Latin American Blog

SEC Staff Issues Report on the Cross-Border Scope of Private Rights of Action for Securities Fraud

Sheppard Mullin — Wed, 09 May 2012 09:35:05 -0800

The staff of the Securities and Exchange Commission (“SEC”) recently released a study on the cross-border scope of the private right of action under Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder. The study, mandated by Congress following the United States Supreme Court’s decision in Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010), outlines a number of legislative options for extending the scope of private actions for international securities fraud that may provide a roadmap for future Congressional action.

Background

While courts have long recognized a private right of action for securities fraud under Section 10(b) of the Exchange Act, the Supreme Court held in Morrison that Section 10(b) does not apply to the purchase or sale of non-U.S.-listed securities outside the United States. Prior to Morrison, federal courts applied Section 10(b) to transnational securities fraud if a sufficient level of conduct occurred in the United States (the “conduct test”) or conduct occurring outside the United States had a foreseeable and substantial effect within the Untied States (the “effects test”). In Morrison, the Supreme Court rejected these tests in favor of a “transactional test,” which limited Section 10(b) to fraud in connection with the purchase or sale of a security listed on a U.S. exchange and the purchase or sale of any other security in the United States.

In response to Morrison, Congress added Section 929P(b) to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), which restored the conduct and effects tests for civil and criminal actions brought by the SEC and the Department of Justice (“DOJ”), respectively. With respect to private rights of action, however, Section 929Y of the Dodd-Frank Act required the SEC to solicit public comment and conduct a study to determine the extent to which the conduct and effects tests should apply in such cases.

The Study

The study outlines three legislative options for applying the conduct and effects tests to private rights of action for transnational securities fraud. The first is to apply the SEC and DOJ versions of the tests, which (according to the study) “would involve policy trade-offs that could carry significant implications” for investor protection and international comity — a principle of customary international law that recognizes the validity of foreign law.

An alternative approach (and one that the SEC advocated in Morrison) is to narrow the conduct test by imposing a “direct injury requirement,” which would require the plaintiff to show that the injury resulted directly from conduct within the United States. A disadvantage of this approach is that it could pose challenges for international comity because it would allow “foreign investors [to] receive remedies that their governments have determined not to provide . . . .” A second alternative is to limit the conduct and effects tests to U.S. investors, though this would permit “application of Section 10(b) to securities transactions that occur on foreign securities exchanges, which a number of foreign governmental authorities have opposed.”

The study also outlines four options for supplementing and clarifying the transactional test adopted by the Supreme Court in Morrison. The first option is to allow private actions for the purchase or sale of any security that is of the same class of securities registered in the United States. This would provide a bright-line standard based on U.S. registration, but could have the unintended consequence of discouraging foreign issuers from registering in the United States.

A second option is to allow private actions against securities intermediaries (e.g., broker-dealers and investment advisors) that engage in securities fraud while purchasing or selling securities overseas for U.S. investors. District courts interpreting the transactional test under Morrison have held that Section 10(b) no longer applies to such transactions, even in cases where the securities intermediary resided in and engaged in fraudulent conduct in the U.S. or traveled to the U.S. frequently to meet with the U.S. investor.

A third option is to allow private actions for investors who can demonstrate that they were induced to engage in the transaction while in the United States. According to the study, such a “fraud in the inducement” test would not raise international comity concerns because it would require a showing of actual reliance and would therefore preclude use of the “fraud on the market” theory, which “has been a source of criticism from foreign government authorities when it is applied to transnational securities frauds involving overseas transactions.”

A fourth option is to allow private actions if either party to the transaction made or accepted the offer to sell or purchase the securities while in the United States. This would further Morrison’s goal of establishing a bright-line standard for liability by clarifying when an off-exchange transaction takes place.

Criticism

Apart from noting in passing that the SEC “has not altered its view in support of” the direct injury requirement, the study offers little in terms of specific recommendations. In a sharply worded dissenting statement, SEC Commissioner Luis Aguilar argued that the study “fails to satisfactorily answer the Congressional request, contains no specific recommendations, and does not portray a complete picture of the immense and irreparable investor harm that has resulted” from Morrison.

Although the study identifies a number of policy considerations that Congress may consider in determining whether to enact legislation extending the transnational scope of private actions under Section 10(b), the reluctance of the SEC staff to provide explicit recommendations renders the immediate impact of the study unclear. As noted in the study, “a final option would be for Congress to take no action” at all, in which case lower federal courts would continue to interpret and refine the transactional test under Morrison.

For further information, please contact John Stigi at (310) 228-3717 or Dan Brooks at (202) 469-4916.

Opportunities in the Upcoming U.S.-Colombia Free Trade Agreement

Sheppard Mullin — Tue, 08 May 2012 09:02:02 -0800

By Curt Dombek and Mark Jensen

President Obama’s visit to the Summit of the Americas produced an important development for business in the United States and Colombia. During an April 15 press conference, President Obama and Colombian President Juan Manuel Santos jointly announced that the U.S.-Colombia Free Trade Agreement (CFTA) will enter into force on May 15, 2012. The enactment of the CFTA creates significant opportunities for both U.S. and Colombian businesses involved in international transactions. In order to take advantage of these opportunities, it will be important for parties to understand key parameters of the agreement, including what qualifies goods as originating in the United States or Colombia.

Economic Background. The United States is currently Colombia’s leading trade partner for both imports and exports, while Colombia is the 20th largest export market for products from the United States and the 25th largest foreign exporter of goods to the United States. See Congressional Research Service, the U.S.-Colombia Free Trade Agreement: Background and Issues (Dec. 20, 2011). U.S. Exports to Colombia in 2011 were $14.3 billion, which the U.S. International Trade Commission estimates will grow by more than $1.1 billion under the CFTA. Colombia exported $15.6 billion worth of goods to the United States in 2010. Office of the U.S. Trade Representative (USTR), Colombia, http://www.ustr.gov/countries-regions/americas/colombia.

The CFTA will make over 80 percent of U.S. exports of consumer and industrial products to Colombia duty free immediately, while most other tariffs will be phased out over a 10-year period. USTR, Benefits of the U.S.-Colombia Trade Promotion Agreement: More American Exports, More American Jobs, http://www.ustr.gov/about-us/press-office/fact-sheets/2012/april/benefits-us-colombia-trade-promotion-agreement-more-ame. For agricultural products, more than half of current U.S. farm exports to Colombia will become duty free immediately; virtually all other tariffs will be eliminated in 15 years. Id. Colombia will provide substantial market access across its services sector by eliminating measures preventing firms from hiring U.S. professionals, and phasing out restrictions in cable television. Id. Colombia will also join the World Trade Organization’s Information Technology Agreement, thereby removing barriers on Information Technology products. Id.

Origination under the CFTA. As with other free trade agreements involving the United States, the origin of items under the agreement will be determined by rules related to tariff-shifts and regional value content. Specific tariff-shift or regional content requirements apply based on the item’s Harmonized Tariff Schedule (HTS) number, and requirements may differ from item to item; some items may require regional value content calculations, for example, while others will not. Under the tariff shift rules, a product that is processed to become a different product in either the United States or Colombia will be considered of U.S. or Colombian origin, respectively, so long as it meets the tariff-shift requirements for its HTS number. See generally CFTA, Ch. 4, U.S.-Colom., Nov. 22, 2006. Under the regional value calculations, a product must be manufactured or processed using a certain amount of underlying materials originating in the country, according to specific formulas provided in the CFTA. See id. Special categories of goods such as textiles and autos are subject to specific origination requirements, such as an exception where underlying materials are not available in the territory (e.g. textiles) or a unique regional value content formula (e.g. autos).

The CFTA also provides for verification procedures related to origination claims, which may be made by written requests for information or questionnaires, visits to the premises to observe production of goods, and other mutually-agreed upon procedures. The CFTA allows parties to deny preferential treatment to an imported good where the verification request is not responded to within a reasonable period of time under the importing Party’s law, where a request for a visit is not granted within a reasonable period, or where the Party finds a pattern of conduct indicating that an importer, exporter, or producer has provided false or unsupported declarations that a good imported into a territory is originating.

Conclusions. The CFTA provides significant opportunities for the development or expansion of cross-border markets in the United States and Colombia. In order to take full advantage of these opportunities, it will be important for businesses to understand laws regarding origination, obligations related to verification procedures, and other aspects of the law.

IRS Issues Final Regulations Requiring Reporting by Financial Institutions of Interest Payments Made on U.S. Accounts of Non-Resident Individuals

Sheppard Mullin — Tue, 24 Apr 2012 12:55:02 -0800

By Keith Gercken and Danica Dodds

Summary

On April 17, 2012 the Treasury Department and the Internal Revenue Service issued final regulations requiring information reporting by a broad range of banks and other financial institutions of interest paid to certain nonresident alien individuals on funds held in U.S. accounts. These reporting requirements are generally applicable for payments of interest made on or after January 1, 2013, and are intended to enhance the ability of the IRS to effectively exchange tax information with foreign revenue authorities under the existing network of tax information exchange agreements, thereby bolstering its ability to combat offshore tax evasion by U.S. taxpayers.

General Rules

In general, the rules are only applicable to interest payments that are

Made with respect to deposits maintained at offices of banks and other financial institutions that are located in the United States;
Made to non-resident individuals (i.e., and not interest payments made to companies, partnerships or other legal entities); and
Made to non-resident individuals that reside in certain countries with which the U.S. has entered into certain tax information and exchange agreements (listed below).

Determining Residency

In order to determine the non-resident alien's country of residence, a financial institution may rely on the permanent residence address provided on Form W-8BEN, unless it knows or has reason to know that such documentation is not reliable.

Alternatively, financial institutions subject to this reporting requirement are given the option to report interest payments made to all non-resident individuals regardless of country of residence. According to the IRS, this election is intended to make it easier for financial institutions to comply with the new reporting requirements – presumably because they would not need to make any individual determinations regarding whether a depositor resides in one of the listed countries.

Reporting

The paying financial institution is required to file a Form 1042-S with the IRS for each calendar year in which the interest is paid.

Automatic Information Exchange

With the exception of Canada, the information collected under this regime will not automatically be reported to the depositor's home jurisdiction. While this information may be provided to tax authorities in other jurisdictions upon request, the IRS is not compelled to exchange information if it believes that there is concern regarding the use of the information or other factors exist that would make the exchange inappropriate – for example, if the IRS believes that the foreign jurisdiction may not comply with its obligations of confidentiality under the applicable tax information and exchange agreement, or if the information may be used for some non-tax related purpose. Several other countries are currently discussing an automatic exchange of information with the U.S. so the number of countries with which the U.S. automatically exchanges information is likely to increase.

Applicable Countries (subject to change)

Antigua & Barbuda	Guemsey	Netherlands Island territoties: Bonaire, Saba, St. Eustatius and the countries Curacao, and St. Maarten (Dutch part)
Aruba	Guyana	New Zealand
Australia	Honduras	Norway
Azerbaijan	Hungary	Pakistan
Bangladesh	Iceland	Panama
Barbados	India	Peru
Belgium	Indonesia	Philippines
Bermuda	Ireland	Poland
British Virgin Islands	Isle of Man	Portugal
Bulgaria	Israel	Romania
Canada	Italy	Russian Federation
China	Jamaica	Slovak Rep.
Costa Rica	Japan	Slovenia
Cyprus	Jersey	South Africa
Czech Republic	Kazakhstan	Spain
Denmark	Korea (South)	Sri Lanka
Dominica	Latvia	Sweden
Dominican Republic	Liechtenstein	Switzerland
Egypt	Lithuania	Thailand
Estonia	Luxembourg	Trinidad and Tobago
Finland	Malta	Tunisia
France	Marshall Islands	Turkey
Germany	Mexico	Ukraine
Gibraltar	Monaco	United Kingdom
Greece	Morocco	Venezuela
Grenada	The Netherlands

Contact

For further information, please contact Keith Gercken at (415) 774-3207 or Danica Dodds at (310) 228-2274.

