Tuesday, November 01, 2005

Dispute Leaves U.S. Executive in Chinese Legal Netherworld

Dispute Leaves U.S. Executive in Chinese Legal Netherworld

Du Bin for The New York Times
Employees heading to work at Sichuan Changhong Electric in Mianyang. The company, once a defense contractor, is publicly traded and majority owned by the city of Mianyang and the province of Sichuan.

By JOSEPH KAHN
Published: November 1, 2005
BEIJING, Oct. 31 - David Ji, a Chinese-American electronics entrepreneur, spent two months in custody enduring all-night interrogation sessions, but his stubbornness and occasional flashes of sarcasm infuriated his Chinese captors.




David Ji, left, shown last year during his stay under guard in a residence in Shanghai that is owned by Sichuan Changhong Electric.


Apex Digital
David Ji, co-founder of Apex Digital, is accused of fraud.


Imaginechina
Zhao Yong, a former partner, is chief executive of Changhong, which says Apex owes it $470 million.


So in late December last year, according to a person who compiled a record of the encounter, guards emptied his pockets, removed his shoes and socks, and ripped the buttons off his oxford shirt. He was ushered disheveled and barefoot into the office of Zhao Yong, the chief executive of Sichuan Changhong Electric, Mr. Ji's onetime business partner and, more recently, his warden.

"Your only way out is to do what Changhong tells you to do," Mr. Zhao told him. "If I decide today I want you to die, you will be dead tomorrow."


Mr. Ji soon agreed to cooperate with Changhong. But a year after the Chinese police apprehended him in his hotel room during a business trip, he remains in China as a pawn - Mr. Ji's colleagues say a hostage - in a commercial dispute that pits Changhong, China's largest television manufacturer, against Apex Digital, Mr. Ji's electronics trading company based in Los Angeles.

Changhong, which declined repeated requests for comment over several weeks, claims that Apex owes it $470 million. Apex, which recruited Changhong to supply Wal-Mart, Best Buy and Circuit City with inexpensive television sets and DVD players, says it owes less than $150 million. The sums involved are large, but what is more significant about the case is the way Changhong, a major state-owned company in Sichuan Province, deployed the police, prosecutors and judges in a campaign to collect its debt.


China has attracted hundreds of billions of dollars in foreign investment and has become the world's third largest trading power. But its legal system, even when handling nonpolitical business cases, has progressed far more haltingly and still rarely backs investors or ordinary citizens against the state.


Difficulty enforcing contracts, rampant violations of copyrights and trademarks and protection of domestic industry champions have heightened trade tensions at a time when China is struggling to convince the outside world that its growing economic might poses no threat. Beijing is under heavy pressure to embrace global legal norms with the same fervor with which it has pursued foreign trade.


Courts and arbitration panels do resolve many business conflicts that arise from China's thriving market-oriented economy, and they can rule professionally and impartially. But when the fate of powerful companies like Changhong, which has 36,000 employees, lies in the balance, the judicial system does not act independently and offers no recourse for outsiders like Mr. Ji.


Ultimately, some legal scholars argue, China's legal system may not improve markedly until central and local government officials relinquish some control and stop putting short-term political goals, like protecting influential companies and suppressing dissent, above the law.


Mr. Ji and his Los Angeles-based partner, Ancle Hsu, are ethnic Chinese who became American citizens. They helped Changhong break into the American market, and its products outsold Sony and Panasonic, heralding China's arrival as an electronics powerhouse.


Relations with Changhong soured, however, over quality control problems and unpaid debts. And when they did, Changhong's first response was not to file a lawsuit, but to dispatch the police.


The police from Mianyang, the city in southwestern Sichuan province where Changhong has its headquarters, apprehended Mr. Ji in Shenzhen, near Hong Kong, on Oct. 23, 2004. He entered a legal netherworld in which Changhong decided where he would be held in custody, when to interrogate him, and how he could help Changhong take over Apex, according to court documents, video recordings, and taped witness accounts compiled by people sympathetic to Mr. Ji. The records, which were also submitted to the State Department, were obtained independently by The New York Times.


Mianyang is a company town. The legal ambiguity partly reflects the tight bond between local corporate and government officials. It also reflects a risk of doing business in China that applies mainly to ethnic Chinese, dozens of whom have faced criminal charges after falling out with government-backed business partners. Overseas Chinese are often treated as subject to local authority regardless of their country of citizenship.


But in this case, Changhong did not act like a rogue. It solicited and received financial and political support from the most senior levels of the central government, according to lawyers involved in the matter.


Changhong's executives said they could not discuss a pending legal matter. But Jack C. Auspitz, a lawyer with Morrison & Foerster in New York who represents Changhong in an ongoing court case against Apex, said the California company repeatedly failed to pay for goods Changhong delivered. He said that he did not have detailed information about Mr. Ji's conditions in Chinese custody, but that he had no reason to believe that he had been coerced.


