Source: https://uschinatradewar.com/category/delaware-law/
Timestamp: 2019-04-20 06:50:22+00:00

Document:
Since the last blog post focused on trade policy and trade and customs issues, with extensive coverage of the Trade Promotion Authority fight in the US Congress, after addressing the trade area briefly, this blog post plays catch up and follows the other issues, products liability, patents/IP, antitrust and most important securities.
With the dramatic plunge in the Chinese stock market, there is real lesson to be learned from all the US securities cases reported in this blog against Chinese companies that have listed in the United States. There is a fundamental difference between the US and Chinese stock markets.
China stocks drop 8.5% in massive rout…China’s Shanghai Composite index shed 8.5% on Monday, a bone-rattling decline that raises questions about the government’s ability to prevent a crash. Beijing managed to stabilize markets with a dramatic rescue in late June and early July, intervening in a number of ways to limit losses for investors.
But the rout has now resumed: Monday’s slump was the biggest daily percentage decline since 2007. The vast majority of companies listed in Shanghai, including many large state-owned firms, fell by the maximum daily limit of 10%. Losses in Shanghai, and on the smaller Shenzhen Composite index, accelerated into the close. Shenzhen, which is heavy on tech stocks, closed down 7%.
Investors are worried about a possible withdrawal of stock market support by Beijing, and signs of a sharper slowdown in China’s economy.
Industrial profit data released Monday indicate that factories in the world’s second-largest economy are losing momentum. Profits dropped 0.3% in June, compared to the same period last year, the government said.
On Friday, an early measure of China’s manufacturing activity for July came in below analyst expectations. The reading was the lowest in 15 months.
China’s stock markets have been extremely volatile this year. The first signs of trouble came in June, after the Shanghai Composite peaked at more than 5,100 points, a gain of roughly 150% over the previous 12 months. When the bubble burst, the index lost 32% of its value in just 18 trading sessions.
Chinese shares suffered their biggest one-day drop in over eight years, wiping out hundreds of billions of dollars of market value and calling into question the effectiveness of Beijing’s recent efforts to prop up the market. . . .
Traders and analysts listed several reasons for the sudden slide, which came amid relatively thin trading volumes. Some cited fears of the effect of an unwinding of heavy investor borrowing to buy shares, while others pointed to concern that the government could soon pull back on its recent attempts to underpin the market. . . . .
Monday’s big decline shows investors have become skeptical of the market and of the government’s ability to control it. The move fits with the history of the volatile Chinese market, where government-engineered bull markets have often ended with spectacular selloffs that left stocks languishing for years. . . .
“The cat is out of the bag when it comes to China, and the collapse in the stock market overnight has confirmed that Beijing’s stabilization polices are not working,” says David Madden, market analyst at brokerage IG. “I feel that confidence will be difficult to get back, no matter how much money they throw at it.” . . .
The market-rescue measures could mean more harm down the road, they say, by reinforcing the idea that the government will come to the rescue whenever there is a crisis, undermining the progress China has made in allowing more room for risk in its financial system. . . .
To put the Chinese stock market drop in perspective, in the Charts accompanying the Article, the Wall Street Journal reported that the New York Stock Exchange has a total value of $19.7 trillion with NASDAQ being $7.4 trillion for a total of $27.1 trillion. In contrast, the Wall Street Journal reported that the composite China Stock Exchange value is $14.2 trillion, but this includes the Hong Kong Exchange of $4 trillion, which is run by much stricter rules than Shanghai and Shenzhen. The Shanghai and Shenzhen stock exchanges total $10.3 trillion, with the Shanghai stock exchange at $5.9 trillion and the Shenzhen stock exchange being $4.4 trillion. The $10.3 trillion dollar value, however, is still greater than the $5 trillion stock market of Japan and the $1.8 trillion of Germany.
With the 30 percent drop in the Chinese stock market since June, the loss in Chinese stock is about $3 trillion. This Chinese stock bubble is so big that it is very difficult for any government, even the Chinese government, to control the market. The United States faced this problem in 1929, which led to the Great Depression, and the Japanese government faced a stock market collapse in the early 1990s, which led to the lost decade. Stock market bubbles can get so large that no government can control the situation.
