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Cablegate: Mexico 2007 Report On Investment Disputes And

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OO RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #3308/01 1761332
ZNR UUUUU ZZH
O 251332Z JUN 07
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 7650
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE IMMEDIATE
RUCPDOC/DEPT OF COMMERCE WASHDC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE

UNCLAS SECTION 01 OF 06 MEXICO 003308

SIPDIS

SIPDIS

STATE FOR EB/IFD/OIA HEATHER GOETHERT AND JOHN FINN
STATE FOR L/CID SAM MCDONALD
STATE FOR WHA/MEX AND WHA/EPSC
TREASURY FOR IA MEXICO DESK ALICE FAIBISHENKO

E.O. 12958: N/A
TAGS: EINV ETRD KIDE CASC OPIC PGOV MX
SUBJECT: MEXICO 2007 REPORT ON INVESTMENT DISPUTES AND
EXPROPRIATION CLAIMS - PART 2

REF: STATE 55422

CONTINUATION OF MEXICO 2007 REPORT ON INVESTMENT DISPUTES AND
EXPROPRIATION CLAIMS

11. a. Claimants J

b. 2002

c. Claimants are joint venturers in Mexican
facilities for the production and distribution of high
fructose corn syrup (HFCS) for use by Mexican soft drink
bottlers and other food and drink processors. They challenge
the same soft drink tax as Claimant I above. Since the tax
took effect on January 1, 2002, Claimants substantially
ceased the manufacture and sale of HFCS and stopped importing
and distributing HFCS for use by Mexican soft drink bottlers.


This dispute became a NAFTA Chapter 11 arbitration claim
when Claimants filed their request for institution of
arbitration proceedings against the GOM on August 4, 2004.
Claimants allege the GOM's tax on HFCS violated the national
treatment obligation under NAFTA Article 1102, the
prohibition on performance requirements in NAFTA Article 1106
and the prohibition on indirect expropriation in NAFTA
Article 1110. Claimants seek damages in excess of $100
million.

Given that Claimant J challenges the same measures as
Claimant I and K, these claims were consolidated and a new
NAFTA Tribunal was established in February 2005.

On March 6, 2006, the World Trade Organization (WTO)
informed the Mexican government that it had rejected Mexico's
appeal of the WTO's initial ruling that Mexico's 20 percent
tax on beverages using sweeteners other than sugar,
principally HFCS, was illegal. In response in May 2006, then
President Fox sent an initiative to the Lower House of the
Congress to eliminate the tax in order to comply with WTO
rulings. However, it was not until the new Congress was in
place in September 2006, that this issue began to be
discussed as part of the bill outlining the 2007 Mexican
budget. The initial 2007 budget proposal sent to Congress in
December 2006 by the Calderon administration called for the
removal of the 20 percent tax on drinks made with HFCS,
complying with WTO rulings, and instead proposed a 5 percent
tax on all soft drinks, regardless of the type of sweetener.
The Senate rejected this proposal and all taxes on soda,
including the 20 percent tax on HFCS, were eliminated in the
final budget bill. Q;

It is Post's understanding that the cases are still
pending, because the Claimants are seeking damages that
occurred during the period indicated due to the "illegal"
imposition of the 20 percent tax. Therefore, although the
Claimants no longer face the tax they can still seek
compensation for the damages done.

In keeping with NAFTA Chapter 11 procedures, however,
the Embassy does not take an active role on behalf of
Claimants while dispute resolution measures are proceeding.

12. a. Claimant K

b. 2002

c. Claimant produces high fructose corn syrup (HFCS) in
the U.S., some of which it sells and distributes through a
business unit in Mexico for use by Mexican soft drink
bottlers. Claimant challenges the same soft drink tax as
Claimants I and J above. Since the tax took effect on
January 1, 2002, Claimant's distribution facilities in Mexico
have been largely idle and HFCS production capacity in the
U.S. has been diverted to markets other than Mexico.

