SEC PROBE OF FOREIGN VISAS ROILS VIRGINIA GOVERNOR RACE

SEC PROBE OF FOREIGN VISAS ROILS VIRGINIA GOVERNOR RACE

By Julie Bykowicz and Joshua Gallu August 09, 2013 Bloomberg

The U.S. Securities and Exchange Commission and other government agencies are conducting a broad probe of “potential security and financial risks” in a foreign visa program used to promote job growth, according to a letter sent to the Senate yesterday.

The investigations are becoming an issue in the Virginia governor’s race, where Terry McAuliffe, a Democratic fundraiser and confidant of Bill and Hillary Clinton, partnered in 2009 with a Chinese businessman in a startup company, GreenTech Automotive Inc., and worked with Anthony Rodham, the former first lady’s brother, to secure financing from Chinese investors.

In December, McAuliffe, 56, resigned from GreenTech to devote full time to his campaign. He left behind a company that employs fewer people than promised, hasn’t produce many cars and is drawing government scrutiny for promises made in its pitch to prospective foreign backers -- details that Republican candidate Ken Cuccinelli, himself fending off criticism over ties to a developer under scrutiny, has repeatedly raised on the campaign trail.

A closer look at GreenTech illustrates what some analysts and government investigators say are broader flaws in a two-decade-old program that gives foreign investors green cards in exchange for $500,000 investments that create or preserve at least 10 American jobs. There are 10,000 so-called “EB-5” visas available each year.

Program Skepticism “I’m very skeptical about this program,” said David Martin, a law professor at the University of Virginia who has served as general counsel to the Immigration and Naturalization Service and as a deputy counselor to the Department of Homeland Security, in the Clinton and Obama administrations. “It’s doubtful how much these visas have contributed to jobs and the overall economy. And has it been worth all of the effort and complications?”

Federal agencies including the SEC and U.S. Citizenship and Immigration Services formed a team last year to “examine potential security and financial risks associated with the EB-5 program,” according to a letter dated yesterday from the SEC to Senator Charles Grassley, an Iowa Republican who has been asking questions about the visas.

In addition, the SEC is conducting its own review. In February, it filed a securities fraud claim against a Chicago man seeking foreign money to build a “green” hotel, and in July the commission sent a document subpoena to GreenTech, the company confirmed in a statement. Other firms are also under scrutiny and could face fines and other civil penalties.

Homeland Investigation The Department of Homeland Security’s inspector general also has been auditing the EB-5 program for a year, according to an e-mail from the inspector’s office to Grassley, which the lawmaker made public.

“The EB-5 program was created to benefit American communities through investment and job creation, and with a fragile economy, the program has been a tool that could increase economic activity,” Grassley said in a statement. “But when whistle-blowers come forward with documents and allegations of political favoritism and national security concerns, Congress needs to take another look at the program and ask questions with a new sense of urgency.”

McAuliffe, who in an Aug. 3 statement said he was unaware of the SEC inquiry, has more than $250,000 invested in the company, according to a financial-disclosure form he filed as a gubernatorial candidate.

Startup Troubles “Like every startup during the recession,” Josh Schwerin, a McAuliffe spokesman, said in an e-mail, “the company faced headwinds: Manufacturing isn’t easy, and manufacturing a new kind of car is even harder.”

The foreign investor visas have powerful allies in Congress, including Senator Patrick Leahy, a Vermont Democrat who heads the Judiciary Committee. Vermont has made use of the program to help build two ski resorts, steering the money through a state-run broker. In a May Senate hearing, he highlighted the program as an “investment in America, the power of immigration to make our economy stronger.”

The program’s detractors say an examination of it is long overdue.

“I’m not surprised the SEC is investigating GreenTech because I’m not surprised the SEC would investigate any EB-5 project,” said David North, a fellow at the Center for Immigration Studies, a Washington group that favors reducing the number of immigrants in the U.S. “It’s inherently a program that deals with the second- and third-rate investments -- just the sort of thing that would naturally attract the attention of the SEC.”

Visa Origins The visas were created decades ago during a recession. Grappling with an even worse economic collapse, President Barack Obama’s administration sought to make more use of them to spur growth and job creation when cash-strapped American investors were on the sidelines.

Its initial champion was Alan Simpson, a now-retired Republican senator from Wyoming , who demanded that 10,000 investor visas be included in the 1990 revision of immigration laws, according to an Associated Press article at the time. Dale Bumpers, a Democratic senator from Arkansas, unsuccessfully tried to defeat the visa provision, calling it “a toll road” into the country.

The immigration law went into effect on Oct. 1, 1991. In the course of the next two decades, Congress tweaked the program several times, generally with an aim of making the visas easier to get rather than increasing scrutiny of the jobs claims associated with them.

Regional Centers In broad strokes, the program works like this: Companies seeking to finance projects with foreign cash typically are required to work with a “regional center.” Those centers help match foreign investors with development projects and then prepare paperwork to forward to the federal government for visa approval. Sometimes these centers are run by government entities, as in Vermont. Other times, as in the case of GreenTech and the Gulf Coast Funds Management regional center, which is Rodham’s employer, they are set up by the project itself and run privately.

Once a commitment of $500,000 is made to a project, the investors -- and their spouses and children -- qualify for a two-year green card after undergoing homeland security checks and proving they haven’t obtained their money illegally.

