Editorial: Jay Peak and the EB-5 Program

Jay Peak and the EB-5 Program

Monday, April 18, 2016

Almost from the beginning, the massive foreign-investor-financed development touted for Vermont’s Northeast Kingdom seemed almost too good to be true. There was every reason to hope it wasn’t, because the variety of manufacturing, research and tourism-related projects promised to transform the pristine but poverty-ridden region by creating, directly or indirectly, 10,000 new jobs built around a core of high-end manufacturing. But, as so often is the case, that which appeared to be too good to be true really was too good to be true.

Or so say the U.S. Securities and Exchange Commission and the state of Vermont, which have filed civil complaints alleging what Attorney General Bill Sorrell describes as “a massive and complex fraudulent enterprise” that has been likened to a giant Ponzi scheme. The complaints claim that Ariel Quiros, a Miami businessman who owns Jay Peak and Q Burke Resorts, and Jay Peak CEO Bill Stenger misused more than $200 million invested through the federal EB-5 Immigrant Investor Program and that Quiros misappropriated $50 million in investor funds for his personal use. Stenger is alleged to have facilitated the fraud. A federal judge in Miami has appointed a receiver to oversee Jay Peak and Q Burke Resorts and associated EB-5 projects.

Under the EB-5 program, created by Congress in 1990, up to 10,000 foreign nationals a year willing to invest at least $500,000 in development projects that will create jobs in rural areas are eligible for permanent residency in the United States, along with a path to citizenship. However, the investors are not guaranteed a return on their investment; in this case, not only is much of their money likely to be gone, but also their immigration petitions are in grave danger of being denied because the new jobs may not materialize. Quiros and Stenger generated $350 million in capital from more than 700 investors in 74 countries through the program, Vermont Public Radio reports.

The collapse of this scheme, if that is what it proves to be, is not only a major disappointment to Vermont’s elected officials but also a major embarrassment. Gov. Peter Shumlin and U.S. Sen. Patrick Leahy, both Democrats, have been the most prominent cheerleaders for the development, although they were by no means alone. “The beauty of this program is that it is doing so much to create jobs and economic growth and is not costing the taxpayers a cent,” Leahy said in 2012, after Jay Peak announced it was planning to build, among other things, a biomedical research and manufacturing facility in Newport, Vt. Despite the fact that Quiros and Stenger raised three-quarters of the $110 million needed to build that facility, almost nothing has been done on it, according to the SEC.

In March 2013, Shumlin visited the Valley News and, in discussing the Northeast Kingdom project, assured the editorial board that Vermont was doing more than any other state to evaluate projects. As our colleague Jim Kenyon reported at the time, Shumlin said that Vermont was the only state that “actively reviews” EB-5 investments. “It gives investors some confidence that there’s more involvement in the EB-5 program than just the developer who is going to benefit from the investment.” Unfortunately, it appears that whatever confidence the state’s involvement bred was misplaced.

One mistake may have been to originally put the EB-5 program under the auspices of the Agency of Commerce and Community Development, which became responsible both for overseeing it and promoting it and thus was presented with conflicting missions. The alleged fraud only came to light once Shumlin transferred the program at the beginning of 2015 to the Department of Financial Regulation, where Commissioner Susan Donegan ultimately unraveled the scheme. Another potentially tell-tale sign was the lack of transparency Kenyon encountered in reporting on the Quiros/Stenger project in 2013.

But apart from the program’s apparent susceptibility to fraud, it has long seemed to us that EB-5 is fundamentally flawed in two respects. The premise that worthy projects must rely on foreign investors who participate for non-financial reasons seems shaky at best. If a development proposal is truly sound, it should be able to attract capital in the usual ways. The second flaw, as we have discussed here previously, is that permanent residency in the United States is sufficiently precious that it should not be auctioned off to the highest bidders, but rather conferred as part of a comprehensive agreement on what talents, qualities and attributes best qualify immigrants for admission to this country.