This dispute became a NAFTA Chapter 11 arbitration claim
when Claimant filed its request for institution of
arbitration proceedings against the GOM on December 29, 2004.
Claimant alleges the GOM's tax on HFCS violated the national
treatment obligation under NAFTA Article 1102, the obligation
to provide fair and equitable treatment under NAFTA Article
1105(1), the prohibition on performance requirements in NAFTA
Article 1106 and the prohibition on indirect expropriation in
NAFTA Article 1110. Claimant seeks damages in excess of $100

MEXICO 00003308 002 OF 006


million.

On March 6, 2006, the World Trade Organization (WTO)
informed the Mexican government that it had rejected Mexico's
appeal of the WTO's initial ruling that Mexico's 20 percent
tax on beverages using sweeteners other than sugar,
principally HFCS, was illegal. In response in May 2006, then
President Fox sent an initiative to the Lower House of the
Congress to eliminate the tax in order to comply with WTO
rulings. However, it was not until the new Congress was in
place in September 2006, that this issue began to be
discussed as part of the bill outlining the 2007 Mexican
budget. The initial 2007 budget proposal sent to Congress in
December 2006 by the Calderon administration called for the
removal of the 20 percent tax on drinks made with HFCS,
complying with WTO rulings, and instead proposed a 5 percent
tax on all soft drinks, regardless of the type of sweetener.
The Senate rejected this proposal and all taxes on soda,
including the 20 percent tax on HFCS, were eliminated in the
final budget bill. Q;

It is Post's understanding that the cases are still
pending, because the Claimants are seeking damages that
occurred during the period indicated due to the "illegal"
imposition of the 20 percent tax. Therefore, although the
Claimants no longer face the tax they can still seek
compensation for the damages done.

In keeping with NAFTA Chapter 11 procedures, however,
the Embassy does not take an active role on behalf of
Claimant while dispute resolution measures are proceeding.

13. a. Claimants L

b. 1985

c. In 1985, Mexican citizens Alfonso Vizcaino and
Edelberto Verduzco (brothers-in-law) unlawfully seized
approximately 125 acres of agricultural land owned by
Claimants, who are brother and sister and U.S. citizens, in
Tecoman, Colima. The land was and continues to be a
commercially profitable source of coconut, lime, mango and
papaya, some of which are exported to the US, together with
cattle raising and shrimp farming. Claimants inherited the
land from their uncle, a U.S. citizen and long-time resident
of Tecoman. Vizcaino and Verduzco own land adjacent to the
property and are powerful figures in the state of Colima,
with close ties to previous governors.

After the uncle's death in 1985, Vizcaino and Verduzco
fraudulently titled the property in their names and used
their own workers to exploit the land, informally known as
"El Buen Vecino" (Good Neighbor) ranch. Claimants filed suit
to have their rights to the property recognized. In December
2001, after more than 15 years of legal proceedings in the
local, state and federal courts, the Mexican federal court of
appeals in Guadalajara denied the last appeal and upheld
Claimants' ownership rights. On February 6, 2002, the land
was turned over to their representatives.

Less than one week later, on February 12, 2002, Carlos
Montes Salazar, President of the local labor tribunal in
Tecoman, led an invading mob of workers from Verduzco's other
properties onto the ranch. The workers claimed to be on
strike against Verduzco for back pay and other benefits.
However, the paperwork requesting approval for the strike was
filed a year earlier with the labor tribunal, yet the workers
did nothing until 2002. Since the strike was against
Verduzco, Claimants were not formal parties in the labor
action and were placed in the predicament of relying on their
long-time opponent Verduzco to fight to get his own workers
thrown off the land he coveted. None of the signs normally
indicating a strike in Mexico (red and black flags, protests,
etc. are evident on the ranch, and the "strikers" are working
the land.

The Ambassador, the Consul General and other
representatives from the Consulate have met with numerous
officials in Colima, including two governors, requesting that
the final order of the Mexican court be implemented. In a
meeting with officials from the Consulate in September 2003,
then-governor Fernando Moreno Pena agreed that the strike
appeared to be a sham used as a delaying tactic to deny
effective ownership rights to the family. He also asserted
that to his knowledge this was the only strike in the entire

MEXICO 00003308 003 OF 006


state of CoQma. Although the governor indicated he would
personally look into the matter and resolve it quickly, he
took no action. His successor, Gustavo Vazques Montes
(apparently a cousin of labor magistrate Carlos Montes),
likewise took no action to enforce the court's order before
he died on February 24, 2005.

