The federal government is shutting down the state’s EB-5 regional center, which is under the cloud of the largest investor fraud case in the history of the EB-5 visa program.
Gov. Phil Scott issued a statement Monday saying the state received notice Friday that U.S. Citizenship and Immigration Services, the federal administrator of the EB-5 program, intended to “terminate” the center.
The action is a result of concerns raised by alleged fraud involving hundreds of millions of dollars in EB-5 investor money by two Vermont developers over an eight-year span, according to the notice sent to the state. Jay Peak’s former owner Ariel Quiros and its former president Bill Stenger are accused of perpetrating a “Ponzi-like” scheme in which they misused $200 million invested by foreigners in seven of eight projects through the EB-5 program.
Federal authorities have not yet brought criminal charges in the case.
The 27-page notice is a stinging criticism of past operations of the regional center, including a lack of action and oversight as Stenger and Quiros raised money from immigrant investors. The EB-5 program offers foreigners permanent residency in exchange for a $500,000 investment in qualifying projects. Each investment must create 10 jobs.
USCIS officials say the regional center “failed to properly engage in management, monitoring and oversight of the program for many years, as required by the program.”
“It appears that for years (the Vermont Agency of Commerce and Community Development Regional Center) relied excessively — if not primarily — on third party project managers to perform oversight functions rather than taking on those responsibilities itself,” the notice reads.
“Even where a regional center has an outside party providing management services — as occurred here — the ultimate responsibility for compliance with the relevant statutes and regulations, remain with the regional center itself.”
Ultimately, USCIS has determined that “by a preponderance of the evidence that the Regional Center no longer serves the purpose of promoting economic growth.”
Quiros and Stenger are accused in lawsuits by federal and state regulators of misusing $200 million of $350 million raised from immigrant investors for seven projects through the EB-5 program. The two developers raised money from 890 investors totaling $489.5 million, including an eighth project and administrative fees, according to new information from USCIS.
The money was meant to fund massive upgrades at Jay Peak, a hotel and conference center at Burke Mountain, and two other projects that never got off the ground in Newport, including a $110 million biomedical research center. The developers began to run out of money in 2014, and by the time the SEC filed charges in April 2016 about 400 investors in three incomplete projects had not received green cards.
The notice of termination by USCIS follows action in July 2016 when the federal agency asked the state to submit an interim application for renewal of the Vermont EB-5 Regional Center designation in light of the fraud allegations against the developers.
VTDigger first reported on allegations of fraud and the state’s cozy relationship with Quiros and Stenger in 2014. Officials defended the developers and the state commerce agency secretary blasted coverage of investor complaints in October that year.
The news organization sued over access to the state’s communication with USCIS last year. In March, records released by the Scott administration showed that USCIS had threatened to terminate the Vermont Regional Center. In response, the Shumlin administration defended its oversight of the EB-5 program. After the state responded, USCIS continued to approve investor green card petitions in Vermont projects.
The news of the termination on Monday coincided with the results of a review the Scott administration began in July of the future of the Vermont EB-5 Regional Center.
That report recommends “winding” down the regional center, the governor’s release stated.
Michael Schirling, the commerce agency secretary, said the Scott administration agrees “that the center should ultimately be closed.”
“It is clear from our review that state government was not, and is not, the best-suited entity for managing the EB-5 program,” Schirling wrote in a release issued by the governor’s office.
State officials say they will respond to the notice of termination before the deadline of Sept. 16 with information in the report, detailing how “a staggered closure” would “minimize any adverse economic impact and ensure investors in existing, viable projects are protected.”
After the SEC brought charges against Stenger and Quiros last year, the Vermont Regional Center retained oversight of four remaining projects, none of which were associated with Jay Peak.
USCIS says, however, the allegations of fraud at Jay Peak have “dampened the future ability of [the regional center] to sponsor projects and promote economic growth.”