Because of this problem, on July 27th it was widely reported that the International Monetary Fund (“IMF”) has told the Chinese government that while interventions in the stock market in general are appropriate to prevent major disorder, prices should be allowed to settle through market forces. Chinese officials reportedly assured the lender that the measures should be considered temporary. But that statement alone creates instability in the market because no one knows when the Chinese government will terminate the measures.
The world’s biggest hedge fund has turned on the world’s fastest-growing economy. Bridgewater Associates LP, one of Wall Street’s more out-spoken bulls on China, told investors this week that the country’s recent stock market rout will likely have broad, far reaching repercussions.
The fund’s executives once had been vocal advocates of China’s potential. But that was before panic in the country’s stock markets shaved a third of the value off Shanghai’s main index . . . “Our views about China have changed” Bridgewater’s billionaire founder, Raymond Dalio, wrote with colleagues in a note sent to clients earlier this week. “There are now no safe places to invest.” Bridgewater, which has $169 billion under management, is renowned for its ability to navigate global economic trends . . . .
The move adds Mr. Dalio and Bridgewater to a growing chorus of high-profile investors who are challenging the long-held view that China’s rise will provide a ballast to a whole host of investments, from commodities to bonds to shares in multinational firms. . . . .
Kingdon Capital Management ILC, a nearly $3 billion New York hedge-fund firm, told clients this week it had sold all its shares in Chinese companies listed on the Hong Kong exchange. It said it was spooked by the fallout from a surge in China in the use of borrowed money to purchase stocks, particularly after authorities cracked down on the practice, helping drag down Kingdon’s investments.
The firm said it would wait until the level of such borrowing in the market drops further before going in anew.
The shifts by Kingdon and Bridgewater follow a series of concerns raised publicly last week about China by other high profile hedge-fund managers, including Elliott Management Corp. founder Paul Singer, Perry Capital LLC founder Richard Perry and Pershing Square Capital Management LP founder William Ackman. . . .
But there is a more fundamental problem with the Chinese stock market. Before the recent crash there was already indications/warnings in this blog that the Chinese stock market could drop significantly. The warning/indication is the very significant number of private class action securities cases brought in the United States and cases brought by the Securities and Exchange Commission (“SEC”) against Chinese companies that have listed their stock on US exchanges. In contrast to the Chinese system, the SEC’s job is not to pump up the US stock market and intervene in its actions. The SEC’s job is to protect the integrity of the market, which means that the earnings and statements of public companies must be accurate and truthful. This is important because real investments in stock of public companies require that the actual earnings and assets of the company be real, not fake.
The same could be said of the Hong Kong Stock Exchange, which in contrast to the in-China Exchanges, is heavily regulated by the Securities and Futures Commission of Hong Kong (“SFC”). In contrast to China, this year the SFC is reporting another record year of investment in the fund management business and that the market growth since 1999 can be attributed to the “robust regulatory regime . . .[which] is fundamental to Hong Kong’s development as an international asset management centre. . .” and the SFC’s continued cooperation and work with international regulators. See http://www.secactions.com/sfc-reports-hong-kongs-growth-as-international-investment-hub/.
In contrast to the SEC and the SFC, however, the role of the China Securities Regulatory Commission, according to its spokesman Zhang Xiaojun, is to “continue efforts to stabilize market and investor sentiment, and prevent systemic risk.” The state-owned China Securities Finance Corp apparently has pledged to loan 21 Chinese securities firms about $42 billion to purchase shares. This reaction has left the Chinese government heavily invested in its own stock market. The China Securities Finance Corp had borrowed a stunning 1.22 trillion renminbi from commercial banks to buy stocks as of July 13, according to financial media Caixin, and is now one of the top 10 shareholders of many listed firms.
A main critique of the government’s plan is that it is simply unsustainable. Beijing may have hoped that it could prop up the market long enough for economic and earnings growth to catch up and make valuations more reasonable. . . .
