Another EB-5 visa fraud, more burned investors. For people outside the United States trying to pick a reputable investment that will get them permanent residency in the U.S., sorting through hundreds of projects is often the hardest part of the job.

EB-5 due diligence

There is plenty written about what you should do before you invest, one of the latest guides being from the North American Securities Administrators Association, here. You can read up on EB-5 frauds here.

What are the warning signs of fraud? Last year’s revelation of a huge fraud at a Vermont development that had sucked in hundreds of investors led many to wonder, “How could we have known this would blow up?”

There is no guaranteed way to find fraud, but if you see things that would give a prudent investor pause; if the project’s sponsors don’t have a good track record; if you don’t understand the risks of the project (and they all have risks) walk away.

Remember, many reputable immigration lawyers refuse to recommend an EB-5 investment because they don’t want to be sued if the investment encounters problems, whether of a normal business variety or because of fraud. Even if your lawyer recommends an investment, you should still perform due diligence on the project.

Even more surprising to some non-Americans, once the government spots EB-5 fraud, it’s often too late for the investors who have put in their money. Sometimes investors can recover and sometimes not, but the green cards they wanted will not be delivered and they have lost time in addition to money.

Looking at the track record of a developer is much easier than going through the hundreds of pages of documents you and your lawyer will need to examine before you invest your money. You will always need to do both, but as you sort through five or ten possible investments, start with the track records.

The Vermont Fraud Warning Signs

One of the most celebrated of all the projects was the group of investments in the northeastern state of Vermont, near the border with Canada. Jay Peak was an old ski hill that fell into the hands of a Canadian operating company. They began with the EB-5 program by raising money for one project, but then in 2008 the Canadian company sold the business to a man local press described as “mysterious,” Ariel Quiros. He grew up in New York, was of Puerto Rican and Venezuelan background, but had spent years in Korea building unspecified businesses which supposedly gave him the ability to buy Jay Peak for $25 million.

Once Quiros bought the mountain, the EB-5 projects accelerated, with six more projects for hotels and finally, before the scheme was exposed, a bio-technology park that was supposed to flourish among the ski hills and dairy farms of far-northern Vermont.

The main thing an investor should have asked about Jay Peak was, who exactly is Ariel Quiros, the owner? The whole sickening unravelling of the investment project is available at vtdigger.org (going from most recent to oldest story). But anyone investing after January 14, 2014 would have had an easy way to throw this one in the waste basket. A Vermont Digger article available on line described Quiros’ track record this way:

  • He lost his seat on the board of Bioheart Inc. after AnC Bio [Quiros’ company] failed to make the second installment in a $4 million investment.
  • Quiros also survived a Texas lawsuit in which two investors alleged breach of contract after they didn’t get their money back in full in 10 years.
  • And a Florida man claims he never received almost $16,000 worth of equipment from a [Quiros] company called Q Vision, but he appears to have dropped his pursuit of the matter.

Of course, full due diligence could involve verifying the assertions in this article, but if they turned out to be true, who would entrust half a million dollars and a green card to someone with a track record of not following through on investments and unhappy investors alleging breach of contract?

If Quiros occasionally had disputes with investors and partners, you would also ask a more basic question: how did he make his money – the money that bought Jay Peak — in the first place?

The article in January 2014 said,

“Quiros has melded street smarts from New York, military sensibilities from the Korean Demilitarized Zone and a love of adventure into a business empire that spans the globe, starting with international trade from Korea in the early 1980s… GSI Group, where he got his start in Korea, imported and exported goods ranging from shoes to women’s blouses to radios…He specialized in raw materials, much of it for the Korean government, he says.”

In addition, Bloomberg says that “Mr. Quiros serves as a Director and Principal of GSI Group, a raw materials procurement company for the South Korean manufacturing community with offices in Seoul, Beijing, Sydney, Hong Kong and Miami.”

The only problem is, GSI is one difficult company to find. Quiros shows up on open-source databases as a corporate officer of 96 companies, but these are all in Florida, Panama and Vermont. None of the Florida companies are called GSI.

