Sec. & Exch. Comm'n v. Liu

• Decision Date: 20 April 2017
• Docket Number: Case No.: SACV 16–00974–CJC(AGRx)
• Citation: 262 F.Supp.3d 957
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Charles C. LIU; Xin Wang a/k/a Lisa Wang ; Pacific Proton Therapy Regional Center, LLC ; Pacific Proton EB-5 Fund, LLC; and Beverly Proton Center, LLC f/k/a Los Angeles County Proton Therapy, LLC, Defendants.
• Court: U.S. District Court — Central District of California

262 F.Supp.3d 957

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,

v.Charles C. LIU; Xin Wang a/k/a Lisa Wang ; Pacific Proton Therapy Regional Center, LLC ; Pacific Proton EB-5 Fund, LLC; and Beverly Proton Center, LLC f/k/a Los Angeles County Proton Therapy, LLC, Defendants.

Case No.: SACV 16–00974–CJC(AGRx)

United States District Court, C.D. California, Southern Division.

Signed April 20, 2017

Jacob A. Regenstreif, John W. Berry, Gary Y. Leung, US Securities and Exchange Commission, Los Angeles, CA, for Plaintiff.

Brian Thomas Corrigan, Corrigan and Morris LLP, Santa Monica, CA, Stanley C. Morris, Corrigan and Morris LLP, Los Angeles, CA, for Defendants.

ORDER GRANTING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AGAINST DEFENDANTS LIU AND WANG

CORMAC J. CARNEY UNITED STATES DISTRICT JUDGE

I. INTRODUCTION

Defendant Charles C. Liu formed and controlled three corporate entities, Beverly Proton Center, LLC ("Beverly Proton"), Pacific Proton EB 5 Fund LLC ("PPEB5 Fund"), and Pacific Proton Therapy Regional Center ("Pacific Proton") (together with PPEB5 Fund and Beverly Proton, "Corporate Defendants"), purportedly to build and operate a proton therapy cancer

treatment center in southern California. Liu financed the cancer center with nearly $27 million dollars of international investment through the EB–5 Immigrant Investor Program.

Instead of pursuing proton therapy, Liu funneled over $20 million of investor money to himself, his wife Defendant Xin Wang, and marketing companies associated with them. Millions of dollars were transferred shortly after Plaintiff Securities and Exchange Commission ("SEC") subpoenaed Liu as part of the SEC's initial investigation in February 2016.

The SEC now seeks summary judgment against Liu and Wang. For the following reasons, the Court GRANTS the SEC's motion. A judgment and permanent injunction shall issue forthwith.

II. FACTUAL BACKGROUND

Liu used the EB–5 Immigrant Investor Program to ostensibly develop and run a proton cancer

therapy center in Montebello, California. (See Dkt. 7 [hereinafter "Regenstreif Decl."] Ex. 1 at 10, 14, 36; Dkt. 200–1 ¶ 9.) Through that program, foreigners can obtain permanent residency in the United States by investing at least $500,000 in a "Targeted Employment Area" and thereby creating at least ten full-time jobs for United States workers.¹ (Dkt. 200–1 ¶ 5; see also Dkt. 81 at 2 n.3.) Investments are often administered by "regional centers," which are designated and approved by the United States Customs and Immigration Service ("USCIS") as EB–5 eligible projects. (Dkt. 200–1 ¶ 1.)

1. Formation of Corporate Defendants and the EB–5 Offering

Liu, along with his business partner Dr. John Thropay, formed three entities in 2010, Pacific Proton, PPEB5 Fund, and Beverly Proton,² to facilitate investment. (See Dkt. 200–1 ¶¶ 10, 11; Dkt. 150–1 Ex. 1 (Pacific Proton Operating Agreement); Regenstreif Decl. Ex. 5 [Private Offering Memorandum, hereinafter "POM"] at 475; Dkt. 81 at 2.) Ownership of Pacific Proton was originally split 75% for Liu and 25% for Dr. Thropay, (Regenstreif Decl. Ex. 4 [hereinafter "EB–5 Application"] at 149; Regenstreif Decl. Ex. 1 [hereinafter "Liu Questioning"] at 36); Beverly Proton was allocated the same way with Liu as Beverly Proton's President and Dr. Thropay as its CEO, (see Regenstreif Decl. Ex 8; POM at 464–65, 471). Pacific Proton was PPEB5 Fund's sole manager. (POM at 475–76, 456.)

On November 19, 2010, Liu and Dr. Thropay applied to USCIS to designate Pacific Proton as an EB–5 regional center. (EB–5 Application at 146.) Beverly Proton purportedly would develop and operate the proton therapy

treatment center; it was the job–creating vehicle sponsored by Pacific Proton, the USCIS-approved regional center. (Dkt. 200–1 ¶¶ 11–13; see also Liu Questioning at 38.) The USCIS application estimated that the cancer treatment facility would create more than 4,500 new jobs and have an economic impact of $728 million per year. (Id. ) USCIS approved Pacific Proton's application on June 28, 2012. (Dkt. 200–1 ¶ 14; Regenstreif Decl. Ex. 11.)

Pacific Proton, PPEB5 Fund, and Beverly Proton each played an important role in Liu's scheme. Foreign investors purchased shares in PPEB5 Fund, enabling them to petition USCIS for permanent residency in the United States. (Dkt. 81 at 2–3; Liu Questioning at 38.) Each share of PPEB5 Fund was $500,000 (the "Capital Contribution"); investors also paid a $45,000 "Administrative Fee" directly to Pacific Proton. (Dkt. 200–1 ¶ 37; Liu Questioning at 71; Dkt. 81 at 2; POM at 456; see EB–5 Application at 152.) Investing members of PPEB5 Fund had limited rights to participate in its management; Pacific Proton had "full, exclusive and complete authority, power, and discretion" to run it. (POM at 475–76, 456.) PPEB5 Fund loaned investor money to Beverly Proton to support the development of the proton therapy center. (See Dkt. 200–1 47; Dkt. 81 at 3; EB–5 Application at 426–42 (Loan Agreement); Dkt. 84–1 (amended and restated loan agreement).)

