From Securities Regulation Daily, December 7, 2015

SEC targets lawyers for acting as unregistered brokers in EB-5 investments

By Jacquelyn Lumb

The SEC has announced 10 settled enforcement actions against seven lawyers and three law firms that offered investments in the government’s EB-5 Immigrant Investor Program without registering as brokers. Another lawyer and his firm are charged with defrauding foreign investors in the program, which offers a path to U.S. residency for individuals who invest in a specific project that creates or preserves at least 10 jobs for U.S. workers. During a news conference to discuss the cases, Enforcement Director Andrew Ceresney said it is the SEC’s first enforcement action against lawyers acting as unregistered brokers in EB-5 investments (SEC v. Feng, December 7, 2015).

EB-5 program. The EB-5 program was created to stimulate the U.S. economy with capital investment from foreign investors. The investments are typically administered by regional centers throughout the U.S. The lawyers in these cases allegedly received commissions for selling, recommending, and facilitating the investments. While the limited partnership interests are offered under an exemption from registration, and the SEC plays no role in the program, the interests are still subject to other requirements of the securities laws.

Settled proceedings. In the settled proceedings, the lawyers or their firms received commissions for new investors to whom they sold limited partnership interests. The payments were in addition to the legal fees they received for providing legal services to the same clients. By acting as liaisons between the regional centers and the investors, or by facilitating the transfer or documentation of investment funds to the regional centers, the lawyers acted as unregistered brokers in violation of Exchange Act Section 15(a)(1).

The individuals and firms agreed to cease and desist from acting as unregistered brokers and to pay disgorgement, prejudgment interest, and penalties. The individuals cooperated with the SEC’s investigation which conserved investigative resources, according to the news release.

Complaint. In the complaint against a lawyer and his firm, Feng & Associates, the SEC alleges that the defendants sold the EB-5 investments while secretly collecting commissions from promoters when their clients invested in the promoters’ offerings. The defendants had fiduciary, legal, and ethical duties to disclose the receipt of the commissions and the conflicts of interest the compensation created, according to the complaint.

The defendants also defrauded some of the promoters by using overseas nominees to receive the commissions, and falsely telling the promoters that the foreign-based persons were responsible for finding investors. The commission recipients included a friend, relatives, and an entity that the lawyer controlled, none of whom played a role in finding investors. The SEC is seeking disgorgement, prejudgment interest, and penalties in addition to permanent injunctions.

Ceresney said the cases reflect the SEC’s increased focus on the EB-5 program in recent years, and it will remain an area of focus. He reminded lawyers of the need to be mindful of the securities laws.

Attorneys: Donald W. Searles for the SEC.

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