Regulators sharpen focus on EB-5 projects

The man who proposes to remake the economy of the Northeast Kingdom using money from foreign investors has had one tough year.

Bill Stenger, CEO of Jay Peak Resort, announced his intention nearly three years ago to use the federal Immigrant Investor Program, better known as EB-5, to invest about half a billion dollars in the Kingdom. Stenger made it clear he was out to do nothing less than lift up the region from a long exile of joblessness and economic depression.

The plan got off to a rousing start, but in the past year Stenger has had to contend with losing the site for a $100 million project in Newport and an avalanche of bad press.

In September 2012, Bill Stenger and his mostly silent partner, Ariel Quiros, co-owners of Jay Peak Resort, held news conferences at Jay Peak and in Newport to announce their EB-5 plans. The media briefing at Jay Peak was attended by Sen. Patrick Leahy, D-Vt., Gov. Peter Shumlin, and other dignitaries, including Burlington real estate mogul Tony Pomerleau. The hoopla had a triumphant air.

The eye-popping amount of money would come from the EB-5 program, which offers the possibility of citizenship to foreign nationals who invest $1 million in a project in the United States that creates 10 jobs. The threshold is lowered to $500,000 for projects in a "targeted employment area." A TEA, as they are known in fed-speak, is an area where the unemployment rate is 150 percent of the national average. The lesser investment also is allowed in rural areas where the population is under 20,000 people.

The Northeast Kingdom qualified on both counts.

"The idea was to put money into the U.S. economy," said Ed Carroll, an immigration attorney in Grand Isle who has been involved in EB-5 nearly since inception in 1990.

At first, Carroll said, the program remained fairly sleepy. In 1992, the feds added the concept of "regional centers." The centers allowed EB-5 developers to count indirect employment as well as direct employment to reach the 10 jobs per investor threshold. The entire state of Vermont became a regional center in 1997, one of few to be run by a state. Most regional centers are privately held. The majority of EB-5 projects are associated with regional centers because of the ability to count indirect jobs.

When Vermont became a regional center, Carroll said, there were about 17 regional centers in the country. As of June 1, the U.S. Citizenship and Immigration Service, which oversees the EB-5 program, reported about 676 regional centers had been approved.

"It has exploded," Carroll said. "Some would say because of unavailability of funds from other traditional sources, such as venture capitalists and banks."

The troubles

Bill Stenger is one of those who would say that. Stenger and his small team have raised hundreds of millions of dollars in EB-5 investments to build three hotels and a water park at Jay Peak and nearly complete a new hotel at Q Burke Mountain Resort, wholly owned by Quiros. They also have broken ground on a biotechnology facility in Newport, called AnC Bio Vermont.

Construction at Jay Peak in 2013. 

"It's a very different world here because of EB-5 than it would have been," Stenger said. "Ask any of the local bankers: What was the appetite for significant commercial lending for the period from 2007 to 2010 in Vermont? Were they likely to have loaned Jay Peak $20 million to build a water park in the middle of Orleans County? I think not."

The trouble for Stenger began in May 2014, when Tony Pomerleau — the same Tony Pomerleau who helped Stenger celebrate in 2012 — pulled out the rug from a deal he and Stenger had struck for lakefront property Pomerleau owns in Newport. One of Stenger's EB-5 projects, a $100 million Newport Marina Hotel and Conference Center, was slated for that property, currently a shopping center.

Jay Peak Resort owner and president Bill Stenger tours construction of the resort's hotel, restaurant, spa and equipment facilities in 2009.

Pomerleau said at the time he was "tired of waiting to be paid" for the property.

"I've been waiting for four years; I can't wait any longer," he said. "I haven't received one dime, and we're talking about a big deal, millions of dollars."

Stenger disputed Pomerleau's characterization of how much money he had received and tried to smooth over the dispute in a subsequent meeting, but Pomerleau refused to budge. Stenger was left without a site for his hotel and conference center. He still has not announced a new location.

