TRADE, 337 INTELLECTUAL PROPERTY, CUSTOMS FRAUD, SECURITIES AND ANTITRUST DEVELOPMENTS

TRADE–ALUMINUM EXTRUSIONS DISASTER

 One of the trade disasters for Chinese companies and US importers is the US antidumping and countervailing case on Aluminum Extrusions from China.  There are two reasons for the disaster. 

 First the big problem is the Countervailing Duty (“CVD”) case, which resulted in CVD rates for most Chinese exporters/producers of  374%.  The AD rates are high enough of 32-33%, but the CVD rate is simply over the top, having the effect of excluding many aluminum products from the United States.

 The reason for the high CVD rates is that the three Chinese companies chosen as mandatory respondents did not respond to the Commerce Department’s countervailing duty questionnaire.  Two Chinese companies did voluntarily cooperate with Commerce and received CVD rates from 8-9%, but Commerce refused to use these two rates for the rest of China. 

 The case has been appealed to the Court of International Trade (“CIT”), which has resulted in one remand.  Commerce refused to budge on the 374%, which resulted in another recent remand back to Commerce.   Specifically, on July 30, 2012, the CIT remanded the CVD determination back to Commerce again stating that the 374% rate is punitive, not remedial, and that Commerce was applying every single subsidy program even though some of the all other companies are not located in the provinces and municipalities where the subsidies are being given.  The Court further stated:

“The all-others companies are not the largest companies in this investigation and Commerce has neither explained 1) how smaller companies, which presumably are located in one province or town, can avail themselves of subsidies that exist in another province or town, nor 2) how the assumption that “the same types of subsidy programs exist across most provinces and municipalities” is a reasonable one for the all-others companies.  Thus, Commerce has not explained, based on the evidence in the record, how the all-others rate calculated is not punitive rather than remedial.”

 Attached is the entire Court remand determination. ALUMINUM EXTRUSIONS SECOND REMAND

We will have to wait and see how the Commerce Department responds to this remand.  Today, however, in the first administrative review Commerce rescinded the first Countervailing Duty review investigation for a number of Chinese aluminum companies case so some US import companies must be hopeful that the Court case will solve their problem.

 The second reason for this disaster, however, is the open ended nature of the product covered by the countervailing duty and antidumping orders.  More specifically, the scope/specific products covered by these orders is almost one page long in the Federal Register, which makes it extraordinarily complicated to figure out.  But the specific language that creates all the problems is the following:

 “Subject aluminum extrusions may be described at the time of importation as parts for final finished products that are assembled after importation, including, but not limited to, window frames, door frames, solar panels, curtain walls, or furniture. Such parts that otherwise meet the definition of aluminum extrusions are included in the scope. The scope includes the aluminum extrusion components that are attached (e.g., by welding or fasteners) to form subassemblies, i.e., partially assembled merchandise unless imported as part of the finished goods “kit” defined further below. The scope does not include the non-aluminum extrusion components of subassemblies or subject kits.

 Subject extrusions may be identified with reference to their end use, such as fence posts, electrical conduits, door thresholds, carpet trim, or heat sinks (that do not meet the finished heat sink exclusionary language below). Such goods are subject merchandise if they otherwise meet the scope definition, regardless of whether they are ready for use at the time of importation. . . .

 The scope also excludes finished merchandise containing aluminum extrusions as parts that are fully and permanently assembled and completed at the time of entry, such as finished windows with glass, doors with glass or vinyl, picture frames with glass pane and backing material, and solar panels. The scope also excludes finished goods containing aluminum extrusions that are entered unassembled in a “finished goods kit.” A finished goods kit is understood to mean a packaged combination of parts that contains, at the time of importation, all of the necessary parts to fully assemble a final finished good and requires no further finishing or fabrication, such as cutting or punching, and is assembled “as is” into a finished product. An imported product will not be considered a “finished goods kit” and therefore excluded from the scope of the investigation merely by including fasteners such as screws, bolts, etc. in the packaging with an aluminum extrusion product.”

 The key issue for US importers is what is a “finished goods kit”  As a result of this unclear product descriptions, questions have been asked as to whether these antidumping and countervailing duty orders cover imports of curtain walls/sides of buildings, tie racks, geodesic structures, motor cases, drapery rail kits, fence posts, window kits, shower doors, decorative water containers, cleaning systems, retractable awnings, water heater anodes, and door thresholds, just to name a few.

 The problem is that many aluminum finished products are imported into the United States in kit form because the containers are simply too small to take the finished product.  But if the finished products are imported as kits and the entire kit is not a finished goods kit, the importer owes 406% in CVD and AD duties.

