A private venture that was supposed to spark an economic renaissance in northern Vermont has turned into what state and federal authorities are calling a “Ponzi-like” fraud on foreign investors, who have allegedly been duped out of tens of millions of dollars by the owner of Jay Peak.
An 81-page complaint unsealed by the Securities and Exchange Commission Thursday outlines a scheme in which Ariel Quiros, a Miami businessman, and owner of Jay Peak, “systematically looted” more than $50 million from foreign investors through the federal EB-5 program. Authorities say Jay Peak CEO Bill Stenger facilitated the fraud by funneling investor money to private accounts controlled by Quiros.
“We all feel betrayed,” Gov. Peter Shumlin said during an afternoon press conference. “It’s a dark day for Vermont.”
The EB-5 program offers a path to citizenship to immigrant investors willing to pour at least $500,000 into approved projects in economically depressed regions of the United States. Quiros and Stenger have used the program to generate $350 million in capital from more than 700 investors in 74 countries.
Authorities say more than half that money - $200 million - was misappapropriated.
Investors were under the impression their money was being used to underwrite construction of seven separate projects in the Northeast Kingdom, including hotels, conference centers, retail outlets and a $110 million biomedical research facility.
Instead, state and federal authorities say, Quiros used the money to pay off personal debts, income tax obligations and even to purchase a $2.2 million luxury condominium at the Trump Place in New York City.
“Let me just say that this is not a depiction of a simple bank robbery, rather this depicts what we allege to be a massive and complex fraudulent enterprise,” Attorney General Bill Sorrell said at the news conference.
The state has filed its own civil complaint against Quiros and Stenger in Washington County Superior Court. Neither the state nor the federal civil charges would result in any jail time. Sorrell says he has no plans to file criminal charges.
Eric Miller, U.S. Attorney for the District of Vermont, said Thursday afternoon that “our office has been conducting and will continue to conduct an investigation to determine whether or not there have been violations of federal criminal law in conjunction with the EB-5 projects in the Northeast Kingdom.”
The frauds have been going on since 2008, according to the SEC complaint, when Quiros illegally used $22 million in EB-5 money to fund his acquisition of Jay Peak. The money was supposed to be used as capital for the construction of a hotel there.
State regulators were responsible for overseeing EB-5 projects, but it wasn’t until the beginning of 2015 that Quiros and Stenger began to arouse suspicion.
Those suspicions arrived shortly after the Shumlin administration transferred oversight away from the Agency of Commerce and Community Development and onto the Department of Financial Regulation, where Commissioner Susan Donegan ultimately unraveled the alleged scheme.
“It occurred to me and others that it seemed inappropriate that we were asking our hardworking folks at ACCD to promote Vermont’s regional EB-5 center … at the same time they were supposed to be giving investors assurances we were scrutinizing projects as much as allowed,” Shumlin said Thursday.
Shumlin and other top state officials have traveled on numerous occasions with Stenger to Asia, to drum up investor interest in the EB-5 projects. Former Gov. James Douglas engaged in similar activities on Stenger’s behalf.
Shumlin said he stands by the decision, based on the information available at the time.
“I mean the dream that we could finally create hundreds and hundreds of jobs in the part of the state that has been struggling for jobs is something that any reasonable person would wish to pursue,” Shumlin said.
Asked whether he regrets not having made those reforms earlier, Shumlin said “of course.”
“We can all sit here and say who should have done what and when differently. And we have done a lot of inner searching in my administration as this has become more obvious to us,” Shumlin said. “I think all of us have tremendous regret that we’re standing here today in a program that had so much promise. And having to outline these allegations — it’s a really bad day for Vermont.”
Shumlin has accepted tens of thousands of dollars in political contributions from Stenger, Quiros and their family members over the course of his gubernatorial tenure. The governor says the fact that he reformed the EB-5 oversight structure in ways that uncovered their fraud shows he wasn’t unduly influenced by their largesse.
“I think it’s a testament to the fact that campaign contributions don’t make a difference that I set up a structure that found this out and brought us to where we are today,” he said.
