Defamation Lawsuit Over $2.5B Times Square Project Pits Billion-Dollar EB-5 Fund Against 2 Feisty Critics
For the past decade, some of America's biggest real estate projects have been built with hundreds of millions of dollars borrowed from foreign investors. The EB-5 visa program encourages foreigners to fork over $500K a pop and be rewarded with green cards for their whole families. Intermediaries bundle the funds and loan them out to developers, pocketing fees along the way.
For as long as it has existed, the EB-5 program has faced criticism and nearly annual threats of cancellation because of its inherent flaw: The program is highly susceptible to abuse and fraud.
"Fraud risks in the EB-5 program are constantly evolving," the Government Accountability Office wrote in a 2015 report on the program. Two years earlier, the Securities and Exchange Commission had to take emergency action to curtail fraud in the program. U.S. Citizens and Immigration Services officials "continually identify new fraud schemes," according to the GAO.
Last year, one of the biggest money-raisers in the business, the U.S. Immigration Fund, alleged that a "desperate, bankrupt" Chicago attorney named Doug Litowitz and a Chinese-American woman named Zoe Ma, engaged in "wonton [sic] fraudulent behavior," defaming USIF's projects and scaring off potential investors in order to earn legal fees. USIF is suing them for $23M.
Litowitz and Ma contend that USIF is the fraudulent one. They told Bisnow the case illuminates how Wall Street players exploit unsophisticated foreigners for profit, and that USIF is using the courts to bully and embarrass them. The two are fighting back in a legal saga that winds from Hong Kong to Chicago, right through two multibillion-dollar developments in Times Square.
The case is tied to New York's 20 Times Square — a project that includes a 452-room Marriott Edition hotel, 76K SF of retail and an 18K SF LED billboard — and TSX Broadway, a 46-story tower that encompasses the Palace Theater, 669 hotel rooms, 75K SF of retail and another 18K SF LED sign.
“They are sewer people,” Litowitz said of USIF. He has asked the Manhattan Supreme Court to dismiss the lawsuit.
Ma, whose full name is Xuejun Makhsous, vowed that the lawsuit would backfire and expose USIF's misdeeds. She has filed a counterclaim, as well as a whistleblower complaint with the SEC. She said she would expose "the grandfather of EB-5 fraud" in the process.
"[USIF] just sued the wrong person, because I have a lot of evidence,” she told Bisnow.
USIF says that it has operated legally and that the EB-5 program has been a success.
"[USIF] is the unquestioned leader in immigrant investor programs," said Richard Haddad, USIF's attorney. "Every one of its projects has complied with the immigration regulations, tens of thousands of American jobs were created, and thousands of investors are achieving their immigration dreams.”
Ma wrote in court documents that the lawsuit portrays "USIF as Santa Clause [sic] while in fact USIF is Mafia with iron fist."
The EB-5 Program
The EB-5 Immigrant Investor Program began in 1990, and lets qualified foreign investors obtain U.S. green cards and eventually citizenship — for themselves, their spouses and their single children younger than 21 — if they invest $1M in a new commercial enterprise that creates at least 10 jobs. The investment amount drops to $500K in certain “targeted employment areas,” or TEAs, defined as rural areas or places where the unemployment rate is at least 150% of the national average.
The EB-5 program, administered through U.S. Citizenship and Immigration Services, was intended as a win-win-win: Businesses could borrow capital more easily and cheaply than from a bank. Regular Americans would get jobs. Foreigners could get citizenship legally and, ideally, get their funds back plus interest.
Stephen Yale-Loehr, a professor of immigration law at Cornell Law School, explained that it was established as a part of a bigger overhaul of legal immigration in the early 1990s, "in part because Australia and Canada had similar programs." It was enacted as a pilot program, and still needs to be periodically reauthorized.
The process from investment to green card takes years. An investor files a petition to be deemed an alien entrepreneur and waits for approval, then asks for conditional permanent residency (CPR) and waits for that to be approved.
The investor can live in the U.S. for 21 to 24 months conditionally, after which time she would file a petition proving she had created jobs and kept funds at risk, and ask for the conditions to be removed and get permanent residency in the form of a green card. About five years after that, she could apply for citizenship.
