[A] superior court judge dismissed an EB-5 investor case against the state Friday that alleged officials were negligent and violated state and federal securities laws.
Lamoille County Superior Judge Thomas Carlson ruled that the state is not responsible for harm caused to investors by the fraud at Jay Peak Resort. Ten state officials and two agencies named in the lawsuit are immune from claims made by the investor plaintiffs in the case, Carlson said in court documents filed Friday in Hyde Park.
While Carlson recognized “the scale of the alleged harm done to investors” as a result of the $200 million fraud at Jay Peak Resort under the auspices of the state-run Vermont EB-5 Regional Center, he says the five investors in the case have recouped their losses through a lawsuit brought by the receiver in the Jay Peak case. The developers, former CEO Bill Stenger and former owner Ariel Quiros, have settled with federal regulators, but still face an ongoing legal battle in state court.
“It is easy to see that the hundreds of millions of dollars of investment that caused such promise and excitement for Vermont’s economically struggling Northeast Kingdom would prove to be an all-too tempting pile of money for one or more of the players,” Carlson wrote.
But while the plaintiffs alleged that state employees received favors from Jay Peak, such as ski passes and travel, Carlson said “it is important to note that this case is not about state employees diverting, stealing or otherwise taking investor funds for personal use.”
The question, he writes, is whether the state and state officials “can be held financially responsible for promoting, facilitating and then failing to sooner subdue what came to be a monster of promise gone bad.”
Citing the state’s absolute immunity from third party civil claims, Carlson ruled against all 16 counts brought by Barr Law Group of Stowe, which represented five investors, including Tony Sutton, a British investor, in the case. The counts included negligence, fraud, willful misconduct, breach of fiduciary duty and breach of contract.
Michael Pieciak, the commissioner of the Department of Financial Regulation and a defendant in the lawsuit, said the plaintiffs could appeal, “but I think if you look at the judge’s detailed and thorough analysis it doesn’t look like that would have much success.”
“I don’t see anything that wasn’t in our favor … Then on top of that, the judge appeared to cast great skepticism on the underlying merits of Mr. Sutton’s allegations as well, so a total win from that perspective for the state,” Pieciak said in an interview. “It certainly allows us to focus on the continued efforts of cleaning up the situation that was left by the defendants in the case, Mr. Quiros and Mr. Stenger.”
Pieciak said he had “a good sense that there was nothing that had been done to the level that was described by Mr. Barr and Mr. Sutton.”
He described the eight-year period of inadequate state oversight as “a breakdown in structure, a breakdown in resources, a breakdown in authority, but that there weren’t individuals that were corrupt, or individuals that were complicit in what was going on at Jay Peak, the true culprits and perpetrators of the alleged fraud were Mr. Quiros and Mr, Stenger.”
Russell Barr, of Barr Law Group, said in a statement that the investor lawsuit is “the first step in our pursuit of justice.”
“Inconceivably, there has been no investigation of the state employees directly involved in this decade long half billion dollar Ponzi-scheme,” Barr said. “Our clients invested in Vermont’s program because the Defendants promised, in writing, the state government would properly manage and oversee their investments. Obviously those promises were false.”
Barr said the ruling ignores the “wrongdoing” of state officials, which is not “only damaging to our clients but immeasurably damaging to anyone who cares about the reputation of our state, the integrity of our government, the economic viability of our region and the fundamental democratic values we as a country strive to achieve.”
“We will persevere until the truth is revealed,” Barr said. “This massive fraud was not perpetrated by just one or two people, there was direct and complicit activity up to the highest level of the government and this will come out. This is round one.”
Judge: State was ‘not ignoring the situation’
Much of the judge’s reasoning for the ruling hinged on whether the Vermont EB-5 Regional Center was required to audit the projects under state and federal laws.
Barr Law Group argued that investors bought into the Jay Peak projects because they were told the investments would be safe. They believed former CEO Bill Stenger’s claims in marketing materials featuring the state of Vermont logo that the projects were audited by the Vermont EB-5 Regional Center. Former Gov. Peter Shumlin bolstered that assertion in an October 2013 promotional video in which he assured investors that the projects were audited by the state. The video was translated into Chinese and promoted to investors via the Internet.
When investors asked Brent Raymond, the former center director, in the summer of 2014 for copies of the audits, he said the state wasn’t responsible for auditing the projects.
In his ruling, Carlson came to the conclusion that there is no legal requirement for audits, and thus the center had no fiduciary duty to investors.
In addition, the judge ruled that agreements between the state and Jay Peak that required quarterly financial reporting, oversight, management and administration of the projects did not call for the state to conduct “any audit of the project.” “The reporting and honesty obligations fell on the Jay Peak entities,” he wrote.
He points to the state’s decision in December 2014 “to add securities regulation to the mix,” authorizing the Vermont Department of Financial Regulation to oversee the EB-5 program as proof that state was “not ignoring the situation.”
Pieciak began working with the Securities and Exchange Commission to unwind the complicated Ponzi-like fraud scheme perpetrated by Stenger and his business partner, Ariel Quiros, in March 2015. A year later, the SEC alleged that the Jay Peak developers misused $200 million in investor funds. Both Stenger and Quiros have settled with the federal government.
Quiros and Stenger promoted projects to potential investors under the auspices of the Vermont EB-5 Regional Center right up until the SEC brought charges.
Barr Law Group argued that the state’s action was too little, too late. Quiros was accused of using investor funds to purchase Jay Peak in June 2008. The SEC, which began its investigation in 2013, says that’s when the fraud began. The plaintiffs argued that state officials were aware of the fraud years before the Department of Financial Regulation was brought in to investigate.
The Vermont Attorney General’s office and the Vermont Department of Financial Regulation contended that the state had absolute immunity from investor claims.
Ultimately, Carlson determined the state could not be held financially responsible for state officials’ inaction years prior based on qualified and sovereign immunity defenses that protect the state from third party claims.
Carlson granted the admission of an amended complaint to the court filed by Barr Law Group earlier this month that includes hundreds of pages of exhibits. The Vermont Attorney General’s office opposed the new complaint.
Pieciak believes the ruling will undermine Quiros’ “unclean hands” defense against the state. Defense attorneys for Quiros cited the Sutton case in a recent filing with Washington County Superior Court.
“The judge’s outright dismissal of the case here certainly casts a doubt that the other judge would allow that,” Pieciak said.
Editor’s note: Alan Keays contributed to this report.
