Sec. & Exch. Comm'n v. Xia
| Decision Date | 08 December 2022 |
| Docket Number | 21-CV-5350 (PKC) (RER) |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. RICHARD XIA, a/k/a YI XIA; and FLEET NEW YORK METROPOLITAN REGIONAL CENTER, LLC, f/k/a FEDERAL NEW YORK METROPOLITAN REGIONAL CENTER, LLC, Defendants, v. JULIA YUE, a/k/a JIQING YUE; XI VERFENSTEIN; and XINMING YU Relief Defendants. |
| Court | U.S. District Court — Eastern District of New York |
In this action, the Securities and Exchange Commission (“SEC”) charges Defendants Richard Xia and Fleet New York Metropolitan Regional Center, LLC (collectively “Defendants”) with violating 15 U.S.C §§ 77q(a), 78j(b) and 17 C.F.R. § 240.10b-5 and unjustly enriching Relief Defendants Julia Yue, Xi Verfenstein, and Xinming Yu (collectively, “Relief Defendants”). The parties have cross-moved for and against a preliminary injunction that freezes Defendants' assets and Relief Defendants' residential properties. For the reasons stated herein, the Court grants the SEC's motion in part and issues an asset-freezing preliminary injunction, for the duration of two years (subject to continuation as discussed herein), that covers all of Defendants' assets and Relief Defendants' residential properties.
BACKGROUND[1]
On September 27, 2021, the SEC brought this action against Defendant Richard Xia (“Xia”), Defendant Fleet New York Metropolitan Regional Center, LLC (“Fleet”), and Relief Defendant Julia Yue (“Yue”) (Dkt. 1), and on April 6, 2022, amended its Complaint to add Relief Defendants Xi Verfenstein (“Verfenstein”) and Xinming Yu (“X Yu”). (Am. Compl., Dkt. 98, at 1.) In substance, the SEC alleges that, since 2010, Defendants have defrauded the immigration authorities and over 450 prospective immigrants to raise more than $229 million in investor funds, and then diverted or misused these funds for their personal needs. (See generally Dkt. 98.) The SEC alleges that Defendants' actions amounted to investor fraud that violated 15 U.S.C. §§ 77q(a), 78j(b) and 17 C.F.R. § 240.10b-5 (“Rule 10b-5”), and unjustly enriched Relief Defendants. (Id. ¶¶ 191-99.)
Together with its Complaint, the SEC moved for an emergency temporary restraining order (“TRO”) freezing Defendants' assets and a preliminary injunction freezing the same assets and lasting throughout the pendency of this suit. (See Dkts. 2, 2-2.) The Court granted the TRO. (Dkt. 11.) Between February 14 and 16, 2022, the Court held a Hearing at which Defendant Xia, court-appointed monitor M. Scott Peeler,[2] and expert witnesses provided sworn testimony. (Dkt. 101 37.)
The SEC subsequently moved to expand the scope of its requested preliminary injunction to cover the three mansions that Relief Defendants now own. (Dkt. 99.) Relief Defendants and Defendants cross-moved to dissolve the asset freeze, or in the alternative, exclude from its scope assets obtained by Xia prior to the alleged scheme. (Dkt. 178; see also Dkts. 120, 127.)
The evidence in this case is voluminous and complex. First, the Court surveys Defendants' transactions with their investors. Second, the Court turns to a series of transactions that occurred after Defendant Xia and Relief Defendant Verfenstein learned of the pending investigation against them, including the purchase of three mansions in short succession and their transfer to Relief Defendants.
Defendant Xia, an engineer who resides in Queens, married Relief Defendant Yue in 1994 and moved to the United States from China in 1996. (See Test. Richard Xia, Dkt. 6-24, at 14:619.) In 2002, Xia developed his first-and, before soliciting the EB-5 investments,[3] only- independent construction project, a 65-unit building in Queens named the “Shangri-La Tower.” (Tr. 49:3-19.)[4] Xia then met Relief Defendant Verfenstein, who became Shangri-La Tower's manager and designer. (Tr. 228:18-23, 290:1-25.) In or about 2008, Xia finished the Shangri-La Tower and later became the registered owner of fifteen rental properties across New York, including several units in the Shangri-La Tower. (Tr. 291:14-20; see also Dkt. 183, at ¶ 6; Dkt. 183-2.)
