Court records point to state cover-up in EB-5 fraud at Burke Mountain Resort

Then-Gov. Peter Shumlin had hoped to allay the fears of prospective foreign investors in the state-run EB-5 visa program, which funneled money to the development projects, by bringing in securities regulators to oversee them.

The governor also took steps to secure his relationship with Ariel Quiros, the owner of Jay Peak Resort — and the man federal and state officials would eventually describe as the mastermind of a massive “Ponzi-like scheme” centered around the resort.

On New Year’s Day in 2015, Shumlin and Quiros met privately at the governor’s East Montpelier home, according to information from FBI records that has not previously been disclosed. Quiros later told investigators that he and Shumlin discussed “all of the problems at Jay Peak” that day, including cost overruns and state oversight. Shumlin also sought information about the apparent arrest in China of a Vermont EB-5 Regional Center employee, Quiros told the feds.

The developer told the FBI that he and the governor talked for five hours, according to a new filing in federal court. Shumlin told the same investigators the meeting lasted 20 minutes. The governor recalled that Quiros had been concerned that one of the Northeast Kingdom projects, at Burke Mountain Resort, was “being slowed down” by the state.

The secret Shumlin-Quiros rendezvous, however long it lasted, laid the groundwork for the state’s role in the fraud, according to documents newly released to the public this week. Most of the records were included as exhibits to a motion filed in federal court Wednesday by defense attorneys for former Jay Peak President and CEO Bill Stenger. The FBI records recounting the interviews were filed under seal but quoted from in the motion.

According to the filing, Shumlin and state officials knew from an internal investigation in March 2015 — a year before federal regulators stepped in — that Quiros had stolen tens of millions of dollars from investors in six projects at Jay Peak, a ski area on the Canadian border. A few months later, state regulators had documented how Quiros used the money to buy a Porsche, a Miami restaurant and two luxury condos.

As VTDigger reported at the time, state officials, at the direction of the governor, reinstated the two final projects in an eight-phase development — a biomedical center in Newport and a hotel at Burke Mountain Resort, another ski area in the heart of the Northeast Kingdom.

The documents show that state officials concealed the results of an internal probe of the Northeast Kingdom fraud in 2015. And, in their motion, Stenger’s lawyers make another bombshell claim: that state regulators and commerce officials made false statements to the public, investors, the U.S. Securities and Exchange Commission, and the U.S Citizenship and Immigration Services.

Stenger asks judge to release records implicating state

The new motion filed by Stenger’s attorneys, David Williams and Brooks McArthur, includes 45 supporting records — mostly emails, in addition to the records from the FBI and other documents — showing that, as the lawyers put it, Shumlin and state officials “knowingly facilitated and participated” in defrauding investors in the Burke hotel.

Williams and McArthur assert that the state Department of Financial Regulation approved investor offering documents for Burke that made no mention of the fraud — despite knowing it was taking place. Unsuspecting foreigners continued to invest in the hotel in exchange for green cards. State officials wrested control of the project from Quiros, took money from defrauded investors and made payments to the general contractor for the Burke project.

“It looks like the Shumlin administration was willing to use other people’s money to finish the Burke hotel knowing the other people were going to be out of luck,” Williams told VTDigger in an interview.

Stenger pleaded guilty last month to a felony charge for filing a false document to the federal government. He faces up to five years in prison. Quiros could be sentenced to eight years in jail. Another co-conspirator, William J. Kelly, could also see jail time.

In advance of a sentencing hearing scheduled for early October, Stenger’s lawyers are asking U.S. District Court Judge Geoffrey Crawford to unseal dozens more documents that could further implicate the state. The records surfaced as part of a search of millions of pages of documents by defense counsel.

In a statement responding to the motion, Assistant Attorney General David Groff said, “Let us be clear. We support the release of hundreds of thousands of pages of unredacted documents, which is the vast majority.”

“However, some of these documents should remain sealed because privileges apply to them, including the attorney-client privilege and the work product doctrine,” Groff said.

