Why The State Is Fighting Investor EB-5 Lawsuit

Oct 11, 2017

Attorney General TJ Donovan is asking a judge to dismiss a civil lawsuit that seeks to hold the state of Vermont liable for its failure to stop alleged EB-5 frauds in the Northeast Kingdom.

The suit was filed in June by a group of foreign investors who say that state regulators were basically complicit in an alleged Ponzi scheme, since they failed to exercise even basic oversight of the EB-5 projects under their watch.

Donovan, however, says the plaintiffs have provided no evidence that state officials were somehow responsible for the alleged crimes.

“There is no specific allegation of fraud. There is no allegation of any state employee, current or past, lining their pockets,” Donovan says. “This is a wild goose chase.”

And Donovan says the state is immune from the plaintiffs’ charges anyway, thanks to a legal doctrine known as sovereign immunity. The provision gives legal immunity to state officials while acting in the course of core government duties.

Donovan says making those officials vulnerable to civil liability would set a dangerous precedent.

"The plaintiffs have failed to present any facts alleging any specific act of fraud or deceit by the state of Vermont or any of its employees, therefore the case should be dismissed." — Attorney General TJ Donovan

“It would effectively shut down government, and it would have a chilling effect on decisions being made by employees who work for government,” Donovan says.

Chandler Matson, one of the Stowe attorneys who filed the suit on behalf of the foreign investors, says immunity applies only to state officials performing traditional government duties. And he says the Agency of Commerce’s oversight role was well outside its core functions.

“They’re traveling, promoting, planning and marketing what turned out to be the biggest fraud in Vermont history,” Matson says. “So for the sake of our state and our credibility, we can’t allow that same agency to hide behind the state and say, ‘Well, we have immunity, because we’re the state.’”

The 85-page civil complaint, filed against a group of state officials and government divisions in Lamoille County Superior Court, says the state played a critical role in a $250 million fraud allegedly perpetrated by Ariel Quiros, the developer behind seven EB-5 projects in the Northeast Kingdom.

The foreign investors attribute their losses to “gross negligence” and “willful misconduct” by the state regulators that were supposed to oversee the EB-5 projects in question.

Foreign investors claim in their lawsuit that the Vermont Regional Center’s failure to execute its oversight authority allowed Quiros to perpetrate the alleged fraud. And they say the Regional Center, which was housed in the Agency of Commerce and Community Development, spent years “ignoring investor complaints, as well as attacking and attempting to discredit those who raise issue with the wrongdoing at the Jay Peak projects.”

“They harmed this state greatly, and someone needs to take ownership of that - stand up and say, ‘Okay, we did it. It happened. Let’s make it right,’” Matson says.

Donovan says most of the investors have already been made whole, thanks to a $150 million settlement with a financial firm that allegedly helped facilitate the scheme. And he says the state continues to pursue civil charges filed last year against the men who allegedly orchestrated it.

Donovan says the state should be held to account for shortcomings in regulatory oversight that may have allowed the alleged fraud to go undetected for so long. And he says the Department of Financial Regulation is undertaking a “top to bottom review of what happened.”

“That’s very different from alleging fraud by the state of Vermont, that somehow we conspired to cover up … alleged misdeeds,” Donovan says. “The plaintiffs have failed to present any facts alleging any specific act of fraud or deceit by the state of Vermont or any of its employees, therefore the case should be dismissed.”