EB-5 investment Fraud

As detailed in a June 2018 Congressional hearing, there has been a rise in investment fraud in the EB-5 Immigrant Investor Program. The EB-5 program, administered by the U.S. Citizenship and Immigration Services (USCIS), provides a path to legal residency for foreigners who invest directly in a U.S. business or private regional centers that promote economic development in specific areas and industries. The purpose of the EB-5 program is to stimulate the U.S. economy through job creation and capital investment by foreign investors. Lately, however, marketers have used this investment-for-visa program to defraud investors.

In a typical scheme, a company/Regional Center and its fundraisers will solicit EB-5 investors with the promise of high rates of return or U.S. residency. In some instances, the companies will even guarantee that the investments are risk-free. In reality, many of these companies act as Ponzi schemes or other illegal operations. The common SEC violations (see examples below) arising out of EB-5 schemes include:

• False or misleading EB-5 advertisements in violation of Section 10(b)-5 of the Securities Exchange Act of 1934;
• Theft or misuse of investor funds in violation of Section 17(a) of the Securities Act of 1933; and
• Improper solicitation of investors by unregistered broker-dealers in violation of Section 15(a) of the Securities Exchange Act of 1934.

Due to the prevalence of EB-5 fraud, the SEC has released an investor alert to warn investors about potential scams in EB-5 offerings. Moreover, USCIS released its Annual Report to Congress, which noted that “fraud-in the form of embezzlement, securities violations, investment schemes, and criminal conduct-has plagued the Regional Center program since its inception.” According to a letter from Senator Grassley, the EB-5 program has become riddled with fraud and EB-5 groups are telling investors they have “bought off the White House.”

See this helpful article: How to Report EB-5 Fraud and Earn an SEC Whistleblower Award.

SEC Whistleblower Program: Awards for Reporting EB-5 Fraud

Under the SEC Whistleblower Program, individuals can receive an award for exposing EB-5 fraud. In fact, the SEC has already issued a $14.7 million award to an individual who exposed a fraudulent EB-5 scheme. In recent testimony on the EB-5 immigrant investor program, the SEC’s Associate Director, Division of Enforcement, stated: “The SEC is committed to investigating fraudulent investment schemes arising from the EB-5 program, and will remain focused on this area and the key participants who offer and sell these investments.”

SEC EB-5 Enforcement Actions

In 2017 alone, the SEC brought enforcement actions against nearly $1 billion worth of EB-5 projects. A majority of these enforcement actions are against individuals or companies that misuse investors’ funds (see examples below). Notably, the scrutiny over EB-5 projects has only increased since then.

Improperly Advertising EB-5 Projects As “Risk-Free”

On July 26, 2016, the SEC obtained a $63.8 million judgment against an oil company for a scheme that targeted EB-5 investors. The SEC alleged in their complaint that Luca International Group, LLC and its entities (collectively, the “Luca Entities”), targeting investors in Asia to invest in unregistered offerings of securities. Luca Entities represented to investors that their money would be invested in oil and gas drilling operations, and that they could expect risk-free annual rates of return of 20-30 percent. Luca Entities deceived investors by misrepresenting that their operations as successful, all while knowing that the company was losing millions of dollars. Luca Entities maintained this deception by using money from new investors to make sham profit payments to earlier investors until its bankruptcy in August 2015.

Illegal Brokering of EB-5 Investments

On June 23, 2015, the SEC charged two firms (Ireeco LLC and Ireeco Limited) that illegally brokered more than $79 million of investments by EB-5 investors seeking U.S. residency. Ireeco LCC used its website to solicit EB-5 investors and provide them with the “information and education” they would need in choosing the right regional center to invest with. After securing foreign investors from the website, Ireeco LCC would then direct them to the same handful of regional centers that paid the company a commission averaging around $35,000 per investor. While raising money for EB-5 projects in the U.S., these two firms were not registered to legally operate as securities brokers. The SEC sought to disgorge all of the ill-gotten gains and subject the companies to civil penalties pursuant to Sections 21B and 21C of the Exchange Act.

Misusing EB-5 Investments: $72 Million

On December 27, 2016, the SEC charged a California-based attorney, Emilio Franscisco, with stealing money over $9.6 million from EB-5 investors. According to the SEC’s complaint, Franscisco raised $72 million from investors in China to invest in EB-5 projects that included opening Caffe Primo restaurants, developing assisted living facilities, and renovating a production facility for environmentally friendly agriculture and cleaning products. Instead of using investors’ funds for the EB-5 projects, Franscisco used the money to purchase a yacht, and finance his own businesses and luxury lifestyle.

Misusing EB-5 Investments: $136 Million

On January 11, 2017, the SEC received a settlement offer from real estate developer and former Tibetan monastery student, Lobsang Dargey, in a $136 million EB-5 fraud case. This could signal a possible resolution to the high-profile case. In late 2015, the SEC ordered an asset freeze against Dargey and his “Path America” companies after raising at least $135 million for two real estate projects. Instead of properly investing the money, Dargey diverted $14 million for unrelated real estate projects and $3 million for personal use including the purchase of his $2.5 million home and cash withdrawals at casinos.

