The SEC has sued Seattle developer Lobsang Dargey, alleging that he misappropriated $17 million from investors in his EB-5 program, and announcing a freeze of Dargey’s assets at the same time.

The EB-5 program allows foreign nationals who invest $1,000,000 ($500,000, in certain high unemployment or rural areas) in qualifying businesses in the U.S. and create 10 jobs for U.S. workers to obtain permanent residence in the U.S.

A “qualifying business” means:

  • The creation of an original business;
  • The purchase of an existing business with simultaneous restructuring or    reorganization such that a new commercial organization results; or
  • Expansion of an existing business created after November 1990 through the investment of the required amount such that the net worth is increased by at least 40%.

The EB-5 program has drawn much interest from Chinese investors over the last several years looking for business opportunities. Unfortunately, it also has drawn interest from individuals, who seek to take advantage of EB-5 investors, as Dargey is alleged to have done.

According to the SEC, Dargey raised at least $125 million from 250 Chinese nationals seeking permanent residence through the EB-5 program. The money was to be used in two of Dargey’s Seattle-area real-estate projects, but he misappropriated millions for his own use. Whether or not the investors will be able to process their permanent residence or recoup their investment is yet to be determined. The SEC’s civil suit was filed August 25 in federal court in Seattle.

Dargey’s case is similar to a 2013 case in which the SEC alleged that Anshoo Sethi, a Chicago area real estate developer, “fraudulently sold more than $145 million in securities and collected $11 million in administrative fees from more than 250 investors primarily from China.” As with the Dargey case, the investors were seeking permanent residence in the U.S. through the EB-5 program. Fortunately, the SEC was able to facilitate the return of the invested funds.

While the SEC investigates such cases and is working diligently to prevent the type of fraud alleged, potential EB-5 investors should exercise proper due diligence and engage knowledgeable counsel to ensure that they do not fall victim to these schemes.