SEC & USCIS Take Action to Stop EB-5 Visa Scheme Committing Fraud

In a coordinated action unprecedented in our industry's history, the SEC and USCIS have coordinated to stop the activities of Anshoo Sethi and the EB-5 designated Intercontinental Regional Center Trust of Chicago (IRCTC) from continuing to misappropriate funds from overseas immigrant investors in connection with the "A Chicago Convention Center LLC" offering that he and Chinese migration agents were heavily promoting to investors. 

 

 

SEC Action

The SEC alleges that Sethi, through the EB-5 visa Regional Center offering, used fraud and misrepresentation to sell more than $145 million in securities and collect over $11 million dollars in fees from over 250 investors and although Chinese agents were not named in the SEC action, their involvement was instrumental in the scheme and deception. 

The complaint alleges that Sethi and his associates orchestrated a scheme to dupe and defraud investors over a period of 18 months by violating securities laws, making false claims, committing fraud and materially misrepresenting unsupported claims to collect millions of dollars in fees for his own personal account. 

The SEC states "the fraud described is ongoing and likely to continue" and has taken this step to protect the interests of current and future investors.  The agency is seeking an emergency ex parte relief to "enjoin violations of the anti-fraud provisions of federal securities laws, freeze assets, secure a preliminary injunction and other equitable relief".  As of today, several Chinese agencies continue to promote this project to investors on their websites:

• Worldway 
• Goldlink 
• ACC Tenet 
• Visa 160 
• IMMI 
• SEETO Go Abroad 
• JUST INFO 
• Golden Reach 
• Gasheng 

The Lies

Among the allegations that Sethi promoted to investors are the following:

• All necessary construction permits had been obtained to construct a convention center, five upscale and luxury hotels, restaurants, shopping facilities, bars and entertainment facilities
• Franchise agreements with Indigo and Staybridge Suites (Intercontinental Hotel Group), Element by Westin (Starwood) Hyatt Place & Hyatt Summerfield Suites (Hyatt) were in place and in good standing
• These agreements would offer investors a "Hotel Brand Advantage" ensuring high volume through their brand name recognition, reservation systems and loyalty programs
• Land with a market value of $177 million was being used as developer equity
• Investor funds would be 100% protected and returned in the event that their applications for residency were denied
• Investment from Qatar for $370 Million was pledged as an additional capital contribution to the capital stack and to cover development costs
• Construction would begin in the summer of 2012 and occupancy of the first tower in early spring 2014
• That Sethi, who is 29, had over 15 years of experience in real estate development and managing lodging properties
• The project developer Upgrowth LLC had over 35 years of experience in developing hotel and lodging properties
• The ACCC project would create over 8,000 jobs

The Truth

All of the following is easily obtainable with a minimal amount of effort and due diligence and it will show that none of the claims made by Sethi can be supported by research and market based analysis. 

 

 

We reported our research in a report here in 2011 and despite that and subsequent coverage of our concerns as reported in the Chicago Tribune, EB-5 service providers, consultants, attorneys and Chinese migration agents could not get in line fast enough to collect fees and commissions as hundreds of investors were duped. 

 

 

Financial consultants who have reviewed the convention center project on behalf of potential foreign investors said it has appeared troubled from the start.

Michael Gibson, whose Tampa, Fla.-based firm researches the viability of EB-5-financed developments across the U.S., called the project too big and unrealistic. He cited a saturated market for hotels in Chicago and the monumental task of securing the public financing and backing from so many private investors. The project, he said in an interview, is "a mess."

"In order to raise this much capital from an extremely large number of investors (499), the migration agencies in China and elsewhere often make exaggerated claims to meet their quota," Gibson wrote on his blog, eb5info.com.

HOTEL LICENSE AGREEMENTS - NON-EXISTENT

 

 

The letters confirming the license agreements that were handed out by the agents were dated years before and were no longer in place by the time of the offering.

 

 

Hotel Agreement Letters (dated)

according to the SEC action:

"Although Intercontinental Hotels and Starwood Hotels had previously entered into franchise agreements with Sethi and companies affiliated with him (other than ACCC and IRCTC), these agreements were terminated well before Defendants began circulating their December 2011 Offering Memorandum to potential investors and selling the investments in the fall of 2011. In fact, these franchise agreements were terminated before ACCC was formed in January 2011."

