|The following text is excerpted
from the initial Complaint filed in the United States on behalf
of the American Bondholders Foundation. The Complaint addresses
violations of U.S. and international law with respect to defaulted
full faith and credit obligations of the Government of China
and the continuing deceptive practices perpetrated by the People's
Republic of China in concert with certain securities firms which
continue to underwrite securities issued by the Chinese Government
and instrumentalities thereof. Additional Complaints are presently
being prepared for filing with various U.S. and foreign regulatory
agencies having jurisdiction over the issues and practices described
below. Such practices as are described below demonstrate a willful
disregard for the interests of the defaulted creditors of the
Chinese Government and pose a danger to the investing public.
HERE FOR PDF VERSION OF LETTER
Eliot Spitzer, Esq.
General of the State of New York
New York , New York
Sovereign Credit Rating and
U.S. Underwriting of
Debt Securities of the People’s Republic of
Practices, Inadequate Disclosure, Misleading Credit Analyses, Violations
and International Laws, Selective Enforcement
of Multilateral Agency Policies, Unlawful Diversion of Monies Due
respectfully wish to bring to your attention a situation which I
believe represents a grave injustice to thousands of American bondholders,
including residents of New York
As a class, these bondholders continue to suffer economic
harm as a result of the actions of the Government of the People’s
Republic of China acting in concert with the major credit rating
agencies and the complicity of various U.S. underwriters including
Morgan Stanley, J.P. Morgan, Goldman Sachs, Citigroup and others
which are actively assisting the People’s Republic of China in the
issuance of new debt securities in the U.S. capital markets.
American Bondholders Foundation (the “ABF”) is the duly incorporated
national organization representing the consolidated claims of thousands
of United States
bondholders located across America
who are holders of full faith and credit sovereign
bonds issued by the Government of China and on which that government
has defaulted and continues to evade payment to American citizens.
Although repeated demands by individual
U.S. bondholders to
for payment of these obligations have been ignored for years by
the Chinese Government, the People’s Republic of
China has previously
settled an identical series of these bonds with citizens of
Great Britain in 1987.
series of bonds which are the subject of the ABF collection action
were issued by the Government of China as full faith and credit
sovereign obligations of the Chinese Government, and were sold to
individual investors within the
United States by various institutions
including Deutsche Bank and HSBC Bank.
established principles of international law and accepted conventions
of international trade and commerce, a successor government is liable
for payment of the pre-existing sovereign debt of a predecessor
to defaulting on the external bonded debt represented by this series
of bonds, the Government of China pledged its intention to resume
service on the debt when economic conditions permitted, although
the People’s Republic of China
has not made any payments on the bonds.
The continued evasion of payment to American citizens who
are holders of the Bonds represents a discriminatory attempt to
evade payment of full faith and credit sovereign debt by a country
which possesses the financial ability to pay such legitimate claims.
ABF is duly incorporated under the laws of the state of
The ABF and its members have retained the law firm of Stites
& Harbison to act as counsel in the matter of collecting on
the defaulted Chinese government debt.
On June 13, 2001
, at the direction of the White House Counsel, the United States
Department of State and the Securities and Exchange Commission,
the ABF contacted the Foreign Bondholders Protective Council (the
“FBPC”) to initiate collection proceedings on these defaulted obligations.
The FBPC was created by Presidential Executive Order to assist
citizens in collecting on defaulted debts of foreign issuers and
has successfully completed collection of 47 previous defaulted bond
settlements. The ABF
has been featured extensively by the international print and broadcast
media, including the British Broadcast Corporation, Financial Times,
Wall Street Journal, Associated Press, Bloomberg Financial News,
USA Today, Congressional Quarterly, Voice of America, Business Week
and Barron’s Financial News.
The ABF has also hosted a congressional forum with the participation
of the National Congress of American Indians.
most prevalent obligation for which payment is sought by the ABF
is the Chinese Government 5% Reorganization Gold Loan.
This class of obligations was issued by a global syndicate
of international banks and was sold to investors in the
United States and
Europe . The
bonds were scheduled to mature in 1960.
The language of the bond certificates, as well as the language
of the Loan Agreement authorizing the bond issue, mandated that
the obligations were to be considered as binding upon the Government
of China and its successors.
The obligations which are the subject of the ABF collection
action have been appraised in accordance with the debt covenants
specified in the Loan Agreement by a recognized specialist in bond
The value of the obligations has been determined in accordance
with the provisions specified in the language of the Loan Agreement.
All such bonds which have been tendered for collection are
presently held in trust by the ABF.
addition to general principles of international law, there exist
several recent precedents that are applicable in the situation described
Government of the Soviet Union settled the
claims of British citizens who were holders of defaulted pre-1917
Russian government bonds.
Government of the People’s Republic of
China settled the claims of British
citizens who were holders of an identical series of defaulted Chinese
government obligations as the ABF affiliated bondholders.
Government of Russia settled the claims of French citizens who were
holders of defaulted pre-1917 Russian government bonds.
the People’s Republic of China
has notified the Government of France that
it intends to settle the claims of French citizens who are holders
of an identical series of defaulted Chinese government obligations
as the ABF affiliated bondholders.
the obligation of the People’s Republic of
China to honor the
claims of U.S.
bondholders under international law, the Chinese Government continues
to blatantly disregard the claims of American bondholders and continues
its discriminatory treatment of
United States citizens in an attempt
to evade payment of these claims.
a judicial remedy is generally available to
U.S. investors in
the securities of foreign governments which subsequently enter default,
a 1984 U.S.
federal court ruling prevents American courts from retroactively
applying the “commercial activity” exception to the doctrine of
The court held that, although American law changed in 1952,
a creditor of a foreign government could not retroactively apply
the newer 1952 law to obtain a
U.S. judgment against a foreign
government for debt issued prior to 1952.