Disclaimer

This update has been prepared by Sheppard, Mullin, Richter & Hampton LLP for informational purposes only and does not constitute advertising, a solicitation, or legal advice, is not promised or guaranteed to be correct or complete and may or may not reflect the most current legal developments. Sheppard, Mullin, Richter & Hampton LLP expressly disclaims all liability in respect to actions taken or not taken based on the contents of this update.

Mexico Continues to Entice Private Investment in Infrastructure With a New Public-Private Partnership Act

Sheppard Mullin — Tue, 10 Apr 2012 10:45:23 -0800

By Bram Hanono

On January 16, 2012, Mexico enacted the Law on Public-Private Partnerships (Ley de Asociaciones Público Privadas) ("PPP Law"). The new PPP Law is intended to regulate the formation of partnerships between the public and private sectors in an effort to provide services and build infrastructure to improve social welfare and increase investment levels in Mexico.

Since assuming office in 2006, President Felipe Calderon has aggressively lobbied for increased investment in infrastructure in Mexico. In 2007, President Calderon launched the National Infrastructure Program ("NIP") to increase the competitiveness of Mexico's infrastructure. For President Calderon, investing in infrastructure is the way to economic and social development. In November 2009, President Calderon proposed the PPP Law as a compliment to NIP. It took two years for the Mexican Congress to approve the law. We reported on NIP and President Calderon's proposal for the PPL Law here.

The PPP Law implements a framework for public-private partnerships to allow better cooperation between the Mexican government and the private sector regarding the construction of infrastructure. The PPP Law is limited to new projects and implementation of its methods are optional. However, it cannot be applied to certain projects and activities reserved for the government, such as the oil industry.

Under the PPP Law, the private sector is permitted to submit its own proposals to relevant government agencies, either when opportunities are identified by the private sector or in response to a government agency's identification of the types of proposals it is willing to receive. The proposed project may not be awarded directly to the proposing party without undergoing customary tender procedures. However, in order to generate interest in the private sector, when a proposal leads to a tender offer, the promoter is reimbursed for the costs of project feasibility studies and is afforded a premium of up to 10 percent in the evaluation of the offer.

The PPP Law allows the government to enter into contracts with a private company for up to 40 years. In order for a private company to enter into a public-private partnership agreement, its sole corporate purpose must be to carry out the activities necessary to fulfill the agreement and develop the corresponding infrastructure project.

The PPP Law provides more legal certainty for private investors. It contemplates equal distribution of risk, access to financing, step-in rights of the government agency involved, the circumstances under which an agreement may be amended, and contractual penalties and sanctions in the case of default by one of the parties to the public-private agreement. Finally, under the PPP Law it is foreseen that disputes concerning a public-private agreement, as well as the permits and approvals necessary for the development of the project, will be resolved by arbitration.

With the implementation of the PPP Law, President Calderon anticipates that Mexico will be able to increase development of its infrastructure by enticing private investment with improved legal protections. The PPP Law is intended to address the need for schools, hospitals, and other infrastructure projects which will be developed with better quality and in areas that the government has been unable to fulfill.

__________________________________________
Sheppard, Mullin, Richter & Hampton LLP has been at the forefront in representing developers and investors in "public/private partnership" projects. There is a wide variety of potential forms of public/private ventures so it is essential to retain a law firm with the actual experience to address every issue that arises in the course of implementing a successful project. We have negotiated, documented and implemented transactions pertaining to developments ranging from malls and shopping centers, stadium and convention centers, theme parks and manufacturing and industrial complexes to the development of infrastructure including roads, sea and airports, marina complexes, bridges and low income or senior housing projects, among others. We understand what it takes to negotiate, document and close public/private ventures, making us a leader in this area of the law.

The Chevron Ecuador Saga Continues as Second Circuit Overturns Anti-Enforcement Injunction

Sheppard Mullin — Mon, 12 Mar 2012 10:11:06 -0800

By Neil A.F. Popović and Rachel Tarko Hudson

In the latest U.S. chapter of the long and hard-fought battle over claims of pollution and adverse health effects from oil development in the Ecuadorian rain forest by Texaco (acquired by Chevron in 2001), a potentially important court victory has gone to the so-called Lago Agrio plaintiffs. On January 26, 2012, the Second Circuit Court of Appeals issued an opinion in Chevron Corp. v. Naranjo, ___ F.3d ___, 2012 WL 232965 (2d Cir. Jan. 26, 2012), ordering vacation of a preliminary injunction that prohibited the Lago Agrio plaintiffs from enforcing or preparing to enforce a potential Ecuadorian judgment against Chevron anywhere in the world outside Ecuador.

Background

The Chevron-Ecuador controversy first arrived in U.S. courts in 1993, when a group of Ecuadorian residents filed suit in the Southern District of New York, alleging a variety of environmental, health and other tort claims related to Texaco's oil extraction activities in Ecuador. As described by the Second Circuit, "the conflict between Chevron and residents of the Lago Agrio region of the Ecuadorian Amazon must be among the most extensively told in the history of the American judiciary." 2012 WL 232965 at *1 & n.1 (noting that an "underinclusive" Westlaw search yielded 56 results dealing directly with the litigation). (See our prior coverage here.)

In the recent episode addressed here, Chevron sued the Lago Agrio plaintiffs under New York's Uniform Money-Judgments Recognition Act (the "Recognition Act") seeking a global anti-enforcement injunction against the Lago Agrio plaintiffs and their counsel, New York attorney Steven Donziger. Chevron sought to prevent enforcement of a $17.2 billion judgment awarded to the Lago Agrio plaintiff's by the Ecuadorian trial court where the underlying case was litigated, after being dismissed from U.S. courts based on forum non conveniens. The Ecuadorian court awarded plaintiffs $8.6 billion in damages plus $8.6 billion in punitive damages to be awarded if Chevron did not apologize within fourteen days of the issuance of the opinion, which Chevron did not.

Chevron included its claim for injunctive relief in a February 1, 2011 complaint that also asserted claims based on RICO, extortion, mail fraud, and money laundering. On April 15, 2011, the district court severed the injunctive relief claim under the Recognition Act from the other claims and thus its decision and the Second Circuit's decision address only that single claim.

Chevron offered three arguments in support of injunctive relief: (1) that the Ecuadorian judgment was fraudulently procured; (2) that Ecuador lacks impartial tribunals; and (3) that domestic and international due process were violated in procuring the judgment. At the time of Chevron's complaint and the District Court's opinion, the Ecuadorian judgment was on appeal in Ecuador, and thus was not yet final. On January 3, 2012, while the Second Circuit appeal was pending, the appeals court in Ecuador affirmed the trial court's decision and the $17.2 billion judgment. Chevron appealed that decision to Ecuador's Supreme Court, the National Court of Justice, but the Ecuadorian high court rejected Chevron's request for a waiver of the obligation to post a bond to stay enforcement of the judgment while the appeal is pending. Chevron did not post a bond, so the judgment is or should soon be enforceable in Ecuador.

The Second Circuit's Opinion

Back in the United States, the Second Circuit based its opinion on two lines of reasoning. First, the court held that the Recognition Act was not enacted as a tool to preemptively prevent or impede the enforcement of foreign judgments, but rather as a tool to facilitate recognition and enforcement of final foreign judgments. At the time the District Court opinion issued its preliminary injunction, there was neither a final judgment nor an enforcement action initiated by the Lago Agrio plaintiffs, in New York or elsewhere. The court of appeals reasoned that the provisions of the Recognition Act on which Chevron relied in support of its injunction claim provide potential defenses in an action for recognition of a foreign judgment in New York, but they do not create affirmative causes of action to enjoin enforcement. The court distinguished the one out-of-circuit case where a pre-enforcement injunction was issued under another state's Recognition Act on the grounds that in the other case, the judgment holders had already attempted, but failed, to enforce the judgment in another U.S. court. In any event, the Second Circuit stated that even if the reasoning of the other case did allow for an injunction to issue, the court declined to follow it.

The court also reasoned that the procedural requirements of the Recognition Act are motivated by an interest in facilitating the recognition and enforcement of foreign judgments, not preventing it. The exceptions to recognition exist to facilitate trust among nations by preventing one country from selling justice to the highest bidder and then tying the hands of foreign courts from not enforcing their judgments. To the extent Chevron believes the proceedings in Ecuador were tainted by corruption, it can raise such arguments if and when the Lago Agrio plaintiffs attempt to enforce their judgment in the U.S.

The Second Circuit found additional reasons to reverse the preliminary injunction based on considerations of international comity. The court noted that the New York legislature enacted the Recognition Act to provide a ready means for foreign judgment creditors to secure enforcement in New York courts, in order for New York to act as a responsible participant in the international system of justice. The Recognition Act was not enacted to enable New York courts to pass judgment on the justice systems of the world. The court distinguished cases involving anti-foreign-suit injunctions, emphasizing that contrary to the characterization of both sides, an attempt to obtain an anti-enforcement injunction was not governed by the same standards and concerns.

An anti-suit injunction is a procedural tool to prevent a litigant from subjecting a party to defending the same suit in multiple jurisdictions. In contrast to that scenario, the underlying litigation in Ecuador and the claims brought by Chevron in New York encompassed "two distinct disputes," and they were sequential as well. The factors that apply to anti-suit injunctions simply do not apply.

As for comity, the court noted that it is "a particularly weighty matter for a court in one country to declare that another country's judicial system is so corrupt or unfair that its judgments are entitled no respect from the courts of other nations." That determination may be unavoidable when a party seeks to enforce an actual foreign judgment, but that is very different from a court in one country attempting to preclude the courts of every other nation in the world from ever recognizing a foreign judgment.

To take such sweeping action would potentially disrespect those other courts by implying that they are not to be trusted to make the determination for themselves. Accordingly, Chevron's request for injunctive relieve raises "far graver" comity concerns than a request that courts in New York decline to recognize and enforce a particular judgment from the courts of Ecuador.

Having found that the New York Recognition Act did not authorize a preemptive anti-enforcement injunction, the Second Circuit did not need to reach the issue of international comity. The court seemed deeply troubled, though, by the global aspect of the injunction, over and above its stern rejection of the underlying procedure itself. Perhaps the court meant to signal to the parties that if and when the Ecuadorian judgment became final, comity concerns will remain an issue. In that respect, the court drew a clear distinction between the defenses that may be available in an action for recognition of a particular foreign judgment, on the one hand, and a preemptive request to prevent recognition and enforcement, in New York Courts and elsewhere. As the Second Circuit noted, parties on the losing end of a foreign judgment are not without recourse; they may use the exceptions of the Recognition Act to defeat an action for recognition and enforcement once it is filed; but they may not jump the gun.

The Next Steps

Moving forward, Chevron may seek further (en banc) review by the Second Circuit and/or petition the Supreme Court for certiorari. In the meantime, the court of appeals remanded the case to the district court to litigate the remaining severed claims. On February 16, 2012, District Judge Kaplan lifted the stay he had imposed on the rest of the case, and litigation resumed.

With a final judgment from Ecuador in hand, the Lago Agrio plaintiffs may seek recognition of their judgment in U.S. courts, and/or in other jurisdictions where Chevron might have attachable assets. In the meantime, Chevron continues to pursue its arbitration claim under the U.S.-Ecuador Bilateral Investment Treaty. On February 16, 2012, the Hague-based tribunal in the arbitration proceedings issues a Second Interim Award on Interim Measures, in which it directed the Republic of Ecuador "(whether by its judicial, legislative or executive branches) to take all measures necessary to suspend or cause to be suspended the enforcement and recognition within and without Ecuador" of the Lago Agrio judgment. And on February 17, 2012, the Ecuadorian Provincial Court of Justice in Sucumbios held that it lacked the power under Ecuadorian law to suspend enforcement. The only thing certain, is that Chevron, Ecuador and the Lago Agrio plaintiffs will continue to litigate their respective rights in the courts of Ecuador and the United States, as well as international arbitration in the Hague. Further enforcement litigation in New York will be guided by the decision of the Second Circuit.

