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England and Wales High Court (Commercial Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> Metlife Seguros De Retiro S.A. v JPMorgan Chase Bank, National Association  EWHC 463 (Comm) (26 February 2015)
Cite as:  EWHC 463 (Comm)
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QUEEN'S BENCH DIVISION
Strand, London, WC2A 2LL
B e f o r e :
| METLIFE SEGUROS DE RETIRO S.A.
|- and -
|JPMORGAN CHASE BANK, NATIONAL ASSOCIATION
David Wolfson QC and Patricia Burns (instructed by Allen & Overy LLP ) for the Defendant
Hearing dates: 20, 21, 22, 26, 27 January and 2, 3 February 2015
Crown Copyright ©
Mr Justice Burton :
"in respect of any day, the Argentine Coeficiente de Estabilización de Referencia published in respect of such day by the Banco Central de la Republica Argentina ("the BCRA") as reported [on its] website. The CER is calculated according to Resolution 47/2002 of the Argentine Ministry of Economy."
Resolution 47/2002 contained a formula for calculating the CER which involves using monthly figures from the "Índice de Precios al Consumidor", meaning Argentina's monthly Consumer Price Index ("CPI") for Buenos Aires City and Greater Buenos Aires ("GBA"), calculated and published by the "Instituto Nacional de Estadística y Censos", the Argentine Institute of National Statistics, known as INDEC. INDEC announced the monthly CPI on its website by the seventh day of the following month. The BCRA used that figure to announce the CER on its website, which it did on a daily basis. At the time of the issue of the Notes the method of calculation pursuant to Resolution 47/2002 which was in place, and had been since October 2000, was INDEC's Methodology 13, but this is nowhere referred to in the Notes.
(i) "CER Event means the occurrence of one or more of the following:
(a) the CER is not timely announced by the BCRA; or
(b) the CER is replaced by a successor index; or
(c) the CER is no longer published and has not been replaced by a successor index; or
(d) The Republic of Argentina, or any of its agencies, instrumentalities or entities (including, without limitation, the BCRA) by means of any law, regulation, ruling, directive or interpretation whether or not having the force of law, takes any action which legally or de facto prevents or has the effect of restricting or limiting the calculation or announcement of the CER or any of the values used to determine the CER."
("The CER Event Provision").
(ii) "If a CER Event has occurred and is continuing on the ARS Valuation Date then CERFINAL shall be determined and CERINITIAL may be recalculated as for January 23, 2006 if determined to be necessary by the Calculation Agent, such determination and recalculation (if any) to be made by the Calculation Agent in good faith and in a commercially reasonable manner based on such available market information and other information as it deems necessary and relevant, including the new calculation method applicable to (i) the successor index or to (ii) the securities issued by the Republic of Argentina linked to CER or other obligations of the Central Bank linked to CER.
Notwithstanding any provision in the Notes that the determinations of the Calculation Agent are binding absent wilful default, bad faith or manifest error, the Calculation Agent's determination of CERFINAL or CERINITIAL after the occurrence of a CER Event will only be binding if such determination is in good faith and in a commercially reasonable manner."
("The CER Calculation Provision").
(i) The INDEC CPI had (prior to the events here in question) accurately and reliably recorded inflation in GBA, and has done so since 1924. It is effectively used as an index measuring consumer expenditure and inflation nationally in Argentina, though there are in fact separate indices for 15 Provinces of Argentina.
(ii) Throughout the term of the Notes INDEC published a figure for the CPI on the seventh day of every month and the BCRA published a daily figure on its website for the CER.
(iii) Throughout the term of the Notes, Resolution 47/2002 continued to govern the calculation of the CER (see paragraph 2 above).
(iv) Throughout the term of the Notes, and to date, the CER continues to be used in securities issued by and in Argentina, and other financial instruments, and the experts for both sides do not know of any case in which a provision for application of the CER index has not been followed.
(v) The actions taken as described below are accepted to be actions by "the Republic of Argentina or any of its agencies, instrumentalities or entities".
(vi) In the circumstances set out in paragraph 7 above, it is not suggested that the Provisions are standard terms.
