South Dakota's EB-5 Program was, until recently, a showcase example of what State governments could do with the promise of capital investment from foreigners through the EB-5 visa program.
What has transpired, though, is a potential warning to the other EB-5 Public Private Partnerships (PPP) that contract outside entities to raise capital and manage the investments of what can go wrong when the state exercises little to no controls, audits or oversight of the people and firms that it has contracted to promote investment, recruit investors and operate its Regional Centers to.
The South Dakota program had to date raised more capital than 90% of the designated EB-5 Visa Regional Centers, a long established track record and was a favorite among foreign agents and U.S. immigration attorneys because of the perception of the State's involvement, has effectively shut down amidst federal and state investigations for “alleged misconduct” and the mysterious death of one of its principal architects.
At the center of attention in the investigations are Joop Bollen, the person appointed by South Dakota to oversee the capital raising, promotion and operation of the EB-5 program for the state (under both SDIBI and SDRC) and Richard Benda, former Cabinet Secretary and Director of Tourism & State Development for the state and later employee of SDRC.
Until December 2009 Bollen served as Director of the South Dakota International Business Institute (SDIBI) which was created under the South Dakota Board of Regents and administered by Bollen as part of an administrative unit of Northern State University and partially funded by Benda’s department which was tasked with overseeing the investments in the state. Established in 1994, it achieved USCIS designation as a Regional Center in April, 2004 and was among the oldest of the existing EB-5 Regional Centers.
It was terminated by the State at the end of 2009 and replaced with a private entity, SDRC, which was controlled and administered by Bollen who requested and was granted permission to change the name of on the federal designation to the South Dakota Regional Center. The new entity then entered into a contract with the state to continue to to promote EB-5 investment into South Dakota and manage the investments and contracts with the law firms and agents that supported his efforts. Interestingly enough, this contract was signed on behalf of the state by Benda.
The program initially focused (under SDIBI) on funding dairy farms with a mix of European and Asian investors. Remarkable about that period of time and perhaps a foreshadowing of things to come were the bankruptcies of both the Winters Dairy and Veblen farms.
Despite moving the program from state control to the privately held SDRC, Benda and other state officials continued to be heavily involved in the promotion of investments into South Dakota by traveling to overseas seminars and entertaining agents and investors on trips to the state.
Small Time to Prime Time
When I met with Joop in 2008 he told me that he was tired of funding small time farm operations and wanted to capture some of the limelight and compete with the attention that the other prominent Regional Centers at that time: CMB, American Life and RC manager CanAm were getting in the Chinese & Korean markets by funding larger, higher visibility projects.
The agents and immigration law firms prefer the larger projects as they are more cost effective to package and process and more lucrative because of the volume. If the investors begin to sound like cattle at a beef processing plant with the same end result then this might be an appropriate metaphor for how most of them are treated in our industry.
So Bollen began looking for the perfect showcase example of a large scale, larger investment project and, along with Benda and others in South Dakota, determined that a state-of-the art beef processing plant was exactly what was needed.
The Chinese and Korean agents and attorneys loved the idea. The first round of financing involved 69 Korean investors, the second round, SDIF LP6 would allow them to raise $35 million from 70 Chinese nationals and later SDIF LP9 to raise an additional $25 million from 50 more investors and subsequent offerings totaling close to $100 million. This would be the first of several large scale investments and a departure from the smaller dairy projects which had been the staple of SDIBI promotions.
For the agents, law firms and SDRC the it meant several million dollars in legal, commission and other fees for these larger asset investment (more on the fee agreements, SDIBI and SDRC projects, bankruptcies and lawsuits in Part II)
Public to Private
Such lucrative contracts do not go un-noticed among public officials, so a year after Benda signed the SRDC contract, he left public service and the government to work with Bollen at SDRC to oversee the Beef Packing plant investment, but assumably at a much higher pay grade. Because the problems encountered at the NBP plant with both development and later operations, the Chinese investors were becoming concerned and approached Bollen about installing their own manager to “participate in management decisions” and protect their interests.
According to news sources, Bollen opposed that idea saying that Benda was “an effective monitor and four times less expensive” that bringing in a Chinese caretaker.
On June 23 & 24th of 2012 Bollen received both formal and written requests from an attorney investigating SDRC’s activities in the Northern Beef Packers (NBP) in Aberdeen and the Dakota Provisions Turkey Plant in Huron. According to press reports the attorney asked, "What steps are being taken to ensure that the described turkey plants have created the minimum number of jobs prescribed on attached USCIS memorandum HQSCOPS 7A16.1.2-C?"
The attorney also asked for "a listing of entities and amounts of EB-5 funds distributed to South Dakota entities from 2000 to present" and "a list of pending EB-5 applications involving South Dakota entities."
According to these reports on July 5, 2012, at 4:37 p.m., Bollen responded thus:"If you please could forward the necessary funds for my legal counsel I will certainly obtain it" [Joop Bollen, e-mail, 2012.07.05].
Shortly thereafter, on August 29, 2012 the Governor’s Office of Economic Development took over the bank accounts of SDRC by imposing a “Deposit Account Control Agreement”.
This agreements restricts Bollen from accessing any of the funds from the SDRC account which had been under his control and gives the State complete access to all bank records and activity. For the State to exert such control over a private contractor appears to be an extraordinary action.
One month after the state issued the letter, former Sec. Benda dies of gunshot wounds at his sister’s house near Lake Andes and his death remains under review by State Attorney General Jackley who has promised to release information about the autopsy later this month.
The current administration under Gov. Daugaard and the Commissioner of Economic Development Pat Costello appear to have distanced themselves considerably from the EB-5 program in South Dakota.
“Earlier this year, I became aware of alleged misconduct, prior to my administration, at the economic development office,” Daugaard said in a statement. “I asked the state attorney general to investigate and provided all relevant materials to him. There has also been a federal investigation.”
Daugaard referred all further questions to Attorney General Marty Jackley and U.S. Attorney Brendan Johnson. At this time no criminal charges have been filed in either the federal or state investigations.
Jackley acknowledged the investigation but declined to release any details.
“I will confirm that requests have been made for authorities to review allegations of financial misconduct at the Office of Economic Development,” Jackley said in a statement. “That investigation is ongoing, and I am therefore unable to provide further information.” “GOED has not actively promoted the EB-5 program during the Daugaard administration”
“There are certainly projects that make use of or plan to make use of EB-5 investments that GOED works with, and tries to encourage or promote those projects, but they have not been actively promoting the EB-5 program.”
Further, the Governor’s Office of Economic Development (GOED) cancelled the contract with SDRC two months ago and nine months early “for cause, effective immediately”. This termination of the contract, however, was not revealed to the public until a few days ago and only on request by media sources. When asked why South Dakota cancelled the contract public officials say they could not comment publicly, but the letter demands that Bollen and SDRC turn over all documents and control of the funds immediately.
It appears that they have ceased all marketing and promotion of South Dakota EB-5 projects.
In Part II we will discuss the relationship between the state, SDRC, agents, attorneys and the projects that Bollen, Benda and others promoted to investors.