Argentina's Parliament Approves A Measure Limiting Amount Of Land That Can Be Purchased By Foreigners

Sheppard Mullin — Fri, 10 Feb 2012 15:35:31 -0800

By Alejandro E. Moreno

Fluctuating commodity prices, particularly with respect to the price of food and basic staples, have created a significant demand for arable land. The demand for arable land has, in turn, boosted the price Argentina's rural land and caused a flurry of foreign investment. In response to acquisition of land by foreigners, Argentina recently passed a law that imposes several restrictions on the foreign ownership of rural lands.

On December 22, 2011, Argentina's parliament approved a law limiting the amount of rural land foreigners can purchase in Argentina (the "Law"). Parliament established the "Consejo Interministerial de Tierras Rurales" (roughly, the Ministerial Council of Rural Lands) to implement the Law. "Rural land" is defined as all land that is outside of an urban area. An "urban area" is any an area with 2000 or more inhabitants. Under this definition, most of Argentina's land mass will be classified as rural land. Total foreign ownership of rural land cannot exceed 15% of Argentina's total land mass. No more than 15% of the 30% (e.g. 4.5% of Argentina's total land mass) can be acquired by persons and/or entities of the same nationality. Any particular individual or entity is limited to no more than 1000 hectares (2,470 acres) of rural land.

The Law will not be applied retroactively and does not affect existing foreign landowners. The acquisition of land in certain areas designated as "security areas" (near Argentina's borders) will require an additional approval by Argentina's Ministry of the Interior.

Currently, Argentina's government has not conducted a survey to determine the exact proportion of Argentina's land in foreign hands. To that effect, the Law provides for a census of Argentinean land belonging to foreigners. Foreign owners of rural land are required to report their ownership to the National Registry of Rural Land within 180 days of the Law's enactment. Any foreign legal entities owning rural lands will now be required to report any modification in their corporate structure within 30 days of such a modification.

The Ministerial Council of Rural Lands is charged with enforcing the Law. Any action infringing the law will be deemed null and void. Moreover, any infringing party will have no right to seek compensation for the voided transaction.

There are several issues a foreign company or individual should keep in mind regarding this Law. First, the Law does not regulate or restrain lease agreements. Companies are permitted to enter into lease agreements for rural land without limitations on the amount of land leased. Second, the Law does not specify how to determine the nationality of an entity with shareholders of diverse nationalities. As certain foreign nationalities approach the 4.5% limit on foreign ownership by a particular nationality, this ambiguity will become more important. Third, Argentinean corporate entities that are controlled by foreigners or have over 50% of their capital stock owned by foreigners will be subject to the Law.

To avoid problems, foreign entities contemplating the purchase of land in Argentina should seek legal counsel to ensure that their purchase complies with the Law.

Single Shareholder/Partner entities in Mexico

Sheppard Mullin — Thu, 09 Feb 2012 12:33:34 -0800

By Larissa Calva-Ruiz

Corporate laws and entities in Mexico have several key differences with their respective counterparts in the United States. One of the most notable differences is the number of shareholders, members or partners needed to incorporate any type of entity. While in the United States it is permissible and customary to set up a corporation or limited liability company with one shareholder/partner, this is not allowed under Mexican law. Consequently, we find a considerable number of entities incorporated in Mexico with one "real" majority shareholder/partner and another minority "phantom" shareholder/partner (a straw man), whose sole purpose is to fulfill a corporate formality.

Since 2006 legislators in Mexico have tried to amend Mexico's Law of Commercial Entities, Civil Code and Commercial Code (the "Laws") to allow for sole shareholder/partner entities. Their most recent attempt (2010) was vetoed by President Felipe Calderon. President Calderon opposed the bill because he considered that the reforms would not simplify the creation of sole shareholder/partner entities but would instead over-regulate such entities; in the President's view, the entire purpose of a sole shareholder/partner entity is to be as uncomplicated and practical as possible.

In response to the President's vetoed bill, a new bill was introduced in 2011 by the House of Representatives. Some of their reforms include the following:

Sole shareholder entities are limited to corporations and limited liability companies, since these are the entities most widely used in Mexico.
The words "Sole Partner Limited Liability Entity" (Empresa Unipersonal de Responsabilidad Limitada) or "Sole Shareholder Corporation Entity" (Empresa Unipersonal Anónima) shall be added after the name of these types of entities.
Provisions referring to meetings and calls for meetings shall not be applicable to sole shareholder/partner entities. All shareholder/partner's decisions shall be taken by written resolutions and recorded in the entity's book of minutes.
Entities originally incorporated with only one shareholder/partner shall be referred to as "inceptive sole shareholder/partner entities" (empresa unipersonal originaria); entities originally incorporated as a limited liability company or corporation which then became a sole shareholder/partner entity shall be referred to as "succeeding sole shareholder/partner entity" (empresa unipersonal sobrevenida).
Sole shareholder/partner entities shall be incorporated before a notary public or public commercial attestor and be registered before the Public Commercial Registry.
Agreements entered into by the sole shareholder/partner entity shall also be recorded in a special book and shall be registered before the Public Commercial Registry.
Management of the entity is entrusted to the sole shareholder by operation of law. The sole shareholder/partner may appoint officers or representatives to carry out or execute any resolution or act, but ultimately the sole shareholder/partner shall be responsible for the management of the entity.

Critics of past bills have stated that the reforms to the Laws go against the nature of the sole shareholder/partner entity because they over-complicate the concept with recording and registration requirements. In theory, a sole shareholder/partner entity would be preferred by an individual over a traditional corporation or limited liability company because of simplicity, among other things. Also, notary public and public commercial attestor's services are expensive in Mexico and the costs of registration before the Public Commercial Registry could be a disincentive. It is likely that the majority of individuals who would benefit the most from these reforms would be small business owners. These individuals need capital to grow their businesses and might not be inclined to spend that money on such expenses. Finally, the fact that the shareholder/partner has to "officially" manage the entity might discourage others who are not intimately familiar with the Laws and do not understand the full extent of their duties. These individuals may be distrustful of authorities or uneasy about handling such responsibility.

Proponents of the past and most recent bill, however, claim that the sole shareholder/partner entity will greatly benefit commercial and service sectors in Mexico because medium to small business owners will have their own companies and through them, they will be able to obtain previously inaccessible funds, bids and subsidies from banks and/or the government. An even greater incentive is the fact that these individuals will no longer risk all their capital; they will only be liable up to the amount of the entity’s corporate capital. Furthermore, the creation of these types of entities would also help to keep track of and would regulate what is commonly known as informal commerce (comercio informal). This concept refers to small businesses that operate informally and outside of the law. Having a legally incorporated entity will give these businesses legitimacy and at the same time, will provide legal certainty to any third parties with whom they do business. The most obvious benefit of these reforms is the elimination of straw men in companies where at least two shareholders/partners are needed. It is extremely common to see corporations or limited liability companies in Mexico with a minority shareholder/partner who holds 1% of the corporate capital only to fulfill the two shareholder/partner requirement.

In conclusion, even if there are certain downsides to the aforementioned reforms, it appears that the benefits far outweigh them. In practice, sole shareholder/partner entities have existed for a long time with the use of straw men and these reforms will once and for all acknowledge such entities formally. Individuals will finally be able to incorporate their own entities without procuring a second partner or shareholder. Many doors previously closed to individuals and only accessible to entities will now open and faster, more practical commercial proceedings will also be available to these individuals. The key will be the actual language of the bill and whether President Calderon will support it. We hope sole shareholder/partner entities will soon be an option for many of our clients who in the past have either personally been that minority shareholder/partner or have needed to use subsidiaries to set up corporations or limited liability companies in Mexico.

Doing Transactions in Mexico - Conducting Due Diligence

Sheppard Mullin — Wed, 04 Jan 2012 15:16:24 -0800

By Joseph Pileri

Conducting due diligence is a key aspect of any transaction, international or otherwise. Attorneys working on transactions conducted in Mexico or that involve Mexican entities ought to be aware of registration and certification requirements that are unique to Mexico and that can affect the good standing and validity of Mexican contracts and companies.

First, unlike the United States, many types of documents are required to be notarized in Mexico. For example, the incorporation of every company, the buying and selling of all types of real estate, the establishment of deeds and wills, the creation of mortgages all require notarization. Corporate formalities such as amending governing documents, appointing and removing directors, or merger transactions also require certification before a notary public.

Many corporate documents of Mexican entities must also be recorded before the Mexican Public Registry of Property and Commerce (Registro Público de la Propiedad y de Comercio). There is both a federal registry and local registries in each Mexican state. Among the documents that need to be filed with these public registries are organizational documents, granting of powers of attorney, appointment of directors, and significant transactions. Failure to ensure that such documents are properly filed can lead to penalties and cause significant complications for a transaction.

Entities themselves must be registered with several governmental agencies in Mexico. One such agency is the National Registry of Foreign Investment (Registro Nacional de Inversiones Extranjeras), which documents all foreign investment in Mexico. Companies must also be registered and in good standing with the Federal Taxpayers’ Registry (Registro Federal de Causantes). All Mexican entities that maintain employees in Mexico must be registered as an employer before the Mexican Institute of Social Security (Instituto Mexicano del Seguro Social), the Mexican Institute for Workers’ Housing (Instituto del Fondo Nacional de la Vivienda para los Trabajadores), and the Workers’ Retirement Fund (Sistema de Ahorro para el Retiro).

In addition to being registered with the Federal Taxpayers’ Registry, Mexican companies are also required to keep an After-Tax Earnings Account (Cuenta de Utilidad Fiscal Neta), a Capital Contributions Account (Cuenta de Capital de Aportación) and previously, a Reinvested After-Tax Earnings Account (Cuenta de Utilidad Fiscal Neta Reinvertida). Failure to follow any of these registration formalities can have adverse effects on the tax treatment of a transaction.

The above is by no means an exhaustive list of diligence issues that practitioners face when conducting transaction involving Mexican entities. However, these are all good examples of formalities that may be unfamiliar to non-Mexican attorneys but that should be noted in the diligence process. All practitioners working on transactions involving Mexican entities are advised to familiarize themselves with these and other corporate formalities specific to Mexico (or retain counsel who are) in order to identify and address these issues in the diligence process.

Taking a Cue From Brazil's Sustainable Development Practices Past and Present

Sheppard Mullin — Wed, 14 Dec 2011 13:31:30 -0800

By Whitney A. Hodges

Brazil's Long-Standing Commitment to Sustainability

Brazil arguably boasts some of the most breathtaking natural wonders and extensive natural resources worldwide. Covering a total area of over eight and a half million square kilometers, Brazil features more than two hundred million hectares of rangeland, over six million hectares of farmland, and one hundred million hectares of unexploited land.

In acknowledgement of its natural beauty and extensive though finite resources, Brazil has focused on research and development of green initiatives, most notably renewable energy, since the early 1970s. In order to implement these and other green land use initiatives, Brazilian authorities have utilized various legal techniques to secure financing from foreign and domestic investors and to ensure compliance with development and environmental laws. This dedication has not gone unnoticed. In a March 8, 2011 United Nations press conference in preparation for the 2012 UN Conference on Sustainable Development, Sha Zukang, Under-Secretary-General for Economic and Social Affairs, stated, "Brazil has certainly shown the world how to put sustainable development into practice."

