SEC Files Another Fraud Action Based on EB-5 Program
The EB-5 program is supposed to provide a path to a permanent green card. The program was designed to create that path for foreign national who invest specified sums in the U.S. that create jobs – a win win for everyone. Unfortunately, in some instances there is no win. The SEC has brought a number of cases alleging fraud and other violations of the securities laws in connection with the program. The agency’s most recent case in this area centers on allegations that a promoter diverted substantial portions of the money to himself that were intended for development and job creation under the program. SEC v. Path America, LLC, Civil Action No. 2:15-cv-01350 (W.D. Wash. Filed August 24, 2015).
Named as defendants in this action are Lobsang Dargey and seven LLCs he controls including path America, LLC, Path America SnoCo, LLC and five other similarly named entities. Mr. Dargey also controls the bank account for each entity through with the program funds flowed.
The action centers around two projects. One is the Tower Project. The other is the Farmer’s Market Project. First, regarding the Tower Project, beginning in November 2013 Mr. Dargey, Path America and three other controlled entities raised about $85 million from 170 Chinese nationals as investments in real estate developments in Seattle. Investors acquired limited partnership interest for $500,000 plus an administrative fee of $45,000. The investment was to be wired to an escrow account in the U.S. The administrative fees was to be wired to an account in Hong Kong. The PPM stated that the goal was to raise $122 million from 244 investors and that the program was intended to qualify for the EB-5 program.
The PPM and subscription agreement also provided that on confirmation the investor had filed an EB-5 visa petition with the USCIS, $400,000 would be released from escrow. The remaining $100,000 would be released on confirmation that USCIS had approved the investor’s EB-5 visa petition.
Second, for the Farmer’s Market project, beginning in 2012 Mr. Dargey, Path America and other related entities raised about $41 million from 82 Chinese nationals as investments in residential real estate development in Everett, Washington. The PPM was substantially similar to the one for the Tower Project.
Both PPMs were false and misleading, according to the complaint. Both represented that the funds would only be used in accord with the business plans provided to USCIS. In fact they were not. The defendants are alleged to have misappropriated substantial sums from the two projects. For example, on September 9, 2014 Mr. Dargey transferred $1.5 million from the Tower Project Account to an account for Dargey Development LLC. The next day the funds were moved to an account for Mr. and Mrs. Dargey. A few days later funds from that account were used to purchase a residential property in the name of a trust whose beneficiaries are the couple. Other similar transfers were made. Overall defendants are alleged to have misappropriated about $17.6 million of investor funds.
The complaint alleges violations of Exchange Act Section 10(b) and each subsection of Securities Act Section 17(a). The Commission secured an emergency freeze order. The case is pending. See Lit. Rel. No. 23326 (August 25, 2015).