And valuations are still extremely high. The overall Shanghai market trades at 15 times forward earnings, near its long-term average. Yet stripping out China’s banks, which investors have shunned for fear of hidden bad loans, ratios look much higher. The tech heavy Shenzhen market, for instance, traded at 31 times forward earnings, 65% above its historical average, before Monday’s fall. . . . It is clearly a dangerous game for investors to stick around in Chinese stocks while that happens.
Other Chinese stock experts have stated that price-to-earnings ratios in China — a measure that indicates whether a company is fairly valued — have been well over 100 this year, in the neighborhood of values on the NASDAQ when the U.S. dot-com bubble burst.
But the problem with that statement is that it assumes that the earnings stated by Chinese companies, in fact, are accurate. People can truly invest in stock with confidence only when they know that the company statistics are factual and true earnings of a company are available to the public.
I have one family member, who has done very well in the US stock market, buying Microsoft, for example, when it was a very young company, at $3 a share. But she charts stocks and uses graphs to determine the predicted earnings growth and compares the charts against the stock price to determine whether a company’s stock is undervalued or overvalued.
This is the Golden Rule for most investors who employ fundamental analysis and have a long term perspective. Buy stocks of high-quality companies at good prices and continue holding them as long as the companies’ performance merits doing so.
Sales drives earnings; earnings drives the stock price. That’s what it comes down to for fundamental investors. You might hear of different ways to buy and sell stocks, and countless books have touted systems that promise great returns. But over the long term fundamental analysis is what works in building wealth.
Value investing, as practiced by Buffett and his mentor Benjamin Graham, is a time-tested method involving fundamental analysis that has served many investors well. But for the typical person . . . fundamental analysis focused on growth stocks might be more appropriate.
This is because individual investors can spot a good growth company quickly. . .
Is this a well-managed company?
Is its stock reasonably priced?
We seek great management because talented, capable executives know how to ensure their company thrives over the long term amid competitive battles and periodic downturns. These are the people, in other words, who are responsible for driving the sales and growth increases that fuel stock prices.
See http://www.betterinvesting.org/Public/SingleTabs/BI+Mag/Articles+Archives/0210publiccs.htm for more information.
But value investing is based on comparing actual company earnings to stock prices.
Although certain Chinese companies do not play with their earning and numbers, the number of securities cases in the United States against Chinese companies, which have listed in the United States, indicate that many do. When the faulty earnings are coupled with a Chinese government approach not to protect the integrity of the market but to simply puff up the market, bubbles are created, and when bubbles burst many individuals and companies are badly burned.
The difference between investing in the United States and investing in China is the difference between investing and gambling. In the United States, many analysts believe that the US stock market is not overvalued because the earnings to stock price do not indicate a vastly overpriced market. When I was in college, the Dow Jones Industrial Average for the New York Stock Exchange was at 700. It is now on July 27th at 17,440. What justifies that high stock average is not speculation or simply attempts by the US government to puff up the market, it is significantly increased earnings by US companies, but that means that the earnings reported by US public companies must be real and accurate.
In addition, when a professional gambler goes into the casinos in Las Vegas and Macau, he knows the odds/risks associated with each different gambling game and which game gives him the best chances of winning. So professional gamblers will often play blackjack or poker, because the odds are much better than with slot machines.
But in the Chinese stock market, one does not even know the odds of winning. In China, an investor does not have a government agency committed to making sure that the earnings and assets reported by a Chinese company are accurate. In fact, in China the actual earnings and assets of companies, especially state-owned companies, may be confidential available only to management and not to investors in the Chinese stock market.
As one Chinese stock analyst in Shanghai recently stated, the severity of an 8.5 percent drop in the Shanghai Composite Index is bad enough, but what angers him the most is not knowing why it tumbled so much. In a market where unprecedented intervention has made government money one of the biggest drivers of share prices, authorities are not transparent enough for investors to make informed decisions. Thus Chinese markets are not real markets; they are government gambling operations in which real corporate earnings are often confidential and not based on reality.