Architects of the program, conscious of being seen as offering visas for sale to the rich (a criticism that persisted anyway), built in a requirement that stipulates the project's funds remain "at risk" while the immigrant investor goes through the two years of CPR in the U.S. Typically, deals would be structured for the foreign investors to get their money back in five to seven years.
All over the world, people moved to make the most of the program. In the U.S., privately run “regional centers” like USIF formed to pool investors’ capital, sometimes from hundreds of people, and facilitate the loans. Maps were gerrymandered so that even affluent areas qualified as TEAs. Regulators were generous and let EB-5 regional centers count jobs that had been created both directly and indirectly toward applicants’ visas.
Abroad, new industries sprang up to connect investors with U.S. projects. Developers would fly to China to promote their projects at networking events. Videos on YouTube show drummers firing up the crowd at a 2013 summit in Shanghai.
At a 2016 event, USIF founder Nicholas Mastroianni was joined by former New York Gov. George Pataki, who offered "calming messages" to the Chinese worried about changing visa rules as Donald Trump assumed office as president.
Chinese law allows citizens to move only $50K out of the country at a time, according to Bloomberg, so investors enlist friends, family and even strangers to make a series of transfers to invest the required $500K. Deals that match Chinese investors with American projects are massaged by intermediaries called "migration agents" who earn five-figure fees for every investor who signs on (or "subscribes"), plus a percentage of the interest earned on each investment.
Fraud has dogged the EB-5 program. Sometimes developers would mislead foreign investors with confusing documents or omissions, or take the money and simply never build the project they’d advertised. In 2013, the SEC warned that fraudsters may use layers of shell companies managed by the same individuals to control all aspects of a project, which can lead to conflicts of interest.
In the May 2015 GAO report, USCIS had told the watchdog group that it was preparing a new system to better track fraud, but the GAO found "the system is nearly four years delayed."
"In the meantime, USCIS does not have a strategy for collecting additional information, including some information on businesses supported by EB-5 Program investments, that officials noted could help mitigate fraud," the GAO report found.
In 2016, USCIS Immigrant Investor Program Chief Nick Colucci told EB-5 stakeholders in Miami that "due diligence, monitoring and oversight are the obligations of the designated regional center entity," such as USIF. Colucci said when USCIS is made aware of regional center violations, it may issue a termination notice.
"The bad news about improprieties in the EB-5 Program can overshadow good news about creating jobs and putting capital into our communities that really need it," Colucci said in 2016. "And that’s not just a shame, in some of these cases, it’s a crime."
In the biggest EB-5 fraud to date, developers who planned to expand the Jay Peak ski resort in Vermont commingled investor funds in what investigators say amounted to a Ponzi scheme. Litowitz outlined such flaws in an article titled "The EB-5 Program Is Legally Defective And Has Become A Scam."
The EB-5 program started off quietly, but boomed in popularity following the 2008 housing crisis, when banks tightened lending. Now, the U.S. gives out the program’s allotted 10,000 visas every year, and because the allotment is divvied up among countries, the wait for Chinese investors, who account for about 85% of applicants, to receive their visas is about 15 years.
Some groups of investors, dismayed by both the fraud and the wait times, are suing to get out of deals. With critics on multiple sides calling for reform, the EB-5 program has limped along, continually getting reauthorized by Congress for months at a time and leaving uncertainty as to its future. It was most recently extended until Sept. 30 as part of the broader spending bill President Donald Trump signed last week.
Despite the program’s flaws, titans such as Bill Gates and Warren Buffett support it. An industry trade group called IIUSA, which stands for “Invest In the USA,” says the program resulted in more than $37B contributed to the U.S. gross domestic product between 2010 and 2015, creating 276,000 jobs during that time.
The Rogue Lawyer
During the eight years he taught at various law schools, Litowitz wrote a book about why lawyers are miserable and dashed off the occasional article, such as “Are Corporations Evil?” and “Investing: A Pretentious Word for Gambling?”
Despite the anti-capitalist bent, in 2005, Litowitz found himself needing more money than a visiting professor’s salary allowed, so he went to work as in-house counsel for his brother’s $14B Chicago-based hedge fund, Magnetar Capital. He told a newspaper reporter that the career move was “a contradiction that I hope to be able to resolve someday.”
