TRADE IS A TWO WAY STREET
“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”
PRESIDENT RONALD REAGAN, JUNE 28, 1986
US CHINA TRADE WAR NEWSLETTER JULY 30, 2015
Dear Friends,
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.
Best regards,
Bill Perry
CHINA STOCK MARKET CRASH—WARNINGS FROM THE UNITED STATES
On July 27, 2015, both CNN and the Wall Street Journal reported a sharp drop in the Chinese stock market of 8.5%. This drop took place after a drop of 32% in the Shanghai exchange, wiping out almost $3 trillion in value. As CNN stated on July 27th:
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.
As the Wall Street Journal reported on the same day, “The combined value of China’s stock markets eclipses many of the world’s biggest exchanges…” In reporting the July 27th stock plunge in China, the Wall Street Journal also stated:
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.
As Donald Straszheim, head of China research at New York-based Evercore ISI, a well- known US analyst on the Chinese stock market, recently stated, “The markets in China now are not really markets. They are government operations.”
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.
Before the IMF announcement, as reported in the Wall Street Journal on July 23, 2015, many US hedge fund managers, who had been bullish on China, have changed their story:
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. . . .
“It looks worse to me than 2007 in the United States,” Mr. Ackman said during an investment conference in New York, pointing to the unreliability of the government’s economic statistics. ”Much worse.”
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.
But the key economic criterion in judging the health of a stock market is valuation, which is comparing the earnings of various companies and their stock price. As Alex Frangos of the Wall Street Journal stated in an opinion piece on July 27th:
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.
She started out in an investment club run by the National Association of Investment Clubs (“NAIC”). One can find their website at http://www.betterinvesting.org. The NAIC describes its fundamental principle of value investing, followed by such stock experts as Warren Buffet, as follows:
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.
Fundamental analysis comes down to studying a company’s financial performance. Broadly, there are those who look for growth stocks and those who look for value equities, but the line between value and growth investing is gray: As Warren Buffett says, value and growth “are joined at the hip.”
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. . .
The Three Most Important Ideas:
Management, Management, Management
The individual investors who belong to Better Investing ask two questions when studying a stock:
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Is this a well-managed company?
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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.
TRADE POLICY
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.
Although election year politics in 2016 are a concern in the US, the Canadian National Election is in this October of 2015 making it very difficult for the Canadian government to cave on dairy and poultry issues. Canadian officials along Congresswoman DeLauro are all arguing that the negotiations need to slow down. Congresswoman DeLauro has stated:
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.
TRADE AND CUSTOMS ENFORCEMENT BILL STILL AT THE CONFERENCE COMMITTEE STAGE
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.
On July 29, 2015, the House Ways and Means issued the attached Press Release, HOUSE WAYS AND MEANS TRADE CUSTOMS BILL, stating:
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.
“Since the passage of customs and trade enforcement legislation in the House and Senate, work has taken place to resolve the differences between the two chambers’ bills. I am pleased that we have made significant progress, and I expect this will allow us to move to a formal conference committee soon after Congress returns from this district work period. I am confident the bill we send to the president will include important House priorities and provide the United States the enforcement tools needed to ensure American workers and businesses are competing on a level playing field.”
Effectively this means that the new Customs and Trade Enforcement bill will have to wait until after the August legislative recess.
TRADE
NEW STEEL CASE FILED
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.
U.S. Steel President and CEO Mario Longhi stated:
“We’ve taken aggressive and decisive actions to address the extremely challenging conditions we continue to face in North America. Our Carnegie Way efforts, combined with short-term cost improvements, have helped to partially offset the continued depressed volumes and low prices in both the tubular and flat-rolled markets as well as the negative impact of tremendously high levels of imports.”
COUNTRY DUMPING MARGINS ALLEGED
Brazil 50.07 – 59.74 percent
China 265.98 percent
India 42.28 percent
Japan 82.58 percent
South Korea 93.32 – 176.13 percent
Netherlands 47.36 – 136.46 percent
Russia 69.12 – 320.45 percent
United Kingdom 47.64 – 84.34 percent
See ITC announcement below:
Docket Number 3080
Received:
Tuesday, July 28, 2015
Commodity:
Cold-Rolled Steel Flat Products
Investigation Number:
701-TA-540-544 and 731-TA-1283-1290
Filed By:
Alan H. Price; Jeffrey D. Gerrish; Roger B. Schagrin; R. Alan Luuberda; and Stephen A. Jones
Firm/Organization:
Wiley Rein LLP; Skadden, Arps, Slate, Meagher & Flom LLP; Schagrin Associates; Kelley Drye & Warren LLP; King & Spalding LLP
Behalf Of:
AK Steel Corporation, Arcelor Mittal USA LLC, Nucor Corporation, Steel Dynamics Inc., and United States Steel Corporation
Country:
Brazil, China, India, Japan, Korea, Netherlands, Russia, and the United Kingdom
Description:
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.
