Dan D'Ambrosio, and April McCullum

Burlington Free Press

MONTPELIER - The dream of spectacular economic development in the depressed Northeast Kingdom using money from foreign investors came crashing down Thursday amidst federal fraud allegations.

Gov. Peter Shumlin gathered with several of his top officials at the Statehouse to announce state and federal accusations of fraud against Bill Stenger and Ariel Quiros, partners in Jay Peak and Q Burke resorts and a variety of projects that set foreign investors on a path toward U.S. residency.

“We all feel betrayed,” Shumlin said. “It’s a dark day for Vermont.”

Under the federal EB-5 program, foreign nationals who invest $500,000 in a project in a economically struggling region of the country can receive residency if the project creates a specified number of jobs. Stenger raised about $400 million for projects at Jay Peak and Q Burke ski resorts and in Newport from some 800 investors in countries from Brazil to South Africa to Vietnam.

Stenger and Quiros are accused in civil actions by the U.S. Securities and Exchange Commission of perpetrating a "Ponzi-like" scheme in which they diverted money raised from the investors to a variety of shell companies and financial accounts — in the case of Quiros, for his personal benefit.

No charges have been filed, but a federal criminal investigation is underway.

Susan Donegan, commissioner of Vermont Department of Financial Regulation, said 100 accounts at 10 financial institutions were involved in the scheme.

Sen. Patrick Leahy, D-Vt., who has been a champion of the EB-5 program, said he is "shocked and saddened" by the allegations against Quiros and Stenger, who testified before a Senate committee five years ago about the virtues of EB-5.

“I’m especially heartbroken for the people of the Northeast Kingdom, whose high hopes for these projects have been dealt a harsh blow," Leahy said. "I am also aware that hundreds of investors who believed in these projects now do not know if they will see their money or any immigration benefits. It is a terrible situation all around."

Quiros, Stenger poured thousands into VT politics

Leahy said the EB-5 programs is in "dire need of reform."

"Fraud and abuse cannot be tolerated, no matter where it occurs," he said. "Even where there is no indication of fraud, the incentives that Congress created to direct EB-5 investment to underserved areas are regularly abused. Given the significant problems plaguing this program, I will continue to push for meaningful reform. Without reform, I believe the time has come for the program to end.”

Neither Quiros nor Stenger responded to messages left beginning late Wednesday, when news of the situation first began to develop. But in previous comments and in remarks quoted in court papers, the men deny wrongdoing.

The 'spaghetti map'

To illustrate how the alleged fraud worked, Donegan showed two posters depicting the way money should have flowed through the various EB-5 projects developed by Stenger and Quiros — in a "straightforward" manner.

"When the EB-5 investor sends in their money, it should go into an escrow account, where it is kept until certain conditions are met, and the money is released to an operating account to pay expenses and finish the project," Donegan said. "Each project is to be discreet, and the flow of money is easy to follow."

Regulators say millions unaccounted for at Q Burke

Next, Donegan revealed the poster showing the purported scheme — a mass of swirling lines connecting a dizzying number of financial accounts that "allegedly facilitated improper commingling, misuse and diversion of funds between EB-5 projects, related companies and personal accounts."

"We call this the spaghetti map," Donegan said.

The federal complaint alleges more than $200 million of investor funds intended for EB-5 projects were "misused," and that Quiros "misappropriated" an additional $50 million for his "own personal enrichment." Quiros is accused of spending $20 million to purchase Jay Peak and Q Burke ski resorts, $2 million for an apartment at Trump Place in New York, and "millions for personal expenses and taxes."

In testimony to the SEC in September 2015, Quiros said he took no salary from the EB-5 projects and complained that the SEC was "hindering" him from doing his work.

Criminal investigation

The 80-page, 52-count federal complaint alleges civil as opposed to criminal violations of federal securities laws. The document was filed in federal court in Miami, where Quiros lives, and was unsealed Thursday.

But Eric Miller, U.S. attorney for Vermont, said his office is investigating potential violations of federal criminal law.

"We have been aware of the state and SEC civil enforcement efforts made public today," Miller wrote in an email. "My office has been conducting, and continues to conduct, an investigation designed to determine whether or not there have been violations of federal criminal law in connection with EB-5 projects in the Northeast Kingdom."

The Miami federal court froze Quiros’s personal and professional assets. The SEC asked the court to order Quiros to “disgorge all ill-gotten gains,” essentially asking the court to order Quiros to repay investors. The SEC specifically exempted Stenger from the disgorgement request.

With Stenger being exempt, his assets remained unfrozen, but both Stenger and Quiros would be on the hook for civil penalties if the court rules in the SEC’s favor.

“The alleged fraud ran the gamut from false statements to deceptive financial transactions to outright theft,” Andrew Ceresney, director of the SEC’s Division of Enforcement, said in a statement. “As alleged in our complaint, the defendants diverted millions of EB-5 investor dollars to their own pockets, leaving little money for construction of the research facility investors were told would be built and thereby putting the investors’ funds and their immigration petitions in jeopardy.”

