Cooperative deals

The US Justice Department on Tuesday sued Steve Wynn to compel the hotel and casino magnate and Republican mega donor to register as an agent of China.

The suit, filed in US District Court for the District of Columbia, argues that Wynn, former CEO of Wynn Resorts, leveraged his relationship with then-President Donald Trump and other members of his administration to advance Beijing’s interests in 2017.

The US Government said the complaint is the first affirmative civil lawsuit under the Foreign Agents Registration Act in more than 30 years – a sign of stepped-up enforcement efforts under the 1983 law.

Wynn, a former finance chairman of the Republican National Committee, is accused of relaying a request from a senior Chinese official asking that the Trump administration remove a Chinese national who had sought asylum in the United States. His activities, prosecutors assert in the lawsuit, included discussing Beijing’s interests directly with Trump during a dinner in June 2017 and providing the Chinese national’s passport photos to the president’s secretary.

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“In so doing, from at least June 2017 through at least August 2017, the Defendant acted as an agent for foreign principals Sun and the PRC, and engaged in political activities on their behalf in the United States,” the complaint states.

The Chinese national is a businessperson who had left China in 2014 and was later charged with corruption, according to the complaint. A lawyer for Wynn did not immediately respond to a request for comment. An inquiry to Wynn Resorts, which he headed until 2018, also went unanswered.

“The filing of this suit – the first affirmative civil lawsuit under FARA in more than three decades – demonstrates the department’s commitment to ensuring transparency in our democratic system,” Assistant Attorney General Matthew G. Olsen, who heads the Justice Department’s national security division, said in a news release.

“Where a foreign government uses an American as its agent to influence policy decisions in the United States, FARA gives the American people a right to know.”

Wynn was advised three times, beginning in 2018 and finally last month, to register under FARA but declined to do so, according to the complaint.

The Justice Department has said that Wynn was approached to work with China by longtime GOP and Trump fundraiser Elliott Broidy, who worked under Wynn as deputy RND finance chairman after Trump’s 2016 election as president. Broidy pleaded guilty in October 2020 to acting as an unregistered foreign agent, admitting to accepting millions of dollars to secretly lobby the Trump administration for Malaysian and Chinese interests. Broidy agreed to cooperate with prosecutors in exchange for a recommendation of leniency at sentencing, which remains pending, and to forfeit US$6.6 million.

Wynn stepped down as RNC finance chairman in January 2018 and as CEO of Wynn Resorts the following month in the face of allegations of sexual misconduct, which he has denied.

Wynn and his wife have contributed about US$2.5m to Republican candidates and committees in the first three months of this year alone, according to federal records.

The Washington Post

While it recognises the need for urgent climate finance by developed economies, the draft agreement hammered out at COP26 after nine days of intense negotiations does not put a final target on the total amount of finance or the minimum level of funds to be raised.

“The draft agreement has mentioned the need for significantly scaling up the $100-billion climate finance target manifold, and has suggested that this may reach more than $1 trillion. However, there is scant movement beyond this,” a senior official present at the summit said.

Climate finance refers to local, national or transnational financing—drawn from public, private and alternative sources of financing—that seeks to support mitigation and adaptation actions that will address climate change.

Even before COP26 began in Glasgow, the Organisation for Economic Cooperation and Development had said developed countries would likely reach the $100-billion goal only in 2023.

Among other things, the draft agreement also calls for ending further coal exploration and production, as well as subsidies for fossil fuel. The first draft would go through multiple revisions before a concrete deal emerges.

Contentious issue

Meanwhile, international media has reported from the Glasgow summit that India has sought $1 trillion worth of financing just for itself. This is over and above the finance set to be extended to least developed countries, Pacific island states and sub-Saharan Africa, some of the poorest parts of the globe that are more susceptible to extreme weather events due to climate change.

However, sources said that the final amount of financing required would depend on multiple factors and currently remained unspecified. They did not confirm whether India wants $1 trillion worth of finance for itself.

Senior officials in the environment ministry, though, had earlier confirmed to Moneycontrol that India would not only seek finance for itself but would continue to bear the responsibility of arguing on behalf of smaller developing nations.

“On a broad scale, the amount of finance to be required by developing nations, including India, would be directly linked to how fast the developed nations reduce their emissions,” a senior source in the know said.

He added that India has communicated to the Conference of Parties or COP that developed countries need to be more ambitious in reducing carbon emissions, given that India has set a deadline of 2070 to become ‘’net zero’’. While the US, European Union and even China have all set earlier dates, their economies have already reached a higher stage of industrialization and prosperity that India is yet to naturally achieve.

At the historic Paris summit in 2015, all emitters, big and small, had agreed to bring forward new and more ambitious carbon-cutting plans every five years. The 2020 deadline has since passed without major commitments from any member of the developed bloc.

The Indian position

The government also continues to argue that the country’s per capita emissions show each Indian has a much smaller carbon footprint than the average American or European.

“This COP is all about climate finance. This represents the final barrier in the fight against climate change. Almost everything has been proposed and tried. Now, only the money remains to be made available,” said Samrat Sengupta, programme director, climate change and renewable energy at the New Delhi-based Centre for Science and Environment.

India is also pushing for a part of the green financing from developed nations to be channelled into the International Solar Alliance, a network of now 101-plus countries that it has established and championed. The grouping has grown significantly in recent years and established the Global Green Grids Initiative last week at COP26.

The ambitious move is based on a plan to improve connectivity between the world’s power grids to accelerate the transition to greener energy. It will allow areas with excess renewable power to send it to areas facing a shortage. With the United States being the latest entrant into the grouping, the government is pushing for greater financing.

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There have been two important opinions in the Low Income Housing Tax Credit Year 15 struggle so far this month. Both favor not-for-profit (NFP) sponsors. They each deserve their own post, so today we will start with JER Hudson GP XXI LLC which came down May 2 from Vice Chancellor Morgan T. Zurn of the Delaware Court of Chancery. First a little bit of background, which you can skip if you are familiar with the issue.

The Year 15 Problem

The major source of funding for affordable housing in this country is the LIHTC – Section 42 of the Internal Revenue Code. States are apportioned credits based on population. A specified agency in each state then parcels out the credits to projects. NFP sponsors have an edge in the allocation process.

Typically the credit will be allocated to an investor limited partner, often a bank that is getting Community Reinvestment Act good dooby points in addition to the return from the credit. The credit is doled out over ten years and subject to recapture for an additional five years. There is a requirement for the property to remain affordable for an additional 15 years, but that is enforced by the state agencies not the IRS.

Section 42 allows for not for profits sponsors to have a right of first refusal (ROFR) to purchase the property for a bargain price at the end of the 15 year compliance period. Many deals are underwritten on the assumption that the ROFR price will take the investor out after year 15.

Lately investors, some of whom have acquired their interest after the credits have been exhausted are not cooperating with the ROFR process and are looking for an additional return that in the view of the NFP sponsors they are not entitled to. In general NFP sponsors have been doing well in state courts and the court of public opinion. Overall the investor interests, sometimes referred to as aggregators have been winning in federal court.

The Case

JER Hudson presents an unusual fact pattern. At issue was Kate’s Trace, a 108 unit project in Newport News, Virginia, owned by Kate’s Trace Limited Partnership (KTLP). Hudson Housing Tax Credit Fund XXI LP (The Fund) held the limited partnership interest in KTLP through a LLC . JER is the general partner of the the Fund. They are the plaintiffs in the case. DLE Investors LP (DLE) is a limited partner in the Fund.

The Fund started in 2002. DLE became a limited partner in the Fund in 2007. Sometime between 2007 and 2020 ownership of DLE changed. When DLE became a partner in 2007, projections indicated that there would be tax credits flowing, but that there would not be much in the way of residuals as the expectation was that NFP sponsors would acquire the properties under the bargain ROFR terms.

The new owners of DLE, Hunt Capital Partners, didn’t see it that way. They tried to convince the GP to buy them out at a premium. When the sponsor of KTLP acquired the Newport News property at the bargain ROFR price, the GP, on advice of counsel, decided to take no action. DLE was not happy with that and sought to remove the GP under the terms of the partnership agreement.

So the GP brought the action to challenge the removal. DLE asserted counterclaims for breach of fiduciary duty, breach of contract and declaratory judgement that the removal was valid.

Enough Is Never Enough

There is little doubt that if Chancellor Zurn were a Ferengi, that DLE would have prevailed in this case in accordance with Rule 97 of the Ferengi Rules of Acquisition – Enough is never enough . The opinion outlines some of the bickering that went on between the JER and DLE including DLE refusing to consent to a refinancing unless some of the proceeds were used to buy them out. It was the NFP sponsor NHT Communities that ended up triggering the litigation even though it was not directly involved in it.