IMPORT ALLIANCE FOR AMERICA
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?
Nelson Dong, Larry Ward, and Clint Foss of the Dorsey Export Controls/National Security Group have written an article on when sanctions might be lifted against Iran. The primary point they make is:
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).
CHINA ANTIDUMPING
On May 21, 2015, in the attached notice, US OPTICAL FIBER MOFCOM PRELIM, the Chinese Ministry of Commerce (“MOFCOM”) announced preliminary antidumping duties on imports of Optical Fiber Preform from Japan and the United States. The Antidumping rates are listed below:
Japanese companies:
1. Shin-Etsu Chemical Co., Ltd. 8.9%
2. Sumitomo Electric Industries, Ltd. 7.8%
3. Fujikura Ltd. 8.3%
4. Furukawa Electric Co., Ltd. 8.3%
5. ALL Others 8.9%
U.S. companies:
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Corning Incorporated 39.0%
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OFS Fitel, LLC. 16.9%
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ALL Others 39.0%
PRODUCTS LIABILITY
MORE CASES AGAINST LUMBER LIQUIDATORS
The cases against Lumber Liquidators keep rolling on.
False Advertising and Consumer Protection
On May 29, 2015, Dennis Chapman filed the attached class action complaint against Lumber Liquidators for false advertising and consumer protection violations. CHAPMAN LUMBER LIQUIDATORS
On June 9, 2015, Melanie Jeffcoat filed the attached class action complaint against Lumber Liquidators for false advertising and consumer protection violations. JEFFCOAT LUMBER LIQUIDATORS
On July 29, 2015, Laura Gonzalez filed the attached complaint, GONZALEZ LUMBER LIQUIDATORS, against Lumber Liquidators for false advertising and consumer protection violations.
IP/PATENT AND 337 CASES
NEW 337 COMPLAINTS
On June 12, 2015, a new 337 patent case was filed against Containers for Lip Balm. The ITC Notice is set forth below:
Received:
Friday, June 12, 2015
Commodity:
Lip Balm Products, Containers for Lip Balm
Investigation Number:
337-TA-961
Filed By:
Louis S. Mastriani
Firm/Organization:
Adduci, Mastriani and Schaumberg LLP
Behalf Of:
eos Products, LLC and The Kind Group LLC
Description:
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.
PATENT AND OTHER INTELLECTUAL PROPERTY CASES
NEW PATENT AND TRADEMARK CASES AGAINST CHINESE, HONG KONG AND TAIWAN COMPANIES
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.
ANTITRUST
There have been developments in the China antitrust area.
CHINA ANTI-MONOPOLY CASES
T&D JULY REPORT
In early May and July T&D sent us their attached May and June reports on Chinese competition law. T&D Monthly Antitrust Report of May 2015 TD Monthly Antitrust Report of June 2015
SECURITIES
PUDA COAL
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.
In April 2013, I reported 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. The complaint alleged 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 alleged 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.”
In March of 2013 I sent out an article by our China office about the famous bench decision by the Delaware Court in In Re Puda Coal, Inc. Stockholders Litigation, C.A. No. 6476-CS (Del. Ch. Feb. 6, 2013). In that attached February 3, 2013 decision, PUDA COAL STRINE RULING DELAWARE, Chancellor Leo Strine, Jr., of the Delaware Court of Chancery refused to dismiss a claim for breach of fiduciary duty against independent directors of Puda Coal Inc., a Delaware corporation with primary assets and operations in China. Plaintiffs alleged that the independent directors “had failed to detect the unauthorized sale of the company’s assets by its chairman. “
In the opinion Chancellor Strine bluntly reminded independent directors that they must be capable of fulfilling their fiduciary duty of oversight, no matter where the company’s assets or operations are located. As Chancellor Strine stated in several quotes from the opinion:
“[I]f you’re going to have a company domiciled for purposes of its relations with its investors in Delaware and the assets and operations of that company are situated in China … in order for you to meet your obligation of good faith, you better have your physical body in China an awful lot. You better have in place a system of controls to make sure that you know that you actually own the assets. You better have the language skills to navigate the environment in which the company is operating. You better have retained accountants and lawyers who are fit to the task of maintaining a system of controls over a public company.”
