On Feb. 8, 2013, the US Securities and Exchange Commission (SEC) brought charges against a Chicago regional center for defrauding close to 300 foreign investors out of $156 million.
This investment scam was sold to foreign investors as part of the United States Citizens and Immigration Services (USCIS) EB-5 Immigrant Investors Visa program.
In exchange for investing in the regional center’s development of a hotel and convention center, foreign investors were promised US citizenship. In the end, none of the investors obtained a green card through the scam, but became parties of a legal battle against the regional center to recoup their losses.
While the victims of the Chicago regional center recently recovered most of their investments with the help of the SEC, many foreign investors are not as fortunate.
Therefore, the Chicago regional center’s scam should serve as a warning to all EB-5 foreign investors about the importance of vetting all projects and hiring competent legal counsel and accountants.
What is EB-5?
The EB-5 immigrant investor visa program was created by USCIS in the ’90s to provide immigrant investors a pathway to obtain US citizenship.
The criteria for the investment is that the amount must be either $1 million or $500,000 “at risk” in a new commercial enterprise that creates 10 full-time jobs.
A new commercial enterprise is usually a franchise or a commercial real estate development (hotel, shopping mall, residential/office building).
In order to prevent money laundering or have drug traffickers participate in the EB-5 program, the source for the investment funds must have been legally obtained, including the administrative fees.
The EB-5 program is regulated by the SEC because a regional center’s offering to an investor is considered a sale of securities.
The most popular investment strategy among foreign investors is the minimum at risk investment of $500,000 in a Targeted Employment Area (TEA).
A TEA is an area of the United States that is undeveloped, rural, or has high unemployment.
Foreign investor’s role ‘passive’
A regional center is a privately held company (usually a partnership or an LLC or limited liability company) approved by USCIS that sponsors a real estate developer’s project in the redevelopment in a TEA.
Therefore, with the $500,000 investment, the investor becomes a partner, shareholder, or member of the regional center’s commercial enterprise.
With the minimum at risk investment of $500,000, the foreign investor’s role is “passive.”
In other words, the management and day-to-day operations of the development project are performed by the principals or staff of the regional center.
An example of a real estate project sponsored by a regional center is the redevelopment of the West Side known as Hudson Yards.
The Hudson Yards project is projected to include 5,000 residences, 5 office towers, 100 shops, 30 restaurants, and span the length of 6 city blocks.
Currently, there are 579 USCIS approved regional centers in the US.
Although USCIS approves the regional centers and SEC regulates the sale of securities by the regional centers, neither USCIS nor SEC looks into the quality of the investments or the risks involved.
To make matters more difficult for the foreign investor, regional centers are not registered with the SEC since they qualify for certain SEC exemptions—either Regulation D or Regulation S.
A regulation D exemption prevents the regional center from advertising its sale of securities to the public and only permits experienced investors in the offering.
Regulation S only permits the offer and sale of securities outside the borders of the United States.
Therefore, it is all that more important for the foreign investor to perform due diligence and not become a victim of fraud.
How does fraud happen?
The excitement of making a minimal at risk investment of $500,000 and the prospect of obtaining US citizenship as a result can easily cloud the foreign investor’s judgment.
As such, the foreign investor should immediately be wary of any regional centers guaranteeing a generous investment return and/or a US green card.
Since the investment is at risk, the foreign investor should not expect to see any investment returns for several years after the new commercial enterprise is completed.
As recent as Sept. 3 the SEC has brought charges against a Los Angeles regional center for defrauding two dozen foreign investors out of $11.5 million.
The regional center, in 2006, offered foreign investors the opportunity to invest in the development of an ethanol plant in Kansas that would generate a generous investment return and a path to US citizenship.
However, due to economic difficulties and its failure to generate jobs, construction on the project halted in 2008.
The regional center’s principals (who are also immigration attorneys) failed to notify their investors of the project’s failure.
Instead, they continued to set up investor seminars in LA to sell the project and misrepresent to investors that the project was ongoing.
In the end, the principals misappropriated and misused investors’ funds for personal use and to fund a non-EB-5 iron ore project in the Philippines.
