Sec. & Exch. Comm'n v. Chen, CASE NO. C17-0405JLR

• Decision Date: 15 February 2019
• Docket Number: CASE NO. C17-0405JLR
• Court: U.S. District Court — Western District of Washington
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. ANDY SHIN FONG CHEN, et al., Defendants, and NORTH AMERICAN FOREIGN TRADE ZONE INDUSTRIES, LLC, et al., Relief Defendants.

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. ANDY SHIN FONG CHEN, et al., Defendants, andNORTH AMERICAN FOREIGN TRADE ZONE INDUSTRIES, LLC, et al., Relief Defendants.

CASE NO. C17-0405JLR

UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON AT SEATTLE

February 15, 2019

ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT

I. INTRODUCTION

Before the court are: (1) Defendants Andy Shin Fong Chen ("Mr. Chen") and Aero Space Port International Group, Inc.'s ("ASPI") (collectively, "Defendants") and North American Foreign Trade Zone Industries, LLC ("NAFTZI"), Washington Economic Development Capital, LLC ("EDC I"), Washington Economic Development Capital II, LLC ("EDC II"), EVF, Inc. ("EVF"), Moses Lake 96000 Building, LLC ("Moses Lake 96000"), Sun Basin Orchards, LLC ("Sun Basin Orchards"), PIA, LLC ("PIA"), John Chen, Tom Chen, Bobby Chen, and Heidi Chen's (collectively, "Relief Defendants") motion for summary judgment (Def. MSJ (Dkt. # 25)); and (2) Plaintiff Securities and Exchange Commission's ("SEC") motion for summary judgment (Pl. MSJ (Dkt. # 36)). The SEC opposes Defendants and Relief Defendants' motion for summary judgment. (Pl. Resp. (Dkt. # 31).) Defendants and Relief Defendants oppose the SEC's motion for summary judgment. (Def. Resp. (Dkt. # 39).) The parties filed replies. (Def. Reply (Dkt. # 32); Pl. Reply (Dkt. # 44).) The court has considered the motions, the parties' submissions concerning the motions, the relevant portions of the record, and the applicable law. Being fully advised,¹ the court GRANTS in part and DENIES in part the SEC's motion for summary judgment. The court further GRANTS in part and DENIES in part Defendants' motion for summary judgment.

II. BACKGROUND

This case is a securities enforcement action. It arises out of Defendants' alleged misuse of the EB-5 Immigrant Investor Program ("EB-5"), which affords certain foreign investors a path to permanent residency in the United States. (See generally Compl. (Dkt. # 1).) The SEC alleges that Defendants violated securities laws by making materialmisrepresentations to foreign investors who purchased membership interests in an EB-5 project based in Moses Lake, Washington. (See, e.g., id. ¶¶ 26-35, 71-72.) According to the SEC, Defendants misappropriated millions of dollars in investor funds for uses unrelated to the EB-5 venture to which investors committed their capital. (See, e.g., id. ¶¶ 37-70.) Defendants deny that they materially misrepresented aspects of their EB-5 project to foreign investors. (See generally Answer (Dkt. # 17); Def. MSJ.) The court outlines the EB-5 program before detailing the factual background to the SEC's claims.

A. The EB-5 Program

Administered by United States Citizenship and Immigration Services ("USCIS"), the EB-5 program allows certain foreign investors to obtain visas and, eventually, lawful permanent resident status. See 8 U.S.C. § 1153(b)(5); (see generally Worland Resp. Decl. (Dkt. # 30) ¶ 3, Ex. 2 ("USCIS Policy Manual, Ch. 2").) Eligible immigrant investors must show that: (1) they have invested or are in the process of investing a specified amount of capital in a new commercial enterprise; and (2) their investment will create at least 10 jobs for United States workers. 8 U.S.C. § 1153(b)(5)(A); (see also USCIS Policy Manual, Ch. 2 at 1 (noting that the EB-5 program requires "an investment of capital . . . in a new commercial enterprise . . . which creates jobs").) Where the new commercial enterprise is based in a "targeted employment area," immigrant investors must invest a minimum of $500,000.00. See 8 U.S.C. § 1153(b)(5)(C); (see also USCIS Policy Manual, Ch. 2 at 9.)

In the early 1990s, lawmakers amended EB-5 program requirements to permit foreign investors to pool their capital in "regional centers," USCIS-approved entitiescommitted to supporting economic growth in particular regions. See 8 C.F.R. § 204.6(e); see also id. § 204.6(m)(1) (citing Section 610 of the Departments of Commerce, Justice, and State, the Judiciary, and Related Agencies Appropriation Act of 1993, Pub. L. 102-395, 106 Stat. 1828). Regional centers collaborate with new commercial enterprises, which in turn may affiliate with one or more "job-creating" entities to carry out specific investment projects. (See USCIS Policy Manual, Ch. 2 at 7.)

In the regional center context, immigrant investors may qualify for EB-5 status and permanent residency if their investments "indirectly" create at least 10 jobs. (See id. at 10.) A foreign investor cannot qualify for EB-5 status merely by showing that the investor remitted funds to a new commercial enterprise that pledged to loan those funds to a job-creating entity, however. (Id. at 7.) Rather, the investor must show that the new commercial enterprise made "the full amount" of his or her investment "available" to the entity or entities responsible for the job creation upon which the investor's immigration petition is based. (Id.); see also In re Izummi, 22 I. & N. Dec. 169, 179 (B.I.A. 1998).