The individual U.S.
bondholders affiliated with the American Bondholders
Foundation are therefore denied relief through
U.S. courts since
the Chinese Government issued the bonds prior to 1952.
has long been the policy of the United States Department of State
that intervention by the United States Government in bondholder
disputes is appropriate in situations involving either debt repudiation
The ABF bondholders are victims of both of these circumstances
(e.g., debt repudiation by the People’s Republic of
China and an exclusionary
settlement with British citizens).
Accordingly, the ABF affiliated bondholders are therefore
pursuing resolution of claims through the United States Congress.
members of the 107th United States Congress, including
the House Majority Leader and the Chairman of the House Financial
Services Committee, signed a letter to President George W. Bush
expressing their desire that the Administration take action to compel
the Chinese Government to honor its debt (copy
of letter from the U.S. House of Representatives to President George
W. Bush provided as tab “4” of companion reference binder).
In response to the efforts of the ABF and its many Congressional
supporters, the 108th Congress held a hearing in the
U.S. House of Representatives on this issue preparatory to a vote
on House Concurrent Resolution 60 (“H.Con.Res.60”), stating the
desire of the United States Congress that China honor its debts
to American taxpayers.
October 21, 2003 , Mrs. Jonna Z. Bianco, President of
the American Bondholders Foundation presented testimony in the United
States Congress on this issue during the televised public hearing
conducted by the International Relations Committee of the U.S. House
provided some background on this important issue, please allow me
to now direct your attention to certain recent events related to
the situation described above, which may merit further investigation
by your office. On
behalf of the American Bondholders Foundation and the affiliated
individual bondholders, the following specific complaints are hereby
presented to your attention:
Inadequate Disclosure of Risk by Chinese Securities Issuers
a letter addressed to the United States Securities and Exchange
Commission (the “SEC”) dated January 8, 2003, Mr. B. Riney Green,
a partner of the law firm of Stites & Harbison articulated specific
concerns regarding the extent of disclosure provided pursuant to
offerings of securities within the U.S. capital markets by the Government
of the People’s Republic of China and its state-owned entities (copy
of letter dated January 8, 2003 from Stites & Harbison to the
United States Securities and Exchange Commission provided as tab
“7” of companion reference binder).
following issues were brought to the attention of the SEC as examples
of inadequate disclosure in securities offering filings and investor
documents related to offerings of securities by the People’s Republic
Misleading Chinese Government economic data;
Political instability of the Chinese Government; and
Risk of debt repudiation.
date, the SEC has not taken any action concerning this very serious
matter apart from acknowledging receipt of the Stites & Harbison
of letter dated January 21, 2003 from the United States Securities
and Exchange Commission to Stites & Harbison provided as “Tab
8” of companion reference binder).
issues adversely affect the resolution of the ABF affiliated bondholders’
claims since the Government of the People’s Republic of
China continues to
enjoy unfettered access to U.S.
capital markets without any disclosure of
the situation described herein, and thus has little incentive to
settle the claims of prior holders of its defaulted debt.
securities issuers and their U.S.
underwriters continue to omit mention of material
disclosures related to, among other omissions, the situation described
herein. For example,
the People’s Republic of China sovereign bond offering prospectus
filed with the U.S. Securities and Exchange Commission on October
16, 2003 for the offer and sale of $1 billion in ten year debt securities
in the United States contains no mention or reference to the ABF
collection action or to any existing defaulted full faith and credit
sovereign debt of the Chinese government.
following excerpted statements appear in the prospectus and the
prospectus supplement of the People’s Republic of
October 16, 2003 describing the offering of $1 billion
of ten year notes in the United
Page S-11 of the Prospectus Supplement:
China is neither involved
in any litigation, arbitration or administrative proceedings which
are material in the context of the issue of the notes nor aware
of any such litigation, arbitration or administrative proceedings,
whether pending or threatened.”
as disclosed in this prospectus supplement and the accompanying
prospectus, there has been no significant change in the condition
(financial, political, economic or otherwise) or the affairs of
which is material in the context of the issue of the notes since
December 31, 2002 .”
statements are misleading to prospective investors for the following
The legal counsel to the American Bondholders Foundation
has served a formal notice of demand for payment of the defaulted
Chinese Government securities to the Minister of Finance of the
People’s Republic of China
, as well as to the Embassy of the People’s Republic
in Washington , D.C.
The prospectus supplement omits mention of the existence
of a significant quantity of defaulted full faith and credit sovereign
obligations of the Chinese Government;
The prospectus supplement omits mention of the Chinese Government’s
continued discrimination against American citizens in this matter
and the continuing refusal of the Government of China to honor claims
of American bondholders in violation of accepted conventions of
The prospectus supplement omits mention of the recent public
record testimony on this matter in the United States Congress;
The prospectus supplement omits mention of the Congressional
Resolution (“H.Con.Res.60”) pending in the United States House of
The prospectus supplement omits mention of the recent initiation
of settlement negotiations by the Chinese Government with citizens
regarding settlement of the same series of bonds held by French
preceding factors are directly related to
China ’s economic affairs.
