Federal judge rules sec quiros EB-5 case

A federal judge has issued a scathing ruling against Jay Peak developer Ariel Quiros, agreeing with federal regulators that the Miami businessman was the mastermind behind the largest EB-5 fraud case in the country, which played out in the mountains of northern Vermont.

District Judge Darrin P. Gayles, in a ruling handed down Monday in Miami, wrote that Quiros was the architect of a scheme to deceive hundreds of investors over an eight-year period.

With “severe recklessness,” Quiros intentionally defrauded investors, enriched himself and misappropriated funds, Gayles wrote.

The judge froze the assets Quiros accumulated through investor funds. Those assets include two ski resorts, one in Jay and another in East Burke, and properties in the town of Newport, in addition to money raised from immigrant investors meant to pay for developments. Gayles also barred Quiros from raising more money through the EB-5 visa program as he heads toward a civil trial. In a previous ruling, Gayles severely limited the amount of money Quiros could use for his legal defense.

Gayles granted a Securities and Exchange Commission request for the injunction. In a 44-page ruling, he said the SEC wove “a compelling and well-documented account of one man’s use of his control over multiple entities to squander investor funds, enrich himself, and, ultimately, commit securities fraud.”

In an evidentiary hearing last May, SEC provided the court with 141 exhibits and testimony from five witnesses, including a Vermont regulator. Federal litigators showed that Quiros improperly commingled funds in a complicated financial scheme that involved more than 100 bank accounts and 1,000 transactions. The SEC said the Miami businessman leveraged more than $100 million in investor funds for margin loans. Quiros also purchased both Jay Peak Resort for $25.7 million and Burke Mountain Resort for $7 million using investor monies, according to federal regulators.

“The record supports a preliminary finding that Quiros was the architect of a fraudulent scheme to use the investor funds to enrich himself,” Gayles wrote.

“The result is a financially strapped ski resort, unpaid contractors, unfinished projects, and unhappy investors at risk of losing their residency status in the United States,” Gayles added. “Accordingly, the court finds a preliminary injunction necessary to maintain the status quo pending trial on the merits.”

Quiros and his former business partner Bill Stenger, Jay Peak’s former CEO, are both accused in a federal lawsuit of operating a “Ponzi-like” scheme over an eight-year period. That lawsuit, brought by the SEC in April, alleges the two men misused $200 million in investor funds raised through the EB-5 program and meant for projects in Vermont’s Northeast Kingdom.

In all, the two men collected $440 million from more than 700 immigrant investors from 74 countries. The immigration status of about 400 of those investors is now in doubt because of the fraud.

The money was to be used to build eight projects in three Northeast Kingdom towns — Jay, Newport and East Burke. Six of the projects were part of a $282 million expansion of Jay Peak Resort including three hotels, three condo complexes, a golf club, ice rink, water park and other amenities. Most of these projects were built, although some of the promised investments made by Stenger and Quiros, such as a medical facility were never constructed. One of the condo villages — Stateside — is incomplete because the developers ran out of money. While a hotel at Burke Mountain was built, a promised athletic center was not constructed. AnC Bio Vermont, a proposed $110 million biomedical research center in Newport, never materialized. Federal regulators have termed that project “nearly a complete fraud.” Seven of the eight projects are named in the SEC’s lawsuit.

The SEC alleges that about $50 million of the investor funds were misappropriated for Quiros’ personal expenses, including more than $2 million for a luxury condo in Trump Tower in New York City and another $3.86 million for a second condo on Fifth Avenue.

The SEC has said the fraud wouldn’t have been possible without Stenger acting as the front man for the scheme. The former CEO solicited investors, acted as general partner in six of the eight projects and was co-owner of a biomedical park proposal with Quiros that federal regulators deemed nearly a complete fraud. He also garnered direct support from the state’s top politicians — Sen. Patrick Leahy, Rep. Peter Welch and Gov. Peter Shumlin  — in a bid to show investors that the Jay Peak, Newport and East Burke developments had the state’s stamp of approval. Questions raised in 2012 about financial improprieties at Jay Peak were ignored by state officials who had direct oversight of the projects.

Federal litigators have said that in their probe of thousands of transactions made by Quiros and Stenger they found that Stenger did not enrich himself over the course of the eight-year “Ponzi-like” scheme.