Mount Snow Resort is the only one of the four that had been approved by the federal government. The company began construction of a $22 million ski lodge in June and plans an additional $30 million in projects. Mount Snow officials have said they will not work with the state on future EB-5 projects because of “troubles” related to Jay Peak. Dick Deutsch, the CEO of Peak Resorts, has said the company will seek its own designation as an EB-5 regional center in order to complete multi-phase projects at Mount Snow.
In April, Stowe Aviation withdrew from the EB-5 program. The proposed $20 million development at a regional airport in Lamoille County included an aircraft hanger, flight academy, aircraft maintenance and regional charter air transportation services. Russell Barr, the owner of Stowe Aviation, told USCIS that the allegations of fraud at Jay Peak Resort hampered marketing for his project. Barr is now suing state officials on behalf of investors for effectively acting as partners in the Jay Peak fraud.
The federal agency denied an amended application in June that was submitted by developers of South Face Village who planned to use $34 million in EB-5 money to develop condos at Okemo Mountain Resort in Ludlow.
A Trapp Family Lodge application for EB-5 funding to support the development of a $20 million restaurant and brewery has yet to be approved by USCIS.
Information about how much money is at stake in each of the four projects and how many investors would be affected by the termination of the regional center is unknown.
The Vermont Regional Center program began in 1997 and launched its first project at Jay Peak in 2006. Over the course of a decade, the state had oversight of 21 developments, most of which were of a much more modest scope than the eight Jay Peak projects.
The state claims to have created more than 10,000 jobs over the history of the program.
USCIS notice of termination
Federal officials make a case for closing the regional center based on the SEC lawsuit and the state’s civil suit against the developers, a case lodged by Tony Sutton and other EB-5 investors against the state and press reports about allegations of fraud at Jay Peak.
After considering “a preponderance of the evidence” provided by the state, the feds determined that the regional center is no longer in compliance with EB-5 program requirements.
Under federal law, the regional center was required to monitor all investment activities.
USCIS officials say that the evidence shows the state’s oversight of the Jay Peak projects was inadequate and “allowed the alleged malfeasance by Quiros and Stenger to occur.”
The feds cite a story by VTDigger about questions raised by a whistleblower in 2012 about financial irregularities at Jay Peak. Despite these red flags, Gov. Peter Shumlin and other high level officials went on to promote Jay Peak projects overseas and at press events. During this period, regional center staff did not require Stenger and Quiros to submit quarterly reports to the state as mandated.
In particular, USCIS points to the regional center’s willingness to allow the marketing of AnC Bio Vermont, a proposed biomedical center in Newport, despite concerns about the project that emerged in 2013. In 2014, the state suspended the project, only to reinstate AnC Bio in March 2015 under pressure from Gov. Peter Shumlin. The developers at that point were allowed to continue fundraising for the project. Later that year, the state, as the result of its own investigation, became aware that it was likely that funds raised for “various Jay Peak projects” were diverted.
The state commerce agency and the Vermont Regional Center, however, continued to allow the marketing of the AnC Bio Vermont and other projects right up until the SEC brought charges in April 2016 against the developers.
The SEC, in its lawsuit, described the proposed biomedical facility as “nearly a complete fraud.” Most of the $50 million that Quiros allegedly stole outright came from investors in AnC Bio Vermont. A total of $80 million from the proposed biomedical facility was misused, USCIS writes.
USCIS concludes that the Vermont Agency of Commerce and Community Development “may have allowed marketing to occur for a project suspected of serious malfeasance.”
The state’s willingness to allow the developers to fundraise for the Burke Mountain Resort project also “seems improper” because Quiros “wrongly used $7 million from investor funds to buy the resort.”
USCIS acknowledged that the state took actions to improve monitoring and oversight of the regional center programs, but says that the more rigorous compliance program instituted in December 2014 by the Vermont Department of Financial Regulation and the Vermont Agency of Commerce and Community Development came too late.
