"Red flags preceded fraud allegations at Jay Peak Resort" by Hilary A. Niles Globe Correspondent April 21, 2016
MONTPELIER — The news was stunning: Two of Vermont’s most prominent businessmen, Jay Peak Resort owner Ariel Quiros and president Bill Stenger, were accused last week of securities fraud and misuse of more than $200 million raised from investors since 2008.
But red flags had been waving for years over their use of a controversial federal program that grants US residency to foreigners in exchange for job-creating investments.
Some of the warnings dated to 2012, when an immigration attorney involved in Jay Peak’s securities deals publicly severed his relationship with the developers, implying their financial disclosures were misleading.
Construction delays mounted, and a crucial real estate deal was canceled for lack of payment. Investors complained that Quiros and Stenger had changed the terms of their payouts.
Other alarms rang later, heard only within state government: An approved business plan didn’t pass legal muster. Jay Peak withheld information about a key business partner. Quiros and Stenger resisted the state’s requests for documentation.
But state officials overseeing the visas-for-investment program largely allowed the Jay Peak executives to proceed — a testament to the developers’ promise of much-needed spending in Vermont’s most economically challenged counties and the strong political support from two governors and Vermont’s congressional delegation.
“You had a sense something wasn’t right here, just on the questions we weren’t getting answered,” said the state’s commerce secretary, Patricia Moulton, whose agency runs Vermont’s immigrant investor program. She eventually became suspicious of Jay Peak.
Quiros and Stenger’s designs were as audacious as the fraud they are accused of committing. In 2012, the duo unveiled a half-billion-dollar plan for Vermont’s Northeast Kingdom. It would sweep from the Jay Peak ski resort, near the Canadian border, to the newly acquired and renamed Q Burke Mountain.
Jay Peak would build a biotechnology campus, window manufacturing plant, mixed-use hotel, conference center, and marina known as Renaissance Block.
Q Resorts, Jay Peak’s parent company, wholly owned by Quiros, even took over management of the Newport State Airport in a flurry of promises that saw the facility renamed Northeast Kingdom International Airport.
But only expansion of the ski resorts came to pass. At the airport, international flights have yet to land or take off.
Development money was to come from the federal EB-5 visa program. EB-5 offers permanent residency to foreign investors and their family members if at least 10 jobs’ worth of economic activity can be attributed to an investment of at least $500,000 in a qualified US business.
The investment offerings are exempt from the federal securities registration that’s common for stocks and bonds, but otherwise subject to federal and state securities laws.
Vermont’s EB-5 office has worked with about a dozen developers since 2006, but none more than Jay Peak. Quiros, who is based in Miami, and Stenger raised more than $350 million from over 700 investors in at least 74 countries, according to an April 12 lawsuit filed by the Securities and Exchange Commission.
Neither man could be reached for comment.
Vermont runs its EB-5 program through an entity owned and operated by the state. It’s an unusual setup adopted by only one other state, Michigan. Hundreds of other regional centers, as the EB-5 offices are known, are for-profit outfits.
Even at a news conference to announce allegations of “massive” fraud leveled by the SEC and the state, Governor Peter Shumlin promoted the added assurance that state oversight affords.
Yet compliance with securities laws appears to have been an afterthought.
Moulton, the state commerce secretary, said that until Vermont financial regulators got involved in 2015, about a year after the SEC began investigating, the regional center conducted no systematic, independent, third-party reviews of projects’ business plans.
“We can all sit back now and say there are probably 18 things we should have done. But we were not required in our position as a regional center to do that level of analysis. We’re required as a regional center to market projects,” she said.
Moulton said this is a weakness in the whole EB-5 system, and one Vermont corrected after bringing in financial regulators. She said the commerce agency’s due diligence previously amounted to a review of applicants’ business plans and the reputations of their principals. With Jay Peak, Bill Stenger carried the case. The longtime president of the iconic ski area was a known entity in Vermont well before Quiros bought the operation in 2008.
And with Jay Peak, as with other projects, state officials mostly took the word of attorneys who had drafted the securities offerings, Moulton said.
The econometric forecasts on which job-creation projections were based — the heart of EB-5 — were taken at face value, even though they were paid for by developers. Market analyses also were trusted, but never verified beyond EB-5 approval by US Citizenship and Immigrant Services.
