VZCZCXRO8412
PP RUEHKN
DE RUEHKN #0042/01 0930616
ZNR UUUUU ZZH
P R 030616Z APR 09
FM AMEMBASSY KOLONIA
TO RUEHC/SECSTATE WASHDC PRIORITY 2245
INFO RUEHC/DEPT OF INTERIOR WASHINGTON DC
RUEHKN/AMEMBASSY KOLONIA 2608

UNCLAS SECTION 01 OF 03 KOLONIA 000042 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EAID CPAS FM
SUBJECT: AMCIT INVESTMENT DISPUTE SPARKS HOUSE ARREST, POSSIBLE SUIT 
IN U.S. FEDERAL COURT SUIT 
 
REF: A. A) KOLONIA 41 
     ¶B. B) KOLONIA 40 
     ¶C. C) E-MAIL WEMHOENER-CUITE/KORFF 4-01-09 AND PREVIOUS 
 
¶1.  (U) SUMMARY:  On March 27, the FSM Supreme Court ordered 
house arrest, which commenced April 1, for Patricia and Robert 
Arthur for Contempt of Court. This is the latest and most 
disturbing development in a commercial dispute that is well over 
a decade old.  The court also continues to impound the Arthurs' 
U.S. passports.  From the initial dispute over repayment of 
loans that originated from U.S. Compact Investment Development 
Funds (IDF), the Arthurs entered into two separate trials.  The 
first case focused on the role of the Pohnpei State Government 
in driving the Arthurs out of business, while the second case 
centers on a loan repayment.  The Arthurs won a monetary claim 
against the state, which has not fully paid the Arthurs.  The 
loan repayment case continues.  END SUMMARY. 
 
The March 27 Hearing 
-------------------- 
 
¶2.  (U) On March 27, Econ/ConOff accompanied Robert and Patricia 
Arthur to a hearing on a Contempt of Court charge.  Mike Sepos, 
the Attorney representing the Federated States of Micronesia 
Development Bank (FSMDB), argued that following a June 2, 2008 
decision by the FSM Supreme Court ordering the Arthurs to 
deposit $10,000 and repay their loan from the FSMDB, the Arthurs 
had taken no further moves to repay the loan.  Sepos continued 
that the Court should punish the Arthurs for contempt through 
additional fines, travel limitations, or incarceration at the 
Courts discretion.  The total loan repayment, including 
interest, is close to $1 million. 
 
¶3.  (U) Attorney Douglas Cushnie, representing the Arthurs, 
contended that the Arthurs were not in contempt and were trying 
to adhere to the Courts rulings.  For example, the Arthurs made 
the initial $10,000 deposit, but had appealed an earlier 
decision by the Supreme Court to permit pursuit of the case and 
were awaiting a determination.  The Arthurs filed an appeal over 
one year ago and it remains pending in the FSM Supreme Court 
system.  After approximately 20 minutes the Judge ended the 
hearing and informed both attorneys that he would inform them of 
his decision.  That evening, a bailiff hand carried a court 
order to the Arthurs, which stated that the Court was placing 
them under house arrest for a period of three months beginning 
April 1.  They may only leave their property with proof of 
medical appointments. 
 
Long History 
------------ 
 
¶4.  (U) The Arthurs are well established investors in the 
Pohnpei community, with over 30 years invested in Pohnpei.  They 
own and operate The Village Hotel, an eco resort that has won a 
number of international prizes and wide recognition for its 
positive role in the FSM.  By the early 1990s the Arthurs also 
invested in two other companies, Pohnpei Pepper and a trocas 
shell button factory.  Both companies employed Micronesians and 
exported to the international market.  Pohnpei Pepper earned a 
positive reputation as a gourmet pepper, which commanded 
equivalent prices on the world market.  The trocas shell buttons 
also catered to a small but well paying market, for example one 
client was the Ralph Lauren Company. 
 
¶5.  (U) The Arthurs contend that to start the companies they 
took out a business loan from Pohnpei State, which the FSMDB 
administered.  The funds for the loan originated from the United 
States through the Compact of Free Association provisions for 
Investment Development Funds (IDF), which were intended to spur 
private enterprise.  A Federal Development Agency at the FSM 
national level allocated a portion of the funds to Pohnpei 
State, which then lent the money to the Arthurs, using the FSMDB 
as an administrative conduit.  Any loan repayment would return 
funds to Pohnpei State's coffers.  So long as the two businesses 
thrived, the Arthurs complied with regular loan repayments, at 
one point earning a distinction as the best FSMDB borrower. 
 
¶6.  (U) By the late 1990s, however, both business ventures 
failed allegedly owing to the direct actions of Pohnpei State 
Governors who supposedly resented the competition.  After the 
success of the Arthurs Pohnpei Pepper, the State subsidized a 
state operation to export pepper.  The Arthurs allege that the 
state then offered payment for pepper crops well beyond anything 
that they could pay or that international clients would pay. 
The decline of pepper exports from the FSM when the state was 
operating the business seems to confirm their assessment.  As to 
the shells for the button business, the Arthurs say it was a 
simple matter of the State's passing new laws that limited 
trocas shell harvesting after the state previously approved the 
business.  Robert and Patricia Arthur believe that when a new 
Governor was elected he pushed to change the trocas shell 
harvesting laws based on personal ties he had with others. 
 
