February 19, 2019

February 18, 2019

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SEC Freezes Assets of EB-5 Asset Manager LLC and Alleged Fraudster Lin Zhong

For alleged EB-5 fraudster Lin Zhong there is a cold winter ahead. A deep freeze. As we expected when news of the case recently broke, the Securities and Exchange Commission (SEC) obtained a court order freezing Zhong’s assets as well as those of her company EB-5 Asset Manager LLC. It is alleged that under the guise of the EB-5 regional center program, Zhong raised at least $8.5 million for EB-5 projects.  Zhong is accused of diverting nearly $1 million to purchase luxury personal items such as a boat, a BMW and a Mercedes. Zhong is the latest alleged EB-5 fraudster to be stopped in her tracks by the SEC.

It is clear that the SEC is now focused on prosecuting EB-5 market participants and issuers who violate the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The allegations here are similar to those alleged in recent cases – the SEC has alleged material misrepresentations and omissions to investors by Zhong.  According to the SEC’s website and recent press release, the Commission also obtained a court order appointing a receiver to administer and manage the business affairs and assets of the company and its subsidiaries for the protection of investors.

What does all of this mean to participants in the EB-5 industry?  In means that the SEC is watching the EB-5 marketplace closely so all participants need to be sure they are taking the necessary steps to protect themselves in these transactions.  There are a number of issues that are common to all in the industry, namely:

  • Deficient or vague disclosures to investors about management fees paid to general partners in deals

  • Failure of a general partner to fulfill fiduciary duties to EB-5 limited partners

  • Comingling EB-5 funds of investors in different projects, or paying back existing EB-5 investors with recently acquire funds meant for new EB-5 projects

  • Undisclosed self-dealing such as land sales between related parties

  • Substandard accounting practices and financial controls

  • Lack of data privacy and cyber-security policies.

The SEC’s willingness to commit resources to EB-5 related investigations and litigation is an indicator that at the Commission there is more awareness, now than ever before, about the EB-5 program. Enforcement is on the rise, so all market participants need to be aware of these issues and take steps to protect themselves. Do not wait for the SEC to come knocking on your door. You should take steps NOW to ensure that your EB-5 regional center has the necessary protective compliance policies in place.

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About this Author

Adam Sisitsky, Mintz Leving Law Firm, Boston, Corporate and Litigation Law Attorney
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Adam is an experienced trial attorney and litigator whose practice encompasses a wide range of matters focusing on business and securities litigation, internal investigations, and government enforcement actions. Adam represents corporations, officers, directors, accountants, and other individuals in SEC investigations and enforcement proceedings, as well as in civil litigation. He routinely counsels public and private companies and others in matters involving compliance issues, including matters arising under the Foreign Corrupt Practices Act (FCPA).

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Francis J. Earley, Mintz Levin, Complex Commercial Disputes Attorney, Class Action Suits Lawyer,
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Frank focuses on securities and on complex commercial disputes. His practice includes representing both public and private companies and their directors and officers in class action and derivative suits including mergers and acquisitions and other transactions that implicate directors' and officers' fiduciary duties. Frank also represents corporations, officers, directors, accountants, and other individuals in SEC investigations and enforcement proceedings.

Frank has significant jury and nonjury trial experience in federal court. He has litigated in various state and federal courts throughout the country and has arbitrated extensively before the Financial Industry Regulatory Agency (FINRA, formerly NASD, and the NYSE) as well as the American Arbitration Association and JAMS. He also has mediated a number of disputes before those same bodies. 

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Douglas Hauer, Corporate Immigration Attorney, Government Investigations, Mintz Levin Law
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Doug is a Member in the firm's Corporate & Securities Practice and Immigration Practice. On the corporate side, he focuses on private offerings and related securities work. Doug serves as counsel to developers and businesses seeking capital through the EB-5 investor visa program. He also counsels lenders, private equity firms, and EB-5 Regional Centers on all aspects of EB-5 financing. In the immigration law space, Doug represents corporate, institutional, and individual clients in routine and complex immigration matters. He has in-depth...

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