Alicia Grace and others v United Mexican States - ICSID Case No. UNCT/18/4 - NAFTA - Statement of Claim - 7 October 2019
Country
Year
2019
Summary
Reproduced from www.worldbank.org/icsid with permission of ICSID.
I. INTRODUCTION
1. This is a paradigmatic case of unfair and discriminatory treatment, expropriation and government retaliation, leading to the total destruction of Claimants' investment. México destroyed Integradora de Servicios Petroleros Oro Negro, S.A.P.I. de C.V. ("Integradora, and together with its subsidiaries, "Oro Negro") and drove it out of business because, among other reasons, Oro Negro refused to participate in bribery of Mexican officials. México also implemented its wrongful measures by colluding with Oro Negro's creditors and allowing them to take over Oro Negro's only assets, five state-of-the-art jack-up rigs used for offshore drilling (the "Rigs"), and Oro Negro's contracts with Petróleos Mexicanos ("Pemex"), México's oil company and monopoly, through which Oro Negro leased the Rigs.
2. After Pemex purported to unilaterally cancel Oro Negro's contracts, the U.S. shareholders of Oro Negro initiated this arbitration against México, claiming damages for México's breaches of the North American Free Trade Agreement ("NAFTA"). Claimants are the U.S. individuals or entities who own 43% of Integradora.
3. Oro Negro's business was to own and lease Rigs to Pemex. Integradora is the ultimate parent company of Oro Negro. Oro Negro's five Rigs are among the best jack-up rigs in México, including because they extract oil in deeper water and are of superior quality to most of the rigs provided by its competitors. Few other Mexican oil companies own comparable rigs. Oro Negro leased the Rigs to Pemex under five contracts (the "Oro Negro Contracts"). Oro Negro had the best performance, including safety record, of any company in the industry.
4. Pemex is a highly corrupt and, not coincidentally, tremendously inefficient company. It is owned and controlled by the Mexican government; indeed, it is part of the government and by far México's largest source of revenue. Pemex has been at the center of numerous high-profile corruption cases. As one of many examples, Pemex's Chief Executive Officer ("CEO") from 2012 to 2016, Emilio Lozoya ("Mr. Lozoya"), is currently the target of one of México's largest corruption scandals ever: México is investigating him for taking millions in bribes from Pemex contractors. Indeed, one of Pemex's largest former contractors, Odebrecht, S.A. ("Odebrecht"), a large Brazilian construction company, admitted to paying Mr. Lozoya and other Pemex officials over USD 10 million in exchange for contracts.
5. Since initiating this arbitration, the Mexican government has made every effort to fiercely retaliate against certain of the Claimants and Oro Negro, including by initiating close to eight criminal investigations against Oro Negro, its employees and lawyers, and recently issuing arrest warrants and requesting Interpol Red Notices against two of the Claimants and three individuals who are key witnesses in this NAFTA proceeding. These criminal investigations are based on fabricated evidence and replete with red flags of corruption, suggesting that Mexican prosecutors and judges may have taken bribes from Oro Negro's creditors or their agents in pursuit of México's criminal charges against Oro Negro.
6. Oro Negro was founded in 2012 by well-known entrepreneurs; it was, at the time, the only Mexican oil services company to raise equity capital from large international investors, including prominent U.S. investors. In 2014, it raised USD 900 million in debt from international investors (collectively, the "Bondholders") by issuing bonds (the "Bonds"). The group that today controls the majority of the Bonds is known as the "Ad-Hoc Group." The Ad-Hoc Group is comprised of several international vulture funds whose business is to invest at high discounts in debt or equity of distressed companies or governments, and then reap a profit by driving them to bankruptcy and collecting the spare parts. These types of vulture funds have been responsible for the collapse of numerous companies and governments worldwide and for worsening the economic crises of several countries--most notably, of Argentina.
7. The core of this case involves the ultimately successful efforts by México and its co- conspirators to drive Oro Negro out of business and retaliate against Oro Negro for its refusal to partake in México's pay-to-play bribery system and for other arbitrary and discriminatory reasons. With the aid of an international investigation agency, Claimants have obtained recordings (the "Recordings") of Pemex officials where they confirm that México retaliated against Oro Negro because, in part, of its refusal to pay bribes, which led to highly detrimental amendments in 2015 and 2016 and ultimately the cancellation of the Oro Negro Contracts in 2017. The Recordings indicate that Oro Negro's competitor Seamex Limited ("Seamex") paid bribes to Pemex to secure its highly favorable contracts.
