 2019 it bought the rights to the debts incurred by the Banco Nacional de Cuba (BNC) with Crédit Lyonnais and Istituto Bancario Italiano in 1984, when the BNC was a central bank. The loan was taken out in German Marks, a currency that no longer exists, being declared in default by Fidel Castro’s government after the fall of the Soviet Union.
In those years, this debt was incurred for the equivalent of USD $15 million. According to CRF I Ltd.’s own calculations, the sum of the debt is now about USD $78 million, with interest.
As proof of the purchase made in 2019, the investment fund claims to have a document issued by a former BNC employee, who allegedly gave the Bank’s—and therefore the Cuban state’s—consent for his rights as a creditor to be transferred in favor of CRF.
At the same time, the fund claims to have tried to negotiate with Cuba after it obtained the debt bonds. The tax haven-based fund accuses the Cuban government of having refused to negotiate a “rational and mutually convenient agreement.” This version has been repeated by most of the international press.
Why doesn’t Cuba accept the CRF as a legitimate creditor?
Cuba argues that the CRF I Ltd. has never been a creditor of the country, nor is it at present. Havana argues that it has never gone into debt with the investment fund (an issue the two sides maintain). Furthermore, it argues that obtaining ownership of the debt in 2019—which CRF claims to have—was not valid because it did not comply with the corresponding legal requirements and also used illegal mechanisms to obtain this documentation.
According to the Cuban government, the debt contracted with Crédit Lyonnais and Istituto Bancario Italiano in 1984 by the Banco Nacional Cubano (BNC) was made at a time when the institution acted as a Central Bank and had powers to act on behalf of the Cuban state. However, when subscribing to these two financial debt instruments, which are the subject of the lawsuit, it was agreed that if creditors wished to assign their rights as creditors of these public debts, they would have to inform the BNC and the Cuban state to obtain their consent.
In 1997, Cuban regulations reformed the BNC, obliging the organization to request authorization from the Ministry of Finance and Prices and the Council of Ministers to approve the cession of public debt and guarantees granted by the State.
In this regard, the Cuban state claims that the debt ownership documents held by CRF I Ltd. are not valid, since these documents do not have the institutions’ endorsement.
The document presented by CRF I Ltd. bears only the signature of Raúl Olivera Lozano, who was the director of operations of the Cuban National Bank. Lozano would have signed the authorization to unilaterally assign the creditor’s rights without the consent of the Cuban state, as established by Cuban law.
Lozano has been serving a prison sentence in Cuba since 2021, after being found guilty of corruption for receiving bribes—and CRF I Ltd.’s promise of a £25,000 payment—in exchange for illegally facilitating the process of transferring creditor rights. Raul Olivera Lozano himself testified to this effect, virtually, during the trial in London.
Is CRF I Ltd. a vulture fund?
Vulture funds are hedge funds. They engage in buying subprime debt securities at below par values. They then litigate in foreign courts for payment for these securities above the value at which they were purchased. Hence their speculative nature.
The chairman of CRF I Ltd, David Charters, told the press he would not admit to the label “vulture fund” as the investment group he chairs is significantly smaller than the powerful Elliott Management—which in 2016 litigated against Argentina in a landmark case. However, vulture status is not determined by the size of the group, but by its activity.
During the trial, CRF I Ltd. consultant Jeetkumar Gordhandas admitted that he asked the National Bank of Cuba (BNC) to recognize his investment fund as a creditor of Cuban sovereign debt “with the sole purpose of initiating the present legal action to force its payment.” Gordhandas’ statements came after 11,000 new documents belonging to the investment group, which had not been disclosed before, were made public. Among the documents was a communication from a CRF executive informing his clients that the purpose of acquiring the two Cuban debt securities was to sue the country and force it to pay. In the same communication, it was stated that the lawsuit would close Cuba’s access to international financial markets, as it would show the Cuban state as a bad faith actor unwilling to negotiate.
After the oral phase of the trial, Cuban Justice Minister Oscar Manuel Silvera told the Financial Times newspaper that Cuba is willing to talk with legitimate creditors about the payment of its foreign debt. “The position of our country is that we recognize our legitimate debts and our legitimate creditors. Our position is, first of all, to recognize them, to be transparent, to always talk to our creditors and to seek mutually favorable terms to meet these obligations,” Silvera stressed.
This article was originally published in Portuguese on Brasil de Fato.