The Chinese police accused Mr. Ji of fraud for writing bad checks to Changhong and have threatened to prosecute him. He has been released on a form of bail, with heavy restrictions on his freedom, while negotiations with Apex proceed. That has left the impression that his legal fate depends on debt talks between the companies.


"We have been doing business there for many years but could never imagine something like this happening," said Mr. Hsu, Mr. Ji's partner, in a recent interview. "They have turned a commercial dispute into a hostage situation and a human rights issue."


Trial and Error


Changhong and Apex seemed, for a time, a brilliant match.


The American company spotted the potential of the DVD player to replace the VCR in American living rooms if the price came down. Japanese makers dominated sales in the late 1990's, but often charged $400 or more, making it a luxury item. Apex thought that with the right Chinese partner it could change that.


The job fell to Mr. Ji, 53, who is also known by his Chinese name, Ji Longfen. He was born in Jiangsu Province in eastern China and learned English at Fudan University in Shanghai before emigrating to California. There he and Mr. Hsu, a native of Taiwan, sold scrap metal and car radios before testing the DVD market.


Retiring by American standards, Mr. Ji projects a polite deference that plays well in China. He wears his hair in a starchy wave, a style popular among Chinese officials. He toured industrial zones and small township enterprises for partners, a trial-and-error process that produced some embarrassing failures. A worker in one plant altered a chip on an Apex DVD player to make a message appear on the screen if a user loaded an X-rated film: "You dirty old man!"
Changhong, once a big defense contractor and now a publicly traded electronics maker, seemed more professional. The company, though majority owned by the Mianyang city and Sichuan provincial governments, had entrepreneurial drive. Under Ni Rongfen, its chief executive, Changhong became China's top television maker. It had its sights set on the American market.
Mr. Ji and Mr. Ni struck a deal in 2001. In the Chinese style, the agreement consisted of a simple three-page purchase order.


Changhong was not Apex's only vendor, but it rapidly became its largest. Its bulk production brought the retail price of its DVD players at Wal-Mart and Circuit City down to $59. In 2002, Apex became the top brand of DVD player in the United States.


Apex also began selling Changhong-made television sets and got the cost of a 27-inch color model below $100, a record. The company's total sales hit $1 billion in 2002 and nearly $2 billion in 2003.


But the two companies were on a collision course. Changhong received far less from its American sales than it initially recorded on its books. Fast growth covered that deficit for a time, but the Chinese company later claimed that half of what it sold ended up as unpaid debt.


The companies have different explanations of what happened. Apex says Changhong mismanaged its business, basing production on price forecasts that proved overly optimistic. It also did not time its shipments well, saddling Apex with high storage costs, the company says. Worse, the California company claims, Changhong provided low-quality goods, including a ill-fated foray into rear-projection televisions, which left Apex to deal with dissatisfied customers and defective products.


Changhong executives have told the Chinese news media that Apex played tricks with its vendors. It persuaded them to finance their own production and wait months for payment. Payments often lagged behind badly, raising suspicions of fraud.


Two other Chinese electronics makers, the Hongtu High Technology Company and the Tianjin Tiancai Company, say Apex owes them money. A third supplier, the China Minmetals Corporation, recently settled a dispute with Apex in arbitration.


Whatever the root causes of the dispute, Apex and Changhong initially tried to keep things on track, including by taking steps that came back to haunt Mr. Ji.


In early 2003, as debts piled up, Mr. Ni, the Changhong boss, came under pressure to explain the shortfall. He leaned on Mr. Ji, who wrote 37 company checks totaling $85 million. Apex said the checks, which do not bear the markings of having been deposited, were meant as promissory notes. It said it honored them and more by paying Changhong $370 million later in 2003.


Even so, Changhong's debt load worsened and its stock price plunged. Chinese state-run banks stopped advancing loans, Chinese news media reports said. That prompted a boardroom coup against Mr. Ni last summer. He was replaced by Zhao Yong, the deputy mayor of Mianyang.


Shortly after he took office, Mr. Zhao sent a mission to Apex's headquarters to demand payment of $470 million, a figure Apex claimed was three times what it owed. The business relationship froze.


Apex still had a sizable business in China. In October 2004, Mr. Ji visited to oversee progress on a Wal-Mart order for portable DVD players. He ignored warnings of a colleague at Apex, who felt the dispute with Changhong had reached a dangerous impasse, and decided to contact Changhong during the trip. He told his family he would be back in a week.


Mr. Ji phoned Changhong after he arrived and said he would like to meet Mr. Zhao after attending to business in Shenzhen. He hung up thinking that a dinner appointment had been arranged.


"I felt very happy because I thought the problem would finally be resolved by one person," Mr. Ji told a colleague.


