Over the last week, there have been major developments in the Trade, Patents, Securities and Antitrust areas. The beat of the US China Trade War goes on.
Commerce has referred a number of Chinese exporters and US importers to Customs for evasion of the Antidumping and Countervailing Duty Orders through the Third Country Solar Cells issue. See attached document. PUBLIC VERSION Solar Cells Referral to CBP In fact, we are working with one importer now because Customs is requiring the importer to prove that all the solar cells in the Chinese panels and modules are foreign solar cells and have not been commingled with Chinese solar cells.
Unfortunately, the ITC reached an affirmative injury determination in the Steel Sinks case, ignoring the “but for” standard, the higher causation standard set in the Wood Flooring appeal. The major reason for the loss in this case, however, was the failure of US importers and Chinese producers/exporters to participate in the case. They gave up too soon. Attached are the antidumping and countervailing duty orders that were issued in the case. SINKS AD ORDER FED REG SINKS CVD ORDER FED REG
COMMERCE DEPARTMENT RULE CHANGE
Attached is a revision to the Commerce Department’s antidumping and countervailing duty regulations regarding the submission of factual information, including surrogate value information, on the record at the Commerce Department, which was published April 10, 2013 in the Federal Register. COMMERCE RULES CHANGE ON SURROGATE VALUES The most important change apparently is the decision of the Commerce to eliminate the opportunity to submit surrogate values after the preliminary determination.
This is a real blow to US importers and Chinese producers/exporters because often the Chinese respondents have no idea what critical value Commerce will use until they see the Commerce Department’s preliminary determination. If, for example, Commerce uses an aberrational surrogate value for a specific raw material input in the preliminary determination, the US importer or the Chinese company had the opportunity to get a more reasonable value and put it on the record. No longer.
By the way, Commerce’s argument that Petitioners or respondents could not comment on the submission of the surrogate values after the preliminary determination is bogus. Generally, Commerce takes another 6 months after the preliminary determination to issue its final determination and during that period both Petitioners and Respondents submit case and rebuttal briefs and attend a hearing at Commerce.
Now the chance to counter an aberrational surrogate value has been eliminated making it even more difficult for US importers and Chinese producers/exporters to get a fair determination at the Commerce Department.
HONEYGATE– HONEY TRANSSHIPMENT
Attached is an article about the Customs fraud investigations in the transshipment of Chinese honey around US antidumping orders. Honeygatel The author is Michael Coursey, at the Kelley, Drye law firm. Mike and I used to work at the Commerce Department together. Mike represents the US producers in the Honey, Mushrooms and Garlic from China antidumping cases so understand that he is looking at antidumping cases from a domestic producer’s point of view.
The point of the article, however, is that US producers are pushing for Customs investigations against transshipment around antidumping orders, and Customs is taking these investigations very seriously. As Mike states in the attached article as just one example of the Customs investigations listed in the Article:
“ICE’s undercover investigation also led to it to uncover another major player in Honeygate: Jun Yang, a wealthy Chinese businessman and purported pillar of the Houston, Texas community who served on advisory boards to the Mayor of Houston and hobnobbed with the rich and famous. Yang is believed to be involved in efforts to avoid dumping duties through the “new shipper” administrative review process at the Commerce Department. Specifically, Yang made millions as owner of honey and seafood importer National Commodity Corp. by brokering sales to Honey Solutions and others of honey that was adulterated or mislabeled as being from India and Malaysia when it really came from China. Yang has agreed to the prosecutors’ recommendation for a 74-month prison sentence, imposition of a $250,000 fine and restitution of $2.64 million. The judge has not yet ruled on the plea agreement. . . .”
“In addition to Honeygate, there is an increasing trend of the U.S. Department of Justice (DOJ) and private citizens fighting customs fraud under the False Claims Act, which allows private citizens to sue on behalf of the United States and share in any recovery if they provide the government with the necessary information and evidence. The first phase of Honeygate marked the DOJ’s first use of Sarbanes-Oxley’s criminal obstruction of justice statute, which includes a 20-year incarceration penalty per offense, in the Alfred L. Wolff prosecutions.
This trend has continued in other customs fraud prosecutions of importers that falsify entry documents and cover-up such fraud in order to avoid paying millions in customs duties. Much of this area is still evolving, with at least four U.S. federal circuit courts currently split as to whether certain customs fraud and smuggling laws are just civil or also criminal in nature.”
In talking to Mike, he also told me that he is behind the effort to go after the US insurance companies that posted new shipper bonds for Chinese producers/exporters. Mike estimated that the liability for one US insurance company is close to $200 million.
