The Complicated Legal Backstory of Terry McAuliffe's Former Car Company

A look at the dispute that gave rise to GreenTech

August 28, 2013, 2:00 AM
PHOTO: GreenTech's Lake Horn Plant
GreenTech Automotive's first U.S. Manufacturing facility is proudly located in Horn Lake, MS.

Aug. 28, 2013 -- For an upstart electric-car company with big ambitions, its ties to Virginia gubernatorial candidate Terry McAuliffe have been both a blessing and a curse.

The company, GreenTech, is now front and center in Virginia's 2013 race for governor, and its critics are raising questions about political favoritism, national-security risks, and the government's role in foreign investments—unwelcome attention for the struggling firm. McAuliffe defended his role in the company in a recent op-ed.

But troubles began for two GreenTech executives before McAuliffe became its chairman and well before he launched his Democratic bid for governor.

In 2009, months before McAuliffe bought 25 percent of GreenTech and became chairman, two top executives were embroiled in a lawsuit that was covered in local press and detailed in a federal judge's advisory opinion.

Not only was the future CEO of GreenTech, Xiaolin "Charles" Wang, embroiled in a dispute with a business partner not long before McAuliffe got involved, a federal judge said Wang took actions of "dubious legality" in issuing stock in connection with a similar company, Hybrid Kinetic Automotive Corp.

While all of that long predated McAuliffe's involvement in GreenTech, and while he left GreenTech as chairman last year, the man who is now hoping to be governor of Virginia has acknowledged joining the executives' new venture despite knowing about some of the past legal troubles.

The former Democratic Party chairman and Clinton confidante joined fledgling electric-car company GreenTech after his failed 2009 bid for governor, ostensibly attempting to boost his record as a jobs creator—now the central focus of his 2013 campaign. McAuliffe originally sought to base the company in Virginia, but it landed in Tunica, Miss., after Virginia officials raised doubts over the business plan, in an internal Virginia Economic Development Project memo obtained by ABC News, and after Mississippi offered millions in financial incentives for GreenTech to build a plant there instead. The company launched its plant with fanfare in Mississippi in the summer of 2012, with Bill Clinton in attendance at the opening.

McAuliffe promised his new company would create thousands of jobs.

"I'm going to put it right in the heart of Virginia," McAuliffe told a local Virginia Boilermakers union in 2010. "And we're going to have 2,000 folks down there — all of them union members — and show that when you do it right, everybody benefits, including the state of Virginia."

McAuliffe personally lobbied Department of Homeland Security Secretary Janet Napolitano, in a letter obtained by ABC News, to expand federal approval for Gulf Coast Funds Management – a firm headed by Tony Rodham, the brother of Hillary Clinton – to obtain visas for Chinese investors giving over $500,000 to the project.

So far, GreenTech has failed to live up to those job-creation promises, struggling to get off the ground. It employs "more than 80" workers at its manufacturing facility in Mississippi, GreenTech told ABC News.

The company was born out of a legal dispute, after two executives had a falling out with the owner/primary investor of Hybrid Kinetic Automotive Corp., the similar electric-car company they operated before GreenTech.

The story of this first venture, and of the dispute between McAuliffe's eventual business partners and their former funder and associate, was complicated enough that a federal judge issuing an advisory opinion on their lawsuit expressed dismay at its "extraordinar[y]" complexity.

The company that owned Hybrid Kinetic Automotive Corp. sued Wang and other executives, who were running Hybrid Kinetic at the time. Both sides settled out of court, and McAuliffe's eventual partners dropped the name "Hybrid Kinetic" and started anew under the "GreenTech" moniker, as part of a reported settlement agreement that included a $1.5 million repayment to Benjamin Yeung, the project's original funder.

According to the judge's advisory opinion, Yang Rong, aka Benjamin Yeung, originally worked with Wang to launch Hybrid Kinetic. The company that owned it—Hybrid Kinetic Automotive Holdings, which was actually owned by Yeung's wife—accused Wang of executing a corporate coup, absconding with Hybrid Kinetic shares and issuing them when they weren't his to sell. Wang, in turn, accused Yeung of reneging on a promise to supply $200 million in startup funds for the hybrid car project and effectively abandoning the project, a claim backed up by a former Securities Exchange Commission lawyer who submitted an affidavit.

Yeung was at one point wanted in China for alleged "economic crimes," according to state news agency Xinhua, and has been identified by the South China Morning Post and Reuters as a fugitive of mainland China—a distinction he "never attempt[ed] to rebut" in his communication with the U.S. court in the lawsuit with GreenTech's eventual founders, the judge wrote. The U.S. State Department could not confirm Yeung's status as a Chinese fugitive, and the Chinese embassy to the U.S. could not be reached for comment.

The disagreement was messy, and the two sides settled, with Wang eventually dropping the name Hybrid Kinetic and launching GreenTech. Hybrid Kinetic Motors continued as a separate, competing project in Alabama.

U.S. District Judge Michael P. Mills showed a clear sympathy for Wang over Yeung in his June 2009 opinion. That Yeung's wife owned the holding company, Mills wrote, "color[ed] Yeung's dealings in [the] case with a sense of dodginess." The legwork done by Wang and eventual GreenTech Executive Vice President of Finance Gary Tang on Hybrid Kinetic's business plan impressed Mills, who saw the basic premise as something that could work if given the chance, according to the opinion he wrote on their lawsuit.

But Mills concluded that Wang's conduct in issuing shares—while continuing to accept funding from Yeung's wife's holding company—was "something this court can not [sic] condone."

