Former Gov. Peter Shumlin’s administration had full knowledge of a massive Ponzi-like scheme in March 2015 but kept foreign investors in the dark about it for more than a year, according to a new lawsuit filed Tuesday in federal court.
The suit alleges that a top official at the Vermont Department of Financial Regulation gave several detailed presentations to the Shumlin administration and the state Attorney General’s Office in the spring of 2015 outlining the fraudulent nature of the Northeast Kingdom Development Initiative, which was centered around Jay Peak Resort.
The official, then-deputy commissioner Mike Pieciak, had begun investigating the developers’ misuse of hundreds of millions of dollars from EB-5 immigrant investors in December 2014 and had subpoenaed bank records to build his case, according to the suit. He told state leaders that Jay Peak owner Ariel Quiros and CEO Bill Stenger had defrauded investors across all eight phases of the Jay Peak developments.
The lawsuit was filed on behalf of seven immigrants who invested $500,000 apiece in a development project at Burke Mountain Resort in East Burke — then owned by Quiros and known as Q Burke.
The investors are represented by Russell Barr of the Stowe-based Barr Law Group, which has reviewed thousands of pages of new documents.
Shumlin did not respond to a request for comment on the lawsuit. Pieciak, now commissioner of the Department of Financial Regulation, declined to comment, according to department spokesperson Stephanie Brackin. Charity Clark, chief of staff to Attorney General TJ Donovan, told VTDigger that the office “is reviewing the complaint and anticipates responding in the coming weeks.”
The Barr lawsuit is the latest of dozens of complaints in the wake of the U.S. Securities and Exchange Commission’s 2016 enforcement action that stopped what it described at the time as a Ponzi-like scheme. Most recently, Stenger, Quiros and another partner pleaded guilty in federal criminal court and face jail time. The judge is holding sentencing hearings in the cases this fall.
According to Barr, Shumlin was told about “accounting irregularities, transactions that did not make sense, as well as illicit purchases of property and luxury items throughout the Jay Peak projects.” In addition, Pieciak informed Shumlin and other members of the administration that Quiros had illegally used investor money to buy the Burke resort, according to the suit.
The now famous “spaghetti map,” showing the complex and fraudulent Jay Peak transactions, was provided to the governor and other state officials, Barr alleges. (The map was not released to the media or the public until a year later, at a press conference held by Shumlin after federal officials raided Jay Peak and put the properties into receivership.)
Nevertheless, the governor asked DFR to “partially” reinstate the Q Burke project, as reported by VTDigger at the time.
In order to complete the hotel, state regulators who were supposed to protect investors from the fraud instead allowed the Ponzi scheme to continue, the lawsuit alleges.
Nearly a decade ago, when questions about financial improprieties were first raised by Seven Days, a leader of the state-run Vermont Regional Center asserted that it carefully monitored the projects.
As the noose tightened on the developers in 2014 and 2015, Shumlin backed up the center’s claims. He later adamantly denied to investors and the public that the state was complicit in the massive Jay Peak fraud.
In 2015, the Department of Financial Regulation and the Attorney General’s Office picked up the mantle of denial, which has manifested in hardball tactics on records lawsuits brought by VTDigger, the ACLU of Vermont and the Cornell Law School First Amendment Clinic.
The Barr lawsuit is the first outlining the state’s alleged involvement in the wrongdoing and describes a cover-up by the Vermont Attorney General’s Office, the Shumlin administration and the Department of Financial Regulation spanning at least seven years.
The case seeks to establish how deeply the state may have been involved in the fraud.
‘A disgrace’
In July 2015, the Department of Financial Regulation approved a new offering memorandum for Q Burke. Under securities law, it was supposed to provide material disclosures to investors, but the document made no mention of the fraud.
Officials working for the Vermont Regional Center, which oversaw EB-5 projects in the state, continued to travel overseas to meet with investors and help Stenger raise funds. When the money — totaling $43 million — came in, DFR controlled the bank accounts for the hotel, and the Attorney General’s Office made payments to contractors, according to the lawsuit.
