SEC's Christmas Present to EB-5 Skeptics & a Due Diligence Experiment

By David North on January 5, 2017

Although the delivery was delayed (it came on December 27), the ever-reliable Securities and Exchange Commission came through with an attractive Christmas present for those of us in the EB-5 doubters community.

In one sense, it was another nice tie for Dad and an attractive sweater for Mom — the case involved the misuse of $72 million in EB-funds in various California projects, including the apparent theft of $9.5 million of the total. Presumably about 144 or so alien investors, probably mostly Chinese, were duped.

It was another, by now routine, example of how the immigrant investor program can be robbed at will. Each investor had put up $500,000 in the hopes that St. Nicholas (dressed as Uncle Sam) would soon be there with a fistful of green cards for each of the investor's families.

There was a nice decoration on our gift as well, as the SEC press release stated:

According to the SEC's complaint [Emilio] Francisco and PDC Capital diverted investor funds from one project to another and outright stole at least $9.6 million ... to buy a yacht and prop up his other businesses.

How often do government press spokesmen (and I used to be one of them) use such an honest and strong term as "outright stole"? We should frame those words and hang the document on the tree.

I just wish they had been a little more specific about the boat, such as: "a brand-new, 48-foot Chris-Craft with twin screws now bobbing gently on the waves of the San Diego harbor".

A Due Diligence Test. Then an un-Christmas-y thought struck me: Would it have been possible for one or more of the 100-plus investors to have prevented this fraud? To have done so in a matter of minutes?

I decided on a little test. I assumed that the investor would either be English-speaking or rich enough to hire a translator, that no secret or hard-to-reach databases would be used, that no money would be spent in the process (other than hiring the translator), and that the whole operation had to be done in 10 minutes.

So I Googled Mr. Francisco's law firm, and found it had a truly prosperous sounding address: 5 Saint Tropez, Newport Beach, Calif. So far so good.

Then I looked at one of the listings and found that he was also head of something called the Debt Reduction Law Center. An American like me might worry about that, as the debt reduction business has some bad actors in it, but the investor in Beijing might not know that. Next I looked at Mr. Francisco's biography, and found that he had attended Western State College of Law.

Never having heard of it, I Googled the law school, and found it is in southern California and is one of a handful of for-profit law schools in the nation. I am more than a bit dubious about for-profit higher education institutions, so I read the Wikipedia entry on the school and found:

According to law professor blog "The Faculty Lounge", 32.5 percent of graduates obtained full-time, long term positions requiring bar admission nine months after graduation, ranking 189th out of 197 law schools.

So the EB broker went to a truly dismal law school, one that ranked, in this listing at least, in the very bottom 4 percent in the country. But maybe, the investor thinks, he knows a good deal when he sees one. After all, I am not hiring him to defend me in a murder trial.

Then I checked another entry on the Google page, that of the California State Bar, and found that Mr. Francisco had been disciplined twice by the bar, for unknown violations. The entry said:

10/28/1994 Discipline, probation; no actual susp.
02/29/2012 Discipline, w/actual suspension.

He was allowed to start practicing again nine months later. That's a pretty severe penalty, just short of being disbarred.

Given all that information, should not an investor at least start asking some questions before entrusting such a lawyer with $500,000? I would think so.

But none of the 144 or so investors apparently spent those 10 minutes to learn what I have just described. Any one of them could have done so.

It makes one grateful for the SEC; clearly the 144 investors were all too casual, as was the Department of Homeland Security, which is supposed to monitor the program.

The problem is, of course, that this sort of thing keeps happening, again and again, even at this time of year.