For a period of at least seven years, the Department of Homeland Security either did not know about the theft of $50 million in its Vermont EB-5 program, a sign of remarkable incompetence, or knew about it and did nothing about it, a sign of something worse.
The loss of these moneys in a well-honed Ponzi scheme was announced last week by the Securities and Exchange Commission — once again riding to the rescue — and by chagrined officials of the State of Vermont, as we reported at the time.
As of Sunday, DHS had — perhaps understandably — issued no statements on the disaster to the program, which is like the Titanic's owners saying nothing after its sinking.
If a multi-million, multi-year EB-5 embezzlement can take place under the eyes of the squeaky-clean government of the State of Vermont, EB-5 scandals can bloom anywhere, and they have. In the EB-5 program an alien investor can secure a batch of green cards for himself, his spouse, and their kids for an investment of $500,000 in a DHS-approved, but not guaranteed, business venture.
Usually EB-5 moneys go into urban areas, funding real estate developments in downtown areas such as in New York, Los Angeles, and Miami. Most of the scandals in the program, similarly, are found in urban areas, such as New Orleans, Chicago, and Las Vegas.
The financial losses in Vermont, on the other hand, negatively impacted an area known as the Northeast Kingdom, which has been a center of genuine rural poverty for decades. The ski resorts and other investments are all within a few miles of the Canadian border.
To add to the woes of the EB-5 industry, the Vermont projects were dear to the heart of the former chairman of the Senate Judiciary Committee, Pat Leahy (D-Vt.), long the program's champion on Capital Hill. He and Sen. Chuck Grassley (R-Iowa), the current chairman of the committee, are now leading an effort to reform the program.
Had a DHS auditor paid a single site visit in those seven years; had a DHS GS-13 telephoned an opposite number in the Food and Drug Administration about a proposed EB-5 funded laboratory; or had anyone in the agency read the investigative journalism of VTDigger.org on the subject, the plot would have been foiled years ago. Clearly none of those things happened and it was the SEC, as it was in EB-5 scandals in Chicago and the Pacific Northwest, that apparently first noticed that something was wrong, not DHS.
Further, it's clear from reading either the SEC's exhaustive, 81-page complaint filed in the U.S. District Court in Miami or the somewhat similar 50-page complaint filed by the State of Vermont that the first indications of fraud took place as early as June 2008, when Ariel Quiros, the main defendant in the case, used EB-5 money, not to remodel the ski resort at Jay Peak as promised, but to buy it from its Canadian owner. Such use of the money was directly contrary to the stipulations of the EB-5 documents used to secure the funding from the aliens.
Further, it was in the same month that William Stenger, the other Jay Peak manager named in both complaints, changed an EB-5 document that had said that the investors' moneys must be kept in FDIC-insured accounts. These funds were sent by Stenger to brokerage firm accounts maintained and controlled by Quiros, and thus were not covered by the FDIC.
In fact, these fund transfers should have sent an immediate warning to both state and federal officials, had they been looking. These were margin accounts, which allowed the owner (Quiros) to use money he did not have to invest in either securities or in the EB-5 activities. Further, these transfers caused the co-mingling of investors' moneys with other funds, which is against all of the rules.
Margin accounts are legal for many purposes, and are often used by speculators to leverage their stock market investments (or gambles). It is not known if these accounts were used to cover Quiros' losses in the stock market, if he had them, but it is known that $2.5 million in investors' funds were used to pay interest on the margin accounts. That sum would suggest a margin account that carried something like a $25 million average deficit for a full year.
These fraudulent maneuvers, and similar ones, are described in aching detail in the SEC complaint, which includes 52 counts of specific financial wrongdoings.
It should be noted at this point that both the SEC and the Vermont state court cases are civil complaints and not criminal indictments, but everyone I talked to about the case said that criminal charges are sure to follow, as they did in the SEC's Chicago EB-5 case.
The complaints treat Stenger (a resident of Vermont) and Quiros (a resident of Miami) differently. Quiros is charged with misusing EB-5 funds for his personal use, including the purchase of a condo in Trump Place, a luxury apartment building in New York; for the purchase of the ski resort at Jay Peak; for his income taxes; for interest on his margin account; and for unrelated investments. His assets have been frozen by the U.S. District Court in Florida.
Incidentally, the $2.2 million for Quiros' pied-à-terre did not buy him a very impressive New York apartment. Currently, according to the Trump Place website, the smallest units, studio apartments, start at $2.9 million. Quiros' studio was apparently bought earlier, when prices were lower, and is one of the more modest units in the complex.
Stenger, in these civil suits, is regarded as a facilitator for Quiros, though that precise term is not used, and his assets have not been frozen. Stenger has been the front man for the investment, always appearing at the ground-breaking ceremonies wearing a white construction helmet. According to the SEC document, he turned over control of the various accounts to Quiros.
A Miami lawyer, Michael Goldberg, has been appointed the trustee for Quiros holdings, and though the SEC changed the locks on some of the Vermont holdings, the EB-5 funded activities, including some construction, are continuing.
The Role of the State Government
In most states, the EB-5 program is almost completely outside the purview of state government. Not so in Vermont or in South Dakota. Perhaps it's a coincidence, but the two states that really got involved in this program have proved to be terrible stewards of investors' funds.
In these two states the state governments decided to take on the role of regional centers, the DHS-licensed middleman-entities that obtain the funds from the aliens (half a million dollars at a time) and channel those moneys into appropriate investments. Most of the more than 800 EB-5 regional centers are private-for-profit organizations.
The problems with the program in South Dakota, as we have reported frequently, probably involve even larger sums of stolen or missing money than those in Vermont. And while there was a matter of a key EB-5 official's mysterious death (shotgun wound to the stomach) in South Dakota, there has been no violence in Vermont.
Further, once the Vermont state government (years late, to be sure) got suspicious about the Stenger-Quiros operation, it started its own investigation along with that of the SEC, and at a really grim press conference last week, the state's leaders admitted at least some of their own mistakes. The governor and three state cabinet officials spent a miserable hour discussing the matter and responding to press questions about the case.
In contrast, both the legislative and executive branches in South Dakota sought for years to cover up their EB-5 problems, and only recently have some minor criminal charges been brought by the state's attorney general against the prime suspect, the former director of the state's regional center, Joop Bollen.
There is, incidentally, a third state that had (lesser) problems with the director of its regional center; Michigan forced that official out of office after he ran up a dinner bill for himself and two other state officials in Dubai for more than $1,171, among a long list of other extravagances. This was state tax money that might better have been spent on replacing the lead pipes in Flint. I can't tell at the moment whether the Michigan EB-5 office is still operative.
Two other elements of the EB-5 scandal in Vermont, the alleged investment in an advanced medical laboratory, and the policy challenge of just when to blow the whistle when a government agency encounters an on-going financial scandal, will be covered in a subsequent blogs.