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In the wake of Staten Island Wheel's failure, another black eye for EB-5

In the wake of the latest black eye involving EB-5 investments, the case of the aborted Staten Island Wheel--which may deliver green cards (though not a lock) but seems far less likely to return the 412 investors' $500,000 each--it's worth looking at some other recent EB-5 news.

Chinese investors sue Nick Mastroianni over alleged EB-5 fraud, the Real Deal reported 10/15/18, citing a lawsuit against the founder of the U.S. Immigration Fund, the nation's leading regional center, or middleman, pooling those immigrant investors' funds:
According to a lawsuit filed in Palm Beach County Circuit Court last week, Mastroianni raised $99.5 million from 199 EB-5 investors for the Harbourside Place development in Jupiter. The deal was he would raise $100 million.
The complaint, filed through Miami-based Levine Kellogg Lehman Schneider + Grossman, alleges Mastroianni intentionally structured the EB-5 investments so that he was one investor short for the $100 million, first-priority, secured construction loan. The alleged purpose of that was so that Mastroianni could eventually control the new senior lender.
Of the 78 plaintiffs, according to the article, more than 60 have gotten their green cards, but none have been paid back. Previously, Mastroianni has been sued over whether investors had been properly warned about an investment structure that requires funds to be redeployed, potentially over 15 years.

As I wrote for City & State in May 2017:
The press coverage of One Journal Square has understandably focused on the Kushners, but let's not ignore the role of Nicholas Mastroianni II, who heads the U.S. Immigration Fund...
In 2014, Fortune memorably described Mastroianni as having "a long history of legal problems, failed ventures, and unpaid debts – which have continued even as his professional fortunes have turned sharply upward."...
However, Mastroianni devastatingly undermined the justification for his projects – including, presumably, One Journal Square – at a little-noticed panel in Shanghai last November for EB-5 insiders.
"Projects that don't typically need the capital are the projects that we look to lend money on," he said, on video. "If a project can't be developed without the EB-5 capital, it's not a project that you should be looking to invest in, because you've got a desperate situation."
But if One Journal Square doesn't need that EB-5 capital, the immigrant investor funds don't create jobs at all. So the debate over reforming EB-5 should not be limited to fixing gerrymandering, increased fraud protection or a higher investment threshold, currently the big issues before Congress.
The debate hits the WSJ

I missed an op-ed 9/19/18 in the Wall Street Journal, No More Pay-to-Play Green Cards, by a right- and left-wing tag team, John Vecchione,president and CEO of Cause of Action Institute and Anne Weismann is chief FOIA counsel at Citizens for Responsibility and Ethics in Washington.

They made familiar but worthwhile arguments:

  • that regional centers pool investments in so-called Targeted Employment Areas, which are supposed to be areas of high unemployment, but are gerrymandered to fit the law
  • that the program "is also a bipartisan source of political corruption and cronyism," including once praised projects in South Dakota and Vermont

Their bottom line:
The only real support for renewing the EB-5 program comes from real-estate developers with political connections. They argue that the program creates jobs, but an independent examination by the Government Accountability Office found no evidence to verify those job-creation claims.
That column drew a letter, published 9/26/18, The EB-5 Visa Program Is Worth Retaining, which instead quoted more positive, yet dubious statistics:
The Commerce Department estimated that EB-5 brought in $5.8 billion for fiscal years 2012-13 and created an estimated 174,000 jobs. Another study places the influx of capital at $20 billion since 2008. Those figures would be higher if not for the extensive backlog that has accumulated, as well as the legal uncertainty hanging over the program.
As I wrote, quoting Mastroianni himself, the evidence that such money creates jobs is very questionable.

The letter writer was Daniel Mitchell,  Chairman of the Center for Freedom and Prosperity, which, however libertarian, seems in this case quite supportive of the real estate industry.

In a column published 3/18/18 in The Hill, Mitchell argued that EB-5 immigrations "unambiguously would increase per-capita prosperity in America." Again, he quoted the sunny Commerce Department rather than more critical analyses. He argued for increasing the number of visas and vaguely indicated that safeguards are "also needed to prevent cronyism and abuse of the program by politicians."

But what about abuse of the program at its heart?

Mitchell does make the valid point that other countries let people buy their way in. What he doesn't suggest is a way out of our current Rube Goldberg system, like, say, simply auctioning off visas.

And in Vermont

Check out this 9/20/18 coverage of the controversy in Vermont, headlined "EB-5 chief was repeatedly shut down in efforts to audit Jay Peak." It quotes a deposition from a director of the state's Vermont EB-5 Regional Center, who kept hands off a project now mired in scandal.

From the article:
In a deposition taken by attorney Russell Barr, [Brent] Raymond, who was director of the program for three years, says commerce agency and state securities officials, the developers and their agents, including Gov. Peter Shumlin’s former deputy chief of staff and close confidante, shut down questions about financial improprieties and self-dealing by Quiros and Stenger. In addition, Raymond says U.S. Citizenship and Immigration “was so mismanaged that it didn’t provide enough direction to regional centers to really know what their responsibilities would be.”
...Instead of exercising their authority and legal obligation to prevent the fraud and protect the interest of investors, state officials not only refused to investigate in 2012, 2013 and much of 2014, they also heavily promoted the Jay Peak projects in China.
After alarms had been raised about Jay Peak’s finances, and despite Raymond’s own misgivings, he frequently shared a booth with Jay Peak at EB-5 conferences. In 2013, Shumlin appeared in a video that was translated into Chinese, falsely claiming the projects were audited by the state. And there were several junkets to China in 2013 and 2014 in which Shumlin, Sen. Patrick Leahy, D-Vt., and Rep. Peter Welch, D-Vt., were featured speakers at meetings with investors organized by Jay Peak.
Many of the 800 immigrants who invested in Jay Peak said they did so because Leahy and Shumlin vouched for the projects.Sen. Patrick Leahy and Jay Peak developer Bill Stenger.
(Emphases added)

It has been typical for government and elected officials to promote EB-5 investments, giving a misleading sense of security for overseas investors. That's been part of the pattern with many projects, including Atlantic Yards/Pacific Park. The question is how many will now be subject to such rigorous scrutiny.

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