"Starwood Hotels terminated its relationship with Sethi and an entity related to him in 2009-more than two years before the Offering Memorandum was circulated to potential investors and well before either ACCC or IRCTC were formed. By September 14, 2009 and November 20, 2009, respectively, Starwood had terminated two licensing agreements that Defendants maintained with Starwood in connection with developing Element by Westin and Four Points by Sheraton hotel properties under the names of Upscale Hospitality, LLC and Upsliding, Inc."

"In subsequent letters Starwood specifically directed Sethi, Upscale and Upsliding to cease representing that their properties were either one ofthe aforementioned Starwood brands immediately, including, but not limited to, in oral and written disclosures. Moreover, Starwood sought over $2.6 million in damages and fees as a result of breaches ofthe licensing agreements. Defendants did not disclose these material facts to USC IS or in the Offering Memorandum to investors."

"Defendants also submitted to USCIS a letter purporting to be a "comfort letter" from Hyatt Hotels (on Hyatt Hotels' letterhead). Hyatt Hotels has informed the SEC that the letter is not genuine. Rather, Sethi manipulated an electronic version of a form Hyatt Hotels comfort letter (that was unsigned and contained numerous blanks) to generate the letter provided to users."

Further investigation by Antonio Olivio of the Chicago Tribune reveals:

 

 

 

 

 

CONSTRUCTION PERMITS

The only construction permits granted by the City of Chicago are for a 49x49 tent, a 200 amp service panel, a fence, and to wreck and remove a brick building:

 

 

Description:   PERMIT EXPIRES ON 01/08/2013 ERECTION STARTS: 11/12/2012, ERECTION ENDS: 11/16/2012. ERECT 49' X 49' TENT FOR EVENT NOVEMBER 15,2012 PER PLANS

 

 

Description:   200 AMP TEMPORARY SERVICE

 

 

Description:   FENCES: 1300FT IN X 6FT 0IN: QTY 1

 

 

Description:   WRECK & REMOVE 2 STORY BRICK COMMERCIAL BUILDING

What is so remarkable about the permits is that even though Sethi had been to China marketing this project for over 18 months, made dozens of trips, hosted countless seminars and raised over $145 million in funding, the only progress he had made on the site was to demolish a building, erect a fence, put up a tent and install a small electrical panel.  Remember that he was claiming to be completed with the construction of the first hotel and have it occupied by spring of 2014. 

In the meantime dozens if not hundreds of I-526's must have been filed, or in the process of filing, yet it appears that no agent, immigration attorney or EB-5 service provider thought to question the project's ability to be completed on time when all they had done in 18 months of effort was to erect a small tent. 

I can understand that the investor's attorneys may not have been aware that the hotel franchise agreements were no longer in place, and could not be bothered to place a phone call to verify such, but to not ask for photos and progress reports from the developers prior to submitting the I-526 and transfer funds might be considered by some to be a lack of due care for such a large and important investment. 

INFLATED LAND VALUE

 

 

In the Chicago Convention Center offering documents and in marketing material handed out to investors, Sethi and the Chinese agents often referred to the land as having a value of $178 million dollars which is pretty funny to anyone who has seen valuation reports and inflated claims before and pretty steep for 2.80 acres far from downtown Chicago. 

 

 

 

 

According to reports, the land cost less than $10 million when purchased in 2008 so to claim an increase in value of nearly 2,000% is a pretty tall tale even by EB-5 standards.  For tax purposes the land was assessed at $603,960.  For comparison, a nearby 20 acre parcel with improvements sold for $7.7 million in 2011. 

What the Integra report really says is:

 

 

The key words here are "land based on allocation of the forecasted stabilized income stream in terms of the relative contributions of the land; improvements, FF&E..." and "going concern".  Sethi and his agents told investors that they were acquiring unimproved raw land for the value of the completed, cash flow producing assets or a "stabilized project".  Here are the figures which more closely reflect the true value of the land at the end of the report:

 

 

Integra Market Valuation Report: Chicago Convention Center

INFLATED DEVELOPMENT COSTS

Along with the inflated land valuations, the investors were also told that the costs to build and develop these hotel rooms would be substantial. According to the SEC action:

"First, the costs of the project are unusually high compared to hotel industry data. The business plan reports that the hard costs of the project will be $686,365,381 with an additional $48,589,790 in soft costs such as design and engineering for a total cost estimate of $734,955,171. This value represents a cost of $738,348 per room (key) and $421.3 per square foot. Defendants claim that the land is worth $177,547,465, which if included, raises the estimated cost per room to $917,088."