Over the next year, VTDigger.org and other media published stories revealing Stenger and Quiros had lost the trust of some of the 35 immigrant investors in the first EB-5 project at Jay Peak, the Tram Haus Lodge, and were the subject of a Securities and Exchange Commission "investigation."

At the Tram Haus Lodge, Stenger and Quiros had dissolved the investors' equity ownership in the project without telling them, and given them promissory notes instead.

Stenger admitted to poor communication with his investors but maintained he had the "unilateral authority" as general partner to dissolve the original agreement. All of the investors in the project had received permanent green cards.

In February, the Agency of Commerce and Economic Development, responsible for Vermont's Regional Center, announced an "oversight partnership" with the Department of Financial Regulation, ratcheting up the level of scrutiny on EB-5 projects. Patricia Moulton, secretary of the ACCD, said in a statement that the extraordinary growth of EB-5 has led to closer scrutiny of the program by state and federal agencies, particularly with regard to securities aspects of the projects.

"With the new and significant regulatory requirements, we realized it was essential to enlist DFR's financial expertise in selecting and monitoring projects," Moulton said.

State regulators describe the SEC action as a "review," as does Stenger. The SEC never confirms investigations or reviews, because of the effect that confirmation would have on the business or individual in question.

Nevertheless, word often leaks out, as in the case of Green Mountain Coffee Roasters, the subject of a four-year SEC inquiry into the company's accounting practices, beginning in 2010, until the matter was dropped last year without any enforcement action.

The SEC launches inquiries — the precursor to an investigation — and investigations based on tips, complaints and referrals, as well as newspaper articles, the agency said. In 2014, the SEC received about 15,000 tips, complaints and referrals, including 3,600 from whistleblowers. As a result, the commission launched 291 investigations in 2014. The number of investigations remained fairly consistent since 2010, according to the SEC, with a high of 349 in 2011 and a low of 289 in 2013.

Stenger told the Burlington Free Press the SEC initiated a "private review" of two of his EB-5 projects, AnC Bio and Tram Haus Lodge, about two years ago, asking for background information on the offering documents — the documents potential investors receive to make a decision on whether to put money into a project.

"We've cooperated fully. We don't expect anything to come of it," Stenger said.

Stenger acknowledged the SEC subpoenaed Jay Peak for documents and for testimony. The SEC pursues inquiries and investigations in a wide variety of ways, the agency said, including using subpoenas when targets of investigations are uncooperative, or want to be seen as having no choice but to cooperate.

Stenger said he was unaware of the "technical reason" why the SEC subpoenaed Jay Peak, adding, "Our legal folks did not find that abnormal at all in this particular situation."

Duped investors

The EB-5 program became a higher priority for the SEC after several successful prosecutions of fraudulent regional centers, beginning in Chicago in February 2013, when the agency alleged Anshoo Sethi "fraudulently sold more than $145 million in securities and collected $11 million in administrative fees from more than 250 investors primarily from China."

Sethi duped investors into believing they were buying into a new LEED-certified convention center in Chicago "that was not nearly the done deal that he portrayed," Stephen Cohen, associate director in the SEC's Division of Enforcement, said in a statement. All assets were frozen, preserving nearly all the money invested, according to the SEC.

In October 2013, the SEC pursued a second EB-5 fraud case against a couple in Texas who were alleged to be routinely diverting investor dollars to other "undisclosed businesses and for their personal use."

In September 2014, a third case was brought against three people collecting EB-5 investments for an ethanol plant project in Ulysses, Kansas, that was never built. This June, the SEC cracked down on two men who created two firms, one in Florida and the other in Hong Kong, that solicited foreign investors for EB-5 investments through a website, claiming a 100 percent success rate in getting to the final step of a permanent green card.

"While raising money for EB-5 projects in the U.S., these two firms were not registered to legally operate as securities brokers," Eric Bustillo, director of the SEC's Miami Regional Office, said in a statement. "The broker-dealer registration requirements are critical safeguards for maintaining the integrity of our securities markets, and the SEC will vigorously enforce compliance with these provisions."

