The Securities and Exchange Commission (“SEC”) appears to be stepping up enforcement in the EB-5 area. On July 6, 2015, the SEC filed a complaint and a separate cease and desist order against the perpetrators of a Ponzi scheme targeting EB-5 investors. These enforcement actions highlight the perils that EB-5 investors face when dealing with unregistered brokers and investing in unregistered private placements. EB-5 investors should be sure to conduct thorough due diligence before investing.

The SEC complaint alleges that an oil and gas company and its CEO ran a Ponzi scheme that targeted Asian investors, including some solicited as part of the EB-5 program. According to the SEC, the CEO set up a number of investment funds (the “Luca Funds”) and engaged in a fraudulent scheme targeting the Chinese American community and Asian EB-5 investors.  Specific to the EB-5 program, the CEO and the CEO’s “chief fundraiser” recruited investors through seminars in China where, the SEC claims, they distributed brochures that “were unfounded and inconsistent with the actual performance” of the Luca Funds. Further the SEC alleges that the CEO raised approximately $8 million by representing in a private placement memorandum given to EB-5 investors that their money would be used to make fully secure loans that would finance the development costs for eight oil and gas drilling projects.  In fact, according to the SEC, the entity receiving the money, which the CEO controlled, had no realistic possibility of ever repaying the loans, and the CEO diverted the funds for personal gain.

The SEC’s complaint alleges the CEO violated of Section 17(a) of the Securities Act, and Sections 206(1), 206(2) and 206(4) of the Investment Advisors Act, by making material misstatements to investors in the Luca Funds.  The complaint further alleges that the CEO violated the registration provision of Sections 5(a) and 5(c) of the Securities Act through the unregistered offer and sale of securities in the Luca Funds. Additionally, the SEC claims that the CEO’s chief fundraisers violated Section 15(a) of the Exchange Act “by receiving hundreds of thousands of dollars in commissions for soliciting investment in the Luca Funds without being registered broker-dealers.”

In connection with the complaint, the SEC issued a cease and desist order to another individual who, according to the SEC, solicited investments from Japanese investors in furtherance the Ponzi scheme in violation of Section 15(a) of the Exchange Act. The order requires the solicitor to disgorge the commissions that he earned, totaling more than $1.1 million.