Big EB-5 Project is Bankrupt in South Dakota; Investors May Lose Everything

By David North on July 27, 2013

A large EB-5 project in Aberdeen, S.D., Northern Beef Packers Limited Partnership (NBP), has filed for Chapter 11 bankruptcy, probably leaving some 160 alien investors (mostly Chinese) with little or no financial return for their 160 half-million-dollar investments, according to local reports.

Whether the Chinese also lost their immigration benefits was not immediately clear, though this is not automatic if an EB-5 investment fails. (The bankruptcy system is much more transparent than the immigration system, and the bankruptcy courts have nothing to do with the immigration variables.)

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The financial collapse of what we would have called a slaughterhouse when I was growing up in the Midwest, came just as the entire immigrant investor program is undergoing congressional scrutiny related to the nomination of USCIS Director Alejandro Mayorkas to be Deputy Secretary of the Department of Homeland Security, as described in a previous blog.

NBP is also a poster child for what is wrong with the EB-5 program generally: 1) it was an unlikely winner to start with; 2) it was marred by slippery financial maneuvers on the part of the promoters; and 3), even at its peak of activities, the one-investor-to-ten-new-jobs formula required by law was not being met, at least not directly.

Second or Third-Class Investments. It is a rule of thumb, though one rarely acknowledged by EB-5 advocates, that the EB-5 investments are by definition sub-par in nature. Promoters who cannot secure funding through the normal channels turn to EB-5 only as the last resort, when other options are closed to them. Thus EB-5 investments, on average, are more risky than other ones. If you wanted to raise money half-a-million at a time for a project, would you want to do so through the Department of Homeland Security? Wouldn't you rather not have to hire a translator so that the pitch could be written in another language (Mandarin, in this case)?

In this instance, however, the sub-par truth was acknowledged by one of the middlemen in the case. He is Joop Bollen, head of the USCIS-licensed company in the case, SDRC, Inc., (South Dakota Regional Center). He told the Aberdeen News Home last year:

EB-5 is vastly responsible for being able to keep NBP going because the local banks haven't really jumped in.

The bankers, in this case, were exactly right.

As I recall from reading about NBP in the past, it was, in addition to its other problems, deeply involved in court cases fought by two rival factions of Hutterites, both of which have deep roots in the cattle and packing businesses. Hutterites are members of a deeply conservative Protestant sect, formed in Germany centuries ago, that make the Amish look like hippies. They are a significant force in Dakotas farming.

Complicated Financing. EB-5 investments, like the purchase of common stock, are supposed to be at risk, they are not supposed to be loans. Investors prefer loans, because they would like to get their money back, and this sets up an awkward dynamic.

In this case, as was reported in the Madville Times, an alternative publication, the first 70 EB-5 investors bought stock in the company, in keeping with the rules; then the promoters sold the next 90 investors stakes in a corporation whose main business was to lend money to NBP, making those investments appear to be closer to loans than to common stock in the packing plant. The EB-5 program is full of such shenanigans.

Apparently USCIS swallowed this bit of legerdemain, as did the 90 Chinese.

The irony, according to a lawyer near but not in the case, is that the loans of this entity are junior to those of another lender, which has $64 million coming to it, making it highly unlikely that the EB-5 "loans" will be repaid, even partially. Whether the 70 Chinese with actual stock in the company will get anything back is not known, but they seem to have a fighting chance for pennies on the dollar at some point in the future.

Ten Jobs per $500,000 Investment. The statute stipulates that no immigration benefit can be extended to an alien investor unless the investment produces 10 jobs, other than any to the investor's family.

In the case of the Dakota meat packing plans there were 160 alien investors — and they probably were not the only investors. That means that the project should have produced at least 1,600 new jobs.

According to the Madville Times, NBP had laid off 108 workers in April and still had 300 on its shaky payroll when it filed for bankruptcy, for a total of 408. Unfortunately, a sloppy Congress allowed for the calculation of indirect job creation, estimates usually put together by clever economists, and this must have been done in this case, too.

I only hope that someone in addition to the South Dakota press picks up this story.