That federal green light remains the only required business plan review in the EB-5 process.
In 2012, Doug Hulme, an immigration attorney who had worked with Jay Peak, cut ties with the resort over alleged financial misrepresentations. Hulme issued a news release saying his company, Rapid USA Visas, “no longer has confidence in the accuracy of representations made by Jay Peak.”
But Hulme himself was the cause of consternation in the state EB-5 office, because Rapid USA at the time was improperly marketing itself as the state regional center, Moulton said. The state chalked it all up to “sour grapes,” Moulton said.
No financial audit of Jay Peak was performed.
Not every project got a pass, though. The regional center did rescind agreements with other developers and has declined to work with at least one group it was “not comfortable with,” Moulton said.
The state does not appear to have applied such scrutiny to Jay Peak until early 2014, when a group of investors began complaining that Quiros and Stenger had converted investor’s equity shares in the resort’s Tram Haus Lodge to unsecured IOUs — without their knowledge or consent.
Prior to this, Moulton said, more rigorous inspection hadn’t seemed necessary because there hadn’t been any visible problems.
“Projects were getting built. Jobs were being created. Money was being spent. There was nobody screaming and hollering, no question marks, until the first conversion of Phase I investors from equity into debt.”
After a brief suspension by the regional center, the state allowed Jay Peak to continue selling its EB-5 securities, with conditions set by the Department of Financial Regulation. Responsibility for compliance for all of Vermont’s EB-5 projects was moved to Financial Regulation, which exercised its subpoena power to demand over 300,000 documents from Jay Peak. Its investigation is one the commerce agency had neither the resources nor the authority to conduct. The resulting charges against Quiros and Stenger largely mirror the federal charges by the SEC.
Shumlin, who is finishing his third two-year term, deflects questions about whether Vermont’s EB-5 center should have been reformed sooner. He cited its structure as a legacy of prior administrations. “We made the change when we made it, and we found what we found,” Shumlin said by e-mail.
US regulators are going overboard, Vt. ski resort says
Vt. resort built on immigrants’ investments used fraud, SEC says
“I’m shocked and saddened by what state and federal investigators have found,” said Vermont Senator Patrick Leahy, a Democrat who has been a supporter of the EB-5 visa program. “I’m especially heartbroken for the people of the Northeast Kingdom [of Vermont], whose high hopes for these projects have been dealt a harsh blow.”
Senator Leahy says visa program endangered without overhaul
"Vermont ski resort in Ponzi-like scheme won’t close, receiver says" by Deirdre Fernandes Globe Staff April 26, 2016
The Vermont ski resort at the center of a federal securities fraud case will remain open into the next ski season, despite warnings last week it was losing money, a court-appointed receiver said Monday.
Michael Goldberg, a Florida attorney and the court-appointed receiver for Jay Peak resorts, said he will borrow money from frozen accounts tied to the resort and has found about $1.6 million in a Canadian bank to finance the day-to-day operations.
“It’s not going to close,” Goldberg said on Monday afternoon as he hopped a flight back to Vermont to oversee the management of the resort. “We can’t close it because the value would be shot.”
The US Securities and Exchange Commission earlier in April filed civil fraud charges and froze the assets of Jay Peak owner Ariel Quiros of Miami and its president, William Stenger of Newport, Vt., along with seven of their partnerships. The commission alleged Quiros and Stenger ran a Ponzi-like scheme that siphoned off millions of dollars raised through a federal program that gives immigration visas to foreign investors in job-creating projects.
The men allegedly raised $350 million from 700 investors worldwide to build hotels, restaurants, and a water park in northern Vermont. But more than half the money was misused and more than $50 million was “systematically looted” for personal uses, the SEC charged.
Quiros has accused the SEC of overreaching and last week tried to convince a Florida federal court to unfreeze his assets.
Quiros did not return calls for comment.
In court documents, Goldberg argued unfreezing the assets would put the resort in danger since he needed access to the money to keep Jay Peak and nearby Q Burke Mountain Resort, also owned by Quiros, running.
Jay Peak needs at least $7 million to operate through the offseason and must finance a $4.15 million gondola repair project. However, the resort is currently losing money, in part due to the warm winter that limited skiing.