On line, there is www.GSIkoreanet., but this mentions no overseas offices. GSI Australia’s website says it is a company dealing in poultry, swine and grain. There are no Korean links evident. And it is based in Queensland and Victoria, not New South Wales where Sydney is. The Australia companies registry provides no evidence of any Korean trading company registered in New South Wales.

In Hong Kong, a search of directors of all Hong Kong companies shows that nobody named Quiros and no company called GSI directs any Hong Kong company.

A search of regulatory filings in the U.S. turns up nothing on Quiros until 2010, after he bought Jay Peak. A news search on Bloomberg turns up only GSI Group Inc., a maker of agricultural equipment.

The earliest mention of Quiros in securities filings in the U.S. is in 2011, as an investor in a U.S. biotech company. His Korean address in this filing was: 10th Floor, H&S Tower, 119-2 Nonhyun-Dong, Gangnam-Gu, Seoul, Korea 135-820. A reverse search of this address turns up nothing on GSI.

Are we therefore stunned to learn today that according to the U.S. Securities and Exchange Commission, Quiros never used his own money to buy Jay Peak in the first place? Instead, according to the judicial complaint filed in 2016, Quiros took money investors had already put into Jay Peak when it was owned by the Canadians, and used that cash to buy the ski resort.

Subsequent cash that came in for new projects funded prior projects, but eventually the game was up when Quiros told investors that their hotel project was cancelled and converted into a loan. They would get their money back, he promised, but green cards would not be forthcoming. Quiros is fighting the SEC, while his President has settled with the agency.

In the Bernard Madoff Ponzi scheme, there were red flags that sent many prudent investors away: a small-time accountant for what was supposed to be a multi-billion-dollar enterprise, and no independent custodian for the investor money.

In the case of Quiros and the Vermont project, a history of unhappy investors and a murky source of funds should have been enough for investors to say, “Not this one.”

 

About the firm:

Charles Griffin Intelligence is an independent consulting firm that performs investor due diligence for hedge funds, corporations and individuals both inside and outside the United States. We never do work for any EB-5 developer or regional center. We do not provide legal advice, but can help investors and their lawyers assess the business risk of an investment.

For more information about the firm, please see the website at www.charlesgriffinllc.com. You can also read our blog, The Ethical Investigator, at www.ethicalinvestigator.com

 

When your defense is that the law allows you to publish garbage without fear of prosecution, one takeaway is simple: the internet is filled with garbage that needs to be well verified before you rely on it.Internet searching

This blog thinks the Ninth Circuit got it right in exonerating Yelp this week from the lawsuit by a small business that was incorrectly identified in a negative Yelp ad. The decision is here.

While we feel terribly for the locksmith whose business was tarred with a brutally negative review that Yelp erroneously attached to his business, it seems clear that the court was right in deciding that Yelp was protected from prosecution by the federal Communications Decency Act.

The reasoning in Congress for this and other laws that grant safe harbor to internet facilitators of exchanges (of opinions, goods or anything else) is that if the internet sites were to be held liable for the contents of what they were portraying, the industry would shut down or need to charge a lot of money to compensate them for the risk.

As fact finders, we think the Yelp case is a handy example of why just about anything on line should be verified if you intend to make any kind of important decision based on what you read.

We recently had a case in which a negative review of a doctor became relevant in a malpractice case. Question one to us was: is this reviewer a real person and if so who is she? Based on her Yelp handle and city we managed to find her and to take a statement from her that turned out to be even more valuable than what she had posted on Yelp.

But what if “she” had turned out to be a competitor, an embittered but deranged former patient, or just a crank?

This is the not the first time we’ve written about this. In The Spokeo Lawsuit: Databases are Riddled with Errors we discussed a database that spits out some free information but then asks you to pay for more (often inaccurate) information.

As we tell our clients all the time (and as I’ve written in my book, The Art of Fact Investigation), even the most expensive databases confuse people with similar names, leave out key information such as where a person really lives or works, and are mostly hopeless with linking people and their shell companies.

The internet is a wonderful, useful and time-saving place, but there is no substitute for a good critical mind to sort investigative gold from the masses of garbage you find there.

