Given the early stage of the lawsuits, and the confidentiality of certain exhibits, it's difficult to fully evaluate them. But it is clear that the EB-5 program can bring significant sums to the middlemen, and thus fuel disputes.
The New York City Regional Center (NYCRC), which has focused on recruiting green card-seeking investors in China, is facing a lawsuit filed by a former affiliate, which claims that the NYCRC appropriated its confidential client list and thus evaded obligations to pay $6 million in finder's fees for new investors.
There's good reason to pay a big referral fee; I estimated that the 498 investors in the Atlantic Yards project might earn NYCRC $50 million. Meanwhile, Forest City Ratner will get the benefit of a $249 million low-interest loan, from 498 immigrant investors, itself saving perhaps $140 million.
The NYCRC would benefit from the spread between the no-interest offered investors--who care more about green cards than investment returns--and the low interest, perhaps 4% to 5%, charged to the borrower.
Indeed, the suit charges that NYCRC told the local affiliates, aka Network Agents, they'd get $20,000 rather than the $15,000 offered by Lion’s if they worked directly with NYCRC to recruit investors for Atlantic Yards and the other two projects, involving the Brooklyn Navy Yard and Steiner Studios.
The defense says the charges aren't true, that the Network Firms had a right to work directly with NYCRC, and that no exclusive relationship was promised to Lion's, which doesn't deserve credit for introducing NYCRC projects to some of the China's best-known agencies.
The defense says Lion's was supposed to solicit only individuals and representations of individuals.
(The Referral Agreement, likely a key to the case, is a secured exhibit and thus has not been made public.)
The public interest?
The immigrants, who park $500,000 for five years, are willing to forego a return in exchange for green cards. They need not live in the community where they investment, nor speak English. Many Chinese investors, for example, want to ensure that their children can become educated in the United States.
What about the public benefit? The investments are supposed to create jobs, but in some case--as I've shown with the Atlantic Yards investment--they don't create new jobs, and the immigrant investors get credit--apparently legal, though logically questionable--for the jobs created by the entire $1.448 billion in the "Brooklyn Arena and Infrastructure Project."
For example, the suit says, NYCRC and Cansine (which has worked on the Navy Yard project, at least, and put its logo on an official NYCRC video, right) made a joint presentation to investors falsely describing a project as being “guaranteed by government-owned land. So there is no risk.”
NYCRC denies that.
It's not clear to which project they referred, but in presentations regarding Atlantic Yards, both NYCRC affiliates and Hayden offered guarantees of no risk, which are contradicted by the NYCRC's contractual avoidance of warranties.
The relationship with New York City
Also, the suit points to the relationship the regional center, a private business, has established with New York City officials, who are apparently eager to steer developers to a source of cheap capital that costs the city nothing.
Regarding the relationship with a Chinese firm, Henry Global, the suit says, "In an imperial attempt to justify its improper interference, NYCRC told Mr. Katzap 'this is our regional center and our relationship with the government of NYC that we need to protect.'"
Looking for clients
The NYCRC signed a Referral Agreement with Lion’s in July 2009, which Lion's says, "authorizes Lion’s Property to be responsible for the marketing of NYCRC projects in China, and provides that Lion’s Property would be paid compensation for introducing Chinese investors to NYCRC."
According to the suit, "NYCRC conspired with Hoche to cut Lion’s Property out of the process by misusing Lion’s Property’s confidential Client Lists to contact the Network Agencies directly, in many cases interfering with express contractual agreements between Lion’s Property and the Network Agencies."
Former Projects page, lists the Brooklyn Navy Yard and Steiner Studio projects. It is currently touting another EB-5 project, the details of which are upcoming.
However, the NYCRC says only two actual investors were introduced by Lion's to NYCRC, and compensation was paid. Hoche had no involvement in the solicitation of investors.
Lion’s Property also charges NYCRC and its principals with "trade defamation," including false and disparaging statements that have cost Lion’s existing contracts and suffered other damages.
The defense responds that Lion's wrongfully disclosed confidential information.
Thus the NYCRC got into the game fairly early, at a time when developers and others seeking cheap
capital recognized this could be a source. In 2008, there were perhaps 35 Regional Centers, but as of September 2011, there were 180.
NYCRC responds that the agreement was not exclusive, and that Lion's specifically requested and was denied a broader scope of rights.
