The most recent suit is brought by a group of Chinese and Iranian investors who allege that the Palm House developers defrauded them out of $50 million. Each of the plaintiffs invested at least $500,000 into the project, as the minimum required for an EB-5 investment. The suit names 33 defendants, including the developers of the project, Robert Matthews, his wife Mia, brother Gerry Matthews, with Ryan Black, Joseph Walsh, and Joseph Walsh Jr. also being named as developer defendants.
As is alleged in the suit, the Palm House project was a shell company set up to lure in EB-5 investors so that the accused could pilfer the funds for their personal use. Local news reports detailed how the escrow account that held investors’ funds had the money “improperly transferred” to other accounts controlled by the defendants. The defendants then used those funds for “personal pleasure,” purchasing yachts, luxury cars, real estate, and even paying off personal debts.
While many in industry tout the EB-5 investor program as a booming success, instances of fraud have plagued the program for years. The U.S. Securities and Exchange Commission (SEC) recently released an updated investor alert to warn of investor scams targeting foreign nationals who are seeking to become permanent residents through participation in the program. The allure of having the ability for you and your family to become permanent U.S. residents has led many to jump at whatever investment opportunity presents itself. The SEC, in conjunction with the U.S. Citizenship and Immigration Service (USCIS), has taken emergency enforcement action to try to stem the amount of fraud infiltrating the program, however, the fact remains that the frequency of emerging scams will cast doubt on the integrity of the program.
Typically, when a developer applies for EB-5 funding, it is in conjunction with other traditional financings, such as venture capital or commercial loans. In this instance, the plaintiffs claim that they were told that their investment funds would not be utilized until after the company’s existing capital was depleted. The suit alleged that the investors believed their funds would be held in escrow until such time that their immigration paperwork was finalized. They also believed that only after this time would the funds be used to complete the development of the property. However, the funds were withdrawn from escrow before any visas were issued and they were not used for the project or to create any U.S. employment.
The suit also alleges that investors were led to believe that many prominent Americans would also be involved in the project as advisors or board members. Some names that were claimed as members of the board included Donald Trump, Bill Clinton, Bill Koch, and Celine Dion. The developers even went so far as to allegedly invite immigration agents to a charity event at Donald Trump’s Mar-a-Lago resort, to demonstrate the importance and social status of Robert Matthews.
The Palm House project was promoted as a $144 million dollar luxury condominium hotel to be completed in 2014, but records show it had been under construction since 2007 with no real progress made towards completion. The plaintiffs complain that they have now been deprived of their ability to immigrate to the United States along with losing what amounted to their family’s entire nest egg. With the hotel being nothing more than a façade, the investors accuse the developers of being “conspirators” with the sole intent of stealing their money from the very beginning.
This case appears to be an addition to a string of setbacks for the EB-5 program in the form of fraud and deceit. While the SEC and USCIS have stepped up efforts to investigate and shut down controversial EB-5 projects and regional centers, the Palm House is another high-profile case that could damage investor confidence. As we await the imminent arrival of a new president and administration, Congress is considering changes to the program that will restore integrity by providing additional transparency. With the EB-5 Immigrant Investor Program being extended by Congress until December 9, 2016, it is yet to be seen what changes will be on the horizon for this growing and highly sought-after program. Many industry professionals believe that amendments to the EB-5 Immigration Investor Program are on the horizon. They are working together to instill meaningful change in the regulations to prevent fraudulent projects like The Palm House Project.