A fascinating piece in today’s Wall Street Journal about a Japanese collector of North Korean garbage got me thinking about the value not just of garbage in a normal investigation, but to take a minute and to ask, ‘What is garbage?the value of garbarge.jpg

First, the article: Stuffed into a rented room near Tokyo are all kinds of cigarette packages that indicate class divisions in a supposedly classless society; ration books from a country that has suffered numerous recent famines; even an old phone book that cost $2,000 on the black market. A Korean-speaking history professor in Japan has collected it all, mostly from trips to the part of China that borders on North Korea.

Our clients sometimes ask us how we gather information when public records, databases and interviews don’t get us everything we need. One option we sometimes discuss (but very rarely get hired to do because of the expense) is to go through the garbage of people related to the investigation.

Picking up someone’s garbage is a complicated endeavor, in addition to the unpleasant task of physically sorting through it. Not only do you have to figure out where it gets left and when, but you need to make sure that you have the right to collect it at all. If it’s on private property, you are trespassing and stealing if you take it. Even if abandoned on public property, some states may still frown on the idea of taking it.

Appreciating the value of garbage can help an investigation that goes nowhere near a trash can.

Garbage is something that was once considered important to its owner but no longer is. But just because the owner doesn’t care about it doesn’t mean the rest of us cannot find use for it. That’s easy to see if you spot some nice piece of Danish furniture put out on the curb, but it applies to information too.

Think about a summer cottage purchased years ago by a married couple. Along the way the marriage sours and the husband begins to skim money out of the family business into a secret company he founds. The couple sells the cottage as the children grow up and move away, and then divorce proceedings commence.

When the wife approaches us with the suspicion that her husband has hidden assets, we take a look at his entire profile of both today and years past. We search the names of companies linked to the address of the former cottage and find a company was once based there but now has an updated address.

That is probably the one hiding the company assets, and that is garbage picking: an address no longer of use to the husband, but linked forever to the company he once founded and which is still very important to him.

There is much less than meets the eye in new Treasury Department rules aimed at tracking “secret buyers of luxury property,” as the New York Times put it this morningfincen rules on luxury property.jpg.

When you look at the new rules here, you see that it will fall to title insurance companies in two U.S. cities (Miami and New York) to report the beneficial ownership of corporate entities that pay more than $3 million in cash for a property.

This blog takes no position on whether there should be more vigilance about who is buying real estate in the U.S. What is clear is that these rules will do little to shed any light on the matter.

If I were a very rich person from Russia, China, Brazil or anywhere else, here are the obvious and inexpensive workarounds I would consider:

  1. Forgo title insurance. If you have $12 million to spend on a condo you will seldom visit, you will do without title insurance – a policy usually required by banks in exchange for taking your mortgage. Oligarchs need get mortgages. Any doubts about good title can be solved by a competent lawyer who can do the same work as the title searcher, minus underwriting the work with an insurance policy. In any case, many of the properties the government is targeting are new construction where title is much less of an issue.
  2. Set up a foreign holding company to control the U.S. company buying the property. Have a lawyer in the foreign jurisdiction control that foreign company as the beneficial owner. Once the sale of the U.S. property goes through, transfer the shares of the foreign company to a trust controlled by the rich foreigner. Even if title insurance reported the initial beneficial owner, they would not be able to track subsequent ownership changes overseas of the foreign holding company.
  3. Buy a place in Hawaii, Palm Beach, or Connecticut. The rules are backward looking. These people buying the properties are not. If they can buy with a corporation or LLC no questions asked somewhere other than New York or Miami, they will do so.
  4. Instead of buying a place for $4 million in Manhattan, buy two for $2 million. When you have millions and billions to spare, who cares about transaction costs of an extra conveyance?

There is a sad piece in the Wall Street Journal today about the demise of librarians and university programs in library science, In the Age of Google, Librarians Get Shelved. computer investigation.jpg

People trained to run computers do not have the training to gather facts the way librarians do. I count as a loss the presence of libraries with I.T. help desks instead of librarians  

Not that a good professional investigator is the same as a reference librarian. Part of what we do is to pick up a phone or travel to interview people to get information that is not written down.