Based on “a preponderance of the evidence,” USCIS determined that the regional center failed to properly engage in management, monitoring and oversight for many years, as required.”
State review of EB-5
Starting in July, the Scott administration undertook a review of the Vermont EB-5 Regional Center conducted by the Vermont Agency of Commerce and Community Development and the Vermont Department of Financial Regulation. The two state agencies released a report on Friday, the same day state officials received the USCIS notice of termination. The review was led by Michael Pieciak, the commissioner of DFR, and Michael Schirling, the commerce agency secretary.
Pieciak and Schirling revisit the history of state’s role in helping the SEC develop its case against Quiros and Stenger as part of a DFR investigation that began in March 2015. As a result of the state’s action and settlements with Raymond James and Citibank, about $163 million has been recovered — most of which has been used to maintain operations at Jay Peak, to repay vendors and contractors who were owed more than $11 million and to repay about 100 of more than 800 EB-5 investors.
They argue in the report that because the state stepped up compliance requirements and enforcement in 2015 the Vermont EB-5 Regional Center should continue operating long enough to wind down the Trapp Family Lodge and Mount Snow projects.
Pieciak and Schirling argue that closing the regional center immediately and either stopping all center activities or transferring the center’s activities to a private entity is “not legally viable.” Nor is it viable to continue the regional center as is, they write in the report.
“We believe the best course … is winding down the [regional center] over time, fulfilling all obligations for existing projects but not taking on new ones,” they write.
This approach would enable the state to fulfill its commitments to existing projects and investors, Schirling and Pieciak say.
Other EB-5 nonprofit centers in the region could continue to provide Vermont developers with access to the federal program, they conclude.
In a recap of the history of the Vermont program, state officials say that funds raised for Jay Peak totaled $423 million. Projects not involving Jay Peak totaled $109 million. The state spent $1.3 million to administer the program from fiscal year 2008 through July 2017.
Commerce agency oversight prior to DFR’s involvement consisted of visits to Jay Peak Resort, according to the review. The state did not conduct financial audits, nor were any provided by the developers — despite representations in a 2013 promotional video for Jay Peak featuring former Gov. Peter Shumlin in which he attested that all of the projects were audited.
When Douglas Hulme, who solicited investors for Quiros and Stenger through his company Rapid USA Visas, issued a public statement that he no longer had faith in the financials at Jay Peak, the commerce agency requested “pertinent” information from Quiros and Stenger. The developers, however, did not provide the information, and the commerce agency “ultimately determined that it lacked clear legal authority under the existing MOU to force the projects to do so.” The state required the developers to sign a revised MOU in October 2012 that called for securities compliance.
Not long after, John Kessler, general counsel for the agency, sought expert advice from a law firm in Boston. Two years later, state officials became concerned about whether the developers had provided all of the material information about AnC Bio Vermont and Burke Mountain Resort. Both projects were suspended in summer 2014.
After a VTDigger article was published in October 2014 about the state’s failure to require Jay Peak to file quarterly reports, the state began requiring regional center projects to provide financial and accounting information for all projects, payment histories for vendors and contractors and any material changes to projects.
In December 2014, DFR took over the formal oversight role of the EB-5 program in conjunction with the commerce agency, which had run the regional center for 17 years up to that point. The Burke Mountain and AnC Bio Vermont projects were reinstated after DFR became involved in compliance efforts and an investigation into the developers in 2015.
As part of an agreement with the developers, DFR required that Quiros and Stenger hold new money in escrow and mandated that a third party oversee payments for construction. This prevented money from new investors from being commingled with accounts that were used to perpetrate the alleged fraud.
In April 2016, state officials unveiled a “spaghetti map” that outlined thousands of transactions using margin loans, Treasury bills and 100 bank accounts used by Stenger and Quiros to cover up the fraud. Pieciak, who was then a deputy commissioner, led the investigation and testified in U.S. District Court in Miami on behalf of SEC litigators.