Page 69 of the Prospectus:
central government has always paid when due the full amount of principal
of, any interest and premium on, and any amortization or sinking
fund requirements of, external and internal indebtedness incurred
by it since the PRC was founded in 1949.”
statement is misleading to prospective investors for the following
The complete omission of the existence of pre-1949 defaulted
full faith and credit sovereign obligations of the Government of
China, which under accepted conventions of international law, the
payment obligation for such indebtedness was incurred by the central
government of China in 1949 and on which that government has
since settled with British bondholders and is presently in the process
of negotiating a settlement with French bondholders, while continuing
to exclude the claims of American bondholders.
situation described herein, involving a significant amount of outstanding
defaulted Chinese Government debt obligations, and the Chinese Government’s
continuing refusal to acknowledge or honor such obligations in violation
of accepted principles of international law, and the related ABF
collection action, merits disclosure as a material aspect of any
offering of full faith and credit sovereign obligations of the Government
of the People’s Republic of China.
concerns regarding inadequate disclosure of the material risks implicit
to the offer and sale of securities of the Chinese Government, or
instrumentalities thereof, has recently been reiterated by each
of the following:
The Wall Street Journal;
The Hong Kong Credit and Collection Management Association;
Security Review Commission.
pertinent to this complaint are certain “Key
Findings” of the bipartisan U.S.-China Security Review Commission
Report to the United States Congress (copy
of report provided as tab “9” of companion reference binder).
conclusions presented in the salient section of the report, entitled
’s Presence in U.S. Capital Markets”, identify serious concerns
related to inadequate disclosure of the material risks implicit
to the offer and sale of securities of the Chinese Government or
Such concerns are summarized in the following excerpts from
“The U.S. Government lacks adequate institutional mechanisms
to monitor national security concerns raised by Chinese and other
foreign entities seeking to raise capital or otherwise trade their
securities in the U.S.
debt and equity markets.
Moreover, Security and Exchange Commission (SEC) reporting
requirements for foreign registrants provide insufficient disclosure
to the investing public of the national security risks related to
certain foreign entities’ global business activities, including
the material risks associated with entities that do business in
“Chinese issuers have raised an estimated $20 billion over
the past decade from international bond offerings denominated in
has also raised significant sums internationally through its sovereign
and corporate bond offerings. As
shown in Figure 6.2, Chinese sovereign bonds garnered $8.5 billion
and corporate bonds raised $26 billion from 1986 through 2001.”
“Marc Lackritz, President of the Securities Industry Association,
testified that Chinese entities had raised $48.3 billion in equity
capital overseas from 1991-2000, and that about 7 percent of this
amount or $3.4 billion had been raised td through targeted
He further indicated that Chinese issuers of debt raised
around $9.7 billion in the U.S.
markets during that time period.
A report prepared for the Commission on China’s fundraising
activities in the U.S. equity markets concludes that Chinese firms
raised approximately $14.6 billion through IPO's in U.S. capital
markets from 1999-2001, representing 73 percent of the $20 billion
Chinese firms raised in total through overseas IPO's during that
“The Chinese Government’s bond offerings, which have been
purchased by U.S.
institutional and other investors, provide scant detail on the use
of the proceeds raised from such offerings.”
“The presence of Chinese debt and equity offerings in the
capital markets raises U.S.
national security concerns that have not been
adequately examined to date.
The Commission is concerned about the identities and nature
of the Chinese companies accessing the
U.S. capital markets.
Specifically, the extent to which they have ties to the People’s
Liberation Army or components of China’s defense industry, intelligence
services, or are assisting in the proliferation of weapons of mass
destruction ballistic missile delivery systems.
The Commission is also concerned with those entities operating
in U.S.-sanctioned countries, or are otherwise engaged in activities
inimical to U.S.
“The PRC is using U.S.
capital markets as a source of central government
funding for military and commercial development and as a means of
technology acquisition efforts by its front companies with a patina
of regularity and respectability.”
“Overlaying these specific concerns is the issue of Chinese
sovereign debt issuances.
’s bond prospectuses generally provide little
detail as to how the proceeds will be spent, the significant monies
raised by these offerings could be finding their way into military
spending and other activities that are harmful to
U.S. security interests.
Because money is fungible, funds raised by
China from its general
purpose bonds are just as useful for military and other security-related
purposes as funds raised by a PLA-affiliated company.”
“The Commission is concerned about the use of the
U.S. capital markets
as a source of funding for the Chinese military and intelligence
services and for Chinese companies assisting in the proliferation
of weapons of mass destruction or ballistic missile delivery systems.
This activity not only poses direct security concerns, but
raises issues regarding investor transparency and material risk
as well. Given this
dynamic, the Commission is troubled that neither the U.S. Government
nor the U.S.
investment community is adequately evaluating security-related risks
related to China
’s fundraising in the U.S.
foregoing conclusions by a congressional investigative commission
are indicative of the seriousness of the implications regarding
inadequate disclosure of risk by Chinese securities issuers.
Credit Rating Agencies Selectively Ignoring Pertinent
three major nationally-recognized statistical rating organizations
(“NRSROs”), commonly referred to as credit rating agencies (i.e.,
Moody’s Investors Service, Standard and Poor’s Rating Group and
Fitch Ratings) continue their deceptive practice of selectively
disregarding pertinent facts associated with the situation described
herein, particularly the “willingness
to pay” metric, which represents a significant and continuing
component of embedded risk implicit to general obligations of the
to representatives of the U.S. Department of State, the People’s
Republic of China
explicitly repudiated all bond claims originating prior to its 1949
assumption of the Government of China.