In the spring of 2021, NHT and the KTLP general partner started taking the steps to transfer the property under the terms of the ROFR to an affiliated NFP. I will spare you the details. It was a done deal when they informed JER. JER sought advice from law firm Holland & Knight about whether the transfer was proper and whether they could do anything about it.

Based on the advice of H&K, JER, the Fund GP, decided not to spend any of the Fund’s remaining $200,000 in reserve funds engaging in futile resistance to the ROFR exercise. DLE responded to that easy going approach with “You’re fired”.

The Opinion

The essence of Chancellor Zurn’s opinion was that the purpose of the Fund was to reap tax credits and the GP had no duty to try to squeeze more out of the deal. Chancellor Zurn wrote:

At the risk of straying from my task, I will share that I do not believe that a failure to sue over an improperly exercised ROFR can cause a material adverse effect on the Fund after the Compliance Period. As explained, Fund GP’s duties to safeguard the funds and assets of the Fund encompass the Property Partnership Interests and cash reserves, but not the Property itself. As explained, Fund GP is authorized and charged to protect those interests only as consistent with the purpose of the Fund. And as explained, under that purpose, the Fund’s Property Partnership Interests have always been valued as sunsetting with a ROFR disposition. Because the partners understand and intend the Property Partnership Interests will terminate with a ROFR disposition, it seems to me that an improperly exercised ROFR does not change the value of the Fund’s Property Partnership Interests, and so cannot constitute a material adverse event on the Fund. Consequently, failure to correct or rescind an improperly exercised ROFR would be exculpated due to the absence of a material adverse effect on the Fund.

Limits

David Davenport is an attorney who has been involved in numerous ROFR cases. He was not directly involved in this litigation, but rather represented the NFP sponsor. He is quite enthusiastic about the opinion.

The written decision was issued earlier this week and represents a scathing acknowledgment and indictment of Aggregators and their misconduct throughout the LIHTC industry. It is an extremely lengthy, detailed, and thorough decision, with more than 350 supporting citations to various other cases, articles, treatises, and sources. ………………………

The Court found that the Hudson Fund GP’s mission was to preserve the Kate’s Trace property as affordable housing under the LIHTC program through a ROFR execution, and the Fund’s course of conduct through the end of the Property’s Compliance Period was consistent with its stated purpose. That purpose was an exchange of investor dollars for tax credits and the original investors exiting the Fund once the tax credits were distributed. The Court further found significant that, fundamentally, the Fund is a LIHTC partnership and its source of value and reason for formation is to participate in the LIHTC program, and the ROFR is a feature of the program that is meant to extend the property’s viability as affordable housing beyond the Compliance Period.

I understand Mr. Davenport’s enthusiasm, but this situation is pretty limited in its applicability. The lesson to aggregators is probably that they need to get control of the GP interests in funds or find GPs who will play ball with them. On the other hand, the opinion does endorse the views of NFP sponsors. And it endorses an “Enough is enough” view of responsible business behavior.

Reflection

An industry insider told me that what has created this problem is a long period of low capitalization rates that were not anticipated when the projects were underwritten. I tend to think that this sort of thing is an inevitable byproduct of using the tax code as an instrument of social policy. Capitalism hates the commons as we learn from watching Mr. Potter and George Bailey every Christmas.

Other Coverage

Jeff Montgomery has Chancery Nixes Investor Suit To Force Subsidized Apt. Sale on Law 360 . The piece is behind a paywall so I don’t know if there is a pun intended referring to Nixon Peabody which represented DEL.

Beth Healy has Courts are handing setbacks to Nixon Peabody clients seeking control of affordable housing on WBUR . This follows coverage in September on the firm’s role in representing aggregators.

Here is a roundup of my coverage of the issue .

This is not a spy thriller. We have therefore deliberately chosen not to name names. This is a story about the ethical gray zone of scientific collaboration between Germany and China.

There is a woman, a physicist, specializing in theoretical particle physics. After obtaining her PhD in China, she moves to Europe, initially for two years’ research at a renowned institute of nuclear physics in Italy. She then spends three years at two German universities in Hamburg and Mainz. Scientific cooperation with China is politically desired in Germany. The government believes it has “special significance for the long-term stability of bilateral relations.”

But what if scientific cooperation is giving the Chinese arms industry a cutting-edge ?

Today, the physicist is employed by a Chinese academy best known for its research into nuclear weapons. A scientist who worked with her and other Chinese colleagues in Germany recalls: “They were extremely focused on the technical work. Usually not very visionary, but technically extremely well thought out. And all highly motivated.” Politics was never discussed, he says. Instead, they collaborated on basic research — the open-ended study of theoretical, rather than applied, knowledge — the practical uses for which are not always immediately apparent. “You need the basic research part for many things. Then it’s always a question of what you choose to use it for later on.”

