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[T]he two latest steps in the fallout from Vermont’s EB-5 scandal have been a mixed bag for the state.
Last week, the federal government notified officials that the Vermont EB-5 Regional Center would be immediately shut down, a direct result of the state’s failure to stop a massive fraud scheme. Days later, the state announced a civil settlement against the developers at the center of the fraud.
While the settlement provides some restitution for the city of Newport, which is still recovering from the botched development, the federal notice to end the EB-5 program was a major blow. With multiple EB-5 projects still underway, hundreds of investors could be left in limbo.
The state is appealing the U.S. Customs and Immigration Services decision. But Russell Barr, a Stowe attorney representing a group of investors in litigation against the state, says fighting the shutdown is a lost cause.
“They did not take the appropriate approach with USCIS from day one. They did not sit down with them and say, ‘we made a mistake,'” Barr says. “And that has created a whole host of issues for the investors.”
Barr says the state’s settlement also provides no relief for those investors, despite the fact that the suit sought full restitution for investors when it was first filed. “We all know now that not one penny of that settlement went to our clients.”
On this week’s podcast, Barr describes the resolution investors want to see. Commissioner of Financial Regulation Mike Pieciak talks about making the state’s case to the federal government. Assistant Attorney General Kate Gallagher, who led the state’s case against the Jay Peak developers, discusses what the recent civil settlement means for the state. And VTDigger’s Alan Keays talks about the open questions around the state’s accountability.
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Last week, two new steps in Vermont’s EB-5 fraud scandal have renewed questions about how and when investors in that program will see a resolution.
EB-5 is a federal program that allows foreign investors to fund U.S. development projects in exchange for green cards. For over two years, the state of Vermont has been dealing with the fallout from federal charges that two developers at Jay Peak Resort defrauded hundreds of EB-5 investors. Last Monday, a document handed down from the US Customs and Immigration Services agency clarified what’s still at stake.
Alan Keays: It was a notice of termination to the state of Vermont saying they were terminating the regional center from overseeing projects.
What is the EB-5 Regional Center?
Keays: It’s the entity that oversees those projects that are funded by EB-5 dollars.
Alan Keays covers EB-5 for VTDigger.
Keays: The notice took the state to task for lax oversight of previous projects, as well as submitting some documents that contained material misrepresentations.
And material misrepresentations is basically government speak for: they lied on paperwork?
Keays: Well, whether they lied or they allowed lies to proceed, I guess. Documents were presented to them, and they continued to move them forward, and signing off on them, without verifying the information in them.
What’s at stake with the EB-5 regional center being terminated?
Keays: Those investors who have invested in EB-5 projects, who are in the process of trying to obtain their green cards or permanent U.S. residency, risk not being able to obtain that status. Because there’s no entity that will process them through the state.
Mike Pieciak [Commissioner of Financial Regulation]: There’s about 200 investors, as we understand it, that haven’t yet achieved the level of immigration status that would secure their permanent immigration benefit.
They basically have to get this first form approved, which is called a 526, and then they also have to get a visa number. And then they also have to actually physically have immigrated into the United States. So as we understand it, at least 200 investors have not yet achieved those three things. So they’re certainly at risk.
Normally, it’s up to the EB-5 regional center to complete this process. The Vermont center still has projects in the works.
Keays: Some of the projects include Jay Peak projects, and the other was the Von Trapp project up in Stowe.
So an EB-5 project is built, and then it’s up to the EB-5 regional center to prove that that has had a certain kind of economic value.
Keays: Yeah, to verify it had created ten American jobs. A lot of it’s in construction, or people who are working there.
And that is kind of the key that unlocks the immigration benefit for the investor.
Keays: Yep. For each investor.
And that’s the process they were in the midst of when the federal government said the center needs to be shut down.
Keays: For a lot of them, yes.
Pieciak says this is why the state plans to appeal the USCIS decision. His department wants to wind those projects down gradually. And he thinks they have a strong case.
Pieciak: Basically we’ll make the point that the regional center is fulfilling its mission of promoting economic development. And even though we’re not taking on new projects, we’re still fulfilling that commitment.