 Many US importers are simply too scared to take the risk of importing Chinese products under this situation.  If a mistake is made, the US importer owes a cash deposit of 406% and is bankrupt.  This Aluminum Extrusions case is probably having a direct impact on billions of dollars in imports from China.

SOLAR CELLS

The vote in US International Trade Commission’s ( ITC’s) injury and critical circumstances determinations in the Solar Cells from China case is scheduled for November 7, 2012.

 CUSTOMS FRAUD—LINED PAPER ANTIDUMPING CASE

 As indicated in the attached indictment, on October 17, 2012, the US government brought a criminal action for Customs fraud against Watanabe Paper, Apego Inc., a US company, Fromus Psyche International, a Taiwan Company, and various Chinese individuals for transshipping Chinese lined paper products through Taiwan to avoid payment of antidumping duties.  To secure safe passage of the paper shipments into the U.S., prosecutors claim company officials doctored shipping documents and provided fraudulent invoices, bills of lading and packaging lists to conceal the Chinese origin of the products. The problem for the companies began when a Taiwan customs official stopped containers in Taiwan because the company could not provide the name of the products manufacturer.

 Attached is a copy of the indictment. Indictment

 NEW 337 CASE–HYDROXYPROGESTERONE CAPROATE

 A new section 337 Intellectual Property/Patent Case was filed on October 23, 2012 at the US International Trade Commission (“ITC”) against Hydroxyprogesterone Caproate from China and a number of other countries.  A summary of the filing and the list of respondent companies are below.  If anyone wants a copy of the complaint please feel free to contact me.

 Pending Institution Previous Next

      Docket No: 2919

      Document Type:337 Complaint

      Filed By: Adam H. Gordon

      Firm/Org: Wiley Rein LLP

      Behalf Of: K-V Pharmaceutical Company

      Date Received: October 23, 2012

      Confidential: Yes

       Commodity: Hydroxyprogesterone Caproate and Products

 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 Hydroxyprogesterone Caproate and Products Containing the Same. The proposed respondents are New England Compounding Pharmacy Inc., Framingham, MA; Alwan Pharmacy & Compounding Center, West Peoria, IL; Avella Specialty Pharmacy, Phoenix, AZ; Bellevue Pharmacy, St. Louis, MO; Betapharma (Shanghai) Co, Ltd, China; Boudeaux’s Specialty Compounding, Shreveport, LA; California Pharmacy & Compounding Center, Newport Beach, CA; College Pharmacy, Colorado Springs, CO; Compound Care Pharmacy, Louisville, KY; Compounding Solutions, Birmingham, AL; Daniel Drug, Fort Worth, TX; Five-Star Compounding Pharmacy, Clive, IA; Fagron, Inc., Saint Paul, MN; Hawthorne Pharmacy, Columbia, SC; Health Dimensions Compounding Pharmacy, Farmington Hills, MI; Hopewell Pharmacy & Compounding Center, Hopewell, NJ; Hubei Gedian Humanwell Pharmaceutical Co., Ltd., China; Hubei Saibo Chemical Co., Ltd., China; Jinan Haohua Industry Co., Ltd, China; Kelley-Ross &  Associates, Inc., Seattle, WA; Lacey Drug Company/Marietta Medical Center,Mariettta, GA; Letco Medical, Decatur, AL, Medisca, Inc., Las Vegas, NV; Owens Healthcare Compounding Pharmacy, Redding, CA; Partners In Care, Inc., Gainesville, GA; People’s Custom Rx, Memphis, TN; Pharmerica Corporation, Louisville, KY; Prescription Compounds, Baton Rouge, LA; Rye Beach Pharmacy, Rye, NY; Sherry’s Drug Compounding and Natural Pharmacy, Edmond, OK; Shanghai Jinhong Biopharmaceutical, Ltd., China; Stark Pharmacy, Overland, KS; The Compounder Pharmacy, Aurora, IL; The Compounding Shoppe, Homewood, AL; The Medicine Shoppe Pharmacy; Triangle Compounding Pharmacy, Cary, NC; Trinity Healthcare Medical Center, Ocala, FL; Universal Arts Pharmacy, Hialeah, FL; Village Compounding, Houston, TX; Wedgewood Pharmacy, Swedesboro, NJ; Westmoreland Pharmacy & Compounding, New Albany, IN; Williams Bros. Healthcare Pharmacy, Bloomington, IN; Wilson Pharmacy, Inc., Johnson City, TN; Women’s International Pharmacy, Madison, WI; Wuhan Xianghe Pharmaceutical Co., Ltd., China; and Xianju Hongyan Pharmaceutical Chemicals Co., Ltd., China.