A decade later, a cousin recruited him to work in Hong Kong, Litowitz said. Litowitz’s wife is Taiwanese, and he had learned to speak Mandarin at an intermediate level.
“I had never heard of EB-5,” said Litowitz, now 55. “I thought, ‘This is nice. People get their green cards.’”
In Hong Kong, Litowitz said he managed an $80M EB-5 fund run by Brook Lenfest, chairman and CEO at NetCarrier Inc., who is also a real estate investor and a well-known philanthropist in Philadelphia.
"They had sent me to China full of lies,” Litowitz said.
He claims that, as manager of Lenfest’s $80M EB-5 fund — which is being used to build two hotels in Philadelphia — he was asked to make misrepresentations to the Chinese about particulars of the financing, such as whether other loans were already in place.
Litowitz said he soured on the work. Wait times for green cards were growing. He doubted investors could fully understand 300-page contracts written in English. He said he wanted to hire an auditor to provide transparency to the Chinese, but Lenfest objected, so he quit.
Reached by phone, Lenfest disputed Litowitz's account of their split.
“None of that’s accurate," Lenfest told Bisnow. "He’s a lawyer. He knew the exact structure of the investment raised in China from the beginning. Later on, he acted like he had amnesia about the structure. I really can’t say anything good about him.”
Lenfest said his fund used a standard EB-5 structure with “nothing untoward or uncommon about it.” The hotel project is being built and investors will be repaid, he said. He sympathizes with Chinese facing long waits for visas, but said the government could solve that by making more visas available.
“I encouraged [Litowitz] to resign,” Lenfest said.
Litowitz then went to work for the Hong Kong offices of SBI Securities, an offshoot of SoftBank, and then global advisory firm Duff & Phelps, but hated the work and admittedly had “personal issues.” USIF says he was fired from both jobs.
“I realized the Chinese were being ripped off,” Litowitz said. “What they need is their own lawyer.”
The Thorn In The Side
In China in 1989, thousands of students gathered for weeks in Tiananmen Square to protest the Communist government and call for democracy, facing off against soldiers with tanks and guns. Ma, now 49, said she was there.
"Fighting for justice runs in my blood,” she told Bisnow.
Ma said she came to America from China as a student in 1994. She became a real estate agent and mortgage broker. She said she used the EB-5 program to team up with a few Chinese investors and open two senior living facilities in Wisconsin.
That work led her to discussion forums on an app, WeChat, where Chinese involved in EB-5 projects would solicit advice and swap horror stories, all in Mandarin. From Chicago, Ma warned of deals that seemed shady, including a competitor’s senior home.
For this, her company was sued for libel in California, and although some people in that case testified that she had an “online reputation as an unreliable source of information about EB-5 projects,” a federal judge sided with her. Wisconsin officials cited her senior homes for violations; she fired back with a lawsuit alleging the state had discriminated against her; that case is ongoing.
Meanwhile, she took on part-time work for a Hong Kong-based company called Reviv-East, performing due diligence on U.S. projects for the Chinese.
In 2017, one Chinese woman had asked Ma for help getting out of her subscription with Lenfest’s fund. Ma helped prepare a demand letter alleging the fund should have been required to register with the SEC as an investment company, and thus be subject to greater scrutiny, but had wrongfully claimed an exemption.
The demand reached Litowitz, who by then had left Lenfest’s fund. He wrote back, explaining, “I could no longer trust that the Chinese were being protected, and that was very upsetting to me … I am happy to talk and to help your client the best I can.”
They began a loose working relationship, with Ma referring Chinese clients to Litowitz, and doing translations and research for him.
This is our argument: EB-5 funds are unregistered securities, the brokers are unregistered, and the regional center does not give material information about the kickback to migration agent. These failures give you a ‘rescission’ right to declare investment void, get money back.— Doug Litowitz (@DougLitowitz) October 9, 2018
The Money-Raiser In The Middle
USIF, whose offices are in Jupiter, Florida, has helped put together funding for some of the biggest projects in America: the $6B Atlantic Yards, now Pacific Park, in New York, and renovations of Nassau Coliseum and the Brooklyn Public Library.
