The Securities and Exchange Commission (SEC) has just published three new decisions in connection with administrative proceedings against two well known immigration lawyers, as well as against a third lawyer. One party has allegedly earned $450,000 in commissions from one EB-5 Offeror alone. This enforcement is not surprising. Last year, we saw several immigration lawyers subject to the same proceedings and sanctions. The allegations are resoundingly familiar: Violation of Section 15(a)(1) of the Securities Exchange Act of 1934 (the "Exchange Act"). We expect even more SEC enforcement activity in this space. Why is the SEC targeting immigration lawyers? What implications are there for all parties in an EB-5 transaction and to the industry as a whole when an EB-5 Offeror pays finder's fees to lawyers?
Immigration lawyers are EB-5 gatekeepers
The SEC has a strong interest in prosecuting civil violations of securities laws by gatekeepers of securities markets.
Immigration lawyers are viewed as gatekeepers to the EB-5 Program. What is a gatekeeper? In the securities law context, a gatekeeper is a professional that holds a position of trust who should be looking out for the interests of a specific securities market. The idea is that the integrity of markets is kept in check by professionals charged with executing their responsibilities. Accountants, lawyers and auditors are often gatekeepers of the securities marketplace.
The SEC has the objective of keeping gatekeepers accountable. The SEC expects gatekeepers -- be they accountants, lawyers or auditors to name a few -- to raise red flags when there are visible issues and problems in an offering of securities. This maintains the integrity of markets and protects investors. When gatekeepers violate securities laws or engage in conduct that turns the concept of protecting investors on its head, the SEC becomes very interested in holding those individuals accountable. The idea here is that gatekeepers are front-line protectors of a marketplace. Immigration lawyers in the EB-5 industry have often taken on this role. They are often the first to be able to spot an irregularity in an EB-5 transaction. And immigration lawyers often comment on or assist with drafting documents prepared in connection with an EB-5 offering.
The SEC likes to hold out gatekeeper-violators of securities laws as examples for an industry. This is no consolation for the attorneys facing sanctions and disgorgement, but it does explain to some degree how the SEC prioritizes investigations and why immigration lawyers are of interest. Attorneys with high profiles in the EB-5 industry who are involved in producing investors for regional centers or who engage in marketing should be concerned. And so should the attorney who takes a finder's fee from a regional center one single time. The SEC also pursues "minor violations" particularly by gatekeepers to set an example for an industry. One of the attorneys in today's proceedings had received $37,500 in finder's fees. This was sufficient for the SEC to pursue administrative proceedings and sanctions.
Transaction-based compensation is often not difficult for the SEC to trace and later prove
The DNA of these three recent cases is virtually identical, with the SEC finding that each of the attorneys earned transaction-based compensation for steering clients to specific EB-5 regional center projects. The SEC ordered disgorgement of unlawfully earned commissions along with interest in all three cases. One of the three attorneys also incurred a civil monetary penalty of $30,000. He is alleged to have had commissions transferred to a foreign bank account despite the fact that his business is U.S. based. In the case of one of the other attorneys, he had a "Referral Services Agreement" in place with the EB-5 regional center that paid him compensation. This means that these attorneys left their fingerprints in very identifiable places, which SEC investigators love.
The SEC's message with these latest cases is that the Commission is looking carefully at immigration lawyers who appear to have acted as aggregators for EB-5 regional centers. The common strand in these cases is payment of transaction-based compensation. Recommending a regional center, effectuating a purchase of an EB-5 limited partnership interest, and then receiving a commission from an EB-5 Offeror are factors that together may place an individual squarely into the sphere of needing to register as a broker-dealer. Had these lawyers not received transaction-based compensation from regional centers, the SEC would have had a tough time sustaining allegations and imposing any sanctions.
EB-5 Offerors/Issuers face risks in paying transaction-based compensation to unregistered finders
Unlawful finder's fees are not risky business for immigration lawyers alone. The regional centers and issuers that engage in payment of transaction-based compensation to unregistered individuals also assume both financial and reputational risks that can come back years later to haunt them. Specifically, the payment of finder's fees to individuals deemed to be unregistered broker-dealers could result, in certain instances, in investors asserting rescission claims against an issuer. Such claims, once made, can open a Pandora's Box of other issues relating to securities fraud. The long-term reputational risks can also be substantial. Senior lenders may not agree to underwrite loans to issuers with exposure to later claims of securities law violations. And future financings can be undermined because of EB-5 capital that is tainted. If you are a regional center or issuer of an EB-5 security, now is a good time to audit your business practices to ensure that you are in compliance with securities laws. Close any gaps in understanding on compliance with qualified securities counsel. And work with counsel where necessary to decide whether remedial action should be taken in any given situation where there has been a violation.
Civil violations of the securities law undermine the integrity of the EB-5 Program
Prosecuting and sanctioning immigration lawyers has other ramifications for the EB-5 industry. As violations of the securities laws continue to be uncovered and exposed by the SEC, investors will also lose confidence in the EB-5 Program and its participants. Immigration lawyers --- the very professionals that investors trust to see them over the finish line to permanent residence --- should not come to be viewed as brokers or aggregators for regional center projects. This undermines the independence that a lawyer should have when looking out for a client's interests.
Although not a visible issue in the proceedings before the SEC, one wonders whether and how disclosures of the commissions were made to clients of the law firms who were the subject of today's decisions.
Part of EB-5 maturing is making the industry and its participants more accountable on all fronts. Adopting more normative practices that are compliant and fair to investors is a first step. Until we get there, immigration lawyers who have accepted finder's fees (no matter the amount) should be concerned about SEC sanctions and professional liability claims. And the SEC should continue to be concerned that EB-5 cannot self-regulate effectively as an industry-- at least not quite yet.