Numerous countries worldwide, including the United States, can duplicate Brazil's environmental and developmental success through the similar legal tactics, governmental initiatives and economic incentives as those implemented in Brazil. This article will discuss how this country was able to attain the title of the world's most forward thinker in terms of sustainability and green development.

As a modern day trailblazer, Brazil has strived for many years to generate electricity in innovative ways, rather than relying on the use of fossil fuels. In conjunction with this effort, companies are voluntarily signing up for Brazil's GHG Protocol Program, a program aimed at reducing carbon emissions. Thanks to the country's dedicated application of a variety of green energy initiatives, including the required use of ethanol,[1] Brazil has reduced its carbon dioxide emissions by two billion tons.

The push toward sustainable development is partially the result of Brazil's alarming growth rate. Due in large part to a successful economy where more Brazilians are moving into the middle class every day, consumption of cars, electronics, luxury items and new homes is increasing faster than these products can be supplied. For example, in 2010, it was estimated that 43,000 new cars were on the roads each day in Brasília, the capital city. The growing middle class puts pressure on antiquated power grids and roads ill designed for large numbers of vehicles. As the country ramps up infrastructure, development must move forward at a sustainable pace. International Green Energy Council ("IGEC") President Ralph Avallone recently commented, "Brazil will need to move very fast to take advantage of a growing economy. They need mass transit systems, a more reliable power grid and sustainable development plans."

In order to capitalize on Brazil's dedication to sustainability, the IGEC established a new chapter in Brazil in 2010, appointing Leandro Cararro as the chapter's first president. In conjunction with this, the IGEC has already presented many manufacturing opportunities to the Brazilian government, from solar panel manufacturing, LED street light manufacturing, asphalt and cement plants, to biomass facilities and sustainable development projects throughout Brazil. Another factor compelling Brazil towards further sustainable development is its recent victorious bids for the 2014 World Cup and 2016 Olympics. Rio de Janeiro is also the home to the 2012 UN Conference on Sustainable Development. These events mean that Brazil will experience huge influxes of foreign and domestic visitors. With these upcoming events, the Brazilian government is embarking upon a $200 billion reinvention of its infrastructure and is insistent on presenting Brazil as a forward thinker on sustainable development. Brazilian officials hope this demonstration will secure new investors, form new business partnerships, and propel Brazil forward as a global competitor in industries such as energy, logistics, and security.

In an attempt to achieve this goal, the state government of Rio de Janeiro has created the Green Economy Department ("GED"), an organization developed in January of 2011. Despite its youth, GED has been working hard to bring many sectors of state and national government together in order to collaboratively plan for and implement initiatives to further green economic strategies and bolster the number of "green-collar jobs."

GED priorities include: sustainable constructions, electricity, agriculture, finance, tourism and water. GED hopes to attain its innovative vision through green gross domestic product, green jobs, financial flows, the use of market mechanisms to solve environmental issues, and fiscal and tributary incentives. Among GED's first projects are the laying of rubber asphalt, urban agriculture projects, new housing developments built with green building practices, and reforestation.

Further, in May 2011, Rio de Janeiro opened a branch office of the Climate Policy Initiative ("CPI"), a global analysis and advisory organization that supports nations' efforts towards green and low-carbon growth. CPI Rio will examine low-carbon growth policies and program in Brazil in areas such as forestry and agriculture, finance and cap-and-trade systems.

In addition, Brazil has been reaching out to foreign countries, like the United States, in order to explore a cohesive blend of environmental and economic priorities. In March 2011, President Obama traveled to Brazil to meet with President Dilma Rousseff. The heads of state agreed on a number of measures, including the decision to work together on sustainability for urban infrastructure. In furtherance of this decision, government, industry, academic and nonprofit officials from both the United States and Brazil met in August 2011 in order to both learn from each other and share their own expertise and success stories. United States' participants to the collaboration included representatives from the Environmental Protection Agency, Microsoft, Morgan Stanley, Alcoa, Harvard University and Philadelphia Major Michael Nutter.

While devising new and groundbreaking ways to pursue green development, Brazil has utilized a variety of legal and legislative avenues, including public agency agreements , local government initiatives, and development and construction agreements. Brazil, or any other country seeking to expand the traditional notions of mixed use, could benefit from employing some techniques applied by Sheppard, Mullin, Richter, & Hampton LLP's land-use practice in the United States. The firm has extensive experience in coastal and waterfront development, urban redevelopment, mixed use projects, and environmentally-conscious timber and mining, all of which are areas impacted by Brazilian development. Sheppard Mullin's recent work has focused on the clean-up and reuse of contaminated land, habitat conservation and the adaptive reuse of historic buildings, and could act guiding precedent for the newly established Brazilian and international green organizations.

Brazilian Case Study in Sustainable Development

Curitiba, capital of the Brazilian state of Paraná, is a city of 1.5 million people and has been said to rival Chicago as the center for progressive urbanism.[2] Examples of this progressiveness abound. First, in an effort to combat urban sprawl, Curitiba utilizes a system of "tradeoffs" to expand its green space. This system distributes city government sponsored incentives to private developers to encourage the exchange of undeveloped land in neighborhoods or outskirts of the city for rights to build larger, higher-density buildings in more urbanized parts of the city.

Second, Curitiba implements a number of GHG-emission reducing measures. Specifically, the city boasts a transit system that rivals many American counterparts. The city employs a wide range of bus lines that cover the spectrum from neighborhood shuttles to high-speed transit lines. This public transit system relies solely on buses traveling as fast as subways but costs a mere 1/40 of what rail transit costs. This system is used by seventy-five percent of all residents. Additionally, the city features a "twenty-four hour street." This partially enclosed pedestrian-only walkway is lined with businesses open twenty-four hours. This street was created in response to residents' concerns of downtown crime and safety, but has become a booming commercial marketplace and encourages walkable developments.

Third, Curitiba's government actively encourages architectural preservation. The city allows owners of historic buildings to develop next to the architectural significant structures or to transfer building rights to another location, in exchange for the developer's restoration of the historic building. The end result is an aesthetically pleasing architecture, cultural preservation and a reduction in development waste.

Challenges Facing Brazil's Continued Sustainable Development Success

While Brazil has received well-deserved respect for the country's forward thinking approach, the path to sustainability has not been an easy road to travel. Brazil has been heavily criticized for hydroelectricity projects since the 1980s. In recent years, the country has been under fire for the decision to move forward with plans to build dams on the Xignu River, which lies in the Amazon basin. The most infamous of these dams is the "Belo Monte," which, while greatly increasing Brazil's ability to harness hydroelectricity, carries the potential to transform the tributaries of the world's largest river into "an endless series of stagnant reservoirs."[3] Belo Monte may also displace indigenous people in the area.

In addition, any sustainability program implemented at a state or national level may take many years to clear the current obstacles facing Brazilian society. First, despite the recent success of the country's economy to survive the 2008 downturn, poverty remains widespread. Second, rural areas that were once the home of established community-based agriculture enterprises are losing ground to urbanization and sprawl. Third, regardless of Brazil's successful quest for alternative forms of fuel, fossil fuel dependence is still present.

Despite these apparent shortcomings and challenges, Brazil appears poised to come into its own as a global power without leaving a trail of environmental waste and natural resource destruction. Brazil has a veritable arsenal of proven tools, including legal tactics, legislative precedent, and community support, that can be utilized to further advance its reputation as a sustainable and self-sufficient green country.

[1]According to Mario Garnero, founder and Chairman of Brasilinvest Group, nearly 80% of Brazil's cars run on flex-fuel engines.

[2]Carmen Vidal-Hallett and Mark Hallett, Learning from Curitiba, Presentation, Evanston, IL, October 26, 2006.

[3]Sigourney Weaver, Amazon Watch and International Rivers, 10-minute Tour in 3-D Highlights the Dam's Harmful Impacts on  Xingu River and Greener Alternatives, August 30, 2010.

United States Increases Entertainment Exports to Latin American Markets

Sheppard Mullin — Thu, 01 Dec 2011 14:21:22 -0800

By Whitney A. Hodges

On September 30, 2011, the United States government signed an Export Trade Certificate of Review for the Latin American Multichannel Advertising Council ("LAMAC"). This certification will allow seven United States-based entertainment firms to increase the exportation of multimedia entertainment to Latin American countries and will likely pave the way for other United States-based entertainment studios to enter the market. The LAMAC's Certificate of Review was signed by Under Secretary for International Trade, Francisco Sánchez.

Background

A Certificate of Review is a legal document issued by the Department of Commerce with the concurrence of the Department of Justice pursuant to Title II of the Export Trading Company Act of 1982 (15 U.S.C. § 4001-21). The certificate provides antitrust protection for the export activities specified in the certificate that is applicable to the holder and members identified in the certificate. This protection provides immunity from federal and state antitrust suits, shortens the statute of limitations for private antitrust actions, alters the burden of proof to the advantage of the certificate holder, provides recovery of legal expenses in cases in which the certificate holder prevails, and reduces liability from treble to single damages.

Any United States exporter able to demonstrate the proposed export activity sought to be certified will not result in substantial lessening of competition within the United States is eligible to apply for a certificate. Individuals, partnerships or corporations formed under United States laws, state and local government entities, associations, or combinations of these entities are eligible to apply.

The antitrust protection offered by a Certificate of Review is an incredibly valuable asset as it allows United States exporters to work collectively without threat of antitrust liability. This cooperative effort enables two or more exporters to lower costs by sharing market information, negotiating high volume freight rate discounts, and operating joint sales and warehouse facilities. These, and other joint export activities, result in economies of scale and minimize individual risk. Thus, a Certificate of Review helps United States exporters improve their export competitiveness by providing legal clearance to coordinate and to recognize greater profits.

Currently, seventy certificates have been issued and there are approximately 2,500 firms participating in this program. In 2010, the exports associated with the Export Trade Certificate of Review programs totaled an estimated $19.6 billion.

LAMAC's Certificate of Review

LAMAC applied to the Office of Competition and Economic Analysis, International Trade Administration, United States Department of Commerce for a Certificate of Review on February 3, 2011 (Application No. 11-00001). The seven members identified in the application are: Discovery Latin America, LLC; Fox Latin America Channel, Inc.; NGC Networks Latin America, LLC; Turner Broadcasting Systems Latin America, Inc.; A&E Mundo, LLC; History Channel Latin America, LLC; and E! Entertainment Television Latin American Partners, L.P.

LAMAC's Certificate of Review allows LAMAC to engage in distribution of Pay TV channel programming and ancillary rights – cable television rights, broadcast or satellite television rights, copyrights, and neighboring rights, etc. It also allows LAMAC members to: (i) exchange information on foreign market conditions and customers; (ii) collect and disseminate foreign market research information and analysis; (iii) negotiate and enter agreements with foreign entities, including audience data providers and advertisers, to reduce trade barriers and expand markets; (iv) develop and recommend common business models; (v) enter into, terminate, amend, and enforce exclusive agreements to provide, produce, negotiate, and administer Export Trade and Export Trade Facilitation Services; (vi) enter into, terminate, amend, and enforce territorial and customer restraints regarding the sale, licensing and/or transfer of title of its exports services into the foreign markets; (vii) enter into, terminate, amend, and enforce agreements for tying of distributions rights and price settings; (viii) refuse to deal with, or provide quotations to, non-members regarding export distribution rights; (ix) provide accounting, tax, legal and consulting assistance and services to LAMAC members; and (x) engage in joint promotional activities aimed at developing the export markets.

LAMAC's Certificate of Review identifies Latin America as the export market. The designation includes Mexico, the Caribbean, Central America, and South America.

This Certificate of Review contains the potential to be a very profitable endeavor as the United States remains the world leader in creative content, offering a robust selection of movies, television shows, and other Spanish- and Portuguese-language programming. LAMAC members now stand poised to capture a large portion of Latin American TV advertising capital.