"34. Ms Trabuchi and I attended the meeting, which lasted approximately two and a half hours. Mr Moreno asked questions throughout the meeting about specific items included in INDEC CPI, and about the methodology for calculating INDEC CPI. Whatever answers we gave, he laughed at us and was abusive throughout the meeting, saying that we were incompetent. He also said at that meeting that his department wanted to lower inflation, specifically because of the effect it had on CER-linked government bonds. The reason for this was that if the CER was low, the payments the government had to make to international bondholders was much lower than it would have been if the INDEC CPI reflected true inflation in Argentina. Moreno said that he wanted all the items in the basket at zero per cent inflation. He also said that if we did not lower the INDEC CPI we were acting against the interests of the country and reminded us that he was a Secretary of State. In my opinion he expected us to comply with his instructions.
35. The meeting finished with Ms Trabuchi saying that while Mr Moreno might not agree with our methodology, we did our best from a technical perspective; Mr Moreno's response to this was to say that the dictators in Argentina in the 1970s "did their best". He went on to say that if we did not provide him with the data he requested, he would do "as they did in the old Peron times", and sit down at the front entrance to INDEC and take each CPI surveyor away to "have a coffee with him" as they came into work at the INDEC building in the morning. I took this to be a direct threat against the confidentiality and safety of the data that INDEC surveyors delivered each morning (he implied he would personally alter such data) and, consequently, that he was threatening to manipulate the INDEC CPI."
"43. Mrs Paglieri seemed to me to be concerned with reaching a number for INDEC CPI for January 2007 that she could report to the Minister of Economy which matched the Minister for Economy's expectations, not with the calculation and preparation of a true and accurate INDEC CPI figure prepared in accordance with Methodology 13 and reflecting data that INDEC had captured."
"INDEC employees reported serious manipulation by the authorities of that national organisation. Through a press release the employees of the Consumer Price Index department indicated that since Monday 30 April, Beatriz Paglieri and her three trusted colleagues . . . have been deleting prices from the CPI database since April."
Mr Werning stated in the JPMorgan Global Data Watch for Argentina on 8 June 2007:
"Because the official statistics institute methodological intervention remains firmly in place, CPI measurement distortions continued in May, much as expected. . . . Seasonal patterns suggest that CPI inflation will remain modest in June . . . Following that, a pickup should be expected in July . . . the magnitude of the pickup will likely remain capped by INDEC's methodological changes, similar to what happened last January. The extent of CPI inflation underreporting - which according to JP Morgan estimates stood close to 40% in 1Q - gets harder to estimate as time goes by and distortions are amplified."
Notwithstanding the reports, it seems from an exchange of JPMorgan emails in September 2007 that MetLife did not wish to unwind or restructure their Notes, because they could not be 'underinvested' in CER.
"We believe that the Argentine government has taken certain actions in the course of the last two years by means of . . . (INDEC) to manipulate the . . . (CPI). Such manipulation of the CPI affects the CER as reported by the [BCRA], which in turn adjusts the principal due under our Note at maturity. Since INDEC has taken action which limits the appropriate calculation of the CER and affects values used to determine the CER, such as the CPI, we expect that you, as Calculation Agent, determine the [FRA] with respect to the ARS Valuation Date in a commercially reasonable manner as mandated by the terms of the Note and not follow the official but erroneous CER being published by [BCRA] or any other arm of the Argentine government."
By solicitor's letter dated 8 February 2011 the Claimant asserted that a CER Event had occurred and was continuing at the ARS Valuation Date "because the Argentinean Government has during the term of the Notes taken action which has legally and/or de facto had the effect of restricting or limiting the calculation of the CER and/or values used to determine the CER". The measures which were relied upon as establishing a CER Event were in that letter listed as:
"? Reducing the number of items considered by INDEC in the Consumer Price Index upon which the CER is based from 818 to 440.
? Altering the weighting of the items used to determine the Consumer Price Index upon which the CER is based;
? Restricting the geographic area from which prices are taken to compile the Consumer Price Index upon which the CER is based."
