Earlier this week, the Securities and Exchange Commission ("SEC") filed charges against a California oil-and-gas company relating to an alleged $68 million "Ponzi-like" scheme targeting the Chinese-American community and investors abroad, including investors solicited under the EB-5 Immigrant Investor Programs ("EB-5 Program"). This enforcement action comes just weeks after the SEC announced its first enforcement action against brokers handling investments in the EB-5 Program in a case involving the sale of securities related to the EB-5 Program by unregistered broker-dealers. For further information on that action, please see our previous alert SEC Expands its Enforcement Against Unregistered Broker-Dealers by Bringing First Enforcement Action Against an Unregistered Broker-Dealer Based on the EB-5 Program. This week’s enforcement action continues to demonstrate SEC’s focus on the EB-5 Program as a potential source of fraud.
In its most recent action, filed in the Northern District of California, the SEC alleged that from 2007 until at least 2014, Bingqing Yang, through a group of wholly managed companies including Luca International Group, LLC (the "Luca Companies"), presented false information to potential investors while soliciting investments in the unregistered offerings of a series of investment funds. Yang and others are alleged to have fraudulently represented the success of the Luca Companies and told investors that their investments would be risk-free. While investors were told to expect annual rates of return of 20-30%, some were guaranteed returns of at least 12-15%. At the same time that Yang and others made these representations to investors, the Luca Companies were losing money and the entire enterprise was sinking in debt. In discussing the recently-filed complaint, Jina L. Choi, Director of the SEC’s San Francisco Regional Office, stated that "As alleged in our complaint, Yang falsely claimed that Luca International was a profitable oil and gas drilling operation when it was really a Ponzi-like scheme preying on Chinese-Americans and EB-5 investors who lost millions of dollars while Yang lined her pockets."
The EB-5 Program, created by Congress in 1990 and administered by the U.S. Customs and Immigration Services, provides foreign investors an opportunity to apply for U.S. residency based on qualifying investments in certain domestic projects. Qualified EB-5 investors must invest at least $1 million, or at least $500,000 in a Targeted Employment Area, generally a high-unemployment or rural area, in an approved enterprise. While investors may be granted a two-year conditional permanent residency based on that initial investment, permanent residency requires further documentation that the investment created or preserved at least 10 jobs for U.S. workers, excluding the investors and their immediate families.
The SEC continues to review EB-5 investment opportunities as a source of potential fraud. As an EB-5 investment in fraudulent securities offerings may result in both lost money and the loss of a path to lawful permanent residency in the United States, investors should carefully vet any EB-5 offering before investing. Further, companies should carefully investigate any association with individuals using the EB-5 Program to source investment.