Indications that things were seriously amiss began to surface Wednesday evening when federal officials showed up at Q Burke to change the locks and secure the premises. Federal authorities have seized Quiros and Stenger’s assets and appointed a receiver to oversee operations at their properties.
Shumlin says that the receiver, Miami lawyer Mike Goldberg, has indicated he intends to keep the resorts running and retain the employees working there. And Shumlin says he’s optimistic that many of the EB-5 projects, including Q Burke, will thrive despite the alleged frauds.
“Jay Peak is a booming business right now with a water park, with improved mountains, with improved golf course, with improved accommodations,” Shumlin said. “That’s not an asset that is just going to dry up and go away.”
The fate of other projects spearheaded by Quiros and Stenger is less rosy. The so-called “Renaissance Project” would have created a centerpiece in the heart of downtown Newport, with retail outlets, hotels and apartment buildings. Shumlin says it’s likely that project is now dead, and that there will be nothing forthcoming to fill the hole created to accommodate the project. The $110 million biomedical facility, called ANC Bio, also in Newport, looks to be a total bust as well.
The SEC complaint says that “Quiros orchestrated and Stenger facilitated an intricate web of transfers … to disguise the fact that the majority of the seven projects were either over budget or experiencing shortfalls.”
It says the shortfalls “were due in large part to Quiros pilfering tens of millions of dollars in investor money for his own use.”
ANC Bio in particular, according to the SEC complaint, is an EB-5 project “that the defendants have operated as nearly a complete fraud.”
SEC officials say Quiros and Stenger falsely told investors that they were “in the process of obtaining FDA approval for the research center’s products,” and that they “baselessly projected hundreds of millions of dollars in revenue from the research center.”
Authorities say those projections were based on FDA approval that Quiros and Stenger had “done virtually nothing to obtain.”
The pitch apparently worked. According to the SEC, Stenger and Quiros have raised nearly three-quarters of the $110 million needed to build the facility. Unfortunately for investors, “they have done almost no work on it other than site preparation and groundbreaking, and are years behind their original construction and revenue schedule.”
Instead of going toward project construction, according to the complaint, Quiros used millions to pay off old loans, and $30 million for his own personal use.
There’s more at stake for investors than just the $500,000 they put into the projects. The EB-5 programs allow for the issuance of U.S. citizenship only if their investment leads to the creation of a certain number of jobs. The SEC complaint says many of the Quiros and Stenger’s investors “are in grave danger … of having their immigration petitions denied.”
Donegan says she began suspecting malfeasance when Quiros and Stenger became oddly uncooperative when asked to share basic financial information. Donegan and Shumlin sat down with Quiros and Stenger in March of 2015 to request easier access to information.
As she began peeling back the layers of the onion, Donegan says, the enterprise started to reek.
Donegan says the EB-5 program calls for a relatively clean and simple arrangement in which investor money is dropped into an escrow account, then disbursed for activities related solely to the project in which the investor has a stake.
“As DFR began its financial reviews … we saw anomalies and unusual transactions that raised regulatory concerns about how all the investor money, across all the projects … were transferred and accounted for by Mr. Stenger, Mr. Quiros, and various companies and related entities,” Donegan said Thursday.
Instead of a clean line between investor money and project costs, Donegan said the Quiros and Stenger books were a “spaghetti map” that saw money being transferred inexplicably between more than 100 accounts at 10 financial institutions.
“We saw a complex web of financial accounts that allegedly facilitated the improper co-mingling, misuse and diversion of funds between EB-5 projects, related companies and personal accounts,” Donegan said.
Sorrell, who credited Donegan’s work for exposing the alleged fraud, emphasized that the investigation is still in its infancy and that the state could name additional defendants as the case progresses.
Shumlin said his priorities now lie with the hundreds of workers at Jay Peak and other Quiros-owned operations, as well as ensuring that construction on Q Burke continues. The state in recent months has been allowing investor funds to be spent on the Q Burke property, even after they uncovered strong evidence of fraud.
Donegan and Shumlin said they did so to preserve the viability of that asset and to make it as attractive an opportunity as possible for future EB-5 investors.