Saturday, May 4, 2013

Attempt to defraud 261 Chinese investors in U.S. EB-5 Visa Program for proposed Chicago Convention Center

Three 5-Star hotels and a convention center on a 2.8-acre site next to Hooters?

It's been a while now that this blog has been cautioning real estate investors of the world, whether North American, European or Chinese, to exercise due diligence in making real estate investments in other countries. Foreign investors are always at an informational disadvantage and can be exploited by the unscrupulous. I also promote my own valuation and due diligence services with this blog and do not have a conflict of interest by receiving sales commissions or advertising dollars or operating as a subsidiary of an international brokerage operation. Objective information on international real estate investment is in short supply.

The EB-5 Visa program and the real estate development it is spawning

The Appraisal Institute recently held a local luncheon program that spoke of new opportunities coming to appraisers as a result of the EB-5 Visa Program, a program that grants U.S. residency to foreign nationals who invest at least $1 million (or just $500,000 in “targeted” areas of high unemployment, 50% above the national average) in an enterprise that creates or preserves at least 10 full-time permanent jobs for Americans other than the immigrant’s family members, for at least two years.

Some EB-5 applicants are seasoned entrepreneurs who come here with a business plan, but there are others, many of whom are from China, who seem to have more money than ideas and pool their money into "regional center" EB-5 schemes which operate much like private real estate syndications. USCIS (U.S. Citizenship and Immigration Services) recently reported that over 90% of EB-5 visa applicants are choosing the regional center route, and by far the largest number of applications come from China. Many of the new millionaires from China made their wealth through real estate flipping and are attracted to real estate schemes created by "regional centers". Not every regional center is well-conceived or honest, though, as the example below illustrates:

$156 million EB-5 fraud in Chicago

In February, the U.S. SEC (Securities and Exchange Commission) filed suit against A Chicago Convention Center, LLC and 29-year-old Anshoo Sethi, its managing partner, in an effort to protect more investors from fraud. In the Offering Memorandum supplied to investors were counterfeit documents and misrepresentations, including a bogus franchise agreement with Hyatt Hotels and a counterfeit letter from the Qatar Investment Authority promising $340 million in funding. The defendants are also accused of misrepresentation of franchise agreements with Starwood Hotels and Intercontinental Hotels, permits from the city of Chicago, and an appraisal of the 2.8-acre site near the airport for $177 million. 

The site, seen in the above photo, lies between a Hooters restaurant and a Spring Hill Suites hotel along the Kennedy Expressway leading to Chicago's O'Hare airport.  My first reaction is that the traffic infrastructure was a bit lean for such a large project with 995 rooms and 260,000 square feet of convention space. It is also located across from a residential neighborhood. In a situation like this I would call the city planners, but no one did in this case.

Mr. Sethi's appearance on CCTV (China Central Television)

Mr. Sethi also claimed to have 15 years of real estate development experience, which means he would have started developing real estate at the age of 14. He has also spent several years working as a pharmacy technician. There is no record that he or his family has ever developed anything. They simply owned the hotel that previously occupied the proposed construction site.

Each investor supplied $500,000 plus a $41,500 administrative fee which was purportedly placed in escrow to reimburse unsuccessful visa applicants, but more than 90% of these administrative funds have been taken out already, including $2.5 million transferred to Sethi's private Hong Kong bank account.

Willfully Blind Accomplices

Investors need to realize, too, that promoters of such schemes, whether American or Chinese, receive large sales commissions, and the dodgier the investment, the higher the commissions.  Chinese migration agencies have been offered up to $125,000 per customer, an obvious conflict of interest in advising would-be immigrant-investors, leading to serious competition among finders to reel in the Big Kahunas. Many American "finders" are failing to register with the SEC as broker-advisors.

There is a lot of money to be made in misleading Chinese investors, but who is there in China to protect them? Likewise, when they arrive in the U.S., they are heavily influenced by their handlers, and who is there to caution then?

Independent inquiries need to be made before making such investment decisions. Some of the real estate projects spawned by this visa program seem ill-conceived, and immigrants would be better off starting businesses that create needed things or services rather than unneeded buildings. If immigrants feel that they must invest in real estate development, they should get a second opinion from an objective advisor, such as American Property Research, for instance.

Update 2/22/17:  Anjoo Sethi has received a 3-year prison sentence for his fraud.


Anonymous said...

There is one further matter you could look into when asking why Chinese investors are so eager to enter into scams. What is the source of their money in China? Is it totally legitimate?

Vernon Martin, MSRE, CFE said...

That was my initial suspicion, too, but the two Chinese nationals I consulted, one who is now a U.S. immigration attorney, seem to think that the Chinese EB-5 investors being directed into U.S. real estate projects are most likely to have acquired their wealth through real estate investment in China, thus making them more comfortable with the prospect of real estate investment in the U.S. These real estate projects themselves might not be scams, other than the concept that they will produce enough jobs to earn the EB-5 visa for their Chinese investors.