All these matters in fact arose from the 2008 Update. There is no mention at that time of either the use of the patch or of zero prices. JPMorgan by letter dated 1 March 2011 rejected the suggestion that there had been a CER Event. That is now for my determination.
(i) The Claimant submits that this deals, and is intended to deal, with a quite different scenario. It is not a question of the CER being unavailable, because it continues to be calculated and published, but that through Government action the figures published have been distorted or fabricated. The Claimant submits that the actions by the Government and/or by INDEC in paragraphs 11 to 22 above have, if not prevented, certainly had the effect of restricting or limiting the calculation of the CER and/or the CPI. This amounted to a CER Event, or series of CER Events, which continued until (and after) February 2011, even though the CER ostensibly continued to be published. The Calculation Agent was thus obliged to re-determine or recalculate CERFINAL by reference to what it would or should have been but for the intervention by the Government, and, as neither of the sources of information specified in the last five lines would be appropriate, there being no successor index, and the Government and BCRA securities linked to CER continuing to be so linked to the published CER, the Calculation Agent was obliged to determine, without reference to them, an alternative figure.
(ii) The Defendant's case is that there are not two severable parts of sub-paragraph (d), but the whole of (d) is, like the other 3 sub-paragraphs, an example of unavailability of the CER, as a result of Government action having prevented or limited the calculation or announcement of the CER or CPI. These being CER-Linked Notes, if the CER, and the underlying CPI, are still calculated by INDEC and published by the BCRA (and used and adopted by the Government and BCRA CER-linked securities) then there is no place for fresh determination of the CER, and to do so is outside the responsibility of the Calculation Agent.
(a) INDEC changed from surveying prices paid by consumers to using "estimated prices" provided by Ministries and State Secretaries of the Argentine Republic, such as the Tourism Secretariat and the Ministry of Health.
(b) The amount of "imputed data" (being data which was not based on actual prices paid by consumers but instead based on figures chosen by INDEC) increased from approximately 10% to 30%.
(c) INDEC changed the way in which it classified and identified "outliers" (i.e. atypical prices to be excluded from the calculation of the CPI), thereby excluding significantly more prices than had previously been the case by removing high outliers while low outliers were left in.
(d) INDEC made changes to its computer systems and/or programmes so as to monitor the variation in prices of goods and services from the previous month and place a cap on the price increase and such capped prices were then used in the calculation of the CPI.
(e) INDEC removed some categories or products and items and allocated a zero price to some items, which had not been done previously.
(f) Whereas INDEC used to survey over 800 items each month, this was reduced to 440 items by, inter alia, removing higher value goods which had higher value inflation.
(g) Whereas INDEC used to obtain approximately 90,000 prices, this was reduced to fewer than 30,000.
(h) The weightings applied to the basket of goods were changed with greater weight being attributed to lower value items with low inflation.
(i) INDEC introduced new "seasonal baskets" and a new method for calculating the index for such baskets each month by using a moving average of the past 12 months. Different fruit and vegetable baskets for each month were chosen on the basis that they had the same calorific content, whereas INDEC had previously selected baskets based on consumption.
(i) the evidence of Ms Bevacqua and the BA City Index, referred to in paragraph 21 above;
(ii) the fact that both sides' experts agree that inflation was substantially under-recorded at least until February 2011, although there is a dispute about precisely by how much;
(iii) the fact that there was no 'spike' in the CER records of inflation before 2011, which indicates that the methods must have continued, because otherwise there would have been a substantial 'catch up' of increased prices;
(iv) the, albeit unparticularised, resolution of censure by the IMF.
The Primary Actions, alternatively all these actions, continuing as above, constitute CER Events, by virtue of falling within the Claimant's construction of (d)(i).
(i) address clause 22 of the Final Terms (which contains both the CER Event Provision and the CER Calculation Provision) as a whole, taking account of it all if possible, if consistent with the approach set out above.
(ii) address the CER Event Provision as a whole, similarly as above.
(iii) take full account, if I can assess it, of the commercial purpose of the Notes.
