Jianping Qu was 35 years old when he arrived in the US a decade ago, a veteran of the rough and tumble of China's marketplace. He has said he left after allegations of fraud in a real estate deal led to a 90-day "detention" by the authorities in Shanghai.
By last year, Qu (pronounced Chu) was a wealthy man. He had accumulated at least US$100 million in cash in his personal accounts and another US$300 million in the accounts of his Silicon Valley companies, in which he is both the dominant shareholder and chief executive. In a court filing in his divorce in 2003, Qu gave his annual salary as US$40.1 million, making him one of the highest-paid chief executives in America.
But his only major partner and customer, New World Development, a multibillion-dollar conglomerate based in Hong Kong, now accuses Qu and his company of defrauding it of US$700 million for a system that never worked. Qu counters that New World never held up its end of the deal to gain the full approval of the Chinese authorities for his technology.
ILLUSTRATION: YU SHA
The first of a series of court cases is set to go to trial next month in California. It will be the first time, experts say, that allegations on this scale of fraud and misappropriation of funds involving China's exploding economy will be presented in a US courtroom. The bitter dispute also raises the issue of whether the scramble to cash in on the vast economy in China has blinded some companies to the business risks.
worthless
New World, whose stock fell sharply after it announced last year that its US$700 million investment was worthless, says it paid Qu and his company, PrediWave of Fremont, California, to deliver a system that would provide interactive video services, like video on demand, to 100 million cable subscribers in China.
What made PrediWave's system so attractive to New World was that it did not require a two-way cable system. Rewiring in the US cost more than US$100 billion. PrediWave said it could provide the same service over the basic one-way cable prevalent in China and most of the developing world.
From the beginning of the partnership, said Dennis Ellis of the Los Angeles law firm of Paul, Hastings, Janofsky & Walker, New World's spokesman and lead counsel in the US, Qu was engaged in "looting" New World's investment, duping the company into believing he would provide it with a commercially viable system.
"We were defrauded," Ellis said.
Qu declined repeated requests for an interview made through his lawyer and PrediWave's general counsel, Vincent Lin. Lin said Qu had been "traveling in Asia" for much of the last year "trying to recoup his reputation in the business community."
Lin, who works out of PrediWave's mostly abandoned headquarters, insisted that the company and Qu were victims of a ruthless decision by New World to cut them out of "the billions that can be made in China" in favor of a more politically acceptable partner.
A crucial element in the case is the role of the managing director of New World's technology subsidiary, Douglas Chan Wing-tak, who made the deal with PrediWave and appears to have approved all the spending on the company and Qu. In e-mail messages obtained by the New York Times, Chan urges Qu to accept cash bonuses of up to US$38 million. Just before the deal unraveled in April of last year, Chan called on Qu to accept another US$25 million bonus, writing: "I feel very strongly on this. As the captain of our `ship,' you are worth every penny of it."
Chan, who was forced to resign from New World last summer, has never commented publicly on the deal, nor did he return phone calls or messages left with his lawyers in Hong Kong.
Even Ellis conceded that the technology had the "promise" of revolutionizing the cable industry in developing countries like China.
In a traditional two-way system, using what is known as "true video on demand," or VOD, the customer, through a set-top box, signals the supplier to deliver a movie or other programming, using one path to order and another to receive. Even with a two-way system, the delivery can be bogged down when many customers order the same programming at the same time.
PrediWave, relying on its own set-top box technology, claims to have solved both the problem of having one pathway and the potential for jamming of the pipeline. This is accomplished, the company says, through continuously broadcasting bursts of electronic data in a compressed format.
To market a technology like the PrediWave system in China requires approvals from regional governments as well as the central authorities in Beijing. New World was well equipped to gain the required approvals.
After the government put down pro-democracy protests at Tiananmen Square in 1989, New World rushed in to invest in the country, passing other companies on their way out. That led to a valuable network of high-level political connections. Today, New World operates everything from bridges to electric power plants in China. In Hong Kong, its hometown, the company moves hundreds of thousands of Hong Kong commuters every day on its bus lines and ferries to office towers, including some it owns.