Later that summer, Pieciak pointed out in a slide presentation that new investors in Q Burke would not receive green cards or get their money back, Barr wrote.
Meanwhile, the Shumlin administration and the Attorney General’s Office hid the fraud from investors, according to the complaint.
“The State’s overriding interest was in ensuring that the ski resort at Burke would avoid the fate of Newport, Vermont, (which in 2015 had a hole the size of a city block in its downtown as a result of the Ponzi-scheme), and ensuring that the dozens of Vermont contractors, materialmen and suppliers would be paid for their contracts building Burke’s hotel,” Barr wrote.
State officials also kept the public in the dark and stymied reporting on the financial improprieties, according to the suit. In a March 2015 email to Quiros obtained by VTDigger, the governor said the state would issue “a joint media response within the next few days to clarify and correct inaccuracies that were published by VTDigger in their recent articles.”
In August 2015, state regulators drafted a legal complaint against the developers. That lawsuit sat dormant and unfiled until April 14, 2016, the day after the federal Securities and Exchange Commission brought 52 counts of securities fraud against the developers and shut down the Ponzi scheme.
According to Barr, the Shumlin administration’s failure to disclose the Ponzi-like scheme to investors for more than a year allowed them to be defrauded. The state’s misuse of plaintiffs’ funds, he argued, represented an unconstitutional “government taking” without “just compensation.”
“State of Vermont officials were absolutely aware of the Ponzi-scheme, they were absolutely aware that the investors’ money was going to be lost, and they were absolutely aware of the dire immigration consequences that awaited these immigrants,” Barr wrote in an email to VTDigger.
“These same officials did everything to conceal the truth from the investors for one reason — to ensure that their money would continue to flow. It’s shameful,” he wrote. “These investors did nothing wrong. They only wanted to make a legitimate investment in this State and a path to citizenship.”
The actions of state officials and their “total disregard for these people’s lives,” Barr wrote, “is a disgrace.”
Barr has been engaged in a separate, long-running legal case, Sutton v. State of Vermont, on behalf of a different group of EB-5 investors. In that lawsuit, Barr alleges the state was negligent in its management of the Jay Peak projects over a 10-year period. That suit was initially dismissed in Lamoille Superior Court, but the Vermont Supreme Court ruled that Barr had grounds to appeal and sent it back to the Lamoille court.
In his latest lawsuit, Barr goes beyond the negligence arguments made in the Sutton case. He points to a calculated effort by the state to finish the Burke hotel and to engage in a subsequent cover-up of the fraud.
The State of Vermont, the Attorney General’s Office, the Department of Financial Regulation and the Agency of Commerce and Community Development are named in the Burke lawsuit, as are more than half a dozen current and former officials with those entities.
The investor plaintiffs hail from Nigeria, Colombia, Chad, Brazil, Vietnam, Mexico and Canada.
‘A sad truth’
By the time Stenger and Quiros started the Q Burke project in 2013, they had already collected $250 million in EB-5 investments to build three hotels, a water park and two condo complexes at Jay Peak Resort. They were also in the process of raising an estimated $600 million for six more projects across the Northeast Kingdom, including at Q Burke.
Immigrant investors in the EB-5 program can plow $500,000 into a project in a rural area and receive green cards in return. For each investment, the company must create 10 jobs. The Jay Peak developers promised to employ 10,000 people in the Kingdom.
Shumlin and the Vermont Regional Center told prospective overseas investors that the Jay Peak projects had been audited by the state and that the developments were subject to rigorous quarterly state reviews, as VTDigger reported. That due diligence was never executed, according to Barr.
In the case of Q Burke, the developers sought to use a proposed athletic center and hotel at the resort as a vehicle for soliciting $180 million from investors. When Quiros and Stenger began construction of a hotel at the mountain in 2014, they had raised $16.5 million from 33 investors.
