Thirty-five Chinese investors who lost $18.55 million in a failed South Dakota economic development project will take their fight to the state Supreme Court next week, adding another chapter to the state’s controversial participation in a federal immigrant-investor program known as EB-5.
The investors want their money back and are suing several entities for it: the state of South Dakota and two state departments; a man named Joop Bollen, of Aberdeen, who formerly managed the state’s immigrant-investor center under a contract with the state; and two of Bollen’s business entities.
The state won a dismissal from the lawsuit July 18 in a decision by Sixth Circuit Court Judge John Brown, who is based in Pierre. But the Chinese investors, who want to keep the state in the lawsuit, have asked the state Supreme Court to consider an appeal of the decision before the lawsuit is resolved. The high court is scheduled to consider the appeal request Sept. 7.
Aaron Scheibe, deputy commissioner of the South Dakota Governor’s Office of Economic Development, issued a written statement to the Journal in response to questions about the state’s dismissal.
“The State believes the judge’s decision was firmly based in the law and opposes the appeal,” Scheibe wrote.
The lawsuit, which dates to 2015, stems from a long-running and multifaceted scandal surrounding South Dakota’s participation in the federal government’s EB-5 program. The scandal emerged into public view in 2013 following the death of Richard Benda, a former state official whose death by shotgun — which was ruled a suicide — happened while he was under investigation for an alleged theft of state grant money that was intended for an EB-5 project.
The EB-5 program is for foreigners who invest at least $500,000 in a U.S.-based economic development project that creates at least 10 jobs. Qualifying applicants are issued an employment-based, fifth-preference visa — or “EB-5” for short — to enter the country, followed by a permanent-residency green card.
Each paid $530,000
The Chinese investors put their money in an EB-5 investment vehicle called SDIF Limited Partnership 6, or LP6, which was set up by Bollen to help finance the construction and operation of the Northern Beef Packers plant in Aberdeen (the same plant to which the state grant money allegedly diverted by Benda was supposed to go). Beginning in May 2010, according to their lawsuit, the investors each sank $500,000 into the project. They also paid $30,000 apiece in fees and expenses.
The beef processing plant was eventually built and put into operation, but it went bankrupt in 2013 and the 35 Chinese investors lost their entire investment, according to their lawsuit. The beef plant was eventually sold and reopened by new owners under the name DemKota Ranch Beef.
The recent dismissal decision by Judge Brown applied only to the state-government defendants in the lawsuit, leaving Bollen and his business entities as remaining defendants. Bollen, meanwhile, is trying to force a Chinese man, Henry Zou, and the Henry Zou Global Consulting Group — which helped recruit the investors — into the case as third-party defendants.
The Chinese investors allege they were defrauded by state government and by Bollen through intentional or reckless misrepresentations and omissions in the beef plant's project documents.
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The lawsuit alleges, for example, that the Chinese investors were falsely led to believe that the beef plant was substantially complete at the time of their investment, and that the plant would begin operating and generating revenue when they handed over their money.
The lawsuit also alleges that information was omitted from project documents, including the failure of an effort to sell tax-increment financing bonds for the project, the existence of liens against the project and unpaid property taxes owed by the project, and the need for at least $30 million in additional financing to put the plant into operation.
At issue in the appeal request is whether state government can be held liable for losses suffered by the Chinese investors. Brown, in his July 18 memorandum decision, wrote that claims against state government in the lawsuit are barred by the state’s right of sovereign immunity, which he defined as the right of public entities to be free from liability for tort claims unless waived by legislative enactment.
The Chinese investors and their attorney, Steven Sandven, of Beresford — who did not respond to an email or phone message from the Journal — have argued in part that sovereign immunity does not apply to commercial enterprises such as South Dakota’s effort to recruit investors for EB-5 projects.
Other pending EB-5 matters
Even if the state's sovereign immunity is upheld, it will not be the end of its involvement in the EB-5 scandal.
In other EB-5 matters, the state is defending itself against an effort by the U.S. Citizenship and Immigration Services to terminate South Dakota’s EB-5 regional center. The termination proceedings began in 2015 because of alleged improprieties in the administration of the EB-5 program in South Dakota.
The state, which cut ties with Bollen in 2013, appealed the termination. The Administrative Appeals Office of the USCIS withdrew the termination in March and remanded it for further review. Tony Venhuizen, chief of staff to Gov. Dennis Daugaard, said last week that the state does not yet know the outcome of the review. A USCIS spokesman told the Journal this week that the agency is "unable to comment on active adjudications."
Another ongoing EB-5 legal fight is playing out between private parties in federal court. A company called Tentexkota is battling with Bollen and his business entities over $32.5 million that his SDIF Limited Partnership 2 raised from EB-5 investors and loaned to Tentexkota, for the conversion of the historic Homestake slime plant into the Deadwood Mountain Grand hotel-and-gaming resort in Deadwood.
Bollen is seeking repayment of the loan, but members of Tentexkota want their personal loan guarantees voided. They claim Bollen duped them into signing the guarantees by falsely claiming they were a requirement of the EB-5 program.
Various other legal matters stemming from the EB-5 scandal have been resolved during the past several years. In February, for example, Bollen pleaded guilty to unauthorized disposal of personal property subject to a security interest, and he was sentenced to a $2,000 fine and two years of probation.
The charge arose from his diversion of about $1.2 million from an account that was created to protect the state against EB-5 costs and liability. He eventually put most of the money back into the account — all but $167,000 was accounted for — but he also used some of the money to buy Egyptian artifacts.