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China's ZTE exits probation after U.S. court ruling, shares soar

Stock Markets Mar 23, 2022 03:17AM ET
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© Reuters. FILE PHOTO: People walk past a building of China's ZTE Corp in Beijing, China, August 29, 2018. REUTERS/Thomas Peter

By Karen Freifeld

(Reuters) -China's ZTE Corp (HK:0763) saw its shares soar as much as 60% in Hong Kong on Tuesday after the telecommunications equipment maker completed five years of probation in the United States, marking the end of a U.S. criminal case.

ZTE's probation - imposed in a 2017 guilty plea deal for illegally shipping U.S. technology to Iran, and extended in 2018 - ended on schedule on March 22, despite a possible violation.

An alleged visa fraud had raised the possibility of additional penalties, sending ZTE's stock plummeting earlier this month, but a U.S. judge on Tuesday ruled against further action by the court.

ZTE is still subject to a 2018 settlement agreement with the U.S. Commerce Department.

ZTE suspended trading in its Shenzhen and Hong Kong-listed shares following the ruling and before markets opened Wednesday. Upon resuming trade at 0500 GMT, its Hong Kong stock registered its biggest daily percentage gain since its December 2004 debut.

Its Shenzhen stock rose 10% to its highest since March 10.

ZTE had been accused of violating probation over an alleged conspiracy to commit visa fraud. According to an indictment unsealed last March, a former ZTE research director and a Georgia Institute of Technology professor allegedly conspired to bring Chinese nationals to the U.S. to conduct research at ZTE from at least 2014 through 2018 while on J-1 visas sponsored by the university.

While ZTE has not been charged in the visa case, which is pending in Atlanta, Georgia, U.S. District Court Judge Ed Kinkeade held a hearing in Dallas last week on the fraud allegation as a possible violation of ZTE's probation.

In his Tuesday ruling, the judge found ZTE was legally responsible for the actions of the former ZTE director.

But he decided to not take any further action against ZTE, which had already reached the maximum term of probation and, ZTE argued, had already been fined the maximum as well.

As part of its 2017 plea deal, ZTE paid the U.S. $892 million.

There was an "open question about legal tools left for the court," the judge wrote.

Despite the favorable ruling, the judge encouraged the government to pursue any reasonable charges and criminal or civil penalties against the company, especially for export compliance matters.

PENALTIES

The visa issue was not the first problem that surfaced for ZTE since the plea deal. In 2018, the U.S. Commerce Department found ZTE made false statements about disciplining executives tied to the illegal shipments to Iran and, as a result, issued a total ban on the company buying U.S. components.

ZTE, which ceased major operations as a result of the ban, paid a $1 billion penalty and agreed to change its leadership and cooperate with a 10-year monitor appointed by the Commerce Department, as part of a settlement lifting the ban.

The judge took action in 2018 over the false statements, too, extending ZTE's probation and a court-appointed monitor from three to five years.

In his Tuesday ruling, the judge noted that ZTE argued the visa-fraud related events occurred more than three years ago, and that new leadership had brought an improved export compliance program.

"The Company has made strides," the judge said, adding that ZTE's export control and compliance programs were effectively "nonexistent" when it was originally sentenced.

He said he considered ZTE's compliance a mitigating factor, but that its record of compliance could be summarized in one word: "sometimes."

ZTE in a statement to Reuters said it was "proud of the significant improvement in the company's compliance program and culture." It said the improvement had been acknowledged over the years.

Evans Rice, a lawyer for ZTE, said in court last week that, in 2020, the court-appointed monitor had recognized "a sea change" in the company's commitment to compliance and cooperation.

The U.S. Department of Justice did not immediately respond to a request for comment.

The professor charged in the visa case, Gee-Kung Chang, has pleaded not guilty. The status of the former ZTE research director, Jianjun Yu, is unclear. ZTE said he left the company in 2019.

The case against ZTE was the first of a series of U.S. government actions against major Chinese tech companies that caused tensions in U.S.-China relations.

It was followed by a case, still pending, against Huawei Technologies Co Ltd, the hobbled Chinese telecommunications equipment giant, which was also placed on a U.S. trade blacklist in 2019 for activities contrary to U.S. national security or foreign policy interests.

China's ZTE exits probation after U.S. court ruling, shares soar
 

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