Lessons Not Yet Learned

By: Robert Patton, Columnist

Until very recently, few Vermonters had ever heard of EB-5. Many still have no idea what it is. No Lyndon State course on economics, political science, or American history has ever given EB-5 a place in its syllabus. But in the last few weeks EB-5 has earned more than its share of front-page headlines in Vermont newspapers.

Simple put, EB-5 is a federal program that allows foreigners to earn a place as legal residents if only they “invest” a minimum of $500,000 in an area that the government flags as depressed. Of course, laws passed by our government are never simply put, but you don’t need thousands of page of arcane legalese to get the idea.

This paper has published a number of article over the last three years that were strongly critical of the program. For starters, the idea that the rich should have an entry path to residence and citizenship denied to ordinary hard-working people is decidedly un-American. When man-of-the-people Bernie Sanders once spoke at this college, his acceptance of the program was challenged and his response was that although he had not supported it in principle, it was working well in Vermont.

What he had in mind was the activity of two men, Bill Stenger and Ary Quiros who had tapped into the EB-5 program to fund a number of projects in the Northeast Kingdom. Closest to our college was a luxury hotel on Burke Mountain. Ary Quiros had not only raised EB-5 funds to begin construction on the now-finished hotel, but had purchased the entire ski facility with EB-5 money from foreign investors who hungered for U.S. residency. Not a modest man, he even renamed the mountain, calling it Q-Burke in his honor.

Meanwhile, up in Newport, his business associate, Stenger, had even more ambitious plans. Foreigners had poured in funds for projects ranging from an upgraded ski facility, water park, and the excavation of a deep hole in downtown Newport that is now doing nothing but collecting rain water and rubbish. South Koreans gave Stenger millions toward a bio-medical research center that was supposed to provide hundreds of high-salary, high-tech jobs, but now the money’s gone and nothing has been built.

A lot of attention is now being given to the discovery that both Stenger and Quiros have been caught with their hands in the till. Both men siphoned off hundreds of millions of dollars and put those funds to personal use. One item that has appeared in all news stories on this matter is the assertion that the men are alleged to have committed civil fraud, not criminal fraud and therefore do not face jail time. Stenger himself has pointed out that a business can legally use new revenues to pay past bills.

But this is really only a half truth. What Stenger is saying and what local journalists are swallowing is this. Let’s say you order some merchandise that is not in stock with your supplier and pay in advance. That money is then available for your supplier to pay staff, rent, taxes, or any other business expense. If the worst happens and the store burns down with no insurance, you may never get what you paid for, but no one has committed fraud. On the other hand, if you put your money in a regulated investment market like copper futures, that money is required to be segregated from your broker’s business funds and cannot be spent on anything other than the investment.

What Stenger and Quiros are claiming is that since their investors were putting their money into a market that was not as stringently controlled as securities and futures, there was no requirement to segregate funds and so the investor losses were just bad luck, bad business judgement, or a bad investment climate. Sorry folks,it just didn’t work out. End of story.

Well not quite.Just because an ordinary business mistake can cause the loss of customer deposits and payments, does not mean that when you make representations to customers or, in this case investors, you can just spend the money any way you like. The term lawyers like to use is mens rea, a Latin term that simply refers to the intent of the perpetrator. If a building burns down because sparks from burning cigarette lit some dry leaves, it makes a big difference whether that burning cigarette was deposited by a careless smoker or by the building’s owner with the intent of getting a big insurance payout from a fire that looked like an accident.

As for Stenger and Quiros, whether or not they do time will depend on the relative skills of the prosecution and defense. Was Quiros’s purchase of one of Donald Trump’s New York luxury flats just a normal living cost or was it a deliberate attempt to siphon off investor funds from projects that were not likely to pay off? The same question could be asked about some of Stenger’s shenanigans that cost many investors their life savings. Only a jury can decide.

But there are a few things that can be decided without the assistance of the legal system. These are things that should have been obvious almost from the beginning. The premise of the EB-5 program is that foreign investment can create jobs in depressed areas and that green cards can be used to attract green cash from overseas.

To believe that one has to be ignorant of an economic concept called “malinvestment.” Not all investments are worthwhile. If a beautiful town park is paved over there will be a substantial cost accompanied by an even more dramatic fall in value. Just because you can spend a lot of money on something doesn’t mean it’s a good idea and a sound investment.

Let’s just take the hotel on Burke Mountain as an example. As an investment, did that project make economic sense? If the answer is yes, then why was it that not a single one of America’s numerous hotel magnates didn’t jump at the chance to put money into the project? Was it really true that existing local hotels were having trouble meeting the burgeoning demand for luxury rooms from rich out-of-town skiers?.One could also reasonably ask how the region would benefit from an infusion of the kind of low paying seasonal jobs hotels and ski lodges provide?

Ary Quiros wooed Lyndon State College for support on many fronts. Somehow he managed to sell the idea that graduates of our mountain recreation program would benefit both from part-time jobs while in school and the prospect of more lucrative employment on graduation. He also gained support from local veterans by sponsoring an annual fundraising event on the mountain. The message was that Ary Quiros is here to help the college, help veterans, and, of course help politicians.

Now let’s take a look at the political chicanery that went on. Our own Peter Shumlin even traveled to Asia to help promote Stenger and Quiros projects to Asian investors–many from South Korea. There was a groundbreaking ceremony on Burke Mountain for the hotel that now sits empty that had over an hour of speeches from a large number of local officials and business people who wanted the region to know that they had played a role in this wonderful project. Peter Shumlin was there, of course, and made clear how strongly he supported the project.

But the leading political friend of Stenger and Quiros was Senator Pat Leahy who had been promoting EB-5 for years. Now that the whole thing is in shambles, now that Newport has a big hole to fill, and Burke has a hotel in receivership, does Pat admit to any mistake.

No way. You don’t get to be a U.S. Senator for as many years as he has without being fast on your feet.In an op-ed in the Caledonian-Record. Leahy sticks by his guns in supporting the EB-5 concept. The problem happened because of insufficient regulation. And no-one supports regulation more than Pat Leahy.

Why is it that whenever a government program fails badly, the reason we are given is insufficient government. When governmental actions wreck the economy, the.solution we are offered is to apply more government.

In the meantime, the huge hole in Newport that was to be the foundation of a luxury hotel and convention center sits empty and contractors and builders who erected a huge hotel on Burke Mountain have yet to be paid.