In Manhattan, USIF is currently raising money for two other Manhattan projects: a two-tower project designed by Bjarke Ingels at 76 11th Ave. and a LEED-certified Class-A office building at 29th Street and Fifth Avenue.
A company website says that, all together, USIF has raised $2.9B in EB-5 capital in 25 funds. In court documents, USIF says it has helped 6,000 clients.
But the regional center has also been dogged by some unflattering reports: A 2014 article in Fortune magazine explored founder Mastroianni’s "tangled past," which included bankruptcy, four felony arrests for drugs and various legal challenges over his business dealings.
USIF made mainstream news in 2017, when it was working with the family of White House senior adviser Jared Kushner and his sister played up her family connections while recruiting Chinese investors, drawing criticism that access to the White House was for sale.
Last year, a group of Chinese investors filed a lawsuit against USIF over the center's Harbourside Place project in Florida, alleging that the deal structure positioned entities controlled by Mastroianni as both the borrower and the lender, and was set up to disadvantage the Chinese — an alleged $99.9M fraud.
USIF fired back that "the allegations are baseless, factually incorrect and totally ignore the economics and legal structure of the Harbourside investment." USIF pointed out that the majority of the investors in that fund did not sue.
The Parties Clash
With help from the well-known Chinese recruiting agency Qiaowai, USIF raised $200M from 400 Chinese investors for what it called “the 701 Project.” This money would eventually be pooled with other funds to build 20 Times Square. The EB-5 loan for the 701 project was supposed to be payable to the Chinese in May 2020, according to court documents.
USIF was also raising funds for another project across the street, TSX Broadway. The $2.5B project would replace a DoubleTree hotel with a major mixed-use project encompassing the Palace Theater, luxury hotel rooms, 170K SF of retail and another huge LED sign. USIF called this “the 702 Project.”
“The two projects have been planned to complement each other in a way that establishes this corner of Times Square as the new 'must-see' location in New York City,” a USIF press release stated.
In February 2018, when construction on 20 Times Square was almost complete, "the developer informed [USIF] that it had decided to sell the 701 project and prepay the 701 loan,” USIF’s lawsuit against Litowitz and Ma reads.
USIF moved to reinvest Chinese investors’ funds into the 702 Project — redeployment was necessary, USIF contended, because of the “at-risk” requirement. But USIF alleges that Litowitz and Ma “came up with a plan to make money by nefarious means” — by steering Chinese clients away from the redeployment, arranging their refunds and charging them fees.
Ma said she got suspicious, believing that the redeployment was a bid to “save” the TSX project. She said USIF's fund for it was undersubscribed — according to USIF's website, the project is seeking 600 investors and still open for investment — and the project, she wrote in court documents, “had failed to obtain a construction loan from JP Morgan for 2 years," which she says she deduced while doing due diligence for a separate client.
Litowitz, who had returned to Chicago in 2017, would call USIF, cursing and demanding clients’ money back. Ma wrote in Mandarin on WeChat that TSX Broadway would be a “bloodbath” for investors and that it was "a shitty project,” according to USIF's translations in court documents.
In total, about 70 of the Chinese from the 701 project objected to the redeployment; some hired the firm Reid & Wise to stop the maneuver. Others hired Miami attorney Ronnie Fieldstone. Those attorneys declined to comment for this story.
Ten hired Litowitz to represent them.
Among the parties, there were disagreements over whether to sign revised agreements and whether withdrawing investors would have to wait for the whole group to get their green cards before getting refunds.
Yale-Loehr, the Cornell professor, says redeployment has become a contentious issue as processing times for visas have grown. Contracts can be structured in various ways, he said — with all the money from a group being moved together at one time, or in tranches.
USCIS' EB-5 chief, Colucci, said in 2016 that moving funds between projects improperly is one of the program's main potential areas for fraud.
"Sometimes, the improper movement of money can signal the beginnings of a Ponzi-like scheme," Colucci said. "This harms not only investors and communities but also, I would add, could jeopardize the very existence of the program."
USCIS did not respond to requests for comment for this story as of press time.
