Business & Economy

VTDigger exclusive: State raises questions about AnC Bio finances

AnC Bio Korea
AnC Bio Korea image from YouTube

© 2015 VTDigger

The court auction of a biotech company headquarters in Seoul spurred state inquiries into a Vermont project with close ties to the South Korean-based research and development firm.

As previously reported, the state suspended the AnC Bio Vermont project last year not long after officials found out about the public auction, and the state is now determining whether the proposed $118 million biotech project complies with state and federal securities laws.

In months of research and an ongoing back-and-forth with the developers of AnC Bio Vermont, the state generated hundreds of pages of documents that show officials had significant concerns about the auction.

A review by VTDigger shows that the state also had questions about the finances of the two companies and whether immigrant investors in the EB-5 biotech project were adequately informed by the developers, Ariel Quiros and Bill Stenger, about the relationship between the Vermont business and AnC Bio Korea.

AnC Bio Korea had been in financial trouble for years, according to an audit of the biotech manufacturing and stem cell research company. But the spring of 2012 was a particularly difficult period for the biotech firm. The value of the company’s stock plummeted, creditors took ownership of its Seoul headquarters that May and AnC Bio Korea had to lease back office space in the building.

Within weeks of banks seizing the property, the South Korean company began taking steps to extend its operations to the United States, and in September 2012, Quiros and Stenger announced they would launch a nearly identical biotech company in Newport.

The formation of an AnC Bio beachhead in the United States had been long anticipated. Quiros and Stenger publicly announced in 2009 that they wanted to create an affiliated company in Vermont. The businessmen planned to manufacture the same organ replacement devices that had been developed by the Seoul company and design a new headquarters in Newport that would be a virtual replica of the one in South Korea. In addition, key members of the AnC Bio Korea team would be involved in the Vermont company.

While AnC Bio Vermont is not a division of AnC Bio Korea in the classic American sense (there is not an apparent legal ownership arrangement), Stenger has told the state that the two companies have a “scientific” and “contractual” relationship. Quiros is listed as a consultant for AnC Bio Korea on the company website.

Like Quiros and Stenger’s ski resort expansions in the Northeast Kingdom, AnC Bio Vermont depends heavily on immigrant investor funds raised through the EB-5 program. The developers are seeking $110 million from 220 foreign investors (plus $11 million in administrative fees) and began promoting the project overseas, with a particular focus on Chinese investors, in late 2012 after state officials approved the project in October of that year.

In documents provided to investors in November 2012, Quiros and Stenger made no mention of AnC Bio Korea’s financial difficulties.

AnC Bio Korea
The AnC Bio headquarters in Seoul.

State officials at Vermont’s Regional EB-5 Center weren’t aware of AnC Bio Korea’s problems until in the course of their own research in May 2014, they learned that the Korean headquarters had been sold at auction to satisfy banks and other creditors.

In a rare move, the center not only suspended the Vermont biotech facility last year, but also threatened to cancel the project altogether unless the developers answered a wide range of probing questions about the finances of the project. The state asked for a market study and an update of the business plan and contracts.

Bill Stenger
Bill Stenger outside the Stateside Hotel at Jay Peak in September 2013. File photo by Hilary Niles/VTDigger

Stenger says the company has complied with all rules and regulations. He welcomes more rigorous state oversight and said in a statement that the project is on schedule: Construction, he said, will begin this spring and the facility will open in the fall of 2016.

The developers say they have also responded to the state’s requests for information and “have invested in a marketing study and legal services to update and satisfy ACCD’s (the Agency of Commerce and Community Development) concerns.”

“I feel we have answered every question asked,” Stenger writes in a January memo to the state.

Stenger also told the state he is anxious to obtain approval as soon as possible because the permanent residency status of investors hangs in the balance.

Stenger has told the media that AnC Bio Vermont would create 3,000 jobs in Newport, a poor town that has had the highest unemployment rate in the state. The project is an opportunity, he says, “to inject some economic vitality into the Northeast Kingdom.”

