SEC Scrutiny of EB-5: Proactivity by the Commission Continues

The SEC’s first truly proactive enforcement effort against an EB-5 project began a little over a year ago (February 6, 2013) when the Commission sought and obtained a temporary restraining order and asset freeze against Anshoo R. Sethi, A Chicago Convention Center, LLC (ACCC) and Intercontinental Regional Center Trust of Chicago, LLC (IRCTC) for their roles in raising approximately $158 million dollars from close to 300 EB-5 investors as part of a fraudulent offering. On April 19, 2013, the Court granted the Commission’s motion to return to investors the entire $147 million of principal that had been frozen pursuant to the SEC’s motions.  The only remaining dispute involved some $11 million in “administrative fees” paid by the investors, which were the only funds remaining to be returned in order to make the investors whole.

That got resolved two weeks ago: on March 17, 2014, the U.S. District Court entered judgment against the defendants.  The Final Judgment establishes, among other punishments, joint-and-several liability among the defendants for over $11.5 million in disgorgement and prejudgment interest and an order enjoining and restraining defendants for twenty years from offering or selling securities issued by any of the defendants or issued by any entity owned or controlled by Sethi, and the forced dissolution of the entities in question.  For a full breakdown of the enforcement actions, see the SEC’s press release:

SEC Obtains Settlements in $150 Million EB-5 Immigrant Investor Offering Fraud

As my good friend Sam Udani put in ILW’s Immigration Daily blog yesterday, “the SEC is on the prowl”…as they SHOULD be!   This is an excerpt from Sam’s comments yesterday:
“Immigration Daily has learned that over the last couple of months the SEC has served subpoenas on 8 Regional Centers represented (separately of course) by 3 law firms. From the pattern of information that Immigration Daily has gleaned it appears that the SEC effort started in Q4 2013, when it received information (thru subpoena or otherwise) from financial institutions involved in EB5. The effort is not based in one particular SEC office, multiple SEC offices are involved. This may not be a one-time effort, since the subpoenas were sent out many weeks apart. So far, the RCs involved are small-to-mid-sized. Our calls to attorneys representing several of the top 10 RCs indicate that none of them has yet received a SEC subpoena.

Our best guess is that this is an effort by the SEC to educate itself on EB5 matters, and that more subpoenas will likely show up during Q2, 2014. On balance, Immigration Daily welcomes increased scrutiny by SEC into EB5 matters. Perhaps this scrutiny will focus on two major irregularities in EB5 custom as follows:

  • Most of the larger Chinese agents maintain offices in the USA, without appropriate licensure
  • In many cases, insufficient disclosures are made to Chinese investors as to intermediary fees paid by RCs to Chinese agent”

That is EXACTLY correct.  Over the past three years and my dozens of trips to East Asia, I have witnessed what I can only describe as a pandemic of hype-driven EB-5 marketing, particularly in China, which operates not only in flagrant disregard of both U.S. and local securities laws, but in flagrant disregard of fundamental principles of fair dealing and business integrity.   Many – not all but many – Chinese migration agents base their forceful “buy” recommendations not on the underlying integrity of the EB-5 project and its principals but on the size of the “success” fee offered.   Among the most dishonest agencies, the modus operandus is even simpler:  ad blitzes in secondary markets followed by hard sales pitches result in dozens of investors escrowing with the agent…who then negotiate under-the-table kickbacks with EB-5 projects for the bulk delivery of investors. And when the U.S. project is questioned about these tactics, the response is always the same:  “Hey, I can’t control what the Chinese agents say!”  Sure you can’t…

How do I know all this?  Because these issues are what those of us who are working very hard to comply with U.S. securities laws both inside and outside the U.S. face in overseas markets face on a daily basis.  As we painstakingly cultivate the foreign professional relationships through which bona fide, accredited prospective EB-5 investors may be able to find their way to Lake Point EB-5, the city buses roll by with giant EB-5 megaproject ads plastered on the side….it’s THAT flagrant, folks.

While AILA members fret at this increased involvement by SEC, Sam and I agree: if the securities fraud isn’t aggressively contained by the SEC, EB-5 will go the way of the Canadian immigrant investor program, with the government concluding that the endeavor, in light of the reality, is not even worth the effort.