PIERRE — The use of EB-5 financing from foreign investors seeking favorable U.S. visa treatment was considered for economic development and discussed project by project at the top level of state government during the program’s peak period from 2007 through 2010 under the Rounds administration, according to current and past officials.
Nearly 500 people are known to have together made nearly $250 million of loans under EB-5 for South Dakota projects during the four years of then-Gov. Mike Rounds’ second term. That flurry of action coincided with changes in key personnel and corresponded with a noticeable shift in the management approach for economic development within the government.
EB-5 financing, primarily through large pools of loans of $500,000 apiece from China and South Korea investors who also paid large service fees, became a source of capital for projects that tended to fit into two categories: those too solid to fail, such as electricity production; or too risky and pricey to attract sufficient conventional loans, such as meat processing.
The move into EB-5 came on the heels of a spectacular failure – some said fraud – involving the proposed Ridgefield Farms beef packing house at Huron and later re-proposed, but again never built, at Flandreau. That private venture cost South Dakota investors many millions of dollars, including money from private individuals, commodity groups, Farmers Union and state government.
Neil Fulton, who was Rounds’ chief of staff from November 2007 through June 2010, said EB-5 discussions were project-based. He said EB-5 considerations were similar to talking about a project’s potential use of the state’s low-interest loan program known as the Revolving Economic Development Initiative.
“The lawyer in me is reluctant to agree to any statement that says what is ‘standard’ or ‘routinely’ but what I can agree is that EB-5 was not a plot,” Fulton said.
“It was a legitimate program of the United States government to attract private investment capital to economic development projects, and it got used for projects in South Dakota. As did other economic development funding sources, private and public.”
Jeff Erickson, who was the South Dakota-based CEO at the time for Great Western Bank’s U.S. operations, served on the state Banking Commission and the state Board of Economic Development that makes REDI loans for new and expanding businesses that create sufficient jobs.
Erickson said there wasn’t any general presentation made to the economic development board about the plan to use EB-5. “We were told anecdotally about all the money coming in,” he said.
In one instance, the board loaned money to Dakota Turkey Growers for its Huron operations. Meanwhile, the associated meat packing business, Dakota Provisions, received a large infusion of EB-5 financing during the same general period.
But in another instance, the board – as well as the South Dakota Development Corporation, a non-profit economic development organization – made commitments to lend money to Northern Beef Packers for its Aberdeen plant but never delivered the money because conditions weren’t met.
Northern Beef, meanwhile, received three rounds of EB-5 financing and at one point needed a special declaration from the Banking Commission that an off-shore source for a $30 million loan wasn’t actually a bank and didn’t need to meet South Dakota requirements.
Northern Beef briefly operated in 2012 and 2013, then shut down last summer and declared bankruptcy. The operation remains closed and is now under ownership by a California-based investment group that had made a major loan to the project.
Erickson, now retired from the banking business, is the current chairman for the Board of Economic Development. He said the use of EB-5 attempted to fill a need. “Once the dust settles, it’s going to be very good for South Dakota,” he said.
Erickson recruited Richard Benda to serve as secretary of tourism and state development for Rounds in 2006 after the resignation of Jim Hagen. Erickson was based in Watertown, and Benda was the head of Watertown’s economic development organization.
Benda seldom went to meetings of state economic development boards after he accepted the appointment, according to official minutes, while Hagen had attended nearly every meeting during his two years.
Hagen said he wasn’t involved in EB-5 and barely knew Joop Bollen, who became the center of EB-5 efforts during the Benda years. Hagen said the only work he could recall with Bollen dealt with an international trade designation for the Sioux Falls airport.
Likewise for Fulton: “To my knowledge, I’ve never spoken to or met Mr. Bollen.”
Erickson said he and the previous chairman, the late Jerry Prostrollo of Huron, surprisingly seldom heard from Benda during the growth of EB-5’s use and weren’t kept closely in the loop. He described Benda as distant.
Information about projects became more closely held during those years, an outside for-profit company was formed in 2008 to handle EB-5 matters for state government, and a secret contract was formally arranged in 2009.
The contract granted full authority to the company including the power to collect fees that were to be split with state government. The contract was scheduled to last for nearly four years into the next governor’s administration.
Last September, Gov. Dennis Daugaard’s commissioner of economic development, Pat Costello, terminated the contract nine months before its scheduled expiration. Daugaard said he knew little about EB-5 while he was lieutenant governor, a part-time role, during Rounds’ eight years as governor.
Bollen has declined to speak with news reporters since shortly after his corporation’s state contract was terminated.