From October 1, 2014, to April 2016, at least fifty investors purchased shares of PPEB5 Fund.³ (See Dkt. 200–1 ¶ 34; Dkt. 16 [hereinafter "Pearson Decl. II"] ¶ 12; Liu Questioning at 42 (indicating forty seven or forty eight investors).) Their investment constituted $24,712,217 in Capital Contributions⁴ and $2,255,701 in Administrative Fees. (Pearson Decl. II ¶ 12.) No non–EB–5 funds were raised for the project. (Liu Questioning at 43.)

The POM clearly delineated the purposes and legitimate uses of Capital Contributions and Application Fees. It stated that Liu and Corporate Defendants would use the entire Capital Contribution to create the proton therapy center. (See POM at 470 ("Other expected uses of [Capital Contributions] include construction financing, architectural and other professional fees, working capital and fees for services required to obtain permits and satisfy regulatory requirements related to the project."); id. at 470 n.2 ("Offering expenses, commissions and fees incurred in connection with this Offering shall [not] be paid ... from EB–5 Capital Contributions."); id. at 468 (Beverly Proton "will use the [Capital Contributions] to partially finance the construction and operation of a proton therapy center.").) In contrast, the POM explicitly stated that the Administrative Fee would be spent on, inter alia , offering expenses and marketing. (POM at 452 ("PPEB5 charges an administrative fee ... for payment of expenses incurred in connection with this Offering."); id. at 456 (Administrative Fee to "pay for Offering Expenses, including legal, accounting and administration expenses, and commissions and fees related to this Offering."); id. at 470 n.2 (same).)

2. Liu's Diversion of Funds

Liu did not adhere to the POM. Instead, he diverted approximately $20 million of investor money to marketing companies, himself, and Wang.

i. Marketing Companies

Payments were made of $12,924,500 to three overseas marketing companies: Overseas Chinese Immigration Consulting Ltd. ("Overseas Chinese"), Hong Kong Delsk Business Co., Ltd. ("Delsk"), and United Damei Group, United Damei Investment Company, Ltd., and/or Beijing Pacific Damei Consulting Co. Ltd. (collectively, "UDG"). (Dkt. 200–1 ¶ 97; Dkt. 212 ¶ 97.)

On March 8, 2013, Liu signed an agreement with Overseas Chinese to pay it $800,000 per year and $75,000 per successful investor. (Regenstreif Decl. Ex. 22; see Liu Questioning 85–89; Dkt. 15–2 Ex. 1.) Overseas Chinese received $7,722,000 from Corporate Defendants⁵ and successfully solicited eleven investors. (Dkt. 200–1 ¶¶ 98, 100; Pearson Decl. II ¶ 49(a); see Liu Questioning at 91 (indicating four or five successful investors).)

In August 2013,⁶ Liu signed an agreement with UDG promised to pay UDG $80,000 per investor, $500,000 immediately as a "document preparation fee," and $650,000 annually. (Regenstreif Decl. Ex. 28 § 2.1(a),(c)–(e); see Liu Questioning at 89–91.) UDG received $3,815,000 and successfully solicited ten investors. (Dkt. 200–1 ¶¶ 102, 104; Pearson Decl. II ¶ 49(b); see Liu Questioning at 91 (indicating successful solicitation of twenty investors).)

On September 24, 2014, Liu signed an agreement with Delsk to pay it $75,000 per successful investor. (See Regenstreif Decl. Ex. 27; Liu Questioning 136–37, 139–41.) (Id. ) Delsk received $1,387,500 and recruited thirty seven successful investors. (Dkt. 200–1 ¶¶ 106, 108; Pearson Decl. II ¶ 49(c).)

ii. Liu and Wang

Liu received $6,714,580 from Corporate Defendants and Wang received $1,400,000 from Corporate Defendants, ostensibly as "salary." In 2012, Liu signed five-year employment agreements with Pacific Proton and PPEB5 Fund with annual salaries of $350,000⁷ and $200,000, respectively. (See Regenstreif Decl. Ex. 15 (Pacific Proton-Liu agreement); id. Ex. 14 (PPEB5 Fund–Liu agreement).)

On January 19, 2016, Liu removed Dr. Thropay as Chief Executive Officer of Pacific Proton and elected himself as President and Treasurer and Wang as Secretary. (See Regenstreif Decl. Ex. 7.) The same day, Liu held a meeting of Beverly Proton with only himself in attendance at which he nominated himself and Wang as the sole directors. (Id. Ex. 8.) A few days later, on January 28, 2016, Wang signed a five–year employment agreement with Liu (acting for Beverly Proton), entitling her to compensation of $250,000 annually retroactively from January 2011. (Id. Ex. 9 at 495.) According to Liu, she had recruited investors since 2011. (Liu Questioning at 28–29; see also Regenstreif Decl. Ex. 2 (Wang Questioning) at 28, 33.)

In April 2016, two months after the SEC's February 4, 2016, subpoena and shortly following his March 23, 2016, questioning by the SEC, Liu signed a five-year employment agreement with Beverly Proton. (See Regenstreif Decl. Ex. 13 at 519; id. Ex. 18 (subpoena).) His annual salary was $550,000 retroactively from January 2011.⁸ (See Regenstreif Decl. Ex. 13 at 511; but see Liu Questioning (stating on March 23, 2016, salary of $750,000 from Beverly...