Since the assumption and payment of any valid outstanding
obligations of a pre-existing government by a recognized successor
government is a basic tenant of international law, the refusal of
the People’s Republic of China
to abide by this established convention violates
accepted principles of international trade and commerce and demonstrates
its unwillingness to comply with commonly accepted standards of
Such an attitude, manifested as
a form of institutionalized behavior, is inconsistent with increased
recognition of the quality of the Chinese Government’s international
obligations. The Sovereign Immunity Act does not convey perfect
protection to all participants in defaulted sovereign debt financings.
The People’s Republic of
China explicitly acknowledged
its responsibility for payment of pre-1949 Chinese sovereign bonds
pursuant to a 1987 agreement with
Great Britain , thereby establishing
a precedent for collection by United
Despite the agreement with
Great Britain , the People’s Republic
continues to attempt to evade payment to
U.S. citizens for the identical
series of full faith and credit sovereign bonds.
events involving instrumentalities of the Chinese Government serve
to further illustrate the character and intent of the Government
of the People’s Republic of China
with respect to honoring payment obligations.
The spate of serial defaults by numerous state-owned enterprises
and the apparently deliberate defaults by various Chinese international
trust and investment companies which are instrumentalities of the
Chinese Government reveals the appearance of a serial pattern of
orchestrated issuance and subsequent defaults, which may be construed
as intentional and selective in nature, and represents a recurring
theme, or “pattern” on the part of the Chinese Government.
long-term sovereign credit rating assessments of the People’s Republic
of China issued by the major credit rating agencies contain no mention
whatsoever of the fact that a very substantial quantity of full
faith and credit sovereign obligations of the Chinese Government
presently remain in a state of default.
The discriminatory repudiation of these obligations by the
Government of China is material to a fair and accurate assessment
of overall payment risk inherent to full faith and credit obligations
of the Chinese Government, particularly with respect to evaluation
of the willingness to pay
metric, and it is unconscionable that disclosure of this fact is
not reflected in the long-term sovereign credit ratings assigned
to full faith and credit obligations of the People’s Republic of
China by any of the three major rating agencies.
An examination of the historical facts suggest that the probability
of continuity of payments on present and future-issued obligations
may reasonably be construed as embodying a significant degree of
repayment uncertainty which is not reflected in the current long-term
sovereign debt rating of the People’s Republic of China.
situation described above, involving the omission of significant
and material aspects from the prevailing rating assessments of the
Chinese Government, was explicitly brought to the attention of the
chief executive officers of Moody’s Investors Service, Standard
and Poor’s Rating Group and Fitch Ratings in a letter dated November
27, 2002 written by Mrs. Jonna Z. Bianco, President of the American
Bondholders Foundation (copy
of letter included as tab “11” of companion reference binder).
date, no acknowledgement or response to this letter has been received
from any of the three major credit rating agencies.
On October 13, 2003 Fitch Ratings affirmed its investment
grade assessment and assigned a “positive” outlook.
On October 15, 2003 Moody’s Investors Service announced that
it was upgrading the long-term foreign currency sovereign credit
rating of the Chinese Government from the previous A3 rating to
a newly-assigned rating of A2.
Incredibly, on October 22, 2003 , the very day after
the United States Congress House of Representatives International
Relations Committee conducted a televised public hearing on the
ABF issue, Standard and Poor’s Corporation actually
affirmed its investment grade assessment of the long-term foreign
currency sovereign credit rating of the Chinese Government and assigned
a “positive” outlook. Coincidentally,
each of these development occurred during October, 2003, the same
month that the Government of the People’s Republic of
China filed a prospectus
with the SEC for the offer and sale of $1 billion in government
following is a summary of actions taken by the major credit rating
agencies during the month of October, 2003:
October 13, 2003
Ratings affirmed the long-term foreign currency rating of
China at A-. The rating
outlook is positive. This rating applies to all of
China ’s senior unsecured
long-term sovereign debt issues.
October 15, 2003
Investors Service, Inc. upgraded
China ’s sovereign rating from
A3 to A2 for long-term foreign-currency denominated debt. The rating
outlook is stable.
October 22, 2003
& Poor’s Ratings Group affirmed its BBB senior unsecured foreign
currency credit rating for China
. The outlook is positive.
intentional and willful omission of the existence of a significant
dollar value of defaulted obligations of the Chinese Government
in the prevailing debt rating assessments of the People’s Republic
of China constitutes a blatant rejection of the generally accepted
current U.S. national standard that the degree of rigor exercised
in assessing the adequacy of issuer disclosures must be increased
rather than relaxed (compare, for example, the insufficiency of
Hong Kong standards when measured against U.S. standards).
ABF considers this conduct as outrageous, particularly in light
of the fact that the circumstances described herein were previously
brought to the explicit attention of the three major credit
rating agencies by the ABF.
In light of the persistent evasion by the Chinese Government
with respect to payment of its defaulted sovereign obligations and
the potential financial impact arising from the emergence of a significant
liability, the following existing Chinese Government credit ratings
are inappropriate and misleading:
Republic of China
Foreign Currency Credit Rating
conduct of the Government of the People’s Republic of China with
respect to its continuing refusal to honor U.S. citizens’ claims
arising from defaulted Chinese Government debt obligations as required
under conventions of international law is neither consistent with,
nor indicative of, an investment-grade sovereign.
Rather, such behavior is suggestive of the conduct
of parties which have been deemed criminal enterprises in the
United States and
against whom both civil and criminal actions have been successfully
brought pursuant to the Racketeer Influenced Corrupt Organizations
Act (“RICO”). The isolationist
Chinese communist government (i.e., the People’s Republic of
China ) ultimately
acceded to political power over the Chinese mainland and subsequently
repudiated existing external sovereign debt obligations.
