Jay Peak’s path to fraud

by Anne Galloway

April 23, 2016

This is part of a two-part series. Read part two.

Bill Stenger summoned the brightest stars in Vermont’s political galaxy to the Northeast Kingdom at the end of September 2012.

It’s not often that the governor and the entire congressional delegation visit Newport. But on Sept. 29, 2012, they all came — Sen. Patrick Leahy, Sen. Bernie Sanders, Rep. Peter Welch and Gov. Peter Shumlin – to pay a visit to this city of 4,500 on the Canadian border that is home to an animal feed factory, an undeveloped lakefront and not much else.

The gathering itself was singular, and the announcement the CEO of Jay Peak made that sunny day three and a half years ago was historic. Stenger had already secured more than $200 million and created more than 1,200 jobs as part of a redevelopment at the Jay Peak ski area.

Now, on the heels of that success, Stenger promised to bring $600 million more in capital to two other impoverished towns in the Northeast Kingdom — Newport and East Burke — as part of a massive development scheme that he declared would transform the poorest region of the state and bring 10,000 additional jobs to Orleans County.

All that money for the Northeast Kingdom Economic Development Initiative, he told reporters, politicos and locals, would come from hundreds of foreigners who were willing to invest $500,000 each in the projects in exchange for the promise of a green card and eventually permanent residency. The investors, Stenger pledged, would also get their money back with a return on investment, and in a unique arrangement, the state was charged with monitoring the projects.

With more than a half billion dollars in additional funding from the EB-5 immigrant investor program, Stenger planned to build new trails at Jay Peak, an airport terminal facility in Coventry and a hotel and elite athletic center at another ski area in East Burke. But most of the development would be centered on Newport. Stenger proposed to construct a window manufacturing plant, a five-story office building on Main Street and a hotel, marina and conference center.

The “crown jewel,” as Stenger has described it, was a state-of-the-art biomedical campus in Newport for stem cell research and the manufacture of organ replacement devices.

The proposals for the suite of seven projects were so exhaustively detailed, Stenger held a daylong press conference in three locations to explain how the plans would proceed. Everywhere he went the politicians cheered.

It was the biggest economic development scheme the state had ever seen, and the outpouring of support from local residents was immediate. His remarks were punctuated by sustained applause.

Newspapers quoted local residents and politicians who were bowled over by the initiative and used adjectives like “magnificent,” “spectacular” and “amazing.” A sign went up on the Newport municipal offices not long after thanking Stenger for bringing jobs to the area.

Congressional delegation, Stenger, Quiros
Rep. Peter Welch, Bill Stenger, Sen. Patrick Leahy, Sen. Bernie Sanders, Gov. Peter Shumlin, Ariel Quiros and Bill Kelly.

The governor and the delegation were equally effusive at the press conference.

“What we are seeing today is something of extraordinary importance,” Sen. Sanders told reporters. Shumlin, Leahy, Sanders and Welch posed for photographers with Stenger and his partner, Ariel Quiros. Three of the pols (Sanders excepted) would go on to promote the Jay Peak projects to investors on trips to China through the Vermont EB-5 Regional Center.

Shumlin declared that Stenger was the “Michelangelo” of EB-5 and had “a magical ability” to attract foreign investors. Leahy, who pushed through reauthorization of the national EB-5 program that month, said the best part was “it’s not going to cost taxpayers one cent.”

Three and a half years later, Stenger’s starstruck dream has dissolved into a black hole of pending litigation, finger-pointing and the airing of dirty laundry.

On April 14, the Securities and Exchange Commission charged Stenger and Quiros with 52 counts of fraud for misusing $200 million in immigrant investor funds out of $350 million to be used for the construction of hotels, condos and amenities at the Jay Peak and Q Burke resorts. The state of Vermont, in coordination with the SEC, is also suing the developers for defrauding investors.

The “Ponzi-like” scheme began when Quiros used investor funds to purchase the Jay Peak Resort back in 2008, the SEC alleges. The Miami businessman then backfilled construction costs for the first investor project with money from new investors, regulators say. That pattern continued over a seven-year period for seven different projects. Quiros also borrowed against investor funds, and from 2009 to 2012 incurred $105 million in margin loan debt, according to the SEC.

At a press conference last week Shumlin soberly described the chain of events that led to the state and federal investigations. The governor said he and members of the administration who were responsible for overseeing the projects “feel betrayed.”