State demands more disclosure

Brent Raymond, director of the Vermont Regional EB-5 Center, began making inquiries about the biotech company in 2013 because he was concerned about the financing and business plans outlined in AnC Bio Vermont’s 2012 agreement with investors, documents show.

Raymond hired Korean interns to research AnC Bio Korea’s activities, and in 2014 they translated a public audit that showed the company had been in a tenuous financial position since 2008. A leading South Korean accounting firm found that in 2013 AnC Bio Korea had liabilities of $17 million; the company’s taxes were in arrears; and employees were owed compensation.

What is EB-5?

During the recession, it was difficult for developers in Vermont, and nationally, to obtain financing for projects, and the EB-5 immigrant investor program became an attractive alternative to commercial lenders.

In exchange for a $500,000 investment in qualifying projects in Vermont, immigrant investors can seek permanent residency in the United States. Investments under the EB-5 program must be placed “at-risk” in order for immigrants to qualify for permanent residency. That means return of investment is not guaranteed.

The U.S. Customs and Immigration Service requires that each investment results in the creation of 10 jobs.

Projects are exempt from filing documentation with the Securities and Exchange Commission even though investors must sign off on a limited partnership agreement with developers.

Lawrence Miller, secretary of the Agency of Commerce and Community Development at the time, called Stenger into a meeting to discuss the involuntary auction in May 2014.

Shortly after, the state hired Edwards Wildman Palmer, a Boston securities law firm, to determine whether the information Stenger and Quiros offered to investors was accurate and complete. The burning question was whether the developers omitted information about the fiscal health of AnC Bio Korea and the relationship of the Seoul company to the Vermont project in the 2012 offering memorandum (the business plan and associated contracts) given to investors.

A month later, not long after Patricia Moulton took over as secretary, the agency suspended AnC Bio Vermont’s memorandum of understanding, and Raymond and John Kessler, the agency’s general counsel, undertook a seven-month inquiry into the company’s financial affairs. The state agency questioned whether the developers adequately explained the relationship between affiliated companies, the principals of those companies and how investor funds were to be used.

Under the suspension, which began June 27, Quiros and Stenger are prohibited from marketing AnC Bio Vermont, soliciting new investors, spending investor funds or engaging in construction activities. Despite that prohibition, the developers promoted the project at an EB-5 conference in October and began some construction-related work in November. In both instances, state officials admonished the developers for violating the imposed moratorium.

Raymond and Kessler insisted that the developers submit a new offering memorandum to investors that provided more material disclosure, or information that a reasonably prudent investor would want to know.

Brent Raymond
Brent Raymond, director of Vermont’s EB-5 Regional Center. File photo by Hilary Niles/VTDigger

In an interview with VTDigger, Moulton said the private placement memorandum was old, the state was concerned about the auction of the Korean headquarters and more information about the business plan was necessary because “biotech is a rapidly changing sector.”

The auction prompted related queries about the structure of the dozen or more affiliated AnC Bio companies, the familial relationships between individuals in those companies and the competitive viability of AnC Bio products.

Jong Weon (Alex) Choi, a 20-year business affiliate of Quiros, has served as a principal officer for AnC Bio Korea and Quiros is a consultant for the company, according to documents from the state. In a signed letter to the state, Quiros said he has no financial position or ownership “of any kind” in AnC Bio Korea.

AnC Bio Korea has transferred intellectual property rights to AnC Bio Vermont LLC, a company owned by Stenger, Quiros and Quiros’ son, Ary, that is responsible for coordinating the construction and operation of the biotech facility. The foreign investors are a part of the Jay Peak Biomedical Research Park LP, which is commonly referred to as AnC Bio Vermont. Quiros and Stenger also own the entity that serves as the general partner for the immigrant investors’ limited partnership agreement.

The state has asked for details about the ties between the individuals and companies and has raised questions about financial transactions between the entities and whether the interconnected relationships were adequately disclosed to investors.

Stenger, in a two-page memo to the state, says, “AnC Bio Vermont LLC only has a scientific relationship with AnC Bio Korea.” In another statement, he says the relationship is “contractual.”

In a series of memos sent between July 9, 2014, and Dec. 30, 2014, the agency issued a litany of additional requests for information about AnC Bio, including a timeline for FDA approvals, new business plan projections, a regulatory discussion of biomedical and stem cell research and full financial disclosure for the AnC Bio Vermont project.

The state also has questions about internal transactions made by the company. Typically, immigrant investor funds are kept in escrow until the capital is needed for construction. Under the 2012 private placement memorandum, the investors in AnC Bio Vermont are not only buying shares in a construction project, they are also purchasing $10 million in product distribution rights from the Korean company. Some investor funds have already been paid to AnC Bio Pharm (Korea) for the rights, according to an email from Stenger to the state.

The state has asked Quiros and Stenger for an independent valuation of the distribution rights and to explain whether and how much investor money has been transferred to affiliated entities run by the developers.

In a memo to Stenger’s and Quiros’ attorneys, Kessler asks if the value of the contract for the distribution rights is appropriate “in light of the lack of sales revenue to date attributable to those products,” and he asks Stenger and Quiros to provide the state with information about the market history and market value of the products and technologies.

In addition, the 2012 offering memorandum lists $44.5 million in manufacturing and stem cell research equipment. State documents show that investors have paid an undisclosed sum toward the cost of the equipment to JCM, another affiliated entity, which has in turn paid AnC Bio Pharm Inc. for the distribution rights and the equipment.

There is also a separate independent contract between AnC Bio Vermont and AnC Bio Korea for the transfer of technology rights. No investor funds are to be used in that transaction.

The state also wants an independent appraisal of the real estate in Newport that is to be sold to investors. The plant is to be built on land originally purchased by GSI of Dade County, Florida, a company owned by Quiros. GSI bought the former Bogner plant and 25 acres in Newport for $3.1 million in September 2011, according to land records.

Investors entered into a purchase and sale agreement for seven acres of the land as part of the 2012 offering memorandum, which was verified in a statement from Quiros. The agreement lists the price as $6 million, and the payment was to be made by Jan. 31, 2013.

Ariel Quiros
Ariel Quiros. File Photo by Hilary Niles/VTDigger.

Stenger and Quiros took seven weeks to respond to the first official memo from ACCD, and the developers continued to delay or push back on the responses to the state’s requests, despite Kessler’s repeated warnings that the state would cancel the project if they refused to comply. The developers submitted a new offering memorandum in October, but by the end of the year many of the state’s questions remained unanswered, according to correspondence between Kessler and the developers and their attorneys.

In January, the state’s chief financial regulator, Susan Donegan, commissioner of the Department of Financial Regulation, was asked to review the AnC Bio Vermont project and to oversee regulatory compliance for all EB-5 projects in Vermont. Donegan now has the sole authority to determine whether the biotech project should be canceled or continued. If Donegan approves the project, the developers must ask each investor to sign off on the new offering memorandum.

While Donegan has emphasized that AnC Bio Vermont is not being singled out for special scrutiny under her department, it’s rare for the regional center to reopen existing agreements with EB-5 developers. Until this summer, only one project out of 17 – DreamLife Retirement Resorts in 2013, which had no investors – had been canceled since the inception of the program in the early 2000s. The state canceled the project because of “material misrepresentations.” Last summer, the Agency of Commerce and Community Development suspended two of Stenger and Quiros’ projects and canceled a third.

Stenger told the Caledonian Record that he supports the state’s new approach to regulating EB-5 projects “100 percent.” In an article that appeared in the newspaper a few days later, Stenger characterized the VTDigger story about the state’s suspension of AnC Bio Vermont as “incorrect, unfair and frankly abusive to the program and the community.”