After two years, the investor -- usually working with the regional center -- can petition the government to remove the conditional status, becoming a permanent resident. At that point, the Citizenship and Immigration Services, a DHS agency, must certify that 10 jobs have been created or saved.

Job Creation The Association to Invest in USA, a trade group for regional centers, says in an economic-impact report provided to Bloomberg that “spending associated with EB-5 investors contributed $2.65 billion to the U.S. gross domestic product and supported over 33,000 jobs during 2010-2011.”

More than half of those jobs are “indirect” or “induced,” meaning the projects aren’t directly employing them. Critics say those fluid definitions for job creation, approved in 2003 by Congress, make it easier for each project to reach its 10-jobs-per-investor quota.

The program drew 6,106 foreign investor applicants in fiscal year 2012, eight times as many as the year before the recession began, 2007, according to Citizenship and Immigration Services data. In 2007, there were about two dozen regional centers to help process these applicants; that list has grown to more than 300 across the country.

GreenTech Founding Among the companies counted in that surge of growth was GreenTech, which was formed in the aftermath of a legal dispute between two Chinese businessmen looking to break into the green-car market by attracting foreign investors through the EB-5 program.

McAuliffe joined Xiaolin “Charles” Wang as a co-founder in late 2009. Within a year, the former head of the Democratic National Committee was showing off the company’s Day-Glo orange golf-cart-sized MyCar to Bill Clinton and a flock of reporters and photographers at the former president’s annual Clinton Global Initiative meeting in New York.

To fund the project, McAuliffe worked with Rodham. Gulf Coast, which lists on its website Rodham as chief executive officer and president, serves as GreenTech’s regional center. Schwerin said McAuliffe recommended Rodham for the job and Gulf Coast made its own hiring decision.

Phone calls and e-mails to GreenTech and Gulf Coast, in Mississippi and in McLean, Virginia, where the two companies are based, weren’t returned.

MyCars Promises McAuliffe, speaking at the Clinton Global Initiative in September 2010, pledged to make the first 100,000 MyCars available to consumers for $10,000 apiece. He also said as many as 5,000 workers would be hired to produce the vehicles, which reach a top speed of 45 miles per hour and are intended for neighborhood use.

Meanwhile, Rodham pursued foreign investor funding, documents shared by Grassley’s office show. McAuliffe played no role in recruiting foreign investors, Schwerin said. In 2011, there were at least 64 GreenTech investor applicants awaiting approval by immigration officials, internal agency e-mails show.

In early 2012, after getting referrals of possible fraud from immigration authorities, the SEC created an informal working group to investigate companies that might be luring foreign investors into fraudulent investment schemes, according to a person with direct knowledge of the complaints who asked not to be named because the matter isn’t public.

Fraud Tips Most of the companies using the EB-5 program aren’t registered with the SEC, so the agency has relied on immigration authorities to flag cases of possible securities fraud, the person said.

GreenTech and Gulf Coast received subpoenas from investigators seeking a range of documents and bank records. The SEC raised concern about a GreenTech promissory note posted online that appeared to guarantee investors’ principal, according to the documents posted online by Grassley. Pledging to return investors’ money if their visa application is denied isn’t consistent with one of the EB-5 program’s requirements: Project backers must bear some risk.

The note says GreenTech would invest the person’s $500,000 for a period of five years once the immigration petition has been approved. Alternatively, the note says, GreenTech “promises to purchase back” the $500,000 in stock bought by the investor if the company fails to go public in five years.

Favored Treatment In addition to the SEC inquiry, Grassley has raised questions about whether Alejandro Mayorkas, director of Citizenship and Immigration Services, gave preferential treatment to McAuliffe and Rodham.

“We absolutely gave special treatment to GreenTech at the directive of D1,” an unnamed immigration agency employee wrote in an e-mail Grassley released. The e-mail said “D1,” which Grassley said is a reference to Mayorkas, “was working directly” with an attorney for Gulf Coast.

Mayorkas, a nominee to become deputy director of Homeland Security, said in a Senate hearing last month that GreenTech was treated no differently than any other EB-5 project.

In general, Mayorkas said the “EB-5 program is indeed controversial, and it is extraordinarily complex.” He said he added economists and business analysts to the immigration agency to help vet the projects and the jobs claims they ultimately submitted to remove visa conditions.

From the inception of the program through the end of the last fiscal year, 23,599 investors have asked for green cards. The government gave conditional approval to about half of them, and just 4,843 have been granted permanent residency, according to a document provided to Bloomberg by the Citizenship and Immigration Services agency.

Economic Impact Based on those numbers, the agency calculates that the program created at least 49,000 jobs over the years and pumped at least $6.8 billion in foreign capital into the country.

A GreenTech press release last week reported the company employs more than 80 workers and is still building its main production plant in Tunica, Mississippi . The company has a smaller facility in nearby Horn Lake.

Marshall Molen, a professor of vehicle design at Mississippi State University, said he’d toured the Horn Lake site several months ago and spotted a handful of employees and “maybe two” MyCar vehicles being assembled.

“Are they alive?” the professor asked when a reporter called with questions about GreenTech. “I haven’t heard anyone out here mention them in quite some time.”

To contact the reporters on this story: Julie Bykowicz in Washington at jbykowicz@bloomberg.net ; Joshua Gallu in Washington at jgallu@bloomberg.net

To contact the editor responsible for this story: Jeanne Cummings at jcummings21@bloomberg.net