The Government of the People’s Republic of
determined to re-access the international capital markets while
ignoring the payment claims arising from holders of valid pre-existing
obligations of the Chinese Government in violation of international
law. Such conduct represents
a form of institutionalized behavior which suggests the probability
that debt defaults presaged upon the unwillingness to pay external
obligations may reasonably be expected to recur in the future. The
investment grade rating assigned by the three major rating agencies
to the sovereign debt of the People’s Republic of China ignores
the conduct of the Chinese Government in failing to honor its outstanding
full faith and credit obligations (i.e., the willingness
to pay valid obligations as opposed to the mere ability
to pay) and serves to reward the “bad actor” conduct of this
government for its discriminatory mistreatment of American bondholders.
major rating agencies continue to willfully disregard the fact that
a substantial dollar value of full faith and credit sovereign bonds
of the Chinese Government remain in a state of default in contravention
of international law. By
assigning an investment grade rating to the long term sovereign
debt of the People’s Republic of
China , the major credit rating
agencies continue to selectively ignore the willingness
to pay issue, sending a dangerously misleading signal to the
global financial markets and creating a dangerous precedent with
respect to accepted principles of international law.
concerns expressed herein regarding the posture of the major credit
rating agencies with respect to intentional omission of pertinent
facts and willful disregard of material information in assigning
credit ratings are echoed in testimony presented at the recent hearing
on the credit rating agencies conducted by the U.S. Securities and
Exchange Commission on November 15, 2002 (copy
of testimony provided as tab “12” of companion reference binder).
The following excerpts of testimony presented
at the SEC hearing by Mr. Glenn Reynolds, Chief Executive Officer,
CreditSights, Inc. illustrate that the specific deficiencies described
herein may be part of an endemic problem:
“Our main areas of concern with respect to the rating agencies
have been the transparency of the ratings process and how information
flows are extracted from higher risk issuers and subsequently delivered
to the market. One major area of confusion has been in the use of
confidential information and to what extent the
decisions are tied to public information. We also address
below some of the considerable
barriers to entry that have been created by the long process of
allowing new NRSROs to enter the market. This has served
to protect the market position
and the revenue stream of the current peer group of rating agencies.
The fact that the agencies
have a business model that allows them to get paid
regardless of the quality of product they deliver to the
market, all the while insulated
from securities litigation and competitive inroads by new market
entrants, makes for a great equity story but not necessarily a very
good market watchdog. We also
believe there are some conflicts of interest worth considering in
light of broader trends going on in the market.”
terms of the issuer-fee conflict, we have heard a number of points
made in the past by investors.
Since the fee does not get generated without a deal, being
generous at new issue and revisiting the credit trend after
the deal is in the market creates
an apparent tension in the decision making process. Any rating
action/assessments that prevents an issuer from accessing
the market such as an unduly
harsh opinion or demand (and transparent) set of metrics and forward
expectations could jeopardize the deal. That means no fee.
That action presents additional
risks since the agencies can always revisit later after the deal
is in the market. At that
point, the ability to be more aggressive in ratings actions and
express disappointment in financial trends can lead to rapid
and precipitous downgrades.
We certainly saw such post-new-issue-boom revision in the aftermath
of the record 2001 issuance wave. When such post-issuance revisions
occur, the problem is that the rating agency has booked its fee,
the underwriter has booked
its fee, and banks have refinanced their exposure and laid off their
risk, and the only loser is
the investor who gets blindsided after an accelerated review. The
holders of the debt securities are often pension funds, insurance
companies, and mutual funds,
so the impact goes down to the individual level of retiree, policy
holder and life savings. We have seen too frequently major deals
get printed and a reassessment
of the credit in a matter of weeks and often a few
months. While the agencies often describe this as "calling
them as they see them,"
the fact is greater transparency in the information flows
and more detailed criteria for
future ratings moves should be available when the new deal is printed.
At least, such an approach will give investors a better idea of
what is expected, and they can better gauge what the agencies are
expecting and make investment
judgments appropriately. Then they will not be so shocked
when the agencies "call
them as they see them" later. Uncertainty over this process
only heightens market
volatility and for many institutions promotes risk aversion.”
situation described herein, involving a significant amount of outstanding
defaulted Chinese Government debt obligations, the Chinese Government’s
continuing refusal to acknowledge or honor such obligations in violation
of accepted principles of international law, and the related ABF
collection action, merits disclosure as a material aspect of any
credit rating assessment pertaining to the long-term sovereign credit
of the Government of the People’s Republic of China.
Since the curing of prior defaults
is a normal pre-condition to new publicly-funded debt by domestic
U.S. corporations, it is reasonable to expect the major credit rating
agencies to display no less tolerance to foreign issuers, sovereign
or commercial, when an issuer fee is involved.
It is extremely inappropriate for the major credit rating
agencies to be permitted to continue to selectively ignore long
established principles of law and finance as well as current accounting
and disclosure standards.
outrageously unconscionable conduct of the three major credit rating
agencies in this matter demonstrates a willful and deliberate disregard
of the objective facts and circumstances and is
inconsistent with the important role of the major credit rating
agencies as independent evaluators upon which the public-at-large
may depend in confidence.