The products

Under the business agreement with investors, known as the offering memorandum or private placement memorandum, AnC Bio Vermont would manufacture four organ replacement products at the Newport facility, including an artificial kidney (C-PAK), a liver replacement device (E-LIVER), a heart-lung machine (T-PLS), and an implantable ventricular assistance device (S-VAD). T-PLS, which is intended for use in emergency rooms, operating rooms and intensive care units, has been approved by FDA equivalent agencies in Korea and the European Union, according to literature from the company.

The state asked for the status of FDA and other regulatory approvals needed to market the four products. No U.S. patents have been obtained, according to documents from the state, and FDA approvals have not yet been granted, which the state says are necessary to research, develop, produce, market and sell the described products and technologies.

There is no regulatory discussion of biomedical and stem cell research in the 2012 offering memorandum, Kessler says in the memos, even though it is a “most sensitive area subject to intense regulation.”

In a written statement to VTDigger, Stenger said, “the FDA approval of products and services will in part be facilitated by the completion of the building, which will be FDA certified and built totally to FDA specifications.”

NNE Pharmaplan will design the facility, Stenger says, and the company has hired Biologics Consulting Group of Alexandria, Virginia, to facilitate the FDA timeline to be submitted to the state. “Biologics is highly experienced in FDA approval protocol and is among the most respected firms in this field,” Stenger writes in a memo to the state.

After five years of operation, the company expects to make $300 million in revenue and $127 million in gross profits from the proceeds of stem cell development, artificial organs and clean rooms leased to other researchers, according to the 2012 offering memorandum. The “market opportunity” descriptions in the business plan are largely broad explanations of the number of patients globally who suffer from heart and kidney disease.

The state asked Quiros and Stenger to update the two-year-old business plan for the stem cell research and manufacturing arms of AnC Bio Vermont.

“We note the absence of an independent marketing study, factual foundation or adequate assumptions on which to support the business plan’s projections,” Kessler writes in a memo to Stenger and Quiros’ attorney. “Absent such information, investors may not be able to evaluate the success of the project or their return on investment.”

Moulton said the biotech industry is in “a high risk, fast-changing environment.” The state sought new information that would substantiate projections made in 2012.

“It was clear we needed an update,” Moulton said. “We hadn’t seen a market study, we were concerned about the auction and we don’t know what else is there.”

Stenger and Quiros hired a global tech firm last fall, Frost and Sullivan, to conduct a market analysis for AnC Bio Vermont that was submitted to the Department of Financial Regulation earlier this month. Frost and Sullivan gives AnC Bio Vermont high marks, citing the company’s superior scientific and engineering expertise for developing organ-assistance devices that are simple, efficient, safe, small and lightweight.

“The company’s organ-assist products will not only be highly competitive in the global market but will be leaders in setting new standards for the industry,” Frost and Sullivan writes.

Similarly, AnC Bio has an opportunity to become one of the first leading-edge stem cell research manufacturing facilities in the world, according to Frost and Sullivan.

Stenger told the state the Frost and Sullivan data from the marketing study would be provided to investors upon request.

“It will be up to the individual investor to come to their own conclusion as to whether they invest, as that conclusion must come independently from the project,” Stenger wrote in a letter to the Agency of Commerce and Community Development.

Stenger urges the state to allow the company to resume promoting the AnC Bio project and to allow construction in a January memo, because the “clock is ticking” for investors who have green cards.

In order for the immigrant investors to be eligible for permanent residency in the United States, the company must prove job creation targets have been met.

“If job creation does not occur within the 24-month window ascribed by USCIS, the I-829 will be in jeopardy,” Stenger writes in a memo on Jan. 28.

Stenger points up the economic impact the biotech plant could have on the Northeast Kingdom economy in a previous letter. He has told members of the press that the facility would generate 3,000 jobs, and he describes the biotech plant and the Q Burke Mountain Resort projects as “game changers for the economics of Newport and East Burke and will improve each community immeasurably.”


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Anne Galloway

Recent Stories

  • Fred Woogmaster

    This, in my opinion, is an excellent piece of journalism. Thank you.