Since taking over as receiver of the property several weeks ago, Goldberg said he has tried to cut expenses by more than $1 million. Goldberg has also borrowed from the Jay Peak resort funds to pay the bills for the Q Burke Resort and its hotel, according to court documents.
Quiros added a Q to Burke Mountain’s name when he bought it, but Goldberg said the mountain will revert to its former name.
Goldberg said he is trying to ensure that the resorts are in good shape so they can be sold and investors can recoup their costs.
However, some of the immigrant investors have come forward and volunteered to pour millions more into Jay Peak to keep it going and ensure that the jobs remain. These investors fear that if the resort closes and the jobs are lost, their visas could be at risk, Goldberg said.
Also see: Miami businessman challenges SEC over Vermont projects
"A windfall for Chobani employees: Stakes in the company" by Stephanie Strom New York Times April 26, 2016
NEW BERLIN, N.Y. — The 2,000 full-time employees of the yogurt company Chobani were handed quite the surprise Tuesday: an ownership stake that could make some of them millionaires.
Hamdi Ulukaya, the Turkish immigrant who founded Chobani in 2005, told workers at the company’s plant here in upstate New York that he would be giving them shares worth up to 10 percent of the company when it goes public or is sold. The goal, he said, is to pass along the wealth they have helped build in the decade since the company started. Chobani is now widely considered to be worth several billion dollars.
“I’ve built something I never thought would be such a success, but I cannot think of Chobani being built without all these people,” Ulukaya said in an interview in his Manhattan office.
“Now they’ll be working to build the company even more and building their future at the same time,” he said.
Chobani employees received the news Tuesday morning. Each worker received a white packet; inside was information about how many Chobani shares they were given. The number of shares given to each person is based on tenure, so the longer an employee has been at the company, the bigger the stake.
Two years ago, when Chobani received a loan from TPG Capital, a private equity firm, the company’s value was estimated at $3 billion to $5 billion. At the $3 billion valuation, the average employee payout would be $150,000. The earliest employees, though, will most likely be given many more shares, possibly worth more than $1 million.
Rich Lake, lead project manager, was one of the original group of five employees Ulukaya hired for the plant in New Berlin. Lake said Tuesday that he did not expect Chobani shares to change his life much. “I’m not one for living outside my means,” he said.
Rather, he said, the shares are an acknowledgment of what he and the other employees have put into Chobani. “It’s better than a bonus or a raise,” Lake said. “It’s the best thing because you’re getting a piece of this thing you helped build.”
The transfer of money by Ulukaya touches on a hot-button economic issue: the rapidly expanding gap in pay between executives and average workers. The United States has one of the widest pay gaps, and the topic has played a prominent role in this year’s presidential race, particularly among the Democrats.
Some other executives have also taken this issue on themselves. A founder of Gravity Payments, a Seattle-based credit card payment processing firm, last year promised to pay a minimum wage of $70,000 to his 120-person staff within three years.
The shares given to Chobani employees are coming directly from Ulukaya. The shares can be sold if the company goes public or is bought by another business, neither of which seems imminent. Employees can hang onto the shares if they leave or retire, or the company will buy them back.
The unusual announcement comes before TPG Capital, whose $750 million loan helped bail out Chobani, can buy a stake in the company. Tension between Ulukaya and TPG about the direction of the company emerged shortly after the loan deal.
TPG has warrants to buy 20 percent or more of Chobani’s shares, depending on targets set in the original deal it struck. But that percentage would now be calculated from the 90 percent of the remaining shares, after the 10 percent given to the employees, essentially diluting TPG’s potential stake.
TPG declined to comment Tuesday.
Technology startups often pay employees partly in shares to help recruit them or to compete in a company’s early days for in-demand workers. Early employees of Google and Facebook became overnight multimillionaires thanks to such compensation.
But unlike many of those tech companies, Ulukaya is giving his employees a piece of the company after its value is firmly established.
Ulukaya will still own the vast majority of the company, though his portion will be diluted as well. He said that giving his employees a stake in the company’s success was among the terms he demanded when the deal with TPG was struck.
Also see: Filling the income inequality gap with yogurt
Time to hit the slopes.