Defense attorneys for former Jay Peak President Bill Stenger say they have discovered new information that shows state regulators ignored — or even withheld — information that would have been exculpatory.
David Williams and Brooks McArthur filed a motion in federal court last week asking Judge Geoffrey Crawford to strike an order requiring Stenger to pay $250,000 in restitution to 36 EB-5 investors who suffered millions of dollars in losses as a result of the Jay Peak fraud.
Stenger was convicted a year ago for making false statements about promised job creation at AnCBio Vermont, a proposed biomedical facility, and Food and Drug Administration approval of medical devices that were to be manufactured there. He was sentenced to 18 months in prison and was released in March after serving seven months in a Massachusetts penitentiary.
The attorneys say Stenger should not have to pay back the investors because state regulators are to blame for the investors’ losses at AnCBio.
Two recently released state memos show the Securities and Exchange Commission warned state regulators in 2015 about fraudulent activity throughout the Jay Peak ski area developments, the Burke Mountain ski area and AnC Bio Vermont.
Citing the memos, Stengers’ defense attorneys argue that former Department of Financial Regulation Commissioner Susan Donegan “disregarded critical information” from the SEC when, in April 2015, she lifted a hold the state commerce agency had put on the AnCBio Vermont project.
Donegan declined to comment by email.
Williams and McArthur make the case that the AnCBio investors’ losses occurred not because of Stenger’s misstatements on Jan. 9, 2015, but because DFR decided to greenlight the project after hearing the SEC’s investigatory findings on Feb. 4, 2015.
“The only proximate cause of EB-5 losses was the ill-advised and politically motivated” decision to lift the hold on marketing AnCBio to investors, Williams wrote.
Paul van de Graaf and Nicole Cate, lead counsel with the U.S. Attorney’s Office in Vermont, declined to comment in an email to VTDigger. “A response will be filed to Mr. Stenger’s motion later this month,” said Fabienne Boisvert-DeFazio, public affairs officer for the U.S. Attorney’s Office.
The federal EB-5 program, launched in 1990, is designed to attract foreign investment in economically disadvantaged regions. In return, investors are provided with a path to citizenship.
SEC gives advance warning to state regulators
Two investigators for the SEC told state regulators in early February 2015 that the Jay Peak Resort developments in the Northeast Kingdom were fraudulent, according to the court filings.
Williams cites two exhibits, memos written at the time by Christopher Smith, the director of capital markets for the Department of Financial Regulation. In the documents, which are addressed to David Cassetty, then the department’s general counsel, Smith recounted conversations with the SEC on Feb. 3, 2015, and Feb. 4, 2015.
Federal investigators shared findings from their nearly two-year investigation of the Jay Peak projects with Smith and Mike Pieciak, then-deputy commissioner of the Department of Financial Regulation and now Vermont state treasurer, according to the memos.
In the first call, the federal investigators “were shocked to hear” from Pieciak that Jay Peak’s lawyers described the SEC investigation as a “general review of EB-5 projects,” according to the memos filed with the court.
The SEC was also “surprised” to learn that state regulators were planning to reinstate an investor program for AnCBio Vermont after the commerce agency had put a hold on the project, in June 2014, because of questions about financial mismanagement.
Trish Sindler and Brian James, the investigators for the SEC, told state officials they would like to follow up the next day. In the meantime, Sindler and James were going to seek permission from their supervisors to share information about their probe into Jay Peak, according to Smith’s memo.
On Feb. 4, 2015, the SEC officials provided detailed information to Pieciak and Smith about fraudulent activity at Jay Peak. Ariel Quiros, the owner of the resort, had misappropriated millions of dollars from foreign EB-5 investors to buy the resort, then used funds from every subsequent phase of the development to backfill previous projects. All of the projects at Jay Peak, Burke and AnCBio were tied up in the fraud, according to Smith’s memo.
Sindler and James were particularly troubled by what they found at AnCBio, Smith said. Quiros had profited on land and equipment at investors’ expense, and he used $20 million in investor funds to pay back a margin loan on another project, the DFR official wrote.
The federal regulators also expressed concerns about the FDA approval of medical products and job creation numbers.
James was “surprised” that DFR had “come to the conclusion that the AnCBio Vermont offering (for investors) was nearly ready,” Smith said.
“The SEC attorneys acknowledged that the decision to let AnCBio Vermont continue their offering was entirely up to us but expressed their concerns about ANC Bio Vermont and Jay Peak EB-5 projects generally,” Smith said.
Quiros and his counsel, Bill Kelly, were “the only people to know about the accounting of all Jay Peak projects,” according to the memo. Quiros was “pulling the strings,” Sindler and James said, and it appeared Stenger “may not be aware of accounting issues.”
About six weeks later, Pieciak, and his boss, Donegan, approved a new private placement memorandum for AnCBio, and Stenger was told he could market the projects. The SEC shut down the Jay Peak projects, including the biomedical facility, in April 2016. In the intervening year, dozens of investors were defrauded at AnCBio.
The Smith memos recently came to light in a pending negligence lawsuit brought by investors against the state Agency of Commerce and Community Development for civil damages. The case goes to trial in Lamoille County Superior Court on June 19. Last month, Judge Mary Miles Teachout ordered the state to release thousands of pages of privileged documents that had been withheld by the Vermont attorney general’s office, which represents the state, in discovery.
The memos were released as part of that order. Williams says the evidence, however, was not included in the subpoenaed records from the Vermont attorney general’s office released to the defense two years ago. He asserts that the documents appear to have been withheld.
Disagreement on documents
Lauren Jandl, chief of staff for the Vermont attorney general’s office, said by email that the office worked with Stenger’s defense counsel “to search for documents in our document management database. The document you referenced was not responsive to the agreed-upon search terms.”
Reached by phone, Williams questioned what the agreed-upon search terms might have been.
“They must have excluded the names of the people listed in the subpoena to miss the 2/3/15 and 2/4/15 memos. They must have excluded AnCBio, DFR, SEC, Q Resort, Quiros, EB-5, Jay Peak, margin loan, FDA, Stenger and Kelly as well. That explanation makes no sense,” Williams said.
In court filings of FBI and IRS interviews with Donegan and Pieciak, no mention was made of the February 2015 calls with the SEC, according to Stenger’s attorneys.
Pieciak told IRS investigators in 2018 the SEC was “leery about sharing information about the investigation,” according to a transcript of an interview provided to the court.
“What is really shocking about these memos is that shortly after he was assigned to investigate Jay Peak’s EB-5 project, the current treasurer of the state of Vermont was told by the SEC that Quiros was running a Ponzi scheme,” Williams said. “Rather than take steps to put an end to Quiros’ Ponzi scheme, Treasurer Pieciak did nothing, and, as a result, dozens of unwitting investors were fleeced.”
Attempts to reach Pieciak by phone and email were unsuccessful.
The Smith memo “undercuts the credibility of Donegan’s sentencing hearing testimony,” the defense attorneys allege.
In addition, Williams and McArthur claim Donegan misled the court when she made a “spurious claim she had never seen” in an April 13, 2015, memo in response to a question from the governor’s office. The letter, provided to then-Gov. Peter Shumlin’s former legal counsel, Sarah London, gives a dire assessment of the Jay Peak projects asserting that “every single penny of investor money will be lost for good. New investors most certainly will not be issued visas.”
Donegan testified no one on her staff told her that.
Cassetty, former general counsel of DFR, has said under oath he sent the memo to Donegan.
In court, Donegan said she never would have approved AnCBio had she known investors wouldn’t get their visas.