The New Zealand Superannuation Fund is bogged down in a seemingly hopeless, but understandable, legal wrangle over a $200 million investment in a Portuguese Bank that evaporated in late 2014.

Overnight the English courts dismissed a challenge from investors in Oak Finance, a Goldman Sachs-organised loan to Banco Espirito Santo that foundered when the bank was struck by fraud allegations and subsequently bailed out by the Portuguese government, ruling the case should be heard in Portuguese courts.

The NZSF, with a $200m commitment to the scheme alongside other international investors, launched legal action in early 2015 but has faced a difficult road in the courts.


While the potential legal ramification of the overnight ruling are academically fascinating - many cross-bank European loan agreements are written under United Kingdom law, leading to the country's courts being a jurisdiction of choice for resolving disputes - the effect for New Zealanders is more likely to just provide closure on one of the NZSF's rare missteps.

In hindsight, the investment looked dubious: Reports of fraud at the bank had been circulating prior to the investment, and the Oak Finance loan attracted only moderate interest. It was an investment that looked more risk than return, but was hedged with default insurance intended to protect against the loan going sour.

This careful structuring - NZSF boss at the time Adrian Orr said the investment was considered to be "risk-free" - came apart in the subsequent bailout. The Oak Finance loan was classified by the Bank of Portugal as equity due to shares held by Goldman Sachs, voiding the default insurance and seeing the NZSF investment not covered by the bailout.

The crisis saw Orr make an emergency call to Bill English on Boxing Day in 2014 to brief the Finance Minister of the likely $200m loss.

The crux of the legal challenge centred on the Bank of Portugal's classification decision.

Presumably - given Oak Finance's attempts to have the case heard in England - the Portuguese courts are considered less likely to overturn the administrative decisions of their own central bank.

These latest developments are not unexpected, even at the NZSF. Its 2015 accounts provided for the loss, but won't stop the legal challenge continuing in Lisbon.

When the stakes are this high - and the collective loss by the NZSF and its co-investors of a billion dollars is high by any standards - deep-pocketed investors are likely to explore any possible avenue for restitution, no matter how marginal their chances.