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Cablegate: Mexico 2008 Report On Investment Disputes

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OO RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #2072/01 1892240
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O 072240Z JUL 08
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 2465
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE IMMEDIATE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE

UNCLAS SECTION 01 OF 05 MEXICO 002072

SIPDIS

STATE FOR EB/IFD/OIA HEATHER GOETHERT AND KIMBERLY BUTLER
STATE FOR L/CID CAMERON HOLLAND
STATE FOR WHA/MEX AND WHA/EPSC
TREASURY FOR IA MEXICO DESK RACHEAL JARPE

E.O. 12958: N/A
TAGS: EINV ETRD KIDE CASC OPIC PGOV MX
SUBJECT: MEXICO 2008 REPORT ON INVESTMENT DISPUTES
ANDEXPROPRIATION CLAIMS - PART 1

REF: STATE 437841.

Summary. The United States Government is aware of sixteen
(16) claims of United States persons that may be outstanding
against the Government of Mexico (GOM). Eight (8) cases are
NAFTA Chapter 11 cases. In addition, two (2) cases were
resolved in 2008. End Summary.

2. a. Claimants A

b. 1975

c. The Claimants signed a profit-sharing contract with a
sulfur company controlled by the GOM. The investors were to
have received payments for the life of the contract, but, in
fact, received nothing. In 1975, the sulfur company offered
to settle the dispute. Several investors did settle, but
sixteen did not. The remaining sixteen were told by the
company in 1980 that a USD 5 million settlement offer would
be available, but no money was offered to the investors. The
investors were in frequent contact with the Department of
State concerning their claim until August 1997, and despite
the Department's attempts to assist, the dispute was not
resolved. As of June 2005, the Embassy's attempts to obtain
current contact information on the company and updates on
this case have been unsuccessful.

3.a. Claimant B

b. 2000

c. Claimants are a group of U.S. citizens who, in the 1970s
and 1980s, leased beachfront land along the Baja California
coast of Mexico. The land is part of a 37,000-acre land
grant the GOM awarded in 1973 to about 80 Mexican families.
By the late 1980s, the Mexican families, working through a
Mexican developer, had leased most of the land to the
Claimants and other foreigners, who paid up to USD 90,000 for
30-year leases and built homes, a hotel, and swimming pools.

In 1987, a private Mexican company claiming to be the
original owner of the land sued the GOM to reclaim the land.
The company argued that the GOM had illegally seized it
through a bureaucratic error. In 1995, the Supreme Court of
Mexico agreed, ruling that the land was mistakenly included
in the land grant, that it belonged to the prior Mexican
owners, and that the developer did not have legal title to
lease the land. The U.S. Embassy subsequently attempted to
facilitate discussions between Claimants and the legal
Mexican landowners.

On October 23, 2000, the Mexican Supreme Court ordered the
Mexican Land Reform Secretariat to evict the Claimants and
the other foreign owners of 23 houses on the property, and
return the land to the legal owners within ten working days.
On October 30, 2000, the GOM began evicting the foreign
owners. U.S. Embassy officers were on site to ensure that
the Claimants' rights and property were respected during the
evictions.

Both before and since the October ruling, the Embassy has
raised this issue at all levels of the GOM. In November
2000, the U.S. Ambassador noted to senior GOM officials that
Claimants made their investments in good faith, and urged the
GOM to actively promote negotiations between Claimants and
the legal owners.

A number of members of Claimant have negotiated new lease
arrangements with the legal Mexican landowners. The U.S.
Government has encouraged the Claimants to consult with legal
counsel regarding their legal rights and options under
Mexican law.

Claimants also brought their claims before a NAFTA Tribunal,
submitting a Notice of Intent on October 27, 2000, which
claimed a breach of NAFTA Articles 1102 (National Treatment),
1105 (Minimum Standard of Treatment), and 1110 (Expropriation
and Compensation). The Claimants seek compensation of at
least USD 75 million for damages caused by the GOM, as well
as the costs associated with the current proceedings and
previous legal actions undertaken in Mexico and the U.S.,
including pre-award and post-award interest. Claimants filed
a Notice of Arbitration on February 16, 2001.