Under Secretary Sánchez deemed this Certificate of Review as "an important step toward realizing the tremendous export potential for U.S. producers of Spanish-language content." Sánchez also added that the Central and South America regions are expected to be the strongest growth market for entertainment and media "with a compound annual growth rate in excess of ten percent through 2015." The overarching hope, as articulated by Sánchez, is that as LAMAC members recognize growing advertising revenue, the opportunity for U.S. filmed content will expand. "This will benefit not only the big U.S. studios, but the hundreds of independent and TV production houses."

Increasing Level of Seizures by U.S. Customs

Sheppard Mullin — Fri, 29 Jul 2011 03:41:09 -0800

By Curt Dombek

Companies are reporting a significant increase in intellectual property seizures at U.S. ports in recent months, resulting in increased supply chain disruptions. Unfortunately, not all of this activity can be explained by more effective enforcement methods. More cases of erroneous seizure have also been observed, and some of these are attributable to difficulty in tracing the valid licensing authority for components incorporated in products that have been manufactured abroad.

Sadly, once the seizure process begins, it takes on a life of its own, with short deadlines, forfeitures and related procedures that present complexities of timing, jurisdiction and filing requirements. Before long, the cost of responding to an erroneous seizure can exceed the value of the individual shipment affected.

Careful attention to the licensing of trademarks by U.S. Customs has the benefit of protecting U.S. trademark owners from the entry of infringing goods. Given the complexity of international supply chains, however, it also poses the risk of disrupting legitimate business transactions if affiliates, authorized component suppliers and sublicensees are not readily recognized by U.S. Customs personnel comparing shipments and associated paperwork against automated lists of licensees.

This increased activity calls for companies importing into the United States to pay greater attention to the trademarks their suppliers are using and implement measures to protect themselves. Questions importers should be asking include:

Do our terms of contract with foreign suppliers place clear enough responsibility for intellectual property compliance procedures and the associated financial risk on the suppliers?
Has our company performed sufficient due diligence on the suppliers we are using and their major subtier suppliers?
Has our company examined the licenses of our foreign suppliers to ensure not only that the requisite licenses are in place, but that the named licensees correspond to the parties who will appear on the shipping documents for our purchases?
Has our company verified that these licenses are properly recorded with U.S. Customs?

These are all prudent measures that importers can implement to reduce the risk associated with Customs seizures in this time of increased enforcement activity.

Customs law requires the exercise of reasonable care by importers, so even for relatively infrequent or inexperienced importers an appropriate measure of due diligence is called for. Seizures entail not only the potential loss of the merchandise but also Customs penalties, which can end up exceeding the value of the merchandise seized.

Calibrating an appropriate level of effort in each case calls for consideration of the circumstances of the importer, the volume of business, the nature of the goods, their country of origin and the suppliers involved. The challenge is to manage risk prudently with a level of effort that reduces risk without disrupting legitimate trade.

For additional information, please feel free to contact us.

Ninth Circuit Finds Jurisdiction Over Foreign Corporation Based On Its Subsidiary's Contacts in the United States

Sheppard Mullin — Tue, 05 Jul 2011 09:30:24 -0800

By Bram Hanono

In the recent case of Bauman v. DaimlerChrysler Corp. (No. 07-15386 (9th Cir. May 18, 2011)), the Ninth Circuit expanded the use of "agency theory" to impose personal jurisdiction over a foreign corporation doing business in the U.S. solely through its U.S. subsidiary. The court found jurisdiction based on the subsidiary's contacts within California, even though the lawsuit was initiated by non-U.S. residents regarding acts allegedly committed in a foreign country that had nothing to do with the subsidiary's contacts.

If this decision stands, it has the potential to affect any foreign company doing business in the U.S. through subsidiaries, even if those subsidiaries have nothing to do with the company's alleged actions giving rise to the lawsuit.

In the decision, the Ninth Circuit held that personal jurisdiction existed over DaimlerChrysler AG (DCAG), a German company, based in part on its right to maintain control over Mercedes-Benz USA LLC (MBUSA), its wholly owned U.S. subsidiary. The court held that DCAG could be haled into court in California due to MBUSA's contacts within California.

Background

The plaintiffs in Bauman are 22 Argentine nationals who allege that DCAG's Argentine subsidiary, Mercedes-Benz Argentina (MBA), collaborated with the Argentine government during its "Dirty War" in order to break up the union at an MBA plant. The plaintiffs brought suit under the Alien Tort Statute and the Torture Victims Prosecution Act of 1991.

Suit was brought against DCAG in the Northern District of California. Like many global companies doing business in the U.S., DCAG owns an American holding company, DaimlerChrysler North America Holding Corp., which in turn owns MBUSA. MBUSA is a Delaware company with its principal place of business in New Jersey, but it has a regional office in California, as well as other centers of operation located in California.

The relationship between DCAG and MBUSA is governed by a General Distributor Agreement which establishes requirements for MBUSA as the general distributor of Mercedes-Benz cars in the U.S. MBUSA is the single largest supplier of luxury vehicles to the California market, and MBUSA's sales in California alone account for 2.4 percent of DCAG's total world wide sales. DCAG did not dispute that MBUSA was subject to general personal jurisdiction in California.

However, DCAG did dispute that it was subject to personal jurisdiction in California. At the district court level, DCAG's motion to dismiss for lack of jurisdiction was granted. Plaintiffs appealed to the Ninth Circuit, which reversed the district court's holding.

Ninth Circuit's Decision

The question before the Ninth Circuit was whether the district court has general personal jurisdiction (i.e. jurisdiction over any claims against DCAG, regardless where they arise) over DCAG through the contacts of MBUSA. The court recognized that the district court did not have specific personal jurisdiction over DCAG, since the plaintiffs' claims did not arise from DCAG's contacts with California. Instead, the court determined whether general jurisdiction was appropriate over DCAG.

First, the court considered whether DCAG had "the requisite contacts with the forum state to render it subject to the forum's jurisdiction" by considering either "substantial" or "continuous and systematic" contact with the forum state. The real question was whether the court could impute MBUSA's contacts in California to DCAG. To decide this, the Ninth Circuit said that courts can use the "alter ego" test or the "agency" test. Recognizing that the alter ego test was not met in this case, the court turned to the agency test.

The agency test is predicated upon showing the "special importance of the services performed by the subsidiary." Specifically, the agency test is satisfied by a showing that the subsidiary functions as the parent corporation's representative in that it performs services that are sufficiently important to the foreign corporation that if it did not have a representative to perform them, the corporation's own officials would undertake to perform substantially similar services.

Further, the parent company must also exert, or have the right to exert, sufficient control over the subsidiary, though "not as much control as is required to meet the 'alter ego' test."

The court held that MBUSA's services were sufficiently important to justify personal jurisdiction over DCAG via the agency test. The court explained that "DCAG simply could not afford to be without a U.S. distribution system," given the amount of cars sold in the U.S. and in California. Moreover, DCAG had the right to control MBUSA's activities under the distributor agreement.

Second, the court analyzed whether the assertion of jurisdiction would be fair and reasonable under the circumstances of this case. Looking at several factors, the court concluded that it was reasonable to assert jurisdiction over DCAG.

Of importance, the court focused on DCAG's purposeful interjection into the California market. The court looked at the importance of the California market to DCAG's car sales and the fact that DCAG had initiated lawsuits in California to challenge clean air laws and to protect its patents. The court also found that DCAG was a large sophisticated company, therefore the burden to litigate the dispute in California was not enough to preclude jurisdiction.

The court also found Germany's sovereignty concerns trumped by California's interest in adjudicating important questions of human rights. Finally, the court expressed doubts that Argentina was an adequate alternative forum to address allegations involving the "Dirty War."

Conclusion

The importance of Bauman is that the Ninth Circuit's use of the "agency" test makes it easier for foreign corporations to be sued in the U.S. based on the unrelated activities of an American subsidiary. Foreign corporations exercising control, or which have clauses in distribution or other agreements with their U.S. subsidiaries which allow them to control their subsidiary's activities, should pay close attention to the court's analysis in Bauman.

However, Bauman's importance may be limited depending on the Supreme Court's approaching decision in Goodyear Dunlop Tires, S.A. v. Brown (No. 10-76), which raises similar issues regarding personal jurisdiction over a foreign company when the lawsuit does not arise from events in the U.S. It is possible that the Ninth Circuit views their "agency theory" as a way around any Supreme Court decision, but until Goodyear is decided, Bauman's reach remains uncertain.

For more information, please contact Bram Hanono. Mr. Hanono is an associate in the Business Trials Practice Group in the firm's Del Mar office.

IRS Announces Second Special Voluntary Disclosure Initiative for Taxpayers With Undisclosed Offshore Accounts

Sheppard Mullin — Tue, 22 Feb 2011 06:06:14 -0800

The Internal Revenue Service announced on February 8, 2011 the creation of a second special voluntary disclosure initiative for U.S. taxpayers with undisclosed foreign bank and other financial accounts. This new program is a follow-on to the IRS' original voluntary disclosure initiative that closed on October 15, 2009. The 2009 program reportedly attracted some 15,000 voluntary disclosures by taxpayers with previously undisclosed offshore accounts, and has been viewed within the government as a success in getting taxpayers "back into the U.S. tax system" by offering them the ability to avoid or significantly mitigate various the criminal and civil penalties that would otherwise have potentially applied had their failure to disclose been discovered by the IRS on audit.

As background, U.S. persons are generally required to file an annual information statement with the IRS disclosing any beneficial interest in, or signatory authority over, bank or other financial accounts located outside the U.S. This information statement is filed on Form TD F 90-22.1, and is generally referred to as an "FBAR" (Foreign Bank Account Report"). From an accountholder perspective the failure to file FBARs as required can potentially lead to a large array of both civil and criminal penalties – including monetary penalties of up to 50% of the unreported account balance (per year) and criminal penalties if the failure to file was willful.

The new 2011 program represents a second chance for taxpayers who did not take advantage of the original 2009 voluntary disclosure program. While the penalty structure offered by the IRS this time around is slightly less favorable than under the original 2009 program, it still offers taxpayers an opportunity to significantly reduce their penalty exposure. Highlights of the new 2011 program include the following:

The program covers the years 2003 through 2010.
There is an August 31, 2011 deadline to submit all required information to the IRS, including delinquent or corrected FBARs and amended income tax returns reporting any previously unreported income.
In lieu of the normal 50% per year penalty, a participating taxpayer must pay a 25% penalty on the highest aggregate account balance in the undisclosed offshore account during the period covered by the voluntary disclosure. In limited cases, this 25% penalty may be reduced to 12.5% or 5%.
Participating taxpayers must pay all delinquent taxes relating to any unreported offshore income, together with applicable interest and a 20% accuracy-related penalty.
Participating taxpayers must pay any other applicable civil penalties associated with a failure to file returns or failure to pay taxes during the period covered by the voluntary disclosure.
The program includes a generally favorable alternative resolution procedure to enable participating taxpayers to calculate their tax liability associated with investments that may have been made in "passive foreign investment companies" (e.g., foreign mutual funds) through their undisclosed offshore accounts.
Participating taxpayers must fully cooperate with the IRS in providing information on offshore financial accounts, institutions and facilitators.
The IRS will not initiate criminal prosecution of taxpayers who fully comply with the terms of the program.

The IRS remains focused on the potential evasion of U.S. income tax that is facilitated by hiding funds in offshore accounts, and has been increasingly aggressive in pursuing U.S. taxpayers who have failed to properly file FBARs and pay taxes on offshore income. As offshore financial secrecy continues to erode, the IRS has become increasingly able to obtain information relating to U.S. taxpayers directly from foreign banks. As a result, taxpayers with undisclosed offshore accounts that did not previously take advantage of the 2009 voluntary disclosure program may wish to consider the potential advantages of participating in this new 2011 program.

