State files suit alleging investor fraud at Jay Peak, Inc EB-5 Projects

-A A +A

State files suit alleging investor fraud at Jay Peak, Inc EB-5 Projects

Thu, 04/14/2016 - 3:08pm -- katie

The Tram House Lodge was part of the Phase I project at Jay Peak and generated the first investor complaints. Vermont Business Magazine photo.

by Timothy McQuiston Vermont Business Magazine State and federal officials revealed Thursday that a massive fraudulent scheme was undertaken at Jay Peak Resort and Q Burke Resort that involved hundreds of millions of dollars and which goes back to 2008. The Securities & Exchange complaint alleges that the developers, Ariel Quiros and Bill Stenger, engaged in a "Ponzi-like" scheme that "looted" foreign investors in the EB-5 program. Vermont Attorney General William Sorrell in an analogy likened it to a "bank robbery." But so far only civil complaints have been filed on both the state and federal level. Criminal charges could come eventually. About $400,000 million in 10 developments, along with hundreds of jobs, are at stake.

overnor Peter Shumlin, Department of Financial Regulation (DFR) Commissioner Susan Donegan, Attorney General William Sorrell, and Agency of Commerce and Community Development (ACCD) Secretary Patricia Moulton on Thursday afternoon announced that the State and US Securities and Exchange Commission (SEC) have filed similar civil actions alleging investor fraud dating back to 2008 at EB-5 development projects run by Florida resident Ariel Quiros and Bill Stenger. The State’s lawsuit filed in Washington Superior Court is the result of over a year-long investigation by DFR into the finances of the projects. The State’s complaint was filed in coordination with the SEC’s case filed in federal court in Florida. The officials insisted that the resorts will remain open for business, but that the AnC Bio medical facility in Newport and the downtown Newport hotel project "will not happen."

From his very first contact with Jay Peak in 2008, Quiros "improperly" and with Stenger's assistance, bought Jay Peak Resort with a substantial amount of EB-5 funds. AnC Bio, meanwhile, was to be a $110 million, medical clean-room EB-5 project originally set to open this fall. The SEC alleges that AnC Bio, the last of the approved projects, was a virtual ATM machine for Quiros.

The downtown Newport project, where a large building was demolished and a hole now sits, is not an EB-5 project. Quiros and Stenger were also the developers of that project and would be required to at least turn it into a green space, though the enforcement of that is unclear at this time.

The Allegations:

Attorney General Sorrell shows the money flow and how the EB-5 funds were fraudulently moved around. VBM photo.

The complaints allege that Quiros and Stenger misused more than $200 million of investor funds intended for EB-5 development projects in northeastern Vermont. The cases further allege that Quiros misappropriated an additional $50 million of investor funds for his own personal use. According to the allegations, investor funds were unlawfully diverted, or misused, between and among various EB-5 projects over many years.  In addition, Quiros’s alleged misappropriations of investor funds for personal use include: over $2 million to purchase an apartment at Trump Place in New York City; millions of dollars to pay personal income taxes and other personal expenses; and over $20 million to purchase Jay Peak and Q Burke Resorts.

In the SEC case in Miami, a federal judge has granted the SEC’s request for a temporary restraining order to freeze Quiros’s assets, and prohibit Quiros and Stenger from involvement in EB-5 projects while the federal case is pending.  In addition, the federal court has appointed a receiver to oversee Jay Peak and Q Burke Resorts and the EB-5 projects at issue while the litigation is pending.

Sorrell said at this time these are civil complaints and that no criminal charges have been filed and that the state has no plan at this time to file criminal charges. However, the US attorney's investigation is continuing and criminal charges could come at a later date.

Legislators reporters and others packed the governors ceremonial State House office Thursday afternoon. Vermont Business Magazine photo.

On Tuesday, Stenger told Vermont Business Magazine that he had not heard from the SEC in "months and months." He also said he could not understand why the state and news organizations had taken such a heavy hand in these projects. He also said that the insinuations that there was criminal activity was unfounded.

The fraud allegedly began when millions of investor funds intended for two EB-5 projects at Jay Peak – Jay Peak Hotel Suites L.P. (also known as Tram Haus Lodge or Phase I) and Jay Peak Hotel Suites Phase II L.P. (also known as Jay Hotel, Pump House or Phase II) – were used instead to purchase the Jay Peak Resort in 2008. Over the next seven years, investor funds were allegedly funneled through a complex web of accounts, which facilitated the misuse of funds between projects as well as the personal enrichment by Quiros. DFR has tracked over 100 accounts at ten financial institutions involved in the scheme.

RELATED STORIES:

State, SEC reveal complaints: Quiros, Stenger 'looted' $50 million

Leahy seeks to reform EB-5 program, eliminate gerrymandering

Comments of Senator Patrick Leahy on state and federal EB-5 enforcement actions in Vermont

In a typical EB-5 project, investor funds are raised and used to complete a specific project described in the project’s Private Placement Memorandum (PPM) or offering document. The complaints allege that, following the misappropriation of investor funds to purchase Jay Peak Resort in 2008, later investor funds were misused and commingled, and used for personal enrichment by Quiros. 

Shumlin was adamant that the intent of all the state and federal officials was to maintain and operate Jay Peak Resort and Q Burke Resort.

Vermont’s Unique EB-5 Oversight Structure:

The growing popularity and complexity of the federal EB-5 program has led to enhanced SEC scrutiny of projects across the country.  Recognition of the growing complexity of the program led Gov. Shumlin in September 2014 to ask ACCD and DFR to develop a partnership to better oversee EB-5 projects in Vermont.

Very top photo of the Tram House Lodge by Vermont Business Magazine. Right photo courtesy of Q Burke.