In August, Stenger reached a settlement with the SEC, in which he did not admit or deny wrongdoing, and he agreed to cooperate with investigators. Under the agreement, he is barred from proclaiming he was innocent of any impropriety associated with the alleged fraud. Stenger could later pay a fine, based on his level of cooperation and ability to pay. He still faces civil action brought by the state of Vermont, and a federal criminal probe is underway.

Quiros has fought the SEC allegations. His attorney, David Gordon, who has represented Quiros since 2014 when the SEC first subpoenaed the Miami businessman, could not immediately be reached for comment. At the U.S. District Court of South Florida in Miami last spring, Gordon argued that Quiros made reasonable profits from the developments. He also contended that the Miami businessman had limited knowledge of the specific language and wording of the offering documents presented to investors. Quiros has blamed Stenger, who was directly involved in communicating with investors, as the one who broke securities laws by making material misrepresentations.

However, Gayles took a different view in his ruling Monday.

“Quiros was aware of the limitations of the offering documents regarding use of investor funds, but chose to use them anyway,” the judge wrote. “Indeed, he not only ‘associated himself with the venture,’ he was the venture.”

In addition to freezing the assets and preventing Quiros from raising more money through the EB-5 program, the judge’s order states the developer is “preliminarily enjoined” from destroying or concealing any evidence, including ledgers, correspondence or other records, related to the case.

Gayles called Quiros’ actions “egregious” and wrote that the preliminary injunction was needed to prevent the Miami businessman from regaining control of the assets at the heart of the case, including Jay Peak.

“When the Receiver took control of the property, it was in poor financial condition, due in large part to Quiros’s misuse of investor funds,” the judge wrote. “Accordingly, the Court finds a reasonable likelihood that Quiros will re-offend if not enjoined, and that a preliminary injunction should issue.”

The developers owed $8 million to contractors for construction work at Stateside, Burke and AnC Bio Vermont, the proposed biomedical facility in Newport. Another $5 million had not been paid to vendors, and an additional $5 million is needed to pay for repairs to the Jay Peak tram.

In a separate ruling, also handed down Monday, the judge denied Quiros’ bid to have the SEC’s lawsuit dismissed. Quiros’ attorneys had raised several challenges to the action, including that the statute of limitation had expired on many of the allegations. The original act of alleged fraud occurred in 2008 when Quiros used money from escrowed immigrant investor funds to purchase Jay Peak instead of building two hotels as promised.

“The Court finds that the SEC has sufficiently pled its claims,” Gayles wrote in a three-page order. The judge also told Quiros he had 15 days to file an answer to the lawsuit, as the case now heads to trial.

The two orders Gayles issued Monday come on the heels of another stinging ruling the judge handed down against Quiros last month regarding attorneys’ fees.

Gayles, in a ruling from the bench after a nearly hourlong hearing, said Quiros could use only $80,000 from a mortgage on a condo in New York City to pay the more than $1.5 million in legal bills he had racked up since the lawsuit against him began in April. The SEC has said Quiros was “quickly squandering” funds for his legal case.

The judge said at that hearing he was seeking to balance “competing interests” — Quiros’ need to defend himself and the need to protect assets on the behalf of investors.

“While that seems like an insignificant amount as to the defendant considering the litigation involved, it may seem to be quite a large amount to the investors,” Gayles said.

Gayles has frozen Quiros’ assets — cash and properties — from the alleged fraud scheme. That means Quiros must use other funds to pursue his case.

The SEC claims against Quiros are civil allegations. U.S. Attorney for Vermont Eric Miller has said his office is investigating whether federal criminal charges should be filed.

In the EB-5 program, foreign investors put up $500,000 in qualified projects, plus an administrative fee. If 10 jobs are created through the investment, the person becomes eligible for permanent U.S. residency.

In its lawsuit, the SEC claims the trouble for Quiros began in 2008 when he used investor money to buy Jay Peak Resort, instead of using it as promised, to build the Jay Peak and Tram Haus hotels.

The SEC alleges money from investors that was supposed to be used to build two hotels, phase 1 and 2 of the development, was used instead to purchase the Jay Peak Resort in 2008. The developers then used money from investors in phase 3 to build the phase 1 and 2 projects.

