Governor Dennis Daugaard might want to reallocate $20 million in his budget address next week. 35 Chinese EB-5 investors are suing the State of South Dakota and Joop Bollen for $18,550,000.
In an action filed in Hughes County today, these EB-5 investors claim that in 2010, Mike Rounds’s Department of Tourism and State Development (now the Governor’s Office of Economic Development) and Mike Rounds’s EB-5 visa investment czar Joop Bollen lured them into investing $500,000 plus $30,000 in fees each in SDIF Limited Partnership 6, a shell corporation created by Bollen to pool money for investment in the ill-fated Northern Beef Packers slaughterhouse in Aberdeen, with “material misrepresentations and omissions of material facts.”
To keep it simple, let’s just say the Chinese investors feel the state and Bollen lied to them. What lies did the state and Bollen tell?
- the NBP facility was substantially complete and that the funding to be provided by LP6 would allow for the completion of remaining construction and the operation of the facility;
- the Project was competitive and had a sustainable business model;
- the Project was sufficiently capitalized to generate revenue from operations commencing upon the investment(s) being made;
- the Project would meet or exceed the minimum number of jobs required under the EB5 Program;
- Defendants had carefully reviewed the financial information of the Project and recommended it as sufficiently sound to generate jobs and repay the loan from the investors;
- the Project had a competitive advantage over other major competitors in the beef packing industry;
- the investors were protected because the loan being made to the Project would be secured by security interests on equipment, a corporate guarantee, and a mortgage on the property;
- NBP will be locally owned and led by recognized beef industry experts [LP6 Claimants v. South Dakota Department of Tourism and State Development…, SDRC Inc., SD Investment Fund LLC 6, and Joop Bollen, 32CIV15-000312, Complaint, 2015.12.02].
The Chinese investors say those statements were hogwash because…
- the Project did not have adequate financing to achieve sufficient revenue to create the required jobs or repay loans or support any refinancing;
- given the poor financial condition of the Project the investors could not be adequately secured;
- the Project did not have any favorable or competitive position and did not have sufficient capital to commence operations and generate revenue;
- the Project was owned by foreign investors and not run by beef industry
- that the project was already plagued by years of delays and was already in need of additional financing [Complaint, 2015.12.02].
Furthermore, the investors contend that the state and Bollen failed to inform them of several details that might have affected their decision to trust Bollen and Northern Beef Packers with their money, such as that…
- NBP had been unable to sell tax increment financing bonds to finance the Project;
- the Project had experienced financial difficulties and the initial foreign EB 5 investors had ousted NBP’s management and had become the managers and owners of NBP;
- additional investments or loans of at least $30 million would be required for the Project to begin operations;
- NBP had itself acknowledged that loans to the Project were extraordinarily high-risk because the Project was undercapitalized and its assets were not sufficient to repay or secure any loan;
- substantial liens had been filed against the Project;
- NBP was unable to pay, or was delinquent on, property taxes due and owing;
- other EB-5 investors had lost their money in a similar project promoted and administered by Defendants relating to the Veblen East Dairy in South Dakota;
- the Project’s business was subject to legally imposed restrictions and obligations that placed it at a disadvantage [Complaint, 2015.12.02].
The plaintiffs lost their money because Northern Beef Packers didn’t open until October 2012 and only operated for nine months before going bankrupt in July 2013. The investors are thus calling fraud and breach of fiduciary duty and demanding their money back. In a count titled “Pierce the Corporate Veil,” they further argue that a Hughes County judge and jury should not be fooled by the corporate shell game Bollen played with his “SDRC Inc.” and “SDIF LP 6” to shield himself and the state from liability for such malfeasance.
The investors are maintaining their own corporate veil: they are suing not under their own names but under the name of “LP6 Claimants LLC,” a corporation formed to pursue this litigation. The New York Division of Corporations shows that LP6 Claimants LLC was incorporated on October 14, 2014. Its designated contact is Ezio Scaldaferri, Esq., of Feder Kaszovitz LLP, 845 Third Avenue, New York, New York. Without names, I cannot verify that these litigants are the same investors who were reportedly organizing to sue South Dakota over their EB-5 losses in September 2014.* The attorney listed on the complaint is Steven Sandven of Sioux Falls.
But here they are, and they are going to be able to make a pretty good case that Bollen and the state bamboozled them into investing in one of the biggest economic development boondoggles in South Dakota in this century. Plus, they are tackling co-defendants who aren’t terribly inclined to work together, given the state’s and Bollen’s pending countersuits over EB-5 mischief. To make matters worse, the plaintiffs come shouting Fraud! just a couple months after the USCIS came shouting Corruption! and served South Dakota with its Notice of Intent to Terminate our EB-5 designation.
To top it off, Governor Daugaard walks into the Legislature next week Tuesday to lay out his plans for the FY2017 budget. On top of explaining how to pay for Medicaid expansion and the Blue Ribbon K-12 panel’s teacher pay package, the Governor has to decide whether he should recommend that the Legislature set aside $20 million (don’t forget, we’ve got lawyers to pay!) in case we lose or (gulp!) settle the LP6 Claimants LLC suit. The state’s Extraordinary Litigation Fund doesn’t have $20 million. The indemnification fund Bollen was supposed to hang onto for the state has maybe just a million. And Mike Rounds only has $160,399.10 left in his state campaign warchest that he could convert for personal use.
What do you think, Governor? Can we win this one? Or is the EB-5 scandal about to cost the taxpayers $20 million?
Update 16:19 CST: The EB-5 lawsuit is all over the media:
- Jonathan Ellis, “State Sued for Millions in EB-5 Suit,” that Sioux Falls paper, 2015.12.02.
- Dirk Lammers, “Investors Sue State Over Failed Beef Plant Investment,” AP via Pierre Capital Journal, 2015.12.05.
- Minutes before the lawsuit hit the press, Rep. Kristi Noem issued a statement saying she hasn’t read the proposed reforms of the EB-5 program yet (what, too busy putting up Christmas decorations?) but she will vote against renewing the EB-5 visa investment program without reforms.
Update 18:18 CST: Always keep reading…. As I page through the exhibits, I get to Exhibit 2, which does indeed list the 35 investors who want their money back from South Dakota and Joop Bollen. None appear to be those mentioned in my September 2014 report about possible litigation: