PNC Bank and developers of a now-shuttered Miami Beach hotel asked a judge on Wednesday to let them out of a fraud suit by Chinese investors, arguing the investors had failed to tie the bank and the hotel to an alleged scheme to embezzle their EB-5 visa investment money.
In a telephone hearing before U.S. Magistrate Judge Alicia M. Otazo-Reyes, attorneys for the bank and the developers, referred as the Greystone entities after the hotel project, said the Chinese investors had failed to show that they knew of fraudulent activities by Joseph Walsh, the head of an EB-5 regional center who had allegedly coordinated the investments.
“There’s a disconnect in this pleading between the alleged misconduct by Mr. Walsh and his minions and the actual knowledge of anyone at PNC,” the bank’s attorney Peter Hardy said.
Both Hardy and Stephen Mendelsohn, who represent the Greystone entities, argued that the heightened pleading standard for fraud applied in this case, and that the investors had not met it. Mendelsohn added that the investors’ claims against his clients are dependent on allegations that the entire project was fake, but the hotel did exist.
“The amended complaint says the hotel project was a façade, that the project was completely fake,” Mendelsohn told the court. “But it was completed and would have been operating if not for the COVID[-19] pandemic.”
In the suit filed in October and amended in December, the investors claim they lost both their money and their shot at obtaining U.S. permanent residency through the EB-5 visa program — which allows foreign investors in U.S. enterprises that create American jobs to live in the U.S. — when Walsh allegedly transferred their funds into personal accounts for his own benefit.
The investors allege that Walsh used a fake escrow account at PNC Bank to embezzle the funds. At the hearing Wednesday, Hardy told the court that it was “crystal-clear that PNC had nothing to do with that escrow agreement,” but the investors’ attorney Jordan Shaw said bank employees departed from normal banking procedures and created a workaround that helped Walsh set up a checking account that appeared to be an escrow account but did not have any escrow requirements.
“Not only did they have knowledge, but they assisted,” Shaw said. “But for their departure from their normal banking activity, my clients would have had their own red flag.”
The Chinese nationals were to invest in a limited liability limited partnership called Greystone EB-5 LLLP that Walsh had established, according to the complaint. That partnership was going to lend money to the Greystone hotel developers to partially fund the construction of the hotel. In exchange for the funding, the developers were going to give the partnership a security interest in the property.
But Mendelsohn told the court that the loan was never made and the Greystone entities never received any funds from the partnership.
Walsh is facing a default judgment of $18 million entered in March against him after the U.S. Securities and Exchange Commission accused him of bilking EB-5 investors out of $21 million that was supposed to go toward the development of a Palm Beach hotel but instead was used on personal expenses such as payments toward a mansion and a yacht.
The investors are represented by Jordan A. Shaw, Candace Phillips and Steffani M. Russo of Zebersky Payne LLP and Kevin Qi of SMS Law Group.
The Greystone entities are represented by Stephen A. Mendelsohn of Greenberg Traurig LLP.
PNC is represented by Peter D. Hardy, Aliza Karetnick, Mary K. Treanor, Mansi G. Shah and Nicholas A.R. Kato of Ballard Spahr LLP and Nina Stillman Mandel of Mandel & Mandel LLP.
The case is Feng et al. v. Walsh et al., case number 1:19-cv-24138, in the U.S. District Court for the Southern District of Florida.
— Additional reporting by Dean Seal, Suzanne Monyak and Kevin Penton. Editing by Daniel King.
Original Article published at Law360 on June 17, 2020 by Carolina Bolado.