"However as of January 2012 full-service hotels (a step below luxury hotel) had an average total cost of only $212,300 per room. Luxury hotels had an average total cost of $610,500 per room. For a hotel complex with 995 rooms, these values produce a cost estimate ranging from $211,238,500 to $607,447,500. Therefore, the projected total cost of the project and the cost per room exceed even the high-end averages."

According to the JN+A and HVS Hotel Cost Estimating guide the figures quoted by the SEC are accurate and conform to industry ranges:

 

 

 

 

2012 Hotel Cost Estimating Guide

INFLATED REVENUE PROJECTIONS

According to the SEC complaint:

"Defendants' projections of increased air traffic to O'Hare and room occupancy data in their business plan and an economic analysis they retained are higher than local and industry data. For example, the projected room revenues for 2017 are $105,077,000, which according to the construction time frame should result in all 995 rooms being ready for occupancy."

"To achieve those room revenues, all 995 rooms would need to be occupied every day of the year at a price of $289 per night. This calculation would mean that the occupancy rates and prices would have to be even higher than the optimistic projections used in the economic analysis."

 

 

Based on market research, there is no basis for the expectations of those returns.  According to studies by HVS and Smith Travel and Research:

"After several years of slow or negative supply changes in Chicago, there has been a significant introduction of new supply in 2008 and 2009, mainly in the upscale segments. Eight new hotels opened in Chicago during 2008. Through the first half of 2009, four hotels have opened with a total of 880 additional rooms."

 

 

"During the past six years, a total of 17 new hotels have opened or reopened in Chicago,
representing 3,968 hotel rooms. During the same period, eight hotels have closed, representing 521 hotel rooms. Therefore, the net increase in supply was 3,447 rooms between 2003 and 2009."

 

 

"Nine new or renovated hotels have opened or are under construction and scheduled to open between 2009 and 2012. However, there a number of projects that had once planned to open in 2011 and 2012 that have recently been stalled. Taking a longer view, the average change in supply from year-end 2004 through year-end 2012 is forecast to be approximately 2.0 percent annually, which matches the longer-term historical average of 2.0 percent."

 

 

"An evaluation of near-term projects indicates that hotel room supply in the city will increase from 38,256 rooms at the end of 2008 to approximately 42,343 by the end of 2012. During the same period, we project demand will increase from about 9.1 million room nights in 2009 to approximately 10.2 million room nights in 2012."

 

 

"After a peak in occupancy in 2007, continued supply growth and significant drops in demand in 2008 and 2009 are projected to lead to lower occupancies through 2010. In 2011 growth in demand is projected to outpace growth in supply. In 2012, ADR is projected to surpass the ADR peak of 2007. Occupancy of 66 percent in 2012, however, is projected to finish below 2007’s occupancy of 74 percent. Therefore, RevPAR is expected to top $131 in 2012, slightly below its previous peak of $137 set in 2007."

 

 

"RevPAR is expected to decrease more than 18 percent in 2009, as occupancies and rates both decline. In 2010, RevPAR is projected to experience a slight decline of one percent, as rates flatten, and occupancy falls one percent, due to an influx of supply increases in RevPar are projected in 2011 and 2012 as average daily rates increase and occupancies rebound."

HVS Chicago Hotel Industry Outlook

Even if the developers were to complete all 995 rooms and become operational in record time, it is unlikely that they would be able to collect anywhere close to the projected revenue based on current market room rates and occupancy levels:

 

 

Even accounting for inflation, ADR and RevPAR increases, the developers would conservatively have to build three to four times the number of rooms to achieve their target of $105 million in revenue for 2017. 

Research from TR Mandingo suggests barriers to entry, continued oversupply of inventory, low demand and difficulty for operators to increase RevPar and ADRs:

"The drop in both occupancy and rate that the suburban markets have seen when compared to the highs achieved in 2007 is going to take longer to come back up, as the many overflow days they traditionally counted on are essentially gone."

 

 

"We anticipate that 2012 will see the O’Hare market increase by 4 percent in ADR within the next year, and around another 2.5% in occupancy, or around $105 and 68%, although this will still put it well below its historic highs."

 

 

"The suppression of rate increases is exacerbated by the increasingly competitive corporate and leisure meetings market where new products and a more aggressive marketing program by all the area properties has led to rate compression during all but the very peak spring and fall convention seasons."

"The impact of these rates will gradually offset by more aggressive pricing strategies in the commercial sector and peak meeting periods. The slower rate recovery is also attributed to the lead time for booking larger groups at the large convention hotels, where group rates were negotiated during the dog days of the recession. It will take another year to burn off the pre-committed lower rate positioning in place during the lowest part of this recessionary cycle."

