On April 14, 2016, in the Victorian grandeur of the governor’s ceremonial Statehouse office, then-Gov. Peter Shumlin somberly made a shocking announcement: A series of economic development projects in Vermont’s Northeast Kingdom funded through the federal EB-5 investor visa program were part of a massive fraud — and the U.S. Securities and Exchange Commission had seized control of the properties. Jay Peak Resort, Burke Mountain Resort and a biomedical research operation in Newport would be put into receivership.
After Shumlin’s brief remarks, then-commissioner of the Department of Financial Regulation Susan Donegan explained how the fraud was perpetrated. She showed reporters, lawmakers and onlookers an elaborate “spaghetti chart” with a roadmap of financial transactions the ski area’s owner, Ariel Quiros, used to steal tens of millions of dollars from more than 850 foreign investors as he and his partner, Jay Peak president Bill Stenger, pursued developments in Jay, Burke and Newport. More than $200 million in investor funds were misused, according to federal regulators.
Donegan left state government a few months later and has kept a low profile since.
On Thursday, exactly six years later, the former commissioner was called to the witness stand in Burlington federal court to testify in Stenger’s sentencing hearing.
Donegan’s testimony provided new behind-the-scenes details about her key decision to allow the developers to continue seeking cash from new investors at a time when her department’s investigation into his dealings was underway and it still wasn’t clear where $40 million they had earlier raised and spent related to a project in Newport had gone.
As he questioned Donegan, David Williams, Stenger’s lawyer, tried to shift blame from the developer onto Donegan and other state officials who allegedly learned about fraudulent activity at Jay Peak and nevertheless allowed foreigners to continue investing in AnC Bio Vermont, the biomedical facility.
The state Agency of Commerce and Community Development had suspended the AnC Bio and Burke developments — preventing them from raising additional EB-5 funding — in July 2014 after encountering dubious financial transactions. Donegan’s Department of Financial Regulation was brought in at about that time to oversee a financial review of all of the projects. Even though her department was aware of many red flags pointing to fraud, Donegan lifted the hold on marketing the two projects by March 2015.
In court on Thursday, Williams asked Donegan if she felt pressure from Shumlin to greenlight AnC Bio.
“The governor certainly wanted the project to go forward,” she replied. “He never ordered me to do anything like that. I did express concerns to him about what would the circumstances be under which I would consider lifting the hold.”
Shumlin did not return a call Friday afternoon seeking comment. He said earlier last week he could not comment on the case until all the litigation had been completed.
‘A corrupt political decision’
Williams told the court that he saw “a direct connection between the governor and the decision to put this flawed project, crippled project, disastrous project back into the market knowing that it had widespread financial issues yet to be resolved.”
“I would call it a corrupt political decision to do that,” Williams said.
Shortly after Williams began questioning Donegan, Judge Geoffrey Crawford demanded that the defense attorney cut to the chase and keep his queries narrowly focused on matters related to Stenger — not those relevant to a lawsuit winding its way through state court.
“You know what, I’m going to interrupt you,” Crawford said. “We’re going to have to move the point. … I’m not going to try the civil case here this morning. … It was the government, the governor’s fault, not the defendant’s fault. That’s your point, right?”
“Yeah, that’s my point,” Williams replied.
The former commissioner was one of four state officials Stenger’s lawyers had subpoenaed to testify at the hearing. Waiting in the wings were Liz Miller, Shumlin’s former chief of staff; Patricia Moulton, a former commerce secretary; and David Cassetty, a former general counsel for the Department of Financial Regulation.
In response to Crawford’s concerns, the defense attorney dropped the other witnesses. Only Donegan testified.
Later in the hearing, the judge said he had initially been skeptical of Williams’ move to summon Donegan to the stand.
“I thought she was a helpful witness,” Crawford said as he thanked Williams for calling her to testify.
“You’re welcome,” Williams replied.
The hearing ended with the judge ruling that the former Jay Peak president and CEO would serve 18 months of jail time for his role in submitting false information to the government about the AnC Bio project.
