EB-5 Fund USIF Sued For Racketeering By Representative Of Chinese Investors

A Chicago-based Chinese-American researcher named Xuejun Makhsous, also known as Zoe Ma, has opened a new battlefront in her war with the U.S. Immigration Fund, a company that bundles foreign money to be loaned to developers for U.S.-based projects.

Last year, USIF sued Makhsous for defamation in New York State Supreme Court. Now, Makhsous has filed a federal lawsuit in Illinois that accuses USIF and its sometime partner, Qiaowai — a Beijing-based company that rounds up investors in China — of conspiring and operating "a criminal enterprise" under the Racketeer Influenced and Corrupt Organizations Act, commonly referred to as a RICO suit.

RICO typically targets ongoing criminal organizations and has been used to prosecute Mafia cases. Makhsous claims that USIF and Qiaowai work together to defraud investors and circumvent Chinese and American securities law.

Makhsous, who speaks Mandarin, works with Chinese investors, helping them do due diligence on U.S. projects before they contribute $500K or more in hopes of getting green cards, as well as their money back, under the EB-5 visa program. USIF sued Makhsous last year for defamation after she convinced clients to pull investment from USIF’s funds that would be loaned out to build projects in Times Square. She filed a counterclaim in January. Those cases are still pending.

The RICO suit filed last week names as defendants USIF, its founder, Nicholas Mastroianni II, and eight other entities controlled by him. Qiaowai founder Ding Ying is also named, as are three entities controlled by her. These are huge players in the EB-5 industry: USIF has raised $2.9B in foreign money, and Qiaowai has reportedly recruited close to 80% of EB-5 investors.

“We vehemently deny any and all allegations put forth by Zoe Ma and her cohorts, which have no legal or factual basis," USIF said in a statement to Bisnow. "This is a sham complaint and a thinly veiled attempt to retaliate and move the narrative away from the pending N.Y. action against her for fraud and related causes of action.”

Makhsous is representing herself in the case. She said she is the rare person who is fluent in both Mandarin and English and understands the EB-5 program.

“Who else in the world, in the U.S., can [do this]?” she said. “God sent me here to the U.S. He needed somebody to speak up for the Chinese. Everyone else bullies them because they don’t speak English.”

Both suits concern a redeployment of investors’ capital from one Times Square project, 20 Times Square, into another, TSX Broadway.

USIF said that this was necessary to keep the capital “at risk,” per immigration rules. Makhsous believed that TSX was financially troubled and the redeployment was a bid to save it. She worked with some of the 70 investors who objected to the redeployment.

Makhsous claims that Chinese investors were led to believe that they were backing a five-year loan with a real estate development as collateral. But technically, they were purchasing limited partnership interests in a fund not secured by real estate.

"It's an interesting but novel argument," said Stephen Yale-Loehr, who teaches immigration law at Cornell University. "It remains for the court to decide whether it has validity." 

This is a bigger problem in the world of EB-5, Makhsous said. EB-5 fund promoters often sidestep scrutiny from the Securities and Exchange Commission by claiming they’re exempt from registering as investment companies. They often claim an exemption under the federal 1940 Investment Company Act.

Makhsous argues that provision only exempts entities that deal with “mortgages and other liens on and interests in real estate” and should not apply to EB-5 funds. She quoted USIF's own documents, which warned that it would “seek to structure the Company Loan so that is treated as a qualifying asset under the 1940. Nevertheless, there is a risk that the Company could be deemed to be an investment company, which would result in the dissolution of the Company."

The SEC has started to look at this type of maneuvering in recent fraud cases.

Makhsous alleges that in Times Square, Qiaowai and USIF duped the Chinese investors she worked with by misleading them about what the contracts contained. Reuters in 2017 examined Qiaoawi's marketing materials and found misrepresentations, which led to Sen. Chuck Grassley calling for an investigation. 

When her clients objected to the redeployment and withdrew their money, Makshous claims they were “coerced” into giving up administrative fees and interest income — about $88K per person that instead went to Ding and Qiaowai.

Makhsous wrote that because of this, she did not get paid her fees — $10K she expected from each of her 12 clients. This month, Mastroianni told its Chinese investors that USIF would not deal with Makhsous as their representative.

In December, developers of the TSX project received the EB-5 funds — in the form of a USIF $494.5M mezzanine loan — and a $1.1B loan from Goldman Sachs. Makhsous said that TSX Broadway's debt structure is set up to disadvantage the mezzanine lenders.

"[It's] a scheme to rob Chinese EB-5 investors," she said.

A spokesperson for TSX Broadway declined to comment. Qiaowai could not be reached for comment. 

A spokesperson for U.S. Customs and Immigration Services, which oversees the EB-5 program, declined to comment on specific cases, but wrote in an email to Bisnow that new controls against fraud include site visits to EB-5-funded projects, expanded security checks on regional centers, and cooperation with the Financial Crimes Enforcement Network, the SEC, the FBI and ICE.