U.S. Funds Step Up Legal Battle After ‘Absurd’ Iceland Ruling

Two U.S. funds with millions of dollars worth of assets locked behind Iceland’s capital controls have appealed a decision by the EFTA Surveillance Authority to reject their claims that they were treated unfairly.

The move is the latest installment in a legal battle pitting the northern European government against Eaton Vance Corp. and Autonomy Capital LP.

According to an application dated Dec. 20, 2016, and obtained by Bloomberg on Thursday, the funds argue that the European watchdog had allowed Iceland too much leeway and had failed "to properly assess Iceland’s reasons for taking ’protective measures’."

The appeal to the EFTA court follows a November ruling by the ESA, which monitors compliance to European Economic Area rules by member states. In that ruling the ESA dismissed the complaint filed by the funds in June and said Iceland’s offshore krona asset restrictions did not breach the rules of the EEA, of which Iceland is a member.

The two funds were locked into low-interest rate bank accounts after they refused to accept the terms of a foreign exchange auction that would have imposed huge losses on their kronur assets. The two funds argue that Iceland has no economic reason to stop them from exchanging their kronur into foreign exchange at the onshore exchange rate.

"The idea that Iceland’s Central Bank can continue to pay one rate for foreign investors, and another rate for Icelandic investors, and somehow claim that this action is not discriminatory is absurd," Kevin Roberts, a lawyer representing the two funds, said in an e-mailed statement. "The government has every incentive to right this wrong, and until it does, we will employ all means - legal and otherwise - at our disposal to defend the rights of our investors.”

Eaton Vance and Autonomy Capital have criticized Iceland for the way it handled auctions designed to help the island unwind its offshore obligations as it exits capital controls in place since 2008. The auction partially failed as the funds balked at accepting an almost 40 percent discount on their kronur.

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