Consulate officials spoke to the remaining residents in May

MEXICO 00002072 002 OF 005


2006, who reported that several of them hope to buy their
property back. However, the land cannot be sold until the
boundaries are authoritatively determined by the federal
government, and the owners of the land are able to agree on a
common development plan with the municipal government. The
attorney representing the Claimants informed the Consulate
that the group of approximately 30 American citizens he
represents had decided not to pursue the case through the
Mexican legal system due to the cost involved. He also
stated that he knew of at least one case where a Claimant had
been able to buy their property back. The Consulate will
continue monitoring the case.

4.a. Claimant C

b. 2001

c. Claimant buys and sells the rights to external
advertising. The company has steel outdoor structures and
buildings in Mexico City where billboards are placed.
According to the Claimant, beginning in July 2001, Mexico
City government authorities began cutting down some of its
billboards without any notice. The company claims that the
city's removal and destruction of its steel structures
constitutes an expropriation under NAFTA Article 1110. On
December 12, 2001, Claimant filed a notice of intent to
submit a claim to arbitration under the NAFTA, but did not
pursue the claim further.

Claimant has submitted two cease and desist writs to obtain
the protection of federal authorities and has briefed U.S.
Embassy officials on the status of its case. An Embassy
officer met with city officials in May 2002 to discuss the
case. The city contends that the Claimant received clear and
frequent notice of the city's intention to remove illegal (in
the city's opinion) billboards, that the investor's business
practices were in flagrant violation of applicable law, and
that removed billboard structures would be returned to their
owners upon proof of ownership and payment of any fines owed
to the city. Claimant alleges that its signs were thrown
away and it did not have access to the scrap materials.

Claimant informed the Embassy in June of 2006 that it, along
with 30 other outdoor media companies, signed an "Agreement
For The Re-ordering Of The Billboards And Public Media In
Order To Take Back The Urban Image" with the GOM. This
Agreement went into effect in June 2005 and is valid for five
years. It provides for the control of billboard placement on
certain important streets in Mexico City in exchange for
faster licensing for new public billboard locations.
Claimant and the various companies are working out their
issues with the GOM through Mexican legal channels.

5.a. Claimant D

b. 1995

c. Claimant's sailboat was confiscated by Mexican Customs
officials in 1995 on the grounds that it had been imported
improperly. The Claimant subsequently lost a court case,
although the sailboat was returned to him. The Secretariat
of Finance and Public Credit (Hacienda) seized the boat again
in 1997 and in January 2003 his second appeal was lost. In
April 2004, Embassy officials sent a letter to Hacienda on
behalf of the Claimant requesting that Claimant be given an
opportunity to purchase the boat.

On November 3, 2004, Ambassador Garza sent a follow-up letter
to Francisco Gil Diaz, Secretary of Hacienda, informing him
that the Claimant wanted to meet with the proper officials to
discuss the disposition of the boat and its possible sale.
On July 14, 2005, the Central Administrator for Mexican
Customs replied to the Ambassador's letter indicating that
the boat was under the custody of SAE (administrative office
for seized goods). On July 25, 2005, the Embassy sent a
letter to SAE informing them that the boat administrator
wanted to meet with SAE officials to make an offer to buy the
boat. The boat has been in the custody of the Mexican Navy
in Zihuatanejo since 2001 and has not had any maintenance.
The boat is sinking and is apparently in very bad condition
but Claimant still wants to buy the boat. On September 1,
2005, SAE replied to the Embassy's letter indicating that
even though the boat is in SAE custody it is not for sale.
Once the Mexican courts rule on the Claimant's right to the
boat, it is possible that the boat will be put up for sale.

MEXICO 00002072 003 OF 005

On June 18, 2007, SAE officials reported that the Mexican
government has not authorized the sale of the boat. In
addition, the Embassy does not know if the Claimant is still
interested in the boat, since there has been no communication
from him since January 2006.

