As federal regulators ramped up their investigation of a massive fraud in Vermont’s Northeast Kingdom, a lawyer for the state warned that he and his colleagues could face legal peril for failing to stop the fraud.
The lawyer, Agency of Commerce and Community Development general counsel John Kessler, sounded the alarm in a series of emails in 2015 to then-Gov. Peter Shumlin’s staff and the state Attorney General’s Office. Kessler wrote that he and other officials could be targeted by the U.S. Securities and Exchange Commission for having “aided and abetted” the developers who allegedly orchestrated the fraud.
Kessler’s emails are among 600 pages of records unsealed last week by U.S. District Court Judge Geoffrey Crawford.
Lawyers for former Jay Peak Resort President and CEO Bill Stenger, who faces possible jail time for his role in the Northeast Kingdom fraud, had sought to unseal the records ahead of Stenger’s sentencing next month. The Vermont Journalism Trust, the nonprofit parent company of VTDigger, filed an amicus brief supporting the release of the records. Attorney General TJ Donovan, whose office had for years sought to keep the records from the public, dropped his opposition.
The newly unsealed documents shed new light on the state’s role in regulating — or failing to regulate — development projects financed through the federal EB-5 investor visa program, which confers permanent residency on noncitizens who invest at least $500,000 in certain job-creating ventures.
The documents show that the Shumlin administration was aware in the spring of 2015 that the Northeast Kingdom developers were engaging in fraud — a full year before state and federal officials pulled the plug on the projects — imperiling the immigration status of those who invested in the developments. The records also outline the lengths to which state officials went in concealing the fraud from the public and the press.
One of the newly unsealed documents, published April 13, 2015, describes in explicit detail how state regulators viewed the Northeast Kingdom developments at the time. The internal and confidential document, penned by an unnamed employee of the state Department of Financial Regulation, reads, “Every project appears to be involved in an array of deceptive practices. Every single additional penny of investor money that moves through the projects will be lost for good. New investors most certainly will not be issued visas as the SEC will act long before the two year job creation period ends.”
Four months later, according to one newly released document, a top Department of Financial Regulation official briefed Shumlin, then-Attorney General Bill Sorrell and others on the evidence the department had collected implicating the developers. The official, then-Deputy Financial Regulation Commissioner Mike Pieciak, included in his August 14, 2015, slide presentation a spaghetti map of bank transactions the developers used to perpetuate the fraud.
The final slide, a spreadsheet titled “Immigration Impact to Investors,” listed a series of projects for which “Immigration Status was Likely to be Negated.” In all, the immigration status of 364 investors, or 42% of the total, were in jeopardy. State regulators made clear that 83 investors in a Burke Mountain Resort hotel, 134 in the Stateside condos at Jay Peak and 147 at a biotech venture in Newport would not be eligible for visas because of the fraud.
In his emails to the governor’s and attorney general’s offices months earlier, Kessler expressed particular concern that the Securities and Exchange Commission would question the state’s approval of a proposed stem cell research and biomedical device manufacturing facility in Newport. An outside firm hired by the commerce agency had investigated the biotech venture, known as AnC Bio Vermont, and provided a report to state officials showing that investor statements were rife with material misrepresentations and omissions.
Kessler sent the memos as the state was preparing to give the developers the green light to proceed with their plans at AnC Bio Vermont and the Burke hotel — despite evidence of fraud. Among the recipients of the emails were Shumlin’s then-chief of staff, Liz Miller, and his general counsel, Sarah London.
Miller declined to comment. Kessler and London did not respond to requests for comment.
In April 2016, the Securities and Exchange Commission filed a 52-count civil enforcement lawsuit against Stenger and Ariel Quiros, who owned Jay Peak and the other developments, accusing the two men of misusing $200 million and defrauding 850 investors. In all, the developers solicited $450 million from foreign investors who were seeking green cards through the federal EB-5 visa program.
Federal regulators ultimately took no action against the state or state officials.
Keeping tabs
In recent weeks, defense attorneys for Stenger and lawyers for the foreign investors he and Quiros are accused of bilking have made a similar argument: that state officials knew more about the Northeast Kingdom fraud than they let on — and failed to stop it.
In a motion filed earlier this month — supported by the newly released documents and others — Stenger’s lawyers argued that commerce agency officials knew about dubious financial transactions at AnC Bio as early as June 2014 and allowed the fraud to continue until April 2016, when the Securities and Exchange Commission shut down the Northeast Kingdom development projects.
Stenger’s lawyers, David Williams and Brooks McArthur, argued in a recent motion that the Shumlin administration’s actions went beyond negligence. They pointed to records indicating that officials from two state agencies — the Attorney General’s Office and the governor’s office — sought to cover up the fraud by misleading the federal government, the press and the public.