So tell me if I’ve got this right. The the state is saying that because these projects are still ongoing, that equals new economic development. Whereas the feds are saying: if there’s no new projects, there’s no long term mission for this place.
Pieciak: Yeah, and I think that’s just a really silly argument from the federal government. Just that one subset argument. Because that would mean that the regional center, any regional center, whether it was planning to do one project or planning to do 100 projects, and there are regional centers that do all of those — that they would have to plan to be in existence for perpetuity. Right? They’d have to be in existence for all time.
And if you had a regional center that was planning to do a project or two, does that mean that in the middle of your first project or second project that you are going to be shut down, because you’re not promoting economic development by taking on new projects?
I think obviously, by taking that position, USCIS is simply harming these investors that, again, our department is trying to protect.
Can you speak to what happens if they don’t accept those appeals?
Pieciak: Yeah. So, you know, ultimately, it would be investors that have lost out on their opportunity to get their immigration benefit. They would have their money invested into a project, and they would be like any other equity investor waiting to get their money back. But as you know, the only reason investors make these particular investments — because it’s not a huge return on investment, as promised — they make these investments for the immigration benefit primarily, and then to get their capital back almost as a secondary matter. So certainly, if they couldn’t get their immigration benefits, that would be a significant event for those 200 or so people.
Russell Barr: These are investors that have real life stories, that are real people that have tried to come to the United States and be part of the American dream, the American system.
This is Russell Barr, a private attorney in Stowe who represents a group of EB-5 investors in litigation against the state.
Barr: We’ve got clients from Brazil, one in particular that basically sold his farm to move to the United States and is in limbo right now. With one child in school here, not really knowing at all what the family can do. And these are people that — investors with lives and families and children, dreams, that have been just stopped in their tracks for no fault of their own.
Barr says that appealing the termination of the regional center doesn’t get at the root of the problem.
Barr: If you read the July 3 federal government’s decision, the USCIS decision is a scathing indictment of a state agency of of our state, unfortunately. And why? Because you had an agency that was, in effect, and they found this — committing perjury by lying to the federal government. That’s on page eight.
So if you’re going to say that you have oversight, which they did, if you’re going to say you’re managing these programs, which they said they did, if you’re going to say to federal government that you’re administering these programs and projects, which they said they did, then you have to do that. If you don’t do that, you’ve committed perjury.
And they also found the Vermont regional center, through their license granted by the federal government, actually diverted the funds. So this isn’t just Quiros and Stenger. This isn’t just Jay Peak projects. This is the state funneling — misappropriation, diversion of funds. And I don’t think anyone should be pulling any punches anymore here. This is what’s happening. And that’s why the federal government shut them down.
Realistically, what should be the next steps, in your eyes, with the termination of the regional center?
Barr: Well, nine months ago, we asked a state court in our case on behalf of the investors to appoint a receiver. Appoint an independent expert in this. Somebody who — from Boston, Albany could be from Vermont, if they have immigration experience — to come in and hold the folks that were part and parcel to this fraud accountable, and clean things up and move on. That would have given the state a much higher likelihood of success with the federal government. They didn’t do that.
So you know, the idea that they’re going to appeal, it’s just wrong. It’s very simple. Properly administer your projects, and — one rule: don’t steal the money. The federal government knows this. And so this idea of appealing and spending hundreds of thousands of dollars on an appeal is a complete waste of resources.
When I talked to the commissioner of financial regulation, he says that the state is appealing in the interest of investors. They think that this is the best path forward, the best hope to get those people some resolution. What do you think about that?
Barr: I think they put themselves between a rock and a hard place. What’s happening now is they did not take the appropriate approach with USCIS from day one. They did not sit down with them and say, “we made a mistake. Here are our books and records, here are the people that are responsible.” Instead, they pushed forward saying, “We are state government, we’re above the federal government. We can do what we want.” And that has created a whole host of issues for the investors.
