The spirit of Zohran Mamdani has taken over New York’s federal appellate court. In a recent decision, a divided panel of the U.S. Court of Appeals for the Second Circuit managed both to throw a lifeline to Argentinian socialists and to cast doubt on the reliability of the New York Stock Exchange. For a court long entrusted with preserving the sanctity of New York’s envy-of-the-world capital markets, it’s a shocking decision—one that should be reversed as soon as possible.
The case, Petersen Energia Inversora SAU v. YPF, is the culmination of a decade-long fight between New York Stock Exchange investors and the Argentine government. (Full disclosure: I represent Petersen Energia Inversora in the dispute.) In 1993, Argentina privatized its national oil and gas company, YPF. It raised over a billion dollars from U.S. investors in the process. To attract that capital, the government listed YPF on the New York Stock Exchange and provided strong guarantees against future nationalization in both the company bylaws and its filings with the Securities and Exchange Commission.
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Nationalizing industry is as Argentine as churrasco steak and malbec wine, so it only makes sense that New York investors demanded protections. Those protections took the form of a guaranteed compensated exit for minority shareholders in the event of a nationalization. With that guarantee in place, the stock did brisk business in New York.
The guarantee proved inconvenient to Argentina’s socialists when they returned to power in Buenos Aires. They re-nationalized YPF anyway and brazenly insisted that they would be “fools” to compensate shareholders as they were required by contract.
Over a decade of litigation followed. In that time, Loretta Preska, the former chief judge of the Southern District of New York, engaged in a painstaking review of the relevant law and facts. She concluded that Argentina breached its contract and owed $16 billion to shareholders—roughly $2 billion less than Argentina computed it would need to pay back just before it breached.
New York has some of the most sophisticated commercial courts on Earth. When Petersen Energía brought its claims in the Southern District of New York, it had every reason to believe that the courts with jurisdiction over the New York Stock Exchange would cut through the complex web of New York and Argentine law to vindicate its clear contractual rights. Judge Preska did just that.
But Judge Denny Chin, writing for a divided panel of the court of appeals, saw things differently. The Second Circuit heard arguments in Argentina’s appeal last October and issued its opinion reversing the district court on March 27. Judge Chin did not deny—how could he?—that Argentina took New York’s money and ran. But to be compensated, the court concluded, the swindled parties must go to Argentina to seek recovery in their special nationalization tribunal. No serious person can doubt that Argentine courts would be motivated primarily by whatever is good for Argentina and not by justice for the foreign investors it defrauded.
The result is especially baffling considering that, in 2018, the same judge—writing for a unanimous panel of the Second Circuit, including the esteemed Judges Guido Calabresi and Ralph Winter—held that this case belonged in New York because a YPF shareholder had a contractual right and the federal courts were open to investors with that kind of commercial claim. Now, with Argentina crying poverty, Judge Chin reversed course over the dissent of Judge José Cabranes (another lion of the Second Circuit), expressing concern that that amount was too much for Argentina to pay.
Forget “too big to fail.” To these judges, Argentina’s fraud was too big to recover.
One of the key reasons people all over the country and the world avail themselves of New York capital markets is the protection of New York courts. The investors in YPF would never have put their money at the mercy of judges in Buenos Aires. They invested in New York under the expectation that any disputes would be heard in Manhattan. Thanks to the Second Circuit, that’s no longer the case.
It’s tragic that New York has a mayor who is implacably hostile to New York’s business community. What’s shocking is that New York’s federal appeals court seems to be going along with him, turning its back on investors for the benefit of Latin American socialists.
This decision will undermine the sanctity of New York capital markets. It’s now the job of the whole Second Circuit to step in and change course before it’s too late.