Bollen was director of the South Dakota International Business Institute at Northern State University in Aberdeen. He led the effort to get South Dakota designated by the federal government for EB-5 use in 2003 during Rounds’ first year as governor.
Bollen filed a series of expansion requests over a period of about three years that greatly broadened EB-5. Its purpose changed from a dairy development program to a wide variety of permitted potential uses such as electricity production, casinos, meat processing, manufacturing and oil refining.
Bollen also engaged in overseas recruiting of potential EB-5 investors. After returning from a trip in 2007, he formed his own company, SDRC Inc., in January 2008 as a private corporation to recruit and administer the EB-5 program for state government.
Working with the South Korea-based Hanul law firm and with attorney Jeff Sveen of Aberdeen, Bollen began forming EB-5 loan pools in 2008 for specific projects.
Benda sometimes went on the recruiting trips that involved Bollen, attorney James Park of Hanul and Sveen, who represents the Dakota Provisions operations as a lawyer and executive, and who became involved in the Northern Beef project.
The tie between Bollen’s SDRC and state government deepened in 2009 when the contract was drawn. Sveen represented SDRC, while Benda’s department had its work performed by Tim Engel, a lawyer at the May Adam Gerdes and Thompson law firm in Pierre.
Fulton worked for the MAGT firm before accepting his appointment as Rounds’ chief of staff. Fulton said he was aware of the contract and thought he spoke with Engel once about it but wasn’t involved beyond that.
Fulton left state government in June 2010 to accept an appointment as head of the federal public defender service for South Dakota and North Dakota.
Asked recently whether Rounds and Benda were already discussing EB-5 upon his arrival as chief of staff, or their discussions developed after, Fulton drew a blank.
“I honestly am not certain I know the answer to that. I do not recall a moment where we suddenly started using it, however,” Fulton said.
An atypical project in South Dakota that received EB-5 financing was the Deadwood Mountain Gulch casino, hotel and convention complex.
Ron Wheeler, who was commissioner of economic development during much of the Janklow administration that preceded Rounds, was part of a private group formed in 2006 trying to raise money for Deadwood Mountain Gulch.
Wheeler, who’s no longer involved in the project, said he couldn’t remember how they were approached regarding EB-5. He did recall his reaction: “Oh, right.”
But he said his disbelief was proven wrong when $32.5 million, including $4 million extra for the parking complex, came through.
Public records show the money came from 65 Chinese citizens, at $545,000 apiece including their fees. Bollen created the loan pool in January 2008. It was SDRC’s second one. The first was for Dakota Provisions.
Erickson, who had helped bring Benda into the Rounds cabinet, came into the picture in yet another way after Daugaard won the November 2010 election. Erickson chaired Daugaard’s transition team.
Daugaard kept many members of the Rounds cabinet but didn’t retain Benda. Erickson said Daugaard already planned to break apart the Department of Tourism and State Development into smaller cabinet-level departments and planned to reduce cabinet salaries that had grown substantially under Rounds.
Needing a new job, Benda went to work with Bollen at SDRC in January 2011. In December 2010, Rounds approved a $1 million grant to Northern Beef as compensation for some expenses.
Benda delivered the check in January. Northern Beef in turn put $550,000 into a pre-arranged escrow account for SDRC. Benda’s job with SDRC was loan monitor for Northern Beef.
In that same month of December, Benda also increased a grant from the governor to the South Dakota Development Corporation for Northern Beef by $550,000.
Despite Benda’s continued attempts, neither the Board of Economic Development nor the SDDC made loans to Northern Beef. Sveen made a direct appeal at one point at Erickson’s Sioux Falls office, according to Erickson.
But the two boards kept renewing their loan commitments to Northern Beef. They finally terminated the commitments in recent months.
In March 2013, a federal grand jury subpoena was served on the governor’s office for production of eight sets of information. The only publicly identified portion of the information involved travel records for Benda while he was secretary.
That led to an investigation by state Attorney General Marty Jackley and a series of reviews and audits at the Governor’s Office of Economic Development. Jackley found the diversion of the $550,000 from Northern Beef to SDRC.
Shortly after commissioner Costello contracted with a private accounting firm in October to review the Future Fund grant program that was used, Benda was found dead on Oct. 22 at a farm near Lake Andes from a shotgun wound to his abdomen that was ruled a suicide.
“Richard,” Erickson said, “was a good soldier who looked at how to get things done.”
Erickson recently accompanied Daugaard on a recruiting trip out of state and is strongly supporting Rounds’ candidacy for U.S. Senate this year. Erickson said the state board is more informed about projects and strategy under Daugaard.
“The board feels much more engaged,” Erickson said.
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