AMCIT INVESTMENT DISPUTE SPARKS HOUSE ARREST, POSSIBLE SUIT

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