6.a. Claimant E

b. 2003

c. In August 1995, Claimant began operations in a joint
venture as a stowage firm, operating the Specialized
Container Terminal in the Port of Manzanillo. Over the last
ten years, the firm has invested USD 350 million in several
Mexican ports, which provide employment to 1,000 workers.
The firm has also invested a significant amount in training
and integrating the personnel.

Port authorities in Manzanillo and the Secretariat of
Communication and Transportation (SCT) have not delivered to
the Claimant the expansion areas within the port that are
specified in their 1995 contract due to environmental
problems with the area. In June 2002, President Fox issued
an order to dedicate other adjacent areas to the expansion.
By not delivering the expansion areas, the port authorities
are not complying with the commitments made under the
privatization bid and are preventing the Claimant from
investing in additional infrastructure development.

The Claimant claims to have exhausted possible alternatives
to resolve these issues with port authorities and SCT in
Manzanillo. In April 2004 Claimant filed a formal
arbitration complaint. In early 2005, Claimant obtained a
court order that obligates port authorities to provide the
land for expansion, but Manzanillo's port administration and
the Federal Port Authority refused to obey the order and are
continuing with litigation.

By recommendation of the SCT Secretary Tellez, the Claimant
has had several meetings with Under Secretary of
Transportation Manuel Rodriguez, to discuss their case. The
Claimant had hoped that discussions with Mr. Rodriguez would
be better than previous discussions with the Port's
Coordinator, Cesar Patricio Reyes Roel. However, Claimant
asserts that Mr. Rodriguez is also unwilling to obey the
court orders. Additionally, Claimant reports that Mr.
Rodriguez has accused it of causing problems for projects in
Punta Colonet and other ports.

In mid-June 2007, the Claimant obtained a new Court Decision
ordering the SCT to provide the land for expansion at the
Port of Manzanillo. This decision was sent to the SCT on June
20, 2007. On October 26, 2007, Claimant received formal
notification that 10 hectares of land, adjacent to their
container terminal, had been assigned to the company.
Claimant has started work to prepare the land to be used as a
container yard. All parties consider the matter to be
resolved.

7.a. Claimant F

b. 2000

c. Claimant is a United States corporation that sells
personal and business insurance, including accident and fire
insurance. According to Claimant, Mexico facilitated the
repurchase of a series of debentures denominated in Mexican
pesos and owned by Mexican investors, but did not facilitate
the repurchase of a series of debentures denominated in U.S.
dollars, which were owned by Claimant. Both series of
debentures were issued at the same time and by the same
Mexican financial corporation, and each series was issued for
a total amount of USD 50 million.

In October 2001, this dispute became a NAFTA Chapter 11
arbitration claim when Claimant officially filed a claim
against ainst the GOM. On the basis of the allegations
highlighted above, Claimant asserts that Mexico violated
various substantive obligations embodied in Section A of
Chapter 11 of NAFTA, including NAFTA Article 1110, which
addresses measures that directly or indirectly expropriate an
investor's investment. Claimant seeks USD 50 million in
damages plus applicable interest, attorneys' fees and costs
for the arbitration.

MEXICO 00002072 004 OF 005

On February 6 and 7, 2003, the NAFTA Tribunal held a hearing
on Mexico's jurisdictional objections to Claimant's claims.
On July 17, in a preliminary decision, the NAFTA Tribunal
dismissed all of Claimant's claims except for the
expropriation claim. In 2005, briefing was completed on the
merits of the expropriation claim. The hearing in the case
was held in late September 2005 and the tribunal issued its
ruling in July 2006, in which it rejected the Claimant's
expropriation claim as outside the jurisdiction of NAFTA
Chapter 11 but, in doing so, characterized the Government of
Mexico's actions as discriminatory.