Attached is also another article about the Honeygate Customs fraud cases. CANADIAN FOOD WHOLESALER HONEY GATE
Attached is a patent complaint that was filed on April 8, 2013 by Guardian Media Technologies against Haier, Desay, Lasonic, Digway, Veehom, Denca and Express Way Ltd. for infringement of certain patents for TVs and DVD players. HAIER CASE
Another patent complaint was filed on April 11, 2013 against Huawei by Media Digital. HUAWEI PATENT MEDIA DIGITAL
A new section 337 case was filed on April 3rd against China on Linear Actuators. If anyone wants a copy of the complaint, please feel free to contact me. The notice is below:
Docket No: 2949
Document Type: 337 Complaint
Filed By: Gorman & Williams
Behalf Of: Okin America Inc. and Dewert Okin GmbH
Date Received: April 3, 2013
Commodity: Linear Actuators
Description: Letter to Lisa R. Barton, Acting Secretary, USITC; requesting
that the Commission conduct an investigation under section 337 of the
Tariff Act of 1930, as amended regarding Certain Linear Actuators. The
proposed respondents are Changzhou Kaidi Electrical Co. Ltd., China and
Kaidi LLC, Easton Rapids, MI.
FARRIS ARTICLE—DELAWARE COURT DECISION ON ZST DIGITAL NETWORKS
On April 9, 2013, Ted Farris, an international capital markets partner in our New York office, authored an article about Deutsch v. ZST Digital Networks, Inc. (Del. Ch. C.P.A. No. 8014-VCL, March 28, 2013), in which the Delaware Chancery Court authorized seizure of a Chinese company’s assets and a court ordered shareholder buy-out in what should have been a simple books and records case. See attached order. ZST ACTUAL ORDER Ted Farris specializes in assisting Chinese companies, acquirers and special committees in considering an exit from U.S. regulatory and reporting requirements in going dark and going private transactions, including delistings from US stock exchanges. As Ted states in the Article:
“Delaware Court Authorizes Seizure of Chinese Company’s Assets in Books and Records Case
China-based companies incorporated and publicly traded in the United States have received another harsh blow from the Delaware Court of Chancery, which appears to be losing patience with failure of Chinese companies to comply with Delaware corporate-law requirements. In Deutsch v. ZST Digital Networks, Inc. (Del. Ch. C.P.A. No. 8014-VCL, March 28, 2013), China-based ZST Digital failed to comply with a December 2012 default judgment ordering it to produce corporate books and records to a U.S. shareholder in Delaware pursuant to Section 220 of the Delaware General Corporation Law. On the shareholder’s motion, Vice Chancellor J. Travis Laster held the company in contempt of court, granted the U.S. shareholder the right to put his shares back to the company at a price based on book value derived from its last SEC financial report, and appointed a receiver for the Chinese company’s assets to enforce the court orders, including payment of the put price. Although, as a practical matter, it may be extremely difficult for the receiver to reach the company’s assets which are all in China, the case unveils a potentially powerful new weapon to enforce U.S. corporate-law standards on Chinese companies that are incorporated in the United States and have shares traded in U.S. markets. The ruling may further encourage China-based companies to consider exiting U.S. securities markets.
Stonewalling a Books and Records Request
ZST Digital is a China-based company that was incorporated in Delaware in 2006. Its business operations are entirely in China where it is engaged in supplying digital and optical equipment to cable equipment operators, including internet-enabled set top boxes, primarily in Henan Province. ZST Digital’s common shares became publicly traded through a 2009 share exchange that was accounted for as a reverse merger. The company filed reports with the Securities and Exchange Commission until August 2012, when it “went dark” by filing a Form 15 with the SEC to terminate its reporting obligations under the Securities Exchange Act of 1934. However, its shares continued to trade in the over-the-counter market. The company’s last SEC filing, its Form 10-Q for the quarter ended September 30, 2011, claimed total revenue exceeding $125 million for the nine months ended September 30, 2011. After that filing, ZST Digital ceased filing financial reports with the SEC. In addition, BDO, the company’s auditor resigned in March 2012, and the company claimed it was therefore unable to provide audited financial statements (although it subsequently hired a new auditor). The company’s share price declined from a high of approximately $11.00 in January 2010 to $1.30 per share in April 2013. The stock’s current 52-week range as of April 5, 2013 was from $6.76 to $0.31 per share.