In the same breath, Shumlin praised the state probe of the alleged fraud and took credit for making a structural change to the Vermont Regional Center in January 2015 that gave the Department of Financial Regulation jurisdiction over EB-5 projects and the authority to investigate Jay Peak. Prior to that time, the regional center was responsible for both promoting and regulating developments. Shumlin told reporters, “I realized we needed a better system that didn’t ask one state agency to promote and oversee the EB-5 programs.”

When asked if there was more the state could have done to prevent the alleged fraud — the largest in Vermont history — Shumlin said, “Obviously, we can all sit here and say who should have done what when differently and we have done a lot of inner searching in my administration over the last year as this has become more obvious to us, but I think the answer is that at the heart of it, there’s a certain amount of trust in the partnerships that we have with the private sector and government and we have found in the process we set up that that trust was misplaced, allegedly misplaced.”

But for several years the state had known that there was a problem with the finances at Jay Peak and chose to ignore it.

A former business consultant, Douglas Hulme, who worked closely with Jay Peak, warned immigration attorneys of the suspected misuse of funds. In the spring of 2012, the Shumlin administration spoke with Hulme about his concerns, documents show.  Although it is not known what was said at the meeting, it is clear that state officials did not investigate Hulme’s allegations, nor did they respond fully to questions from an immigration attorney and an EB-5 financial adviser.

Four months later, the Shumlin administration and the state’s congressional delegation gathered in Newport to support Stenger’s plan to bring an additional $600 million in investor funds to the state at the much ballyhooed daylong press conference.

Overwhelming political support at the highest levels of government and the close relationship between developers and state officials gave the developers time, and the opportunity, to perpetrate the fraud, EB-5 analysts say.

Lax state oversight gave the developers room to maneuver and allowed the deception to go undetected for more than seven years.

Politicians who wanted Stenger’s job creation plans to succeed unwittingly helped to facilitate the alleged fraud by attending promotional events with the Jay Peak CEO in China, Vietnam, South Korea, Hong Kong and Taiwan.

As Stenger put it in a 2013 promotional video disseminated to investors: “One of the reasons our EB-5 projects have been so successful has been the wonderful relationships we have at the local, state and federal level.”

Shumlin appeared in that video and told investors that all of the Vermont Regional Center projects were audited by the state. “Vermont is the only EB-5 program that covers the entire state of Vermont and is audited by the state of Vermont,” Shumlin said. “We make sure that our EB-5 programs are good investments for the investor and good economic development job creators for the state of Vermont.” In the summer of 2014, the state asked Stenger to take the video down.

Watch Promotional Video:

In fact, the Jay Peak, Q Burke and AnC Bio Vermont projects were never audited, as advertised, and the state failed to collect quarterly reports from Stenger and Quiros, as required under an agreement with the developers.

Michael Gibson, a registered financial EB-5 adviser who has written extensively about the immigrant investor program, says that if the state had reviewed the financials from the beginning, “They would have discovered in one hour or less, the misappropriation of funds.”

“This fraud went on almost 10 years, to me that’s unconscionable,” Gibson said.

Investors say they were drawn to the Northeast Kingdom EB-5 developments because the state of Vermont was charged with monitoring the projects, and the backing of prominent politicians gave the projects an air of respectability and safety. Both Leahy and Shumlin, for example, wrote letters of support for the Jay Peak projects and the AnC Bio Vermont biomedical campus, which the SEC alleges is “nearly a complete fraud.”

In all, about 700 foreign investors from 74 countries were duped. It’s not clear whether they will recover their money, and several hundred investors who are in the middle of the immigration process may not be able to obtain residency in the United States as a result of the alleged fraud.

Mohammed Adil, an Indian investor who is a CEO of a company in Dubai, said, “For someone sitting so far away, the governor’s promise means something.”

Adil, an investor in the Stateside project at Jay Peak, says he was attracted to the EB-5 program in Vermont because he thought it would be a safe investment.

“I come from a country where citizens cannot always count on the government and corruption abounds,” Adil wrote in a letter to Sen. Patrick Leahy. “But America is supposed to be different, that is why we are so trusting in giving over our savings to Vermont, knowing it would be protected by the appropriate state and federal agencies.”

Adil holds a degree from Harvard University and he brought his family to the United States to give his four daughters an opportunity to obtain a first class education. Now, he doesn’t know if his family’s applications for permanent residency have been jeopardized by the fraud, let alone whether he’ll get his money back.