The Chinese stock market can only recover and become stable when the Government truly protects the integrity of the market by making sure that the earnings/numbers reported by Chinese companies that list on the markets are true and accurate.
For further information on this issue, please see article below on the Puda Coal case and the other US Securities cases filed against Chinese companies.
The Trans Pacific Partnership (“TPP”) negotiations are ongoing in Maui, Hawaii with 13 countries, including the United States, Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. Although Japanese Prime Minister Shinzo Abe will attend, the chance of actually sealing a final agreement is a long shot at best. Many issues need to be finalized including access to the Canadian Dairy and Poultry markets and to the Japanese rice market.
In addition to the Japanese Prime Minister, several US Senators and Representatives will be there, including Representative Rosa DeLauro, a staunch opponent of the agreement.
The administration has indicated they want to wrap up negotiations in this round. My colleagues and I are here to say that is altogether too fast a schedule. The agreement itself is riddled with problems. Congress, industry, advocates still have enormous concerns which the administration has done little or nothing to resolve.
But for Congress to vote on the Agreement before Christmas and 2016, an election year, the Agreement has to be completed by September or October at the latest. Paul Ryan has predicted a final agreement in late fall, which would be after the Canadian elections in mid-October.
The new Trade and Customs Enforcement Bill, which was passed by both the House and Senate, is still at the Conference Committee stage to iron out the differences between the two bills. The Senate has appointed conferees- Senators Hatch, Cornyn, Thune, Isakson, Wyden, Schumer, and Stabenow.
WASHINGTON, DC — Last month, the House passed the Trade Facilitation and Trade Enforcement Act, important legislation to update and strengthen the enforcement of our trade laws. This followed the passage of a Senate version of the bill in May. Today, Ways and Means Committee Chairman Paul Ryan (R-WI) released the following statement on the status of the legislation.
Effectively this means that the new Customs and Trade Enforcement bill will have to wait until after the August legislative recess.
On July 28, 2015, a new steel case was filed against Cold-Rolled Steel Flat Products from China, Brazil, India, Japan, Korea, Netherlands, Russia, and the United Kingdom.
In the attached Federal Register notice, ITC FED REG NOTICE COLD ROLLED STEEL, the US International Trade Commission (“ITC”) has set the preliminary injury conference on August 18. 2015.
The decision to bring the large antidumping and countervailing duty case coincided with U.S. Steel’s announcement that it had posted a $261 million net loss in the second quarter of 2015.
Letter to Lisa R. Barton, Secretary, USITC; requesting the Commission to conduct an investigation under sections 701 and 731 of the Tariff Act of 1930 regarding the imposition of countervailing and anti-dumping duties on Certain Cold-Rolled Steel Flat Products from Brazil, China, India, Japan, Korea, Netherlands, Russia, and the United Kingdom.
This is also why the Import Alliance for America is so important for US importers, US end user companies and also Chinese companies. The real targets of antidumping and countervailing duty laws are not Chinese companies. The real targets are US companies, which import products into the United States from China.
As mentioned in prior newsletters, we are working with APCO, a well-known lobbying/government relations firm in Washington DC, on establishing a US importers/end users lobbying coalition to lobby against the expansion of US China Trade War and the antidumping and countervailing duty laws against China for the benefit of US companies.
On September 18, 2013, ten US Importers agreed to form the Import Alliance for America. The objective of the Coalition will be to educate the US Congress and Administration on the damaging effects of the US China trade war, especially US antidumping and countervailing duty laws, on US importers and US downstream industries.
See the Import Alliance website at http://www.importallianceforamerica.com.
We will be targeting two major issues—working for market economy treatment for China in 2016 as provided in the US China WTO Agreement for the benefit of importers and working against retroactive liability for US importers. The United States is the only country that has retroactive liability for its importers in antidumping and countervailing duty cases.
We are now in the process of trying to gather importers to meet with various Congressional trade staff as soon as possible to discuss these issues. If you are interested, please contact the Import Alliance through its website or myself directly.
BUSINESS DEALS AND INVESTING IN IRAN?