For more information, please contact Keith Gercken. Mr. Gercken is a partner in and Practice Leader of the Tax, Employee Benefits, Trusts & Estates group, and is located in the firm's San Francisco office.

USCIS Makes Important Changes to I-129 Petition for Foreign Workers Effective December 23

Sheppard Mullin — Fri, 17 Dec 2010 05:43:23 -0800

By Curt Dombek

United States Citizenship and Immigration Services (USCIS) has changed the I-129 Petition for Nonimmigrant Workers. This affects all H-1B, H-1B1 Chile/Singapore, L-1 and O-1A petitioners. Companies must certify compliance with the deemed export laws governing the release of controlled technology or technical data to foreign persons in Part 6 of the new form, which becomes mandatory on December 23, 2010.

The new I-129 form requires companies to certify that:

A license is not required from the U.S. Department of Commerce or the U.S. Department of State to release such technology or technical data to the foreign person; or
A license is required from the U.S. Department of Commerce and/or the U.S. Department of State to release such technology or technical data to the beneficiary and the petitioner will prevent access to the controlled technology or technical data by the beneficiary until and unless the petitioner has received the required license or other authorization to release it to the beneficiary.

To complete this certification, companies must know the export control treatment under the Export Administration Regulations (EAR) and International Traffic in Arms Regulations (ITAR) of technology or technical data to which their non-immigrant workers will have access. Making this determination requires a careful review of the technical characteristics of the technology or data and the nationality of the employee.

Companies in the manufacturing and engineering sectors will be most affected, and within those sectors some of the industries most affected include aerospace, sophisticated electronics, high speed computing and software, chemicals, biotech, security technologies and anything relating to the military. The countries subject to the most restrictive export controls include China, Cuba, Iran, North Korea, Russia, Sudan, and Syria, but there are some technologies controlled for nationals of virtually all foreign countries, including all countries in Latin America. Companies that handle controlled technology and choose to prevent access for their foreign workers will be required to implement safeguards that are deemed legally adequate under applicable EAR and ITAR policies.

Sheppard Mullin's export control specialists are assisting many companies with this new compliance requirement. If your company employs foreign workers in the H-1B, H-1B1 Chile/Singapore, L-1 and O-1A categories and is not certain of the export control status of its technology, feel free to contact us.

Curt Dombek
(213) 617-5595
cdombek@sheppardmullin.com

US Courts Order Discovery for Use Overseas in Chevron-Ecuador Disputes

Sheppard Mullin — Wed, 08 Dec 2010 13:16:08 -0800

By Neil A.F. Popović and Rachel Tarko Hudson

Context: The Chevron-Ecuador Litigation

A high profile and complex dispute involving a group of Ecuadorian residents, Chevron Corporation and the Republic of Ecuador is forcing courts and the media to focus on an arcane provision of federal law that authorizes federal courts in the United States to order testimony or the production of documents for use in a foreign or international tribunal. This once-obscure statute, 28 U.S.C. § 1782(a), authorizes, but does not require, U.S. courts to compel U.S.-style discovery in aid of non-U.S. proceedings. Federal courts on opposite sides of the United States recently ordered parties on opposite sides of the Chevron-Ecuador disputes to provide discovery under section 1782(a).

The statute has been around for many years, but it took the extraordinary circumstances of the Chevron-Ecuador litigation to thrust it into the headlines. The litigation started in 1993, when a group of residents from the Oriente region in Ecuador brought a class action against Chevron's predecessor, Texaco, in the Southern District of New York, Aguinda v. Texaco, Inc. The plaintiffs alleged that between 1964 and 1992, Texaco's oil operations polluted the rain forests and rivers of Ecuador. The court in New York dismissed the case on forum non conveniens grounds, with a condition that Texaco submit to jurisdiction in Ecuador. In the meantime, a Texaco subsidiary entered into a settlement with Ecuador whereby the subsidiary agreed to perform specified environmental remediation in exchange for a release of claims by the government.

In 2003, after appellate wrangling in Aguinda concluded and the case was dismissed, an overlapping but not identical group of Ecuadorians sued Chevron (which by then had acquired Texaco) in domestic court in Ecuador, the so-called "Lago Agrio litigation." The plaintiffs in the Lago Agrio litigation assert claims for deterioration of their health and the environment. Further complicating things, the Government of Ecuador filed criminal charges against several individuals, including two of Texaco's lawyers in Ecuador, alleging falsification of public documents in connection with the Texaco-Ecuador settlement, as well as violation of Ecuador's environmental laws.

In 2005, one of the plaintiffs' lawyers solicited the making of a documentary film about the litigation. The film, Crude, came out in 2009. Also in 2009, Chevron initiated an international arbitration proceeding against Ecuador in the Permanent Court of Arbitration in the Hague under the Bilateral Investment Treaty ("BIT") between Ecuador and the United States. Chevron alleges that the Government of Ecuador improperly colluded with the plaintiffs in the Lago Agrio litigation, abused the criminal justice system, and violated its treaty obligations under the BIT.

Thus three sets of related proceedings are pending outside the United States: (1) the Lago Agrio litigation; (2) the criminal proceedings in Ecuador; and (3) the BIT arbitration.

The Statute

Title 28, section 1782(a) of the United States Code provides:

The district court in the district in which a person resides or is found may order him to give his testimony or statement or to produce a document or other thing for use in a proceeding in a foreign or international tribunal, including criminal investigations conducted before formal accusation. The order may be made pursuant to a letter rogatory issued, or request made, by a foreign or international tribunal or upon the application of any interested person and may direct that the testimony or statement be given, or the document or other thing be produced, before a person appointed by the court.

The statute thus empowers district courts to grant requests for discovery where the requesting party satisfies three statutory criteria: (1) the person from whom discovery is sought must reside or be found in the district in which the district court sits; (2) the discovery must be for use in a "proceeding in a foreign or international tribunal;" and (3) the discovery must be sought by a foreign or international tribunal or an "interested person."

If a requesting party satisfies the three-part test, the reviewing court then must exercise its discretion based on a multi-factor analysis articulated by the Supreme Court in Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241 (2004). Under Intel, a court must consider: (1) whether the material sought is within the overseas tribunal's jurisdictional reach and thus accessible without section 1782; (2) the nature of the overseas tribunal, the character of the proceedings, and the receptivity of the foreign tribunal or foreign government or agency to U.S. judicial assistance; (3) whether the request constitutes an attempt to circumvent foreign or domestic proof-gathering restrictions or policies; and (4) whether the request is unduly intrusive or burdensome. The court must also factor in the twin aims of the statute: "providing efficient means of assistance to participants in international litigation in our federal courts and encouraging foreign countries by example to provide similar means of assistance."

East Coast Application – The Southern District of New York

In an effort to obtain evidence for use in the matters pending outside the U.S., Chevron and two of its Ecuadorian lawyers applied to the Southern District of New York under section 1782 for production of documents from and permission to take the deposition of Steven R. Donziger, a U.S. lawyer representing the Ecuadorian plaintiffs, and the one who had solicited the making of Crude. The applicants based their request on outtakes from Crude, which they had previously obtained from the filmmaker pursuant to another (hotly contested) application under section 1782. Donziger and the Ecuadorian plaintiffs moved to quash the application.

Donziger, a member of the New York bar, first became involved in the litigation as counsel for the plaintiffs in Aguinda. He continued his involvement in the Lago Agrio litigation. The applicants argued that Donziger had information and documents that would support their cases against the plaintiffs and the government of Ecuador. The court determined that the film outtakes supported the applicants' arguments that Donziger played a key role in the cases in Ecuador and that he is also key to identifying any misconduct by the government.

In a 54-page opinion issued November 5, 2010, Judge Lewis A. Kaplan denied the motions to quash, thereby approving the requested discovery. In re Application of Chevron Corporation, Case N. 10-MC-00002 (S.D.N.Y. Nov. 5, 2010). The court first addressed the statutory requirements of 28 U.S.C. § 1782, finding (1) that Donziger is located in New York; (2) that Chevron and its lawyers are "interested persons," because all are parties in the overseas litigation; and (3) that the Ecuadorian civil and criminal courts qualify as foreign tribunals and the BIT arbitration qualifies as an international tribunal, because it was established pursuant to an international treaty.

Having found that it could order the requested discovery, the court then turned to the four Intel factors to determine whether it should order the discovery. The court held that the first factor supported the request, because Donziger was present in the district, not a party to the foreign proceedings, and was therefore beyond the jurisdiction of the Ecuadorian courts and the BIT arbitration tribunal. The second factor, focusing on the nature and attitude of the overseas tribunal, also weighed in favor of allowing discovery. Other district courts had already granted requests under section 1782 in connection with the same proceedings, and even if the Ecuadorian courts opposed the assistance, which they had not, that would not be dispositive, especially in light of the charges of judicial misconduct by Chevron against the court in Ecuador.

The court held that the third factor (circumvention of foreign restrictions on discovery) supported discovery because neither the Ecuadorian courts nor the arbitral tribunal could compel Donziger to produce documents or testify. The court concluded that the request was not likely to undermine Ecuadorian proof gathering policies, because it enabled a more complete picture of all of the evidence. The court's logic on this point seems a bit strained, for if neither the Ecuadorian courts nor the arbitration tribunal could authorize the discovery, then allowing it would seem to circumvent proof-gathering restrictions in those proceedings.

Finally, on the fourth factor, whether the discovery would be intrusive or burdensome, the court focused on Donziger's status as an attorney. The court held that much of the work Donziger did for the plaintiffs in Ecuador was not legal work and thus was not protected from discovery. Donziger could object to specific questions if answering would violate attorney-client privilege or attorney work product protections.

West Coast Application – The Northern District of California

Meanwhile, on September 15, 2010, clear across the United States, the Republic of Ecuador launched a counter-attack, filing its own request for discovery under 28 U.S.C. § 1782 in the Northern District of California. Ecuador sought testimony and documents from Diego Fernando Borja Sanchez, an Ecuadorian individual living in the United States who made secret video recordings of meetings allegedly showing bias and corruption in the Lago Agrio litigation, for use in the BIT arbitration. In re the Republic of Ecuador, Case No. 10-80225 (N.D. Cal. Sept. 15, 2010). The magistrate judge approved issuance of a subpoena, and invited a motion to quash. Borja accepted the invitation.

On December 1, 2010, Magistrate Judge Edward M. Chen issued an order granting in part and denying in part Borja's motion to quash. The court rejected Borja's argument that the Republic of Ecuador, as a sovereign government, could not be an "interested person" under the statute. The court reviewed the legislative history of section 1782, noting that the statute originally authorized only sovereign states to request discovery, and subsequent amendments were intended to broaden, not narrow, its scope. The court also granted Ecuador's motion to join the country's attorney general, who is a natural person, and noted it would make no sense to deny a sovereign state discovery when an official acting on its behalf indisputably would qualify as an interested person.

The court assessed the relevance of each specific discovery request to the BIT arbitration and exercised its discretion to narrow some of the requests. The court, however, rejected Borja's contention that the Republic of Ecuador was seeking to use the requested information to harass him and his family, holding that the possibility that the Republic might use the information for the purpose of initiating criminal proceedings against him in Ecuador did not make the information less relevant to the BIT arbitration. The court did not address, but apparently assumed, that use of the information in a BIT arbitration qualifies as "use in a foreign or international proceeding."

Conclusion

In New York, Judge Kaplan methodically applied the tests articulated by the Supreme Court in Intel. In exercising his discretion, the judge repeatedly expressed concern that Donziger had engaged in misconduct. In California, Magistrate Judge Chen also relied on Intel, but he devoted the bulk of his analysis to the determination that the Republic of Ecuador qualifies as an "interested person" entitled to request discovery under section 1782. Given the successful joinder of Ecuador's Attorney General, that issue was not dispositive. Based on the litigious pattern of all concerned, some aspect of the Chevron-Ecuador disputes will likely make their way to the courts of appeal and maybe even the Supreme Court, which would provide a post-Intel opportunity for the High Court to explicate the contours of discovery under section 1782.

