SEC adds millions to developer’s alleged fraud in Seattle

Developer Lobsang Dargey misappropriated as much as $46 million invested by would-be immigrants in his downtown Seattle Potala Tower, an attorney for a federal regulator claimed Tuesday during a hearing on a court-imposed asset freeze.

That would be more than twice the amount the Securities and Exchange Commission (SEC) alleged when it sued Dargey and his company, Path America, on Aug. 24 for securities fraud.

SEC attorney Susan LaMarca said during a hearing before U.S. District Judge James Robart that after reviewing a nearly 1,000-page accounting ordered by the court, the agency concluded that only $17 million of the $63 million in immigrant-investor funds received for the tower was spent on “legitimate” purposes.

The rest was used to pay other companies Dargey controls, sales commissions to investor-recruitment agents and expenses unrelated to the 40-story Seattle project, she said.

Robart froze Dargey’s assets and those of his companies on the day the SEC filed its suit, although he has since allowed selected payments to contractors and refunds to a few of the Chinese investors. LaMarca said Tuesday that keeping the asset freeze in place is the best way to ensure the “massive, massive misuse of investor funds” doesn’t continue. The hearing Tuesday concerned whether to extend that freeze.

Attorney Daniel Dunne, who represented Dargey in Tuesday’s hearing, said the asset freeze is damaging Dargey’s current real-estate projects, especially the Potala Tower, and could harm the immigrant investors who seek an EB-5 visa.

Under the federal EB-5 visa program, immigrants who invest at least $500,000 in a commercial project that creates at least 10 full-time jobs are eligible to get fast-track approval of a permanent-residency visa, also known as a green card, along with their immediate family.

It’s not a situation where someone has siphoned off money to a bank account in Switzerland or the Bahamas, Dunne said. (The SEC, however, alleges Dargey transferred over $3 million in EB-5 funds to a bank account he controls in Hong Kong.)

“All the money, all the assets are hiding in plain sight,” Dunne said.

Although construction on Potala Tower has ground to a halt, Dunne said, “You can jump in the 60-foot hole of the tower on Fourth Avenue.”

Few EB-5 investors want their money back, Dunne said: Just over a dozen investors in the tower project have requested a refund.

None of the investors in Path America’s mixed-use Everett project has requested a refund, he said, because the project has created the required jobs to be eligible for a green card. The Everett project, which consists of a Hampton Inn, 220 apartments and ground-floor retail, is “95 percent complete,” he said.

Just days before the SEC filed its lawsuit, a publicly traded Chinese real-estate firm called Binjiang invested $60 million in three Path America projects, Dunne said: $30 million in Potala Tower, $15 million in a Shoreline project and $15 million in a project in Seattle’s Othello neighborhood.

Dunne asked the court to release the $15 million in the Othello account back to Binjiang.

Robart said his main concern is enforcing the law.

“Don’t talk to me about the expectations of investors,” Robart said. “Talk to me about the issues the SEC has raised … compelling evidence of misappropriation of funds.”

For example, the SEC alleges Dargey used about $9.3 million in EB-5 investor funds raised for the Everett and Seattle projects to pay sales commissions to agents in China who recruited investors — even though investors were told in offering documents that those expenses would be paid out of administrative fees they paid in addition to their $500,000 investment.

The paying of the commissions out of EB-5 funds was “not permissible, pure and simple,” LaMarca said.

Robart is expected to rule on extending the asset freeze shortly. He also will preside over a Friday hearing on the SEC’s request to appoint a receiver, who would take over management of Path America and its projects.

http://www.seattletimes.com/business/real-estate/sec-raises-estimate-of-dargeys-alleged-diversion-of-funds/

Mentions

• Lobsang Dargey
• Path America
• Potala Tower Seattle
• UNITED STATES SECURITIES AND EXCHANGE COMMISSION
• Potala Village Everett

Litigation Cases

• UNITED STATES SECURITIES AND EXCHANGE COMMISSION vs Path America & Lobsang Dargey & Path America Sonoco

States

• Washington