But behind the scenes, Quiros had used investor money as a personal piggy bank to buy the Jay Peak and Q Burke resorts, three properties in Newport, a farm in Burke, New York City luxury condos and to pay personal taxes, according to the SEC. He also leveraged margin loans against $105 million in investor money, federal regulators said.
The misuse of funds further constrained cash that was supposed to be used for the developments. There were work stoppages in 2014 at Q Burke and several other developments because contractors and suppliers had not been paid, as reported by VTDigger.
Commerce agency officials who ran the Vermont Regional Center became suspicious and suspended Q Burke and AnC Bio, a stem cell research plant planned for Newport, in August 2014.
The commerce agency also hired the law firm Edwards Wildman to review the Jay Peak projects, as VTDigger reported in 2015. Wildman’s report cited deficiencies in the offering documents for the proposed AnC Bio plant and suggested that the state make changes that would prevent investors from being misled, according to the Q Burke lawsuit.
“Problems with previous projects must be disclosed,” the lawsuit quotes the report as saying.
This advice was ignored by state officials, Barr wrote.
When VTDigger reported on Jay Peak investor complaints that summer, the immigrant investors blamed the state as much as they did the developers for their predicament. The investors said they were attracted to the Jay Peak projects because Shumlin and U.S. Sen. Patrick Leahy, D-Vt., had vouched for the state’s oversight.
Shortly after the publication of stories spelling out the developers’ alleged financial improprieties and the state’s lax oversight of Jay Peak, Shumlin asked the commerce agency and state regulators to bring the state’s EB-5 program into compliance with state securities regulators.
In the new year, Pieciak subpoenaed financial records from Raymond James Financial Services for all phases of the $600 million under the “Northeast Kingdom Development Initiative.” The projects included Q Burke, an airport terminal, an office complex and AnC Bio. Stenger and Quiros had already spent $250 million on three hotels, a water park and three condo complexes at Jay Peak Resort.
In March 2015, Pieciak told Shumlin and his staff, the regional center and the Attorney General’s Office about Quiros’ commingling of funds, margin loans and theft, Barr wrote.
But Shumlin pressed on with Q Burke anyway, according to the suit. The state took over management of the Q Burke hotel project. A few months after the project was reinstated, attorneys for the Department of Financial Regulation drafted a complaint regarding securities violations across eight of the Jay Peak projects. The lawsuit described self-dealing by Quiros and outlined “in painstaking detail” the machinations of the Ponzi scheme, according to the suit. None of the securities violations were disclosed to immigrant investors in the EB-5 program.
The hotel was finished and the contractors were paid within days of the SEC shutting down the projects in April 2016, the Barr lawsuit asserts.
Stenger and the Vermont Regional Center attracted 86 immigrant investors in the months leading up to the SEC shutdown. In all, 119 people invested $60 million in the Burke project.
The Q Burke lawsuit asserts that about a week before the SEC filed charges in April 2016, DFR general counsel David Cassety sent two affidavits drafted by Pieciak for the state complaint against Quiros and Stenger to the governor’s general counsel, Sarah London, and assistant attorney general Scott Kline. The “robust” affidavit included evidence of misappropriations at Q Burke. Another omitted evidence that Q Burke was part of the Jay Peak fraud. The latter was cited in a legal document submitted to U.S. Citizenship and Immigration Services.
Barr concludes the complaint with what he calls a “sad truth” cited by former state commerce secretary Pat Moulton, who said the state’s “first concern is the people who work at these resorts.”
The extraction of hundreds of millions of dollars in investor money benefited a state that Barr writes relied on “best in country” oversight.
“The Vermont contractors were paid,” Barr wrote. “The Burke hotel continues to generate income for the state of Vermont. Both were paid for by the Burke Investors who have nothing left of their investment and have not been compensated in any way.”
Nor do the Q Burke investors, five years later, have their green cards and the promise of citizenship in the United States.
Correction: An earlier version of this story misstated details of the EB-5 public records lawsuits filed against the state.