“I personally believe the senator [Leahy] and the governor [Shumlin], who have sold this, should come to our rescue, because who can you trust more than the government?” Adil said.

Boosterism from Vermont’s pols

Economic development in Vermont is priority No. 1 for Vermont governors and members of the congressional delegation. With the exception of IBM, the state has not traditionally had a strong manufacturing base. For six decades, tourism has been a major source of revenue for the state and the ski industry is a prime driver.

Stenger and Quiros proposed both tourism and high tech manufacturing jobs for the state’s poorest region, and that combination proved irresistible for the state’s leaders, all of whom were taken in by the prospect of creating thousands of jobs.

When Quiros bought Jay Peak resort in 2008, Vermont had the only state-run EB-5 regional center in the country. The developers promoted the Vermont Regional EB-5 Center’s oversight as a big plus for investors who were concerned about the riskiness of the investment.

Stenger enhanced that false sense of security and safety in the Jay Peak investments by enlisting the state’s top politicians in a marketing campaign that lured hundreds of investors into the program.

Bill Stenger, Jim Douglas, Alex Choi (owner of AncBio Korea), Ariel Qurios
Bill Stenger, Jim Douglas, Alex Choi (owner of AncBio Korea), Ariel Qurios

Republican Gov. Jim Douglas flew to South Korea, in October 2009 and signed an agreement that gave Quiros the go-ahead to solicit funds from investors for AnC Bio Vermont. In an interview last year about his trip, Douglas recalled that there was a surprising lack of activity at AnC Bio Korea, the Korean plant that was directly affiliated with AnC Bio Vermont.

Five and a half years after Douglas’ tour of the facility, the headquarters of AnC Bio Korea was sold in a liquidation auction.

Sen. Patrick Leahy, D-Vt., who described Stenger as a “friend” after the SEC allegations came out, has a long-running relationship with the Newport businessman. Leahy invited Stenger on a trade mission to Ireland in 2009, and in a letter of support written later that year, Leahy congratulates Stenger “on the tremendous growth you have shepherded at Jay Peak and throughout Northern Vermont.” The senator says he is pleased to have “worked with you to make this effort a success.” The letter was part of promotional materials given to investors who subscribed to the Q Burke resort project.

Leahy asked Stenger to testify in Congress in December 2011 to tout Jay Peak as a shining example of what EB-5 funds could do to boost economic development in rural areas, and in 2012, Vermont’s senior senator held his 50th wedding anniversary party at Jay Peak.

Two years later, the senator traveled to Shanghai with Rep. Peter Welch, D-Vt., to promote the Vermont Regional Center in general and the Jay Peak projects in particular, according to fliers provided by an investor.

At the press conference last week, Shumlin, a Democrat, said he inherited the problems with the program, which started before he took office in 2011, implicating his predecessor, Douglas.

But Shumlin, in his capacity as governor, accepted more in campaign contributions from Stenger and Quiros than any other state politician, and he went to great lengths to promote the Vermont Regional Center and by proxy the Jay Peak projects.

In 2011, the governor went to Miami with Stenger to give a presentation about the regional center at a seminar for immigrant investors, and he wrote a letter of support for the biomedical project in October 2012 that was included in a packet Stenger gave to investors. “I look forward to the future success of the AnC Bio Vermont project and am available to meet at any time to assist in its development,” Shumlin wrote.

Alexandra MacLean
Alexandra MacLean

Alex MacLean, a close aide who ran Shumlin’s election campaign, announced she would be taking a job with Stenger in November 2012. In her new role at Jay Peak, MacLean worked alternatively as an investor relations manager, strategic communications director and project manager of the Renaissance project, the proposed office building in Newport.

Two months later, Shumlin gave an extensive shoutout to Stenger and Quiros in his State of the State address.

In September 2013, the governor went on a weeklong trip with MacLean, Stenger, Lawrence Miller, the secretary of the Agency of Commerce and Community Development, to China and Vietnam. Jay Peak paid $100,000 for travel expenses.

At some point in 2013, MacLean was involved in the production of a promotional video of the governor in which he explains to investors that the state audits all of the EB-5 projects in Vermont. The video was translated into Chinese. In a statement released when VTDigger reported on the video in October 2014, the governor’s office said Shumlin recognizes the agency “does not audit these projects, but provides independent oversight.”