On April 28, 2017, the SEC posted the case on its “Notice of Covered Actions” page where all actions resulting in monetary sanctions exceeding $1 million are listed. Once a notice is posted, whistleblowers and their attorneys have 90 calendar days to apply for an award. For a link to the SEC’s complaint against Dargey and his Path America companies, click here.

Misusing EB-5 Investments: $100 Million

On January 18, 2017, the SEC charged California-based San Francisco Regional Center, LLC and owner Thomas Henderson with combining over $100 million he raised from EB-5 investors into a general fund from which he allegedly misused at least $9.6 million to purchase his home and personal items and improperly fund several personal business projects that were unrelated to the companies he purportedly established to create jobs consistent with EB-5 requirements. Furthermore, Henderson used $7.5 million of investor money to pay overseas marketing agents, and he shuffled millions of dollars among the EB-5 businesses to obscure his fraudulent scheme.

Misusing EB-5 Investments: $26.9 Million

On February 16, 2017, the SEC recommended a $65.7 million penalty against a husband and wife who allegedly misappropriated the bulk of $26.9 million raised in an EB-5 investment project. According to the SEC’s complaint, the couple defrauded at least 50 Chinese investors by falsely claiming that their monies would be invested in an approved EB-5 project to build and operate a proton therapy cancer treatment center (Beverly Proton Center, LLC) in Southern California. Rather than invest the money, the couple misappropriated at least $7.7 million for themselves and transferred more than $11.8 million to three marketing firms in China, including $3.5 million to a firm of which the husband is CEO and chairman of the board.

Misusing EB-5 Investments: $50 Million

On April 5, 2017, federal authorities raided a business run by a California attorney and her father suspected of orchestrating a $50 million EB-5 visa scheme. According to the court filings, the father-daughter company, California Investment Immigration Fund, LLC (CIIF), raised money from more than 100 Chinese investors for business projects that would qualify the investors for U.S. green cards if the project created at least ten jobs. However, rather than legitimately investing the funds into the projects, CIIF hired high school students to pose as full-time employees for bogus projects and used the investors funds for personal expenses, including buying million-dollar homes, and other improper uses.

This father-daughter scheme began around 2008 and was undetected for years. Due to a lack of oversight of the EB-5 projects, many of CIIF’s investors were even able to improperly obtain U.S. green cards without invest in legitimate businesses or creating any jobs. Notably, three of the CIIF’s investors who received green cards were fugitives wanted by the Chinese government.

Misusing EB-5 Investments: $350 Million

On April 13, 2017, Raymond James & Associates Inc. agreed to pay $150 million to settle a suit accusing two Vermont ski resorts of misappropriated the majority of $350 million raised through the EB-5 immigrant investors program. According to the SEC's complaint, Raymond James and former branch manager Joel Burstein allegedly masterminded a Ponzi scheme to cheat 836 foreign investors out of at least $200 million of the funds raised for the EB-5 projects. Investors were told the funds were raised to complete various improvement projects. Instead, a majority of the funds were used for other-than-stated purposes, including the purchase of a luxury condominium, payment of one of the EB-5 operator’s income taxes, and the acquisition of an unrelated ski resort.

Misusing EB-5 Investments: $140 Million

On April 28, 2017, the SEC announced that the operator of a $140 million EB-5 project, Serofim Muroff, has agreed to pay back more than $5 million dollars that he stole from the EB-5 investor funds. According to the SEC’s complaint, Muroff used the investor funds to purchase two personal residences, a Ranger Rover, a BMW, and invest in an unrelated zip line operation. Like most EB-5 schemes, Muroff targeted Chinese investors with the promise of developing luxury real estate in the United States. In addition to pay $5 million in disgorgement, Muroff was required to pay interest totaling nearly $1 million and a penalty of $2 million.

Misusing EB-5 Investments: $89 Million

On June 22, 2017, the SEC filed a complaint against a Chicago-based immigration attorney, Taher Kameli, and his companies for misusing investor funds in an $89 million EB-5 project. According to the SEC’s complaint, Kameli raised funds from mostly Chinese and Iranian investors by advertising an EB-5 construction project for senior living facilities in Illinois and Florida. Contrary to Kameli’s representations, however, the SEC alleges that he spent millions of dollars of investor funds for his own benefit, for the benefit of his brother, and for the befits of his companies. In addition, the SEC alleges that Kameli diverted millions of dollars to fund other projects and to make unrelated payments.

Protections for EB-5 Whistleblowers

The SEC Whistleblower Program also protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity. Furthermore, the Dodd-Frank Act protects whistleblowers from retaliation by their employers for reporting violations of securities laws.

Click here to learn more about anti-retaliation protections for SEC whistleblowers under the Dodd-Frank Act and Sarbanes-Oxley Act.

The anti-retaliation provision of the Sarbanes-Oxley Act provides robust protection for corporate whistleblowers. To learn more about corporate whistleblower rights, download this helpful guide Sarbanes-Oxley Whistleblower Protection: Robust Protection for Corporate Whistleblowers.