SEC Files Eight More Actions Tied to EB-5 Program
The EB-5 program was designed by Congress to stimulate job creation and capital investment by foreign investors. In return for an initial investment of $1 million in a new commercial enterprise that creates or preserves at least 10 full time jobs, or $500,000 if the area is high unemployment, investors may obtain a green card. While the program has been successful it has also resulted in a number of enforcement actions by the SEC.
The Commission filed eight actions against lawyers or their firm tied to the program. Seven of those cases fit within the “broken windows” approach to enforcement. They are based on the lawyer or firm acting as an unregistered broker in violation of Exchange Act Section 15(a). See, e.g., In the Matter of Kefei Wang, Adm. Proc. File No. 3-16987 (December 7, 2015)(Section 15(a) action settled by attorney whose firm is now defunct in which the attorney effectuated transactions in EB-5 securities, acting as a liaison between the program investment officers and investors and received transaction based compensation; settled with a cease and desist order and the payment of disgorgement and prejudgment interest).
One action, however, centered on fraud allegations based on undisclosed conflicts. SEC v. Feng, Civil Action No. 2:15-cv-09420 (C.D. CA. Filed December 7, 2015). The defendants in the action are attorney Hui Feng and his firm, Law Offices of Feng & Associates P.C. Defendants began promoting the EB-5 program in 2010. Typically, Mr. Feng wrote retainer agreements with clients requiring the payment of legal fees that ranged from $10,000 to $15,000. As part of the firm’s services the most reliable EB-5 investment projects would be recommended following due diligence.
Defendants recommended clients invest in the offerings of at least five different EB-5 promoters. Mr. Fang facilitated client investments in the programs by obtaining the required documents and having clients execute them. In some instances defendants acted as a conduit for investment funds to promoters. Commissions were paid by the promoters that ranged from $15,000 to $70,000 per transaction. In addition, if the clients petition was approved the firm was paid additional compensation.
Neither Mr. Feng nor his firm disclosed to their clients that they were paid commissions from the promoters. Likewise, the conflict of interest this presented was not disclosed, although if clients specifically inquired they were told.
Beginning in May 2013 some promoters told Mr. Feng that they would not wire commissions to a U.S. bank “as part of an apparent effort to avoid running afoul of the broker-dealer registration requirements of the federal securities laws,” according to the complaint. Mr. Feng circumvented this prohibition by using nominees to whom the payments were made but who secretly acted on his behalf. The representations to the promoters were thus materially false.
From March 2011 through April 2015 Defendants or their nominees received at least $1.1 million in commissions from the five promoters. In addition, defendants are contractually entitled to receive, directly or indirectly, at least $3.1 million more in commission payments upon approval of the pending investor petitions. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a). The action is pending.