Shumlin did not respond to a request for comment Wednesday. The U.S. Attorney’s Office for the District of Vermont is not taking a position on the release of records.

Williams and McArthur argue that the records should be made public because Shumlin waived executive privilege, and his general counsel waived attorney-client privilege in interviews with the FBI.

The defense attorneys also cite the crime-fraud exception to attorney-client privilege. They argue that the records filed under seal should be released because “there is probable cause to believe that State officials facilitated and then participated in securities fraud to raise at least $12.5 million between July 2015 and December 2015 in an effort to complete a hotel that was, in DFR Commissioner [Susan] Donegan’s words, at the root of some intense pressure to include economic and political reasons.”

In the motion to unseal dozens of state documents, Williams and McArthur write that the governor, state securities regulators, the commerce agency and the Vermont attorney general’s office engaged in a “two track strategy.” That is, state officials knew one thing and said another.

Many questions remain unanswered because key documents that could further illuminate the state’s complicity remain under seal, including records that describe Shumlin’s questions — and Quiros’ responses — about the apparent arrest of the Vermont EB-5 Regional Center employee in China.

Investigated and ignored

By the time Quiros showed up at Shumlin’s East Montpelier home, the governor had a political problem on his hands. Local contractors working on the Burke Mountain Resort project were owed thousands of dollars in 2014 and walked off the job before winter. Shumlin was getting calls from builders and state representatives.

The state had oversight of the project, which was funded through the federal EB-5 investor visa program, and “the governor could not go anywhere without a contractor saying something,” according to an FBI interview with Shumlin’s former chief of staff, Liz Miller.

Quiros, who owned the property, had not paid contractors for months, even though hundreds of foreign investors, at $500,000 a pop, had poured $450 million into the Northeast Kingdom projects he and Stenger had overseen for eight years.

In August 2014 the music stopped. State officials administering the foreign investor visa program suspected the developers of fraud and shut off the EB-5 “spigot” for the Burke project and a proposed biomedical facility in Newport, according to Williams and McArthur.

To keep his “lavish lifestyle” going, Quiros “depended on new money from investors,” the defense attorneys wrote. When that dried up, he borrowed money against the remaining investor money and successfully obtained a $15 million line of credit from Citibank to pay his taxes. He was in the process of seeking loans from Credit Suisse and Goldman Sachs, according to the court filing.

After the 2015 New Year’s Day meeting, Quiros apparently succeeded in regaining the governor’s ear. He and Kelly, his top adviser, complained to Shumlin in emails about VTDigger’s reporting on financial improprieties at Jay Peak. Shumlin offered to issue a joint press release alleging inaccuracies in the stories. The governor also expressed concern that Susan Donegan, then-commissioner of the Department of Financial Regulation, and Kelly were not getting along.

Shumlin wanted to finish construction of the Burke hotel, and state regulators found a way to do it, Williams and McArthur wrote, despite growing evidence that Quiros had used a Ponzi-like development scheme to pilfer tens of millions of dollars from foreign investors.

In March 2015, then-Deputy Commissioner of Financial Regulation Mike Pieciak and his boss, Donegan, highlighted securities violations at Jay Peak in a briefing with Shumlin, Miller, then-Commerce Secretary Patricia Moulton and Sarah London, the governor’s general counsel. The investigation by Pieciak and Donegan showed Quiros had misused millions of dollars from immigrant investors through the EB-5 program, according to records obtained by Williams and McArthur.

Shumlin, Miller, Moulton and London met with Quiros and Stenger to talk about how to resolve the hold on the Burke and AnCBio projects on March 27, 2015. The goal of the meeting, as Miller put it in an interview with the FBI, was to “unstick things.”

Afterward, Quiros “ducked into a private room” with Shumlin, according to an FBI interview with Moulton that is cited by defense attorneys but was filed under seal. Quiros had brought a manila folder to the meeting, and Moulton “later learned that the file contained pictures Quiros wanted to show to the Governor.” The records do not describe the pictures.

