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Fraud on Investors in EB-5 Investments: Caveat Emptor! Part 2

Fraud on Investors in EB-5 Investments: Caveat Emptor! Part 2

EB-5 Fraud Courtroom

Examples of EB-5 Visa Fraud

The Chicago Convention Center

The first example is one of the most egregious to date, and one of the most well-known.  It is a case in which from the outset, the developer was likely set upon easy money and fraud.  More importantly, the fraud could have easily been found and the large investments, immigration headaches and lost administrative fees could have been avoided if anyone along the path had stopped to look beyond the documents.  It is the case of the Chicago Convention Center, which was to be a large hotel convention center complex near O’Hare International Airport.

A businessman owned a hotel about four miles down the freeway from O’Hare, which sat on a little over 2 acres of prime land.  His family had purchased the hotel for $10 million dollars a few years earlier.  He managed to run it into the ground, though it was already a pretty terrible property, only fetching $37 per room night, and with light occupancy.  After the hotel closed, the owner determined that the land could be developed into something grand, and he could find investors to put money in, which would result in him making money for doing virtually no work.  He was rebuffed by all conventional sources, and lost rights to use the names of a few prominent hotels in the process.

Undeterred, he became familiar with EB-5, and began hiring respected advisors, cozied up to the right politicians and union bosses, and sold everyone on the idea of building an environmental masterpiece of a hotel complex and convention center at a cost of approximately $950,000.00 per key.  The per key construction cost alone should have told nearly everyone that he was doing something wrong.  There were to be five hotels with just under 1,000 rooms, restaurants, a green roof, and four floors of conference space, situated through three towers of between 14 and 19 stories.  The entire complex was to have zero emissions, be 100% carbon neutral, and platinum LEED certified.  A wonder to be sure, it would be the first of its kind.

The owner raised $147,000,000.00 from nearly 300 investors, entirely from China, as part of the hotel’s capital stack.  Each of the investors also ponied up $41,000.00 in administrative fees to the owner’s regional center and development company.  The administrative fees totaled a little over $12,000,000.00, all of which was spent within one year.  The owner had no hotel naming rights for the five hotels, had no building permits, and had lined up none of the required capital other than EB-5.

The owner paid top dollar to Chinese migration agents to market the investment.  He also orchestrated bold lies, like a statement that the project was guaranteed by the Illinois state government, coupled with a photo of the owner and the governor next to the seal of the state.  He indicated that he had secured naming rights for all 5 of the hotels, that he had secured additional financing through certain government grants, and when those fell through, that the sovereign wealth fund of Qatar was investing $340,000,000.00 in the project.  He stated that he had 15 years of management and hotel development experience, and had developed over 250 such properties.  He further guaranteed green cards to all investors, which is impossible to do.  It is truly a case study in all the things that a developer or regional center must not do.

Lining up investors was easy, but luckily the investors’ investment funds were in escrow, when a whistle blower with a competing project looked at the Chicago Convention Center project and realized that even on its surface it was a sham.  The whistle blower contacted the SEC, who began investigating, took control of the $147,000,000.00 in escrow to return it to investors, and pursued civil and criminal actions.  The investors did not receive the return of their administrative fees, since the owner spent all the money for purposes related to an unrelated to the alleged project.  The investors also did not receive Green Cards as a result of this project.

Jay Peak Ski-Resort

A second example does not look like a fraud on its face, and most likely did not initially start with any ill intent.  Jay Peak is a ski-resort in Vermont.  It needed to expand, and decided to use EB-5 funds to meet its capital needs.  During its existence Jay Peak tapped EB-5 investors multiple times, and used the Vermont State EB-5 Regional Center to do so.  Jay Peak’s contracts with its state owned regional center did not provide for much in the way of disclosure or access to Jay Peak’s accounting books to verify use of funds.

A few traunches in, the owner of Jay Peak saw opportunity to pocket some of the EB-5 capital and use it to enrich his life with a luxury condominium and toys that would make his life more fun and enjoyable.  So, he helped himself.  But the money was, of course, not used in accordance with the various documents connected to the sale of securities.  When it came time to pay off investors in earlier traunches, money from later investors was used, in the style of Ponzi himself.  This practice went undetected for quite some time, but when a biomedical facility connected to the resort was funded, but construction was not taking place, questions began to be raised as to where the money had gone.  Eventually, it was figured out that the money had walked out the door and into the owner’s pocket, and he was unable to catch up with Jay Peak’s obligations to its investors.  

Litigation is continuing in relation to the Jay Peak matter, as well as against the owner, and CEO.  This project, once a darling of the industry due to its rural setting, and great track record, was destroyed in short order once it was apparent that securities laws were violated.  The resort remains in a federal receivership, and every attempt is being made to secure return of funds to defrauded investors.

So, what can we learn from these examples?  They are clearly distinct, one from the other.  But in the end, they are not all that different.  The latter seemingly started with good intentions, and was overcome by greed.  The former seems to have begun with overwhelming greed and was designed to essentially steal from well healed, but vulnerable people.  Could each have been avoided, and if so, how?  These questions can be answered, but first, we must figure out what aspects of the EB-5 Industry made such terrible frauds easier to perpetrate.