Continued Underwriting of Chinese Government Securities
in Contravention of the Johnson Debt Default Act
Johnson Debt Default Act (the “Act”) generally provides that it
shall be a federal criminal offense for any person or corporation
subject to the jurisdiction of the
United States to engage in the
sale of securities of any foreign government which is in default
on the payment of its obligations to the United States Government.
language of the Act states, in part:
it shall be unlawful within the United States or any place subject
to the jurisdiction of the United States for any person to purchase
or sell the bonds, securities, or other obligations of, any foreign
government or political subdivision thereof, issued after the passage
of this Act, or to make any loan to such foreign government, political
subdivision, organization, or association, except a renewal or adjustment
of existing indebtedness while such government, political subdivision,
organization, or association, is in default in the payment of its
obligations, or any part thereof, to the Government of the United
ABF is concerned that any debt obligations issued by the Government
of the People’s Republic of China or any instrumentalities thereof,
which have been sold in the United States, either publicly or on
a private placement basis subsequent to the date of default or repudiation
of the series of bonds referenced herein and presently held in trust
for collection, may represent a violation of the Act.
Under the Act, culpability for any such violations shall
apply to any seller, underwriter or broker of such securities within
the United States
Act may be applicable in the specific instance described herein
for the following reasons:
The ABF has been informed by officials of the United States
Government that the U.S. Government is presently in possession of
a substantial quantity of defaulted full faith and credit Chinese
government bonds substantially similar to the series held by individual
bondholders affiliated with the ABF.
According to members of the Judiciary Committee of the United
States Congress, such bonds were acquired by the U.S. Government
through the Office of the Alien Property Custodian pursuant to the
Trading with the Enemy Act, and are presently held in the vaults
of the U.S. Department of Justice.
The existence of direct loans provided by the United States
Government to the Government of China which subsequently entered
into default prior to repayment, and which remain in default.
For example, the Export-Import Bank loan of 1946.
the Act, it is a federal criminal offence for any party subject
to the jurisdiction of the United States to sell the securities
of, or engage in the provision of loans or extending of credit to,
any foreign government, or organization thereof, which is in default
on debt owed to the Government of the United
States . The language
of the Act may reasonably be construed to prohibit the underwriting,
offer or sale of securities of the Government of the People’s Republic
or its state-owned enterprises, including the provision of trade
their activities involving underwriting of Chinese Government securities
and providing or arranging trade credit on behalf of its state-owned
enterprises, the major financial houses (e.g., Morgan Stanley Dean
Witter, Goldman Sachs, Merrill Lynch, J.P. Morgan, etc.), are constituted
as criminals under the Act.
Included within this group of firms which continue their
practice of dealing in Chinese Government securities are two of
the same institutions which sold the aforementioned defaulted securities
to the investing public (i.e., Deutsche Bank and HSBC).
most recent example of which the ABF is aware pertaining to the
offer and sale of Chinese Government securities in the United
States is the offering of $1 billion of notes
of the Government of the People’s Republic of
dated October 2003). No
disclosure appears in the prospectus regarding possible violations
of the Johnson Debt Default Act in connection with the offering.
a closer examination of the relevant fact pattern, it would appear
that by virtue of their practice of engaging in a repetitive practice
of assisting in the issuance and subsequent serial defaults of Chinese
Government securities (as specified in detail under the section
pertaining to deceptive practices), such financial houses may be
subject to the penalties specified pursuant to the Racketeer Influenced
Corrupt Organizations (“RICO”) statute.
Selectively ignoring repeated violations of the Act, as well
as egregious violations of accepted conventions of international
law, is a dangerous precedent and acts as a destabilizing influence
on global affairs of trade and commerce.
Preferential Treatment Accorded the People’s Republic
of China in Contravention of the Interests of the American
Public and Established International Monetary Fund Policy;
Subordination of United States Bondholders’ Claims.
International Monetary Fund (the “IMF”) admitted the People’s Republic
as a member in 1978. By
providing financial assistance to the Government of the People’s
Republic of China, a sovereign which remains in default on its external
full faith and credit obligations and which refuses to negotiate
in good faith with its creditors, the IMF has selectively ignored
its standing policy (“performance criterion”) of requiring that
a debtor country engage in good faith negotiations with its creditors
in order to maintain eligibility for assistance from the IMF.
Such practice is in direct contravention of the IMF’s established
and therefore the American “public-at-large”, is the single largest
shareholder of the IMF. The
conduct of the IMF in regard to selectively disregarding its own
established policy by continuing to provide financial assistance
to the Chinese Government is harmful to the interests of
U.S. bondholders and
is contrary to the interests of the American public.
In order to protect the interests of the American public
as a shareholder, the IMF should be compelled to disavow its preferential
treatment of China
and adhere to and enforce its established
policies in a consistent and uniform manner.
Diversion of Monies Due Individual Bondholders
Morgan Stanley, J.P. Morgan, Goldman Sachs and Citigroup have begun
a practice of purchasing the defaulted debt of provinces, cities,
villages and towns (including the debt owed by instrumentalities
of such provinces, cities, villages and towns) of the People’s Republic
of China and aggressively pursuing the collection of such debt (copy
of article provided as tab “13” of companion reference binder).
Under the communist system of national government, all provinces,
villages, cities and towns constitute political subdivisions of
the national government. The
national government is also the owner of the banks from which the
majority of these loans were purchased.
the instance described herein, the national government (i.e., the
People’s Republic of China
) is the obligor of defaulted full faith and
credit sovereign obligations which are presently outstanding.
Such full faith and credit sovereign obligations constitute
a class of claims which are senior to the debts of political subdivisions
of the Chinese national government.