“Independent directors who step into these situations involving essentially the fiduciary oversight of assets in other parts of the world have a duty not to be dummy directors … [I]f the assets are in Russia, if they’re in Nigeria, if they’re in the Middle East, if they’re in China, that you’re not going to be able to sit in your home in the U.S. and do a conference call four times a year and discharge your duty of loyalty. That won’t cut it.”
“There’s no such thing as being a dummy director in Delaware, a shill, someone who just puts themselves up and represents to the investing public that they’re a monitor.”
Strine also had a message for independent directors who, like the independent directors of Puda Coal, thought they could avoid responsibility by resigning. He suggested that the act of resignation itself could be a breach of fiduciary duty. “And that’s another reason for sustaining the complaint.”
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.
The SEC in its motion for a default judgment argued that the defendants’ refusal to face the allegations in New York “evinces a cavalier attitude toward these proceedings and the harm caused by their conduct.”
The SEC also said in its June 8 court filing that the scheme had caused U.S. investors to lose $499 million in market capitalization. “Here, defendants came into the U.S. public markets to raise capital for their coal mining venture and then absconded with the proceeds, leaving the shareholders of Puda with an empty shell,” the SEC wrote. “In short, they stole the coal company for their own purposes and fraudulently used the U.S. capital markets to finance their expansion plans.”
UPDATES ON US SECURITIES CASES AGAINST CHINESE COMPANIES
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.[1] 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.[2]
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.[3] 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.[4] 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.[5] 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.
Besides private enforcement, federal regulators also have been busy prosecuting persons affiliated with Chinese interests. Here are some recent developments as reported by the blog post, “SEC Actions”:
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Former Qualcomm Executive Sentenced For Insider Trading:
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).
(http://www.secactions.com/former-qualcomm-executive-sentenced-for-insider-trading/)
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SEC Brings First Unregistered Broker Charges Based on EB-5 Program:
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).
See http://www.secactions.com/sec-brings-first-unregistered-broker-charges-based-on-eb-5-program/.
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SEC Files Another Suspicious Trading Case:
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.
See http://www.secactions.com/sec-files-another-suspicious-trading-case/.
[1] O’Silva v. Alibaba Group Holding Ltd., No. 15-05002 (N.D. Cal.); Ziolkowski v. Alibaba Group Holding Ltd., No. 15-01405 (S.D.N.Y.); Chao v. Alibaba Group Holding Ltd., No. 15-05020 (C.D. Cal.); Rand v. Alibaba Group Holding Ltd., No. 15-00991 (S.D.N.Y.); Huang v. Alibaba Group Holding Ltd., No. 15-04991 (C.D. Cal.); Klein v. Alibaba Group Holding Ltd., No. 15-00811 (S.D.N.Y.); Khunt v. Alibaba Group Holding Ltd., No. 15-00759 (S.D.N.Y.)
[2] R. Mac, Alibaba Claims Title for Largest Global IPO Ever with Extra Share Sales, Forbes, Sept. 22, 2014.
[3] Transfer Order, In re Alibaba Group Holding Ltd. Sec. Litig., MDL No. 2631 (U.S. Jud. Panel on Multidistrict Litig. June 24, 2015).
[4] Keally v. Xunlei Ltd., No. 15-04524 (C.D. Cal.)
[5] 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.).
FOREIGN CORRUPT PRACTICES ACT
Recently, Dorsey& Whitney LLP issued its attached July 2015 Anti-Corruption Digest, Anti-Corruption-Digest-July2015.
NEW SEC, SECURITIES, AND COMMODITIES CASES AGAINST CHINESE COMPANIES FOR FRAUD
On May 28, 2015, Kevin T. Fox filed a class action securities action against Yingli Green Energy Holding Co. Ltd., Liansheng Miao, and Yiyu Wang in the U.S. District Court for the Central District of California (Case No. 15-4003). Bhimsain Mangla filed a similar complaint in the same court on June 17, 2015 (Case No. 15-4600). See attached complaints. YINGLI SECURITIES MANGLA YINGLI COMPLAINT
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).
On July 1, 2015, the US Commodity Futures Trading Commission filed the attached complaint, KERING CAPITAL, against Yumin Li and Kering Capital Ltd. for violations of the Commodities Exchange Act
On July 6, 2015, the Securities and Exchange Commission filed the attached securities complaint, LUCA SECURITIES, against Luca International Group, LLC, Luca Resources Group, Luca Energy Fund, LLC, Entholpy EMC, Inc., Bingqing Yang, Lei (Lily) Lei, Anthony Pollace, Yong (Micahael) Chen, Luca Operation LLC, Luca Barnet Shale Joint Venture, Luca to Kalon Energy LLC, Luca Oil, J&Q Int’l Trading, Inc., Skyline Trading LLC and Xiang Long Zh