What the state knew when

On Feb. 28, 2012, Douglas Hulme, through his Florida-based company Rapid USA, sent notification to over 100 immigration attorneys who had represented investors in Jay Peak programs that he was severing ties with Stenger and Quiros. Hulme stated in his February 2012 missive that “he no longer had confidence in the accuracy of representations made by Jay Peak Inc., or in the status of and disclosures” made by the Jay Peak developers. Hulme had worked with Jay Peak developers for over five years but has since consistently refused to comment to press on what eroded his faith in the Jay Peak developers.

In early March 2012, just over a week after Hulme’s missive, James Candido, who was the Vermont regional center director at the time, told Seven Days that he “spent the entire day at Jay after that letter.”

“There was absolutely nothing that was out of the ordinary,” he said.

In the same article Candido laments, “Within EB-5, if there was any fraud happening, we would find it very quickly.”

In retrospect, Candido’s daylong vetting of Jay Peak financials stands in stark contrast to the 15-month investigation conducted by the Department of Financial Regulation that resulted in a suit leveling $185,000 in fines against Stenger and Quiros.

But back in the spring of 2012, behind the scenes, the state was starting to take heat from EB-5 attorneys and consultants who were raising questions about how the regional center was vetting projects, internal memos show. An attorney for a Jay Peak immigrant investor wrote on March 29, 2012, to John Cronin, the former director of securities for the state, asking to talk about the Rapid USA email and what it meant for his client. Cronin thanked Terenik Koujakian, the attorney from California, for writing and told him that the Vermont Securities Division was collecting information about the private placement offerings provided to investors but “is not conducting an investigation of Jay Peak.”

Lawrence Miller
Secretary of Commerce & Community Development Lawrence Miller. File photo by Hilary Niles/VTDigger

On April 4, 2012, James Candido wrote to Hulme on behalf of Lawrence Miller, the secretary of the Agency of Commerce and Community Development, to request a conference call with Hulme, according to emails obtained through a public records request.

Shortly afterward, state officials arranged a telephone conference call with Hulme, documents show. In an email, Candido explained the purpose of the call to Hulme. “Lawrence wants to discuss in detail the reasons for the departure from the Jay Peak project and your direct concerns about the project that led to the company’s departure. Go over some of the marketing exercises you currently are employing with Vermont projects.”

Meeting minutes for the conference call that was scheduled for May 4, 2012, have not been made available. Public records requests indicate that participants scheduled to be on the call included Miller, Candido, Deputy Secretary Patricia Moulton, Hulme and Hulme’s attorneys.

Miller declined to comment on the substance of the meeting.

Public records show that Miller met with Stenger on May 17. In a subsequent email, Stenger wrote that he spoke to Candido following the call and asking for Miller’s input.

“James [Candido] briefed me somewhat on the Douglas [Hulme] call. I wanted to ask your perspective on it, and if you want anything from me. I have a paper trail on all our interaction [sic]. If you would like that or anything else, please let me know. Best regards, Bill.”

On May 21, 2012, Miller responds to Stenger’s email: “I don’t feel a need for any further information at this point Bill. Everyone is fully consistent with each other.”

Instead of investigating allegations that Hulme may have brought during the call, Miller appeared to have ignored them. In June 2012, Miller sent a letter to Hulme accusing him of “unfair and deceptive marketing.”

And then, just four months later, in September 2012, with the backing of the state’s highest level politicians, Stenger announced $600 million in additional immigrant investor funded projects which included the AnC Bio and Q Burke projects.

Michael Gibson, USA Advisors
Michael Gibson, USA Advisors

Also in April 2012, Gibson had sent a three-page analysis of SEC regulations to Cronin. He alleged that Jay Peak was violating state securities laws. The Jay Peak developers hadn’t filed a Form D with the SEC for any of the projects, for example, he said. The Form D notifies federal regulators that a business is exempt from standard securities offerings.

The email was forwarded to John Kessler, the regional center attorney, who replied: “As I explained in my earlier email, there are certain limits to what James and I can do for the Vermont Regional Center, and naturally we pay attention to USCIS and other informational resources, such as AILA,” Kessler wrote. “We’ll continue to keep up, and hope that, on balance, more attention to EB-5 leads to greater awareness and support when it comes time for program renewal.”

State could have prevented fraud

Gibson says he wasn’t surprised when news broke last week about the SEC fraud case. It’s the largest incidence of fraud, he says, in the EB-5 program so far.

