Eternal Chinese

China-backed buyout fund founder charged in U.S. insider trading case

By Liana B. Baker
China's fifth column: Canyon Bridge Capital Partners

SAN FRANCISCO -- The founder of a private equity firm with Chinese state backing has been charged with insider trading related to the attempted acquisition of Lattice Semiconductor Corp, U.S. authorities said on Monday.
The charges against Benjamin Chow represent a major blow to the buyout firm he created just last year, Canyon Bridge Capital Partners, with capital from China Reform Holdings, a Chinese state-back fund. 

The indictment comes as Chow’s fund Canyon Bridge seeks to close its 550 million pound ($737 million) acquisition of British chipmaker Imagination Technologies Group Plc, after its $1.3 billion takeover of Lattice was blocked by U.S. President Donald Trump last month over national security concerns.
The Acting United States Attorney for the Southern District of New York and the Federal Bureau of Investigation said on Monday that Chow had conspired to commit securities fraud by sending material nonpublic information regarding the Lattice deal to an unnamed friend and former colleague.
A separate indictment by the U.S. Securities and Exchange Commission in February against that former colleague of Chow identified him as Michael Yin, a former Hong Kong-based private equity executive who had become a hedge fund manager.
Chow, a U.S. citizen born in China, is accused in the new indictment of tipping off Yin, who reaped $5 million of profit thanks to knowledge that the deal was in the works. 

Yin and China Reform Holdings could not be reached for comment.
Chow, 46, passed along information to Yin at in-person coffee meetings in Beijing, voice messages and text exchanges ahead of the announcement of Canyon Bridge’s deal to buy Lattice.
A Canyon Bridge spokesman said in a statement that it was aware of the indictment and that it is focused on completing its planned acquisition of Imagination. 

The fund added that it is not itself subject to any investigation.
Imagination did not immediately respond to a request for comment. 

Lattice declined to comment.
The indictment also said that Chow lied to the Financial Industry Regulatory Authority in response to inquiries in April about possible insider trading.
The charges against Chow carry a potential prison sentence and maximum fines of $5 million.
Canyon Bridge's funding can be traced back to China's State Council, the top decision-making body of the government, Reuters has previously reported. 

Canyon Bridge has been trying this year to attract investors from outside China. 

The indictment against its founder could represent a hurdle to these efforts.
Another Canyon Bridge partner, Ray Bingham, has also faced problems. 

The tech veteran joined Canyon Bridge last year but had to leave the boards of several tech companies, including Oracle Corp ORCL.O, due to concerns about his involvement with a firm with links to the Chinese state. 

Bingham could not be reached for comment Monday.

Chinese Peril

Trump Blocks China Bid to Buy U.S. Chip Maker
By ANA SWANSON

Lattice Semiconductor offices in San Jose, Calif., in 2007. President Trump prevented the acquisition of Lattice by an investor group with ties to Beijing.

President Trump on Wednesday blocked a China-backed investor from buying an American semiconductor maker over national security concerns, a rare move that could signal more aggressive scrutiny of China’s deal-making ambitions.
The deal for Lattice Semiconductor has provided a test of the president’s economic and diplomatic relationship with China.
On the campaign trail, Mr. Trump reserved some of his harshest words for China, accusing the country of stealing jobs. 

In recent months, the president has turned more critical of Beijing, accusing it of failing to do more to restrain the nuclear ambitions of North Korea.
Derek M. Scissors, a resident scholar at the American Enterprise Institute who studies Chinese investment, said that the administration’s decision over Lattice was intended to send a political message. 

“We could let it die quietly,” he said, “but we’re going to kill it loudly.”
The White House said on Wednesday that it prevented the acquisition of Lattice Semiconductor, in part because the United States government relies on the company’s products. 

The integrity of the semiconductor industry, it said, was vital.
The White House also raised concerns over the buyer’s close ties to Beijing. 

The investment group included China Venture Capital Fund Corporation, which is owned by state-backed entities, the White House said.
The decision could foretell trouble for other Chinese deals under review by the Committee on Foreign Investment in the United States, a multiagency group that examines takeovers of American companies by foreign buyers and makes recommendations to the president. 