On March 31, 2004, American Consul in Guadalajara met
with Vizcaino, his attorney and his son to discuss the case.
He claimed the workers were striking against him in a dispute
over benefits, and he saw no end in sight to the strike. He
also claimed that he purchased the property from one of the
Claimants years ago, but that they reneged on the agreement.
When asked why he had not accepted the final decision of the
court, Vizcaino argued that Claimants had not won the
litigation. At that point, Vizcaino's attorney interjected
and agreed that Claimants had won that case giving them full
rights and possession to the property and that he was only
representing Vizcaino in a separate breach of contract suit
filed in 2001. Vizcaino and his attorney then began arguing
over the case. Within an hour after the meeting, the
attorney contacted the Consulate to confirm his earlier
statements and to advise that he no longer represented
Vizcaino. The estimated value of the land is $400,000.

The Claimants have since received an offer to purchase
the property from Verduzco and Vizcaino, also assuming
responsibility for the strikers if they remain on the
property. In March 2006, a payment was made to a court
account, and the Claimants' attorney is now dealing with
state authorities in Colima to change the transaction from a
purchase transaction to a "cession of rights" over the land,
thus avoiding taxation over the transactions. The Claimants'
attorney estimated that it will be between two and three
months until the Claimants actually have the money due them
for the property, thus bringing this long-standing dispute to
a favorable conclusion.

In April 2007 the U.S. Consulate in Guadalajara's
American Citizen Services Section ascertained from tQ
Claimants' attorney that the Vizcaino and Verduzco families
had already paid the amount of 2,000,000.00 Mexican
PesosQ;into a court ordered bank account. The reason the
money is still in escrow and has not been released to the
Claimants is, according to theQ;attorney, because they are
delaying acceptance of the funds in anQ;attempt to avoid a
significant Mexican capital gains taxQ;from the sale of the
property (The governor of ColimaQ;hasQ;informedQ;the
Consulate that there are no state or federal taxes pending).
Claimants' attorneyQ;is also aware that lookouts in U.S.
Government's Non-Immigrant Visa (NIV) system have been
entered for the Vizcaino and Verduzco families noting the yet
unresolved case. Between April and June 2007 the
governorQ;of ColimaQ;contactedQ;Post to request a favorable
consideration of visa issuance for the individuals entered in
the NIV system. In April 2007, the Consul
ate separately contacted the Claimants. The Claimants say
they have not received any money from the attorney or an
update on the status of the case. On June 19, 2007
Claimants contacted the Consulate to reiterate that they had
not heard from their attorney for two months. We believe
that the attorney-client relationship has further complicated
the case. The ConsulateQ;has attempted to contact Claimants'
attorney numerous times for a status update, but there has
been no response yet. The Consulate continues to monitor the
case.

14. a. Claimant M

b. 2002

c. Claimant leased planes to a Mexican aviation
company, Allegro, that later went bankrupt. Claimant began a
legal battle to get its planes returned. U.S. and Mexican
courts eventually ruled in their favor, and Claimant took
possession of its planes. However, since that time, Claimant
has been unable to get the Mexican Civil AviatiQ Board
(DGAC) to deregister their aircraft, a necessary step before
the company can bring the planes back to the US. Claimant's
losses come from two sources: first, several planes were not
stored properly after they were seized and are now deemed
un-flyable; second, Claimant is paying high maintenance and
storage fees for the remaining planes that are flyable.
Claimant alleges it has had difficulties dealing with the GOM
on almost every step of its struggle to repossess and return

MEXICO 00003308 004 OF 006


the planes to the U.S.

DGAC's current refusal to deregister the aircraft is
based on a ruling by the Mexican Labor Board, apparently
following an injunction filed by Allegro's former employees'
union. Claimant argues that the Labor Board's decision does
not apply to deregistration of the aircraft, and that it is
based on a statute deemed unconstitutional by higher courts.
Claimant has informed U.S. Embassy and DGAC that it is
formally filing suit against the DGAC under a new law that
allows private industry to sue GOM entities if they are not
properly applying the law. In late May 2005 the DGAC
informed Embassy that it asked the Labor Board for
clarification, but to date it has not received a response.