The defense says the agreement makes no mention of "solicitations conducted through so-called 'Network Agencies,'" a key part of the Lion's claim.
The defense, however, says the firms were simply those that were well-known in China, and did not provide any "exclusivity" commitments to Lion's--and that Network Agencies were not mentioned in the Referral Agreement.
The NYCRC says it doesn't know if that's true, but if it is, they were done without consent or authorization.
The defense says that all efforts were on a non-exclusive basis, with others also attempting to solicit investors.
The defense says that Lion's knew other individuals and firms were making solicitations.
The defense says the firms had no obligation to direct potential investors to NYCRC through Lion's.
The defense says that those agencies had not signed agreement with Lion's, and that NYCRC's George Olsen told Lion's, orally, and in an email dated 11/4/09, that NYCRC would not recognize any such agencies without a written agency agreement.
However, the defense says Olsen told Katzap that NYCRC would not recognize and pay commissions based on a "blanketing" of the market and that "you cannot go to the phone book and send us that list and expect to be protected."
The defense says that there was no exclusive obligation and it denies Lion's allegation that it did not dispute Lion’s assertion that these entities had been gained through Lion’s Property’s work efforts.
The defense says she was never retained by either Hoche or NYCRC.
The defense says that's not true.
The defense says that's not true, and that, at the least, Well Trend was told Lion's did not have an exclusive agency relationship with NYCRC.
The defense denies knowledge or information whether that's true.
The defense says Lion's did not have any contracts with Well Trend and other firms.
According to the suit, another firm, Cansine, "was ready to execute an Agency agreement with Lion’s Property" awaiting additional marketing materials from NYCRC. The head of Cansine told Lion's, according to the suit, that NYCRC had offered Cansine $20,000 per investor to work directly with them.
NYCRC says that's not true.
"After having successfully usurped Lion’s Property’s network, and being bothered by Lion’s Property’s protests over NYCRC’s conduct," the suit charges, on 12/3/09, NYCRC told Lion’s Property by email that it should conduct no further seminars without written consent of NYCRC, because "seminar materials were inaccurate in some undisclosed manner."
NYCRC says it had the right to do so, and on 12/9/09 told Lion’s it could not conduct further seminars without advance approval.
Lion's claims "NYCRC’s purported reason for prohibiting Lion’s Property from engaging in
Katzap and Bing met 6/9/10, and Bing "confirmed that she had been provided with copies of the client list that Lion’s Property had emailed to NYCRC in trust and confidence in August 2009," according to the suit, and said Hayden told her "to use the client list to contact the immigration firms and induce them to deal with NYCRC directly."
The defense says it lacks knowledge to assess the truth of this allegation.
Because NYCRC knew that this was improper, Hayden warned "Bing that she should never disclose the source of the listing to anyone, specifically to Lion’s Property," according to the suit, and that she should avoid meeting with NYCRC in public. The defense denies that.
Breach of the Referral Agreement?
Thanks to Lion's and its relationships with the Network Agencies, NYCRC has secured some 750 investors for its three projects, the suit claims. The defense denies that.
For example, BirchLeaf Miami 31 on 9/8/10 terminated its agreement with Lion’s, because, according to the suit, NYCRC said Lion's provided no investments from Chinese investors; acted beyond what NYCRC had authorized; and had made misrepresentations to investors.
The defense says Lion's did commit those acts, but denies that it had made such statements as charged.
The defense responds
The defense says that Lion's "procured the execution of the Referral Agreement by NYCRC through fraudulent representations and concealment of material facts concerning its abilities to obtain investors in China, as well as its intentions to solicit only individuals and representations of individuals."
Beyond that, NYCRC has no liability because Lion's breached its obligations to maintain documents in confidence. Lion's denies that.
The defense also states that Lion's has made "false and defamatory statements" in the U.S. and China "concerning the integrity and abilities of NYCRC and its principals." Lion's denies that.
NYCRC also charges that Lion's has tried to get firms in China to stop doing business with NYCRC. Lion's denies that.
According to an 11/10/11 preliminary conference order and schedule, the parties are currently involved with an exchange of documents, with documents and answers to written interrogatories due by 12/23/11, and depositions (EBTs, or examinations before trial) due in two stages, by 2/3/12 and 4/6/12.
A compliance conference is due 5/11/12.