Stenger maintains the high-profile EB-5 fraud cases the SEC has pursued in the past several years explains an interest in Jay Peak and other large EB-5 projects across the country.

"This is something we know is taking place at other regional centers," Stenger said. "It stems from the fact there have been projects around the country that have not been legitimate. The SEC has made it clear they are looking at the EB-5 program. It does make logical sense they would look at some of the biggest and longest lasting projects."

'These things take time'

Susan Donegan, commissioner of the Department of Financial Regulation, declined to characterize whatever the SEC is doing with regard to Jay Peak as an "investigation," although she has required Stenger to disclose an SEC "review" in revised private placement memoranda for AnC Bio and Q Burke, where Stenger and Quiros are building a new lodge. Private placement memoranda explain projects to potential investors for their consideration.

"Investigation is not my word," Donegan said. "All I know is the disclosure talks about a review by the SEC. We just wanted that to be part of the update so investors can understand the full picture."

Donegan said the DFR is undertaking a financial review of AnC Bio and of Q Burke, and until those reviews are completed, neither project is fully approved. AnC Bio, which broke ground in May, has been allowed to go back to the market to raise additional money, with conditions attached.

"If they bring in more investor money, it must be placed in escrow and can't be touched until DFR finishes its financial review and clears the project," Donegan said.

Stenger said last week he had raised about $10 million of the final $20 million he needs for AnC Bio. He raised about $65 million before DFR's requirement was in place, which is not subject to the escrow requirement, Donegan said.

Bill Stenger (right) introduced Dr. Ike Lee, CEO of AnC Bio Vermont (left), and Todd Bacheldor, CEO of Menck Windows Vermont (rear), at the former Bogner facility that will house AnC Bio and Menck in Newport on Thursday, April 10, 2013.

"I'm focused on the new money right now," she said.

Things are a little more anxiety-inducing at Q Burke, which still is going through a revision of its private placement memorandum required by DFR, and can't go to market for more investors until that revision is complete. Meanwhile, Stenger said, the hotel is nearing completion, with 200-300 workers on the site. He needs to raise another $25 million for the project.

"We are working with DFR as we speak on what I think are the final details of the private placement memorandum," Stenger said. "There's been several weeks of discussions. They asked us to enhance and expand on certain elements of the memorandum. We've done so very collaboratively."

Stenger's attorneys were meeting with the Department of Financial Regulation on Thursday afternoon to discuss what he hoped was the final version of the private placement memorandum. Stenger said he had a "number of people" ready to invest as soon as the memorandum receives final approval, and unlike AnC Bio, where new money is required to go into escrow, he will be able to use the dollars he raises for Q Burke on completing construction.

"The reason for that is because the project is in midstream," Stenger said. "If you were to go to Burke Mountain, you'd see a very big hotel nearing its final stages. So we need to be continuing to put the investor dollars to work to build the hotel and get ready for a Dec. 11 opening.

"The commissioner and her staff have been very understanding of that reality."

Despite Stenger's urgent time line, Donegan said she would put no deadline on the department's final approval — or rejection — of the two projects, AnC Bio and Q Burke.

"These things take time," she said. "We take our time to do a thorough vetting. What that means for investors is they are getting a compliant project and also receiving the disclosures they need to make an informed decision.

"We're not judging the project. This is an investment. It might not pan out but as long as the risks are fully disclosed then we've met our statutory requirements."

http://www.burlingtonfreepress.com/story/news/local/vermont/2015/07/06/jay-peak-stenger-eb/29760137/

Mentions

• Vermont EB5 Regional Center
• Bill Stenger
• Edward Carroll
• Jay Peak - Q Burke Mountain Resort, Hotel and Conference Center L.P.
• Jay Peak - AnC Bio Vermont
• Patrick Leahy
• Peter Shumlin

States

• Vermont