John McClaughry: Early lessons from Jay Peak scandal


The "Jay Peak EB-5 scandal" is in full bloom. While it's too early to pass judgment on all of the parties involved, there are some emerging lessons to be learned.

In 1990 Congress created the EB-5 Program to give an incentive to foreign investors to invest in job-creating American enterprises. In return for a $1 million investment, the investor and his immediate family can receive a two- year legal resident permit ("green card"). If by then the required ten new jobs were created, the temporary card would be made permanent.

Two years later Congress authorized the Regional Center Program. In approved areas the investment was reduced to $500,000. Vermont state government administers the nation's only statewide Regional Center. Sen. Patrick Leahy, the longtime leading champion of the program, told the Senate in June 2015 that "the state-run Vermont Regional Center continues to attract substantial capital investment and also provides unparalleled oversight of EB-5 projects."

The shining star of the Vermont Regional Center has been Jay Peak. After two early rounds of EB-5 financing created the water park and hotel at Jay Peak, on September 28, 2012 Jay Peak president Bill Stenger and his new partner, Ariel Quiros, announced an enormous expansion of EB-5 financing. It consisted of more Jay Peak facilities, two Newport manufacturing plants, a Coventry airport expansion, a Newport hotel and conference center, and a large new Burke Mountain hotel. The pair projected 5,000 construction jobs plus 5,000 more permanent jobs in ten years, financed with $500 million in EB-5 investor money.

On April 14 the US Securities and Exchange Commission filed a devastating 52-count civil complaint in the U.S. District Court in Miami, where Quiros does business. The crux of the complaint is the allegation that Quiros illegally diverted investor funds earmarked for a specific project into his "personal piggy bank" for all sorts of unauthorized purposes, including personal enrichment.

The complaint names Stenger, who the SEC says "recklessly ceded control" over the investor funds to Quiros in Miami, as the "facilitator" of Quiros' misdeeds, but he is not charged with converting investor funds to his personal benefit. This news is shocking to many Northeast Kingdom residents (including me), who held the likable Stenger in very high regard for his commitment to reviving the Kingdom's sluggish economy. The common question locally is, "How could a smart guy like Bill have given the cash register keys away to that guy from Miami?" That question has not yet been answered.

Without making judgments about wrongdoing at this stage, here are a few useful conclusions to emerge from this blowup.

First, the $122 million invested in now-completed and profitable projects – Jay Peak ski area, water park, and hotel – are a great boon to the Kingdom's economy. Regardless of the outcome of the current legal actions, the upgraded Burke Mountain with its $50 million hotel and conference building will continue as an economic plus, albeit doubtless under new management.

Second, Leahy's idea of the U.S. government giving legal residence to foreigners in return for their passive investments in government-approved commercial projects certainly has its attractions. But Stenger himself has said publicly that without the EB-5 "free money", he could never have attracted the investment capital to launch the NEK Initiative. Asking "why not?" raises a red flag.

Third, the state-operated Regional Center was given contradictory tasks: to promote EB-5 investment, and to regulate EB-5 projects to protect investors. As governors Douglas and Shumlin are now painfully aware, these tasks can conflict. Shumlin's relocation of Regional Center financial oversight to the professionally competent Department of Financial Regulation in December 2014, though belated, was a sound step to resolve this conflict.

Fourth, the political contributions from Quiros and Stenger to support Democratic politicians illustrate what used to be called "honest graft". Unlike straight out graft, which is illegal, the politicians didn't pocket the contributions. But in return for conferring their valuable blessing on an enterprise, they expected political support. The beneficiary of a governor's crucial gift of credibility would find it very awkward indeed to decline the request.

Fifth, as the Jay Peak story slowly developed, and then suddenly broke onto the front page, the Vermont media has done a superlative job in getting the facts into public view – with more doubtless to come. Paul Heintz of Seven Days, Anne Galloway and Mark Johnson of Vermont Digger, Amy Ash Nixon of the Caledonian-Record and perhaps others ought to be in line for prestigious professional awards.

Finally – for now – this episode should focus attention on the difficulties of attracting significant investment to the Kingdom and to Vermont generally.

Leahy's EB-5 program brought in funds that would never have materialized, from would-be immigrants willing to gamble half a million dollars on a highly touted enterprise run somewhere else by people they didn't really know. Often these enterprises did well, and the investors were happy.

But a more sound, responsible way to grow enterprises, create jobs, and bring in tax revenue is to create an attractive business climate. That means modest and competitive tax rates; fair, reasonable and swift regulation; a minimum of intrusive government mandates on business; and a popular culture that celebrates enterprise and wealth creation. On these criteria Vermont habitually ranks near the bottom.

— John McClaughry is vice president of the Ethan Allen Institute


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