Michael I. Goldberg vs Ariel Quiros

Filing Date:May 08, 2019

Case:Goldberg v. Mitchell Silberberg & Knupp, LLP et al

Jurisdiction:Federal District Court for the Southern District of Florida

Status:Pending

Civil / Criminal:Civil

Fraud

Misrepresentation

Securities Violations

Jay Peak receiver Michael Goldberg has filed a lawsuit on behalf of the Receivership Entities (the many Jay Peak-related developments) alleging legal malpractice and breach of fiduciary duty against the law firm of Mitchell Silberberg & Knupp, LLP, a Los Angeles limited liability partnership, and Attorney David B Gordon.

The co-defendants are Quiros, former Jay Peak CEO Bill Stenger, Quiros business associate William Kelly and South Korean national Alex Choi, which the indictment states helped cook up the AnC Vermont scheme with Quiros. Choi is “at large,” while the other three were arraigned on May 22.

The lawsuit states that: “During the course of Gordon’s representation, the Vermont Department of Financial Regulation commenced its own investigation into Jay Peak (the “DFR Investigation”).

The local agency responsible for regulating the Jay Peak EB-5 program, the Vermont Agency of Commerce and Community Development (“ACCD”), began asking questions clearly centered around its concern for the security of investor funds. MSK and Gordon met with the ACCD in late 2014 and, while touting the “maximum amount of safety” and “maximum security” of Quiros’ use of Treasury bills on margin, neglected to disclose what they had learned: that project costs were not being met as those Treasury bills matured, and that investor funds from later phases were being used to supplement the retirement of margin debt from earlier phases.

“Moreover, when in November 2014 the ACCD specifically requested a description of the uses of Phase VII funds to date, MSK and Gordon in a November 24, 2014 letter failed to disclose that the payment to JCM of $18.2 million was used to pay down the margin balance on monies borrowed to complete previous phases. Defendants instead described the payments as being made to JCM ‘for distribution rights, equipment and architectural fees’.

“On February 27, 2015, Defendants sent a letter seeking to convince the Vermont DFR that any future investment in Phases VII (AnC Vermont) and VIII (Burke Mountain hotel) would be handled legally and in conformance with regulatory requirements. In fact, Defendants knew or reasonably should have known that they would not be handled as such.

“Because Defendants failed to respond candidly, or to withdraw their representation of Quiros and the Receivership Entities, the Vermont DFR allowed the Phase VII and VIII offerings to go forward.”

The lawsuit claims that MSK knew early on in its representation of Quiros that he had used EB-5 funds to buy Jay Peak Resort; that “Quiros had directed the commingling of tens of millions in investor funds among the projects’ various phases and entities in an effort to cover construction shortfalls.

“In derogation of their reasonable duties of care, competence, loyalty and diligence, MSK and Gordon negligently failed to advise the Receivership Entities that these actions violated the securities laws. MSK and Gordon also negligently failed to advise the Receivership Entities of conflicts of interest existing among the Receivership Entities and between the Receivership Entities and Quiros.”

“As a result, the violations continued and the Receivership Entities’ exposure increased throughout the term of Defendants’ representation. For example, in March 2014 more than $18 million in investor funds approved to pay for construction-related services on Phase VII (AnC Vermont) were used to pay down a margin loan that had been used to fund previous phases.

“MSK and Gordon learned about the misuse of the Phase VII funds no later than May 22, 2014, when Quiros testified about it at an SEC investigative session. Quiros testified — wrongly — that the $18 million was “his money” in the form of development-related fees. But rather than taking steps to prevent, mitigate or rectify further damage to the Receivership Entities by either i) telling Quiros that the use of those funds constituted a violation of the private placement memoranda and securities laws, ii) warning other decisionmakers within the Receivership Entities about it, or iii) withdrawing its representation of the Receivership Entities to the extent the commingling did not stop, MSK and Gordon breached their fiduciary duties to those entities by continuing to represent the Receivership Entities and taking none of the steps delineated above as a reasonable and prudent practitioner would have taken under these circumstances.”