[F]our high-ranking government officials, including Gov. Peter Shumlin and Attorney General William Sorrell, defended the state’s oversight of Vermont’s EB-5 program in the wake of federal allegations that two Northeast Kingdom developers misused $200 million in investor funds.
The Securities and Exchange Commission, which conducted a two-year probe of Ariel Quiros and Bill Stenger, has accused the developers of perpetrating a “Ponzi-like” scheme as they rolled out hundreds of millions of dollars worth of projects, including those at Jay Peak.
In all, $200 million in immigrant investor funds was misused for “other purposes” than intended, the SEC alleges. Quiros has been accused of using $50 million in investor funds for a $2 million condo at Trump Place in New York City, tax bills and other personal expenses.
According to government and court documents, the alleged fraud began in 2008 when Quiros and Stenger began construction on the $282 million redevelopment at Jay Peak Resort near the Canadian border. The systematic fraud, which included “outright theft,” continued for eight years, the government alleges.
On Thursday, the SEC’s 82-page complaint in federal court in Miami against Quiros and Stenger was unsealed. A federal judge also froze Quiros’ assets and put the Jay Peak and Q Burke resorts in receivership.
Neither Stenger nor Quiros responded to phone and email messages requesting comment.
The state simultaneously filed a similar lawsuit Thursday against the developers in civil court.
Sorrell said the state has not “contemplated” a criminal case at this time. Stenger and Quiros face no jail time at present, Sorrell said. The developers, he said, could incur substantial fines, penalties, restrictions on future business activities and forfeiture of ill-gotten gains.
However, U.S. Attorney Eric Miller confirmed Thursday that his office is conducting a criminal investigation of Stenger and Quiros. Sorrell said he had been working with the SEC, that no state criminal charges were contemplated, but it was early in the case and that could “easily broaden and deepen.”
Shumlin, other state officials and the Vermont congressional delegation have touted the EB-5 immigrant investor program as a surefire way to create jobs in the Northeast Kingdom, which consistently has had the highest unemployment in the state. Until recently, the Jay Peak and Q Burke projects have been seen as a boon for residents in this historically economically depressed region.
At the announcement of the federal fraud case and state’s lawsuit, the mood in the governor’s ceremonial office at the Statehouse was somber.
“We all feel betrayed,” Shumlin said. “It is a dark day for Vermont.”
“This is obviously a very 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,” Shumlin said at a news conference Thursday. “Most of all this is a difficult day for the hundreds of employees, hundreds, in the Northeast Kingdom who rely on Jay Peak, Q Burke and the related projects to support their families, projects that appeared to hold so much promise. My commitment as governor is to do everything that I can to protect these Vermonters’ jobs and the investors who are the victims of these allegations, as well as to ensure we do everything we can to make the best of what is a terrible situation.”
Shumlin said he is working with the Vermont attorney general and the SEC to ensure that the company managing the resorts, Leisure Hotels & Resorts, based in Kansas, will develop “the best possible outcome for the Northeast Kingdom.”
Michael Goldberg — who, according to his firm, is an expert in large Ponzi scheme liquidation recovery — is managing the receivership of the companies.
“It is his intention to maintain normal operations of the affected businesses and keep Vermonters working,” Shumlin said. “We do not expect significant job losses.”
Shumlin took credit for holding Quiros and Stenger accountable. His administration took action to investigate investor complaints in December 2014. The governor said that by September 2015, state officials had enough financial documentation from the developers to grasp the scale of the alleged misappropriations, elaborate transfers of funds between entities, and the overall scope of the deception.
The governor portrayed his administration as the entity responsible for discovering the problems. Despite taking trade trips with Stenger to promote EB-5 projects, Shumlin said he had maintained an appropriate distance with the developers.
“I don’t hang out socially with any of the EB-5 principals,” Shumlin said.
Sen. Patrick Leahy, who has been a major EB-5 booster but recently called for further oversight, said in a statement: “I’m shocked and saddened by what state and federal investigators have found. I’m especially heartbroken for the people of the Northeast Kingdom, whose high hopes for these projects have been dealt a harsh blow. My thoughts are with the many families impacted by this. It is a good sign that both the federally appointed receiver and the state are doing what they can to keep these businesses open and to keep these Vermonters employed. I am also aware that hundreds of investors who believed in these projects now do not know if they will see their money or any immigration benefits. It is a terrible situation all around.”
Leahy, whose correspondence with Stenger has suggested a close relationship and who held his 50th wedding anniversary celebration at Jay Peak, said: “The allegations here are extraordinarily serious.”
On Wednesday, Leahy held a hearing on EB-5 reforms he’s been pushing at the exact same time federal authorities were conducting their unannounced raid at Q Burke resort’s administrative offices. Through his spokesman after the hearing, Leahy said for the first time that there had been abuses in Vermont’s EB-5 program.