In the meantime, the rulings in New York and California continue a trend of allowing discovery for use in international arbitration proceedings when requested by a party, and when the arbitration involves a treaty and/or a government party. Qualification of the arbitral tribunal as a "foreign or international tribunal" under section 1782 was not contested in either case, so the muddle created by other courts that have based decisions on inaccurate understanding of the structure of international arbitration will persist. In particular, the applicability of section 1782 to private commercial arbitration remains unclear, largely due to judicial misconceptions about the status of UNCITRAL, a UN Agency that formulates rules on international business, but does not itself administer arbitrations. Perhaps some of these issues will surface as the Chevron-Ecuador parties continue their legal battles in the United States, Ecuador, and beyond.

For further information, contact Neil A.F. Popović at (415) 774-3156 or Rachel Tarko Hudson at (415) 774-2999.

First Sale Rule Survives in the United States

Sheppard Mullin — Fri, 22 Oct 2010 05:27:06 -0800

By Curt Dombek

U.S. importers and their suppliers breathed a collective sigh of relief this month after U.S. Customs and Border Protection announced that it was not going forward with its planned rule change that would have essentially eliminated the "first sale" rule.

A great deal was at stake in this decision for companies exporting to and distributing in the United States. The rule has allowed companies sourcing goods from third countries for resale to U.S. purchasers to use their arms-length price paid to the third-country manufacturer as the basis for Customs valuation for import of the goods into the United States as long as the goods were purchased from that manufacturer for "exportation to the United States."

The rule allows Latin American distributors and traders who source products for export to the United States to benefit significantly when they arrange drop shipments from third countries such as China to their U.S. customers or distribution centers.

When a transaction qualifies under the rule, the U.S. Customs duty is assessed on the price paid to the third country manufacturer instead of the resale price to the U.S. purchaser. The duty savings can be substantial, especially on products subject to high rates of duty. Apparel importers and retailers would have been especially hard hit if the rule had changed.

Latin American companies should reexamine their supply chain and distribution models to be sure that their sales from third countries into the United States are structured to minimize import costs. The "first sale" rule is here to stay, so companies should not overlook the potential for significant cost savings that the rule can provide.

If you have questions about how this rule might benefit your company or whether your transactions may qualify, the international trade team at Sheppard Mullin can assist you.

Curt Dombek
Sheppard Mullin Richter & Hampton LLP
Los Angeles
+1-213-617-5595
cdombek@sheppardmullin.com

EB-5 (Job Creation) Investor Green Card Pursuit, Regional Center Approach & TEA Designation Information

Sheppard Mullin — Tue, 12 Oct 2010 05:00:12 -0800

By Albert Lu

EB-5 Investor Visa Basics

Under Section 203(b)(5) of the Immigration and Nationality Act, 10,000 immigrant visas per year are available to qualified individual investors (and accompanying spouse & minor children) seeking to obtain permanent resident "green card" status in the United States on the basis of their qualifying financial investment of at least $1,000,000 (or under certain circumstances $500,000 in defined Target Employment Areas) into a new commercial enterprise in USA, as well as their "management" role within the invested commercial enterprise that will create the jobs and employ at least 10 full-time U.S. workers.

Many federal immigration regulations and legal precedents that govern these EB-5 petition filings and underlying eligibilities. They help to define, amongst other things: the nature, size, scope, and origin of the qualifying financial investment; the nature and status of the U.S. commercial enterprise that will serve as the EB-5 vehicle; the "At-Risk" nature of the invested/created commercial enterprise being operated; the direct creation and maintenance of at least 10 full-time jobs for at least two-plus years to qualifying U.S. workers (other than applicant or family); the "management/overseeing" roles/tasks that the investor must be accorded, and the types of business records that must accompany a complete EB-5 immigration filing. Altogether, the initial EB-5 immigrant petition filing (via USCIS Form I-526) and the removal of condition filing (via USCIS Form I-829) two years later are complicated and require ample supporting documentation to achieve USCIS approval, so not only should the foreign investor consult proper business attorneys and related professionals before making the EB-5 investment planning, they are also best served to have immigration attorneys assist/represent them in making the requisite USCIS immigration petition filings.

Initial & Subsequent (Removal-of-Condition) EB-5 Filings Needed

An initial EB-5 (Employment-Based 5^th Preference) petition approval by USCIS leads to a two-year conditional resident green card status for the investor and family, then if the investor/investment continues to satisfy all EB-5 requirement, in two years time the investor can again petition the USCIS to remove the "conditional" status of said green card, and finally succeeds in obtaining permanent resident green card status for self and immediate family members.

For now, EB-5 (initial & subsequent condition-removal) petitions are filed/adjudicated locally by USCIS, and they can easily take 4-6 months of adjudication processing time after initial submission, with additional USCIS request-for-evidence being the norm and adding to overall processing time. There are currently no premium-processing expedited options available for EB-5 filings. Lastly, how to file these case depends on individual case circumstances and whether the investor is already present in USA – and in what type of status. Both consular-processing overseas and local change-of-status filing options are possible for EB-5 petitions – depending on exact individual/case circumstances.

Regional Center Approach of EB-5

Within the general EB-5 Investor Visa program, the U.S. government has created a special "pilot" program allowing qualified intending immigrants to invest in USCIS-approved Regional Centers that relaxes the job-creation (direct creation and maintenance of 10 new full-time jobs) requirements for general EB-5 investors. Instead of each EB-5 investor having to establish their own new U.S. commercial business enterprises (resulting mostly in smaller businesses) and keep them operational for at least two-plus years, the Regional Center approach allows the individual investments to be placed with others into various USCIS-approved Regional Centers (approximately 95+ in USA presently), and the Regional Centers would then put the individually invested capital to use based on its pre-approved and oftentimes ongoing business plan execution. The inherent advantage of the Regional Center option is that, instead of counting solely 10 directly created jobs, depending on the line of business it operates in, a Regional Center can also count indirect and induced jobs in order to meet the 10-jobs-created-per investment requirement. This job count methodology is usually demonstrated to USCIS through detailed economist reports (preferably by established EB-5 economist experts), third party employee contractual documentation (such as commercial malls built allowing contracted chain/local stores to create jobs), other related commercial leases (to vendors, providers, local suppliers, etc.), export commercial data, regional productivity and/or documented local job improvement data, and other acceptable "general predictors" that help to create local jobs and stimulate local/national economy.

Regional Center – More Specifics

USCIS' website maintains and updates a listing of all approved Regional Centers – more than 95 currently listed. A comprehensive Regional Center business establishment plan must be submitted and pre-approved by USCIS before it can designated as such to allow individual EB-5 filings with USCIS to proceed. A new Regional Center approval process can easily take 4 to 6+ months at USCIS. a Regional Center must comprise of a contiguous and specific geographic area within USA, and its primary goal must be to promote economic growth through export sales, improved local regional productivity, creation of new jobs, and increased domestic capital investment. Regional Centers can be used to "pool together" and support multiple EB-5 individual investments and associated USCIS EB-5 filings through time – as long as the underlying threshold investment amounts ($1M each) and jobs created (10 per investor/investment – e.g. 300+ full-time jobs created allows a Regional Center to take on and support 30 individual $1M EB-5 investors) still can be met by the Regional Center's overall business documentation. Due to the two-year condition-removal requirement, a particular Regional Center's existing business record & future plans – even if successful in supporting EB-5 cases in past years – must be sustainable for at least 2-3 more years when one makes his/her present-day EB-5 investment choice consideration.

Within the 10,000 immigrant visas allotted to the overall EB-5 program, at least 3,000 are set aside for the Regional Center classification, and within the last decade-plus, neither annual numerical cap has come close to being met, neither has the per-country quota been met yet (not even for Chinese investors – by and large the biggest consumer of EB-5 visas).

$500,000 Threshold – A Desirable Option to EB-5 Investors

While the EB-5 program is also generally known as "Million Dollar Investment Visa/Green Card", and most EB-5 petitioners and Regional Centers also operate on that minimum investment threshold amount basis, in some cases, a minimum investment of $500,000 can also suffice and support the entire individual EB-5 permanent resident green card pursuit process. This alternative/lower threshold investment amount is allowed – under both regular EB-5 individual and Regional-Center approaches – if the investment is made and job created are located within a defined Targeted Employment Area ("TEA").

A TEA is most recently defined by USCIS as: 1. a rural area, or 2. an area experiencing a high unemployment rate at the time of the capital investment or the time of filing of the Form 1-526 petition whichever occurs first. The term "rural area" means any area that is both outside of a metropolitan statistical area (MSA) and outside of a city or town having a population of 20,000 or more based on the most recent decennial census of the United States. MSA's are designated by the Office of Management and Budget. The term "high unemployment area" means an area which has experienced unemployment of at least 150 percent of the national average rate.

Some Risks Associated with TEA Approach

The EB-5 investor/applicant must demonstrate that, at the time the capital investment is made or when the I-526 petition is filed (whichever occurs first), there has been an unemployment rate of at least 150% of the national unemployment rate within the MSA or other non-rural area in which the commercial enterprise that will create or preserve jobs is located. This information should be based on the most recent information available to the general public from federal or state governmental sources. Within California, a current list of counties/areas that qualify for TEA standing – based on unemployment rate and/or population count – both of which can be volatile (i.e: can change before the subsequent I-829 condition-removal filing is needed in two years time) is maintained by the State of California's Business, Transportation & Housing Agency.

Furthermore, if one intends to construct/operate an EB-5 Regional Center within a TEA to attract EB-5 Investors seeking the lower amount threshold, it is prudent to work closely with the state/municipal government officials beforehand so that a confirmation letter with established TEA designation & validity dates can be obtained to support each/every EB-5 filings upcoming within , say, the next one-two years.

As EB-5 Investor Visa Pursuits continue to pick up momentum and becomes even better known internationally, local state and municipal governments are often/already willing to cooperate with established and/or brand-new approved EB-5 Regional Center programs created/operated by individual business entrepreneurs. But the individual foreign investors must know that, as the EB-5 applicant – especially in a Regional Center + TEA combined pursuit, he/she still has the burden to establish that the individual EB-5 case filed with USCIS will be approved, and therefore the underlying commercial business enterprise must be indeed conducting business and creating at least 10 jobs presently within the designated TEA. The fact that a business may be registered/located within an area that was once rural, for example, does not mean that the area is still rural to date (as populations may change), nor does it mean that all of the new local jobs created/induced will be credited as within the TEA region. Just because a Regional Center may be connected in name to a municipality, it is no guarantee of continuing EB-5 case success, so individual investors must still investigate all their options carefully.

Conclusion

The EB-5 program, Regional Center approach & TEA designations were all established to attract and utilized foreign capital investments to promote local job creations and stimulate our overall economic growth – especially within the most necessary regions of our country. As with any business financial investment, EB-5 investors with capital at risk must analyze all information carefully, including but not limited to: risk to initial capital invested; potential need for additional investment to sustain EB-5 business activities and jobs created for two-plus years; and most importantly the initial/sustained granting of their desired conditional/ & permanent green card status. While many foreign investors nowadays are not looking for their EB-5 investment to generate a profit over the next few years while waiting out their green cards, they are nevertheless very much relying on the EB-5 business vehicles – and in the case of Regional Centers, the expertise of the business entrepreneur operators – to succeed and sustain itself for a determined amount of time.

With careful planning and professional assistance, EB-5 can be a great tool for those with means and desires to come and live in USA,

For further information, contact Albert Lu at (619) 338-6526.

