These disciplinary actions are markedly different from other recent cases the SEC has brought in the EB-5 space, which have focused on those investment-for-visa opportunities that the agency says are actually multimillion-dollar frauds and Ponzi-like schemes.
Instead, the latest crop of cases targets attorneys who arranged for EB-5 investments without registering as a broker-dealer with the SEC, sending a message to a professional class that services this cash-flush sector: Don't let the promise of finder's fees make you lose sight of the rules of the road.
"Collectively, it's a message to the industry that regulators are watching and they will demand compliance with securities regulations," said Adam Sisitsky, a member of Mintz Levin Cohn Ferris Glovsky & Popeo PC.
The federal government's Immigrant Investor Program is designed to reward EB-5 visas to foreigners who pony up $1 million — or even just $500,000 under certain circumstances — to invest in commercial projects that create or maintain at least 10 full-time jobs in the United States.
A number of these visas are set aside for so-called regional centers, which offer overseas investors limited partnerships in local projects. To draw investors to them, many centers pay out finders' fees to anyone who successfully steers investments their way, the SEC said.
The SEC said this is where the attorneys it sanctioned went wrong. As immigration attorneys, they steered wealthy clients to particular regional centers, took steps to effectuate transactions and then collected a commission for each one who signed up, the agency said. The transaction-based compensation required them to register as broker-dealers, but none of the six attorneys who settled with the agency had done so, the SEC said.
Nor had a seventh immigration attorney who did not settle with the SEC, but instead was sued in California federal court. He was accused of fraud for having allegedly failed to disclose the more than $1 million in commissions he was paid, a violation of his ethical, legal and fiduciary duties to his clients, the SEC said.
Attorneys said the cases spotlight the risks that some immigration lawyers faced when they decided to take advantage of the booming interest in EB-5 investment opportunities without understanding the regulatory requirements of doing so.
"They need to pick their sweet spot of competency and not go off their areas of expertise," said Angelo A. Paparelli, partner at Seyfarth Shaw LLP. "When there is a gold rush of money and opportunity, sometimes people's judgment gets dazzled a bit."
The SEC has previously sanctioned nonlawyers for acting as unregistered brokers in EB-5 deals. But going after several lawyers at once for the same alleged failing is one way the agency can put its foot down about what some attorneys say is an obvious conflict of interest of representing both an immigrant investors and working for a regional center.
"This is one area where they could step in and say, 'We're not going to tolerate these gatekeepers from playing a role in the industry that they shouldn't be playing,'" Sisitsky said.
The SEC did not say that immigration lawyers shouldn't be earning commissions by connecting investor clients with regional centers. But the burdens of registering as a broker-dealer likely will steer many away from the business of finding investors.
Likewise, the cost of Monday's enforcement actions will be high for those attorneys named in them. While some of those who settled with the SEC were only required to disgorge their allegedly ill-gotten commissions and weren't barred from appearing before the commission, the attorneys undoubtedly will face other headaches, said Douglas Hauer of Mintz Levin, including potential sanctions by their local bar associations, lost clientele and potential investor lawsuits.
"These findings are only the tip of iceberg," Hauer said.
Representatives of six attorneys named by the SEC either declined to comment or didn't return calls. An attorney for one settling respondent noted that his client, Roger Bernstein, was not accused of any fraud by the SEC and said the commissions he was paid were fully disclosed. The attorneys who settled with the SEC did so without admitting or denying wrongdoing.
While the SEC sent a message with Monday's case, immigration attorneys said it was one they had been expecting to hear for some time. Dawn Lurie of Polsinelli LLP said attorneys for years have heard warnings about the agency probing lawyers acting as unregistered brokers.
But, reading through the settlements, Lurie said she was left wondering why no regional centers or people who made payments to the lawyers were named as well.
The SEC said its investigation into the matter is continuing, though it did not provide any specifics.
Meanwhile, the legislation authorizing regional centers, which draw in so much EB-5 investor money, is set to expire on Friday. With a bipartisan push underway in Congress, attorneys said they anticipate the program will be reauthorized, albeit with even stronger safeguards on how it is regulated.
If that is the case, then Monday's actions may just be a prelude of what is to come in the policing of EB-5 investments.
"This is just the beginning of an intensified enforcement effort by the federal government," Paparelli said.
--Editing by Katherine Rautenberg and Philip Shea.