In the “best case” scenario, if all the involved governments approve the [Joint Comprehensive Plan of Action] (“JCPA”), Iran cooperates, and the IAEA is eventually then able to establish the Implementation Day so that the European Union and the United States will then alter their respective sanctions regimes, what should the U.S. business community expect? Does this mean anything close to “business as usual” for U.S. exports and trade with, and investments in, Iran?
The short answer to this “what” question is “Absolutely not!” Careful and thoughtful strategic planners in U.S. companies need to be aware of the extremely limited effect that “lifting sanctions” will have for those U.S. companies after that Implementation Day.
See the full article at http://www.dorsey.com/eu-us-business-interests-2015-iran-nuclear-settlement (emphasis in the original).
The cases against Lumber Liquidators keep rolling on.
On July 29, 2015, Laura Gonzalez filed the attached complaint, GONZALEZ LUMBER LIQUIDATORS, against Lumber Liquidators for false advertising and consumer protection violations.
Letter to Lisa R. Barton, Secretary, USITC; requesting that the Commission conduct an investigation under section 337 of the Tariff Act of 1930, as amended, regarding Certain Lip Balm Products, Containers for Lip Balm, and Components Thereof. The proposed respondents are: OraLabs, Inc., Parker, CO; CVS Health Corporation, Woonsocket, RI; CVS Pharmacy, Inc., Woonsocket, RI; Walgreens Boots Alliance, Inc., Deerfield, IL; Walgreen Co., Deerfield, IL; Dollar Tree, Inc., Chesapeake, VA; Dollar Tree Stores, Inc., Chesapeake, VA; Five Below Inc., Philadelphia, PA; Wuxi Sunmart Science and Technology Co., Ltd., a/k/a Wuxi Sunmart Group Co., Ltd., a/k/a Wuxi Shengma Science & Technology Co., Ltd., China; and Wuxi Sunmart Plastic Co., Ltd., China.
On June 5, 2015, Xerafy Ltd. filed the attached patent infringement complaint, ZHEJIANG PATENT CASE, against Sensestone Technologies Co., Ltd. and Zhejiang Jiakang Technologies Co., Ltd.
On June 10, 2015, Wenger SA filed the attached trademark infringement complaint, WENGER FUZHOU TMK COMPLAINT, against Fuzhou Hunter Product Import and Export Co., Swiss Digital USA, Krummholz International, Swissgear SARL, and Zhijian “Hunter” Li.
On June 19, 2015, Fellowship Filtering Technologies filed the attached patent complaint, BAIDU PATENT, against Baidu, Inc. Beijing Baidu Netcom Science & Technology Co. and Baidu USA LLC.
On July 1, 2015, Personalized Media Communications filed the attached patent complaint, TOP VICTORY, against Top Victory Electronics (Taiwan) Co. Ltd., TPV Int’l (USA), Inc., Envision Peripherals, Inc., Top Victory Electronics (Fujian) Co. Ltd., TPV Electronics (Fujian) Co. Ltd., TPV Technology Ltd. and Vizio, Inc.
On July 1, 2015, China International Marine Containers (Group) Ltd., Columbian Boiler Company LLC and Gaz Liquifieds Industrie filed the attached patent complaint, MARINE PATENT CASE, against Jiangzi Oxygen Plant Co., Ltd.
On July 14, 2015, Conair Corp and Babyliss Faco filed the attached patent complaint, CONAIR, against Taizhou Jinba Health Technology Co., Ltd.
There have been developments in the China antitrust area.
In light of the recent China stock market crash, it is informative to review the latest US developments in the Puda Coal case. In various newsletters and blog posts in 2013 and 2014, I reported complaints filed by the SEC and various Private parties in class action securities cases against Puda Coal, a Chinese company listed on the US Stock Exchange. Puda Coal defrauded investors by taking their one asset, a Chinese coal mine, and transferring a 49 percent stake in Shanxi Coal to a private equity fund controlled by state-owned firm CITIC Group, which then sold interests to Chinese investors. They took this action without notifying their US investors.