A hole in Newport

The research facility Ceresney is referring to is AnC Bio VT in Newport, which never made it past the groundbreaking stage. Stenger said the facility would produce leading-edge medical devices, perform stem-cell research and provide clean rooms for rent to universities and private companies.

The other EB-5 project in Newport is the portion of downtown called the Renaissance Block, which was supposed to become a new development of retail stores, residences and office space. Stenger and Quiros acquired and demolished the block but got no further, leaving a hole in the middle of Newport.

In the news conference Thursday, Gov. Shumlin said, "I think you can assume AnC Bio and the downtown Newport project that never got off the ground will not happen."

Commerce Secretary Moulton added that a condition of the permit for the Renaissance Block is that if construction fails to begin by September 2017, "they have to fill it, grass it, and turn it into a park." That will be the responsibility of the federal receiver who has taken control of all the EB-5 projects except the Q Burke Hotel and Conference Center.

Jay Peak and Q Burke ski resorts are under federal control.

Attorney General Sorrell said he had urged the federal receiver also to take control of Q Burke Hotel, and added he would move for the state to take over if federal authorities fail to act.

The SEC complaint names Quiros, Stenger, Jay Peak Inc., a Quiros-owned company called Q Resorts Inc. and other related companies in connection with violating anti-fraud laws.

"Quiros orchestrated and Stenger facilitated an intricate web of transfers ... to disguise the fact that the majority of the seven projects were either over budget or experiencing shortfalls," reads the complaint. "These shortfalls were due in large part to Quiros pilfering tens of millions of dollars of investor money for his own use."

State case

Vermont filed a civil action against Quiros and Stenger similar to the SEC's allegations, quoting testimony by both men.

The Vermont lawsuit quotes Quiros saying under oath to the SEC in September 2015 that he had "taken no investor's money, not even a penny" with regard to the Q Burke project.

The lawsuit states that "Quiros admitted under oath that he commingled funds between projects and used what he called a 'one-window' approach to consolidate all investor funds in one place."

Stenger told the SEC he was unaware that investor money was used to pay off a loan that Quiros had taken out, according to the lawsuit. However, the document later describes Stenger's moving money or helping move money into accounts that were used to pay the loans.

The federal complaint states one of the projects, the AnC Bio research facility, has from the beginning been "rampant with fraud" and is now years behind schedule.

Public records reveal tension between Q Burke and state

Federal investigators allege Quiros and Stenger made "bogus claims" to investors by saying they had applied for Food and Drug Administration approval for the facility's biomedical products, such as artificial organs and a liver-replacement device.

In reality, according to the allegations, the businessmen had failed to submit any products for FDA approval.

"Quiros has secretly used most of the money raised for the research facility's construction to pay off and pay down a margin loan and to misappropriate approximately $30 million for his own use," the complaint states.

Receivership

The federal court in Miami appointed a receiver over the companies "to prevent any further spending of investor assets," according to the SEC.

“This is obviously a difficult day for Vermont and for the many people, myself included, who are so invested in growing jobs and economic opportunity in the Northeast Kingdom," Gov. Shumlin said.

Shumlin credited his administration's action as leading to the investigation and brushed off suggestions that state government should have acted sooner. The state increased scrutiny on Stenger and Quiros after investors complained when Stenger changed, without telling them, how long it would take to recoup their money on a project at Jay Peak.

Q Burke hotel struggles to open

The state Department of Financial Regulation began an in-depth financial investigation into Q Burke Hotel in January 2015.

“We allege that since 2008, the defendants have defrauded hundreds of millions of dollars from hundreds of investors,” department Commissioner Susan Donegan said in a statement.

At Thursday's news conference, Donegan said that as her department began the review last year, "we saw anomalies and unusual transactions that raised regulatory concerns about how all the investor money across all projects were transferred and accounted for by Mr. Stenger and Mr. Quiros."

The ski resorts will remain open, and jobs will remain, according to state officials.

Looking ahead, Attorney General Sorrell said that as state and federal authorities learn more about what went on at Jay Peak and Q Burke, litigation against Quiros and Stenger could "broaden and deepen."

"Let me just say that this is not a depiction of a simple bank robbery," Sorrell said. "Rather this depicts what we allege to be a massive and complex fraudulent enterprise. It is very early in what will likely be lengthy litigation."

This story was first published online on April 14, 2016. Contributing: Jess Aloe, Elizabeth Murray and Adam Silverman of the Free Press. Contact Dan D’Ambrosio at 660-1841 or ddambrosio@freepressmedia.com. Follow him on Twitter at www.twitter.com/DanDambrosioVT. Contact April Burbank at 802-660-1863 or aburbank@freepressmedia.com. Follow her on Twitter at www.twitter.com/AprilBurbank.