Three years on, no criminal charges in Jay Peak fraud

2019/04/28 12:57pmVermont EB5 Regional Center 1461

Gov. Peter Shumlin, Jay Peak CEO Bill Stenger, Ariel Quiros, the owner of Jay Peak, and his son Ary Quiros at a ribbon cutting.

No criminal charges have been brought in the Jay Peak Resort fraud scandal — three years after federal and state regulators filed civil charges against the developers, Ariel Quiros and Bill Stenger. Both men settled the civil charges with the U.S. Securities and Exchange Commission more than a year ago and came to an agreement with the state 10 months ago.

The SEC brought 52 civil counts of securities fraud in April 2016 against Quiros, Jay Peak’s owner, and Stenger, the CEO of the Northeast Kingdom ski resort. The federal regulators charged the businessmen with misusing $200 million in EB-5 foreign investor funds to develop hotels and condos at the resort, a hotel and athletic center at Burke Mountain, and an office building and a proposed biomedical facility in Newport.

Federal authorities said the two developers were running a “Ponzi-like” scheme, using new investor money to pay for previous projects.

A day after the SEC case was filed, former Vermont Attorney General William Sorrell announced that the state had brought a separate case against Quiros and Stenger, alleging the developers had violated state civil securities laws.

At the time, Sorrell said his office would defer any criminal investigations or prosecution to the U.S. Attorney’s office in Burlington.

Since then, there has been no word on the status of the criminal investigation in the largest fraud in the history of the state and the federal EB-5 program.

“I’m surprised,” said Sorrell, who left office in January 2017 after not seeking re-election, in recent interview about the lack of any criminal charges brought in the case.

“I stand by the decision to defer the matter to federal criminal investigative authorities who have way more horsepower and much more expertise in complex commercial crimes than the state,” he said.

Federal prosecutors in Vermont have been tight-lipped about the probe, refusing to either confirm or deny whether an investigation is still underway. Through a spokesperson, Christina Nolan, the U.S. Attorney for Vermont, declined comment last week.

Quiros and Stenger settled their cases with the SEC more than a year ago.

Quiros, who fought the case, was forced to give up ownership of properties in Jay, Newport and Burke worth about $82 million, and paid a penalty of $2 million. Stenger cooperated with federal regulators and agreed to a $75,000 penalty.

The state settled with Quiros for $2 million and Stenger for $100,000.

Meanwhile, most of the investors have not been repaid and more than 400 do not have green cards.

Neither Quiros nor Stenger admit or deny wrongdoing, and, ironically, both men have won insurance settlements. Quiros will receive $800,000, and Stenger $200,000 in payments from Minnesota Ironshore Indemnity to pay their legal bills.

Timelines in notable cases

While prosecutors have noted the complexity of the Quiros-Stenger conspiracy, other similar cases have been handled more quickly. In a high-profile EB-5 case in Chicago, regulators leveled criminal charges within a year and a half of filing civil lawsuits against a developer who bilked $160 million from foreign investors.

The SEC sued Anshoo Sethi in February 2013, and federal prosecutors in Illinois brought criminal fraud charges against him 18 months later in August 2014. In February 2017, Sethi was sentenced to three years in federal prison.

The Chicago Tribune reported that Sethi had misrepresented to investors that he had franchise deals in place with hotel chains.

“He also vastly overstated his own background as a developer,” the newspaper reported. “In one brochure circulated in China, Sethi claimed 15 years of experience as a developer — which would have meant he’d started when he was 14.”

Other high-profile fraud cases played out within similar timelines:

• In Seattle, in 2017, developer Lobsang Dargey was sentenced to four years in prison following guilty pleas to federal offenses, including wire fraud, for diverting EB-5 investor money into his own pocket. According to the Kirkland Reporter, Dargey was able to convince Chinese investors to put $240 million into projects, and he then illegally spent the money on projects that didn’t meet EB-5 requirements, or spent the money on himself. He was sentenced two years after he was charged, and ordered to pay $24 million in restitution.

• Federal authorities arrested New York financier Bernie Madoff on Dec. 11, 2008, one day after he reportedly confessed to his employees to operating a Ponzi scheme, and that the firm had lost more than $50 billion in investor funds. Federal authorities arrested him on a single count of securities fraud, and he was sentenced six months later to 150 years in prison.

• In June 2003, Martha Stewart was indicted on a slew of charges, including securities fraud, one year after the SEC and U.S. Department of Justice launched an investigation stemming from a stock trading probe. She was convicted in March 2004 of one count of obstructing justice and another charge of conspiracy. A few months later, in July, she was sentenced to five months in prison.