Pursuit and Capture


Just after breakfast on Oct. 23, he answered his door at the Grand Skylight Hotel in Shenzhen. Seven men in civilian clothes identified themselves as police officers from Sichuan, 500 miles to the west. They interrogated Mr. Ji for most of the day. He was told he had committed fraud, though the charges were not spelled out and they had no warrant, according to the account compiled by people sympathetic with him.


Late that afternoon, Mr. Ji was taken to a private dining room, where a Changhong executive played host for a banquet, complete with champagne and abalone. The Changhong executive raised his glass to the policemen, congratulating them on their "pursuit and apprehension" of Mr. Ji.


Mr. Ji objected, saying he had never been on the run, according to the record of his detention. He was told not to speak for the rest of the meal.


The officers then took him to the airport for a flight to Sichuan. Changhong purchased all eight seats in the first-class section, so the group had the cabin to itself.


In Sichuan, he was handed over to Changhong. The company cordoned off a floor in one of its guesthouses and barred the windows, a makeshift jail. Guards kept watch. A television was left blaring day and night. For four days, Mr. Ji barely slept.


On the fifth day, he was put on the phone with a lawyer named Charlie Wang, known as Wang Xiaolin in Chinese, of Cadwalader, Wickersham & Taft, a white-shoe American law firm that Changhong had retained. Mr. Wang, who was based in Washington, D.C., told Mr. Ji that he had committed fraud and that his only way out was to sign documents that would help Changhong recover missing funds. Exhausted and afraid, Mr. Ji agreed to study the documents, the record of his detention says.


He was then presented with a stack of legal papers the size of a mini-bar. They pledged all of Apex's assets, real property, trademarks and bank accounts as well as Mr. Ji's personal assets to settle the claimed $470 million debt. The documents granted Changhong power of attorney to review Apex's books and remove Mr. Hsu from his position. In effect, he signed away his stake of Apex to Changhong.


Mr. Ji initially balked. A guard then asked, "Do you want this pen, or do you want your hand?" The guard made a motion of chopping off his hand. Mr. Ji took the pen.


'Business as Usual'


Changhong then began an attempt to take over Apex, Apex officials and the record of Mr. Ji's detention say. Mr. Ji was sent to Shanghai by train.


There he stayed in a Changhong-owned residence under guard. But he was instructed to visit Apex offices and act as if he were going about business as usual. He made frequent phone calls back home. As his Changhong guards listened, he repeatedly told Mr. Hsu to execute Changhong's instructions.


The calls did not persuade Mr. Hsu.


"He pretended that nothing was wrong and everything would be worked out," Mr. Hsu recalled. "But we knew he was not himself. Eventually, there was nothing we could say on the phone except, 'Yes David, O.K., yes.' "


Changhong dispatched accountants and investigators to Los Angeles in early December, but Apex refused access, arguing that Changhong lacked legal authority.


It was only then that Changhong took legal action. On Dec. 14, Changhong sued Apex in Los Angeles County Superior Court. The company alleged breach of contract and demanded access to Apex, citing the documents Mr. Ji had signed.


Apex contested the suit. In court documents, it said that Mr. Ji had been abducted and that the documents had been signed under coercion.


Changhong pressed Mr. Ji harder to make Mr. Hsu cooperate. Mr. Ji scoffed, saying he had already "fired" his partner on Changhong's orders so there was little more he could do, according to the record of his detention.


There were constant reminders, however, that his fate hung in the balance. A prosecutor and a judge from Mianyang visited Shanghai to talk with Mr. Ji. They told him that the 37 checks he had written to Changhong in early 2003 constituted a serious crime and that he could get life in prison or even be executed. His only choice was to cooperate with Changhong, the record said.


Changhong submitted the checks as evidence in its American lawsuit. There are no visible markings on the checks to show that they were deposited or sent through the banking system for payment. Apex says that proves Changhong treated the checks as they were intended - as collateral to solve an accounting problem. They became obsolete when Apex made big payments to Changhong in April 2003, the company says.


Mr. Auspitz, Changhong's lawyer in New York, said that despite any other payments Apex may have made in 2003, those checks should have been honored. "There is no question that Apex should have paid and did not," he said.


To counter Apex's argument that Mr. Ji was a hostage, Changhong arranged to have Mr. Ji deposed in Apex's Shanghai offices. Mr. Wang, the Cadwalader lawyer, was present and conducted the videotaped inquiry. Mr. Ji had no lawyer present, and Apex later argued that that raised questions of whether the tape would have any value in an American court.


When taping began, Mr. Ji disputed Changhong's version of events, prompting a heated argument between Mr. Ji and Mr. Wang, according to people who saw the confrontation.


The next day, Mr. Ji was taken to meet Mr. Zhao, Changhong's boss. Buttons and belt removed, he had to hold his pants up with his hands. Mr. Zhao warned him that Changhong controlled the courts in Mianyang, that Mr. Ji would be tried there, and that Changhong would decide if he lived or died.