Peter Deutsch, a ZST Digital shareholder who claimed to own more than 3.9 million shares, brought an action in the Delaware Court of Chancery after ZST Digital “went dark” seeking access to the company’s books and records under DGCL Section 220. Prior to the lawsuit, the company’s counsel at Pillsbury Madison & Sutro LLP had responded by letter offering access to the books and records at the company’s principal office in China, a common response by China-based companies to such a request. Deutsch was not willing to travel to China to see the documents and filed suit demanding that they be produced in Delaware or New York. ZST Digital ultimately failed to respond, and a default judgment was entered on the Section 220 claim in December 2012.
The default judgment ordered ZST Digital to produce books and records in the State of Delaware that included extensive financial disclosures and company strategic plans, including any plans to “go private.” The court rejected the company’s request that Deutsch travel to China to inspect the information. When ZST Digital failed to comply with the terms of the initial order, Deutsch filed a motion against the company for contempt of court, for grant of a put right at the fair value of his shares and for appointment of a receiver. Vice Chancellor Laster granted the plaintiff’s motion for contempt and also granted Deutsch the extraordinary and unprecedented right to put his shares of ZST Digital back to the company at their supposed book value of $8.21 per share (at a time when the shares were trading for only approximately $1.39 per share).
The value of the court-ordered buy back exceeded $30 million and was based on the Company’s book value derived from the balance sheet included in its last-filed Form 10-Q report for the quarter ended September 30, 2011. The court further ordered the appointment of a receiver for the company’s assets for the purpose of enforcing the court’s orders, including the put right, and ordered ZST Digital to pay all costs and expenses of the action, the receivership and enforcement of the court’s orders. ZST Digital has so far failed to respond to the court’s orders.
In his court filings, Plaintiff Deutsch alleged that ZST Digital and other Chinese companies have “gone dark” and ceased filing reports with the SEC in order to lower their stock prices and make a “going private” transaction less expensive. The court-ordered buy-out option requested by Plaintiff Deutsch was based on court-ordered buy-outs in the context of closely held corporations. Plaintiff conceded the unprecedented nature of the “put” remedy in the public company context. The court’s order will effectively prevent ZST Digital from undertaking a “going private” transaction as many other Chinese companies have done over the last several years. (More than 100 Chinese companies have “gone dark” or “gone private” since January 1, 2008.) Any effort to cash out U.S. shareholders now would undoubtedly face substantial court obstacles given Deutsch’s put right and the receivership order. What impact this will have on the company’s U.S. shareholders remains to be seen.
As ZST Digital has simply failed to respond to the lawsuit, Deutsch’s extraordinary legal victory may have little practical impact so long as the company stays out of the United States and does not attempt a transaction with its U.S. shareholders. ZST Digital has no U.S. assets for the receiver to seize and has so far shown no inclination to pay the put price required by the court’s order. Nevertheless, the case shows that the Delaware courts are willing to use every conceivable remedy against a Chinese company that they perceive as having flouted court orders and ignored the corporate-law rights of U.S. shareholders. The decision leaves both ZST Digital and its shareholders in limbo.
Chinese companies have often attempted to stonewall U.S. shareholders of their Delaware-incorporated entities under DGCL Section 220 by insisting that U.S. shareholders travel to China to inspect books and records. Vice Chancellor Laster made clear that shareholders can insist on such production in the State of Delaware. Further, the list of documents ordered to be produced under DGCL Section 220 was extremely broad and included detailed financial and strategic information even though ZST Digital was no longer required, as a matter of U.S. securities law, to file any reports or disclose information under SEC reporting requirements. In the absence of a confidentiality agreement with a shareholder, this kind of material, nonpublic information could not, as a practical matter, be disclosed to one shareholder (who might freely trade on it) without making that information available to all shareholders through a public announcement.
If Delaware courts can really require public disclosure of financial information by non-reporting companies pursuant to a shareholder demand under DGCL Section 220, this section could in theory be used to defeat a company’s purpose in “going dark” by deregistering under the Exchange Act. Nevertheless, the extreme remedies of granting a put right (in effect a court ordered buy out), appointing a receiver and effectively requiring public disclosure of financial and strategic information by a publicly traded company may reflect the unusual facts of the case. There is no question that ZST Digital’s refusal to participate in the case and its repeated defaults in responding to court orders motivated Vice Chancellor Laster in shaping these extraordinary remedies. If ZST Digital had instead made an appearance, contested the matter and offered some compromise proposal on the information requested, it could almost certainly have obtained a better result for the company that would not have limited its future flexibility in dealing with U.S. shareholders.