The group, which operates largely in secrecy, is also looking at the proposed purchase of MoneyGram International by Ant Financial, an affiliate of the Chinese technology giant Alibaba Group.
Chinese deal-making in the United States has surged in recent years, as cash-rich companies look overseas to diversify and spread their wealth. 

Last year, Chinese investment hit $46 billion, a threefold increase from 2015 before, according to the research firm Rhodium Group.
The flow of Chinese money into the country, although it has slowed lately, has prompted concerns over the state’s influence in corporate strategy. 

Critics are particularly worried that China is focusing on sensitive industries, like technology. 

White House officials and lawmakers on both sides of the aisle are pushing for new rules that would keep closer tabs on deals by China, by expanding the powers of the foreign investment committee, known as Cfius.
Mr. Trump has sought to take a tough line on China’s trade and investment practices, threatening on the campaign trail to enact sweeping tariffs. 

In August, the White House began an investigation into Chinese violations of American intellectual property, an inquiry that could result in tariffs or another negotiated outcome. 

Mr. Trump also called for a report on the steel industry, where China is dominant.
By blocking the deal for Lattice Semiconductor, the president is taking direct aim at China’s industrial policy.
As China looks to expand its global reach and support its economic growth, the government wants to be a dominant force in cutting-edge industries. 

The country’s “Made in China 2025” program, which will provide extensive assistance and cheap loans to certain industries, lays out an ambitious plan to build homegrown giants that will compete with American stalwarts.
Semiconductors has been a major focus of the effort. 

As China moves to build and design chips, Chinese investors has acquired overseas chip makers and teamed up with Western technology giants.
The deal for Lattice Semiconductor played to those ambitions.
The company announced an agreement last November to sell itself to a private equity firm, Canyon Bridge Capital Partners, for $1.3 billion. 

The initial funding for the firm, based in Palo Alto, Calif., came from China.
Cfius raised warning flags about the deal. 

Although the review process takes place behind closed doors, Lattice disclosed on Sept. 1 that the committee planned to recommend that the president to block the deal.
When that happens, companies usually drop their acquisition plans. 

Last year, Philips, the Dutch electronics giant, called off a deal to sell a big stake in its automotive and LED components business over Cfius concerns. 

The buyer was a consortium with GO Scale Capital, an investment fund sponsored, in part, by GSR Ventures of China.
Lattice instead tried to appeal to the president. 

In a filing, the company said it would offer measures to resolve any outstanding national security concerns.
The administration was not convinced. 

Treasury Secretary Steven Mnuchin, the chairman of the review committee, said in a statement on Wednesday that its recommendation on the deal was “consistent with the administration’s commitment to take all actions necessary to protect national security.”
“Cfius and the president assess that the transaction poses a risk to the national security of the United States that cannot be resolved through mitigation,” Mr. Mnuchin said.

U.S. Chinese Fifth Column

Chinese government money backs buyout firm’s deal for U.S. chip maker
By Liana B. Baker, Koh Gui Qing and Julie Zhu | SAN FRANCISCO/NEW YORK/HONG KONG