 

 

"Other factors influencing rate discounting include the extensive corporate contract discounts employed by either existing agreements with the market’s franchises or aggressive pricing from the operators in the market area. Marketing and sales for most hotels in the group of significant hotel operations within the defined market are fairly aggressive due to the abundance of competition in the market."

Analysis of Market Conditions for The O’Hare Hotel Market 

GARBAGE IN, GARBAGE OUT: THE INFLATED JOBS REPORT

Perhaps the most important conclusion from the exaggerated claims being made by Sethi was that these were the numbers that were incorporated into the Economic Impact Analysis (EIA) or "Jobs Report" which was shown to investors and submitted by immigration attorneys in their clients I-526 submissions.

 

 

According to the SEC action:

"To the extent that the construction cost and revenue projections are both inflated, that will dramatically impact the estimated job creation figures. As job creation is the key to EB-5 investors potentially receiving permanent residency, this fact would be material to both investors considering the offering and to USCIS in their evaluation of the project as a viable EB-5 enterprise for which investor funds should be released from escrow."

 

 

 

 

It is common to see inflated projections in these reports, they are used extensively by the Chinese agents in their marketing material, but the production of such nonsense by the economists who release this when it is used to commit fraud and cause harm to investors should have consequences.

 

 

Based on the above inflated inputs, none of which were reasonable when considering the experience of the developers, the progress towards completion, market valuation, lack of any additional sources of capital (the $340 million investment from Qatar was a hoax as was the commitment from the Illinois Finance Authority), or expected revenue, yet all were used without question when constructing the EIA to produce the jobs count widely circulated to investors and their attorneys. 

 

 

For attorneys who submit these reports in their client's petitions without questioning any of the premises or conclusions contained within should also raise questions regarding due care.  One does not have to be an expert in impact analysis to see that the premises on which these job creation projections were works of fantasy. 

 

 

In light of the above, which is readily accessible to anyone with an internet connection, and considering the seriousness of a petition for U.S. residency and a substantial investment by the foreign national, it should be reasonable for those in a fiduciary role to ask questions regarding the claims made by promoters before loss and harm comes to their clients. 

 

 

I understand why many Chinese migration agents don't care about the well being of their clients as this project offered some of the highest commissions in the industry, so any concerns that they had regarding a successful outcome were overcome by their greed, in this case commissions of over $125,000 per investor were what was promised.  Since agents don't report these commissions to investors, and the subsequent conflict of interest, most will naturally promote projects which give them the most financial return regardless of the consequences to their clients. 

What I don't understand is why U.S. firms, public officials and EB-5 visa service providers choose to engage with developers and projects in which they do no due diligence, or why immigration attorneys continue to file petitions with little regard for questioning the premises on which the job creation or return of capital will be made.  Having unsophisticated clients sign waivers may not be sufficient defense in the cases where a small amount of due care could be seen by many to be reasonable and appropriate.

 

 

The law states that the EB-5 visa investment must be "at risk" but in my opinion there is a substantial difference between making an investment into an enterprise which may fail due to systemic and / or non-systemic risks and changes in market conditions v. one in which there is no credible or sustainable plan to create sufficient jobs to remove conditions or value to exit and repay investors their full principal invested. 

My opinion is that if service providers and immigration attorneys aid in fostering criminal activity by supporting fraud with services and filing petitions in these investments when a reasonable doubt exists regarding the issuers ability to create jobs or return principal then why should they escape restoring investors losses when they litigate for relief? 

 

 

Foreign investors are looking to U.S. professionals to give them guidance on where to place their families future by making sound investments to secure the green card and hopefully this action will highlight the need for our industry to begin to examine more closely the projects and issuers ability to create value and jobs to satisfy the promises made in the offering documents.

I would like to thank the officials at the SEC: Charles Felker, Adam Eisner, Mika Donlon, Patrick Bryan and those at USCIS for their speed and urgency in bringing this action and for helping to stop fraud and watching out for the interests of the foreign national investors who put their faith and families futures in the hands of attorneys and other professionals in our industry, well done.  

Chicago Investment Advantages (prepared by Chinese agents)

Job Creation Summary

Comfort Letter - IFA

Chicago Convention Center PPM (Mandarin)

USCIS Letter of Designation

Loop Capital Letter

HVS Market Outlook

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: EB5news

Litigation Cases

• UNITED STATES SECURITIES AND EXCHANGE COMMISSION vs Intercontinental Regional Center Trust of Chicago

States

• Illinois