That sentence was less severe than the five years in prison prosecutors had argued was appropriate for Stenger. Crawford also ordered Stenger to pay much less restitution than the $1.66 million prosecutors were seeking. The judge set that figure at $250,000.
Two more criminal defendants, Quiros and business partner Bill Kelly, are set to be sentenced later this month.
Arguments over investor protections
The governor’s office asked Donegan to begin looking at the Jay Peak projects in the summer of 2014, but it was not until January 2015, when her department subpoenaed financial statements, that she began to grasp the scope of the investigation, she said.
Williams pointed out that the Department of Financial Regulation began sharing files with the Securities and Exchange Commission at the end of February 2015 and asked whether that gave her pause. Donegan replied “no,” because the SEC had characterized its work as a “review,” not as an investigation.
In early March 2015, the department received a financial statement showing that $9.8 million had been moved out of an escrow account at Jay Peak and into Quiros’ margin loan.
In her testimony on Thursday, Donegan confirmed that her department also knew that $40 million in AnC Bio investor funds had been transferred to a Korean entity of which the state had no knowledge. The money was purportedly for equipment that was never purchased.
The projects were greenlighted after a meeting on March 27, 2015, with the developers — Quiros, Kelly and Stenger — and a handful of state officials, including Shumlin, Donegan, Moulton, Miller and spokesperson Sue Allen in the governor’s office. Afterward, Quiros stayed behind for a one-on-one chat with Shumlin.
Not all of the details had been worked out. Donegan said she and Shumlin disagreed about how the projects should move forward.
In two private meetings in April, Donegan argued with Shumlin over whether to put protections in place for the investors. She was adamant about putting investor money in escrow accounts held by the state.
The governor wanted to know, she said, “why I felt that that was so necessary.”
“He had hoped that we wouldn’t have to encumber the projects,” she said.
Donegan received similar pressure from Quiros. KSE, a lobbying firm in Montpelier, also “called me to try to have me move things forward,” she said.
In correspondence with Miller, Shumlin’s chief of staff, on April 11, 2015, Donegan wrote that the department had identified possible violations of federal securities law, including noncompliance, fraud, self dealing and misuse of investor funds.
But in court, Donegan said that even then she wasn’t absolutely sure the developers were committing fraud. The probe was incomplete, she said.
“I would say that we were beginning to look at the potential violations and potential misconduct. We did not have full evidence of (fraud),” she said. The department was just beginning to “see things of concern,” she said, and they weren’t getting the info they needed from the developers. She compared the investigation to working a jigsaw puzzle.
“We didn’t have all the pieces and we needed to go collect them and try to see what the picture was going to look like and if the picture came into clear focus, there would be these types of violations,” Donegan said.
Quiros and Kelly continued to complain about state involvement causing further construction delays, according to Donegan’s testimony. They pressured Donegan to issue a revised investor agreement but refused to provide financial information about the Jay Peak projects as her department worked with the SEC on the “review.” Donegan said she never received the requested financial information from Jay Peak.
Ultimately, she said, it was her decision to lift the hold on the projects and put the money from investors in AnC Bio and Burke into an escrow account held by the state.
“We were trying to find out not just where the $40 million went but what was the flow of the funds in the project,” Donegan said. “It would have been premature to just not allow the project to go forward at that point.”
In June, she moved a new investor agreement forward with the developers that included a disclosure about the “SEC review.” Between July 2015 and April 2016 another 36 investors were caught in the AnC Bio web.
Two investors at the hearing Thursday said they invested in AnC Bio because of the state’s oversight. State officials, however, failed to protect him from the fraud, they said.
“I was first drawn (to) AnC Bio project because of the state’s role from the oversight and the administration,” Wei Wang, who is from China, said in video testimony Thursday. “It was the only program that was affiliated with the state-run regional center.”
Carlos Obando, of Colombia, also testified by video, telling the court that Stenger’s involvement was not the reason he invested in Anc Bio.
“My initial first impression was that this project was safe because of the government’s promised oversight,” Obando said.
Other investors have made the same claim. Two civil cases against the state of Vermont are now pending in federal and state court.