Only weeks after the disclosure of some $25 million (or more) in EB-5 losses, the state of Vermont has already recovered a quarter of that figure. South Dakota, whose EB-5 losses probably exceed $100 million, incurred years ago, has barely started its tiny, seemingly reluctant efforts to recover a mere $1 million or so of its losses.
Both states are (or were) Department of Homeland Security-designated regional centers in the immigrant investor program, which provides a family-sized set of green cards to aliens placing half-million-dollar investments in DHS-approved, but not guaranteed, projects. Both states found that multi-millions of investor funds (and smaller amounts of state funds) had been swindled, wasted, or lost. And the states have the powers of both regional centers and of state governments to begin the process of recovering at least some of those funds.
Both states had, for years, failed to spot numerous red flags (visible much earlier in South Dakota than in Vermont). Both states now recognize their own failures, but only Vermont has moved vigorously to remedy matters.
What Vermont has done, which should be front-page news in both states, is to sue one of the erring middleman agencies and then quickly force a $5.95 million settlement.
Coughing up the money is Raymond James, a nation-wide brokerage firm that gained millions in interest when it accepted many millions in EB-5 funds into its margin accounts. Margin accounts are used by stock market speculators who put up some of the money in them and borrow the rest at high interest rates from the broker. (From the point of view of the investor, it is a little like taking the family's grocery money to the casino in the hopes of scoring a big win.)
Margin accounts, at least in modest dimensions, are probably appropriate for individual investors (disclosure: I have a tiny one myself), but they are a totally inappropriate place to lodge funds covered by a trustee-like program, such as EB-5.
According to a comprehensive VTdigger report, $4.5 million of the settlement will be set aside to help repay the alien investors, $1.25 million will go into Vermont's state treasury, and $200,000 will be used to fund the state's financial regulators.
To be perfectly fair to South Dakota, its EB-5 problem is different from, and harder to tackle, than Vermont's. This is the case over and beyond the apparent reluctance of the people in Pierre to go after South Dakota's EB-5 abusers, who seem to be extremely well connected at several levels to the GOP-controlled state government.
Here are some of the other differences:
- Vermont had the excellent services of a comprehensive SEC report on its EB-5 problems; in South Dakota a perhaps comparable (but still secret) FBI report was quashed by the acting U.S. attorney, then campaigning for the permanent position, Randolph J. Seiler. (The president has since made that appointment.) His predecessor in that position, a prominent Democrat, was singularly incurious about EB-5 matters. Thus some officials of both South Dakota parties did not do due diligence.
- In Vermont, there is one clear abuser (Ariel Quiros, a resident of Florida) and one henchman (William Stenger, a Vermonter) according to SEC, and Quiros has substantial financial holdings, such as a small apartment in New York's Trump Tower, that have been frozen. While one subject of South Dakota's reform efforts, the former regional center director Joop Bollen, has been identified, most of the other players are either hard to find or without assets in the United States, or both.
- On the last point, Vermont was in an excellent negotiating position with Raymond James, which has brokerage offices in the state that it wanted to preserve. In contrast, some of those who got South Dakota's EB-5 money, who presumably should not have received any, include an ad hoc corporation with a Hong Kong Office (that made $10 million by lending an EB-5 company $2.5 million for three months), a Canadian entrepreneur whose relations to EB-5 are unknown, and a flock of Korean H-2B workers who were hired to finish a subsequently bankrupt beef slaughterhouse, despite the fact the jobs created by EB-5 are supposed to go to residents of the United States.
It will be interesting to watch these two developing stories in the weeks and months to come.