15. a. Claimant N

b. 2000

c. Claimant is an investment company involved in
commercial development, which owned a property of
approximately 97,000 square meters (24 acres) in one of the
most expensive areas of Mexico. On November 10, 2000, the
federal government allegedly expropriated 13.79 percent of
the area of the property in question. According to Claimant,
the GOM deprived it of its land and also interfered with its
plans for commercial development of the area.

Claimant submitted a Notice of Intent on August 28, 2001
claiming a breach of NAFTA Articles 1102, 1103, 1105, and
1110 (Expropriation). The Claimant seeks relief in the form
of either the restoration of the property in its original
state, as well as the payment of $30 million in damages, plus
corresponding interest; or the payment of $210 million.

In keeping with NAFTA Chapter 11 procedures, however,
the Embassy does not take an active role Q behalf of
Claimant while dispute resolution measures are proceeding.

16. a. Claimants O

b. 2004

c. Claimants are a group of Texas farmers who allege
their investments in water have been harmed through Mexican
measures amounting to expropriation under NAFTA Article 1110.


Claimants submit that from 1992 to 2002, Mexico
expropriated water in the Rio Grande in Mexico. Claimants
allege that they had a right to that water under the 1944
Treaty between the United States and Mexico Respecting
Utilization of Waters of the Colorado and Tijuana Rivers and
of the Rio Grande, Feb. 3, 1944, U.S.-Mexico, T.S. No. 944.
They allege that Mexico diverted and seized approximately
1,013,056 acre-feet of irrigation water in violation of the
Treaty. The specific conduct Claimants complain of includes
Mexico's building of certain dams and reservoirs, which had
the effect of manipulating the flow of water in Mexico's
favor.

Claimants filed a Notice of Intent to Submit a Claim to
Arbitration under NAFTA Chapter 11 on August 27, 2004 and a
Notice of Arbitration on January 19, 2005. They estimate
their damages to be between $320,124,350 and $667,687,930. In
keeping with NAFTA Chapter 11 procedures, however, the
Embassy does not take an active role on behalf of Claimant
while dispute resolution measures are proceeding.

17. a. Claimant P

b. 2005

c. Claimant is a U.S. company that invested $8
million in a conveyor belt for transporting aggregate
materials between the U.S. and Mexico. The conveyor belt
crosses the border at the cities of Mexicali and Calexico.

The State of Baja California issued an environmental
permit in 2001, but refused to renew the permit in 2003. A
revision of the scope of work allowed the firm to proceed
with a municipal permit from Mexicali and a diplomatic note
issued by the Federal Government. The firm received final
U.S. and Mexico building permits in March 2005, but in
October 2005 police officers from the State of Baja

MEXICO 00003308 005 OF 006


California entered the plant and placed closure seals on the
equipment. In November 2005 the firm obtained a court
injunction voiding the state's closure action, but later the
same day the City of Mexicali revoked its municipal
environmental permit. In March 2006, officials from the
Department of Ecology for the State of Baja California,
accompanied by three truckloads of armed police officers,
entered the facility and placed closure seals on plant
equipment for a second time.

The U.S. owner of the firm reported that in an April
2006 meeting, the Cabinet Secretary for the state Department
of Ecology claimed that the company had not complied with his
department's regulatory requirements and that it has various
omissions in its (2001 and 2003) permit applications to his
department but he refused to specify the nature of the
alleged omissions and compliance failures. (He also alleged
that the company was in violation of local zoning ordinances,
but this issue lies outside the jurisdiction of his agency,
according to the firm's legal counsel). The Embassy has
raised the issue with the Secretariat of Foreign Relations
and the Mexican Customs Agency.