Still, the ZST Digital case means that Chinese companies would be well advised to pay more attention to U.S. legal risks given the Delaware courts’ increasingly tough stances in these areas. It is no longer sufficient for U.S.-incorporated Chinese companies to “go dark” and then ignore compliance with basic requirements of U.S. corporate law. The Delaware courts are not likely to give such companies the benefit of the doubt any longer (if they ever did), and other states regularly follow Delaware’s lead in matters of corporate law.
China-based companies with shares trading in U.S. public markets should carefully consider the implications of the ZST Digital case as part of their determination of whether to remain trading in the United States or to consider an exit through a “going private” transaction.”
Attached also an article from “Theasset.com” quoting Mr. Farris on this issue. FARRIS QUOTE
On April 8, 2013, a New York Federal District Court Judge tossed Deloitte out of a class action securities lawsuit against Longtop Financial Technologies for lying to investors and exaggerating the size of its profit margins. In the attached opinion, the Judge determined that the Plaintiff had failed to sufficiently allege that Deloitte violated federal securities laws in signing off on Longtop accounts between June 2009-May 2011. LONGTOP SECURITIES DECISION TOSSING DELOITTE
CITIC AND PUDA COAL
ON April 8, 2013, a class action securities case was brought in the Federal Court in the Southern District of New York against Puda Coal Inc. and CITIC Trust Co., Ltd. Attached is a copy of the complaint. PUDA COAL CITIC
The complaint alleges that CITIC is “the largest Chinese private equity fund and merchant bank, which, by means of a transfer of 49% ownership interest and a 51 % pledge as security for a loan, now controls Puda’s sole operating subsidiary and its only source of revenues.”
The complaint further alleges that “this action arises from a fraudulent scheme in which Puda insiders improperly transferred the Company’s only revenue-producing, operating subsidiary to CITIC and then, with the assistance of CITIC, falsely portrayed to investors in Puda that the Company still possessed its operating subsidiary.”
The Vitamin C case goes on to the next phase. The first attack is the motion by Plaintiffs to obtain their legal fees from the Chinese defendants. The legal fees for Plaintiffs could well be in the millions. See the attached document asking for an extension to file the motion. VITAMIN C MOTION TO PAY PLAINTIFF’S LEGAL FEES The Court granted the extension.
This was followed by an April 11, 2013 Renewed Motion by Hebei Welcome and North China Pharmaceutical Group Corp. that the case be dismissed as a matter of law based on state and foreign sovereign compulsion and international comity. See attached document. SHORT HEBEI MOTION JUDGMENT In the motion, the Chinese defendants go into detail as to MOFCOM regulations issued in the late 1990s purportedly giving the Chamber the authority to set up a group to set prices. The Court has yet to rule on the Renewed Motion.
On April 12, 2013, Plaintiffs filed the attached injunction motion to enjoin the Chinese defendants from operating the cartel and setting the export prices for Vitamin C. INJUNCTION MOTION In the Fact Section of the attached motion, Plaintiffs state:
“Evidence admitted at trial established that after Plaintiffs filed their complaint in January 2005, Defendants continued meeting, exchanging information, and reaching agreements with one another. In November 2005, Wang Qiang of Aland wrote that the defendants “should not have any worry” about the lawsuit whether they won or lost, but that they should “do many things in a more hidden and smart way”:
“This act of deciding production or prices based on coordination is a kind of monopoly whatever the reasons. However, I believe we should not have any worry since the Ministry of Commerce is a friend of the court in the lawsuit. If we won the lawsuit, it would be hard for foreigners to make more trouble. Even if we lost the case, government would take the foremost part of responsibility. After all, we need to do many things in a more hidden and smart way.”
. . . . (“The recent antitrust lawsuit is unprecedented, but we shall not suspend the coordination mechanism of the VC industry in our country”); (noting that “the antitrust investigation was time-consuming” and that “[e]verybody must pay special attention to relevant matters on confidentiality”).
Wang Qi also testified that after the lawsuit was filed, the defendants discussed the need to keep meetings confidential and to be more careful about what was written down. . . . And Qiao Haili testified that, as a result of the lawsuit, any notes taken by meeting participants “would be torn apart.” . . . .
Eventually, with trial approaching, the meetings to discuss price subsided. At trial, Wang Qi of Aland testified that in the time since his 2008 deposition, his company had stopped meeting with competitors to discuss prices. . . . He also testified that he would know if such communications were taking place. . . .”