The Puda Coal story continues, and on July 24, 2015, the U.S. Securities and Exchange Commission (“SEC”) won a $250 million default judgment against two former executives of China-based Puda Coal Inc. for allegedly defrauding U.S. investors, after the defendants failed to appear in New York federal court to face the claims.
During a brief hearing in Manhattan court, Judge Denise Cote ordered former Puda Coal chairman Ming Zhao and CEO Liping Zhu to jointly pay $116 million in disgorgement and $17.6 million in prejudgment interest. The judge also ordered Zhao to pay a $116 million penalty and Zhu to pay a $1.2 million penalty.
In the February 2012 complaint, the SEC alleged that Zhao secretly transferred Puda Coal’s sole revenue-producing asset to himself and then sold a large portion to CITIC. Puda Coal then conducted two public offerings without telling U.S. investors that it was a shell company.
Private securities class actions continue to plague Chinese companies whose securities are traded through American Depositary Shares (ADS’s) in the United States. Chinese companies frequently use ADS’s to trade their shares, which may involve fewer required disclosures than issuance of stocks in the United States. This practice does not immunize these companies from securities litigation, as illustrated by several recent noteworthy class actions.
The federal courts system recently centralized eight class actions against Alibaba, the largest e-commerce online service in China, in the U.S. District Court for the Southern District of New York. Alibaba entered the U.S. securities market last year amidst great fanfare, as the Alibaba IPO was reputedly the largest ever in the United States, raising $25 billion for the company, surpassing the previous record held by the Agricultural Bank of China.
Having entered the U.S. market, the company found itself the target of class actions filed in federal courts in California and New York filed over the past several months. After hearing arguments from the litigants, the U.S. Judicial Panel on Multidistrict Litigation determined that centralization of the litigation in New York best served the interests of justice, citing the fact that the relevant documents and witnesses are available in New York. Judge Colleen McMahon will preside over the cases.
The attached complaints, Khunt v Alibaba (SDNY) Klein v Alibaba (SDNY) Ziolkowski v Alibaba (SDNY) MING HUANG ALIBABA Rand v Alibaba (SDNY), generally allege that all purchasers of Alibaba ADS’s suffered harm from misstatements by the company. On Jauary 28, 2015, media outlets reported that the State Administration of Industry and Commerce, a Chinese regulator, had discussed with Alibaba some concerns over the company’s business practices in July 2014, prior to the IPO. The regulator allegedly discussed the use of Alibaba’s online services by some vendors to market counterfeit goods, among other alleged infractions. On January 29, Alibaba also reported earnings that were lower than previously expected. According to the complaints, these disclosures contributed to a sharp decline in share prices, which led to the lawsuits.
In an action filed in federal court in California, the plaintiff alleges that Xunlei, an internet platform for digital content in China, released misleading public statements that harmed investors in the company’s ADS’s that are traded on Nasdaq. In this case, the plaintiff targets not only the Chinese firm, but also the U.S. financial companies that acted as underwriters for the company’s IPO. The complaint names J.P. Morgan Securities, Citigroup, and Oppenheimer as co-defendants.
The complaint alleges that the company’s registration statement filed in connection with the IPO contained misstatements. The allegations focus on the company’s efforts in developing a new product that would enable crowd sourcing of unused bandwith and data storage. The complaint alleges that the company failed to disclose in its prospectus the risks associated with that project, which contributed to lower earnings and lower share prices.
Two class actions have been filed in federal court in California against Yingli Green Energy, a major producer of solar energy products in China. Both complaints accuse Yingli of misstatements in its releases of quarterly and annual financial reports from March 2014 to March 2015. The allegations focus on a drop in the value of Yingli’s ADS’s on the New York Stock Exchange after the March 25, 2015 news release. The complaints allege that the company misrepresented its financial outlook in its earlier public statements.