    The corruption embedded in the EB-5 program will not be fully exposed for many years – long after its architects have retired to island villas.

    Unbridled capitalism; those with great wealth acquire more – those with no wealth? Destined to be poor.

    The American Dream, founded on Liberty, Justice and Equality, is no longer a viable possibility for many. How sad!

    Green cards for sale to the highest bidders?
    What price – such development?

    Our grandchildren may learn the truth; maybe not.

    • Paul Pierce

      Destined to be poor? How about pull up your pants, tighten the belt and get to work? People make their own destiny, educate yourself, work hard, and your goals are reachable. Sit back, collect money from the Govt, and complain, and you deserve what you get. Capitalism encourages innovation, not laziness. Corruption? Provide us proof and we will listen.

      • Fred Woogmaster

        I agree, Mr. Pierce. Capitalism does encourage innovation.

        Unbridled capitalism, however, encourages greed and widens “the gap”.

      • Fred Woogmaster

        Mr. Pierce:
        Jon Margolis’ new piece “Corren Case Illustrates Absurdity of Campaign Finance Law” discusses “corruption”,

        The substance of the article represents much of my thinking – as well.

    • Dick Livesey

      I am all for good journalism, but I think this piece is the furthest from it. Not only do objective journalist abstain from using phrases like “burning question” in their reporting, they actually get the story right. Two stories just this week from Vermont Public Radio and the Caledonian Record report that the Department of Financial Regulation has approved the project and it will be breaking ground shortly. Plus, the exchanges between the state and these developers that the Digger story casts in an ominous light, appears to be the normal legal wrangling you would expect in the unique public-private partnership that Vermont has formed with several businesses in the state. And to that point, this story really seems to get it wrong because the other two outlets report that all of the state’s EB5 projects are now subject to this new review, not just this biotech one, and the AnC project was just the first to come under the new review.

      I love great journalism, but one of its core tenets is objectivity and this story completely lacks it. It actually reads as if Digger has some sort of agenda, which has no place in journalism at all.

  • Very fine investigative reporting piece. Vermont residents are fortunate to have this kind of information available to them.

  • joseph perry

    How tall a House of Cards. Didn’t Olympia just close their $300 million fully staffed Bio-plant in West Lebanon NH because they could not sell it from $25 million or get FDA approval to sell their products?

  • This story makes me proud to say I’m a VTDigger supporter.

  • Mark Trigo

    Buy property for $3.1 million. Flip 28% of that land for $6 million to a company that you started but is funded with other peoples’ money.

    Good work if you can get it.

  • victor ialeggio

    This series gets better and better, Anne. Great work!

  • Brian Machesney

    Thanks, too, to the State of Vermont. From the Center for Immigration Studies web site:

    “…the regional center handling such matters in Vermont is the only one in the nation that is an arm of state government. All the rest of the EB-5 regional centers (including the one in the Virginia case) are private, for-profit entities, some closely linked to the developers who want to use the EB-5 money.”

  • Annette Smith

    3000 jobs is a lot of jobs. For context, here’s a listing of the top employers in Vermont http://nextupvt.com/articles/work/largest-employers-vermont (hard to find a current list, this one has IBM and Fletcher Allen, both of which have changed names, and the state government doesn’t show up). This fantasy would be in the top 5 of employers.

    If it looks too good to be true….

  • Charles Merriman

    Wow, Anne, fantastic reporting! We all eagerly await your next report.

  • David Matthews

    Senator Leahy, Presidential candidate Senator Sanders, Rep. Welch and Governor Shumlin all are going to have to field awkward questions regarding their roles and support of EB-5 in their respective 2016 election campaigns.

  • Sam Miller

    This is much better than the last piece. Now, if the following can be legitimately confirmed, it would appear they have a market regardless how long the FDA decision is pending.
    “T-PLS, which is intended for use in emergency rooms, operating rooms and intensive care units, has been approved by FDA equivalent agencies in Korea and the European Union, according to literature from the company.”