If the ITC find that there has been a violation of section 337 case in this case, a year from now it can issue an exclusion order and US Customs and Border Protection (“CBP”) can exclude the infringing imports at the border.  The ITC can also issue cease and desist orders ordering the US importers to cease and desist selling infringing imports in the United States.  Failure to abide by these orders can result in very severe penalties.

 SECURITIES LAW

Attached also are three more articles by Tom Gorman, a Dorsey partner, about SEC litigation against Chinese companies.

 In the Third Article, Tom states in part:

 “Corporate governance

 A number of PRC based issuers have been named as defendants in SEC enforcement actions. These cases involve a range of issues including financial fraud, manipulation and misuse of assets.

 Misrepresentations and financial fraud are the central allegations in SEC v. SinoTechEnergy Ltd., Civil Action No. 2:12-cv-00960 (W.D. Louisiana Filed April 23, 2012). The defendants are the company, a Cayman Island corporation based in the PRC, its chairman and controlling shareholder, Qingzeng Liu, its CEO, Guoqiang Xin, and the former CFO, Boxun Zhang.

 The complaint alleges that the defendants mislead investors about the use of the $120 million raised in its IPO. Company filings claimed that it purchased key equipment carried on the balance sheet at $94 million. In fact it made only limited purchases worth less than $17 million. A separate count charges the Chairman with misappropriating over $40 million from the company. The complaint alleges violations of Securities Act Sections 17(a)(2) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) and seeks to impose liability under Section 20(a) as to the individuals. The case is in litigation.

 SEC v. Li, Civil Action No. CV-11-1712 (D. Ariz. Filed Aug. 30, 2011) is another action based on financial fraud allegations. The defendants are James Li, Thomas Chow, Wayne Pratt, Christopher Liu and Roger Kao. Mr. Li is a director, president and COO of Syntax-Brillian Corporation, a developer and distributor of H-D LCD TVs. Mr. Chow is a director and chief procurement officer of Syntax-Brillian while Mr. Pratt is the CFO. Messrs. Liu and Kao are executives with Taiwan Kolin, Co. Ltd.”

 In the Fourth Article, Tom writes in part:

 “Foreign corrupt practices act

 A series of cases have been brought alleging violations of the bribery and books and records and internal controls provisions of the Foreign Corrupt Practices Act that involve PRC state owned entities and their employees and U.S. companies and their officials. FCPA enforcement is of course a priority of for the Department of Justice (“DOJ”) and the SEC. Each has specialized units dedicated to investigating and prosecuting corruption cases and the DOJ has declared this to be a “new era” of FCPA enforcement.

 For public companies the cases have two aspects. One is the bribery provisions which generally prohibit making payments to any foreign official to obtain or retain business. Typically this includes employees of state owned enterprises, at least according to the DOJ and the SEC. The other is the books and records and internal control provisions. Generally, public companies are required to keep their books in reasonable detail. When payments to foreign officials are not properly recorded in the books and records of the enterprise it violates these provisions.

One recent example of the cases being brought by the DOJ and the SEC in this area are the cases involving former Morgan Stanley employee Garth Peterson. U.S. v. Peterson, (E.D.N.Y.) and SEC v. Peterson (E.D.N.Y. Filed April 25, 2012). Mr. Peterson, a U.S. citizen, is the former head of Morgan Stanley’s Shanghai office. The violations alleged in the court papers stem from Mr. Peterson’s dealings with the former Chairman of Yongye Enterprise (Group) Co., a Chinese state owned entity involved in real estate.”

In the Fifth and concluding article about SEC actions against Chinese companies, Tom states:

“Insider trading compliance

Insider trading has long been a priority for the Commission. Since the reorganization of the enforcement division and the creation of its market abuse specialty unit which focuses in part on these cases, the SEC has been very aggressive in bringing insider trading actions.

A number of recent SEC insider trading cases have involved residents of the PRC. Once example is SEC v. All Know Holdings Ltd., Case No. 11 cv 8605 (N.D. Ill. Filed Dec. 5, 2011), a case which centers on the acquisition of Global Education and Technology Group Ltd. by Pearson plc.

Global is a Cayman Islands corporation headquartered in Beijing, China. It provides English language services in China. Global’s American Depository Shares or ADSs are traded on NASDAQ. Pearson is a British corporation headquartered in London whose shares are traded in New York and London. On November 21, 2011 Pearson announced the acquisition of Global at a premium of 105% over the previous day share closing price. Global’s share price spiked 97% from $5.37 to $10.60.

Named as defendants are All Know Holdings Ltd, a British Virgin Islands Company, Lili Wang, Sha Chen, the president of All Know, and ZhiYao. Each of the defendants made large purchases of Global ADSs in the days shortly prior to the deal announcement. None of the purchasers had a history of trading in these shares, although Ms. Wang had bought shares in Global’s IPO. In some instances the traders do not appear to have the financial means to conduct the trading.

