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Cablegate: Kunming Pharmaceutical Chief Claims Chinese Ipr Is Strong;

VZCZCXRO0900
PP RUEHGH RUEHVC
DE RUEHCN #0294/01 3430002
ZNR UUUUU ZZH
P 090002Z DEC 09
FM AMCONSUL CHENGDU
TO RUEHC/SECSTATE WASHDC PRIORITY 3616
INFO RUCPDOC/USDOC WASHDC PRIORITY 0028
RUEHOO/CHINA POSTS COLLECTIVE
RUEHCN/AMCONSUL CHENGDU 4329

UNCLAS SECTION 01 OF 02 CHENGDU 000294

SENSITIVE
SIPDIS

DEPT FOR EAP/CM

E.O. 12958: N/A
TAGS: EFIN EINV ETRD PGOV KIPR CH
SUBJECT: KUNMING PHARMACEUTICAL CHIEF CLAIMS CHINESE IPR IS STRONG;
UNFORTUNATELY FOR HIS U.S. HOLDING COMPANY, SO ARE SEC FILING
REQUIREMENTS

CHENGDU 00000294 001.2 OF 002


1. (U) This cable contains sensitive but unclassified
information - not for distribution on the internet.

2. (SBU) Summary. Chinese intellectual property rights (IPR)
have strengthened considerably in the last 10 years, the
chairman of a New York AMEX-listed, Chinese pharmaceutical
company claimed to Consul General in Kunming, Yunnan Province.
The chairman was confident that Chinese patent law could protect
his company's IP. A foreign attorney at an IPR seminar in
Chengdu predicted, however, that the PRC would comply with
international IPR standards (and thus also protect foreign
companies) only when Chinese companies had IP worth protecting.

3. (SBU) The chairman of the Chinese pharmaceutical company
complained that U.S. lawyers, auditing firms, and stock dealers
were manipulating his company's stock price, and "blinding the
U.S. Security and Exchange Commission (SEC)," but failed to
mention that his company has been sued in a federal class action
lawsuit for allegedly filing false and misleading reports with
the SEC. End Summary.

No Problems with Chinese IPR,

Per Chinese Pharmaceutical Chairman

-----------------------------------

4. (U) On November 20, Consul General and ConOff discussed
evolving patent protection in China with Lan Guihua, Chairman of
the Board of China Shenghuo Pharmaceutical (aka Shenghuo USA), a
holding company listed on the American Stock Exchange (AMEX) in
June 2007. Shenghuo USA owns Kunming Shenghuo, which engages in
research, development, and marketing of pharmaceuticals and
cosmetics based on Chinese herbs in the Kunming Economic Trade
and Development Zone (KETDZ). According to Shenghuo Deputy
Director Tan Xiangxun, the KETDZ considers his "American" firm
as a high-tech foreign company, thereby qualifying it for
preferential investment policies from the local government.

5. (U) According to Lan, China's IPR protection has improved
considerably over the last 10 years, and his company's IP is
sufficiently protected by Chinese law. Shenghuo owns seven
Chinese invention patents, and has applied for American patents
and FDA approval for two pharmaceutical products. Lan said that
Shenghuo's products are strongly protected by Chinese law, and
would be hard for other companies to replicate. Lan claimed
that, if another company violated Shenghuo patents, the
infringer would face fines and perhaps corporate dissolution by
Chinese authorities.

Chinese Company Lists Firm in U.S. Stock Market, But

Finds That Cooking (Accounting) Books Is Not Allowed

--------------------------------------------- -------

6. (SBU) When CG asked why Shenghuo decided to start an American
holding company, Lan said that the tougher listing standards in
the United States helped his company institute stronger
management and financial controls over its operations. Lan also
said it was "very good that there is no tradition among American
companies of giving and receiving gifts." Later however, Lan
opined that Shenghuo USA's stock price did not reflect the
company's true value, and complained that U.S. lawyers, auditing
firms, and stock dealers were manipulating his company's stock
price, and "blinding the U.S. Security and Exchange Commission
(SEC)."

7. (SBU) Conoff's research into Shenghuo's legal status in the
United States revealed the basis for Lan's frustrations, and
also suggest that shady PRC business practices will be under

CHENGDU 00000294 002.2 OF 002


closer scrutiny as more Chinese companies internationalize and
list overseas. Shenghuo USA, Lan, and other defendants were
named in August 2008 in a federal shareholder class action
lawsuit in the Southern District of New York. The plaintiffs
claim that Shenghuo USA issued materially false and misleading
press releases and SEC filings in 2007 and 2008, and ignored
Generally Accepted Accounting (GAAP) Principles.

8. (SBU) In August 2008, Shenghuo USA released press statements
confirming that auditors had found errors in Shenghuo's
accounting practices, internal controls, and personnel
management. Shenghuo's stock price dropped from $2.58 a share
in August 2008, to $0.39 a share in December 2008. The
plaintiffs claim in court filings that a former Shenghuo USA
director, in his resignation letter, claimed that Shenghuo USA's
internal auditing was a "sham," and wrote that Shenghuo's
managers "are uneducated and seemingly unwilling to be educated
on what is necessary to be a good member of AMEX or any other
credible market." Shenghuo's current stock price is $0.82 a
share and the class action lawsuit is ongoing.

Will Stronger IP for Chinese Firms Eventually Help Foreigners?

--------------------------------------------- -----------------

9. (SBU) Comment: Lan's confident attitude toward IPR suggests
the emergence of a double standard for Chinese and foreign IP.
Given recent reports from U.S. companies, few American firms
would now be willing to trust that their IP would be protected
by China's IPR regime and court system. However, the evolution
of IPR in China for local companies may also eventually assist
foreign companies. According to Elliot Papageorgiou, an IPR
attorney with Rouse & Co. who specializes in IPR enforcement in
China, Chinese firms that have developed valuable IP are fueling
the development of Chinese IPR. Papageorgiou, at a public
seminar by the European Chamber of Commerce attended by ConOff
in Chengdu, predicted that China would comply with international
IPR standards only when Chinese companies had IP worth
protecting. End Comment.
BROWN

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