8. An additional reason for México to destroy Oro Negro was its desire to give Oro Negro's Contracts to the Ad-Hoc Group and their affiliated entities. México did this by colluding with the Ad-Hoc Group. Stated simply, in addition to canceling Oro Negro's Contracts to retaliate against it for failing to pay bribes, México, through Pemex, purported to terminate the Oro Negro Contracts so that the Ad-Hoc Group could take over the Rigs and enter into new contracts with Pemex. These efforts began by Pemex unilaterally and dramatically amending the Oro Negro Contracts, including by reducing its payments to Oro Negro and refusing to pay Oro Negro over USD 100 million in past due invoices. The efforts by México and the Ad-Hoc Group culminated in Pemex purporting to cancel the Oro Negro Contracts, which forced Oro Negro to file for reorganization in bankruptcy court in México and led to the Ad-Hoc Group successfully taking over the Rigs. Additionally, as a direct result of Oro Negro's bankruptcy, it was unable to complete payment and take delivery on three new rigs it had built and which Pemex falsely represented it would hire (but never did). Therefore, Oro Negro lost its USD 125 million down payment for the three new rigs.
9. Because Pemex would continue leasing the Rigs from the Ad-Hoc Group and its affiliated entities after the purported termination of the Oro Negro Contracts, this arrangement benefited Pemex and México, while allowing México to retaliate against Oro Negro and those connected to it. Collusion with the Ad-Hoc Group was a win-win for México and its pervasive pay- to-play system.
10. To force Oro Negro to capitulate, the Mexican government and Ad-Hoc Group initiated multiple criminal cases seeking to freeze Oro Negro's cash and imprison Oro Negro's management, forcing Oro Negro's key executives into exile in the United States. They did so, it appears, through improper conduct with Mexican prosecutors and judges who issued the arrest warrants and gave the green light for the Ad-Hoc Group to seize the Rigs based on illegitimate and flimsy evidence. And the Ad-Hoc Group resorted to movie-like sensational efforts to seize the Rigs, including by illegally hiring a squadron of helicopters, with the active assistance of the Mexican government, to forcibly board and seize the Rigs. The Mexican government offered protection and otherwise supported the efforts of the Ad-Hoc Group, which flagrantly violated numerous orders of the Mexican bankruptcy court prohibiting the cancellation of the Oro Negro Contracts and any efforts by the Ad-Hoc Group to seize the Rigs.
11. Two of the largest members of the Ad-Hoc Group are controlled by John Fredriksen ("Mr. Fredriksen"), a Norwegian shipping billionaire. Mr. Fredriksen owns and/or controls half of Seamex, the largest competitor of Oro Negro, which also owns five rigs and leased them to Pemex. The other owner of Seamex is Fintech Advisory, Inc. ("Fintech"), the investment firm of David Martínez ("Mr. Martínez"), a Mexican billionaire who, like Mr. Fredriksen, also competed directly against Claimants and Oro Negro in leasing offshore rigs to Pemex. Seamex, very likely for illegitimate reasons, has the industry's best contracts with Pemex in that they have superior prices, longer duration and cannot be unilaterally terminated by Pemex, in contrast to the contracts of all of Seamex's competitors.
12. México's various actions breached NAFTA Articles 1105 and 1110. Specifically, México violated its obligation to provide Claimants with fair and equitable treatment; to provide full protection and security; and to not expropriate Claimants' investment except under certain conditions not met here.
13. Claimants have brought this NAFTA claim as the only avenue available to seek redress for México's actions leading to the destruction of their investment in Oro Negro. In accordance with well-settled principles of international law, Claimants seek full reparation for the losses resulting from México's violations of the NAFTA and international law, in the form of monetary compensation sufficient to wipe out the consequences of México's wrongful acts. As of October 1, 2019, Claimants claim at least USD 270 million as damages for losses suffered due to México's breaches of the NAFTA plus interest and fees and costs associated with this proceeding.