DOJ ANNUAL ANTITRUST REPORT 2013
On April 11, 2013, the Justice Department issued its annual 2013 antitrust report. In the report, there are two sections of interest to Chinese companies and US importers because it demonstrates how the Justice Department is going after foreign companies for price fixing of export prices using a cartel in the export of products to the United States. The point is that antitrust cases against foreign cartels are not just aimed at China.
The Criminal Division of the report states as follows:
Liquid Crystal Display Panels
On March 13, 2012, following an eight-week trial, a jury in the Northern District of California returned guilty verdicts against AU Optronics (AUO), a Taiwan manufacturer of liquid crystal display panels, its American subsidiary, AU Optronics America, and the former president and former vice president of AUO for their participation in a conspiracy to fix the price of thin film transistor liquid crystal display panels (TFT-LCD panels).
The jury was unable to return a unanimous verdict as to one of the subordinates charged. It returned not guilty verdicts against two other subordinates.
The guilty verdicts were notable in that the jury determined that the Division had proven beyond a reasonable doubt that the gain derived from the conspirators for sales into the U.S. was at least $500 million. This was the first time that a jury convicted a corporate defendant under the antitrust laws and applied the “twice the pecuniary gain or loss” alternative fine provision of 18 U.S.C. § 3571(d).
On September 20, 2012, AUO was sentenced to pay a $500 million fine and the convicted executives were each sentenced to serve three years in prison. The $500 million fine matches the largest fine ever imposed against a company for violating the U.S. antitrust laws.
The Division successfully retried the third AUO executive, who was found guilty after a three-week trial, on December 18, 2012. Including these trial convictions, the Division’s LCD investigation thus far has resulted in convictions of ten companies and criminal fines totaling $1.39 billion, as well as convictions of 13 executives, and charges against seven additional individuals (one awaiting trial and six who remain fugitives). . . .
Ongoing Investigations Continue to Produce Results
The Division is dedicating significant resources to the ongoing automobile parts investigation. To date, this investigation has yielded charges against nine companies and 12 individuals and more than $809 million in criminal fines for participation in conspiracies to fix prices of and rig bids on automobile parts, including safety systems such as seatbelts, airbags, steering wheels, and antilock brake systems, and critical parts such as instrument panel clusters and wire harnesses. Two of the executives charged are Japanese citizens. Each was sentenced in 2012 to serve two years in prison, the longest sentences imposed on foreign nationals voluntarily submitting to U.S. jurisdiction for an antitrust violation. During FY 2012, this investigation also yielded the third-largest criminal antitrust fine ever imposed—a $470 million fine against Yazaki Corporation. The Division continues to cooperate with its counterparts in Japan, Korea, the EC, and Canada, among others, on this investigation.
To date, the following corporate fines have been obtained:
• U.S. v. Yazaki Corporation, $470 million—the third largest criminal fine ever for an antitrust violation
• U.S. v. Furukawa Electric Company Ltd., $200 million
• U.S. v. DENSO Corporation, $78 million
• U.S. v. Fujikura Ltd., $20 million
• U.S. v. Tokai Rika Co., Ltd., $17.7 million
• U.S. v. Autoliv, Inc., $14.5 million
• U.S. v. TRW Deutschland Holding GMBH, $5.7 million
• U.S. v. G.S. Electech, Inc., $2.7 million
• U.S. v. Nippon Seiki Co., Ltd., $1 million
GENERAL LITIGATION PROBLEMS AGAINST CHINESE COMPANIES
In the attached decision, United States v. Pangang Group Company Ltd. and a group of affiliated Pangang companies, a federal judge in California threw out summonses that the Justice Department issued against titanium and steel producer, Pangang Group Co., and related entities in a criminal suit alleging the Chinese state-owned companies stole trade secrets from DuPont Co. by finding that the U.S. government failed to properly serve the defendants. PANGANG ORDER
Pangang was allegedly aided by former DuPont employee Tze Chao and others in the U.S. who wanted to sell titanium dioxide trade secrets. These include chemical technology company USA Performance Technology and one of its co-owners Walter Liew and his wife Christina. The Liews were arrested in July 2011 and indicted in August 2011 on charges that they tampered with witnesses, made false statements and attempted to delay the FBI’s effort to uncover the illegal sale of DuPont’s trade secrets to rival manufacturers, including Pangang.
Chao pled guilty in March 2012 to leaking confidential information from documents he reportedly retained after retiring in 2002. The Liews pled not guilty in April 2012 to charges over their alleged role in the scheme. In February, a magistrate judge ordered Walter Liew to be freed on $2 million bail after 19 months in custody.
If you have any questions about these cases or about these laws in general, please feel free to contact me.