Illustration: Sarah Grillo/Axios

In December 2013, three private equity investors were jailed in Uruguay over a privatization gone bad. One of them remained there until May 2015, despite never being charged with a crime.

Why it matters: Uruguay could now face legal trouble of its own, related to the airline debacle, according to a document obtained by Axios.

Background: The three investors were co-founders of Leadgate, a distressed investment firm that had first experienced success in Uruguay by turning around a local dairy company. In 2007 they won the privatization auction for a 75% stake of national airline Pluna for $15 million, with the Uruguayan government remaining the other 25%.

  • By most measures, Leadgate turned Pluna around. Revenue tripled, losses shrunk and, by 2010, Canadian airline Jazz bought into Pluna at a valuation of $60 million.
  • Then it faced several outside challenges, including a currency crisis in Argentina, a key Pluna market, and a 2011 Chilean volcano eruption that caused off-and-on flight cancellations in the region for months.
  • But the biggest obstacle for Leadgate arguably was its government partner, now led by a new president, whose adverse actions included the state-owned oil company changing demanding earlier payments. Plus, the government board members blocked a new debt issuance, which would have helped alleviate a growing cash crunch.
  • Leadgate turned its 75% stake back over to the government in mid-2012, for zero dollars, after which Pluna filed for bankruptcy and then liquidated. Even though the Leadgate partners had indemnity agreements, they were arrested after returning to Uruguay, ostensibly to testify in an investigation into the airline's failure.
  • Go deeper: An airline investment becomes a Catch-22

Inside of Uruguay, the Pluna affair was an enormous scandal.

  • The Leadgate partners were viewed as arrogant outsiders, who may have skirted corners as Pluna went into a tailspin.
  • Ultimately, however, their "crimes" were viewed more about being on the losing end of a political fight, rather than actually committing criminal acts.

It also seemed to be over.

But Leadgate, which believes it was extorted to sell its Pluna stake for no compensation, this past February quietly transferred any remaining legal rights to Tenor Capital Management, a New York hedge fund that buys into situations where it thinks there could be international arbitration claims.

  • Tenor is a serious player. Last year it successfully won an award of more than $1 billion award against Venezuela, related to a gold mine nationalization.

An entity called Latin American Regional Aviation Holding Corp. last week sent a non-public letter to Uruguay, claiming that Pluna was expropriated in alleged violation of international law. Tenor is not explicitly mentioned in the letter, which has been obtained by Axios, but LARAH appears to be a front for Tenor Capital (which isn't commenting).

LARAH, officially domiciled in Panama to take advantage of a Panama-Uruguay treaty, plans to soon commence legal proceedings, possibly via a World Bank arbitration body called ICSID. And it's expected to seek exponentially more than the $15 million that Leadgate originally paid for Pluna.

The bottom line: One of the past decade's strangest private equity sagas is making a comeback, and Uruguay's government looks to be on defense this time around.

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