10 Observations from Reviewing Evidence in an SEC Civil Enforcement Action

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10 Observations from Reviewing Evidence in an SEC Civil Enforcement Action

Spencerby Spencer McGrath-Agg, Attorney, Boundary Bay Law 

Published on 2/01/17 in the Boundary Bay Immigration Law Blog

We recently reviewed over 100 pieces of documentary evidence in a civil enforcement action brought by the SEC against an attorney for taking commissions as an unregistered broker-dealer. As this action was also related to the EB-5 program, we think the following notes may be useful for attorneys practicing in this area and other industry participants.

1. Stick to your principles. Here is a quote from the defendant attorney’s retainer agreement: “Our fee principle is to charge a reasonable and transparent legal fee. Except for the fees outlined in thie [sic] Agreement, there is no agency fee or any other legal fees.” The evidence would appear to suggest otherwise.

2. The SEC will take sworn testimony of EB-5 investors, and ask them what fees were disclosed.

3.  The SEC and USCIS are collaborating in a way that requires a joint file stamp: SEC-USCIS-E-#######. “E” may stand for “Enforcement.”

4.  During an SEC investigation, the duty of confidentiality still applies. The attorney under investigation here turned over documents almost completely unredacted. Now that those documents have been filed in this case, confidential client information (including names, addresses, and alien numbers) has been made public.

5.  The government will not redact for you. Here, significant portions of private documents were unredacted by USCIS as well. For example, a complete, signed Form I-526 with an approval stamp is among the documentary evidence filed in this case.

6. Writing publicly may adversely affect a future client. In this case, the defendant, testifying under oath during the SEC’s investigation was confronted with an article written by his attorney, which stated: “you won’t find a securities attorney in the entire U.S. who’d say that a firm 1) soliciting EB-5 clients in the U.S., and 2) providing investment advice about which center to select, and 3) accepting finder’s fees from the issuer (regional centers) may do so lawfully without first obtaining a Series 7 or Series 79 license and becoming registered as a broker-dealer, or representative of a broker-dealer firm.” This conduct is exactly what the SEC had alleged against the defendant. The questions associated with this evidence may go to the mental state of the person being investigated, but at the very least it would be uncomfortable in the interview room.

7. Due diligence services require a due diligence plan. This plan must include declining fees from the parties on whom you are performing due diligence. And, of course, this plan must be followed.

8. Your state’s ethics opinions are not law, but a court may consider them as evidence. Here, the attorney exchanged e-mails with a party for which he was providing broker-dealer services. Attached to one of these e-mails was an ethics opinion from his state’s bar. This opinion concluded that an attorney could take an investment “finder’s fee” subject to the caveat that “the terms are fair and reasonable to the client and fully disclosed in a writing.” In response to questions about whether the finder’s fee was ever disclosed to clients, the defendant testified that he didn’t think it was “necessary.”

9. “At risk” capital for EB-5 purposes includes “for the purpose of generating a return.” If the business plan or partnership agreements do not provide for the possibility of a return to the investor, then the capital is not “at risk for the purpose of generating a return” (8 CFR 204.6(j)). There may be some debate over whether this is the correct interpretation of the regulations, but it is the position USCIS takes when adjudicating I-526 petitions.

10. Post-RFE or post-NOID amendments to a project won’t help the investor. In this case, the attorney being investigated testified that, after receiving a Request for Evidence on an I-526, they amended the offering documents to comply with requirements, however, he further testified “that’s still useless.” “An applicant or petitioner must establish that he or she is eligible for the requested benefit at the time of filing the benefit request and must continue to be eligible through adjudication” (8 CFR 103.1(b)). If the offering materials need to be amended in response to an RFE for the petitioner to qualify, then she did not qualify at the time of filing the benefit request.

 

February 3rd, 2017|Categories: Research / Analysis, Securities Law|

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