Banking and Finance

SEC Security Fraud Charges Against Assisted Living Facilities —Should EB-5 Practitioners Be Concerned?

 Assisted living facilities (ALFs) have always been a popular choice for EB-5 investors. On December 3, 2013, the Securities and Exchange Commission (SEC) announced securities fraud charges against top executives at an assisted living facility. What is significant about these charges, is that it draws attention to the very reason ALFs are popular with EB-5 investors.

ALF facilities can range in size from one resident to several hundred. The cognizance of need as well as the medical component of many ALFs almost guarantees that all ALFs will be high income generators. If an investor does not pay close attention to the project’s compliance and operational status, he or she is in danger of being burned.

Securities Fraud and Scheme to Defraud

On December 3, 2013, the Securities and Exchange Commission (SEC) announced securities fraud charges against two top executives at a Wisconsin-based assisted living facility.

The SEC alleges that the two executives devised a scheme involving false disclosures and manipulations of internal books and records to maintain minimum occupancy rates and coverage ratio while operating the facilities.

The fraudulent disclosure documents include identities of fake occupants who are the executive’s family members, friends and former employees, and who did not reside at the assisted living facility. One of the purported senior residents was just seven years old! The two executives certified the annual and quarterly reports that fraudulently represented that the company appeared to be in compliance with the occupancy and coverage ratio.

The SEC stated that false filings in existing assisted living facilities will be pursued vigorously.

Securities Fraud and Scheme to Defraud

The securities laws defined securities “fraud” broadly.

The anti-fraud provision in the securities laws state that “(a) to employ any device, scheme, or artifice to defraud; (b) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security."

It’s a familiar story of developers running their project into the ground because of a lack of experience. This case is similar to the recently charged LA based EB-5 lawyers who ran  an ethanol plant. The developers did not have the intent to defraud the investors in the beginning. Yet, due to a lack of experience, they encountered difficulties in running the business and severe cash flow issues. They tried to cover their business mistakes by making fraudulent statements, conducting gross misrepresentation and omitting material information which was held as fraud against the investors.

It is important to note that the “fraud” can occur at any stage of the project, from financing to construction, operation and management. Even if a developer does not have the intent to defraud from the beginning, if a fraudulent scheme is employed -- even if there is a good intention, such as the lawyers in the ethanol project, who provided fraudulent documents in an attempt to prevent the EB-5 investors’ green cards getting denied. Nevertheless, they were charged with securities frauds by the SEC.

High Standard on ALF Compliance

To operate ALF facilities requires extensive skills and experience. Each state has its own regulatory standards for maintaining records and periodic reporting. There may be on-site state inspections and surveys.

For example, in the State of Florida - the most popular destinations for ALF developments - permits and licenses are required to provide routine personal care services under a “standard” license, or more specific services under the authority of “specialty” license. The purpose of "Specialty Licenses" is to allow individuals to "age in place" in familiar surroundings that can adequately and safely meet their continuing healthcare needs. There is requirement regarding background screenings for nursing home employees and facility administrators.

The successful ALF will require an experienced developer to: develop the project; meet the timeline goals; control the construction budgets amongst other critical tasks. The experienced manager and operator will apply for the multiple licenses required by the state health care administration and meet the on-going requirement for the onerous compliance rules.

After an assisted living facility is built, it is turned over to the facility manager who will be in charge of the daily operations. A good facility manager is vital to the success of the ALF project. The authors learned that one seasoned developer interviewed more than 60 facility managers before finding the satisfactory one.

One common mistake that the EB-5 investors from countries like China are guilty of has a cultural background. Chinese investors, for example, almost always rely on trust and connection (guanxi) rather than professional opinions. However, trust and friendship among members of family, ethnic, religious communities should not replace the critical due diligence process or even ensuring the developers have the requisite experience. The simple question of how the ALF will obtain its residents and patients, is often overlooked.


The SEC has become increasingly active in EB-5, bringing multiple charges against certain EB-5 projects, to name a few, Chicago Convention Center, LA-based EB-5 lawyers’ Ethanol Plant, Velocity Regional Center real estate investment scams, Mamtek Missouri sucralose factory, etc.

The defendants in the case at hand did not commence the ALF with thoughts to defraud, but were inexperienced. The lesson that can be carried away here, is more of due diligence and common sense. Experience matters!

Often the SEC, is informed about suspicious activities by private players. The SEC whistle blower awards system provides enormous incentives to uncovering frauds within the private sector. Following the Chicago Convention Center scandal, a common jest would be: “how to make $14 million in 30 minutes?” Answer: “by spending 30 minutes to fill out a SEC whistle blower form to report on a suspicious EB-5 project!”

Risks exist throughout the prolonged process of EB-5 investment—as does the possibility of fraud.

This article is a general summary of complex securities law issues. No legal advice is provided in this article. Please consult an attorney or investment adviser for specific advice applicable to your circumstances.

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.

All rights reserved by Mona Shah & Associates ©

 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 a book and has spoken extensively on EB-5 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. Yi is a native speaker of mandarin Chinese. She speaks fluent English and basic French.

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