The recent enforcement action by the U.S. Securities and Exchange Commission (SEC) against Intercontinental Regional Center Trust of Chicago (IRCTC), with its numerous allegations of fraud and misrepresentation by the center and its principals, once again brings the EB-5 program into the public spotlight in a way that cannot help the program. Certainly, there will be calls again for reform. But where do we start? Who’s to blame?

My view is that the USCIS has had a largely commendable record of fighting fraud in the industry. The USCIS has ramped up its requirement for regional center approval during the last two years (to the consternation of many applicants) that should reduce the number of rogue regional centers like IRCTC in the future. In addition, more than two years ago USCIS director Alejandro Mayorkas signaled the Service’s intent to hire full-time securities attorneys for the CIS staff and here are now two such attorneys on staff. During the 10/16 USCIS EB-5 Stakeholder Meeting in August 2012, Senior Counsel to Director Mayorkas Rob Silvers spent considerable time discussing the close cooperation between the USCIS and the SEC in investigating fraud in the EB-5 arena. He even refused to rule out the possibility of USCIS asked action to decertify a regional center without SEC involvement it found sufficiently strong securities violations. Finally, the SEC was able to move against IRCTC thanks to the “substantial assistance of the USCIS.”

Both the American Immigration Lawyers Association and the EB-5 industry’s trade Association, Invest in the USA (IIUSA), have for years vigorously warned attorneys and regional center principals of the danger of noncompliance with U.S. and states’ securities laws. Most have taken heed, although there are still some bad actors among regional centers (and the lawyers who counsel them) who continue to violate US securities law in their greed to acquire ever more investor money.

The leading cause of the problem, in my opinion, is that success to the EB-5 field has thus been driven mostly by marketing prowess and only faintly by merit.

The Chinese market is attractive to regional centers not just because of the large demand there, but also because it is possible there to simply buy investors regardless of whether you have a sound project or not. For a variety of social and political issues, Chinese investors look to their personal network of friends and acquaintances for business support and advice, and they are less inclined than Westerners to seek advice from outside experts with whom they lack a prior relationship. This gives the emigration agents a huge advantage in recruiting investors even while their reputations in the eyes of Chinese investors continues to spiral downward. There is also a pernicious self-selection process going on in the China EB-5 market, as the more sophisticated and analytically-oriented investors are not likely to sign on with an emigration agent at all, so the investors the emigration agents do capture for regional centers are likely to be relatively passive and unquestioning.

Likewise, some regional centers in the U.S. continue to deal with unlicensed brokers recruiting investors on the Internet despite the fact that paying fees to such brokers could result in severe financial and even criminal penalties for the regional centers and their officers. The attraction here also is that relatively unsophisticated investors can simply be bought without having to worry about all the impertinent questions coming from professional investment advisors or brokers.

A review of the major scandals in the EB-5 field over the last several years shows a consistent pattern of investors entering projects without the investors and their advisors having done any significant amount of due diligence examination of the project.

A professional financial analyst employs years of experience and sophisticated research and analytical skills to determine whether a project is likely to succeed, but no such skills would t have been needed to determine that the deeply flawed investment projects reviewed below would end badly. Indeed, what’s truly astounding in almost every case of a fraudulent project is the fact that any investor could have placed their money at risk in the ventures given the bright red flags that could have been discovered by reading the offering materials and spending perhaps a half hour on Google.

Before I venture into a review of the two biggest EB-5 scandals of the last two years, I should note that there have been no convictions yet in either of these cases. We are dealing so far only with allegations, and we have seen allegations made in the past against regional centers, directed at Jay Peak just last year, for example, that ultimately proved to be false (see Report from Jay Peak).

That said; let’s take a look at the facts of these cases to see what we can learn.

Chicago Convention Center

The Sell 

The IRCTC, led by Chicago businessman Anshoo R. Sethi, offered EB-5 investors limited membership interests in “A Chicago Convention Center” (ACCC) which was formed to accept EB-5 investors and with their funds finance the construction of the “World’s First Zero Carbon Emission Platinum LEED certified” hotel and conference center near Chicago’s O’Hare Airport. The IRTC had been designated by the USCIS as an approved EB-5 regional center in June 2011. It’s project was promoted by no less than six Chinese emigration agents, some of whom were reported to have received more than $100,000 in fees per investor. Sethi and his companies made the following claims, among others:

  1. Anshoo Sethi had “over fifteen years of experience in real estate development and management, specifically in the lodging area.”
  2. Project’s developer Upgrowth LLC has “more than 35 years of experience.”
  3. Sethi claimed the participation of three major hotel chains in the project: Hyatt, Intercontinental Hotel Group, and Starwood Hotels.
  4. Construction would begin in summer 2012 and occupancy of the first tower would occur in early spring 2014

By February 2013, IRCTC had collected a $500,00 investment plus $41,500 administrative fee from more than 250 investors, virtually all from China.

