By Mary Alice Miller
When Puerto Rico defaulted on its debt a few years ago in the aftermath of Hurricane Maria in 2017, family and friends in New York watched as the territory’s schools and hospitals closed and people lost their pensions. Several high-risk hedge funds had bought much of the country’s assets.

Puerto Rico’s municipal debt is estimated at $74 billion, not counting pension obligations.
The crisis was caused in large part by hedge funds that invest in sovereign debt issued by countries in financial distress, extracting billions of dollars in profit from the pain and suffering of people living in those countries.

“What we’ve seen is after these vulture funds purchase all this debt, they go to these countries and force repayment (by suing often in New York courts),” González-Rojas explained.

“We’ve seen public universities de-funded, particularly in Puerto Rico. We’ve seen social services slashed. We’ve seen health care facilities shut down and we’ve seen pensions cut. And it’s happened not just in Puerto Rico, but in places like Venezuela, Ecuador, Peru,” said González-Rojas. “Often, we wonder why there’s a migrant crisis. We’ve allowed Wall Street to destabilize these economies.”

Countries issue bonds to raise money for infrastructure or other public expenses, promising to repay the buyers later with added interest. In recent decades, some hedge funds adopted strategies of buying distressed sovereign debt and then aggressively suing for repayment when countries default, often in New York courts.
Puerto Rico is not unique. Argentina, Equador, Panama, Peru, and Republic of Congo have also been targeted by vulture funds under New York State law.

New York State plays a major role in predatory vulture fund ability to extract resources from poor, developing countries, draining countries’
resources and further prevents their efforts to restructure debts.

Champerty is a long-standing legal principle that prohibits buying debt simply to sue and bars profiteering through litigation. In 2004, hedge funds won a carve out in New York law: if the debt claim is over $500,000, champerty doesn’t apply.

The carve out allows predatory investors to seek profit from litigation against debt-distressed countries in New York State courts. Normally, sovereign debt cases are handled out of court, but hedge funds choose instead to sue in New York State.
Over half of all sovereign debt bonds are governed by New York State laws. These bonds, representing tens of trillions of dollars worth of debt held by countries around the world, are issued under New York State law.

The state is seen as the best jurisdiction for sovereign debt, but the carve out allow abusive lawsuits to take place, undermining that status.
The International Monetary Fund estimates that nearly 70 countries are in or at risk of debt distress. As vulture funds standardize their practices with an extensive network of high-powered lawyers, trade associations, lobbyists, public relations experts, universities, and cultural institutions, increasing numbers of countries are at risk of being sued in New York.
But, New York State can disrupt these predatory practices.

In the aftermath of Puerto Rico’s crisis, State Senator Liz Kruger and Assembly member Jessica Gonzalez-Rojas introduced legislation that would prohibit the purchasing of financial instruments solely for the purpose of litigation.
The bill would restore champerty protection by 1) removing the safe harbor shielding of $500,000 or greater claims from New York judiciary law, and 2) lower New York’s punitive prejudgement interest rate.

The bill was narrowly crafted to apply only to notoriously litigious investors, ensuring that no impact on conventional or cooperative investors who engage in good-faith workouts. The legislation would impact about $800 billion in debt from developing countries.

State Senator Liz Kruger outlined the purpose of the bill.
“It basically says you can’t buy up a country’s debt because they’ve defaulted just because you want to buy it for 10 cents on the dollar or pennies on the dollar and then litigate to try to get a dollar for a dollar out of countries who don’t have the money to pay back,” said Kruger.

Kruger continued, “When we help to destroy other countries’ economies that means they can’t provide education, infrastructure, clean water, electricity, and health care to their people. And sometimes the government then crumbles and collapses, and they go into Civil War situations. Not only do the people of that country suffer but in fact the United States of America suffers because we’re seen as the ones who are responsible for all this all over the world because we’re letting it happen.

“We always wonder why are there all these migrants fighting to get here. A lot of them come from the countries that there is no longer a functioning government or infrastructure for them to be able to take care of themselves and their families,” said Kruger. “The domino effect of this unbelievably selfish model of finance can’t be allowed to continue.”

Kruger concluded by saying, “My father was an international investment banker his whole life. He would be mortified if he was alive. He would go ‘That’s not what banking’s about , that’s not what cross international investment in about. It’s about ensuring that you are building things, that you are adding to the economic prosperity of places outside of the United States of America. You are not doing this to destroy countries, create international nightmares and havoc for a couple of people who figured out how to game our system for personal wealth.’”

Kruger added, “If dad was alive, he would stand here and say ‘Shut them down. Stop this from happening.’ And so we’re shutting them down. That’s exactly what we’re trying to do in the state legislature as much as we can.”