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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 #2073/01 1892241
ZNR UUUUU ZZH
O 072241Z JUL 08
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 2470
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 002073

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 2

REF: STATE 43784

CONTINUED FROM SEPTEL

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 USD 100 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, Claimants are still
seeking before the Chapter 11 tribunal compensation for the
damages they sustained as a result of the tax. Claimants'
NAFTA Chapter 11 claim is still pending. A hearing on the
merits has already taken place, and the parties are awaiting
a decision.

In keeping with NAFTA Chapter 11 procedures, 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 USD
100 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

MEXICO 00002073 002 OF 005


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. The parties have
recently completed briefing on the issues, and a hearing on
the merits is scheduled for early October 2007.

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.

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 U.S., 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 state of Colima.
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

MEXICO 00002073 003 OF 005


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 USD 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, although closing of the transaction was delayed,
according to the Claimant's attorney, in order to clarify
certain tax issues with the local authorities.

In April 2007 the U.S. Consulate in Guadalajara's American
Citizen Services Section ascertained from the Claimants'
attorney that the transaction still had not closed (although
the governor of Colima has informed the Consulate that there
are no outstanding state or federal taxes). In April 2007,
the Consulate separately contacted the Claimants, who
reported that 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.

After several attempts, on June 17, 2008, ACS staff in
Guadalajara was able to contact Claimants' attorney who
confirmed that he had talked to his clients earlier the same
day. He confirmed that one of his associates, deemed as a
trustee, was in possession of the funds from the sale of the
property. Further, he reassured us that the legal recourse
to reduce the state tax issue, still outstanding, could take
up to two months to be resolve. A successful outcome,
according to him, would allow the claimants to receive a
greater sum from the proceeds. 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 Aviation 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
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

MEXICO 00002073 004 OF 005


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 under NAFTA Chapter 11
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 USD 30
million in damages, plus corresponding interest; or the
payment of USD 210 million.

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.

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 USD 320,124,350 and USD
667,687,930. On June 19, 2007, the claims were dismissed for
lack of jurisdiction.

17.a. Claimant P

b. 2005

c. Claimant is a U.S. company that invested USD 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 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.

MEXICO 00002073 005 OF 005

Mexican authorities at various levels have largely rebuffed
or ignored Consular efforts to use our good offices. U.S.
EPA Administrator Steve Johnson will tour the conveyor belt
facility and meet with Baja California Gov. Elorduy on June
28, 2007. On October 26, 2007, the state government issued
permits to begin allow the company to begin operations. The
company has been in full operation since January 2008 and the
matter is considered resolved by both the company and Embassy
officials.


18.a. Claimant Q

b. 2000

c. Claimant purchased undeveloped beachfront property in
Puerto Escondido in May of 1999 through the Fideicomiso
system. In 2000, claimant begin plans for developing the
property and hired a builder, an investment partner and a
contractor. A temporary dwelling was erected and the
contractor moved onto the property to begin work. Shortly
thereafter, the Attorney General of Chiapas sent several
Chiapas State Judicial Police to the property. They arrested
the contractor and turned him over to the local authorities
where he spent about the next year in jail until it was
determined that he had not committed any crime. The State
Judicial Police moved onto the property with officers
inhabiting the temporary dwelling. While Claimant is
technically still the owner of the property, the police
effectively prohibit development by barring access to the
property. During a visit to the property around 2000. the
Consul General from Mexico City was threatened by a security
guard posted at the property.

The Claimant and her attorney believe that Oaxaca state
government officials are behind this attempt to obtain her
property. The Embassy has approached the Governor expressing
the concern and interest of the U.S. Government in this case

20.a. Claimant R

b. 2007

c. Claimant is a U.S. company who won a concession from the
municipality of Tlanepantla to install and operate a parking
meter system in the city. The newly elected mayor decided
to withdraw the concession based on a technicality, though
the Embassy believes that political pressure from an
opposition party contributed to the decision to remove the
meters. The city claimed that a transfer of concession was
improperly completed and that the Claimant owed back fines
and revenue. Claimant invested approximately $5 million USD
in the project and requested that their property (the parking
meters) be returned.

In August 2007, the mayor and municipality officials accepted
an offer presented by the Embassy to meet with company
representatives (previously the municipality had refused to
meet with the company). The case subsequently escalated and
is now being heard in the Mexican court system. The Embassy
has not received updates from the company but will continue
to monitor the case.

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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