- A trial over unpaid Cuban sovereign debt enterted its second week at the UK High Court.
- The debt dates back to the 1980s, when Fidel Castro still ruled Cuba.
- If it loses, Cuba could be on the hook for billions of dollars more.
Illegally recorded videos, chaotic protests and testimony from an imprisoned Cuban bank official marked the first week of a high-stakes trial in the UK High Court between Cuba and an investment fund.
The fund has sued Cuba over tens of millions of dollars' worth of unpaid commercial loans from the 1980s, when Fidel Castro was still ruling the island. The debts are so old they are denominated in German Deutsche Marks, a currency replaced by the euro in 2002. If Cuba loses, it could end up costing the nation billions.
The fund's representatives testified in court on Wednesday and said repeatedly that they did not want to litigate, but that it was a "last resort" after the Cuban government ignored repeated requests to negotiate for a decade.
"For CRF, litigation is unattractive," the fund's chairman, David Charters, said Thursday, the fourth day of the trial. "It's slow, it's expensive, it's time-consuming. But if it's the only way to get the other side to the table, then you have to go down that route."
The trial is seen as a test case. CRF1, formerly known as the Cuba Recovery Fund, owns more than $1 billion in face value of European bank loans extended to Cuba in the late 1970s and early 1980s, which Cuba defaulted on in 1986.
CRF1, which began accumulating the position in 2009, is suing Cuba and its former central bank over only two of the loans they own for more than $70 million dollars. If CRF wins on this small slice of Cuba's total outstanding commercial debt, estimated at $7 billion, it could lead to further lawsuits from other debt holders, with claims against Cuba rising into the billions.
The Cuban team has argued in pretrial court filings and during the trial that the debt was not lawfully transferred or "reassigned" to CFR, which is registered in the Cayman Islands, and has focused on technical aspects of Cuban law arguing that CRF does not have the right to sue Cuba based on Cuban law.
The scene at the court
The trial, which started a week ago, is expected to last until Thursday. Neither representatives for CRF nor the Cuban government responded to interview requests. Once the trial is over, a judgement is expected in two to four months.
It has drawn so many attendees, including press, the judge ordered a second courtroom opened, equipped with a video monitor, to handle overflow.
At least four people recorded videos in the overflow room and posted them online, drawing rebukes from the judge, Sara Cockerill. Recording proceedings in the high court is a violation of UK law. Cockerill demanded more than once that the videos be removed from social media and ordered those who had posted them to appear in court to apologize, or else they'd be charged with contempt of court.
By Wednesday, a frustrated Cockerill said if there were any further breach of the rules regarding recordings, she would shut down the overflow courtroom and force anyone who wants to watch the proceedings "to sit on the floor in here."
Adding to the intrigue: a court attendee who's a dead ringer for Raul Castro's son and Fidel Castro's nephew, Alejandro. Cuban officials say the man is just a press officer for the Cuban Embassy in the UK.
Outside the courthouse, Cuban exiles protested and shouted "asesinos" and "cobardes" (Spanish for "killers" and "cowards") each time the Cuban government's representatives and legal team entered or left the building.
Debt in distress
Defaulted sovereign debt, like that of Cuba, trades on the secondary market. "Distress" investors specialize in buying unpaid debts at a discount to face value and then negotiating with the government in question to settle them, usually for a portion of the principal and a portion of the past due interest. Many countries have been through debt restructurings, from Greece to Nicaragua to Iraq.
In a CRF investor presentation from 2009, used as evidence during the trial, the fund wrote, "Historic restructurings of emerging market debt point to potential returns of 100% - 1,000%."
In court testimony, a CRF representative said, "the whole strategy" of the fund was based on President Barack Obama's election in 2008 and Obama's desire to work toward ending the decades-long U.S. embargo against Cuba, imposed during the Cold War.
When Obama and then-Cuban President Raul Castro announced a thawing of relations in 2014, Cuban debt temporarily shot up to 30-35 cents on the dollar, after trading at 6-8 cents for decades, a CRF representative testified Wednesday.
But the investment thesis did not work out. Despite numerous diplomatic efforts from the Obama administration, the Cuban government expressed little interest in any U.S. commercial presence or investment on the island.
After Obama's historic visit to Cuba in 2016 there was a harsh crackdown on political dissent. The embargo did not end, and many of the relaxations announced under Obama were rolled back under President Donald Trump.
What Cuba argues
According to court filings and testimony, CRF sent several letters to the Cuban government and offered Cuba a "debt-for-equity swap" — not uncommon in debt restructurings involving countries with little cash on hand. In such a deal, the creditor receives a concession to, or ownership of, a government-owned property such as an airport or a port. Creditors then invest in the asset and receive a portion, or all, of the revenues generated by the asset.
Some of the most dramatic and combative testimony came from Raúl Olivera Lozano, a former official from the Banco Nacional de Cuba, now serving a 13-year prison sentence in Cuba. He was convicted for agreeing to accept a bribe of 25,000 pounds in exchange for signing paperwork which allowed the debt in question to be transferred to CRF, which then allowed the fund to sue Cuba.
But Olivera Lozano says he never got paid. "I did that document because I expected economic benefits and the money," he testified via videolink from Cuba, adding that the CRF representative "did not comply with that, and I found myself having been used by this gentleman," referring to Jeet Gordhandas, a CFR representative.
CRF has maintained the accusations of bribery are "scurrilous" and were falsified by the Cuban government solely to justify not paying the debt.
While it may be dramatic, the bribery allegation is not a core part of the Cuba defense. Instead, the government's lawyers have focused on legal interpretations of Cuban statutes, improper paper work and whether CRF could rightfully sue the Cuban government
Even though Cuba's defaulted debt is nearly 40 years old, there's a precedent for bondholders waiting even longer. More than 300,000 holders of czarist-era Russian bonds, which the Bolsheviks defaulted on in 1917 after the revolution, received payment in 2000.
Because of the U.S. embargo against Cuba, American investors are prohibited from owning and trading Cuban debt, which frustrates some frontier-market hedge fund managers in the U.S. They argue that holding Cuban debt would better serve U.S. foreign policy interests because it would give Americans a seat at some future negotiating table.
Beyond the European commercial debt, there are still nearly 6,000 American claims outstanding from individuals and companies whose properties were confiscated by the Castro government in the 60s.
John Kavulich, the head of the U.S.-Cuba Trade & Economic Council, is closely following the trial on behalf of American companies with claims still outstanding.
"This has not been an elegant spectacle," he said. "Companies and financial institutions are watching, and thus far the message they have received from the lawsuit and the trial is to avoid Cuba."