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State Manipulation of Inflation Index Triggers $3 Billion Investment Dispute

Returns paid on very many financial instruments are linked to inflation – but what happens if the relevant cost of living index is manipulated by state authorities? The Court of Appeal considered that burning issue in relation to structured notes with a face value of $3 billion.

The notes had been provided by an American bank to an Argentine insurance and financial services company and it was agreed that the redemption value would be calculated by reference to an Argentine inflation index. On maturity, the bank had on that basis paid the company $176,541,651.

In claiming that it should have received over $75 million more than that, the company argued that the index had been fabricated by the Argentinian government for political purposes. The company submitted that the index was so unreliable that it should have been disregarded and that the redemption sum should alternatively have been calculated in good faith and in a commercially reasonable manner. Those arguments, however, did not persuade a judge.

In ruling on the company’s challenge to that decision, the Court acknowledged that neither it nor the bank had foreseen the risk of government manipulation of the index. In dismissing the appeal, however, it found that the bank’s construction of the notes agreement made greater commercial sense and was to be preferred. The company’s interpretation would require reading new words into the agreement and there was nothing to support the contention that the notes would only be linked to the index for so long as it remained a genuine measure of inflation.