The Securities and Exchange Commission recently charged a fund-of-funds manager and its principals for allowing redemptions for insiders and preferred investors.
In addition, the New Jersey Bureau of Securities revoked the agent registration of Matthew Schulman, and Vermont ordered Raymond James to pay nearly $1.5 million over violations involving the EB-5 program.
Raymond James Ordered to Pay $1.45 Million to Vermont in EB-5 Case
The Securities Division of the Vermont Department of Financial Regulation has ordered Raymond James & Associates to pay penalties totaling $1.45 million, after the DFR found that a Raymond James registered representative allowed misuse of investor funds in a case involving the EB-5 program, which allows foreign investors to pursue a legal path to permanent residency in the U.S. through the investment of at least $500,000 in projects that create a certain number of jobs in an economically targeted area, often a rural or economically depressed area.
According to the agency, starting in 2006, Bill Stenger sold limited partnership interests in eight Vermont limited partnerships tied to EB-5 construction projects to foreign investors, who placed their funds into an escrow account in a Vermont bank pending U.S. Customs and Immigration Services approval. Upon approval, the funds were released to the partnership and the investor became a limited partner in a specific limited partnership.
From 2008 through 2014, Ariel Quiros and Stenger used bank accounts, as well as brokerage and margin accounts at RJA, to transfer the limited partnership funds to and from different partnerships or entities. Throughout this period, a registered representative was assigned to the RJA accounts.
In or about June 2008, Quiros had the representative open several brokerage accounts and at least four margin accounts at RJA for Quiros, several limited partnerships under his financial control and other entities connected with the Jay Peak ski resort in Vermont. RJA failed to obtain adequate documentation establishing Quiros’ authority to act on behalf of the limited partnerships.
The representative knew the firm accounts would be funded by foreign investors’ purchases of limited partnership interests as their participation in Vermont-based EB-5 projects, most of which were engaged in real estate development at either Jay Peak or Burke Mountain ski area. But the representative allowed Quiros and the limited partnerships under his financial control to set up margin accounts collateralized by short-term Treasury bills purchased by the limited partnerships, with funds derived from the EB-5 program.
On June 23, 2008, the representative allowed Quiros to direct the transfer of $13 million in limited partnership funds to purchase the Jay Peak ski resort, in spite of written instructions to the contrary. In connection with the payment of construction invoices as the projects moved forward, partnership funds from multiple limited partnerships were transferred among multiple firm accounts.
The representative knew, or should have known, that some of those transfers had no legitimate purpose, and that greater due diligence would be appropriate, but none was exercised. In addition, the representative ignored written supervisory procedures regarding funds transfers, prohibiting text message communications with clients without prior supervisory approval and cross-collateralization of margin loans.
The RJA anti-money laundering department identified some funds transfers through multiple Quiros-controlled accounts without apparent business purpose and questioned why RJA continued to do business with Quiros, but the Quiros-controlled accounts were not closed at RJA until November 2014.
On May 5, RJA executed an acceptance, waiver and consent agreement with FINRA arising from the failure to establish and implement adequate AML controls. The registered representative and his supervisor have withdrawn their registrations as broker-dealer agents in Vermont, and the consent order provides for the penalty, of which $1.25 million represents an administrative penalty and the remaining $200,000 is to reimburse the DFR for its costs.
SEC Charges Fund-of-Funds Manager, Principals With Fraud