Second Circuit Affirms Conviction for Unlicensed Money Transmitting Based on Chilean Company's Use of U.S. Bank Accounts

Sheppard Mullin — Wed, 06 Oct 2010 07:49:04 -0800

By Kevin R. Puvalowski

On September 22, 2010, the Court of Appeals for the Second Circuit affirmed the conviction and 42-month sentence of Mauricio Alfonso Mazza-Alaluf (“Mazza-Alaluf”), a Chilean national, for conspiring to operate and actually operating an unlicensed money transmitting business based upon his company's use of bank accounts in the United States. United States v. Mazza-Alaluf, 09-3940-cr, 2010 WL 3666717 (2d Cir. Sept. 22, 2010). Mazza-Alaluf was convicted after a two-day bench trial in November 2008 in Manhattan federal court. See United States v. Mazza-Alaluf, 607 F. Supp. 2d 484 (S.D.N.Y. 2009) (trial court's findings of fact and conclusions of law).

Mazza-Alaluf was one of the owners and operators of Turismo Costa Bravo S.A. (“Turismo”), a financial services business based in Santiago, Chile, that, among other things, transferred funds to third parties on behalf of its customers. Turismo made such transfers on behalf of customers making or receiving payments from outside of Chile and also exchanged currency, including dollars, on behalf of tourists in Chile and currency exchange houses in Chile and neighboring countries. At the time of Mazza-Alaluf's arrest in March 2007, Turismo operated three storefront businesses in Santiago. Significantly, Turismo had no offices or employees in the United States, nor did it solicit customers in the United States.

Turismo would transfer money on behalf of its clients through bank accounts that it maintained at U.S. banks. Those accounts would generally be funded through a process whereby Turismo's representatives, including Mazza-Alaluf himself, would carry bulk cash into the United States through Los Angeles International Airport, often denominated in Euros or other European currencies. After declaring the cash with customs officials, Turismo would deliver the cash to Associated Foreign Exchange, Inc., a foreign exchange house, which would then wire transfer the cash's dollar equivalent to Turismo's U.S. accounts. Turismo would then initiate wire transfers from those accounts as instructed by their customers. Turismo also accepted on behalf of its customers third-party wire transfers and checks directly into its U.S. accounts. Over several years, Turismo facilitated in this fashion thousands of transactions involving hundreds of millions of dollars.

At various times, Turismo maintained accounts in New York, Illinois and Michigan, three states in which it is unlawful to operate a money transmitting business without a license. Section 1960 of Title 18 of the United States Code, in turn, makes it a federal crime to conduct, control, manage, supervise, direct or own “an unlicensed money transmitting business,” which is defined, in Section 1960(b)(1), as a money transmitting business that affects interstate or foreign commerce and: (A) is operated in a state in which such operation is a crime (the “state licensing prong”), (B) fails to comply with the money transmitting business registration requirements contained in 31 U.S.C. § 5330 or the regulations prescribed under that section (the “federal registration prong”), or (C) involves the transmission of funds that the defendant knows have been derived from a criminal offense or are intended to be used to promote unlawful activity.

At trial, the government contended that Mazza-Alaluf violated both the state licensing and the federal registration prongs of Section 1960. Mazza-Alaluf contended that Turismo, as a business operating in Chile, was not subject to registration and that Turismo's mere use of bank accounts was not sufficient to bring him within the boundaries of Section 1960. The trial judge found Mazza-Alaluf guilty of both conspiracy and substantive counts with respect to the state licensing prong as a result of Turismo's use of accounts in each of New York, Illinois and Michigan, see United States v. Mazza-Alaluf, 607 F. Supp. 2d at 490-93, and sentenced Mazza-Alaluf to a 42-month prison term. Mazza-Alaluf appealed.

On appeal, Mazza-Alaluf challenged the verdict primarily on two grounds. He first contended that the evidence was insufficient to show that Turismo was a money transmitting business as that term is defined in 31 U.S.C. § 5330(d)(1)(B). That section, which is specifically referenced in the federal registration prong of Section 1960, defines a money transmitting business as any business required to file reports under 31 U.S.C. § 5313, which in turn applies only to “domestic financial institution[s].” Second, he argued that Turismo was not required to be licensed in any of the three states because Turismo “was, in every sense, Chilean to its core.”

The Second Circuit rejected Mazza-Alaluf's arguments and affirmed his conviction and sentence. The court first rejected Mazza-Alaluf's argument that the government had to prove that Turismo was a “domestic financial institution,” holding that the definition in 31 U.S.C. § 5330(d)(1)(B) — which is expressly applicable to Section 1960(b)(1)(B), the federal registration prong — is not applicable to the state licensing prong contained in Section 1960(b)(1)(A). Moreover, the court opined that, even if it were applicable, Turismo would qualify as a domestic financial institution because it was a “financial institution” (see 31 U.S.C. § 5312(a)(2)(R) (defining “financial institution” as, among other things, “a licensed sender of money or any other person who engages as a business in the transmission of funds”)) that engaged in “action[s] in the United States” (see 31 U.S.C. § 5312(b)(1) (providing that the term “domestic financial institution” applies to “an action in the United States of a . . . financial institution”)).

The Second Circuit then turned to Mazza-Alaluf's argument that Turismo was not required to be licensed in any of the three states because its principal place of business was in Chile and it had neither offices nor employees in the United States. The court rejected this argument —recounting the activities that Turismo engaged in with respect to its accounts in each state: New York (using “New York banking facilities to transmit enormous sums of money in the state”), Illinois (transmitted funds, received tens of millions of dollars via wire transfers and accepted hundreds of checks) and Michigan (taking in and sending out approximately $42 million). The court concluded that such activity was sufficient to support the trial court's finding that the state licensing requirements had been triggered in each jurisdiction.

Finally, the court upheld the 42-month prison sentence, finding it procedurally and substantively reasonable in light of the scope of Mazza-Alaluf's activities, which involved the unlicensed transmittal of more than $200 million.

For further information, contact Kevin R. Puvalowski at (212) 634-3033.

Mexico Passes New Law on Data Protection

Sheppard Mullin — Tue, 15 Jun 2010 11:20:59 -0800

By Larissa Calva-Ruiz

Mexico's Federal Law for the Protection of Personal data (la Ley Federal de Protección de Datos Personales en Posesión de los Particulares) (the "Law") protects an individual's personal data by restricting its use and prescribing the way in which both private and public entities must treat the collection, use, and disclosure of personal data relating to Mexican citizens. The owner of the information has the right to decide who can access his/her personal data and in which ways it might be disclosed to others. The owner has the right to correct such information, control the transfer of the information and block or cancel its use. Also, the owner of the information has the right to access his own information regardless of the holder.

Personal data is defined as data which affects the intimate sphere of its owner and whose inappropriate use may result in discrimination or may bring about a great risk to its owner. "Sensitive data" is information that may reveal aspects such as:

Racial or ethnic origin
Present or future health status
Genetic information
Religious belief
Philosophical and moral beliefs
Union affiliation
Political views
Sexual Preference

Any type of use of sensitive data must be expressly authorized by its owner through a privacy notice. Authorization to use other types of personal data may be express or implied. Any inappropriate use of sensitive or personal data is penalized with economic sanctions; for crimes related to the inappropriate use of personal or sensitive data, the sanctions can go up to 10 years of prison. The organization in charge of enforcing the Law is the Instituto Federal de Acceso a la Información, IFAI (Federal Institute for Access to Public Information).

As for cross border transfer of data, personal data may be transferred nationally or internationally without authorization of the owner: (i) when the transfer is made to parent companies, subsidiaries or affiliates under the control of the party responsible for the data or to a parent company or any other company within the same corporate group of the responsible party that uses the same procedures and internal policies; (ii) when the transfer is provided for in a treaty that Mexico is a part of; (iii) when the transfer is necessary to prevent disease or for medical diagnosis, medical care, or medical treatment; or (iv) when the transfer is necessary by virtue of an agreement executed or pending execution by the owner of the data, the party responsible for the use of the data and a third party, among other reasons provided for in the Law.

On April 27, 2010, the new law on data protection was passed by the Mexican Senate, clearing the way for the President to sign the landmark legislation, which provides for penalties up to an astounding $1.5 million for violations under the law. The Law's purpose is to place Mexico in the same level of protection of personal data as the countries that are members of the OECD, APEC and the European Union and complies with the standards approved in the 31st International Conference of Data Protection and Privacy of 2009. As soon as the President signs it and the Law is published in the Federal Official Gazette, it will have full force and effect.

For further information, please contact Larissa Calva-Ruiz at (714) 424-2833.

Second Circuit Rejects $2 Billion Class Action Award Against The Republic of Argentina

Sheppard Mullin — Tue, 08 Jun 2010 13:04:20 -0800

By Daniel L. Brown & Giselle Rivers

On May 27, 2010, the Court of Appeals for the Second Circuit affirmed in part and remanded in part a district court's decision certifying class actions against the Republic of Argentina and granting over $2 billion in damages to eight classes of plaintiffs. Puricelli v. The Republic of Argentina, No. 09-0332, 2010 WL 2105132 (2nd Cir. May 27, 2010)("Puricelli"). While the Court of Appeals concluded that class certification was appropriate, it held that the district court erred in entering aggregate class-wide relief, as opposed to determining individual relief.

Eight separate putative class actions were filed in the district court by holders of defaulted Argentine bonds, asserting their right to repaymentagainst the Republic of Argentina. The district court certified eight classes of plaintiffs who purchased bonds prior to the date the class actions were filed and who held them continuously until the time of final judgment. Members of the classes differed because they purchased their bonds at different times, some purchased directly from Argentina while others bought their bonds in the secondary market, and some accelerated their bonds while others did not. In January, 2009, the district court granted summary judgment to the plaintiffs and entered judgments totaling over $2 billion in damages to the eight classes, based on aggregate damages derived from "reasonable estimates" of the total amounts of damages the classes might recover.

The Republic of Argentina appealed, arguing that, in certifying the classes, the district court had misapplied Rule 23 of the Federal Rules of Civil Procedure, and erroneously granted aggregate relief based on estimates, as opposed to individual damage determinations.

The Court of Appeals first considered the Republic of Argentina's argument that class action resolution was appropriate because plaintiffs failed to satisfy Rule 23(b)(3)’s requirements of adequacy of representation, predominance, and superiority. The Court of Appeals rejected each of these claims. First, the court found that while there was a possible conflict of interest because the lead counsel represented all eight classes, as well as individual plaintiffs in non-class actions, these possible conflicts threatened the damage allocation stage of the proceeding, not the liability phase. Second, the Court of Appeals determined that "the hunt for assets capable of satisfying Argentina’s obligations to the plaintiffs" satisfied the requirement that a common question of law or fact predominate, and predominance was not negated by the defendant’s concession of liability. Finally, the Court of Appeals concluded that a class action was a superior means of adjudicating the controversy because proceeding individually would be prohibitive for members of the class with small claims.

Next, the Court of Appeals addressed defendant’s argument that the district court's grant of aggregate class-wide judgments was improper because it was based on global estimates of Argentina’s liability derived from expert opinion, and not on individualized proof. The Court of Appeals also noted that the district court acknowledged that the estimates were likely inflated, but had justified the award based on the fact that recovery was unlikely due to the improbability of ever reaching Argentina's assets.

The Court of Appeals held that such estimates violated the Rules Enabling Act, 28 U.S.C. § 2072(b), which forbids the use of federal rules of procedure to “abridge, enlarge or modify any substantive right." Specifically, the Court of Appeals stated that an award based on estimates allowed the plaintiffs to encumber property to which they had no colorable claim. As a result, the court vacated the district court's damage awards, concluding that the award was inappropriate because it did not even roughly reflect the aggregate amount owed to class members, and remanded for more accurate damages to be determined.

For further information, please contact Daniel L. Brown at (212) 634-3095.