Unlike the above cases alleging public misstatements in connection with ADS’s, a recent case in the District of Nevada takes issue with the fact that the company said nothing at all (i.e., “going dark”). The case against China Mining alleges that the company failed to make timely securities filings in the United States despite a contractual obligation to make such filings pursuant to an agreement in connection with the sales of over-the-counter securities. The complaint further alleges that the company’s principal used the proceeds of the sale for personal uses in breach of the agreement. The plaintiffs assert state-law contractual and fiduciary claims in addition to private claims for alleged securities fraud under federal law.
Jing Wang, a former Qualcomm Inc. Executive Vice President, began by constructing a cover-up. Then he engaged in insider trading, using inside information taken from his employer. The scheme failed. Mr. Wang has been sentenced to 18 months in prison and directed to pay a $500,000 fine after pleading guilty to securities fraud based on his insider trading, money laundering tied to his efforts to evade detection and admitted to obstruction. U.S. v. Wang, 3:13-cr-03487 (C.D. Calif. Filed Sept. 20, 2013).
The EB-5 program was designed to create a path to becoming a permanent residence in the U.S. for certain immigrants while facilitating job creation in the United States. Initiated in 1990, the program gives a foreign applicant a path to permanent residency following an investment of $1 million, or $500,000 in a targeted employment area. The investment must be in a USCIS approved U.S. commercial enterprise, defined as any for-profit activity formed for the ongoing conduct of lawful business. The applicant obtains a conditional green card following the investment. It is good for two years. If the investment creates or preserves at least 10 full time jobs during the two year period the applicant may obtain a permanent green card.
While the program has been successful at spurring investment in the U.S. and giving applicants an opportunity to obtain a permanent green card, there have been difficulties. In the past the SEC has brought fraud actions based on the investment program. Now the Commission has brought its first action charging individuals with acting as unregistered brokers in connection with the EB-5 program. In the Matter of Ireeco, LLC, Adm. Proc. File No. 3-16647 (June 23, 2015).
Outsized trades continue to draw SEC scrutiny and enforcement actions – even where the agency does not have the evidence to fully plead a claim. Despite the difficulties of these so-called “suspicious” trading cases, in many instances the Commission is able to develop the evidence to support its allegations. In the meantime the trading profits are typically held in a frozen account.
SEC v. Luo, (S.D.N.Y. Filed June 23, 2014) is a “suspicious” trading case. The action centers on the buy-out announcement for Qihoo 360 Technology Co, Ltd, by its Chairman and CEO and a consortium of other affiliates, announced on June 17, 2015. Defendant Hijian Luo is a resident of Guangzhou, China. He is the CEO of 4399 Co., Ltd., an online game company that provides single, multiplayer and children’s games along with animation through the internet.
 R. Mac, Alibaba Claims Title for Largest Global IPO Ever with Extra Share Sales, Forbes, Sept. 22, 2014.
 Transfer Order, In re Alibaba Group Holding Ltd. Sec. Litig., MDL No. 2631 (U.S. Jud. Panel on Multidistrict Litig. June 24, 2015).
 Mangla v. Yingli Green Energy Holding Co., No. 15-04600 (C.D. Cal.); Knox v. Yingli Green Energy Holding Co., No. 15-04003 (C.D. Cal.).
Recently, Dorsey& Whitney LLP issued its attached July 2015 Anti-Corruption Digest, Anti-Corruption-Digest-July2015.
On June 15, 2015, Doug Keally filed the attached class action securities complaint, XUNLEI SECURITIES ACTION, against Xunlei Ltd., Sean Shenglong Zou, Tao Shomas Wu, J.P. Morgan Securities LLC, Citigroup Global Markets Inc., and Oppenheimer & Co., Inc. in the U.S. District Court for the Central District of California (Case No. 15-4524).
On June 16, 2015, Euro Pacific Capital, Inc. filed the attached complaint , SECURITIES GOING DARK CHINA MINING, on behalf of a large group of individual investors against U.S. China Mining Group, Inc. and Hongwen Li in the U.S. District Court for the Southern District of New York under the federal securities law and state contract and fiduciary law (Case No. 15-4636) because the company decided to go dark and delist from the US exchanges.
