MIAMI — More than 80 years ago, Germany sold tens of thousands of bonds to American investors in an effort to recover financially from World War I. Later, Adolf Hitler used some of the money raised by those bonds to build the powerful Nazi war machine that would ravage Europe during World War II.
Now, a half-dozen U.S. bondholders are turning to federal courts in an effort to force Germany to make good on its promise to repay the debts, which today could be worth hundreds of millions, if not billions, of dollars. Action has been heating up in lawsuits filed in Miami, New York and Chicago, including a victory for investors last month when an appeals court rejected Germany's attempt to dismiss their case.
If the bondholders ultimately win, their lawyers could ask judges to seize German assets in the U.S. to repay them, a tactic that has worked in other legal disputes over money owed by foreign governments.
But if Germany prevails, the bondholders argue, it could undermine the global system through which governments raise money by issuing bonds.
"Our position is not only correct under the law, it would avoid such a potentially far-reaching precedent," said investor attorney Sam Dubbin of Coral Gables, who has frequently represented Holocaust survivors in Nazi-related claims.
Enrico Brandt, a spokesman for the German Embassy in Washington, said the lawsuits are baseless. Brandt said the only way bondholders can redeem the securities is to go through a validation process mandated by a 1953 international treaty and later enshrined in German law.
"Consequently, the efforts of the plaintiffs to outmaneuver the validation procedure by suing in the United States will fail," Brandt said in an e-mail. "Any bond passing the validation procedure successfully will be honored."
Even with the questions of the bonds' validity, a robust market has developed with people around the globe buying and selling them in hopes they one day can be redeemed.
Bondholders claim in their lawsuits Germany has erected a nightmarish maze of bureaucratic red tape around the validation process. One key issue for many bonds is a purported Soviet Red Army plunder of thousands of bonds in 1945 from a Nazi vault as the war ended. Germany said those bonds had already been redeemed to the government, but were still improperly resold around the world. Any from that batch would therefore be invalid, the government argues.
Court documents indicate that Germany has repeatedly cited a "list of stolen bonds" in denying payment, but attorneys for bondholders say Germany won't share its list or allow it to face public and legal scrutiny. The validation law also requires the difficult task of proving the bond wasn't physically present in Germany on Jan. 1, 1945, not long before Germany surrendered.
"There are so many problems with the validation process that there is no real validation process," said Tampa attorney James Lowy, who represents a group of investors separate from those Dubbin works for.
Dubbin said documents from a German archive show most of the looted bonds were returned by the Soviets, a conclusion echoed by historians hired by lawyers in the New York case.
Germany also has claimed it is not subject to U.S. court rulings regarding its bonds, a stance rejected by federal appeals courts in Atlanta and New York. The New York court, however, dismissed one bondholder lawsuit on grounds that they did not first seek repayment through the German validation process. The bonds in that case are valued at more than $400 million.
If Germany ultimately loses in American courts and still refuses to pay the bondholders, their U.S. attorneys could ask judges to seize German assets in this country or ask German courts to enforce the judgment. Lawyers in a separate case previously seized millions of dollars in Cuban assets frozen in the U.S. to pay lawsuit damages.
Richard Buxbaum, an international law professor at the University of California at Berkeley, said the U.S. government set up a fund for investors by seizing Chinese assets in a case involving unpaid bonds from pre-communist China. In the German bonds case, he said, the key for a U.S. judge will be to decide if Germany's system of authenticating the securities passes U.S. constitutional muster.
"You have to show some proof of ownership," Buxbaum said. "My guess is that the American courts would apply the German law."
Germany tried to win dismissal of the lawsuit filed by Dubbin's clients, World Holdings LLC, on grounds that the matter didn't belong in U.S. courts. But a federal judge in Miami rejected that and her decision was upheld Aug. 9 by the 11th U.S. Circuit Court of Appeals, which took pains to point out the issue remains unsettled. Germany could still appeal the decision.
None of the bondholders suing in U.S. courts would agree to comment for this story.
The U.S. court battles are only the latest intrigue to surround the bonds, first issued by Weimar Republic in the 1920s as Germany struggled to recover from World War I, which had ended in 1918.
The bonds were sold in the U.S. from 1924 to 1930 to help Germany invest in new projects and industries and pay war reparations. One series, known as the Dawes Bonds, raised $110 million in 1920s dollars – the equivalent of about $1.2 billion today; another series called the Young Bonds generated more than $98 million – about a billion today.
Investors were told the German bonds were guaranteed safe. Even President Calvin Coolidge urged Americans to snap them up.
But things changed after 1933, when Hitler and the Nazis rose to power. Hitler defaulted on the bonds and ordered that none be repaid, causing them to plummet in value worldwide. Then, Germany began quietly buying them up for pennies on the dollar before World War II began in 1939, stashing thousands in bank vaults and reselling others.
The upshot was that Germany got to keep all the money raised through the bond sales, leaving investors in the cold. And Hitler was able to use a chunk of the money "to rebuild Germany's war machine," according to Dubbin's lawsuit.
Dubbin and Lowy argue the issue remains relevant today.
"It's a question of accountability," Lowy said. "They are saying, 'We will build things with your money but we're not going to pay you.' You think these bonds are safe. They're not."