Donegan met with Shumlin privately and disagreed with him about how to proceed. Afterward, the governor told securities regulators to lift the freeze on Burke and find a way to finish the hotel, documents show. A month later, Donegan tried to stop the projects by describing the securities violations at Jay Peak in a meeting with Miller and London. Donegan suggested that the state pursue receivership, asset seizure or a court injunction.

In May, Pieciak, who was in charge of the state probe of the Jay Peak projects, asked the FBI to investigate possible violations of securities law, self-dealing and misuse of investor funds related to the Jay Peak, AnC Bio and Burke projects.

Donegan and Pieciak discovered the full extent of the scheme in the summer of 2015, Williams and Kelly wrote. The regulators produced a “spaghetti map” of the thousands of bank transactions Quiros used to cover up the fraud. They also drafted a lawsuit against the developers in the summer of 2015 with “an army of attorneys” from the state Attorney General’s Office. In a slideshow for top officials presented to former Attorney General Bill Sorrell and Shumlin in August and September, respectively, Pieciak said “the immigration status of [every Burke and AnC Bio] investor would likely be negated.”

The state regulators, who were “charged with insuring compliance with state and federal securities law,” chose not to disclose that information in offering documents provided to investors.

Ultimately, in response to pressure from the governor and requests from the Securities and Exchange Commission, Donegan and Pieciak continued investigating the fraud and at the same time collected an additional $43 million from 86 investors in the Burke hotel.

Instead of stopping the Ponzi-like scheme, the state kept the flow of investor money coming for the construction of the Burke hotel, according to Williams and McArthur.

Pieciak also misled the Securities and Exchange Commission in communications about Burke, according to Williams and McArthur.

Through a spokesperson, Pieciak — who is now commissioner of the Department of Financial Regulation — declined an interview for this story and referred VTDigger to the Vermont Attorney General’s Office.

Reached by phone, Donegan declined to comment.

Stenger’s attorneys assert that the governor’s office and state officials concealed what they knew from the public for more than a year, until the Securities and Exchange Commission brought 52 counts of securities fraud against Stenger and Quiros in April 2016.

Included in the filing by Williams and McArthur are two affidavits authored by Pieciak. One denies there was any misuse of funds at Burke. The other lists amounts from other investor projects that were funneled into the hotel development. The affidavit that omitted the comingling of funds was submitted in the state’s lawsuit against Quiros and Stenger in April 2016 and was later used by the state in response to a request for information from U.S. Citizenship and Immigration Services.

In 2018, Pieciak told federal investigators that the Burke project was “fundamentally different from Jay Peak’s other EB-5 projects,” Williams and McArthur wrote. The now-commissioner told the feds that the Burke project did not have the massive co-mingling and redirection of funds, as was the case in AnC Bio Vermont, according to an FBI interview cited by Stenger’s defense attorneys that is under seal.

Burke was the last project in a $450 million-plus state-approved spending spree that came to a halt in April 2016 when the Securities and Exchange Commission lawsuit charged Quiros and Stenger with misusing nearly half the money. It was the largest fraud in the history of the EB-5 program.

In all, 119 people invested $60 million in the Burke project. None of them have gotten their money back, and their immigration statuses remain in limbo.

The motion filed by Williams and McArthur mirrors a new complaint against the state filed last month in federal court by seven defrauded Burke investors.

Russell Barr and Chandler Matson of Barr Law Group, who represent the Burke investors, say the state’s misuse of plaintiffs’ funds represents an unconstitutional “government taking” without “just compensation.”

“State of Vermont officials were absolutely aware of the Ponzi-scheme, they were absolutely aware that the investors’ money was going to be lost, and they were absolutely aware of the dire immigration consequences that awaited these immigrants,” Barr wrote in an email to VTDigger.

The actions of state officials and their “total disregard for these people’s lives,” Barr wrote, “is a disgrace.”

Judge Crawford is expected to rule on the unsealing of records in the Stenger case before sentencing in early October.

It is also possible that the judge, who has deep knowledge of the complexities of the Jay Peak fraud, could take up the Burke investor case.