Banking and Finance

SEC Charged Los Angeles-Based EB-5 Lawyers with Securities Fraud

Los Angeles-based EB-5 attorney Justin Moongyu Lee, and his wife Rebecca Taewon Lee and his law firm partner Thomas Edward Kent were charged by the Securities and Exchange Commission today with securities fraud.

Misrepresentation to the Investors

The Lees and Mr. Kent raised nearly $11.5 million from 23 investors seeking to participate in the EB-5 program to invest in an ethanol production plant they would build and operate in Ulysses, Kansas. However, investors’ money was misappropriated for other uses instead of the ethanol plant project.  The plant was never built and the promised jobs never created, yet the Lees and Kent continued to misrepresent to investors that the project was ongoing.

The SEC alleges the Lees and Kent violated the anti-fraud provisions of the securities law, in particular, Sections 17(a)(1), (2), and (3) of the Securities Act of 1933 and Section 10(b) of the Securities and Exchange Act of 1934 as well as Rule 10b-5(a) and (c). Sections 17(a) address the securities fraud in interstate commerce because the Lees are based in California yet the project is located in Kansas.

Section 17(a) states:

“it shall be unlawful for any person in the offer or sale of any securities (including security-based swaps) or any security-based swap agreement by the use of any means or instruments of transportation or communication in interstate commerce or by use of the mails, directly or indirectly—

(1) to employ any device, scheme, or artifice to defraud, or

(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or

(3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.”

EB-5 Attorneys Owned the Regional Center and Submitted False Documents to USCIS

Justin Lee and Kent have owned an EB-5 regional center since 2006 and they raised EB-5 capital to fund their own project. The regional center was approved by USCIS and Justine Lee and Kent claimed that the center would be “substantial economic benefit” and “thousands” of new jobs for this area in southwest Kansas.  The regional center was approved. However, by mid-2008, construction of an ethanol plant at the site was no longer economically feasible, and the Lees and Kent concealed their failure to generate the jobs required by the EB-5 program by submitting false documents to the USCIS. 

Meantime, the SEC alleges, when Justin Lee was running low on cash and having difficulty obtaining financing, he took money out of investor escrow accounts without their knowledge prior to the approval of an investor’s application for residency.  Lee and his wife subsequently misused several million dollars raised from the ethanol plant investors for other undisclosed purposes such as financing an iron ore project in the Philippines and repaying investors in other unrelated offerings. Despite the Lees efforts to repay the investors, their conducts violated the broad anti-fraud provisions in the securities law. They directly employ a scheme to defraud the investors.

In a parallel action, the U.S. Attorney’s Office for the Central District of California today announced criminal charges against Justin Lee.

“These immigration lawyers exploited a desire by foreign investors to participate in a program that would not only generate them a positive investment return, but also provide them a path to legal residency in the United States,” said Michele Wein Layne, Regional Director of the SEC’s Los Angeles office.  “Long after all construction had ceased, they continued to falsely tell investors that they were building the plant.”

Direct Selling Efforts and Seminars in the US

According to the SEC’s complaint, the Lees set up investor seminars in Los Angeles at which the purported ethanol plant project was the main part of the presentation despite the halt of construction in 2008.  Kent, who visited the site frequently in 2008 and 2009 and knew no construction, was taking place, also participated in the seminars,.  Investors continued to be misled that the proceeds from their investment were being used to construct an ethanol plant.  In particular, the business plan updated in June 2010 and distributed to investors falsely represented that construction was “ongoing” and the plant would be in operation before November 2011, despite the fact that the plant construction was ceased since mid-2008.

It’s interesting that the SEC complaints did not include broker/dealer liabilities or the EB-5 registration exemptions Regulation D and Regulation S.

Project Owners, Regional Center Owners and Investors lawyers

There is an obvious and stark conflict of interest in this case.  Mr. Lee and Mr. Kent are EB-5 lawyers who had made direct selling efforts to solicit investors on US soil.  They are EB-5 lawyers who represented the investor. They are also the owners of a regional center and project owners who raised capital from the same group of investors they represented.  As project owners, they participated primarily in marketing activities on US soil.  

This case is another example of collaborating efforts among multiple government agencies including the SEC, USCIS, U.S. Attorney’s Office for the Central District of California, Federal Bureau of Investigation, U.S. Department of Homeland Security’s Immigration and Customs Enforcement (ICE), Internal Revenue Service, and State Bar of California. 

 Mona Shah is the principal of Mona Shah & Associates in New York City. The firm has assisted many Regional Centers and Investors in navigating this complex, nuanced and constantly changing area of immigration law. Mona has more than 18 years of legal experience in immigration law and extensive knowledge in EB-5 law. Mona's substantial litigation background includes her representation of clients in both state and federal courts. She has handled complex immigration law appeals before the US Circuit Courts of Appeal nationwide.  Before coming to the US, Mona was a crown prosecutor in the UK. Mona has authored and published numerous articles and has spoken extensively both in the US and overseas.

 Yi Song  is an attorney at Mona Shah & Associates in New York City. She is also licensed to practice law in People’s Republic of China. Before joining Mona Shah & Associates, she worked at a securities litigation firm in Manhattan. She clerked at China’s high court – the Supreme Court of People’s Republic of China. At Mona Shah & Associates, Yi practices EB-5 law and securities law and works on many successful EB-5 capital raising projects. She obtained her LL.B. degree from Beijing Foreign Studies University and she is a graduate from Georgetown University Law Center in Washington, DC. Her articles on EB-5 and securities law are published by LexisNexis, AILA, eb5info.com, ILW. Yi is a native speaker of mandarin Chinese. She speaks fluent English and basic French.

Mona Shah & Associates reserve and hold for their own use, all rights provided by the copyright law, including but not limited to distribution, producing copies or reproducing, sales of this document. This article is a general summary of complex securities law issues. No legal advice is provided in this article.  Please consult the securities attorney for advice applicable to your particular circumstances.

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