Mexican authorities at various levels remain
intransigent on this issue, and have rebuffed or ignored
Consular efforts to use our good offices.Q; U.S. EPA
Administrator Steve Johnson will tour the conveyor belt
facility and meet with Baja California Gov. Elorduy on 28
June 2007.Q; Embassy EST representative and Tijuana Consul
General are not participating in the tour given the
governor's unwillingness to work towards resolving the case.
The Consulate General in Tijuana is following the issue
closely.

18. a. Claimant Q

b. 2002

c. According to the Claimant,Q;in 2002 Rodolfo
Arciniega NietoQ;executed a fraudulent power-of-attorney that
turned over a number of the Claimant's registered trademarks
to himself. The Claimant never authorized this transfer, and
the notary public who supposedly granted the
power-of-attorney has stated he never did so. Mr. Arciniega
subsequently sold these trademarks to other Mexican
businessmen, one of whom registered them with the Mexican
Institute of Industrial Property, the federal government
agency responsible for registering trademarks and patents. A
number of business owners have since used the Claimant's
trademarks without the Claimant's authorization, claiming
that they are entitled to their use via the fraudulently
transferred and registered rights. The Claimant has
initiated a number of civil, administrative, and criminal
legal actions against those involved in the unauthorized
transfer and use of its trademarks but has been frustrated by
the long delays in bringing these cases to a final judgement.
The Embassy will continue to monitor the case as it develops.


19. a. Claimant R

b. 2006

c. The Claimant, funded by the Overseas Private
Investment Corporation (OPIC) signed a contract with the
Junta Central de Agua y Saneamiento de Chihuahua (JCAS), and
Junta Municipal de Agua y Saneamiento de Cuauhtemoc (JMAS) on
July 20, 2004 for the construction of a water treatment plant
in Cuauhtemoc, Chihuahua. The contract had a term of 20 years
at a price of $5,103,000. A change of Governors in October
2004, adversely affected the project. The State of Chihuahua
stopped making payments and the contract was deemed invalid
by the State of Chihuahua comptroller's office. In order to
resolve the conflict, Lemna, OPIC, and JCAS agreed to modify
the previous contract to meet the terms of Mexican federal
and state law and convert it to a build and transfer
(turnkey) contract.

After extensive negotiations, on April 20, 2007
Lemna and JCAS/JMAS signed a new, extensive contract
validating the previously disputed contract signed July 2004,
which formally finalized the sale of the water treatment
plant in CuauhtQmoc Chihuahua for 67,038,862 Mexican Pesos.
The first installment was received by Lemna on May 25, 2007.
This first payment constitutes approximately 90 percent of

MEXICO 00003308 006 OF 006


the contract total price. The final 10 percent of the plant
will be completed within the next sixty days, aQ final
payment within 7 working days of currently incomplete work
approved. There are two bonds connected with the contract.
The first for unfinished work during the next 60 days and the
second for 12 months as a guarantee the plant will run
properly.

All parties consider the dispute resolved at this point.

20. List of Claimant's Names: All Claimants are American
Citizens unless noted otherwise. American Embassy Mexico and
the nine consulates in Mexico do not require privacy act
waivers for investment dispute cases. The initial request
from the Claimant requesting the Embassy or consulate to
contact the GOM on their behalf is considered sufficient.

Claimant A Texas Gulf (Sulfur)
Claimant B Baja Beach Landowners (Leigh Zaremba)
Claimant C Viacom
Claimant D Tony Piazza
Claimant E SSA Mexico S.A. de C. V.
Claimant F NAFTA Chapter 11 Case
Claimant G NAFTA Chapter 11 Case
Claimant H NAFTA Chapter 11 Case
Claimant I NAFTA Chapter 11 Case
Claimant J NAFTA Chapter 11 Case
Claimant K NAFTA Chapter 11 Case
Claimant L Edith Rabinovich and Arthur Laxer
Claimant M Pegasus
Claimant N NAFTA Chapter 11 Case
Claimant O NAFTA Chapter 11 Case
Claimant P Aggregate Products Inc. (John Corcoran)
Claimant Q Little Cesear's
Claimant R Lemna Corporation

END OF MEXICO INVESTMENT DISPUTES AND EXPROPRIATION CLAIMS
2007


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