The developers used 64 separate entities and 100 bank accounts at 10 financial institutions to perpetrate the fraud, authorities said Thursday. Susan Donegan, commissioner of the Department of Financial Regulation, pointed to a graphic that showed spaghetti-like connections among multicolored boxes depicting the types of businesses and financial instruments Quiros and Stenger allegedly used to cover up the bank transfers and the commingling of funds.
“I’m grateful to Commissioner Donegan and to the team at DFR for so effectively implementing this improved oversight system and their extensive investigative work,” Shumlin said at Thursday’s news conference.
Shumlin said the issues began three years before he became governor. He first realized there was something wrong, he said, when he heard about investor complaints of abuse of the immigrant visa program.
The immigrant investors each put up $550,000 in an “at risk” investment to obtain a visa to live in the United States and eventually permanent residency.
Stenger and Quiros told the investors in Jay Peak, Q Burke and AnC Bio Vermont projects that they’d get their money back five years after project construction was completed.
The first group of investors in the Tram Haus Lodge at Jay Peak learned in January 2014, after that five-year deadline had passed, that the developers had seized ownership of the hotel and converted their ownership stakes into IOUs.
The investors first complained to the Vermont EB-5 Regional Center, which oversees developments under the program, in May 2014. But Brent Raymond, the head of the center, and Patricia Moulton, the secretary of commerce and community development, didn’t act on their emails. VTDigger reported on the Tram Haus complaints in July 2014 and followed up with a report on the regional center’s lax oversight of the program.
Over the summer of 2014, the agency had begun to question developers’ self-dealing in the AnC Bio Vermont biotech project to be built in Newport.
Late in 2014, Shumlin said he “realized the state needed a better system that didn’t ask one state agency to (both) promote and oversee the EB-5 programs.”
Under the governor’s recommendation, the Agency of Commerce and Community Development handed over responsibility for oversight of the immigrant investor funds to the Department of Financial Regulation in January 2015. The department picked up where the agency left off and began an investigation of AnC Bio and the Jay Peak projects.
The yearlong state probe ended Thursday simultaneously with the SEC charges and a lawsuit filed by the Vermont attorney general based on DFR’s probe.
Donegan said that as her department began reviews of the financial documents from Jay Peak, Q Burke and AnC Bio, staffers saw “anomalies” that raised concerns.
The commissioner unveiled a chart Thursday that showed a straightforward flow of money from escrow accounts to projects. That’s what she said she expected to see with the Jay Peak and other projects.
“When an EB-5 investor sends their money,” Donegan said, “it should go in an escrow account that is released into an operating account” that is used to pay for construction. “Each (account) is discrete, and the flow is easy to follow.”
Instead, Donegan said, there was no pattern. The flow of money was a “spaghetti map,” a complex “web of accounts” used to divert funds.
Donegan and her staff gathered 300,000 documents and issued 64 subpoenas.
“People ask me what do we do at DFR,” she said. “This is what we do. This time it has resulted in a complex picture that alleges hundreds of millions of dollars in securities fraud.”
It’s unclear how investors will be affected by the state and federal court cases.
Moulton said it’s too early to know how any investor payouts or refunds might occur.
“We have to let the legal process play out, but (U.S. Citizenship and Immigration Services) is very clear that investors should continue to file petitions and they will continue to adjudicate,” Moulton said.
Moulton said the Vermont regional center, with the oversight of DFR, will remain open. “I want to reiterate that the partnership between ACCD and DFR assures more oversight than most in the country,” she said.
Reaction in the Statehouse after the news conference went from shock to sadness.
“It’s really a pretty hard hit on the Northeast Kingdom,” said Sen. Robert Starr, D-Essex/Orleans. “It’s hard to believe, really.”
Starr said it wasn’t clear to him who did what, adding: “I will still stand by my friend Bill Stenger and would say he’s a victim of circumstances more than a person that used any of this for his own advantages or personal gain. He’s done a lot of good things and this is just a bad situation that it will hopefully turn out maybe different than what we saw today.”
Starr expressed sympathy for Stenger, saying that “he’s been doing most of the lifting” traveling and meeting with investors. Starr said he’d had few dealings with Quiros. Starr wondered out loud how large a stack of $1 bills would make up $50 million.
“I really do feel bad about it because it means so much to the people of northern Vermont” for jobs, Starr said. Last week he said he’d “bet (his) right arm” that the developers were acting properly.
House Speaker Shap Smith said: “The allegations are incredibly disturbing and if proven true are devastating — I think to the people who invested and also to the people of the state of Vermont and in particular the Northeast Kingdom who put a lot of hope and faith in these projects as a way to renew the economy up there and now are seeing the possibility that none of those things will happen.”
He said it was early to say if the state did enough to prevent fraud. “But that’s a question we’re going to have to ask in the future” because the program, Smith said, is not going to go away.