14. This Statement of Claim proceeds as follows: Part II: is the factual background of the case, describing the Oro Negro investment and the relevant actions of the Mexican government. Part III is the legal argument, in which Claimants demonstrate the Tribunal's jurisdiction over this dispute and describe how México's and Pemex's actions in Part II constitute violations of NAFTA Articles 1105 and 1110. Part IV is an explanation of the damages owed to Claimants as a result of México's actions, and Part V is the request for relief.
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TABLE OF CONTENTS
I. INTRODUCTION
II. FACTS
A. Parties
1. Claimants
2. Respondent
i. Overview
ii. Pemex Has Repeatedly Admitted Under Oath in U.S. Courts that It Is Part of and Is Controlled by México
iii. México Controlled and Directed Pemex's Actions Against Oro Negro
B. Oro Negro's Background And Business
1. History and Establishment
i. Overview of Oro Negro
2. Claimants Invested in Oro Negro Relying on México's Promises of Transparency and Fairness to Foreign Investors
C. Oro Negro's Ownership and Operations
1. Overview
2. Integradora
3. Oro Negro Drilling, the Singapore Rig Owners and the Five Contracted Rigs
4. Perforadora
5. Employees
D. Oro Negro's Bonds
1. Overview
2. Security Rights
3. The Bond Agreement's Events of Default
4. The Ad-Hoc Group's Control of Nordic Trustee and the Bondholders
5. Bond Amendments
E. The Bareboat Charters
1. Overview
2. Charter Period
3. Charter Hire
4. The Mexican Trust
F. The Oro Negro Contracts
1. Overview
2. Original Terms
3. Termination Provisions
4. The Three New Rigs
G. Performance and Amendments (2013-2017)
1. Amendments
i. 2015 and 2016 Contract Amendments
ii. The 2015 Amendments
iii. The 2016 Amendments
2. 2017 Proposed Amendments
3. Performance Under the Oro Negro Contracts
H. Events from March 2017 to September 11, 2017
1. The Ad-Hoc Group
2. Pemex Orchestrated Oro Negro's Demise with the Ad-Hoc Group
I. Events After September 11, 2017
1. México's and the Ad-Hoc Groups Efforts to Destroy Oro Negro
i. Concurso Request
ii. Injunctions Protecting Oro Negro
iii. Pemex and the Ad-Hoc Group Drove Oro Negro Out of Business
a. The Bondholders Declared Oro Negro Drilling in Default To Attempt To Foreclose on the Rigs
b. Pemex Unlawfully Terminated the Oro Negro Contracts on October 3, 2017
c. Pemex Refused to Comply with the Concurso Court's Orders
d. Pemex and the Ad-Hoc Group Closely Coordinated To Drive Oro Negro Out of Business
e. Pemex and the Ad-Hoc Group Continued Working Together
f. México Cuts Off Oro Negro's Access to Funds
g. Current Status of the Concurso Proceeding
h. The Chapter 15 Proceeding
J. Seamex
1. Seamex Background
2. The Seamex Contracts
3. Pemex Afforded Seamex Preferential Treatment
K. Failure To Allow Oro Negro To Continue Servicing Pemex
L. Corruption in Pemex
1. México's and Pemex's Pattern of Corruption
2. Oro Negro Was a Victim of México's Pattern of Corruption
3. Oro Negro Refused to Pay Bribes
4. Discussions with Mr. Cañedo Regarding Bribery
5. Discussions with Messrs. Cañedo and Gil Regarding Bribery
6. Recorded Statements of Pemex Officials Regarding Corruption
7. Black Cube Overview
8. Black Cube's Methods
9. The Recordings Confirm México's Bribery and Pay-to-Play-Scheme
10. The Recordings Indicate that Seamex Bribed Pemex
M. México's Further Retaliatory Actions
1. Criminal Investigations
2. The PGR Investigation
i. Overview of Investigation
3. A Mexican Federal Judge Confirmed that this Investigation Is Baseless
4. Improper Representation Investigation
5. The Alleged Sham Companies Investigation
i. Overview of the Investigation and the Fabricated Evidence
6. Unlawful Seizure of Oro Negro's Funds
7. Unlawful Attempt to Seize Oro Negro's Rigs
8. México's Refusal to Provide Key Evidence to Oro Negro
9. Red Flags of Corruption
10. The Contempt Investigation