(iv) take into account the factual matrix, namely those matters which were either in the public domain or had 'crossed the line' between the parties.
(i) The commercial purpose of the Notes which the Claimant asserts is to ensure a return for the Claimant referable to the increase in inflation over the period of the Notes in the GBA. Hence the CER Index is only a reflection of that inflation, and must be, as Mr Taylor submits, reliable, and the CPI, upon which it is based, must also be reliable and based upon representative prices: and is expressly to be replaced/overridden if it is not.
(ii) The commercial purpose of the Notes on the Defendant's case is to ensure a return for the Claimant by reference to the CER, to which they are linked, and the only need for 'back up' is if for some reason the CER is not calculated or published, i.e. not available, in which case (alone) a substitute or replacement CER will be found. Mr Wolfson submits that if the CER were manipulated, the parties are nevertheless bound to it, not surprisingly where the CPI has been reliable and unchallenged since 1924 and was and is a universally recognised inflation index.
"(i) Argentine Pesos Exchange Rate RiskThe amount of any payment on the Notes of principal in U.S. Dollars will be affected by the exchange rate of Argentine Pesos to U.S. Dollars, since the underlying amounts by reference to which U.S. Dollar amounts are determined are in Argentine Pesos. The USD equivalent of the ARS Nominal Amount adjusted by the CER rate and any payments due under the Notes will be based on the exchange rate of Argentine Pesos to U.S. Dollars and that of the CER rate. Currency exchange rates and inflation rates may be volatile and will affect the USD equivalent return to the holder of the Notes. The movement of the currency exchange rates and of the CER rate could result in any amount due under the Notes being less than the initial USD paid for the Notes. As a result, a holder could lose a substantial amount of its investment in these Notes.
(ii) Potentially Limited MarketThere may exist at times only limited markets for the Notes and for the obligations linked to the inflation index to which the Notes are linked, resulting in low or non-existent volumes of trading in the Notes and such obligations, and therefore a lack of liquidity and price volatility of the Notes and such obligations.
(iii) Noteholder Analysis of RiskThe Notes are complex instruments which involve a high degree of risk and are suitable for purchase only by sophisticated investors who are capable of understanding the risks involved. In particular, the Notes should not be purchased by or sold to individuals and other non-expert investors. Each prospective purchaser of Notes must determine, based on its own independent review of the business, financial condition, prospects, creditworthiness, status and affairs of the Issuer, the CER rate, the ARS/USD exchange rate and the Notes and of the rights attaching to the Notes (without reliance upon the Issuer or any Dealer or any of their affiliates) and such professional advice as it deems appropriate under the circumstances.
(iv) Because the Calculation Agent is an affiliate of the Issuer, potential conflicts of interest may exist between the Calculation Agent and the Noteholders of the Notes, including with respect to certain determinations and judgments that the Calculation Agent must make as to the amount (if any) due on redemption of the Notes.
(v) The terms of the Notes entitle the Calculation Agent to exercise discretion in determining an applicable exchange rate. Although the Calculation Agent will make any such determination in good faith, any such determination may have adverse effects on the market prices, rates or other market factors underlying the Notes. In addition, different dealers may arrive at different rates. Consequently, the Calculation Agent cannot and does not represent to investors that the rates, determined by the Calculation Agent will be the most favourable rates to investors or the rates that are available in the market generally."
(i) The CPI/CER was a reliable measure of inflation in the GBA.
(ii) Argentina had had in recent years what Mr Patten agreed to have been a "chequered financial history".
(iii) With regard to the Risk Factors referred to above, it was stated that "currency exchange rates and inflation rates may be volatile": there was no risk warning as to the possible manipulation of the CPI.
The Claimant refers to the fact that Methodology 13 was in place at the time of the Notes: Mr Taylor accepts that there is no mention of it in the Notes, and it is not suggested that it was in any way a term or condition of the Notes that it should remain the Methodology. The Claimant however refers to the fact that it was a reliable Methodology, including the statement in its Introduction:
"Operationally, the CPI is an indicator that seeks to reduce large amounts of data to manageable sizes, in order to obtain useful measurements as accurate as possible, always within the scope of its limitations. Its design is consistent with the purpose of achieving a reliable, accurate, representative, understandable, coherent, comparable, useful, and timely indicator. . .
