Securities

SEC Files Offering Fraud Charges Based in Part on EB-5 Program

 The EB-5 program, which promises a path to a permanent green card for those who can invest in this country and create jobs, has been involved in a number of SEC enforcement actions, most recently involving unregistered broker charges. In a case filed this week, however, it was one facet of an affinity fraud. SEC v. Luca International Group LLC, Civil Action No. 3:15-CV-03101 (N.D. Cal. Filed July 6, 2015).

Luca International, founded and controlled by defendant Bingqing Yang, is an umbrella organization for a number of entities called the Luca Managers who act largely as marketing agents. Defendants Lei Lei and Anthony Pollace, were, respectively, the firm’s former vice-president responsible for marketing the Luca Funds, and the CFO. Also named as defendants were Yong Chen and Entholpy, EMC, Inc. d/b/a Mastermind College Funding.

The action has two key parts. First, from September 2007 through March 2014, Ms. Yang, though the Luca Managers, and in conjunction with the other defendants, is alleged to have raised $68 million from investors through the purported sale of interests in oil and gas ventures. Those investors were typically promised returns of 20-30%. During investment seminars Ms. Yang, Ms. Lei and Luca International represented that the Luca Funds were profitable.

In reality they were losing money. For example, as of March 16, 2015, despite having raised $68 million, the bank account for the funds had a balance of less than $12,000. Much of the money raised was misappropriated. Ms. Yang had $1 million transferred to herself for a sham Trademark Licensing fee. She also used investor funds to purchase an expensive home, for a trip and other such items.

The second key part of the scheme involved the EB-5 program. Between October 2011 and March 2014 Ms. Yang, through Luca Energy, and in conjunction with Ms. Lei, used Luca I to target Chinese citizens who wanted to participate in the program. Using a private placement memorandum, investors were solicited with claims that Luca I was profitable and that investments could be made in oil wells as part of the overall EB-5 program. Investors put up about $8 million.

Luca I was, however, hopelessly in debt. Not only was it delinquent on over $11 million of debt, but, in August 2013, Ms. Yan borrowed an additional $12 million from a Hong Kong lender at an interest rate of about 30%. By early 2014 the Luca Funds and Managers were on the verge of collapse.

The complaint alleges violations of Exchange Act Sections 10(b) and 15(a), Securities Act Sections 5(a), 5(c), 17(a) and 17(a)(3) and Advisers Act Sections 206(1), 206(2) and 206(4). The action is pending. Luca International’s former CFO Anthony Pollach, who is alleged to have played a small role, settled by agreeing to pay a penalty of $25,500. See also In the Matter of Wisteria Global, Inc., Adm. Proc. File No. 3-16675 (July 6, 2015)(a proceeding naming the entity and its principal, Hiroshi Fujigami, as Respondents who are alleged to have acted as unregistered brokers in the scheme; both settled, consenting to cease and desist orders based on Exchange Act Section 15(a); the firm was censured; disgorgement of $1,793,783 was ordered; but $1,138,985 plus prejudgment interest waived based on financial condition; Mr. Fujigami was barred from the securities business). See Lit. Rel. No. 23298 (July 6, 2015).

 For more news and commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.

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