EB-5 Program Faces Heightened Enforcement Scrutiny

by Ballard Spahr LLP
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Announcements last week by the Securities and Exchange Commission (SEC) and U.S. Citizenship Immigration Services (USCIS) indicate that investments made through the EB-5 Immigrant Investor Program (the EB-5 Program) will be subject to heightened scrutiny. On October 1, the SEC announced fraud charges against a husband and wife in McAllen, Texas, for allegedly stealing funds from foreign investors seeking U.S. residency through the EB-5 Program. On the same day, the SEC and USCIS issued a joint Investor Alert to educate and warn investors about fraud in the program.

These actions make clear that both the SEC and USCIS are closely monitoring the EB-5 Program and are willing to devote substantial resources to counter even relatively small instances of fraud. In particular, the enforcement action demonstrates that the SEC will scrutinize applications for U.S. economic development projects, designated as “Regional Centers,” to ensure that funds raised correlate to the Regional Center’s stated purpose and are used for approved Regional Center projects.

The EB-5 Program, administered by USCIS, enables certain foreign investors to earn conditional permanent residency, and eventually green cards, by making “at risk” investments of at least $500,000 in Regional Centers that create or preserve jobs for U.S. workers. Before obtaining lawful permanent residency, however, a foreign investor must demonstrate that the investment funds were actually used to create or preserve jobs for qualifying U.S. workers. Particularly since the economic downturn, project developers increasingly have turned to the EB-5 Program to raise capital for projects that frequently are in the hundreds of millions of dollars.

The SEC’s enforcement action alleges that Marco and Bebe Ramirez fraudulently raised and misappropriated at least $5 million from investors by falsely promising that their money would be invested as part of the EB-5 Program. The couple allegedly diverted the investors’ funds for personal use and, in at least one instance, made a Ponzi-like payment to an existing investor, according to the SEC’s complaint. The U.S. District Court for the Southern District of Texas has granted the SEC’s request to freeze the defendants’ accounts and assets, essentially halting their ability to obtain additional investors.

According to the SEC’s complaint, in May 2010, the Ramirezes sought USCIS approval to register their company, USA Now LLC, as an EB-5 Regional Center. The application stated that USA Now would accept and direct investments from foreign investors into opportunities satisfying the EB-5 Program, such as assisted living facilities and shopping centers, and provided business plans in support of these projects. Based upon these representations, USCIS designated USA Now as a Regional Center in March 2011.

The SEC alleged that in addition to falsely representing to investors that their investments would qualify them for conditional, and later, permanent residency under the EB-5 Program, the defendants also falsely informed investors that their funds would be held in escrow pending the issuance of conditional visas by USCIS. Yet, rather than retain the investor funds in an escrow account, the SEC claims that the defendants immediately disbursed the money, sometimes on the same day an investment was received.

Further, instead of directing investments into the purported EB-5 project, the couple allegedly misappropriated the funds, using:

  • $485,000 to settle an unrelated civil lawsuit
  • At least $500,000 making a Ponzi payment to a prior investor
  • At least $1 million to open a Cajun-themed restaurant
  • Other investor funds to purchase vehicles for themselves and USA Now employees

None of the investors identified by the SEC has received a conditional visa from USCIS, and none of the investment funds remain in escrow.

The SEC’s press release notes the substantial assistance provided by USCIS in its investigation. Previously, the SEC and USCIS coordinated to halt a $156 million fraud arising under the EB-5 Program in SEC v. A Chicago Convention Center, et al. Concurrent with the charges against the Ramirezes, the SEC and USCIS jointly issued an Investor Alert to “warn individual investors about fraudulent investment scams that exploit” the EB-5 Program. The Investor Alert recommends specific actions foreign investors should take to avoid being victimized, and cautions investors to be wary of the following “hallmarks of fraud”:

  • Promises that the investment will lead to the receipt of a visa or a green card
  • Guaranteed investment returns or no investment risk
  • Overly consistent high investment returns regardless of overall market conditions
  • Investments not registered with the SEC or any state regulator
  • Sale by unregistered firms and unlicensed individuals
  • Investments structured through layers of different companies that are managed by the same individuals

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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