The most damning of Williams’ and McArthur’s allegations is that state officials took over the management of investor funds, payments for construction and the opening of the Burke hotel, starting in 2015, even though they had evidence of the fraud and knew investors would not be refunded.
The defense attorneys say the Shumlin administration allowed the fraud to continue for a full year despite this knowledge.
Shumlin, who befriended Quiros and slept in his luxury New York condo on at least several occasions, kept close tabs on how the state interacted with the developers, how the press covered the projects and how the SEC’s investigation was proceeding, the newly released records show.
The governor received weekly reports about the developments from the Agency of Commerce and Community Development and the Department of Financial Regulation. The day-to-day work of monitoring the projects and navigating the legal and public relations challenges they could bring was handled by Miller and London, Shumlin’s chief of staff and general counsel, the documents show.
They weren’t alone in trying to fend off press coverage — and keep public records out of journalists’ hands.
In 2015, VTDigger submitted a records request to the commerce agency seeking all correspondence related to any state or federal directives suspending any of the Northeast Kingdom projects, including AnC Bio Vermont and Burke Mountain Resort.
Kessler, the agency lawyer, wrote Securities and Exchange Commission senior counsel Trish Sinder seeking guidance on how to respond to VTDigger’s request — and whether to reveal the existence of the federal probe. “Please advise how the SEC would want ACCD to treat the information on the existence of an SEC investigation of AnC Bio – confidential or public,” Kessler wrote, according to the newly released documents.
Sinder replied that SEC investigations are confidential, adding, “We cannot advise the ACCD on how to proceed in responding to this request.”
Soon after Kessler contacted Sinder, then-Secretary of Commerce Patricia Moulton wrote Kessler with a proposed solution that would avoid disclosing the SEC investigation to the press and the public.
“I would like to discuss this with you,” Moulton wrote. “[VTDigger founder and Editor-in-Chief] Anne Galloway did not ask about federal investigations, but federal directives or state directives to stop the marketing. The SEC has NOT told them to stop marketing so I’m wondering WHY does the SEC investigation have to come up at all unless we get asked that specifically.”
Moulton added, “I think it is fine that we are asking but given the nature of the request, why would we bring up the SEC investigation.”
The documents also show a particular unwillingness to respond to VTDigger’s records requests.
In July 2016, the news outlet emailed Moulton seeking comment for a story about how early the state had been tipped off to the Northeast Kingdom fraud. In preparing a response, Moulton wrote to London, “We are on a public records exemption for any more details out to Anne. So the details she has is what she will get.”
Warnings unheeded
State officials’ fears that they could be found by the SEC to have “aided and abetted” in the fraud are laid out in the now-public documents.
Kessler appears to have become increasingly alarmed in 2014 by what he was learning about the Newport biomedical center. The South Korean headquarters was sold at auction in May of that year by the Korean government. The sale followed the 2012 prosecution of Alex Choi, the owner of AnC Bio Korea.
That same year a Jay Peak business partner, Douglas Hulme, broke ranks with the developers over “financial improprieties.” Later in 2012, the state of Vermont signed off on a revised proposal floated by Quiros and Stenger for a similar stem cell research and biomedical device manufacturing facility to Newport. The original project was slated to raise $60 million from foreign investors. The new and improved version was to bring in $110 million from immigrants seeking green cards.
Kessler appears to have had concerns about his own involvement in drafting the 2009 and 2012 memorandum of understanding for AnC Bio between the state and the developers. Both documents predated SEC involvement in EB-5 projects. And up to that point, the state had focused on helping Jay Peak promote the eight phases of that ski area’s development overseas. The Vermont EB-5 Regional Center, operated by the state commerce agency, was required to monitor the projects under the federal visa program, but it provided little oversight.
The new memorandum of understanding, Kessler wrote, “shows the beginnings of my effort to introduce securities law requirements, which were notably absent from the earlier AnC Bio MOU that the 2012 MOU replaced.”
“My greatest concern remains the SEC has come out in the last two years with enforcement actions backing up its announced priority of holding government officials responsible under its anti-fraud rule,” Kessler wrote in an exchange with Assistant Attorney General Jacob Humbert on Feb. 6, 2015.
The SEC had opened its probe into Stenger and Quiros in 2013. In particular, federal regulators appeared to be looking into allegations that AnC Bio was a scam, according to an email from Kessler.
At the end of 2014, federal regulators turned their attention to the state and began asking the regional center questions. Brent Raymond, then an Agency of Commerce employee who served as executive director of the regional center, was deposed in January 2015.
As the federal investigation dragged on, commerce agency officials were poised to allow AnC Bio and Burke, both of which had been suspended, to move forward despite concerns about fraud.
In the newly disclosed emails, Kessler discussed the risk to the state of allowing the AnC Bio project to move forward as the SEC weighed the possibility of taking action to shut it down.