Still, most of the time the first step is to do a lot of reading of documents, and we ask ourselves some of the same questions a good reference librarian would ask. And while it’s true that Google searching reduces the need for elementary help on different kinds of research, we are firm believers that Google does not replace the connections made by an alert human mind. The main reasons are:

  1. Google is a business and promotes links that make money rather than links that may be useful to you. Sometimes that works if your interests are aligned with Google’s, and sometimes it doesn’t.
  2. Much of the world’s information is not on Google. Most court documents in the U.S., for instance, have never been scanned and made available on the internet. Of those that have been scanned, many are not keyword searchable via Google: you have to know from Google on which sites to do your keyword search.
  3. No database is good at talking to other databases. If major hospitals in the U.S. can’t get their dozen different computer systems to talk to one another, how is the entire world supposed to get sufficient information into the right format for Google to be able to spit it out in a fraction of a second?

The mistake librarians made was to call what they did a science. Fact investigation is as much art as science for the simple reason that you can’t look everywhere and read everything you find. There are dozens or hundreds of educated guesses involved in good investigation, as I write in my forthcoming book The Art of Fact Investigation, reviewed by Kirkus here.

Pity the librarians who can’t get work, but pity too the people who think that Google is all the help they need to get sufficient information for any but the most mundane inquiries.

It has emerged that the woman who with her husband shot 14 people to death in San Bernardino, California had posted her support of violent jihad on social media even before immigrating to the United States.social media terrorism.jpg

As reported in the New York Times over the weekend, U.S. government officials not only missed these postings in checking into the background of Tashfeen Malik, but “there is a debate” inside the Department of Homeland Security about whether it is even appropriate to review social media as part of background checks.

To someone who uses social media every day in order to build a fuller picture of people we look at, this attitude is incomprehensible.

Looking at someone’s public social media is by definition not an invasion of privacy: We are not discussing reviewing confidential email traffic, but instead postings that were intended to be public whether under a pseudonym or not.

Not that prospective immigrants to the U.S. have much of a claim to privacy rights. Even U.S. citizens are subject to searches at the border that would be declared unconstitutional under the 4th Amendment if they were conducted inside the country.

But even for citizens inside the country, social media with a few restrictions is completely fair game and is an indispensable tool for any investigator. The younger the subject, the more we depend on social media to identify, locate and profile people.

The main limits on social media use for lawyers are these: we may not “friend” people under false pretenses, and in some jurisdictions using an agent to “friend” people without having the agent disclose the real reason for the friend request can be deemed unethical.

But for anything on a social media page accessible to anyone else with an account, social media postings are as confidential as a published article, a website or blog without password protection, or the contents of a speech made on a street corner. If Facebook changes its rules and a comment that was once private becomes public, it is the job of the account holder to reclassify the postings they wish to keep private. That goes for U.S. citizens as well as people seeking the privilege of travel or immigration to the U.S.

The New York Times story implies that the reason some officials shy away from social media checks is that these take too long, and that some in the government are considering social media backgrounds for people from high-risk countries.

Good idea, if years late.

One former Homeland Security official told the Times that “We run people against watch lists and that’s how we decided if they get extra screening.”

Fine, but where do we think the compilers of watch lists get their information? If they are not using social media, they are probably missing a ton of good intelligence, right there in the open.

Spokeo and other low-cost or free information sites on the web spew out a lot of garbage, and that can do a lot of harm.spokeo v robbins case.jpg

This blog takes no position on whether a private right of action exists under the Fair Credit Reporting Act even when no concrete harm can be demonstrated from bad information at Spokeo or other sites. This week, the U.S. Supreme Court heard oral arguments in Spokeo v. Robins after a federal appeals panel in the Ninth Circuit decided that a plaintiff had standing to sue Spokeo because it got a bunch of details about him wrong.

The stakes are huge. eBay, Facebook, Google and Yahoo! all filed amicus briefs backing Spokeo.

What interests us about Spokeo and other low-cost or free databases on the web is that their results are often a little bit wrong or completely false, but people who do not deal in information on a daily basis do not know this. Sometimes there’s no excuse. If a person is in charge of populating his LinkedIn or Facebook profile, how can you take that as solid information about the person without independently verifying it?

We’re written about this issue many times, including here: Low Cost Background Checks Ruin Lives, which talks about a case where there was indeed concrete damage to someone mixed up with another person by the information robots at a database.

What we have to explain to clients all the time is that even the better, very expensive databases that we use on a subscription basis make a lot of mistakes too. We explain that:

  • Databases are only as smart as the people entering data into them. If a person’s name is misspelled by data entry clerks, the database won’t be able to tell. That is one of the ways databases mix people up.
  • Databases don’t talk to each other. If database A says that George Adams lives sold his house in Boston last year, database B may say that George Adams lives in Detroit because it never picked up the purchase of the Boston house in the first place. Database C may tell you that Adams owns two houses: one in Detroit and one in Boston.
  • The only way to sort through the mounds of information out there is to verify whatever you can with the public record. If Adams sold his house, go to the Suffolk County, Massachusetts county clerk and find the deed. Do the same for Detroit and figure out what part of the Spokeo record is right and what isn’t.

The most annoying feature of some information sites is the claim that they can conduct “nationwide” criminal background checks for almost no money. We know that is not possible, because just in New York, a search of all county criminal records through the Office of Court Administration costs $68. It’s cheaper in other states, but there is no way we can see that non-law enforcement can do a thorough nationwide search for anything less than $1,000 in court fees alone.

We sometimes like to pay 99 cents to put our own cell phone numbers into some of the Spokeo-like sites. The last time we tried it we were told our phone belonged to someone we had never met hundreds of miles away. It then signed us up for a monthly plan of $19.99, which the anti-fraud section of our bank got removed right away.

Whatever the Supreme Court decides in the Spokeo case won’t change a basic truth: harmed or not by a lot of the information on low-cost or free sites, it’s just not that reliable.

 

Ban the Box isn’t going away, and companies need a strategy to protect themselves.ban the box.jpg

The movement in the U.S. to restrict the kind of information employers can look for in making a hiring decision gathers momentum, this time in New York City. It’s known as Ban the Box because the list of boxes applicants need to check about past events gets steadily smaller.

The news in New York City is that as of this month, companies with four employees or more are not allowed to run a credit check on most applicants. The new rules are analyzed at Norton Rose Fulbright’s Regulation Tomorrow blog here. We’ve written extensively on this issue on this blog (Screening Job Applicants’ Old Test Results are Relevant but Fraud is Off-Limits) and in ALM’s Employment Law Strategist, here.

Stronger ban the box rules can give employers fits. What you are supposed to do if you notice that a prospective applicant has five previous addresses in the past 16 months? This is someone who will be given a lot of important information related to your company. You will want to be able to find this person if anything goes wrong on the job, especially if you need to pursue legal or equitable remedies upon termination.

Our answer to employers is that (once you have a Fair Credit Reporting Act release) you do a proper background check to the full extent of the law using the old fashioned technological miracle known as the telephone. With this, you can speak to people near and far about your applicant. You should speak not only to references on the resume, but more importantly to people not submitted as references.

Former colleagues, former roommates, former landlords are great places to start. In the context of doing a general character check, you can come across lots of great information. An old landlord could tell you your applicant seemed like a great tenant, but since he left bill collectors have been calling weekly to try to find him. You now have the kind of information you needed without to running the credit check.

Does figuring out whom to call and then interviewing them take more time than running a credit check? Of course it does. But in interviewing you can also find out more than a single three-digit credit score. Someone who has an exemplary past with one large default  linked to paying for the hospitalization of a family member is different from a defaulter who has left four angry landlords behind in six years.

For many jobs, an applicant’s credit history should make no difference. For those on which a bad credit report could mean the difference between an offer and a rejection, the extra time to call references both on and off the resume is probably worth the time and expense to get the hiring right.

These are still early days for the scandal engulfing world soccer, but in the indictments and other stories emerging we see three distinct features crucial for most successful investigations.

