Quiros to Pay $84 Million for EB-5 Investment Fraud
On February 2, 2018, the U.S. Securities and Exchange Commission (SEC) announced an $84 million settlement ($81.4 million in disgorgement, $2.5 million in prejudgment interest, and a $1 million civil penalty) with Jay Peak ski resort owner Ariel Quiros. The SEC brought charges against Quiros in early 2016 after discovering his nearly decade-long scheme perpetrated through the EB-5 Immigrant Investor Program (EB-5 Program). The EB-5 Program offers foreign investors the chance to earn permanent residence in the U.S. if they make an investment of $1 million or $500,000 in U.S. project that creates or preserves at least 10 jobs.
Quiros and William Stenger, the president and CEO of Jay Peak (who has already agreed to cooperate with the SEC), used the EB-5 program to raise more than $350 million from 700 foreign investors for the construction of Jay Peak ski resort in Vermont. Unfortunately for the investors, a majority of their money was never used to construct the ski resort or create jobs. According to the SEC’s complaint, Quiros and Stenger misused more than $150 million of the foreign investors’ money in a “Ponzi-like fashion” to cover losses in unrelated projects. In addition, Quiros used more than $50 million of the investors’ money as his own personal piggy bank, which included the purchase of a luxury condominium, payment of his income taxes, and the acquisition of an unrelated resort.
This $84 million settlement represents only one of the many lawsuits initiated as a result of the fraudulent EB-5 project. In another suit, Jay Peak’s EB-5 investors filed a class-action lawsuit against Raymond James, which held the investors’ funds, and its former branch manager, Joel Burstein, for facilitating the scheme. According to court documents, Raymond James and Burstein aided and abetted the fraud by, among other things, providing millions of dollars in loans to Quiros that were collateralized with the EB-5 investors’ funds, even though they knew that the funds belonged to the investors. In April 2017, Raymond James agreed to a record-setting EB-5 settlement of $150 million with the investors. Citibank also agreed to a $13.3 million settlement for extending a $15 million personal line of credit to Quiros, which was also secured by using investors’ funds as collateral.
In total, the fraudulent EB-5 project and the subsequent litigation lasted more than a decade. In recent years, the SEC has utilized whistleblowers to detect and halt ongoing EB-5 investment fraud well before it grows to Jay Peak’s magnitude. In exchange for information about EB-5 fraud (or any other securities law violation), the SEC offers monetary awards to whistleblowers under its SEC Whistleblower-Reward Program. The SEC has already issued a $14.7 million SEC whistleblower award to a whistleblower who reported EB-5 investment fraud (see details below).
SEC Whistleblower Program Provides Awards for Information About EB-5 Investment Fraud
Under the SEC Whistleblower Program, whistleblowers are eligible to receive a reward for providing the SEC with original information about violations of the federal securities laws, including EB-5 fraud. If the SEC uses a whistleblower’s information to bring a successful enforcement action with monetary sanctions in excess of $1 million, the whistleblower is eligible to receive 10% to 30% of the monetary sanctions collected as an award. The program permits whistleblowers to submit tips anonymously if represented by an attorney.
Since 2011, whistleblower tips have led to enforcement actions resulting in more than $1 billion in financial remedies from wrongdoers and the SEC has awarded more than $175 million to whistleblowers. One of these whistleblower tips, which led to a successful SEC enforcement action, underscores how the SEC Whistleblower Program is a critical tool to combat EB-5 investment fraud.
SEC Awards $14.7 Million Award to Whistleblower for Exposing EB-5 Investment Fraud
In late-2012, a whistleblower (Michael Sears) provided a tip to the SEC about EB-5 fraud in a project run by Anshoo Sethi. According to the SEC’s complaint, Sethi was able to raise more than $145 million from EB-5 investors by making material misrepresentations about his EB-5 project to construct the “World’s First Zero Carbon Emission Platinum LEED certified” hotel and conference center. After raising the funds, Sethi diverted more than $2.5 million to his own personal bank account in Hong Kong. Fortunately for the EB-5 investors, Sears’ tip enabled the SEC to bring the scheme to an early halt before Sethi could steal more of the investors’ money.
On February 8, 2012, the SEC obtained an emergency court order to freeze the assets of Sethi and his companies in order to protect the remaining $147 million in investor funds. Shortly thereafter, on April 19, 2013, the court ordered the return of the $147 million to the investors and Sears became eligible to apply for an award.
On October 1, 2013, the SEC announced the more than $14 million SEC whistleblower award to, who was later determined to be, Sears. (Note: The SEC protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity. As such, the SEC’s press release did not identify Sears as the whistleblower, nor did it disclose the actual amount of the $14.7 million award. Sears’ identity and the amount of the award were only revealed after his business partner, John Tung, filed a lawsuit against him for part of the whistleblower award.)
Jay Peak Whistleblower(s) May Receive Multi-Million Dollar SEC Whistleblower Award
Reports indicate that a whistleblower (or two) likely reported information to the SEC about Jay Peak fraud and may be eligible for an SEC whistleblower award. Douglas Hulme, a key consultant to Quiros and Stenger in Jay Peak, reportedly raised concerns about the project’s financials and misuse of EB-5 funds to the State of Vermont in May 2012. Documents suggest that the state ignored Hulme’s concerns for years and opened an investigation in 2015, a year after federal authorities began their investigation. In addition, Antony Sutton, one of Jay Peak’s EB-5 investors, raised concerns to state officials in November 2014. If the whistleblowers also reported the information to the SEC (which appears probable as the state was slow to act), they may be eligible to receive an 10% to 30% of Quiros’ $84 million settlement as an award.
Increase in EB-5 Investments and Fraud Presents Opportunities for SEC Whistleblowers
EB-5 investments have skyrocketed the past few years presenting more opportunities for fraudsters to exploit the program. The SEC warned investors about a rise in EB-5 investment scams in an investor alert in 2013. Since the alert, however, the scams have only increased as detailed in recent testimony on the EB-5 Program. In fact, since 2013, the SEC has brought 15 enforcement actions against EB-5 projects that raised more than $1.2 billion from EB-5 investors and then proceeded to misuse or steal more than $361 million of the investments. Due to the increase in EB-5 investments and fraud, whistleblowers will have many opportunities in the future to report EB-5 fraud, protect investors, and become eligible for an SEC whistleblower award.
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