HYDE PARK — The Vermont Attorney General’s Office says the state is immune from a lawsuit brought by defrauded EB-5 investors.
Five EB-5 investors in a class action lawsuit allege that state officials were complicit in the fraud at Jay Peak Resort. They say the state acted as a partner in a private business enterprise that harmed 890 foreign investors, each of whom put up $550,000 for the projects in exchange for a green card.
Many of the immigrant investors have said they would not have invested in Jay Peak without the stamp of approval from the state of Vermont.
In a preview of arguments Monday, attorneys for the state and the investors laid out the themes of the case in Lamoille County Superior Court.
Megan Shafritz, chief of the Civil Litigation Division of the Vermont Attorney General’s Office, told the court that the lawsuit against 10 state officials and three state agencies should be thrown out. Shafritz is defending both current and former state employees in the commerce agency and financial regulation department. She said she would file a motion to dismiss the case on Oct. 9.
Shafritz says a doctrine known as “sovereign immunity” gives the state blanket protection from lawsuits. The doctrine also blocks the litigation discovery process, in which plaintiffs have the right to depose witnesses and subpoena records.
Discovery should not begin until after the judge rules on the state’s motion to dismiss the case, Shafritz argued.
“The Vermont Supreme Court has been clear that the immunity issue must be resolved at the earliest opportunity and no discovery may be admitted until that issue is resolved,” Shafritz said. “The court has said this over and over again.
“We believe the plaintiffs’ arguments show that they don’t understand the immunity laws,” Shafritz continued. “The plaintiffs’ arguments are not sufficient for the court to determine that the state’s immunity is not correct.”
Chandler Matson, an attorney for Barr Law Group, argued that the state is not protected by sovereign immunity in the Jay Peak case. State officials were marketing securities on behalf of Jay Peak and were subject to securities laws, he said, and they broke the law when they promoted Jay Peak projects directly to investors and failed to investigate allegations of fraud that surfaced as early as 2012.
“[State officials] promised superior oversight,” and told investors that their money was “safe in specific projects at Jay Peak,” Matson said.
Judge Thomas Carlson interrupted. “That sounds like the core of your argument — whether there should be immunity here,” Carlson said. The state says that because of Vermont Supreme Court decisions, “we shouldn’t be engaging in discovery until the immunity issue is resolved.”
“I don’t see how the court can take [the plaintiffs’ point of view] at face value,” Carlson said. “You’re assuming you’ve already won.”
The judge then said it appeared that the plaintiffs were alleging that state officials “were acting outside the scope of employment” and engaged in “grossly offensive” acts in which immunity wouldn’t apply.
Matson agreed, arguing that state employees were engaged in non-governmental, proprietary business functions, and in their actions on behalf of Jay Peak they were negligent, committed breaches of contract and made false promises about state oversight.
Discovery in the case, he said, is critical to helping investors and the public understand the state’s role in allowing the fraud to continue for four years after questions were raised about financial improprieties at Jay Peak in 2012.
“The state of Vermont has an interest in transparency and accountability,” Matson continued, and I’m looking to open up a little transparency so we can see what went on here.”
Matson said limited discovery should be allowed right away in order to ensure that the testimony of key witnesses, including Douglas Hulme, a former Jay Peak business partner who is now in his mid-70s, is obtained as soon as possible. “I don’t want to lose that testimony forever,” Matson said.
In May 2012, Hulme warned Lawrence Miller, the former secretary of the commerce agency, and Pat Moulton, then-deputy secretary, about financial improprieties at Jay Peak.
State officials were also warned about a possible kickback scheme in which Bill Stenger, the former CEO of Jay Peak, gave immigration attorneys a $25,000 finder’s fee for each new investor. The allegations, made by an EB-5 expert in 2012, were never investigated by state officials.
Last year, federal regulators charged the Jay Peak developers, Bill Stenger and Ariel Quiros, with 52 counts of securities fraud. Quiros is accused of stealing $191.8 million out of a total of more than $450 million from investors. The fraud has jeopardized the immigration status of about 400 foreign investors in Jay Peak who have not yet obtained permanent residency in the United States.
The Vermont EB-5 Regional Center was responsible for approving and monitoring the Jay Peak developments, but documents show that state officials were more interested in promoting the projects than they were in protecting the interests of investors. In January 2015, regulation of the Vermont EB-5 program was moved to the Department of Financial Regulation.
Gov. Peter Shumlin, for example, appeared in a 2013 promotional video in which he told investors that the projects at Jay Peak were audited by the state. The Jay Peak developers, however, never submitted financial records to the state.
Stenger and Quiros were not required to file quarterly reports for or remit $2 million in administrative fees to the state as required by agreements with the regional center.
While some details about the state’s cozy relationship with Stenger and Quiros have been revealed in reports about the fraud at Jay Peak, the bulk of the information has been kept from the public.
Bill Griffin, the chief assistant for the Vermont Attorney General’s Office, has said the 50,000 pages of state documents about Jay Peak are exempt under the relevant litigation clause of the Vermont Public Records Act and will not be released until all legal issues in the Jay Peak fraud are resolved.