SEC Suffers One of its First Major Losses in EB-5 Realm

Earlier this month, the Federal District Court for the Northern District of Illinois denied the SEC’s request for a preliminary injunction against Seyed Taher Kameli and entities he controlled to (i) stop them from having any further involvement in the EB-5 program and (ii) to halt activities that the SEC alleged were in violation of securities laws. This is one of the first significant losses that the SEC has suffered in a EB-5 case that it has brought before a Court and may be a sign that the SEC is overplaying its hand and has become overzealous in its delve into the EB-5 realm.

The SEC alleged that the defendants committed numerous violations of the securities laws in their handling of the EB-5 Funds by (1) charging several of the Funds and Projects over $4 million in undisclosed fees; (2) using approximately $16 million of investors’ funds to engage in securities trading; (3) using money of one EB-5 project as collateral for a line of credit, which they then used for their own benefit and the defendants’ other EB-5 projects; and (4) making an undisclosed profit of roughly $1 million by acquiring parcels of land and selling them at a higher price to several of the defendants’ EB-5 projects.

Regarding the first allegation, the Court said that the $4 million in undisclosed fees were for development services actually rendered by the defendants and that the SEC did not make a persuasive case that the failure to disclose them in the PPM were material or even intentional. In addition, the Court found that the defendants likely made adequate disclosures of its potential conflicts of interest.

On the second allegation, the defendants admitted that investors’ funds were indeed used to engage in securities trading, but the Court accepted the defendants’ argument that the SEC was taking the activities out of context and imputing nefarious intent where it did not exist. Kameli stated that in 2011, banks began to close accounts in which EB-5 investors funds were held because of OFAC regulations pertaining to investments from Iran. In addition, FDIC insurance that had previously covered an unlimited amount of funds (in response to the financial crisis) was being reduced to $250,000 by the end of 2012. Thus Kameli was limited on where he could deposit the funds, but Morgan Stanley and UBS agreed to keep the EB-5 funds on the condition that the money be placed in brokerage accounts. Kameli states that the accounts were managed by professional financial advisors and invested in low-risk securities. Further, the defendants cited language that demonstrated that the activities were permitted by the operating agreement. The Court found the defendants’ argument on this issue persuasive and concluded that the SEC failed to demonstrate that it was likely to prevail on this issue.

On the third allegation regarding the alleged improper use of a line of credit, the defendant cited a provision signed by investors that said “The Parties hereto consent to and agree that the Fund Manager [CFIG] has the right to use the funds held in the Investor Holdings Fund as collateral for the Fund Manager to secure a line of credit to be used for any expense the Fund Manager deems proper.” This provision was in bold, had its own signature line, and had a checkbox were the EB-5 investors could choose “YES” or “NO.” The Court found that this provision that the EB-5 investors agreed to gave the defendants very significant leeway in the use of the line of credit. But the Court did also say there were limits on this use of discretion and purely personal expenses would likely not be permitted. As the SEC was able to cite instances of purely personal expenses such as a cruise fare and college tuition payments, the Court said the SEC was likely to prevail with respect to those certain, limited expenses.

On the fourth allegation, the Court agreed with the defendants that the SEC again is providing an incomplete picture regarding the undisclosed profits totaling roughly $1 million that the defendants made by acquiring parcels of land and selling them at a higher price to several of the defendants’ EB-5 projects. Defendants stated that they purchased the land before any of the Florida EB-5 Funds had even been established. In a declaration, Kameli asserted that he purchased the land when the market was down, and that when he later had it appraised, the land for each Project was valued at above $1 million. Thus, Kameli stated, by selling the land to the Projects for $1 million, he sold the land for less than its market price. Further, the $1 million price that he sold the land to each Project for was the amount that had been listed for land costs in the Projects’ Business Plans. As a result, the Court found that the SEC failed to make a substantial showing that it is likely to succeed on its claims regarding the land purchases.

In all, the Court rejected all of the SEC’s arguments other than with respect to those regarding the use of a line of credit for certain personal expenses. However, even on this issue, the Court decided that the SEC failed to demonstrate that the defendants were likely to repeat the offense now that it was on notice and further creditors were now very unlikely to allow the defendants to do so even if they wanted to. The Court also noted that the defendants had been wholly cooperative with the SEC. In light of its analysis, the Court decided that the SEC’s request for a preliminary injunction was unnecessary. In reading the Court’s analysis, one cannot help but get the feeling that the SEC was throwing mud against the defendant and just hoping something would stick.

By Omar Hakim, Esq., attorney at Mona Shah & Associates
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