A price index's statistical reliability depends upon the representativeness of collected price information, on the representativeness of the weights attached to the goods and services included in the basket, and on the calculation formulas."
(i) The Claimant's first item is not in contention.
(ii) The second is submitted to be irrelevant, where there has never been any doubt about the CER.
(iii) As to the third, the passage in the quotation from the "Risk Factors", set out in paragraph 33(i) above, plainly relates to the volatility of the CER rate, which is the rate referred to twice in that paragraph (and further in paragraph 33(iii)), and not any kind of reference to some different method of calculating inflation. The Defendant agreed that there was no risk warning with regard to the CER, but there is also no warning of any risk in relation to the calculation or determination to be carried out by the Calculation Agent with regard to CER, otherwise referred to in paragraph 33(v) above, whereas there is such a reference in relation to the Calculation Agent's discretion in determining an applicable exchange rate (as to which there is a detailed methodology set out in Annex 1 to the Notes).
(iv) The Defendant notes that it is clear from the experts' evidence that they agree that inflation-linked financial instruments are often used as a hedge or offset for inflation-linked liabilities; and that a pension/insurance company such as the Claimant trading in Argentina would have CER-linked liabilities: and that such was the case in relation to the Claimant is clear from the Claimant's own Submission to the SEC to that effect in 2005. Reference was made by Mr Wolfson to a post-contractual note of August 2007 of a meeting where the Claimant is referring to CPI impacting "equally assets and liabilities", which he submits is admissible, particularly in the absence of any oral evidence from the Claimant, as corroborating the obvious inference of such an offset of CER-linked assets and CER-linked liabilities.
(v) Finally Mr Wolfson refers to the tradability of the Notes, albeit limited as set out in paragraph 33(ii) above, and to the fact that in Part B of the Notes "Reasons for the Offer" are recited as "including hedging arrangements".
The parties' respective arguments
(i) The meaning for which it contends of the words "takes any action which legally or de facto prevents or has the effect of restricting or limiting the calculation or announcement of CER or any of the values used to determine the CER" is the natural meaning of the words: an intervention by a Government entity which causes an interference with the announcement or calculation by preventing, restricting or limiting it. So far as calculation is concerned, there is a restriction or limitation of the calculation (Mr Taylor does not primarily rely on preventing) if the calculation is not allowed to take its normal course, by being manipulated e.g. by the patch or the zero prices.
(ii) If the other sub-paragraphs (a), (b) and (c), and what I have called (d)(ii) (relating to announcement) deal with availability of the CER, (d)(i) deals with reliability. (d) is the only sub-paragraph which brings in specific reference to actions of Government entities, with its very wide definition so as to catch any intervention, and to the CPI (it is common ground that the CPI is what is referred to by the reference to values (in the two previous months) used to determine the CER). (d)(i) is the only sub-paragraph which addresses intervention/manipulation/unreliability, but it is that upon which the Claimant rests its case.
(iii) This ensures that the CER remains reliable. There will be a CER Event if the CER fails to comply with internationally accepted guidelines such as those laid down by the International Labour Organisation ("ILO").
(iv) The CER by virtue of the Primary Actions and/or the Secondary Actions became no longer representative of consumer expenditure in the GBA, which was the commercial purpose of the Notes, as set out in paragraph 32(i) above, and hence did not record actual inflation in the GBA.
(v) Any change in methodology for calculating the CPI must be principled, and the 2008 Update was not principled, because of the Secondary Actions set out in paragraph 26 above.
(vi) In any event, on any basis, the Primary Actions were unprincipled and in breach of any international standards, and constituted manipulation of the CER, and hence restricted or limited its calculation.
