The Securities and Exchange Commission (SEC) last week charged that Anshoo R. Sethi fraudulently sold more than $145 million in securities and collected $11 million in administrative fees from more than 250 investors, primarily from China. Sethi is alleged to have duped investors into believing that by purchasing interests in a company known as “a Chicago Convention Center” (ACCC), they would be financing construction of a hotel and conference center near Chicago’s O’Hare Airport. The investment was marketed as a way for the investors to get green cards through the EB-5 immigrant investor program.
But Judge Amy St. Eve of the U.S. District Court for the Northern District of Illinois has found that the SEC is likely to prevail in court and has issued orders freezing assets held by Sethi, ACCC, and the Intercontinental Regional Center Trust of Chicago. The court orders require an accounting of the investors’ money and that any sums abroad be repatriated to the U.S. According to an SEC press release, the good news is that “the asset freeze preserves nearly all of the money invested.”
Sethi had sought to raise USD 249.5 million from 499 investors. Each investor put up $500,000 investment plus $41,500 in “administrative fees.”
Plans were for the convention center to be built on land that was previously occupied by his family’s budget hotel, where rooms went for as little as $33 a night and weeds grew at the bottom of an empty swimming pool, according to the Chicago Tribune. The troubled hotel was a demolished in November 2012.
The Alleged Securities Fraud
According to the SEC complaint:
- Sethi falsely claimed and that several major hotel chains had signed onto the project. Hyatt Hotels, in particular, informed the SEC that a letter on its letterhead was not genuine but had been forged.
- Sethi claimed to have backup financing from the Qatar Investment Authority, but related documentation was phony.
- The offering materials falsely stated that construction would begin in summer 2012 and occupancy of the first tower would occur in early spring 2014. But a search of the Chicago Building Permits database for the project address shows that the only recent permits are for a tent, a demolition permit, construction of a fence, and minor electrical wiring.
- Although Sethi is just 29 years old, he claimed to have “over fifteen years of experience in real estate development and management, specifically in the lodging area.”
Some of other seemingly unsubstantiated claims Sethi allegedly made include:
- That the land would be worth $600 million, although it was purchased in 2003 for just $13 million.
- That the project would create 8500 jobs.
Strong Marketing, Weak Due Diligence
In the U.S., federal or state securities laws require brokers, investment advisers, and their firms to be licensed or registered, and to make important information public. However, for investments marketed outside the U.S., those laws don’t apply.
The ACCC project was marketed in China by immigration consultants, who would earn $45,000 from the “administrative fee” plus a percentage of the loan collected by the general partners, for a total of $100,000 to 150,000, according to Michael Gibson of USAdvisors.
Gibson feels that the immigration consultants were drawn to the project because of the “exceptionally high commission.” Notably, such commissions are typically not disclosed to the investor, although they create a conflict of interest between the consultant and the investor to whom the project is pitched.
Also, the marketing was undoubtedly bolstered by Sethi’s claims that the project was backed by the Illinois state government. Governor Pat Quinn had, in fact, appeared at a promotional event in Beijing for the project. A promotional video claims that the project secured low-interest loans from the government, and the project claimed, “This shows the government attaches importance to and is resolved in favor of the project” as well as that the government backing makes it the “safest” project. The governor’s office later demanded that Sethi stop referencing Quinn in promotional material, according to the Tribune. But plenty of local officials showed up for the project’s groundbreaking ceremony, as shown in this video.
According to Gibson, ACCC’s misrepresentations could have been discovered by investors with a minimal amount of effort and due diligence but that simply wasn’t done. For example, it would have been possible to check online to see if the construction permits were issued as claimed or called the hotel chains to confirm that cooperation agreements were in place.
- U.S. Citizenship and Immigration Services, which runs the EB5 program, states that it is monitoring the SEC’s lawsuit to determine whether to terminate Sethi’s regional center, which has USCIS approval to pool investments for immigration purposes. It’s unclear how USCIS approved the regional center if, as Gibson argues, Sethi’s allegedly false claims could have been discovered with a minimal amount of effort. It’s also unclear how many of the investors I-529 petitions were approved by USCIS. Was there a systemic failure?
- It’s unclear whether private law suits will follow in the U.S. in the wake of the SEC action. For example, do the investors have claims against the immigration consultants that marketed the project, or against their own attorneys for failing to do due diligence?
- What actions will China’s regulators take? And are private suits likely to follow in China for violations of this country’s securities laws?