SEC Case Pushes EB-5 Focus to Oversight, Compliance

The EB-5 immigrant investment program is ripe for change following a scheme linked to a South Florida businessman that bilked investors of hundreds of millions of dollars, attorneys said.

"Even though it has been very successful in bringing development and jobs, [the program] is in need of certain reform, particularly reform that would allow more integrity and more oversight," said Roy Carrasquillo, a New York attorney with Fox Rothschild who represents developers seeking investment through EB-5 and prospective regional centers.

The EB-5 program helps foreigners obtain U.S. residency in exchange for a $500,000 investment in a job-creating enterprise. The Jay Peak project to expand a Vermont ski resort and build a biomedical research center raised $350 million in EB-5 funds from about 700 investors.

Resort owner Ariel Quiros of Key Biscayne and company president Bill Stenger of Vermont face Securities and Exchange Commission charges in Miami federal court for allegedly diverting $200 million of the funds, including $50 million for Quiros' personal benefit.

Michael Goldberg of Akerman in Miami is serving as the receiver for Jay Peak. Stenger and Quiros were locked out of the resorts, and Goldberg is running them as the civil case proceeds.

The alleged fraud was uncovered months ahead of the scheduled Sept. 30 expiration date of part of the EB-5 program that allows designated "regional centers" to pool investor funds. That creates a deadline for reevaluating the program, attorneys said.

"I think we're going to see much more due diligence up front, and we're going to start seeing much more transparency and financial accountability," said Miami securities lawyer Ronald Fieldstone of Arnstein & Lehr, who is working with colleague Phillip Hudson to advise Jay Peak investors.

About $13 billion of EB-5 capital has been raised in the past 10 years, Fieldstone said. Although it's hard to know exactly how much has been lost to fraud, diversion of funds is no more rampant in EB-5 than in any other securities offerings, he said.

The program was nearly inactive during the recession and saw just one other major fraud involving the misuse of $156 million intended for a Chicago convention center that never broke ground.
Jump Start Oversight

But the money exchange is not as tightly tracked as it would be if the transaction were a bank loan — and that needs to change, attorneys agreed.

Not only does EB-5 fraud embarrass public officials, such as the Vermont governor who touted the Jay Peak project, it also puts investors in double trouble: Because their immigration status is based on job creation funded by their dollars, fraud can leave investors wondering about their immigration status as well as their lost funds.

That's why due diligence is important, Misty Allen of Arnstein & Lehr said Friday at a discussion about EB-5 in Miami.

"It should be treated just as any other loan," she said. "You should have a properly documented file for every EB-5 loan that you do."

One problem that arises during the financing portion of the transaction is that the borrower and lender are often affiliated companies, Reid Thomas, executive vice president of San Jose, California-based NES Financial, said at Friday's event. That means documentation isn't as thorough as it might otherwise be.

Experts weigh in on how the Jay Peak ski resort scandal in Vermont might lead to EB-5 reform.

http://www.dailybusinessreview.com/id=1202758383917/SEC-Case-Pushes-EB5-Focus-to-Oversight-Compliance

Mentions

• UNITED STATES SECURITIES AND EXCHANGE COMMISSION
• Fox Rothschild LLP
• Akerman LLP
• Saul Ewing Arnstein & Lehr LLP
• NES Financial
• Vermont EB5 Regional Center
• Ariel Quiros
• Bill Stenger
• Ronald R. Fieldstone
• Reid Thomas

Litigation Cases

• State of Vermont vs Bill Stenger & Ariel Quiros
• UNITED STATES SECURITIES AND EXCHANGE COMMISSION vs Ariel Quiros & Bill Stenger

States

• District Of Columbia