If the foreign investors had performed even minor due diligence and visited the construction site, they would have noticed that construction had stopped.
At the moment, the foreign investors of this scam can only hope that they will be as fortunate and recoup most of their money.
Similarly, in the Chicago regional center case, the regional center principals promised their foreign investors an immediate generous return as well as a US green card.
Attractive promises
The foreign investors, clouded by these attractive promises, failed to perform the basic duty of due diligence.
If they had done so and researched the backgrounds of the regional center’s principals, they would have easily discovered that not only were the biographies of the principals based on half-truths, but that much of what was promised was too good to be true.
The burden is on the foreign investor to perform background checks on the principals of the regional centers, real estate developers and the construction site.
The foreign investor must be aware of the risks and advantages of one regional center’s offering versus another as well as his rights and liabilities related to the purchase of securities.
For example, a foreign investor’s rights and liabilities as a partner in a regional center formed as a partnership are different from that of an investor who is member of a regional center formed as a limited liability company or as a shareholder in a regional center formed as a privately held corporation.
It is extremely important that a foreign investor hire competent legal counsel experienced with business law to properly advise him.
The attorney representing the regional center is usually an immigration attorney who is not experienced in advising clients on nonimmigration issues.
Immigration attorney
Therefore, the immigration attorney advising the immigrant investor on the risks of a project may not be well-versed in reviewing offering plans, negotiating the terms of an agreement, and performing due diligence.
An experienced business law attorney will be able to not only advise the foreign investor on the intricacies and differences in business formations, but to also review all offerings, negotiate on his behalf, and review the final contract prior to signing.
It is also extremely important for the foreign investor to hire a lawyer who will solely represent the investor’s interests.
Investors must beware of the dual representation attorney and the risks involved.
Often, a lawyer is dually representing the regional center and the foreign investor.
While the model rules of professional conduct governing attorney ethics permit dual representation in certain situations (and always with consent from all parties), dual representation is dangerous for the attorney and the foreign investor.
The lawyer has the ethical obligation to represent his client’s interests without any personal conflicts that would adversely cloud his judgment and prevent him from providing competent counsel.
It is difficult for the attorney to fulfill this ethical obligation through dual representation because the regional center and the foreign investor have competing interests.
The regional center’s goal is to secure a constant stream of funds for its development until the project is finished.
The foreign investor’s goal is to obtain a US green card, and thus, his enthusiasm to obtain a green card can cloud his judgment in a project’s soundness.
The attorney is usually paid by the regional center and risks losing a steady stream of income from the regional center if the attorney advises the investor against investing in the project.
Conflict of interest
Moreover, the attorney faces breaching his duty of client-attorney confidentiality with the regional center if he reveals to the investor a change in the project development that will adversely affect the investor.
At the same time, if he dually represents regional center and the foreign investor, he faces breaching his duty of full disclosure to the investor client by not revealing the adverse change.
For example, there have been instances where the terms negotiated during the subscription phase are different from the terms in the final contract.
An attorney dually representing the regional center and the foreign investor may fail to properly advise the foreign investor of this change because he fears losing the regional center’s business.
However, the attorney may have breached his ethical obligation of full disclosure to the foreign investor by not disclosing the changes.
Therefore, it is extremely important for the foreign investor to hire a competent and experienced attorney to perform due diligence on EB-5 projects. As EB-5 investments become more popular, fraud becomes rampant.
(This article is for informational purposes only.)
Disclaimer: The comments uploaded on this site do not necessarily represent or reflect the views of management and owner of INQUIRER.net. We reserve the right to exclude comments that we deem to be inconsistent with our editorial standards.
To subscribe to the Philippine Daily Inquirer newspaper in the Philippines, call +63 2 896-6000 for Metro Manila and Metro Cebu or email your subscription request here.
Factual errors? Contact the Philippine Daily Inquirer’s day desk. Believe this article violates journalistic ethics? Contact the Inquirer’s Reader’s Advocate. Or write The Readers’ Advocate:
c/o Philippine Daily Inquirer Chino Roces Avenue corner Yague and Mascardo Streets, Makati City,Metro Manila, Philippines Or fax nos. +63 2 8974793 to 94