In December 2014, DFR and ACCD signed a Memorandum of Understanding that brought DFR’s financial and securities expertise to the oversight of EB-5 projects statewide. Vermont’s EB-5 Regional Center, established in 1997, is unusual in that it is one of two active centers administered by a state for the purpose of economic development, not a private entity for the purpose of making money.  As part of its role in helping to administer Vermont’s EB-5 Regional Center, DFR has been conducting an in-depth financial review of the projects at issue in this case since January 2015. 

“This is obviously a difficult day for Vermont and for the many people, myself included, who are so invested in growing jobs and economic opportunity in the Northeast Kingdom,” said Gov. Shumlin.  “Most of all, this is a difficult day for the hundreds of employees in the Northeast Kingdom who rely on Jay Peak, Q Burke, and the related projects that appeared to hold so much promise. My commitment as Governor is to do everything I can to protect these Vermonters’ jobs, protect the investors who are victims of these allegations, and ensure that we do all we can to make the very best of a terrible situation.” 

“We allege that since 2008, the defendants have defrauded hundreds of millions of dollars from hundreds of investors,” said Commissioner Donegan.  “The duty of my Department is to ensure that Vermont’s securities laws are followed, and that investors are protected.  We are committed to ensuring that justice is served, and will continue to work closely with our federal partners as this matter proceeds.” 

The hole in the ground in downtown Newport. Vermont Business Magazine photo.

“Vermont law prohibits unfair and deceptive acts and practices in commerce.  There is no different standard when the marketing is to those residing overseas.  This is early in a massive and complex case. We will continue to expend the necessary resources to see that justice is done,” said Attorney General Sorrell. 

“Today’s actions show how the Vermont Regional Center projects are under greater scrutiny than is available for investors elsewhere,” said Secretary Moulton.  “While this is a very disturbing day for the investors and Vermonters impacted by these projects, my staff and I will be working as hard as we can to preserve jobs and economic opportunities for the people of that region and to assist the Department in protecting investors.”

Filings in the case, as well as more information for investors and the public, are available at: http://www.dfr.vermont.gov/

Status of the Projects While the Litigation is Pending:

The federal court has appointed Michael Goldberg, a lawyer from Miami, as the receiver to oversee and administer the assets of the EB-5 projects at issue in the federal and state complaints.  The receiver will act as a neutral party who will work to preserve all assets and property at issue while the litigation is pending and to keep the resorts operational with minimal, if any disruptions, to employment and services.  Ultimately, the receiver will determine the amounts owed to individual creditors and investors, and will distribute available assets in accordance with a court order.  The State and Vermont’s Regional Center have been in contact with the receiver, and will work closely with him to help protect the investors, employees, contractors and other creditors of the defendants and all associated EB-5 projects. 

The State will provide more information about the receiver as it becomes available. 

Artist rendering of the AnC Bio Vermont facility. The old Bogner plant to the left was destined to become a warehouse.

The AnC Bio and downtown Newport projects are not going to happen, according to the Governor.

The EB-5 Program:

Congress created the EB-5 program in 1990.  The program, which is administered nationally by the U.S. Citizenship and Immigration Services (USCIS), provides green cards to foreign residents who invest at least $1 million — or $500,000 in a high-unemployment or rural area like Vermont — in a U.S. business that then creates a certain number of jobs for U.S. workers.

Cities, states, and other entities may apply to USCIS for approval as a “Regional Center.”  This allows the entity to partner with “new commercial enterprises” that accept investments from foreign nationals.  USCIS first approved Vermont’s ACCD as a Regional Center in 1997.  The purpose of the Regional Center is to provide support for partnered EB-5 projects and to approve the terms of the project through a Memorandum of Understanding with the project.  DFR formally joined in the administration of Vermont’s EB-5 Regional Center in December 2014. 

Vermont’s EB-5 Regional Center, headquartered at ACCD, remains open and available to EB-5 projects unaffected by this case.  Questions regarding other EB-5 projects in Vermont may be directed to: http://accd.vermont.gov/business/relocate_expand/eb5

Lt. Governor Phil Scott today issued the following statement on recent developments with Jay Peak Inc. and Q Burke:

"First and foremost I am concerned about the hundreds of affected workers and their economic security. The Northeast Kingdom has relied heavily on the jobs created by this development. Based on information from the Securities and Exchange Commission this project is in jeopardy, and this will be devastating to the workers, their families, the community and many businesses in the region. I’ve reached out to the Northeast Kingdom’s Senate delegation and will be working closely with them on this ongoing matter.

"I don’t have all of the details before me; very few of us do, but I look forward to obtaining the uncensored facts. It is imperative we determine whether or not all laws have been followed. At a minimum there appears to be a significant lack of oversight on this project. We need immediate answers to basic, yet essential, questions. What went wrong at Jay Peak and Q Burke? How was this allowed to deteriorate to the point it is now? What steps, if any, did the Administration take to prevent this from happening? This is obviously very troubling at a time when faith and trust in government is extremely low. We should be taking steps to restore Vermonters’ confidence in state government. Therefore, we must demand full transparency and accountability on this matter, learn from this and assure Vermonters it will not happen again in order to give Vermonters a clear reason to trust the integrity of their government.”

A day in September 2012 on the Newport waterfront announcing plans for $500 million in development in the Northeast Kingdom, which Governor Shumlin said brought much hope to the region, resulted in a grim press conference Thursday afternoon. Pictured from left: Congressman Peter Welch, Bill Stenger, Senator Patrick Leahy, Senator Bernie Sanders, Governor Shumlin and Ariel Quiros. File photo.

Click Here to view the video of the press conference held on April 14, 2015.

Click on map below to expand chart.