(vii) A CER Event might involve an inaccurate CER either by causing it to be too low, as here (and thus leading to more being payable by the Defendant) or too high (leading to less being payable by the Defendant). Further, if it involves an interference with (restriction/limitation of) the calculation, it could have a de minimis effect, but Mr Taylor submitted that even if the published CER was rendered unreliable by a small amount, as soon as the interference has occurred the CPI would no longer be representative of consumption, and there is a CER Event, and it is then up to the Calculation Agent to do what he concludes to be reasonably commercial in the circumstances.
(viii) It was the evidence of Mr Goldenberg, the Claimant's expert, that the Calculation Agent must act on the basis of the information available to him at the calculation date (Day 2/123). However Mr Taylor did not appear to adopt that in his final reply submissions, and after submitting (Day 7/209) that for commercial certainty the answer would be that subsequent information could not be used if it was not possible to determine that there was a CER Event on the date that the Notes matured, he crystallised his submission (at Day 7/211) as rather being that a party would be entitled, if there was a dispute as to what should be paid, to bring later to a court evidence which was in existence, even though he did not have it prior to the maturity of the Notes. On the other hand, notwithstanding the discussion as to what would or could be put before the Calculation Agent, Mr Taylor was clear (Day 6/53-61) that it was not for the Calculation Agent to resolve a dispute about whether there was a CER Event.
(ix) There was dispute between the parties as to what were called in the course of argument "the last five lines" - as referred to in paragraph 24 above - being what the Calculation Agent was directed to include in his consideration of a determination and/or recalculation of the CER, and how they could be accommodated in Mr Taylor's case. Mr Taylor accepted and asserted that the last five lines did not apply to (d)(i), i.e. a situation relating to restriction or limitation of the calculation of the CER by virtue of its having become unreliable, although it would apply to (a), (b), (c) and (d)(ii). In relation to a (d)(i) situation the Calculation Agent would not consider a new calculation method by reference to a successor index or to the Government etc. securities linked to CER, since the already existing CER would be disregarded as having been manipulated.
It is really the first of these nine submissions which is the crux of Mr Taylor's case, namely that this part of sub-paragraph (d) is intended to address the very case before me, and the rest of his submissions are largely defensive, addressing the arguments raised by Mr Wolfson, to which I now turn.
(i) There is a natural meaning of (d), which deals with Government interventions which prevent restrict or limit the announcement or calculation of the CER or CPI, and which relates to availability: i.e. if the Government restricts or limits announcement or calculation of the CER or CPI, then there will be no CER or CPI available, at any rate at the time when it is required. There is no call for any other meaning of (d)(i). It is no answer that this leads to duplication of result because a (d)(ii) scenario may well also fall within (a) or (c), since there is nothing offensive about duplication, and indeed (a), (c) and (d)(i) and (ii) may all be duplicative. It is an example of 'belt and braces' drafting: see Arbuthnott per Bingham LJ at 1399F: "in drafting a clause of this kind a draftsman's primary concern is not to avoid repetition . . . but at all costs to avoid leaving loopholes which an unscrupulous party might exploit, even if this does lead to repetition."
(ii) Albeit that it was my phraseology which led to the use of the terms (d)(i) and (d)(ii), nevertheless it was based upon Mr Taylor's acceptance and submission that (d) did address two different scenarios. Mr Wolfson submits that it is wholly inappropriate to consider that (a), (b), (c) and (d)(ii) deal with availability and (d)(i) deals with unreliability. There is no explanation why (d)(i) should be what Mr Wolfson calls sandwiched in that way. If there really were intended to be a provision dealing with the separate issue of reliability, it would have been dealt with in a separate sub-paragraph, not sandwiched in among provisions dealing with availability.
(iii) Mr Wolfson asks, if the Claimant's construction was correct, what test is to apply to reliability, or compliance with international guidelines? How is the Calculation Agent (or the Court) to apply those standards? Detailed instruction is given, in Annex 1 to the Notes, as to how to approach disputes about the exchange rate, yet in what is accepted, if indeed it does deal with reliability, to be a bespoke provision, not found in any other market disruption clause by either expert, no method is provided for the resolution of such a dispute.
