EB-5: Something Old, Something New, Something Borrowed, Something Blue

By David North on February 20, 2019

If the news is depressing (i.e., causing one to be blue), as it is, then the old wedding refrain could easily be applied to this week's EB-5 headlines. That's the immigrant investor program that sells a family-sized batch of green cards to those aliens investing $500,000 in a government-approved, but not guaranteed, investment.

The something old (and depressing) is yet another federal district court judge ruling that yet another person with a Chinese name (Andy Shin Fong Chen) was "'consciously' reckless when he diverted money raised from [Chinese, Taiwanese, and Korean] investors through the EB-5 visa program so he could make payments on his BMW and issue loans to relatives, misappropriating at least $6.5 million."

This is yet another case when the alert folks at the Securities and Exchange Commission moved in to clean up a mess created by the lax Homeland Security oversight of the EB-5 program, as reported by Law360 (partially behind a paywall). The case number in the PACER electronic data set is 2:17-cv-00405. It is in the U.S. District Court in Eastern Washington.

On the other hand, there was something new in this case. According to an SEC filing:

Thus, in a little less than two and a half years, Chen paid out over $2.7 million to himself and various related parties, much of it in profits made by speculating with EDC III [i.e., EB-5] investor money.

In so many other EB-5 cases, the middleman is accused of using EB-5 moneys to cover stock market losses; in this case the speculation was successful, but illegal — one is supposed to use EB-5 funds for a specific purpose, not to support the stock purchases of the middleman.

In fact, Chen's lawyers argued that the planned building was built, and that none of the investors had complained about losses, but the judge ruled, in a summary judgment, that the moneys had been misappropriated, if not lost. For an earlier CIS report on this case, see here.

Meanwhile, in a filing in the District of Columbia, we have another round in court for the concept that something borrowed is OK, at least as far as EB-5 is concerned.

As we reported late last year, a federal court ruled that an alien did not have to buy the EB-5 visas with his or her own funds, the money — contrary to decades of precedent — could be borrowed for EB-5 purposes, thus making access to the program easier than it is now.

Recently the feds have (understandably) appealed that decision, but other lawyers for other would-be EB-5 aliens have begun to file copycat lawsuits on this issue. On February 18, the lawyers for Wenying Li, whose EB-5 petition was rejected because he was using borrowed money, sued in the D.C. federal courts along the same lines. That case is 1:19-cv-00409-APM in the PACER system and there probably will be many more to come — something blue.