In a “Ponzi-like” scheme, the charges allege, the developers then raised money from new sets of investors for other projects to improve the resort, including the construction of a hotel and the waterpark.

Regulators say the pattern continued through seven phases of development until Stenger’s and Quiros’ spigot of money from investors began to run dry because of news, first reported by VTDigger, that the developers were under investigation by state and federal regulators and that investors from the Tram Haus projects had lodged complaints about misuse of funds.

As it became more difficult for Stenger to solicit new investor monies in 2014 and 2015, several projects languished. Contractors walked off the Stateside condo job in 2015 and the biomedical center in Newport was barely started.

Stenger, however, continued to solicit new investors right up until the end of March when he gave a pitch to immigrants from South Africa.

Stenger’s ongoing solicitation of investors and the alleged fraud scheme came to a halt when federal regulators asked Gayles for a preliminary injunction in April last year.

In addition to the federal lawsuit, Quiros and Stenger face many other legal actions. At the same time of the filing of the SEC case, the state of Vermont brought its own lawsuit alleging investor fraud, which remains pending against the two developers.

Also, a group of investors, led by Alexander Daccache, of Brazil, filed a class-action fraud lawsuit against the two men in federal court in Miami. Raymond James Financial Services and People’s United Bank are also named in the suit. In that same court, a group of 31 Chinese investors filed a separate investor fraud lawsuit earlier this month, naming Quiros as a defendant.

Michael Goldberg, the court-appointed receiver who has been overseeing the properties at the center of the case against Quiros since April, on Monday called Gayles’ ruling “well-reasoned.”

“Prior to the issuance of this order, we really were only taking those actions necessary to preserve the status quo,” he said in an email Monday. “Now the receivership will be able to move to the next phase, which will include starting the potential sales process.”

The sale of the assets involved in the case, including the hotels at Jay Peak and Burke Mountain, will recoup money for the investors, unpaid contractors and others who are owed or lost money as a result of their dealings with Stenger and Quiros.

Goldberg’s resources are so strapped he has not been able to pay taxes to the towns of Jay, Newport and Burke.

Gayles, in his ruling Monday, agreed to continue the appointment of Goldberg as the receiver overseeing the properties related to the case.

“Quiros and the Defendants left the Jay Peak Resort in a precarious financial position,” the judge wrote. “The Receiver is in a position to clean up the Defendants’ mess and protect what remains of the investors’ assets, and therefore should be permitted to continue his work.”

Mike Pieciak, the commissioner of the Vermont Department of Financial Regulation, was heavily involved in the state and federal probe of the alleged fraud at Jay Peak, and developed the so-called “spaghetti chart” which shows how Quiros moved money around through thousands of transactions. (Gayles included the chart in his ruling.)

Pieciak says the judge used strong language in his order to describe Quiros’ role in the alleged fraud. The ruling, he said, will set the tone for legal action going forward. The fact that the motion to dismiss was denied is an indication, Pieciak says, that the SEC has a very strong case.

The judge said that Quiros acted with “scienter,” a mental state embracing intent to deceive, manipulate or defraud. He made misrepresentations, Gayles said, that were an “extreme departure from the standards of care.”

Pieciak said the judge saw that the evidence supported the allegation that Quiros committed fraudulent acts with a reckless disregard for the truth.

The next step in the case is an SEC request for summary judgment, Pieciak said, which will greenlight the discovery phase of the case. The SEC and Quiros’ defense at that point can gather more evidence.

If the material facts of the case are not in dispute, the judge can rule in a summary judgment, but it is more likely, Pieciak said, that the case will go to a jury trial.

The state’s case, which Pieciak is litigating, is at a similar juncture. He will file the federal decision in state court, which has yet to make a decision on Quiros’ motion to dismiss.

https://vtdigger.org/2016/11/21/federal-judge-rules-sec-quiros-eb-5-case/

Mentions

• UNITED STATES SECURITIES AND EXCHANGE COMMISSION
• Ariel Quiros
• Bill Stenger
• Peter Shumlin
• Jay Peak - AnC Bio Vermont
• Jay Peak Resort - Golf & Mountain Suites
• Jay Peak - Q Burke Mountain Resort, Hotel and Conference Center L.P.
• Mount Snow - West Lake Water Project LLC
• Patrick Leahy

Litigation Cases

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

States

• Vermont