International investors hoping to secure their green cards pumped about $400 million into an economically depressed area of Vermont. They now have a couple of struggling resorts and a vacant lot to show for it.
To understand what happened, it is worth taking a closer look at how foreign investors are especially vulnerable targets. The fraud allegations in Vermont, while remarkable in scope, illuminate dangers that participants in the EB-5 Immigrant Investor Program face regularly on a smaller scale.
As I explained my article “The EB-5 Program: What Foreign Investors Should Consider,” the EB-5 program is a path to permanent U.S. residency for foreign investors who commit a certain amount of capital to a project that will create or preserve a minimum of 10 full-time jobs for Americans. Developers often view EB-5 investors as a cheap source of capital for expensive projects since visas, rather than investment returns, are typically investors’ main goal.
This can make EB-5 investors relatively easy marks for untrustworthy developers, either those who cut corners and promise unrealistic outcomes or those who commit fraud outright. While there are many legitimate developers offering real opportunities, investors run the risk of ending up entangled in a quagmire like the one in Vermont if they invest in the wrong project.
Vermont Gov. Peter Shumlin recently announced state and federal accusations of fraud against Bill Stenger and Ariel Quiros. According to allegations from the Securities and Exchange Commission, the partners perpetrated a “Ponzi-like” scheme in which the nearly $400 million they raised through the EB-5 program found its way into a variety of accounts, with the result that $200 million was “misused,” and that Quiros pocketed an additional $50 million for himself. So far, all the allegations are civil violations, although Eric Miller, U.S. attorney for Vermont, said his office is investigating potential criminal violations as well.
While the legal proceedings roll forward, the Vermont communities that expected the new facilities promised by the development projects continue to wait. According to the Burlington Free Press, a promised biomedical research facility in Newport never made it past the groundbreaking stage. In the same city, Stenger and Quiros demolished a block to make way for retail stores, residences and office space that never appeared.
The two Vermont resorts the men developed are now under federal control. Both Jay Peak ski resort and Q Burke Hotel have little cash on hand, according to the attorney responsible for them, due to severe financial mismanagement. If the resorts are not purchased, the receiver will likely have to shut down operations at Jay Peak. Q Burke has not yet opened, and might never do so if a buyer is not found.
While the civil proceedings against Stenger and Quiros may not be decided for some time, it is obvious that investors should not expect to see either a green card or their money any time soon, if ever.
The fraud allegations were a far cry from the pomp and circumstance surrounding the projects when they were announced after the 2008 financial crisis. The enterprises were supposed to revitalize one of Vermont’s most economically challenged regions by injecting hundreds of millions of dollars into the region and generating thousands of jobs. In hindsight, there were warning signs that the promises offered by Stenger and Quiros were too audacious. The projects suffered major construction delays and investors complained that Quiros and Stenger changed payout terms midstream. Government agencies found the developers resistant to requests for documentation and discovered legal problems with their business plan. Nevertheless, state officials, it seemed, suffered from wishful thinking when it came to spending in Vermont’s Northeast Kingdom.
Part of the problem sprang from Vermont’s unique EB-5 oversight structure. The state is one of two that directly administers an EB-5 regional center for the purposes of economic development; most regional centers are privately owned for-profit enterprises. While many states work closely with regional centers to encourage development in struggling areas, Vermont has extra incentive not to look too closely at seemingly attractive projects before promoting them directly to investors. Outside a few major resort areas and the main business center of Burlington, the state is struggling with a stagnant economy and a shrinking and aging rural population. Investment dollars in those areas are hard to come by, especially from foreign sources that would not put the state’s taxpayers on the hook.
Patricia Moulton, Vermont’s commerce secretary and the head of the agency that oversees the EB-5 program in the state, said she eventually became suspicious of the Jay Peak project, but that there had been no systematic third-party reviews of the project’s business plans.
“We can all sit back now and say there are probably 18 things we should have done,” Moulton told the Boston Globe. “But we were not required in our position as a regional center to do that level of analysis.”
The problems in Vermont serve as a reminder that government involvement is no guarantee that a given project is viable, and that the models developers present to potential investors should not be taken at face value.
This is why third-party due diligence matters. While EB-5 investors may be prepared to weather flimsy investment returns, none of them want to lose their principal altogether or fail to secure a visa. An independent evaluation can identify red flags and create a better context for foreign investors to evaluate a proposal.
Vermont’s Sen. Patrick Leahy, a Democrat, had called for EB-5 program reforms prior to the disaster in his home state. This incident has only strengthened his argument. For now, the state’s EB-5 regional center remains open, and projects unconnected to the case have not been affected.
Nothing can offer complete protection from a developer who commits fraud. After all, a fraudster may well have a perfectly clean record until the first time he or she is caught. However, performing proper research on a potential investment can reduce foreign investors’ risk in situations where they may lack the background to properly evaluate a project themselves.