This researcher has himself spent time at Chinese universities. The standard of scientists there has risen dramatically over the past two decades, he says. “I don’t know what specific goals China has set itself, but basic research is regarded as very strategically important. You see that everywhere.”

China’s nuclear weapons program

The China Academy of Engineering Physics (CAEP), where the physicist now works, also carries out a great deal of basic research. Above all though, this top academy is the only place where China continues to develop its nuclear warheads. The Australian China expert Alex Joske, whose research focuses on technology transfer, says the CAEP has been “involved in several cases of espionage targeting foreign nuclear technology” and is “probably one of the scariest and most concerning parts of China’s research system.”

A search for scientific publications by the physicist since she returned to China yields no results. What can be ascertained is that, after spending a total of five years in Europe, she was placed at CAEP via the best-known government grant program. China has hundreds of these. The Thousand Talents Plan is specifically aimed at top scientists working in other countries, or with considerable overseas experience. It tempts them with large budgets and modern laboratories. Some German researchers have also participated in it.

Research – in the service of the Communist Party

Under President Xi Jinping, the Chinese Communist Party has invested massively in science, so China can become the leading world power by the year 2050. The state aims to achieve this goal through “military-civilian fusion.” According to this doctrine, civilian research must also serve the People’s Liberation Army. Patriotism is a researcher’s duty.

As early as July 2013, Xi emphasized that “Science has no borders, but scientists have a motherland.” He had only been in office a few months at the time. In May 2018, he made clear in a speech to the Chinese Academy of Sciences that “Only by grasping key and core technologies within our own hands can we fundamentally guarantee national economic security, national defense security, and other securities.”

A joint investigation by 11 European media outlets, led by the investigative platforms Follow the Money and CORRECTIV, documents the importance of collaborative research with European universities to China’s plans for its own advancement. In Germany, DW, the Süddeutsche Zeitung, and Deutschlandfunk were part of the journalistic project. We discovered that German scientists have collaborated closely with colleagues affiliated with the Chinese military. Almost 350 joint studies attest this, many of them in sensitive fields like artificial intelligence and quantum science that will decide the future of warfare.

Scientists in profile

For the next stage of the investigation, DW and its partners scrutinized the publicly available data of a number of top Chinese scientists, who – like the physicist – had been in Germany for an extended period during the past 10 years; and who were conducting research in the fields of mathematics, computer science, natural sciences, and technology. With the help of the Center for Security and Emerging Technology (CSET) at Georgetown University in Washington D.C., we identified 80 people.

We then analyzed 26 particularly striking profiles in detail. All of these scientists now work at elite universities that cooperate particularly closely with the military. 22 of them were, like the physicist, brought back via the Thousand Talents Plan. 12 of them had a fellowship from the Humboldt Foundation, a renowned state-funded body that supports academic research.

From Humboldt Fellowship to Military Commission

One of the fellows, a chemist, conducted research from 2011 to 2014 at two top research institutes in Berlin. In 2015, he went to Liverpool, England, for a further year abroad on a Marie Curie Fellowship from the European Union. Today, he is a memberof the Military Materials Technology Professional Group in the Equipment Development Department of the Central Military Commission – China’s highest national defense authority, led by President Xi. One of the chemist’s current research interests is laser technology.

Another Humboldt Fellow, a plasma physicist, spent three years at the Ruhr University Bochum. In 2018, exactly one year after his return, he won a sponsorship award from the Central Military Commission. Today, his areas of specialization include artificial intelligence and aerospace propulsion. Since 2020, he has also worked for the China Aerospace Science and Technology Corporation. Its Laboratory 514, where he works, states that it is “engaged in aerospace and national defense metrology.” Metrology is the science of measurement, dealing with accuracy and calibration.

Individual cases like these are not, of course, in Germany’s interest, admits Enno Aufderheide, the secretary general of the Humboldt Foundation. Nonetheless, he believes that Germany would lose more than China were it to forgo the collaboration. It is necessary to maintain contact with the world’s brightest minds, he says. “The Chinese are very good at understanding Europe, but we are not that good in understanding the Chinese. And that is why we do need this exchange.”

Aufderheide also believes it is wrong to reduce Chinese research policy to military-civilian fusion alone: “There’s a lot of good, true basic research in China as well.”