As the 701 investors worked out a settlement in New York courts, Litowitz was shown confidential documents deemed for “attorney’s eyes only.” USIF saw in chat rooms that Ma mentioned details gleaned from the “eyes-only” documents. Believing Litowitz had shared the documents with her, USIF’s lawyers sent her a cease-and-desist letter.
When Ma told Litowitz, he advised her to write back “and say, ‘I don’t know how I can hurt USIF’s reputation because it is lower than whale shit. You should worry about ripping off Chinese investors instead of your firm’s reputation, which is about the same as a whore in church. Good luck suing me for defamation. I’m in Chicago. Come sue me here if you have the balls. Otherwise shut up.’”
Ma forwarded the email to USIF.
Using that comment to argue Litowitz and Ma acted with malice, USIF filed suit against them in New York in October. The complaint alleges fraud, defamation, breach of contract and tortious interference with a business relationship. USIF alleges the pair also violated securities law by acting as investment advisers.
The complaint includes Litowitz's recent bankruptcy filing as an exhibit, showing that he owned little beyond $63 in a checking account, and that he had fraudulently run up his credit card right before filing. It said Ma's Wisconsin court case had depleted her of her life savings. USIF also filed a complaint against Litowitz with the Illinois bar.
Litowitz and Ma each contend that USIF has the facts wrong: Ma never lived in Hong Kong, they never started a company there, and Ma obtained the eyes-only document from a worried Chinese investor, not Litowitz.
They are each representing themselves in court. They have filed separate motions asking that the case be thrown out. The judge's decision is pending.
“These are the dumbest people you can imagine,” Litowitz said.
USIF Regional Center sued me for damaging their great reputation (lol), then they get sued for defrauding hundreds of Chinese. https://t.co/AZlLnzHDgT— Doug Litowitz (@DougLitowitz) October 16, 2018
Since 2017, Litowitz has published the book Franz Kafka’s Indictment of Modern Law and represented Chinese trying to get out of other EB-5 projects, including funds used toward the Home Plate Center office complex in Seattle and Century Plaza in Los Angeles.
Last fall, Litowitz and Ma registered for a conference held in Chicago by the pro-EB-5 group IIUSA, where Litowitz tweeted that he intended to confront USCIS officials there and "personally request that certain Regional Centers be shut down by USCIS for fraud and securities violations."
He was denied entry to the conference. Ma protested by herself on a street outside, holding up a sign that said "No Redeployment, No CPR" — meaning that she objected to investors' funds being held until they completed their conditional permanent residency. IIUSA's McKenzie Penton, director of events & business development, confirmed the incident and said their registration fees were refunded.
“Doug’s holding himself out as some sort of protector, or savior, to Chinese investors," Lenfest said. "Doug’s trying to make himself a name, or profit from this somehow.”
USIF’s attorney, Haddad, maintains that “the complaint shows how the signed agreement was breached and how these successful projects were defamed — and USIF is committed to enforce its rights under those agreements, for its benefit and the many happy investors.”
The Edition Hotel is scheduled to open this month, and TSX Broadway is slated to wrap up construction in 2021. A spokesperson for TSX declined to comment.
Ma and Litowitz have since had a falling out, which USIF's attorney has pointed to as more evidence that their claims are dubious. She said some Chinese clients had retained him to sue USIF over another project, 855 Avenue of the Americas in New York. Litowitz ultimately advised them not to sue. Ma said he “chickened out.” She also never liked his cursing.
Ma in January filed a counterclaim against USIF. Her filings say the Chinese investors in 701 were misled from the beginning, with omissions and "doctored" agreements. She accuses USIF of malicious prosecution and defamation. She is asking for a $50M award on each count.
Ma says she updated her whistleblower complaint with the SEC. In court documents, both Litowitz and Ma alluded to working with investigators from the SEC and the FBI. Last year, a whistleblower won $14.7M for providing a tip in a successful EB-5 fraud investigation in Chicago.
Ma — whose Hong Kong employer recently shut down because of the litigation (it, too, is named as a defendant) — would welcome such an award, but says she does this work out of righteousness.
"I'm the Moses of EB-5 fraud," she said. "Leading the Chinese out of Egypt."
CORRECTION, FEB. 20, 5 P.M. ET: A previous version of this story misspelled the first name of Xuejun Makhsous. Also, she is 49, not 55. This story has been updated.