(iv) There is no rational explanation whatever for the suggestion that what the parties were intending was not to follow CER (with its plethora of CER-linked securities and liabilities) but inflation in the GBA: there is no measure of 'actual' inflation except by reference to the CER, and the GBA is of no significance except as forming the basis for the CER. The reference which Mr Taylor makes to a suggested concession in that regard in Mr Wolfson's Further Information dated 10 January 2014 at paragraph 8, is submitted (and I find) not to be so, but rather to be a statement relating to the quantum issue, with which I shall deal below, namely the Defendant's then case that in looking for a substitute index for CER, it would be to an index of consumer prices in the Buenos Aires region, rather than indices relating to other Provinces, to which regard should be given.
(v) As for the Claimant's case in relation to the Secondary Actions, all of which were contained in the published 2008 Update, again the question is asked as to the test by which whether such changes were unprincipled is to be decided. There are bound, or at any rate likely, to be changes in methodology over a period of five years, and a change in methodology of itself cannot be sufficient. The ILO allows a wide discretion: see for example clauses 1.116-117 of the ILO Consumer Price Index Manual (2004). It is accepted (as set out in paragraph 34 above) that the continued existence of Methodology 13 is not a contractual term; the most that could be said would be that Resolution 47/2002 would be contractual, and that is not suggested to have been affected. The only Survey which is contractual in the Notes is that set out in Annex 1 in relation to calculation of the exchange rate, and resolution of disputes which the Calculation Agent might need to resolve, being the EMTA ARS Industry Survey Rate.
(vi) As for the Primary Actions, the instant case is obviously fact sensitive; facts cannot dictate the answer to the construction issue. The distortions are described variously as gross or blatant, and although even Ms Bevacqua in her evidence accepted that, because the detailed results were not all published, it was not easy to get at the true position, certainly enough was published in the various Reports at least to draw an inference as to the existence and continuation of these Actions. However, Mr Wolfson asks, what if the actions said to constitute a CER Event are not blatant and not published? There is no history at all of previous manipulation of the CER or CPI so as to justify providing against it in the Notes.
(vii) The provision whereby the amount to be paid could vary upwards or downwards from the published CER rate would create certainty for neither party to the Notes. As to the suggestion as to de minimis, Mr Wolfson submits that there is no justification in the language of the Notes for the Claimant's distinction between a restriction or limitation which has no effect on the CPI figure (which would not be a CER Event) and a restriction or limitation which has a very small effect on the CPI figure (which would be a CER Event, but one which was then left to the discretion of the Calculation Agent). He submits the suggested scheme to be wholly unworkable.
(viii) Mr Wolfson submits that the role of the Calculation Agent is crucial in relation to the choice between the two parties' constructions. He agrees with Mr Taylor that there is no call for the Calculation Agent to decide such a dispute as Mr Taylor postulates in relation to a CER Event, but this is because that is no part of his role. He simply has to decide on a replacement CER in the event of unavailability of the one which governs the Notes. On the case for the Claimant, the Calculation Agent would need to know what the CER Event was, what effect it had and whether it was still continuing. In this case, although for the purposes of construction neither side can rely on the facts of this case, the letters to the Calculation Agent did not provide him with sufficient information, and certainly did not refer to the Primary Actions now relied upon, although Mr Taylor submitted that as the Calculation Agent was (a different office of) JPMorgan it would at least have known what Mr Werning knew. But what of another case? In any event, there is no risk of a misjudgment by the Calculation Agent in relation to CER provided for in the contractual list of "Risk Factors", and in contrast to the provisions in relation to exchange rate determination in Annex 1, no methodology for its determination. The 48 hours which, it is common ground, were provided for calculation by the Calculation Agent (although extendable by reference to the 30 day default period) would be apt for calculation of a replacement index, given the easy availability of the necessary figures, as is agreed between the experts, but not for the resolution of a dispute about a CER Event. It is not surprising that Mr Patten, who has acted regularly as a Calculation Agent, has never had to deal with such a determination.