The collection of debts owed by political subdivisions of
the Chinese national government may constitute an illegal diversion
of monies due individual U.S.
bondholders, whose claims are senior to such
Accordingly, the practices engaged in by Morgan Stanley,
J.P. Morgan, Goldman Sachs and Citigroup may have the effect of
these firms receiving such monies in contravention of applicable
Recurring Pattern of Deceptive Practices
the key findings of the U.S.-China Security Review Commission as
specified in its report to the United States Congress do not articulate
an explicit condemnation that the Government of the People’s Republic
of China, its state-owned enterprises, and underwriters of Chinese
government and corporate securities have engaged in a long-standing
pattern of deceptive practices, misconduct and fraud, a survey of
the report’s findings does suggest that some degree of complicity
or collusion is occurring between issuers of Chinese securities
and institutional marketers of Chinese securities in the United
In fact, a review of the relevant facts is evocative of the
types of actions
may be subject to prosecution under the Racketeer Influenced Corrupt
Organizations (“RICO”) statute.
contention is further supported by a recent example involving the
apparently deliberate spate of defaults involving various Chinese
“International Trust and Investment Corporations”, which are organized
as instrumentalities of the Chinese Government.
After the 1996-1998 collapse of the Guangdong International
Trust and Investment Corporation, the central government disavowed
the sector’s foreign debt, which is estimated at $12 billion dollars.
cursory review of pertinent events reveals the recurring theme of
a serial pattern of repetitive Chinese debt defaults in conjunction
with the deliberate obfuscation of the use of offering proceeds,
which may act in concert to create a threat to the national security
of the United States resulting from the relatively unimpeded access
to capital available to Chinese Government state-owned enterprises
trafficking in weapons sales to terrorist-sponsoring states.
An examination of the relevant facts reveals the following:
That there exists a history of serial debt defaults by the
same issuer (i.e., the Chinese Government);
That issuance of additional bonds to investors in the face
of past serial defaults was aided and abetted by the following:
The advance payment of a ten percent (10%) selling commission
to the selling banks; and
The retail marketing of the securities to individual (versus
The subsequent absorption into the bank(s) of the sinking
fund established for the protection of bondholders;
The subsequent abandonment of individual investors by the
selling banks and the failure by the selling banks to negotiate
a restructuring of the defaulted full faith and credit debt in blatant
and deliberate disregard of fiduciary and moral obligation;
The continuing pattern of events involving instrumentalities
of the Chinese Government serves to further illustrate the character
of the Government of the People’s Republic of
China with respect
to honoring payment obligations.
The recent spate of debt defaults by numerous Chinese Government
state-owned enterprises and the apparently deliberate defaults by
various Chinese international trust and investment companies which
are instrumentalities of the Chinese Government reveals a serial
pattern of orchestrated issuance and subsequent default, which appears
to be intentional and selective in nature, and represents a recurring
theme, or “pattern” on the part of the Chinese Government;
The continuing complicity on the part of U.S. firms and their
foreign affiliates to aid and abet such a pattern of defaults, and
to do so in flagrant violation of U.S. law (i.e., the use of solicitation
and offering documents which contain significant omissions of material
facts; inadequate disclosure; contravention of the Johnson Debt
Default Act). Specific
instances may include the involvement of Ernst & Young with
respect to its role as advisor to the Chinese Government with respect
to defaults by various Chinese International Trust and Investment
Corporations, and the underwriters of the October 22, 2003 $1 billion
offering of notes of the Government of the People’s Republic of
China (SEC Registration No. 333-108727).
Underwriters of this offering include Goldman Sachs L.L.C.,
J.P. Morgan Securities Inc., Merrill Lynch, Pierce Fenner &
Smith Incorporated, Banc One Capital Markets, Inc., Citigroup Global
Markets Inc., Credit Suisse First Boston LLC, Daiwa Securities SMBC
Europe Limited, The Hong Kong and Shanghai Banking Corporation Limited,
ICEA Securities Limited, Lehman Brothers International, Morgan Stanley
& Co. International Limited, and Nomura International plc.; and
That such an orchestrated pattern of behavior has been defined
as racketeering in the United States
and has been subject to the provisions and
remedies available under the RICO statute.
would appear to be the philosophy of Deutsche Bank, HSBC, the Government
of the People’s Republic of China, Morgan Stanley, Goldman Sachs
and other underwriters and credit rating agencies that it is perfectly
acceptable to sell a full faith and credit sovereign bond issue
to a group of unsophisticated individual investors, and then to
leave the issue in default when the issuer reneges on payment, ignore
repeated demands for payment on the defaulted obligations, and then
after the public forgets about the default, to sell additional bonds
of the same government to unsuspecting buyers.
defaults by this issuer remain outstanding and the continued underwriting
of additional debt and equity issues of the Chinese Government and
its state-owned enterprises poses a significant risk to the investing
consideration of the foregoing, I believe you will agree that it
may be appropriate to open an investigation into the practices employed
with respect to the underwriting of Chinese Government securities
within the United States as well as the selective practices employed
by the major credit rating firms regarding the sovereign debt rating
of the People’s Republic of China, and the related ancillary issues
Under accepted conventions
of international trade and commerce, a successor government
is responsible for payment of the obligations of a predecessor
fact, the language which appears on the bond certificates which
are the subject of the ABF collection action explicitly states:
“These obligations are intended to be binding upon the Government
of China and any Successor Government” (image
of bond certificate provided as tab “2” of companion reference
Foreign Sovereign Immunities Act of l976.
