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Cablegate: Mexico 2007 Report On Investment Disputes And

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UNCLAS SECTION 01 OF 05 MEXICO 003300

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 1

REF: STATE 55422

1. Summary. The United States Government is aware of
eighteen (18) 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, one (1)
case was resolved in 2006. 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 $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 US 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
$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 $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.


MEXICO 00003300 002 OF 005

Consulate officials spoke to the remaining residents in
May 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

SIPDIS
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

MEXICO 00003300 003 OF 005


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.

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.; The Embassy will
contact the Claimant to determine whether to continue with
the case or close it.

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 $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, they have
noticed that Mr. Rodriguez is also unwilling to obey the
court orders. Additionally, Mr. Rodriguez has accused them
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. No response or reaction has been received
yet. The Embassy is working with Mexican Government offices
to help resolve this dispute.

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 US 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 $50 million.

In October 2001, this dispute became a NAFTA Chapter 11
arbitration claim when Claimant officially filed a claim
against 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

MEXICO 00003300 004 OF 005


investor's investment. Claimant seeks $50 million in damages
plus applicable interest, attorneys' fees and costs for the
arbitration.

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 $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 $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 $1.5 million in
damages.

In keeping with NAFTA Chapter 11 procedures, however,

MEXICO 00003300 005 OF 005


the Embassy does not take an active role on behalf of
Claimant while dispute resolution measures are proceeding.

10. a. Claimant I

b. 2002

c. Claimant invested $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 $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 $325 million.

Given that Claimant I challenges the same measures as
Claimant J 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. ;


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.

END OF PART I - MEXICO INVESTMENT DISPUTES AND EXPROPRIATION
CLAIMS 2007


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