  • Mark Renkert

    Analysts from our firm made this forecast years ago and calls for better oversight went unheeded. State EB-5 “Finger-in-the-Dike” leadership needs to be held accountable.

    Now that investors alerted the Media – Politicians are scrambling to offer greater oversight, transparency, etc.

    Like Geithner writes in his book “Stress Test”…. by the time you are responding to affronts on Credibility — “It is already too late and can take decades to repair.”

    Here is an amusing comic featuring how State Political Leadership will tergiversate on EB-5 and “Blame Shift.”

    “Who’s to Blame — Not Me” http://bit.ly/1EUZbtG

  • What we have here is a John Grishamesque thriller, fully casted with the usual suspects and ready to be turned into a hard cover bestseller and Oscar nominated movie.

    Shady and ill defined foreign players, slick promoters, big money, loophole laden do good federal policy, floundering state bureaucrats and no major U.S. bio-tech firm with the slightest interest in the AnC Bio technology. The pieces are all here. All that is needed now is a skilled Vermont writer to put the story into a novel.

    Anne, here’s your chance. For the next three months, fully delegate your vtdigger responsibilities to your able staff. Then hit the keyboard to tell the AnC Bio Vermont story in novel form, sell the book rights to Hollywood and we’ll see you next year on the red carpet getting your Oscar for best writer.

    Your chances of success are far greater than even one artificial kidney machine ever being produced in Newport. If there were to any money to be made on the AnC Bio technology it would have long ago been snapped up General Electric or another sophisticated bio-tech firm all to hungry for profitable opportunities.

    In the meantime, Commissioner Susan Donegan should give AnC Bio Vermont the same common sense scrutiny that she correctly gave the Vermont Heath CO-OP when she put that boondoggle out of its misery a few monte ago.

  • Judith Henault

    At last!! Thank you Anne Galloway. And there is so much more. Thank you, too, to all the commentators who have helped keep this investigation alive.
    Judith Henault

  • Kristin Sohlstrom

    Relevant to VT?

    “diGenova told Breitbart News on Friday, “[t]here is no doubt in my mind that an independent Department of Justice or an independent U.S. Attorney would open a preliminary criminal investigation into Harry Reid’s intervention into the expediting of EB-5 visas…”

    http://www.breitbart.com/big-government/2015/03/28/the-real-reason-harry-reid-is-retiring/

  • Diane Peel

    I’d like to read the Frost report. I-don’t know about the T-PLS, maybe being produced in Europe (?) but the C-PAK, a portable kidney dialysis machine, is in competition with similar products already on the market by much larger companies. So how is a product that isn’t even approved yet (maybe hasn’t even been manufactured yet) supposed to compete and keep the company in business. You can produce any product you want (much easier with other people’s money) but if you can’t sell it, you’ll go bankrupt. I can figure that out and I’m not even a business person. So how many jobs will the facility create past the construction if it can’t sell its products? It is interesting to note that a U.S. stem cell company with which AnC Bio once tried to partner, Bioheart, Inc, and whose product Myocell, the AnC Bio website still pictures and suggests is their product, is still after many years only in clinical trials and many millions of dollars in debt. How about we go for more of a sure thing here in the NEK, like, maybe industrial hemp.

  • Diane Peel

    Oh! P.S. Great investigative reporting!

  • beth barnes

    MORE please. I live in this town and I pay taxes in this town. Thank you for the in depth reporting.

  • richard campbell

    ANCBIO has been approved by the state of Vermont as it should.
    There was no reason to prohibit.
    This reporter had an agenda that was contrary to the people in the NEK.
    This reporter never asked for comments from Bill Stenger or Ariel Quiros.
    She assumed there was wrong doing.
    Great reporting?
    I think not!!
    Why not look into Shumlin and his indiscretions?
    I seriously doubt that will ever happen.

    • Phyllis Alberici

      The name Campbell rings a bell. You wouldn’t be part of that Campbell real estate “empire” up in the Newport area would you?

      • richard campbell

        No.