Pub. L. 94-583, 90 Stat. 289l, 28 U.S.C. Sec. l330, l332(a),
l39l(f) and l60l-l6ll.
See also 22 C.F.R. 93.
The Foreign Sovereign Immunities Act provides recourse
citizens who have suffered economic injury from the commercial
activities of foreign governments or instrumentalities thereof,
to bring tort actions against such sovereign governments in
federal court provided that the economic injury occurred during
or after 1952. No
judicial remedy is available to
citizens in U.S.
courts under the Foreign Sovereign Immunities Act for economic
harm or takings which occurred prior to 1952.
The Foreign Sovereign Immunities Act of 1976 (the “FSIA”)
is the sole basis under
law whereby plaintiffs may obtain jurisdiction over a foreign
state. Courts have
consistently ruled that the exceptions to absolute sovereign
immunity under the FSIA are not retroactive. The ‘commercial
activity’ exception to sovereign immunity existed before 1976
because of the 1952 State Department ‘Tate letter’.
See “ China
Evoke the Ghost of Bubble Past”, Wall
Street Journal ( January 27, 2004
), which stated “Chinese companies,
for example, don’t adhere to
or international accounting standards.
And credit-rating agencies are unable to rate most of
the Chinese companies listing overseas because of a lack of
transparency and disclosure.
Finally, the Chinese Government is involved in one way
or another in most of the companies listed on the markets”.
See also “Credit Ratings in
Mere Guesswork”, Wall
Street Journal ( January 5, 2004
), which stated “But faulty accounting,
poor corporate governance and a lack of disclosure hamper the
raters’ efforts. To make matters worse, the Government issues
misleading statistics.” (copies
of articles provided as tab “10” of companion reference binder).
For national security concerns posed by inadequate disclosure
associated with offerings of Chinese securities in the
markets, see Report to Congress of the U.S. China Security Review
Commission: ⢀The National Security Implications of the
Economic Relationship Between the United States and
Chapter Six, China’s
Presence in the U.S. Capital Markets.
The U.S. China Security Review Commission.
This specific finding would appear to be at odds with the explicit
message of the February 17, 2004 full-page display advertisement
in the Wall Street Journal
by Morgan Stanley, entitled “Look Out World, Here We Come”,
which aggressively touts the profits to be made in Chinese stocks.
See also the recent quarter-page display advertisement
in the Wall Street Journal
by Fred Alger & Company, Inc., distributor of the China
Growth Fund, entitled “The Bull.
The Bear. And Now The Dragon”.
This advertisement references
trillion GDP (2003) and
’s no. 2 global ranking for purchasing
power as reasons to invest in Chinese securities.
(Third) of the Foreign Relations Law of the
Section 712(2) and “Creditors Claims in International Law”,
The International Lawyer,
Volume 34, page 235, Spring 2000.
See also, for example, the recent United Nations Security
Council resolution on weapons inspections in
that a subsequent government in
a regime change will remain liable for predecessor national
renounced any claim to the government of all
Hearing on the Credit Rating Agencies, Securities and Exchange
Commission, November 15, 2002
Testimony by Mr. Glenn Reynolds, Chief Executive Officer,
CreditSights, Inc., entitled “Rating Agencies in the Capital
Markets”. For historical
precedent, see “The Dog That Didn’t Bark: Moody’s, Et. Al. Fail
Investors In Asian Markets, Miss Warning Signs In
J. Casey Institute of the Center for Security Policy. Publication
December 23, 1997
Excerpt: “For example, today's New York Times
reports that, while Moody's was downgrading South Korean, Thai,
Indonesian and Malaysian sovereign debt, it ‘affirm[ed its previous]
ratings for Hong Kong and China.’ As it happens, these ratings
are extraordinarily high. In the case of
its long-term foreign currency bonds are rated by Moody's to
be ‘A3’ -- the agency's seventh highest rating.
foreign bank deposits are somewhat lower, at ‘BAA2’.
of these have changed in at least the past year.
This comes in contrast to analyses cited by the highly regarded
DRI/McGraw-Hill Global Risk Service during the second quarter
of 1997. DRI/McGraw-Hill warned that as much as ‘20-40% of
stock of loans, valued at $600 billion can be classified as
non-performing. So far, the problem has been contained. However,
things go wrong in
banking sector, the ramifications in developing
could be huge.’
The scale of the decline
of so-called ‘Red Chip’ stocks (i.e., China-based, government-controlled
or -affiliated entities) on the Hong Kong market have, in many
cases, fallen faster and further than have counterparts among
pre-takeover Hong Kong Blue Chips. It is also the view of some
respected analysts in Asia that China's much-touted hard currency
reserves are, in fact, seriously encumbered by virtue of the
need to prop up large -- and, in many cases, doomed
-- Chinese state-owned industries and enterprises.”
Report to Congress of the U.S. China Security Review Commission:
“The National Security Implications of the Economic Relationship
Between the United
Chapter Six, China’s
Presence in the U.S. Capital Markets.
The U.S. China Security Review Commission.>
For example, the economic sanctions imposed in 1993 by the United
States Government on the Chinese Government’s state-owned enterprise
Norinca for trafficking in illegal weapons sales.
See also the statement “Chinese-made missiles capable
of penetrating an M1 Abrams tank are being smuggled into
February 16, 2004
An even more egregious example of illegal weapons trafficking
by state-owned enterprises of the Chinese Government is the
1992 incident involving the illegal importation of AK-47 assault
rifles through the Port
by the China Overseas Shipping Company (“COSCO”).