"Apex must give Changhong all the money. This is your only way out," Mr. Ji was told, according to the record of his detention.


A second taped deposition was arranged. Mr. Ji dressed neatly in a suit. He sat slumped in his chair and smiled wanly. Everything Mr. Wang asked him, he muttered agreement. As the camera rolled, he said Changhong had "invited" him to stay at its apartment in Shanghai while he sorted out the dispute about the checks.


"I am trying to run my company," Mr. Ji says on tape. "I am the majority shareholder and want to use my power to manage this situation."


High-Level Intervention


Changhong's lawsuit has remained unresolved in court in Los Angeles. The taped deposition was never formally submitted, though Apex received a copy. Apex then complained that Changhong's lawyer, Mr. Wang, acted improperly by being a party to the detention of Mr. Ji.


Cadwalader subsequently withdrew from the case and Mr. Wang, who was made a partner just a few months earlier, left the firm. A spokesman for Cadwalader declined to comment on the case or on Mr. Wang, citing client confidentiality. Apex's business deteriorated as suppliers and customers learned of its troubles. Its sales this year are off sharply, and it has teetered on the verge of bankruptcy. It now claims it has no money to pay even the portion of the Changhong debt it acknowledges owing.


Internally, however, Changhong may have scored a political touchdown. According to lawyers involved in the case, Changhong submitted a report to Prime Minister Wen Jiabao shortly after it arranged to have Mr. Ji detained. The report claims that a fraud masterminded by Mr. Ji put its business, and its 36,000 workers, in grave peril.


It is unclear if Mr. Wen or other central government officials investigated the matter independently or endorsed Changhong's role in managing Mr. Ji's custody. But the lawyers involved said Changhong had boasted repeatedly about receiving Mr. Wen's support in the form of a three-point written instruction late last fall.


The prime minister praised Changhong's leadership, authorized the company to take legal actions at home and abroad to protect its interests, and ordered state banks to provide emergency financing totaling nearly $1 billion, roughly double the amount Changhong claimed Apex owed it, they said.


The ruling defused the crisis that prompted Changhong to pursue Mr. Ji. But it left the business dispute unresolved. And it left Mr. Ji in legal limbo, facing possible prosecution on the alleged fraud the company described to the leadership.


On May 28, seven months after Mr. Ji was first detained, he was handed over to the Mianyang police for formal arrest on charges of "financial instrument fraud," apparently a reference to the 37 checks he wrote Changhong.


In formal police custody, Mr. Ji's conditions improved, according to the detention record. He has been allowed to visit a hospital to get treatment for hypertension, a kidney problem and a bladder infection. The interrogations ceased. American diplomats have visited him regularly, though they have not spoken publicly about the case.


In June, Apex and Changhong signed a security agreement. Apex acknowledged a $150 million debt. The debt remains unpaid, however. Apex claims it has no money.


In August, the police released Mr. Ji on restricted bail. He is allowed to move around Chengdu, the capital of Sichuan Province, but he is under strict orders not to discuss his case with anyone. The police confiscated his passport and gave him a mobile phone that he must keep with him 24 hours a day. He has not been indicted, but the local authorities frequently remind him that they can prosecute at any time.


"They turned this into a criminal case, and now they don't know how to resolve it," says Mr. Hsu of Apex. "I'm afraid we need government intervention, maybe divine intervention, to help David return home."




Jesus! Does anybody remember when this happened?


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1 Comments:

Anonymous Anonymous said...

I have a strong feeling that Americans should Support American Interests ONLY. Any country we help should be as a result of their interests corresponding to our interests.

Whether allying ourselves with Israel is in our National interest is up for legitimate debate it bothers me that a Conservative Radio Talk Show host in this area is going to be getting a "Friend of Israel" award.

I would be bothered regardless of what country, be it a "Friend of Great Britain award" or whatever. Again, in foreign policy Americans should support what is in America's National interests, and everything should flow from that. Which means that if it is in America's interest to support Israel, then I am all for it, BUT if it isn't in America's interests, then I am willing to accept that as well.

But by accepting this "Friend of Israel" award, it means that this talk show host supports Israel regardless of whether it is in our national interest or not. He is looking at it fromt he wrong direction. He is looking at it from the perspective of "a friend of Israel", not from the perspective of supporting America's interests and helping other countries only if it serves America's best interests.

Kirby Wilbur kwilbur@fisherradio.com should be ashamed to accept the "American Jewish Congress Friend Of Israel Award" for it just says that he puts the interests of a foreign country ahead of America.

Look, I criticize naturalized citizens for doing this when it is them putting the interests of the country they came from ahead of that of their new country, America. Can I do any less for someone who was born and grew up in this country?

http://www.kvi.com/x9979.xml

1:05 AM  

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