So there’s no easy answer. I think what’s happening here is, it’s done for the investors. Unfortunately In our opinion, the likelihood of success, given the facts, given the body of law, given the history, given the fraudulent filing — they’ve already made their bed, unfortunately.
So you’re saying that their argument — because part of their argument in winding down the regional center slowly and keeping it open, is that these ongoing projects still have value in terms of economic development — you’re saying that that’s kind of tainted to begin with?
Barr: It’s not me saying it. The USCIS very clearly did a balancing test in the decision. And they found, in effect, that even though there is some good in the program, openly you allowed the stealing and misappropriation of hundreds of millions of dollars. And we cannot trust you.
Is Trapp creating jobs? Yes. Mount Snow, to a degree, I would imagine are creating some jobs. Yes. But our entire brand, our entire program, has been destroyed. The federal government looks at this as: why would they allow this when truly the ultimate program here has is created more harm than good?
State officials say they’re working to address some of that harm that’s been done. They announced one step at a press event last week, down the street from what’s become known as “the hole.”
Keays: The big project, or one the most notable projects, is right in the center of downtown. Right on the Main Street in Newport was a block of buildings. And it was taken down or razed, as they say, to make way for the new office complex or multi-use building that was going to be put there. That project got stalled when the regulators brought the lawsuits against the two developers back in April of 2016.
So the press conference took place probably like two blocks away from there. It was held on this picturesque waterfront in Newport, which is a nice setting. But you know, the other setting where the hole is, is not so pretty and nice.
Vermont Attorney General TJ Donovan: We’re here to update the state of Vermont on two civil actions that the state of Vermont filed against Ariel Quiros and Bill Stenger two years ago.
Keays: They announced a $2.1 million dollar settlement against the two men, Quiros paying the bulk of that in what they value as $2 million in assets, or five properties he owns in the state. And Stenger is making a $100,000 payment to the city of Newport to be used for economic development purposes over a four year period.
Gov. Phil Scott: While our work is not yet completed, the dark cloud that has been hanging over us for the last few years is beginning to lift. I’m confident better days are ahead for this region.
What’s the significance of that settlement? What step is the state now taking towards a broader resolution of this whole thing?
Keays: The state says that they’re trying to harm the impact that was done to the city of Newport. When they brought the case, they were talking about the efforts of the lawsuit to help investors who were hurt in the case. But this lawsuit does nothing to help the investors in the case. Although there is $2 million coming to Newport.
Kate Gallagher: There’s an interesting aspect of because the state is not really acting like the investors. The state is acting in the public interest.
Kate Gallagher runs the Civil Division of the attorney general’s office. She led the state’s case against Quiros and Stenger.
Gallagher: In this case, with the settlement in particular, one of the things that we thought was in the public interest was to make some form of restitution to the Northeast Kingdom and Newport. So we look at a broader interest than just the interests of the investors.
Russell Barr agrees that the city of Newport deserves restitution, but he argues that the investors deserve it first.
Barr: Let’s take a step back here. Without my clients and the investors investing into our program, none of this money would be here. None of it would have been stolen and misappropriated. So any money that is recovered has to go — first, you go back and pay the contractors, including interest and any other damages. And then any remaining amount should go to the investors.
That’s their money. That money was stolen the first time and in our opinion, this settlement is allowing for the money to be stolen again. And what’s so unfortunate is that in their lawsuit, in the state’s lawsuit filed two years ago, on page 49 in a wherefore clause, they specifically ask for full restitution of my clients, of the investors. Well, we all know now that not one penny of that sentiment went to our clients.
Another part of the state’s argument here is that dismissing these cases lets them shift records to the state auditor to start an investigation of the fraud.
Attorney General TJ Donovan: We control these two cases. There’s a lot of litigation about EB-5. We control these cases. We’re saying, we’re dismissing them. We’re repairing the harm done to the city of Newport, a small step towards that direction in the Northeast Kingdom. We’re going on the path to transparency, to answer that question by taking this out of the legal system.