"While Wang appears to have been quite honest with this court, he has admitted to engaging in conduct of dubious legality," Mills wrote.

McAuliffe didn't know about that, according to his campaign. He did, however, know about the legal dispute.

While his campaign told ABC News that McAuliffe "never had any role with" Hybrid Kinetic—and while its dispute long predated McAuliffe's involvement—he received a $25,000 donation from one of its top executives, Jack Deng, during his first run for governor in December 2008, according to public campaign-finance records in Virginia.

McAuliffe got involved with the GreenTech project in late 2009, according to his current campaign—months after the settlement. In March 2010, he would buy a minority share, 25 percent, of GreenTech and become chairman. McAuliffe left GreenTech in December 2012, but he still retains his ownership stake, according to his campaign.

GreenTech did not respond to a request for comment about its executives' history with Yeung. Neither did Wang. A request for comment from Yeung, submitted through Hybrid Kinetic Motors (Yeung's competing Alabama project), went unanswered.

In July, however, it was revealed that the SEC has been investigating GreenTech, a Republican senator began raising national-security concerns with its funding plan, and McAuliffe's political opponents now email reporters daily about GreenTech's struggles, contesting McAuliffe's record as a jobs creator.

GreenTech has sought to rely on funding from Chinese investors, who could obtain conditional U.S. visas in exchange for $500,000 investments under a federal program known as EB-5, designed to attract foreign investments in the U.S. economy. The SEC is investigating GreenTech, Gulf Coast, and (in part) whether investors were "guarantee[d]" returns, according to Dept. of Homeland Security (DHS) documents obtained and posted online by Sen. Charles Grassley, R-Iowa. GreenTech could not be reached for comment about the SEC investigation, but Wang told The New York Times this month that GreenTech is cooperating with the investigation and that it would reveal nothing illegal.

Grassley has asked DHS about potential national security risks of the EB-5 visa program, after a high-ranking DHS official and nominee, Alejandro Mayorkas, fell under investigation from the department's inspector-general office over his possible role in the approval of Gulf Coast's application for visas with U.S. Customs and Immigration Services. Mayorkas has denied "unequivocally" that he exerted undue influence on Gulf Coast's application. The DHS Office of the Inspector General has not commented on that investigation and did not respond to a request for comment from ABC News, and Grassley's office told ABC News this month that it has not received an update on its status.

Grassley submitted a series of questions to DHS, Mayorkas, Gulf Coast, and GreenTech seeking more information on the businesses and the application as an approved visa conduit. So far, Grassley has not heard back, according to a spokeswoman.

The nonpartisan government-watchdog group Cause of Action, meanwhile, is asking whether McAuliffe's political influence helped GreenTech avoid another kind of government oversight.

The Committee on Foreign Investment in the United States (CFIUS) reviews foreign business transactions in the U.S. when red flags suggest potential national-security concerns. In early 2013, CFIUS was reviewing the separate Hybrid Kinetic Motors that continued to operate as a competing company after GreenTech's executives left the project, according to documents obtained by Grassley, and Cause of Action suggests CFIUS should have taken a look at GreenTech as well. CFIUS does not comment on specific companies and declined to say whether or not it's reviewed GreenTech, and GreenTech did not respond to ABC News's attempts to ask.

"Was GreenTech somehow able to circumvent the typical loopholes a foreign-owned company has to run through to do business?" the group's executive director, former Republican House Oversight and Government Reform Committee counsel Dan Epstein, asked in a statement to ABC News. He also alluded to the incentives GreenTech was offered to help build its plant in Mississippi. Cause of Action has received at least $644,000 from the conservative Franklin Center (according to a 2011 Franklin Center tax return); the Franklin Center is the parent organization of, being sued by GreenTech, which has accused the organization of libel.

In an online statement, says it published a clarification in connection with the articles at issue, but otherwise stands by its reporting.

In a statement, Cause of Action said its work speaks for itself: "Cause of Action is an independent organization and does not disclose its donors. All CoA funds are used for general operating expenses, not specific activities."

Cause of Action said it is mainly concerned that all foreign businesses are scrutinized equally by the federal government. GreenTech, the group said, should be reviewed because a majority of its shares are foreign owned (by a British Virgin Islands holding company), and its business activity of building cars in Mississippi should fall under CFIUS's purview.

GreenTech, for its part, says it has received no federal money to date.

In an overwhelmingly negative race for governor, GreenTech's troubles have figured prominently in Republicans' attacks against McAuliffe. A new ad from the Republican Governors Association this week slams GreenTech and highlights Virginia officials' skepticism with the project.

GreenTech does not seem to be enjoying all the scrutiny, brought on by McAuliffe's run for governor, even if McAuliffe's connections brought good press and gained the attention of government officials in GreenTech's earlier stages.

"In a short four years, we have not only one, but two products designed and being build [sic]," GreenTech told ABC News last month in an e-mail. "All this without any federal money. An American job is an American job. It is not a democratic job or republican job. This company should not be the victim of a political battle."

McAuliffe responded to critics in a recent Washington Post op-ed on Aug. 16, writing that he has not been contacted by the SEC and that like any business launched in the last few years, GreenTech faced economic "headwinds." Creating nearly 100 jobs in Mississippi isn't something to criticize, McAuliffe contended; nor, he wrote, is taking a risk by investing in new technology.

"[R]isk-taking and investing in our No. 1 asset — our workforce — are what drive our economy in a global marketplace. Virginia needs a governor who understands that," McAuliffe wrote.

EDITOR'S NOTE: This article has been updated to include additional information about Cause of Action and Watchdog. It was also updated to reflect the content of McAuliffe's letter to Napolitano.

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