Attorney Jerry O’Neill has litigated dozens of cases for survivors of abuse in the Catholic Church.

Jerry O’Neill, a Burlington attorney and former federal prosecutor in Vermont, said the complex nature of the case involving many transactions and different jurisdictions could be among the reasons for such a long investigation in the Jay Peak case.

“There just isn’t any way to know for sure, though,” said O’Neill, adding he had no “inside information.”

O’Neill did say civil lawsuits brought by state and federal regulators did contain many allegations against the Jay Peak developers.

“There was a lot of alleged fraud and it would certainly raise the question in many people’s minds why isn’t there criminal prosecution,” O’Neill said.

“Looking at it,” he added, “one would think there would be a substantial likelihood of criminal prosecution, but it’s difficult to tell without looking at all the evidence about what these people engaged in.”

Melissa Visconti, a Florida attorney representing Quiros, said that she is aware federal authorities are continuing a probe into the EB-5 Jay Peak investment scandal.

“We — we being those of us that are working with and on behalf of Mr. Quiros — are aware that
there is a federal criminal investigation regarding Jay Peak,” said Visconti, herself a former federal prosecutor in Florida.

“I really honestly don’t know who they are targeting,” she said. “I can only guess.”

“Our understanding is that it’s the Vermont U.S. Attorney’s office that’s leading that (investigation),” Visconti said. She declined further comment on the matter.

Asked if her client, Quiros, has been called before a federal grand jury, she replied, “I can’t tell you that.”

Brooks McArthur, a Vermont attorney representing Stenger, declined comment last week when asked about the possibility of criminal charges in the case.

Web of connections

Bill Stenger (right) presides over the ribbon-cutting ceremony to open Jay Peak’s Stateside Hotel and Baselodge in December 2013.

What complicates the Jay Peak case is the web of Vermont connections that enabled Quiros and Stenger to pull off the biggest swindle in Vermont and the largest fraud in the history of the national EB-5 program.

In a blistering review issued last July, U.S. Citizenship and Immigration Services shut down the Vermont EB-5 Regional Center because the state — over an eight-year period — made misrepresentations to investors and failed to stop the Ponzi-like scheme at Jay Peak.

For example, the review cited a proposed $110 million biomedical research facility, called AnC Bio Vermont, in Newport never got off the ground. Federal regulators termed it “nearly a complete” fraud, and USCIS in its report stated the state made “material misrepresentations” when it signed off on the project

The state is appealing the termination decision by USCIS.

Similarly, in the state enforcement action, Visconti, Quiros’ attorney, argued that the state had “unclean hands.” She contended the state was also liable for the alleged fraud because state officials who had knowledge of financial improprieties at Jay Peak did nothing to stop the Miami businessman.

The lure of 10,000 jobs in the state’s poorest region, the Northeast Kingdom, was like catnip for two governors, the congressional delegation and commerce agency officials.

Top politicians — former Govs. Jim Douglas and Peter Shumlin, U.S. Rep. Peter Welch, D-Vt., and U.S. Sen. Patrick Leahy, D-Vt. — served as cheerleaders for the Northeast Kingdom developments, traveling overseas to solicit investors on behalf of Quiros and Stenger.

And there were personal relationships — Leahy and Stenger were friends and Shumlin had a close relationship with Quiros — that were advantageous to the developers. (Shumlin, who took more than $20,000 in campaign contributions from the Jay Peak developers and associates and stayed several times with a girlfriend at Quiros’ luxury condo in New York City, went so far as to tell investors the state was auditing the projects.)

The developments at Jay Peak were never audited by the state — or anyone else, according to SEC filings.

Shumlin later said he misspoke about the auditing of the projects.

The stamp of approval from Shumlin and Leahy set the tone for state officials down the line. When whistleblowers came forward to question financial improprieties at the resort, state officials overseeing the state EB-5 program failed to act.

The network of connections extended to the U.S. Attorney’s office. Eric Miller, the top federal prosecutor, was recommended by Leahy for the position in 2015, shortly after Elizabeth Miller, his wife, left her job as chief of staff for Shumlin. Elizabeth, who is a fundraiser for Leahy and the Democratic Party, had served in the Shumlin administration for five years at that point.

At the time of the filing of the federal and state civil enforcement actions against Quiros and Stenger in April 2016, Eric Miller said his office was investigating whether federal criminal charges should be filed.