Canyon Bridge Capital Partners, a buyout fund that agreed to acquire U.S.-based chip maker Lattice Semiconductor Corp for $1.3 billion earlier this month, is funded partly by cash originating from China's central government and also has indirect links to its space program, Chinese corporate filings show.
Reuters, in a review of about a dozen filings from China's state-run corporate register, has established that the financial investment in Canyon Bridge originates from China’s State Council, the top decision-making body of the government.
This link could draw more U.S. regulatory scrutiny over the Lattice deal on concerns that technology gained through the purchase could be used by China's military, according to analysts who follow the chip industry and monitor foreign investment review decisions by the U.S. government.
"It is a red flag," James Lewis, a researcher at the Center for Strategic and International Studies, said of Canyon Bridge's links to the Chinese state.
"It's not a deal killer, but deals like this sometimes run into roadblocks."
Portland, Oregon-based Lattice makes programmable chips known as "field programmable gate arrays" that allow companies to put their own software on silicon chips for different uses.
It does not sell chips to the U.S. military, but its two biggest rivals -- Xilinx and Intel Corp’s Altera -- make chips that are used in military technology.
Shares in Lattice fell as much as 4.8 percent in early Monday trade, but had recouped losses by nearly midday to be down 2.7 percent.
The Committee on Foreign Investment in the United States (CFIUS), a U.S. government body that conducts security reviews of proposed acquisitions by foreign firms, has yet to sign off on the agreement.
How CFIUS judges the potential military applications of Lattice’s programmable chips will help determine if the deal goes ahead or not, industry analysts and CFIUS experts say.
CFIUS declined to comment for this story.
The Lattice deal is one of the largest attempted by a Chinese-backed firm in the U.S. semiconductor sector. 
It is unclear if CFIUS will block the purchase, but a rejection would deal another blow to the Chinese, who have invested a record $200 billion in overseas acquisitions this year.
The United States, Germany and Australia have scuttled Chinese takeover bids in recent months due to concerns they may serve China's national security interests over their own.
Headquartered in Palo Alto, California, Canyon Bridge was formed recently with Lattice being its first announced deal.
It describes itself as a "U.S.-based private equity buyout fund focused on providing strategic capital" to technology companies, according to its website.
It counts Ray Bingham, an executive chairman of Cypress Semiconductor Corp, chairman of Flex Ltd and an Oracle Corp board member, as one of its co-founders.
Bingham could not be reached for comment.
The only investor in Canyon Bridge is a unit of China Venture Capital Fund Co Ltd, according to a filing made by Lattice to the U.S. Securities and Exchange Commission last Tuesday.
The China Venture Capital Fund is a unit of China Reform Holdings Corp, according to the website of China Reform Holdings. For a graphic, click tmsnrt.rs/2gegSQc


A Reuters review of Chinese corporate filings dated June 16 this year shows that China’s State Council is the only shareholder in Beijing-based China Reform Holdings. 
Reuters was unable to determine if China Reform Holdings has another source of financing.
China Reform Holdings, on its website, states the government holds the investment through the State-owned Assets Supervision and Administration Commission (SASAC), a special unit under the State Council responsible for supervising and managing the country's non-financial government-owned enterprises.
Reuters could not determine if the ownership structure has changed since the filing.
SASAC did not respond to a fax and telephone calls for comment.
Canyon Bridge and Lattice declined to comment for this story.
Canyon Bridge’s legal adviser on the Lattice bid, Jones Day, had said publicly that Canyon Bridge had "limited partners with funding coming predominately from the China Reform Fund."
Limited partners are investors in private equity funds.
China Reform Fund is a unit of China Reform Holdings.
China Reform Holdings declined to comment and China Venture Capital Fund could not be reached for a comment.
Jones Day declined further comment.
According to its 2014 annual report that was published last year, China Reform Holdings is positioned to "invest in strategic emerging industries related to national security and the lifeblood of the national economy."
Chinese corporate filings also show that China Reform Holdings is a shareholder in China Aerospace Investment Holdings Ltd. via a separate unit, Guoxin International Investment Corp Ltd.
Guoxin International, which was created in 2012 to help Chinese state-owned companies expand within China and abroad, could not be reached for comment.
China Aerospace Investment is the main investment manager of China Aerospace Science and Technology Corp (CASC), which develops and launches all Chinese rockets, satellites, manned spacecraft, and space stations as well as all strategic missiles and other weapons, according to CASC’s website.
China has been working to develop its space program for military, commercial and scientific purposes.
While indirect, those ties between China Reform Holdings, China Aerospace and a U.S. company that makes technology with potential military applications will likely get attention from U.S. regulators, according to CFIUS experts.
"It doesn't mean they won't get cleared, but they will get a harder look from CFIUS if the acquiring company is state backed than if it was a private backed company," said Paul Marquardt, an attorney with Cleary Gottlieb who specializes in CFIUS actions.
China Aerospace’s corporate filings and annual report did not detail the size of Guoxin International's stake in the firm, except to show that at the end of 2015 Guoxin was one of as many as 19 shareholders, and that it held a 20 percent stake.
A source close to the deal who was not authorized to speak on the record said that Lattice and Canyon Bridge would disclose all sources of Canyon Bridge's capital in filings with U.S. regulators.
The proxy statement on the proposed Lattice bid, which will have more details of the offer, has yet to be filed.