“To me, it was inevitable there was going to be a time when they could no longer repay the investors,” Gibson said. “The only way to repay the early EB-5 investors was to take money from new investors coming in – through a Ponzi scheme.”

Gibson says federal regulators stepped in when the state abdicated its responsibility to shut down Jay Peak and the situation started to spiral out of control.

“The SEC saw this as being an extremely dangerous situation,” Gibson said. “Their concern was not just the $200 million loss — they saw they could be facing a $400 million to $500 million loss if it had been allowed to go unchallenged.”

The state, he said, should be held accountable for the fraud because the regional center was “completely negligent in the monitoring and compliance of this offering.”

David-North, a fellow with the Center for Immigration Studies, is an internationally recognized authority on immigration policy.
David-North, a fellow with the Center for Immigration Studies, is an internationally recognized authority on immigration policy.

David North, a fellow with the Center for Immigration Studies, says the Jay Peak fraud case is one of the three biggest in the short history of the EB-5 program, pointing to similar problems in Chicago and South Dakota. North says the Vermont Regional Center was “oblivious to what was going on,” and obviously didn’t do enough.

“For years it was much too relaxed,” North said. “If someone had looked at where the money was stored and had found it in margin accounts — well, that’s not really where they were supposed to put investors’ money.”

Spot audits would have quickly shown that Quiros was taking out margin loans against the investor accounts, he said. AnC Bio, he says, was the most outrageous of the projects. “It was totally on paper,” North says. “The people working on it hadn’t done work for the FDA approvals. One of the things that could have been done is call the FDA and ask how the FDA approvals were coming, and nobody did that either.”

While the state waited years to take action, North gives the state credit for “eventually owning up to the problem” by pursuing an enforcement action and splitting the oversight and promotional functions of the regional center.

Like other EB-5 investment experts interviewed for this story, North says the case in Vermont will have a big impact on the program nationally because it comes at an awkward time for supporters of EB-5.

A major part of the program — the $500,000 investment program for rural areas — is up for renewal and will terminate Sept. 30. South Dakota and Vermont were the only rural regional centers, and the program “didn’t work in either place,” North says.

Leahy is a principal backer in the Senate, and the Jay Peak fraud, North says, strengthens the hand of Sen. Chuck Grassley who is trying to reform EB-5.

“If it can go wrong in Vermont, it can go wrong anywhere,” North says.“$50 million going missing in Vermont under state government oversight? In New Orleans that’s not so surprising, but it’s a shocker in Vermont.”

Too good to be true

To many locals, Stenger’s grand plan seemed too big and too good to be true from the beginning. Skeptics wondered whether Orleans could house 10,000 workers. No one understood how hundreds of thousands of square feet in new construction could be completed on an aggressive four-year timetable.

Others questioned the legitimacy of a program that allowed wealthy foreigners to buy citizenship in America where populism is a fundamental value. But most looked the other way.

Since that fateful day in 2012, many of the promises Stenger and Quiros made to investors, politicians and the public proved too good to be true long before the SEC caught up with the Jay Peak developers.

Along the way, partners reneged on deals with the developers, projects stalled, contractors walked off the job and disgruntled investors filed formal complaints with state officials.

Not one of the projects in East Burke and Newport Stenger promised to build three and a half years ago came to fruition.

Stenger and his partner, Ariel Quiros, only made partial progress on only one of the original Northeast Kingdom Economic Development Initiative projects — the Q Burke Hotel and Conference Center. A brand new hotel at the base of Burke Mountain now sits empty, subject to legal wrangling, and the elite athletic center is all but a pipe dream.

One by one, potential development partners pulled out. Menck Windows got cold feet in September 2013 and built a manufacturing plant in Springfield, Massachusetts, instead. Real estate mogul Tony Pomerleau nixed the sale of land for the Newport hotel, marina and conference center less than a year later because, he said, they didn’t have the money.

When the developers held a groundbreaking ceremony for AnC Bio Vermont in May 2015, the governor and members of the congressional delegation who once so enthusiastically championed Stenger and his grand plan were conspicuously absent.

Townhouses at Jay Peak remain half finished. Plans for the airport terminal have been shelved. The developers razed a historic block on Main Street in Newport, and in its stead is an enormous hole in the ground.

EB-5 In Vermont: The Timeline

This is part of a two-part series. Read part two.


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