KOLONIA 00000042  002 OF 003 
 
 
 
¶7.  (U) The Arthurs subsequently argued in court that Pohnpei 
State should reimburse them for their lost profits and the FSMDB 
should drop all liens against the businesses as the businesses 
no longer existed.  Early in the proceedings, the court 
separated the complaints.  One court case focused on the 
Arthurs' plea for compensation from Pohnpei State and the second 
was the FSMDB demand for repayment of the loan.  The Arthurs won 
the first case and lost the second.  The FSM Supreme Court as 
well as the State have conceded that the State drove the Arthurs 
out of business.  However, other than one initial payment, the 
Pohnpei Legislature has refused to fulfill the court order and 
pay the vast majority owed to the Arthurs.  Meanwhile, the 
Arthurs have separately appealed the decision to hear the loan 
case.  To date, they have refused to comply with the courts 
order to pay back the loan (at least as much as they are 
financial able to do through the sale of their personal stocks). 
 
The Embassy's Role 
------------------ 
 
¶8.  (SBU) Ambassador and Econ/ConOff have regularly met with the 
Arthurs to discuss the commercial dispute and to advocate for 
their well being and fair treatment.  Although the case has a 
long history, hearings in the past 12 months have taken on 
disturbingly punitive overtones.  Robert Arthur is 77 and 
Patricia Arthur is 71.  Both have signed full Privacy Act 
Waivers (Reftels A and B). 
 
¶9.  (SBU) While refraining from offering personal or legal 
advice, the Ambassador and Economic/Consular Officer have 
repeatedly met with the Arthurs and kept them informed of the 
steps that Post has taken to advocate for their fair treatment. 
Post has also consulted closely with CA/OCS in this process. 
The Ambassador has raised concerns directly with FSM President 
Mori, critical members of his cabinet, and senior state 
officials.  At one point, Secretary Robert personally intervened 
to help return the Arthurs' U.S. passports for the purpose of 
traveling to Hawaii for medical consultations.  The Arthurs were 
required to return their passports to the Supreme Court when 
they arrived back in the FSM. 
 
¶10.  (SBU) While expressing concern about the non-transparent 
and unequal treatment of Amcit investors in general, the Embassy 
has particularly focused on the Arthurs' case, seeking host 
government support for resolution, including through possible 
mediation. Recently, Pohnpei State, through the FSMDB, offered 
to drop the loan repayment demand in exchange for not requiring 
the State to pay its debt to the Arthurs.  The Arthurs, through 
their attorney, rejected the proposed offset. 
 
¶11.  (SBU) Post has also expressed strong concern about the 
decision by the Court to impose house arrest.  In Post's 
knowledge, there is no other civil case in the FSM in which the 
Court placed a person under house arrest.  This is of particular 
note because the FSM in general has a high rate of default on 
loans given to its citizens, including loans provided from U.S. 
funds. 
 
¶12.  (U) Econ/ConOff also accompanied the Arthurs to the Supreme 
Court on December 11, 2008 when they surrendered their passports 
to the Court.  After consulting with CA/OCS Post informed the 
Arthurs about options for new passports and possible 
implications within the FSM.  Robert Arthur suffers from a 
number of medical conditions that require intermittent travel to 
the United States.  Subsequent to the telephone call from 
Foreign Secretary Robert (para 9), the Supreme Court Justice 
agreed that the Arthurs could use their passports for medical 
travel, if they provided thorough documentation on appointments 
with the court. 
 
Federal Suit May Name Departments of State and Interior 
Departments as Defendants 
------------------------- 
 
¶13.  (SBU) Separate from the continuing legal battles in the 
FSM, Attorney Cushnie is also preparing to submit a case in the 
U.S. Federal Court system, although jurisdiction is unclear. 
The primary contention in the draft suit is that due to the past 
and continued mistreatment of the Arthurs as American investors 
in Pohnpei, the FSM and Pohnpei State have failed to adhere to 
the terms in the Compact of Free Association and should no 
longer receive Compact related funds.  The case is likely to 
name all USG offices involved in Compact funded projects or 
programs in Pohnpei, including the Secretaries of the 
Departments of State and the Interior. 
 
Comment 
------- 
 
¶14.  (SBU) All parties involved agree that former Pohnpei State 
 
KOLONIA 00000042  003 OF 003 
 
 
Governors took deliberate actions to undermine the two 
businesses that the Arthurs opened and successfully operated in 
the 1990s.  The Embassy has repeatedly raised the issue of 
Pohnpei State's restrictive investment climate.  The Ambassador 
continues to advocate for a resolution of this case with key 
Micronesian officials, who concur that the legal impasse has 
assumed the proportions of a bilateral commercial and 
humanitarian issue.  Current options under possible 
consideration include invocation of the Compact Dispute 
Mechanism, suspension of the loan repayment, or dismissal of the 
loan by the Pohnpei Governor.  However, all these suggestions 
have come from the U.S. side, and the Micronesians are clearly 
less motivated than the Americans to find a satisfactory 
resolution.  End Comment. 
HUGHES