On June 23, 2015, Maverick Fund, L.D.C. filed the attached first thin film solar complaint, FIRST SOLAR THIN FILM, against First Solar Inc., Michael J. Ahearn, Robert J. Gilette, Mark R. Widmar, Jens Meyerhoff, James Zhu, Bruce Sohn, and David Eaglesham, alleging violations of federal securities law in the U.S. District Court for the District of Arizona (Case No. 15-1156).
If you have any questions about these cases or about the US trade, trade adjustment assistance, customs, 337, patent, US/China antitrust or securities law in general, please feel free to contact me.
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.
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.
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.
“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.
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.
Kaidi LLC, Easton Rapids, MI.
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.
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.
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.
. . . . (“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.” . . . .
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.
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). . . .
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.
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.
There have been more developments in the US China Trade War.
The most important development may be the February 6, 2013 decision of the Chinese government to launch a major antidumping case against the United States, Canada and Brazil on Cellulose Pulp. The target is estimated to be about $2 billion in exports to China of Cellulose Pulp.
The respondent companies now only have 20 days from the date of initiation or by approximately February 26th to enter a notice of appearance at MOFCOM.
One very important point of Chinese antidumping and countervailing duty law, which is different from US antidumping and countervailing duty law, Chinese Customs will assume that an imported product is in the case if it is imported under specific Tariff Code Numbers in the case. In the Pulp Case, the specific Tariff Numbers are: 47020000, 47061000 and 47063000.
“These orders cover imports of honey, canned mushrooms, garlic and crawfish tail meat from China (Four Orders). We found CBP’s response deeply troubling and glaringly incomplete. It failed to provide any meaningful answers to our questions about the hundreds of single-entry “new shipper” bonds CBP accepted to secure the payment of AD duties assessed under the Four Orders.
l. According to CBP’s own data, the agency failed to collect almost $1 billion in AD duties assessed under the Four Orders from 2003-2011. It collected less than 10 percent of all duties assessed under those orders during that period.
2. The bulk of these duties are owed by importers who entered goods from exporters that were undergoing “new shipper” administrative reviews under the Four Orders before 2006.
3. Most of those duties are secured by single entry bonds (SEBs), which the importers were required to post with CBP upon entry. Each bond has a face value of two to four times the total value of the covered imports. According to CBP’s own data, the combined value of all SEBs on unliquidated entries from new shipper exporters under the Four Orders totaled $347 million as of Oct. 1, 2007.
This does not include the total value of such bonds that secured the assessed, but unpaid, duties under those orders as of that date.
4. In the wake of the importers’ massive and ongoing defaults, the insurance companies – sureties – that issued the bonds have, with rare exception, refused to pay CBP despite their legal obligation to do so.
5. Prior to the domestic producers’ filing of a lawsuit in April 2009 to compel the sureties to pay under the bonds and CBP to take legal action against the sureties, CBP had not filed a single collections lawsuit against any of the issuing sureties. Subsequent to the dismissal of that lawsuit, CBP has filed only a relatively small number of such actions.
The Vitamin C case is now going to trial after the Court dimissed all efforts of Chinese companies to get out of the case.
The Corporate/Securities world is abuzz because of a recent bench ruling by Chancellor Leo E. Strine, Jr., of the Delaware Court of Chancery, refusing to dismiss claims alleging that the former outside directors of a Delaware corporation doing business in China had breached their fiduciary duty of loyalty. The plaintiffs claimed that the directors failed their oversight function by not detecting the theft in China of the corporation’s primary assets by the Chairman in China.
The case is In re Puda Coal, Inc. Stockholders Litigation, C.A. No. 6476-CS (Del. Ch. Feb. 6, 2013) and involves a US Delaware corporation that is the subject of a Securities and Exchange Commission (“SEC”) enforcement and a federal securities law class action based on fraud. The auditor found that the company’s chairman had inappropriately transferred the company’s primary operating subsidiary to himself. The SEC suspended trading in the company’s stock, and the outside directors later resigned from the board of directors due to an alleged lack of cooperation from the company in trying to investigate and pursue the company’s claims.
If you have any questions about these cases or the legal areas, please feel free to contact me.

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