11. The Duplicative Amparos Investigation
12. The Tax Evasion Investigation
13. First Apparent Investigation Against Quinn Emanuel
14. Second Apparent Investigation Against Quinn Emanuel
15. Arrest Warrants Against Claimants and their Witnesses
i. Fraudulent Administration
16. Other Retaliatory Actions Against Claimants
i. México's Tax Audits
17. México's Refusal To Pay Past Due Daily Rates to Perforadora
18. México's Efforts to Subvert This NAFTA Proceeding
III. ARGUMENT
A. The Tribunal Has Jurisdiction Over Claimants' Claims
1. Claimants Are U.S. Investors Entitled to Protection Under the NAFTA and Entitled To Bring Claims Under Articles 1116 and 1117
i. U.S. National Claimants
a. U.S. Citizens
b. U.S. Permanent Resident
ii. Enterprises Constituted or Organized Under the Laws of the United States
iii. Enterprises Majority Owned and Controlled by Claimants
a. Claimants Own a Majority Shareholding of Each of the Entities
b. Claimants Control the Entities
2. Claimants Made a Protected "Investment" in México Under the NAFTA
3. Claimants Have Satisfied All of the Procedural and Temporal Requirements of the NAFTA
i. Articles 1116, 1117, and 1120
ii. Articles 1118 and 1119
iii. Articles 1121 and 1122: Both Claimants and Respondent Have Consented to Arbitration
B. México Is Liable Under the NAFTA for Pemex's Acts and Pemex Acted in a Governmental Capacity in its Conduct Toward Oro Negro
1. Pemex Itself Has Repeatedly Admitted Under Oath in U.S. Courts that It Is Part of and Is Controlled by México and Is Therefore Estopped from Arguing Otherwise in this Case
2. The Acts of Pemex Are Attributable to México Under Both the NAFTA and International Law
3. The Acts of Pemex Are Attributable to México Under NAFTA Article 1503(2)
i. Pemex and its Subsidiaries Are State Enterprises that Acted in a Manner Inconsistent with México's NAFTA Obligations
ii. Pemex and its Subsidiaries Acted Under Delegated Authority
iii. Pemex and its Subsidiaries Exercised "Regulatory, Administrative or Other Governmental Authority"
a. México Delegates Governmental Authority to Pemex and its Subsidiaries
iv. México Failed To Ensure, Through Regulatory Control, Administrative Supervision or the Application of Other Measures, that Pemex and its Subsidiaries Acted In A Manner Consistent with México's NAFTA Chapter Eleven Obligations
4. The Analysis Under NAFTA Article 1503(2) Is Consistent with the Attribution Analysis Under the Articles on State Responsibility
i. Pemex Is a State Organ Under ILC Article 4
ii. Pemex's Conduct Is Attributable to México Under ILC Article 5 Because Pemex Exercised Governmental Authority in its Role vis-à-vis the Investment
iii. Pemex's and its Agents' Conduct Are Attributable to México Under ILC Article 7 Because Pemex and its Agents Were Acting Within its Capacity even if the Acts Were Ultra Vires
iv. Conclusion
C. México Expropriated Claimants' Investment in Breach of its Obligations Under Article 1110 of the NAFTA
1. The Expropriation Standard
i. Expropriation May Be Effected Indirectly and Incrementally Leading to a Creeping Expropriation
ii. Expropriation May Be Effected Incrementally
iii. The Relevant Factor for Indirect Expropriation is the Economic Impact on the Investment, Not the State's Intent or Motive
iv. Expropriation May Affect Rights, Not Only Physical Assets
v. Expropriation Can Occur Through Judicial Measures and Seizures
2. México Unlawfully Expropriated Claimants' Investment in Oro Negro
3. México's Expropriation Was Unlawful
i. The Expropriation Lacked Compensation
ii. The Expropriation Lacked Any Public Interest
iii. The Expropriation Lacked Due Process of Law and Was Contrary to Article 1105(1)
iv. The Expropriation Was Discriminatory
D. Respondent Breached Its Obligation To Provide Claimants' Investment Fair and Equitable Treatment Under Article 1105 of the NAFTA
1. The Fair and Equitable Treatment Standard