We have written about all of them, but rarely are they captured so well in one single story so famously told as the one about FIFA.fifa bribery scandal -.jpg

        1. What is a not a matter of public record in one country may be available in another.

A few days after the indictments were made public in New York, the Wall Street Journal reported on Nike’s entanglement in the FIFA probe. Nike is not accused of any wrongdoing, but in this story we get a fascinating look at what would otherwise be a secret contract between Nike and the Brazilian football authorities. How? The contract was made public in a Brazilian legislative inquiry. All that was necessary was for the newspaper to find it and translate it from Portuguese.

We do a lot of investigations that involve U.S. operations in the United Kingdom. Like many countries, the U.K. forces any company doing business there – even private ones – to make public their accounts. Names and addresses of shareholders, directors and lines of business that remain hidden in Delaware or New York come into the hazy sunlight of Great Britain when a company registers there. France also provides sales figures for companies registered in that country, so that if someone claims to be a corporate mogul in Paris you can legitimately ask him why his giant company only recorded 250,000 euros in sales last year.

        2. Human sources are often irreplaceable.

Whatever anyone tells you in the course of an investigation, you will usually need documents of some kind to support the story being told. Those documents could be public or private. In the case of FIFA, it all started with a bunch of leaked documents from people in a position to gather the right information and get it to the right person – in this case the journalist Andrew Jennings. His story is well told by the Washington Post, here.

While investigations are sometimes best served by keeping a low profile, the journalist who started it all deliberately attracted attention to himself to alert potential leakers that he was interested in receiving leaks. At a news conference with FIFA President Sepp Blatter, he asked, “Herr Blatter, have you ever taken a bribe?” A full page ad could not have done a better job.

We always advise our clients that whether or not to “surface” in an investigation is a matter of tactics, and is always a client decision. But if you can afford to talk to people in addition to looking at databases and public records, it can be well worth the trouble. 

        3. Be First and Be Persistent

New investigators may be put off by the fact that there is very little useable material to be found in newspaper  and other media searches. Good investigators take this as the challenge it is. Little coverage can mean there is nothing to be found, or that you will be the first to find it.

Being first carries risk. All wire service journalists know the story of the reporter who, as he was reporting a big scoop, received this worried cable from his desk editor: “You alarmingly alone on this one.” If you’re wrong, the alarm is justified.

But if you conduct your investigation thoroughly and provide proof of what you allege, you are doing your job well. If you’re first, you’re doing it even better.

News this morning of a Federal Trade Commission civil fraud case against four “cancer” charities in Tennessee is a good time to highlight a wonderful investigative tool out there that we have been using for years.charity non profit investigation1.jpg

Based on the fact that they get tax exemptions, charities have to make their tax returns public. Tax returns are something we rarely get to see early on in a case, but the exception is usually when a charity is involved.

We love it when we have to look at a person who may be wealthy and secretive as far as his for-profit businesses work, but who has to open things up a bit if he’s decided to give money away through a tax-exempt vehicle.

Looking at tax returns is easy. We have a free account at Guidestar which lets us see most of the tax returns of U.S. non-profit organizations. These are usually Form 990, but there are other useful forms that accompany the 990 filing.

While the cancer charities alleged this week to be fraudulent had made it on to lists of bad charities compiled by watchdog groups and were the subject of news articles, there would have been no need to wait for others to evaluate the charities if you had had access to the tax returns. The really good news is that unlike the Form 1040 most of us fill out, the 990 is short and straightforward. You don’t need to be an accountant or have TurboTax to understand it.

Take the 2012 return for Cancer Fund for America, one of the organizations the FTC has targetted. This was an endeavor that took in $13 million, but paid out $3 million to independent telemarketers to raise funds and a total of $4 million for “professional fundraising services.” That may be fine, but with four compensated “key employees” in the whole organization and all that money going to independent contractors, why would this organization need to spend $1 million a year in office expenses?

That would be a hefty rent for a small operation in Central London or Madison Avenue in New York, but in Knoxville, Tennessee?

Such is the joy of being able to investigate based on uncomplicated forms written in English, and not Accounting. A million bucks a year for an office for four executives and a huge telemarketer bill to outside contractors may be explainable, but any prospective donor should ask to see photos of the office (and an employee count) before writing that first check.