An EB-5 investor's path to permanent residency has two steps. First, the investor files a petition for EB-5 status ("the I-526 petition"), which requires that the investor show it is more likely than not that his or her investment will satisfy the job-creation requirements. (See Worland Resp. Decl. ¶ 4, Ex. 3 at 1-2.) If the I-526 petition is approved, the investor may go on to acquire conditional permanent resident status. (Id.) Second, approximately two years after USCIS approves the I-526 petition, the investor files a petition to remove the conditions on his or her permanent resident status ("the I-829 petition"). (Worland Resp. Decl. ¶ 5, Ex. 4 ("USCIS Policy Manual, Ch. 5") at 2);see also 8 U.S.C. § 1186b(c)(1). For the I-829 petition to succeed, the investor must demonstrate that he or she invested the requisite capital and that the investment created, or will create within a reasonable period, at least 10 qualifying jobs. (USCIS Policy Manual, Ch. 5 at 2-3.)

B. Factual Background

1. ASPI, NAFTZI, and EDC III

ASPI, a Washington State corporation, was designated a regional center in 1994. (Def. MSJ at 4; Compl. ¶ 11.) Since then, ASPI has managed several EB-5 projects in rural Grant County, Washington. (Chen Decl. (Dkt. # 26) ¶¶ 6, 11.) In addition, ASPI engages in business activities related to the Chen family's substantial real estate holdings. (Compl. ¶ 11; see also Chen Decl. ¶ 19.) ASPI's shareholders include Mr. Chen, John Chen, Tom Chen, and Bobby Chen. (Chen Decl. ¶ 11.) Mr. Chen, John Chen's son and ASPI's president, manages ASPI's day-to-day operations, including its EB-5 initiatives. (Id.; Compl. ¶ 11.)

In 2009, USCIS recertified ASPI as a regional center under the EB-5 program. (Chen Decl. ¶ 24, Ex. 1 at 1.) In a letter to Mr. Chen, USCIS confirmed that, for purposes of its role as a regional center, ASPI's "geographic area" encompassed all of Grant County, Washington. (Id.) Additionally, USCIS stated that, as a regional center, ASPI could "either direct investments into single projects or form an investment fund to fund multiple projects." (Id.) Defendants state that the recertification letter granted ASPI authority to operate pursuant to a "pooled loan model" in which immigrant investors would "act as secured commercial lender[s]." (Chen Decl. ¶¶ 23-24.)

Two ASPI-related entities are integral to the EB-5 project at issue in this suit. The first, EDC III, is a Washington State limited liability company founded in 2011. (Chen Decl. ¶ 26, Ex. 3 ("LLC Agreement") at 2.) ASPI is EDC III's managing member, and Mr. Chen is its registered agent. (Worland Resp. Decl. ¶ 2, Ex. 1.) EDC III is the new commercial enterprise for purposes of the EB-5 project at issue here. (Def. MSJ at 8); see also 8 U.S.C. § 1153(b)(5)(A). The second entity, NAFTZI, is a wholly-owned ASPI subsidiary. (Compl. ¶ 13; Answer ¶ 13.) NAFTZI is "the developing entity" of ASPI Commerce Park, an industrial and commercial complex in Moses Lake, Washington. (Chen Decl. ¶ 26, Ex. 4 ("Program Mem.") at 11.) Mr. Chen is NAFTZI's president and the sole signatory on all of NAFTZI's bank accounts. (Compl. ¶ 13; Answer ¶ 13.) NAFTZI was to function as the job-creating entity in EDC III's EB-5 project. (See Def. MSJ at 8; see also USCIS Policy Manual, Ch. 2 at 7.)

2. The Offering Documents

Prior to investing in EDC III, each foreign investor received three documents: (1) the "Subscription Agreement, Power of Attorney, and Representation Letter" ("Subscription Agreement"); (2) the "Limited Liability Company Agreement of Washington Economic Development Capital III, L.L.C." ("LLC Agreement"); and (3) the "Confidential Program Description Memorandum" ("Program Memorandum") (collectively, "the Offering Documents"). (See Chen Decl. ¶ 26, Ex. 2 ("Subscription Agreement"); LLC Agreement; Program Mem.) Each document explained the purpose of foreign investment in EDC III as follows:

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Notwithstanding the authorized scope of allowable activities afforded the LLC under the statute and within this Agreement, the primary focus of the LLC will be to create a pool of capital to be used principally for Community Economic Development Loans as approved by the USCIS in 2009. . . .

The purpose of the Community Economic Development Loan(s) will be to provide a funding source for a new development project(s) within ASPI Group's approved Regional Center in Grant County, Washington, thereby enabling the [investors] to qualify as Immigrant Investors under the U.S. Immigration and Naturalization [sic] Act EB-5 visa program.

(Subscription Agreement at 2; LLC Agreement at 1-2; Program Mem. at 10-11.)

The Offering Documents further represented that investors' funds would be used to finance a specific project in satisfaction of EB-5 program requirements: the upgrade of ASPI Commerce Park. (Subscription Agreement at 2; LLC Agreement at 2; Program Mem. at 11.) According to the Program Memorandum:

The Immigrant Investor's funds will be used to fund the purchase

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