 

The Outcome

The SEC’s complaint alleges that Sethi, ACCC, and IRCTC violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. In addition to the temporary restraining order and asset freeze granted by the court, the SEC’s complaint seeks permanent injunctions and other monetary relief. Meanwhile, Sethi and his companies have spent more than 90 percent of the administrative fees collected from investors despite their promise to return this money to investors if their visa applications are denied. More than $2.5 million of these funds were directed to Sethi’s personal bank account in Hong Kong.

 

The (Obvious) Red Flags

  1. Anshoo R. Sethi is just 29 years old. That fact alone, standing alongside the complexity of the project, should have been enough to scare away any investor. His claim to have “over fifteen years of experience in real estate development and management” in his 29 years suggests a precocity worthy of the record books, or, more likely, a penchant for exaggeration if not outright deceit.
  2. Illinois corporate records show that the “experienced” developer Upgrowth was first organized only in 2010
  3. Neither Hyatt, nor Intercontinental Hotel Group, nor Starwood Hotels had ever executed franchise agreements to include a brand hotel in this project. In fact, two of the chains actually terminated prior deals with other Sethi-related entities more than two years before these offering materials were circulated to investors.
  4. A search of the Chicago Building Permits database for the project address shows that the only recent permits are for a tent for a purported groundbreaking ceremony held in November 2012, a demolition permit, construction of a fence, and a minor electrical wiring permit.
  5. The highly uncharacteristic failure to include important legal documents such as building permits and franchise agreements in the offering materials should have stopped any investor proceeding with due diligence until the documents were provided.

MAMTEK

The Sell 

Beverly Hills attorney Bruce Cole promised to build a sucralose (artificial sweetener) factory in the small town of Moberly, Illinois, modeled after a similar factory he claimed to operate in Fujian, China. Cole predicted that the factory would produce over 600 jobs for the town of Moberly (pop. 14,000). Missouri Governor Jay Nixon and former Gov. Bob Holden, chairman of the Midwest U.S.-China Association, appeared with Cole in July 2010 to announce the public-private partnership that would build the factory. A company referred to as “Ramwell Industrial Incorporated” would provide management advice for the factory construction and operation. The project was marketed in China by “Well Trend Immigration Investment VIP,” a prominent Chinese emigration agency. Well Trend gave Mamtek a five star ranking and placed it second on their list of preferred EB-5 visa investments, behind only CMB Export Regional Center.

 

The Outcome 

Mamtek CEO Bruce Cole was counting on EB-5 money to make payments on the $39 million he borrowed from the town of Moberly, but delays in USCIS processing resulted in Regional Center approval for Mamtek only in mid August 2011. By this time Mamtek had missed its August 1 $3.2 million bond payment. Construction, already months behind schedule, ceased completely In September 2001. Nonetheless, Mamtek soon thereafter was able to subsequently attract four Chinese investors, and Well Trend claimed to have many more Chinese investors preparing to invest. By September 2012, however, the U.S. Securities and Exchange Commission (SEC) had filed a lawsuit in U.S. District Court in California against Cole and his wife, seeking financial penalties for securities fraud and diverting at least $700,000 from the money intended to build the factory and using it to avoid foreclosure of the Coles’ Beverly Hills home. Currently, seven lawsuits have been filed in five jurisdictions, including criminal charges against former CEO Bruce Cole in Randolph County, where he sits in prison facing charges that could amount to 45 years in prison. Private lawsuits between law firms, investment banking firms, and government officials paint a picture of everyone pointing to “the other guy,” saying, in effect, “we assumed you had done the due diligence on the project.”

 

The (Obvious) Red Flags

  1. Bruce Cole’s sucralose factory in Fujian China was closed by the Chinese government in 2005 because of concerns about toxic wastes the factory would produce.
  2. Neither Bruce Cole nor any of his assistants had any prior experience with EB-5 projects. In fact, most of his assistants were persons he had recruited at his local temple who had impressive academic degrees but little or no business experience.
  3. No company named Ramwell Industrial Incorporated is listed with the Hong Kong Companies Registry. The California Secretary of State’s Office lists Ramwell Industrial Limited as a company Cole founded in 2001 at a Beverly Hills residential address. The company was suspended by the California Secretary of State in 2004 for failing to file required information and in 2005 by the California Franchise Tax Board for failing to file tax returns. The company was not eligible to do business while suspended.
  4. Prior to the project being started, Indian and Chinese manufacturers of sucralose joined the market resulting in the price dropping from $250/kilo to as little as $90/kilo. Mamtek’s original business plan was based on a projected sucralose price of $170/kilo.
  5. Several other Midwestern U.S. towns had declined to do business with Mamtek after the company proved unwilling to share details of its financing.
  6. Bruce Cole had no money of his how in the project, and the project’s organizing documents provided for little financial oversight or control over how the money would be spent
  7. At the time the deal was being put together, and before any EB-5 investors signed on, Bruce Cole was facing a lawsuit over an unpaid $250,000 loan and had a lien against him for an unpaid bill of nearly $135,000.

 

OTHER SCANDALS

Other scandals, such as those involving the El Monte Regional Center, Victorville Regional Center, and the South Dakota Regional Center “Dairy Case,” all show the same pattern of small projects finding investors in China by paying very high fees to Chinese emigration agents, and no one performing even superficial due diligence.

To be continued……