(ix) As to the "last five lines", Mr Wolfson submits that they ensure that the derivative nature of the instrument is maintained. As he submits (paragraph 83 of his Closing Submissions), the Notes are linked to the CER, performing the same economic function as a CER-linked Government bond, but the investor avoids assuming sovereign risk and obtains instead the risk of JPMorgan as its counterparty. For that reason, if the CER is unavailable, the Calculation Agent will naturally want to look - and is directed to look – at what is happening to other CER-linked instruments in the market: if there is a successor index to replace the CER, that is the first point of call, and if there is not, the Calculation Agent should look at what is happening to CER-linked Government bonds and Central Bank securities. The Claimant's construction, that the last five lines would apply to all the other scenarios but would not apply to (d)(i), is a strained and inappropriate construction, and at the very least would need an implication of "(if appropriate)".
(x) The Defendant has additional arguments. If (d)(i) has the effect attributed to it:(a) It constitutes a risk which Mr Wolfson submits no bank would have accepted (Mr Goldenberg accepted (Day 2/181) that it must mean that the Bank either "just missed it" or "completely undervalued the risk they were taking").(b) It would make the Notes very difficult if not impossible to trade (and where third parties may be involved, certainty of construction is required) or to hedge (see paragraph 35(v) above).(c) Given that it is likely if not certain (as per paragraph 35(iv) above) that the Claimant would have had substantial CER-linked liabilities, adopting the Claimant's construction in this case would give it an unwarranted windfall, in that its liabilities would remain pegged to the official CER, while its return would increase by being un-pegged from the official CER.
(i) Whether to adopt Dr Sandleris's Linear Prediction Methodology, and if so whether it could or should in some way be 'smoothed'.
(ii) If not, whether to adopt a simple or weighted average when addressing the figures derived from the different Provinces.
(iii) Whether to leave out of account one or both of the 2 Provinces referred to above.
(i) Dr Guidotti disagrees with Dr Sandleris that the Prediction Methodology adjusts correctly for the fact that in periods of high inflation Provincial indices assign a higher weighting than GBA to food and beverages, which tend to include higher inflation items. He considers that inclusion of periods of high inflation during the Historic Period leads to inaccuracies for that very reason.
(ii) Dr Guidotti criticises the fact that Dr Sandleris's analysis produces negative coefficients in some Provinces: a negative coefficient between a Province and GBA means that there is the unrealistic result that as the index goes up in that Province it goes down in GBA and vice versa.
(iii) Data for San Luis and Santa Fe are estimated, as above.
(iv) Dr Guidotti demonstrates that the Prediction Methodology did not accurately correlate to INDEC's CPI for the 2 years prior to intervention, when it is common ground it was reliable, whereas his tests are closely aligned with the (then undistorted) INDEC figures over a 4 year period.
(i) I find some force in Dr Guidotti's criticisms set out above.
(ii) I found Dr Guidotti extremely persuasive, and my confidence in Dr Sandleris was somewhat dented by his stubborn refusal to accept the obvious, as referred to in paragraph 9 above.
(iii) The simplicity of the adoption of an average (whether weighted or simple) is of itself attractive. I am inevitably influenced by the fact that if the Calculation Agent were required to do this exercise – and on any basis that would arise in relation to the circumstances referred to in sub-paragraph (c) and (d)(ii) - the compilation of simple or weighted averages would not be a difficult task, as compared with the adoption of the econometric techniques of Dr Sandleris, with or without any dummy. No one, including banks, commenting at the time, when looking at other 'proxies' even considered such methodology.
Simple or weighted averaging
(i) used, and approved of, a proxy based upon 7 Provinces called CENDA 7, which was based on such a weighted average: and
(ii) significantly, in carrying out his earlier calculations based upon only some Provinces, had first performed an exercise to see which Provinces most closely correlated to GBA. This obviously underlined the purpose that any proxy should endeavour to approximate to GBA so far as it could, by avoiding dissimilar Provinces. Now that all (or almost all) the Provinces are being used, I am satisfied that a method must be found to avoid too much weight being given (as it would be by simple averaging) to Provinces which are dissimilar to GBA.
Leaving out Mendoza and Cordoba