“My office has been conducting and will continue to conduct an investigation designed to determine whether or not there have been violations into federal criminal law in connection with EB-5 projects in the Northeast Kingdom,” Miller said.

No charges were brought on his watch, which ended in 2017.

Elizabeth Miller declined comment last week, and referred any questions on a criminal probe to the U.S. Attorney’s Office. Eric Miller couldn’t be reached for comment.

Nolan, who was also recommended by Leahy for the position of U.S. attorney for Vermont, took the post last year, appointed by President Donald Trump.

Rep. Peter Welch, Bill Stenger, Sen. Patrick Leahy, Sen. Bernie Sanders, Gov. Peter Shumlin, Ariel Quiros and Bill Kelly.

An outsider’s view

Mark Labaton, an investment fraud attorney in Los Angeles in private practice with the firm Cypress LLP, who also served as federal prosecutor in the Central District of California, agreed with O’Neill that it’s hard to know what is happening behind the scenes.

He said U.S. attorneys’ offices and federal prosecutors are notoriously tight-lipped when it comes to cases under investigation, and typically won’t even disclose when a probe has ended.

“It’s hard to know what’s happening unless somebody leaks something or something happens,” Labaton said. “The Department of Justice is pretty quiet.”

He added, “Whether they’re a month from indicting someone or a year away, or never will, it’s sometimes hard to gauge.”

He said civil cases tend to move faster because of the lower burden of proof. In criminal matters, prosecutors must prove their cases beyond a reasonable doubt, while in civil cases, the standard of proof is a preponderance of the evidence — or more likely than not.

“There is a lot of urgency to move more quickly on the civil side before the assets disappear,” he said. Criminal prosecutors, he said, often want to make sure they have their “ducks in a row” before moving forward.

“The Department of Justice has very high standards in bringing cases,” Labaton said. “In a very high-profile case when they indict people, they want to make sure they have all the goods to convict.”

Three years, he said, is a long time for a criminal investigation to run, but he has seen cases where probes have lasted longer and led to prosecution.

“I don’t know enough to speculate as to why it’s taking three years in this case — whether it’s a question of prosecutors being cautious, whether it’s a question of some real proof issue of proving their cases,” he said. “It could be one of many reasons.”

Why no Vermont charges?

Vermont Attorney General William Sorrell speaks Thursday about alleged fraud in a string of development projects in the Northeast Kingdom funded with immigrant investors’ money. Looking on is Gov. Peter Shumlin.

While the federal authorities took the lead on the Quiros-Stenger case, the state could also seek its own separate criminal prosecution.

Vermont Attorney General TJ Donovan referred questions about any Jay Peak criminal probe to the U.S. Attorney’s office. “As I said before, the federal government has a criminal investigation,” Donovan said in a recent interview.

Donovan said when he took office in January 2017, his predecessor, Sorrell, had already made the decision to push forward with civil litigation against the Jay Peak developers and defer the criminal matter to federal prosecutors.

“That was the hand that was dealt, that I inherited,” Donovan said. “The civil case foreclosed a criminal action from the state of Vermont.”

Donovan said he believes the state can’t bring a civil action against someone and then move forward with criminal charges. That’s because in the civil case, an entity can compel information and obtain evidence through the discovery process, he said.

Sorrell, who preceded Donovan as attorney general, disagreed with that assessment.

“There is absolutely nothing precluding state authorities from considering criminal charges,” he said. “I disagree that anything that we did precluded the ability for the state and/or federal authorities to move forward criminally, I totally disagree with that.”

Donovan said by starting with the civil action, it allows the office to “compel” testimony from parties, such as turning over records in the case. That raises ethical issues, he said.

“Can I then somehow say, ‘Now I’m going to bring a criminal case and now I’m going to take all the information I had in my possession and somehow wall it off in order to not violate your Fifth Amendment rights?’” Donovan asked. “Can I ethically do that? I don’t think I can.”

The situation is different with the federal government, Donovan said, because separate offices are involved, with the SEC bringing the civil action and the U.S. Attorney’s office considering the criminal prosecution.

On the state level, Donovan said, it would be the attorney general’s office handling both the civil and criminal prosecution if he moved forward on filing charges.

“How am I ethically going to say,’ I’m not aware of this stuff to bring forth a criminal charge when I’m already in possession?’” he said. “That posed a real ethical issue on this.”

Sorrell countered that matters of what evidence can be introduced in proceedings or turned over can be taken up at that time. If a person believe believes their Fifth Amendment right is being violated, Sorrell said, “That will be litigated.”