Next generation for the defense industry

Another case involves the Technical University of Munich. This was where a talented Chinese engineer conducted research for his PhD. After returning to China, he was rewarded by the Central Military Commission, first with an innovation award in 2019, then, one year later, with a sponsorship program. One focus of his research is the technology of thermal protection for hypersonic aircraft.

Today, the talented engineer leads at least three major projects that are directly financed by the Military Commission. Two of them are officially designated “important national defense projects.” As a professor, he also acts as a point of contact for PhD students who want to study in Germany. In an interview with a Chinese regional newspaper in the summer of 2019, he said: “I used to want to carry out the scientific research projects that I liked. Now I hope to train more people for the defense industry.”

A professor at the TU Munich, who is still in contact with the engineer, told us he knew nothing about his colleague’s connections with the military. “My topics of collaboration with Chinese colleagues have always been civilian applications of combustion research,” he said.

DW and its partners tried repeatedly to contact the four Chinese scientists mentioned in this article, but did not receive a response. Two of them have since removed military references from their online resumes.

“Don’t feed the hand that bites you”

According to the Max Planck Society, “around one third” of all scientific management positions in China today are held by people who were trained in Germany. These include the chemist who is advancing military materials research and the engineer who is training the next generation for the defense industry.

Didi Kirsten Tatlow is a co-author of the book “China’s Quest for Foreign Technology – Beyond Espionage.” She believes that Germany’s great openness to visiting Chinese scientists is a serious security risk: “In English, I like to say that there’s a saying: Don’t bite the hand that feeds you. I would actually turn it around and say: Don’t feed the hand that bites you.”

Tatlow says Germany needs to question the nature of the Chinese system. Is it “something that aims to essentially supplant us, to dominate our own industries in a way that is, I think, politically risky and democratically unsafe for us?”

Protecting freedom of research

In Germany, the constitution prevents the government from encroaching on freedom of research. Universities choose their own partners and projects. “We can’t, and don’t want to, do all that centrally, from Berlin,” explains Jens Brandenburg, Junior Minister in the Federal Ministry of Education and Research. Germany’s aim, he says, is to be “as open as possible and as closed as necessary” in its scientific collaboration with China – the latter especially when it comes to dual-use projects that could also be used for military purposes.

“There is the big challenge that freedom of research is very much restricted from the Chinese side. We are also seeing a strong focus on military or civilian-military use ,” Brandenburg says. Nonetheless, he does not believe in drawing red lines: “It is very, very important to me, above all, that we absolutely respect freedom of research in Germany.” He considers his ministry’s role to be a purely advisory one: as an authority that raises awareness and educates.

German science confident it can deal with the challenge

But China is a “systemic rival,” not an ally. Both the EU and the German government see it this way.

German security sources have told DW and its partners that scientists live “in their own bubble,” because, for them, international collaborations “are the currency par excellence.” Research requires a lot of money – and China is also willing to invest in foreign research projects. Many universities, the sources suggest, are therefore “a bit submissive” and “a bit naïve.”

Professor Katja Becker refutes this. She is the president of the German Research Foundation (DFG). “Naiveté is really not the order of the day, because we are constantly reflecting on these issues,” she says. She states that there are intensive internal exchanges between the universities, and that critical dual-use collaborations are thoroughly scrutinized by both scientific ethics committees and the relevant Federal Office for Economic Affairs and Export Control.

“Military research is excluded from DFG funding,” Becker stresses. Yet DFG money has gone to the technical laboratory of a top German scientist who is working with colleagues from China’s National University of Defense Technology (NUDT). The NUDT reports directly to the Central Military Commission. It is the premier institution for scientific research for the People’s Liberation Army.

A pressing political issue

Becker points out how quickly the German scientific community reacted to the war of aggression against Ukraine. All research cooperation with Russia was immediately put on hold, she says. “We learned from this that trust and hope are not always well-founded. Unfortunately.” But she still believes that trust is needed, “if we are to address the big scientific questions facing humanity.”

China has not condemned the Russian invasion , has criticized the West’s arms deliveries to Ukraine, and ignored international economic sanctions levied against Russia. “We definitely would not break off contacts with China at the moment because of this; there is no reason to do so,” the DFG president says.

It is not disputed that the vast majority of the 60,000 or so Chinese researchers in Germany simply want to study. What is a cause for concern, and a pressing political issue for Germany, is the system that coopts their research into the military plans of the Communist Party.

Additional reporting: A DW colleague who wishes to stay anonymous for security reasons Ruairi Casey