The founder and chairman of New World, Cheng Yu-tung, 79, is a school dropout who turned a jewelry store and a few smart investments in real estate and gold into a fortune now worth an estimated US$2.7 billion. Cheng's son, Henry Cheng Kar-shun, is New World's chief executive. He, in turn, chose his college friend, Chan, to run New World TMT, the technology and telecommunications subsidiary. Chan had already made hundreds of millions of dollars for New World in a major Internet investment before he discovered Qu.
Impressed with the demonstrations of the PrediWave system by Qu and his engineers, Chan signed an agreement with the company in April 2000. Chan committed over US$100 million the first year.
In an e-mail message after that initial investment, Chan told Qu that China was the first step in a plan to "secure a beachhead in the fight to dominate the global VOD market." And Chan assured PrediWave that all the approvals in China would be forthcoming through "good friends at the appropriate levels in the Chinese government, based on friendship over the years."
As late as January last year, Cheng, the New World chairman, accompanied by Chan, visited Qu at his headquarters. Cheng and his son declined to be interviewed.
Lin points to that visit last year and a sheaf of documents as proof that the bonuses and perks given Qu were approved by New World executives. But Ellis maintains that Chan approved the bonuses without "the knowledge or authorization of New World."
Asked why bonuses were paid when the PrediWave system had not produced any revenue, Ellis theorized that Qu "somehow corrupted and somehow compromised officials of New World" while scheming to create board resolutions and documents because "he knew the day this started" that litigation would come.
But, Ellis added, there was no evidence that Chan profited personally. Ellis described Chan as a "gambler" who "got in over his head," adding, "If you are gambler, you keep doubling your bet because it's the only way out of it." As to a business plan, Ellis said that it was "in many ways a handshake deal."
While a US judge has ordered Chan to give a deposition, his lawyers in Hong Kong say this is "new legal territory" and are not sure whether he will testify.
detained
Ellis said it was only after the deal collapsed that investigators working for the company learned that Qu had not only been detained in Shanghai in 1994 but that there was also an outstanding detention order on file as well as a financial judgment for about US$90,000.
Lin scoffs at the charges but notes that documents that look official can be bought in China. To bolster his case, he points to documents Qu has filed in court from what appears to be a Chinese government agency that states that he has no criminal record. The documents were also submitted to the US government, Lin said, before Qu was granted citizenship last August.
Lin insisted that New World would "look foolish" in the forthcoming trials because the PrediWave system was demonstrated successfully in China. He pointed to a Web site for Fujian Cable TVNet Service Co., which currently advertises the PrediWave system and service.
An operator for Fujian said the PrediWave system was available for about US$9 a month, providing six VOD channels with movies and sports as well as 14 digital channels. The service has been offered since October 2002, the operator said.
But pirated DVDs of first-run movies are readily available in China for a dollar a copy, making a video-on-demand system that would cost several times that a month less attractive.
The chief technical supervisor of the Fujian cable system, Hu Bufa, said the PrediWave system worked well in demonstrations. But, in practice, he said, the quality of the set-top boxes and other equipment was poor. In addition, he said, the failure of the central government to adopt a format that works best with the PrediWave technology limits its commercial viability, although he acknowledged that a thousand boxes are in use.
While Ellis acknowledged that the PrediWave system appeared to work well in trials, he insisted that it was Qu's responsibility to make the system work in the marketplace. As to Lin's fear that his former partner would find a new politically connected partner, Ellis confirmed that New World had an active partnership with the government-owned China Aerospace to provide "interactive satellite services." But Ellis said that deal would not include the PrediWave technology.
Lin defends the US$100 million or more in bonuses and perks for Qu as justified because of Qu's dedication to his work, the sacrifice to his health and family and a desire by New World to retain his services.
Qu was expected to return to the US and testify in a pretrial deposition in San Francisco yesterday..
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