“There’s nothing that ties the state’s hands from moving criminally,” Sorrell said, unless the statutes of limitation had expired on any charges that would be considered or any legally binding agreements had been made with the targets of the probe.

The state settlement with Quiros and Stenger did not contain an agreement closing the door on a criminal prosecution. And neither did Sorrell’s agreement to let federal authorities head the criminal investigation.

“The deferral to the feds on the criminal side was just between prosecutors,” Sorrell said. “There was no agreement with the defendants.”

Sorrell said a driving force in his decision to refer the matter to federal authorities was the complex nature of the case, involving financial transactions across state lines as well as possible international bank accounts and allegations of shell corporations.

At the press conference three years ago, he pointed to a chart showing spaghetti-like connections among the types of businesses and financial instruments Quiros and Stenger allegedly used to cover up bank transfers and the commingling of funds.

“This is not a simple bank robbery,” Sorrell said. “This is a very sophisticated and complex series of financial transactions which we contend were all intended to defraud investors to enrich at least Quiros.”

Attorney General T.J. Donovan testifies before the Senate Judiciary Committee at the Statehouse in Montpelier on Thursday, Jan. 31, 2019.

Donovan, to back his argument, points to the Vermont Rules of Professional Conduct for attorneys, rule 4.5. It is titled, Threatening Criminal Prosecution.

“A lawyer shall not present, participate in presenting, or threaten to present criminal charges in order to obtain an advantage in a civil matter,” the rule states.

Donovan said if his office did bring criminal charges in a matter where a civil case remains ongoing, defense attorneys could contend that the prosecution amounted to coercion to try to force a resolution in the civil matter.

“I think you’re real close to 4.5,” he said.

Donovan added that on his first day in office in January 2017 he discussed with his staff why state criminal charges had not been brought in the EB-5 case.

“My first question in the office was why wasn’t this a criminal case,” he said. “I concur with the issues raised in terms of the ethics of the same office that brought a civil charge bringing criminal charges against the same individuals.”

“You talk to five lawyers,” Donovan added, “you’re going to get five different opinions. This is the opinion I received from my office, from people I trust, and it’s the opinion I agree with.”

Now that a resolution to the civil case is near, Donovan said there are still impediments.

“Number 1, you have the federal investigation,” he said, adding that he doesn’t want to interfere with criminal probe by the U.S. Attorney’s office.

“Number 2 — and we had this conversation internally — I think you still run into the problem of how to segregate all the information you obtained in the civil case over a process of two years that you might not be entitled in a criminal matter,” he said.

Vermont Defender General Matthew Valerio, whose office represents many of Vermont’s criminal defendants, said he didn’t believe bringing a civil action against someone prevents a prosecutor from filing charges against that same person.

“I don’t see how a pre-existing civil matter has anything to do with precluding a criminal action down the road if the facts lead to there,” Valerio said. “People do have Fifth and Sixth Amendment rights that they can invoke throughout the civil matter if there is the potential criminal liability.”

He then added, “You have a right to not make a statements that may lead to criminal prosecution.”

As to the rule cited by Donovan, Valerio said he is not aware of any threats that have been made to reach the resolution to the civil case.

“I’m not fully familiar with everything that went in EB-5, but that’s my understanding,” Valerio said. “If that didn’t occur, then there is no ethical violation.”

Donovan said if during a civil case he came across information he believed warranted criminal charges he would “refer out” that information, to either federal prosecutors or a separate county state’s attorney’s office.

“It would go to separate office,” he said.

Looking ahead

O’Neill, the former federal prosecutor in Vermont, said possible offenses prosecutors could be looking at include bank, wire and mail fraud. However, he said, proving a federal fraud case isn’t as simple as prosecuting someone for stealing an item from a store.

“Part of the difference of it is, it’s pretty easy to prove generally speaking that someone stole a loaf a bread,” O’Neill said. “Whereas, when you get to fraud charges it’s often a matter of intent. You have to prove someone engaged in a fraud scheme intended to defraud.”

He added there are indicators of fraud and “you probably have a number of them here, but it’s tying them all to together in order to prove a fraud case. Whether or not that’s the case here, I don’t know.”

To find that intent, O’Neill said, investigators need to comb through documents, emails as well as other statements.

“Of course, you can just interview the people and they can acknowledge it,” he said. “but the people engaged in these kind of levels are immediately going to go to a lawyer and a lawyer will say, ‘You’re going to keep your mouth shut.’”