New Legal Tool, Qui Tam, is used in Florida EB-5 Case

By David North on July 13, 2016

A new legal tool has been unveiled against a Florida EB-5 user by a once-fired employee of the lumber mill in question.

The former employee has filed a Qui Tam case in federal court seeking to recover losses suffered by the federal government. To the best of my knowledge this is the first use of this legal tool in the EB-5 business.

These Qui Tam cases, which have an honorable history dating back to the Civil War, are instances in which private citizens, acting for the federal government, sue to recover moneys allegedly fraudulently obtained from the federal government. If the citizen suing -- the term is “relator” -- wins, he or she gets part of the financial settlement.

Given the Department of Homeland Security’s apparent inability or unwillingness to prevent fraud in EB-5, the Qui Tam approach adds another weapon against fraud in the program. To date, most of the actions against financial misconduct have come from the Securities and Exchange Commission, individual U.S. attorneys, and investors. With big scams involving federal funds, individuals using Qui Tam can (after the passage of time) win millions for themselves. Fortunes are made exposing Medicare fraud, for example.

The EB-5 user in this case is Klausner Lumber One, an Austrian-owned firm that has opened a sawmill with alien investor funds in Live Oak, Florida. Klausner has been accused by the relator, Emma Tirella, a former office manager for the company, of the

“systematic practice of submitting false statements to the United States, to the state of Florida and local governmental entities in order to obtain public grants and funding, as well as EB-5 financing, relating to [the company’s] lumber sawmill project . . . in particular, [the company] repeatedly has made false statements to various governmental entities regarding specific job creation and training expectations, which must be met and maintained in order to receive public funding and EB-5 financing...”

The courts’ electronic records system, PACER, carries the case as 3:16-cv-00203-TJC-JBT. The case was filed in March, and the complaint was opened to the public last month.

Bear in mind that this is one side of the story, filed by an individual who was fired from the company (she says for questioning its actions), and that the sawmill seems to be operating, and that there are no charges – as there are in many other EB-5 cases – of the theft of investors’ funds. Klausner is said to have raised $49.5 million in EB-5 funds, largely, if not exclusively from China.

Making repeated false statements to government agencies is, of course, a serious matter although it does not draw the media attention that accompany charges of theft. There has not been much coverage of this event beyond this Law 360 story (behind a paywall).

According to the complaint, Klausner’s false statements not only sped the flow of EB-5 funds, it helped it obtain millions from two federal programs not normally linked with EB-5 projects. It secured from the U.S. Treasury $6 million in “net tax credit equity” funding from the New Markets Tax Credits program. It also obtained, via Suwannee County, federal money from the Community Development Block Grant program for hiring “a minimum of 86 employees [who] must be from low to moderate income families.”

It also received various other state and local government grants, allegedly filing false statements in the process.

Klausner’s name must also be added to the dishonor roll of corporations that have used alien workers on B-1 visas to fill operating jobs when they are only supposed to be serving as trainers. We reported earlier on this practice by the Tesla electric car plant and the giant Indian outsourcing company Infosys. Klausner brought its workers from its European operations to fill these jobs – all in conflict with the immigration law, and the firm’s promises to various agencies to hire resident workers.

We would have reported this case earlier, but have been waiting, for weeks, for Ms. Tirella’s lawyers to return repeated phone calls. Clearly if one obtains either federal funding (the community block grant) or tax breaks from the Treasury (net tax credit equity) under fraudulent circumstances, there is room for the Qui Tam remedy, but does it apply in any way to money raised via EB-5? That’s the question we wanted answered.

If we find out later, we will report on it in a subsequent posting.