Gallagher: We could have continued to litigate, and, you know, maybe gotten a little bit more money and gone through a lot of steps to recoup all that. But you know, that was going to be another two, three years. And we really felt like, again, we’re looking at the public interest.
One of the things we really wanted to do here was to get these documents to the auditor so that he would be able to begin looking at them and reporting to the public. I think the public trust was damaged as a result of this fraud. And I think this is a step — we hope — forward, to maybe restore some of that public trust.
Why now, though? I mean, what’s the significance of working to restore that public trust immediately, rather than continuing to litigate and possibly getting a bigger financial settlement down the line?
Gallagher: So I think, realistically, in order to get that additional maybe 2 million, we would have spent a million. So there’s that aspect of it. There’s always risk in litigation as well.
But I think it was more that, you know, I think the public’s concern that we kept hearing more and more of, was they wanted to know what happened around state government. And we just were not in a position to answer that question while there was ongoing litigation.
It’s going to take some time for the auditor to do his work. So, you know, having him get started sooner rather than later was certainly important to us, too.
And what’s the process going to be for addressing that question? These documents go to the state auditor, what do we do with the information that comes back from him?
Gallagher: I think it’ll depend on what that information is, you know, what he learned. It could be that there are certain types of steps we can take within state government to make sure that maybe a different department should be handling certain kinds of things, or maybe there should be, you know, a separation of interest of the development from regulation. It’s hard for me to anticipate what he will recommend, but I’m sure he’ll have recommendations.
And I mean, the goal is to make state government better, but also just so that people know. Because it’s unknown, there can be all kinds of theories — that, you know, someone’s lining their pockets in state government. And that’s certainly not something that I have seen or believe, but that’s something that he should be looking at.
Still, Barr argues that investors shouldn’t be punished because this level of accountability wasn’t already in place.
Barr: It’s very unfortunate state officials created this economic disruption in the northeast. It wasn’t the investors that created it. And I would suggest that they claw back the salaries of employees that were part and parcel with the fraud. They’ll never do that. That’s where the money should come from. You don’t steal the money, again, from investors — poor, unsuspecting investors.
I want to understand this better. I’m still trying to get a sense of where exactly the interests of the state and the interest of the investors diverge. Because it does seem like there’s some will here to provide restitution to everyone who was affected. But with there being a limited pool of money here, how does that happen?
Barr: It’s an economic problem. It’s a fundamental problem. You’ve got investors that believed in state representations and state filings and, and the program turned out to be a complete Ponzi scheme. So that money must go back to the investors. It’s their money.
Their state needs to find an avenue for restitution — another way, whatever it is. Federal programs, to allowing economic development, to cutting back on the regulatory regime, which is probably one of the most stringent regulatory structures that we have in any state in the nation. You’ve got to turn business around, you’ve got to allow people to bring capital to our state. What happened here now is we had a program that was allowing people to bring capital to our state, and certain state officials have destroyed that program, that opportunity.
You’ve got to turn it around. We’ve got to create honesty and transparency in government here. I don’t understand why this present administration is not cleaning this up. It’s unfortunate.
Alan, help me out here. It sounds like the state, and a lot of these investors that are still in limbo, they all are saying that they want the same things. They want the state to look at its own role. They want some kind of resolution for their financial investments and their immigration status. But there are points of disagreement here about how they come to those resolutions.
Keays: It’s just a question of accountability. Who is accountable for what took place? And what are the consequences for those actions or lack of actions at that time, if there were material misrepresentations made by state officials? What are the consequences for that?
That’s still an open question.
Keays: That’s still an open question. Are those consequences criminal? Have people’s careers advanced despite that? Those are interesting questions.
How do you think those questions might get answered?
Keays: The U.S. attorney’s office, for about over two years now, has been doing a criminal investigation. And we don’t know all that much about that criminal investigation, besides they have said they were doing one.
So we don’t know exactly how far reaching that investigation is. Is it beyond the developers? Is it into state officials? We don’t know actually specifically if that’s the case. But certainly the Notice of Intent to Terminate by the USCIS did raise questions about: will that criminal investigation go into what state officials did at that time?
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