Ms. Wang is the only defendant which the complaint connects to the transaction other than through trading. She has an undefined relationship with Xiaodong (Veronica) Zhang, the cofounder and Chairman of the Board of Global. On information and belief the complaint claims Ms. Zhang financed the trading of Ms. Wang. . . .

Another insider trading case centered on the acquisition of Canada based Nexen, Inc. by China based CNOOC Limited, announced on Monday July 23, 2012. Within days of that announcement the SEC brought an insider trading action against Well Advantage Limited and unknown traders related to two accounts. The agency won a freeze order over millions of dollars in profits made from trading in the shares of Nexen which appreciated 52% on the deal announcement. The case is based largely on the timing and size of the trades which the complaint calls “suspicious.” SEC v. Well Advantage Limited (S.D.N.Y. filed July 27, 2012).

The deal was highly publicized since it involves the acquisition of Canadian owned oil assets by a Chinese oil company. Nexen is a global energy company domiciled in Canada with its headquarters in Calgary. Its shares were listed on the Toronto and New York Stock Exchanges. CNOOC is China’s largest producer of crude oil and natural gas. The company is based in Hong Kong and its shares are listed on the Stock Exchange of Hong Kong Limited.  . . .

Conclusion

Although the number of securities class actions is declining, the Commission and the PCAOB continue to struggle with issues, their executives and auditors based in the PRC. To date neither the SEC nor the PCAOB have been able to obtain the degree of cooperation and transparency required for trading in the U. S. capital markets. The promise of SOX and the PCAOB that the Board would have access to the work papers of firms registered with it has yet to be fulfilled despite repeated efforts by U.S. officials. While the recent filing by the SEC in the Deloitte Touche Tohmatsu subpoena enforcement action suggests that progress is being made, if past history is a guide it will be a long road.

Other cases involving Chinese issuers and their executives only serve to highlight the difficulties and lack of transparency regarding these companies while raising issues about accountability. Financial fraud, manipulation and insider trading are issues in all markets. They can be particularly difficult to police in a forum which is known its shroud of secrecy and impenetrability.

Nevertheless, it is clear that Chinese companies and their executives want access to international capital markets and business channels, including those in the U.S. As this drive continues these companies and their executives will find it necessary adopt the much greater degree of transparency and accountability required by the U.S. and international markets.”

The three articles are attached in full. GORMAN ARTICLE 3 GORMAN ARTICLE 4 GORMAN ARTICLE 5

It should be noted that when in Beijing in June, I met with several law firms that had done IPOs for Chinese companies in the United States.  One law firm that had done the most IPOs for Chinese companies in the United States told us that the practice has simply stopped and no Chinese companies are doing IPOs in the United States.  One reason may be the SEC enforcement actions that Tom has described above.

 SECURITIES CLASS ACTION–TIBET PHARMACY

 A class action securities case was filed back in August against Tibet Pharmacy with substantial Chinese business and a number of Chinese individuals.  See the attached complaint. Tibet Pharma complaint

ANTITRUST–JAPANESE AUTO PARTS

As a follow up to my post on Auto Parts, today the Justice Department announced that Nagoya, Japan-based Tokai Rika Co. Ltd., has agreed to plead guilty and to pay a $17.7 million criminal fine for its role in a conspiracy to fix prices of heater control panels (HCPs) installed in cars sold in the United States and elsewhere.

Including Tokai Rika, nine companies and 11 executives have pleaded guilty or agreed to plead guilty in the department’s ongoing investigation into price fixing and bid rigging in the auto parts industry. Furukawa Electric Co. Ltd., DENSO Corp., Yazaki Corp., G.S. Electech Inc., Fujikura Ltd., Autoliv Inc. and TRW Deutschland Holding GmbH pleaded guilty and were sentenced to pay a total of more than $790 million in criminal fines. Nippon Seiki Co. Ltd., has agreed to plead guilty and awaits arraignment and sentencing. Additionally, Junichi Funo, Hirotsugu Nagata, Tetsuya Ukai, Tsuneaki Hanamura, Ryoki Kawai, Shigeru Ogawa, Hisamitsu Takada, Norihiro Imai, Kazuhiko Kashimoto, Toshio Sudo and Makoto Hattori have pleaded guilty and been sentenced to pay criminal fines and to serve jail sentences ranging from a year and a day to two years each.

See today’s attached announcement from the Justice Department. JAPANESE AUTO PARTS PRICE FIXING

 If anyone has any questions about these cases, please feel free to leave a comment or send me an e-mail.  I will be in China from November 8th through November 22nd.  If anyone wants to meet with me to discuss these various legal areas or US litigation in general, please feel free to contact me.

Best regards,

Bill Perry