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DE RUEHME #3304/01 1761323
ZNR UUUUU ZZH
O 251323Z JUN 07
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 7626
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 003304 
 
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. ; 
 
     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 00003304  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. ; 
 
     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 00003304  003 OF 006 
 
 
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 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 the 
Claimants' attorney that the Vizcaino and Verduzco families 
had already paid the amount of 2,000,000.00 Mexican 
Pesos;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 the;attorney, because they are 
delaying acceptance of the funds in an;attempt to avoid a 
significant Mexican capital gains tax;from the sale of the 
property (The governor of Colima;has;informed;the 
Consulate that there are no state or federal taxes pending). 
Claimants' attorney;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 
governor;of Colima;contacted;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 Consulate;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 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 
 
MEXICO 00003304  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 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 $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 00003304  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.; U.S. EPA 
Administrator Steve Johnson will tour the conveyor belt 
facility and meet with Baja California Gov. Elorduy on 28 
June 2007.; 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,;in 2002 Rodolfo 
Arciniega Nieto;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 Cuauhtemoc 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 
the contract total price. The final 10 percent of the plant 
 
MEXICO 00003304  006 OF 006 
 
 
will be completed within the next sixty days, and 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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