2. The Evolution of FET and the Minimum Standard of Treatment
3. Traditional Elements of the Fair and Equitable Treatment Standard
i. Obligation To Safeguard Legitimate Expectations
ii. Obligation To Refrain from Unreasonable, Arbitrary and Discriminatory Measures
iii. Obligation To Provide Due Process and Transparency
iv. Obligation To Refrain from Harassment, Coercion and Abusive Treatment
v. Obligation To Act in Good Faith
vi. Conclusion
4. A Customary International Law Prohibition Against Bribery Has Emerged such that the Expectation of Bribery in and of Itself Is a Violation of the Customary International Minimum Standard Treatment and NAFTA Article 1105
5. Evaluation of a Breach of the Fair and Equitable Treatment Standard Is Highly Fact-Dependent and Involves a Consideration of the Cumulative Effects of the State's Actions
6. México Breached the Fair and Equitable Treatment Standard
i. México Breached the FET Obligation in NAFTA Article 1105 by Retaliating Against Oro Negro for, Among Other Arbitrary Reasons, its Refusal to Pay Bribes to Pemex and Mexican Officials and Participate in México's Pay-to-Play System
ii. México Breached its FET Obligation by Disregarding its Commitments Made in Relation to the Oro Negro Contracts, such as Returning the Contracts to the Original Daily Rates upon Expiration of the Amendments and Paying the Liquidated Damages Under the Contract when It Did Terminate
iii. México Breached the FET Obligation by Colluding with the Bondholders to Drive Integradora and Perforadora Out of Business and Award its Contracts to Other Parties
iv. México Discriminated Against Integradora Oro Negro in Comparison to Seamex, a Competitor in like Circumstances, with Regard to Contractual Rates and Termination Provisions, Likely in Exchange for Bribes, as well as in Comparison to ODH, Another Competitor in like Circumstances, Which Obtained Liquidated Damages for the Termination of its Contract
v. México Further Retaliated Against Claimants and Their Counsel for by Pursuing Numerous Criminal and Civil Investigations in México and Causing Claimants To Fear for Their Safety
vi. México Violated Oro Negro's Due Process Rights Through Irregular Judicial Proceedings Marked by Indicia of Corruption
vii. Conclusion
E. Respondent Breached Its Obligation To Provide Claimants' Investment Full Protection and Security Under Article 1105 of the NAFTA
1. The Full Protection and Security Standard
i. The Full Protection and Security Standard Includes Protection from Third Parties
ii. Full Protection and Security Extends Beyond Physical Protection to Legal Protection and Security of Investments
iii. The Host State's Duty Is Not Limited To Preventing Damaging Acts by Private Actors, but also the State Itself
iv. México Failed To Provide Full Protection and Security from Third Parties
IV. DAMAGES
A. Claimants Are Entitled to Damages for México's NAFTA Violations
B. Applicable Standard and Methodology
1. Full Compensation is the Appropriate Standard of Reparation Under Customary International Law
2. The NAFTA Provides a Compensation Standard for Lawful Expropriations Only and No Standard for Unlawful Expropriations or Breaches of FET or FPS; Thus the Customary International Law Standard Applies
3. Compensation Must Be Equal to Fair Market Value
4. DCF Is the Most Appropriate Methodology To Assess the FMV of Oro Negro
5. The Appropriate Valuation Date Is the Date of the Award
C. Calculation of the FMV of Claimants' Investment
1. Historical Losses
i. Revenues
ii. Costs
iii. Debt
2. Discount Rate
3. Total DCF Damages
D. Full Reparation Requires Claimants To Be Awarded Post-Award Interest at a Commercially Reasonable Rate
1. Claimants Should Receive Post-Award Interest at a Rate that Ensures "Full Reparation"
2. Interest Should Be Compounded Annually
E. Full Compensation Requires that Any Award of Damages Be Net of Tax
F. Summary of Damages
II. REQUEST FOR RELIEF