“In this context,” Kessler wrote to Humbert, London, Moulton and Raymond, “it seems prudent to me to consider the risk of the SEC finding that the Vermont Regional Center did not take reasonably available steps to protect investors through omission, or worse, that the state by act or omission ‘aided and abetted’ fraud as the SEC found in other enforcement actions.”
Humbert, in a Feb. 11, 2015, reply to Kessler, wrote that the attorney general’s office did not have any lawyers with expertise in the EB-5 program, securities law or SEC investigations, “so we are unable to provide you with legal advice in these highly specialized areas.”
“It is reasonable for ACCD to assume that SEC enforcement action remains a clear possibility regardless of any DFR determination,” Humbert continued.
About an hour later, on Feb. 11, 2015, Kessler wrote to Moulton and Raymond expressing doubt that the SEC would walk away without taking action against Stenger and Quiros after having spent two years investigating.
If the state allowed the AnC Bio project to proceed, Kessler wrote, it could serve to “incite” federal regulators to take a “much more critical stance with the state — mainly ACCD for its decision not to cancel the MOU based on the records of information it possessed.”
Controlling the message
Miller and London, the top Shumlin staffers, were deeply involved in overseeing the state response to the EB-5 projects on behalf of the governor.
Miller, in particular, kept on top of communications with Kessler, Moulton and then-Financial Regulation Commissioner Susan Donegan. Emails show she managed general messaging, communications with developers and strategies for keeping the press at bay.
When Raymond was deposed by the SEC in January 2015, Miller asked the Department of Financial Regulation to review the transcript before he was interviewed a second time. State regulators proposed to “discuss with Brent the best way to normalize EB-5 communications going forward.”
Along the way, detailed evidence from ACCD’s review and DFR’s investigation appears to have been ignored by the Shumlin administration as the AnC Bio and Burke projects moved forward.
For example, the documents show that on April 11, 2015, Donegan discussed the securities violations at Jay Peak with Miller and London, providing them with evidence of individual and material misstatements and omissions, actual conflicts of interest, self-dealing, unjust enrichment, misuse of investor funds, breach of fiduciary duty, breach of contract and tax liability.
Donegan spelled out how Quiros misused $40 million for AnC Bio equipment; paid contracts to a company owned by William Kelly, Quiros’ lawyer and adviser, with no disclosure to investors; and pocketed $3 million when Quiros sold the land to investors for $6 million.
The commissioner also laid out the consequences for Quiros, which included frozen assets, disgorgement penalties and receivership. In addition, DFR explained in other documents provided to the governor’s office the inevitability that investors would not be eligible for visas, nor would they get their money back.
None of this information seems to have deterred the Shumlin administration from moving forward with finishing the Burke hotel or from allowing Stenger to continue soliciting money from AnC Bio Vermont.
Shumlin pressured Donegan to reinstate the Burke and AnC Bio developments in March 2015 after the commerce agency had asked the developers to put a pause on marketing the projects.
A month later, Miller went on to revise one of Donegan’s letters to Kelly about how the state would handle the Burke hotel project going forward.
“I took a significant stab at it based on our convo yesterday,” Miller told Donegan by email with a red-lined version of the letter.
Miller and London also helped Moulton and Donegan navigate through the public relations shoals of the AnC Bio and Burke reapprovals, helping them get the messaging to the press on point.
For example, when Donegan let Miller and London know on April 6, 2015, that Bill Stenger had invited WCAX, Vermont Public Radio, the Burlington Free Press and other local press to Jay Peak for one-on-one interviews about the marketing study for AnC Bio Vermont, Miller told her to avoid attracting attention.
“Given that our story is out there and fine, I’d be pretty circumspect about saying more — as you say, stick with the talking points and in particular the ‘this will apply to all projects going forward’ and ‘I’m not going to discuss the specifics of any project under review,’” Miller wrote.
“Lay as low as you can, I’d say,” Miller said.
The unsealed records also reveal a document titled, “General Strategy,” which apparently was put together ahead of the April 2016 press conference during which the state announced its civil lawsuit alleging investor fraud against Quiros and Stenger.
“MAIN MESSAGE: The state, through the relationship between ACCD and DFR discovered the irregularities and acted upon them.” A sentence following that reads, “When we tracked these irregularities we acted.”
Another section of the document instructs, “Use the general, ‘This is very disturbing to hear may be happening. But it was detected due to the relationship between ACCD and DFR.’”
The document also called for state officials to “tout the many good” EB-5 stories on social media. “Stress Vermont’s financial oversight [DFR and ACCD] as unparalleled and timely.”
Correction: An earlier version of this story misattributed a quotation about the possibility that the state’s decision to allow the AnC Bio project to proceed might “incite” federal regulators. The quotation came from an email written by John Kessler.