Claimant has expressed a desire for the USG to explore
pursuing a Chapter 20 State-to-State case versus the GOM, and
continues its efforts to negotiate a settlement with the GOM.

8.a. Claimant G

b. 2002

c. Claimant is a Delaware Corporation that alleges its
property, a share of a joint venture agreement, was
expropriated by Mexico in violation of NAFTA Article 1110
through a series of Mexican court actions and decisions. In
1988, Claimant entered into a joint venture contract with two
parties (one of which was Mexican landowner) to develop a
time-share complex on the Mexican landowner's property in
Cabo San Lucas, Baja California Sur, Mexico. In 1990,
Claimant learned that the Mexican landowner had transferred
the entire property to the third party to the joint venture
contract. Claimant therefore employed a Mexican law firm to
effect cancellation of the contract and recoup its share of
money already invested. A Mexican court awarded Claimant
relief on August 10, 1994.

According to Claimant, unbeknownst to it or its legal
representative, a former employee of the Mexican law firm
purported to represent Claimant and collected Claimant's
award, including the fees payable to the law firm. Claimant
and its attorney filed suit against the former employee in
Mexican courts, alleging a number of civil and criminal
claims, including conversion. The Mexican court dismissed
the suit finding, among other things, that the relevant
limitations period, which ran from the time of actual
knowledge of the conversion, had lapsed. Claimant had argued
that actual knowledge of the conversion did not occur until
two years after the date of the court's determination.

Claimant alleges that Mexican court delays and errors of law
resulted in procedural and substantive injustice and amounted
to expropriation of its investment in Mexico, in violation of
NAFTA Article 1110. In January 2002 Claimant filed a Notice
of Intent under NAFTA Chapter 11, claiming damages in the
amount of USD 400,000. As of August 2006 Claimant had not
submitted a Notice of Arbitration or taken any further
action. There have been no changes reported to the Mission
over the past year.

9.a. Claimant H

b. 1999

c. Claimant is an individual who resides in California and
purchased a piece of oceanfront property near Baja California
in 1989. Claimant claims that he spent more than USD 100,000
on improvements to the property between 1989 and 1992.
According to Claimant, his property was seized by GOM
officials in 1999. Claimant alleges that immediately after
the seizure, substantial construction was conducted on the
property that destroyed many of the improvements he had made.

This dispute became a NAFTA Chapter 11 arbitration claim when
Claimant filed against the GOM on July 31, 2002. Claimant
alleges breaches of NAFTA Article 1102 for violation of
national treatment, Article 1105 for violation of treatment
in accordance with international law, and Article 1110 for
expropriation. Claimant seeks USD 1.5 million in damages.

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.

10.a. Claimant I


MEXICO 00002072 005 OF 005


b. 2002

c. Claimant invested USD 165 million in a plant in Mexico
for the production of high fructose corn syrup (HFCS),
intending to sell the product to Mexican soft drink bottlers.
On January 1, 2002, the GOM imposed a tax of 20 percent on
soft drinks containing HFCS. The tax did not apply to soft
drinks containing sugar (principally produced by the domestic
sugar industry). Since the tax took effect, Claimant
allegedly lost sales of USD 75 million, had been forced to
shut down its HFCS production line, and has incurred
penalties for canceled equipment orders.

This dispute became a NAFTA Chapter 11 arbitration claim when
Claimant filed a notice of arbitration against the GOM on
October 21, 2003. Claimant alleges 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. Claimant seeks damages
in excess of USD 325 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.

Although the tax is no longer in effect, Claimant is still
seeking before the Chapter 11 tribunal compensation for the
damages it sustained as a result of the tax. Claimant's
NAFTA Chapter 11 claim is still pending. A hearing on the
merits has already taken place, and the parties are awaiting
a decision on the issue of liability.

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

CONTINUED IN SEPTEL

Visit Mexico City's Classified Web Site
athttp://www.state.sgov.gov/p/wha/mexicocity and the North
AmericanPartnership Blog at
http://www.intelink.gov/communities/state/nap /GARZA

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