Seemingly emboldened by the Shangri-La Tower's success, in 2010, Xia, Verfenstein, and Yue sought to construct two new buildings in Queens-the Eastern Mirage and Eastern Emerald (the “Projects”), which far exceeded the Shangri-La Tower in magnitude and complexity. Together, the Projects promised to include nearly 900 five-star hotel rooms, dozens of residential apartments, a spa and fitness center, a multimedia conference center, multiple restaurants, retail stores, a convention center, a performing arts building, and about 650 parking spots. (See Dkts. 6 1, at ECF[5] 12; 6-2, at ECF 11; 6-3, at ECF 12; 6-4, at ECF 10; and 6-6, at ECF 11.) Xia sought to finance the Projects with investments from foreign nationals who wished to immigrate to the United States through the EB-5 visa program.[6] To that end, in 2010, Xia incorporated Defendant Fleet, a New York entity that Xia controls (see Dkt. 6-17, at ECF 19), and sought to designate it as a USCIS-approved regional center.
From 2010 until 2017, together with Walter Verfenstein-Verfenstein's ex-husband-Xia contacted, mostly, Chinese nationals and attempted to solicit contributions of $550,000 per investor. (Tr. 168:1-13; see also Dkt. 6-48.) After submitting requests to USCIS to designate Fleet as an approved regional center for the EB-5 visa program, Xia created five limited partnerships to finance distinct components of the Projects, and issued offering memoranda marketing ownership interests in each limited partnership to foreign investors in return for a $500,000 capital contribution and a $50,000 fee. The respective Partnership Agreements earmarked investors' funds for specific purposes. The EB-5 investors wired funds to their respective limited partnerships, and the partnerships then loaned most of these funds to one of three Xia-controlled entities called “developers.” The developers then transferred funds to twelve Xia-controlled entities, called “contractors” and “subcontractors,” allegedly to pay for services rendered in connection with the Projects.
On October 7, 2010, USCIS approved Fleet as an EB-5 regional center. (Dkt. 6-14.)[7] At least twice, Xia sought to amend Fleet's approval. (Dkts. 6-15, 6-16.) The first time was on December 24, 2013, when Xia filed a request to add the Emerald Project to Fleet's approval. (Dkt. 6-15, at 1; Tr. 62:20-23.) USCIS requested that Xia produce additional evidence to substantiate representations as to his business plan. (Dkts. 6-69, at 1.) In 2014, Xia approved a letter from his attorney responding to USCIS and stating that “$110 million [of] funds will come from” three non-EB-5 sources. (Dkt. 6-69, at 5; Tr. 78:13-19.) First, the letter stated that $18 million will come from a tax-credit named the “New Market Tax Credit Financing” (“NMTCF”). (Dkt. 6-69, at 5.) Xia never received such credit. (Tr. 69:9-14.) Second, the letter stated that $72 million will come from a loan from Hapoalim Securities. (Dkt. 6-69, at 5.) Xia never received such a loan and could not even remember requesting it. (Tr. 60:16-18, 61:12-18.) Third, the letter stated that $20 million will come from a tax credit named Brownfield. (Dkt. 6-69, at 5.) Seven years after his attorney submitted the letter to USCIS, Xia obtained about $11 million in Brownfield Tax Credits, and collateralized it to buy Yue a mansion. (Tr. 87:20-23, 88:1-89:20, 202:11-21.)
Xia filed his second request to add the Emerald Project to Fleet's approval on November 12, 2015. (Dkt. 6-16, at 1-2.) Again, USCIS requested that Xia provide his business plan for the Eastern Emerald. In 2017, Xia's attorney submitted a letter stating that a Xia-controlled entity, LaGuardia Performance Center, LLC (“LaGuardia”), had obtained a “loan commitment letter in the amount of approximately $85 million from R. Seelaus & Co.” (“Seelaus”), to develop the Emerald Project. (Dkt. 6-70, at 3; Tr. 80:20-25, 231:19-22.) The letter included as an exhibit a letter from a Seelaus employee named Edward Chan (“Chan letter”)[8] purportedly representing that it was Seelaus's “pleasure” to advise LaGuardia and Xia that it had “approved [their] construction financing [loan]” in principle. (Dkt. 6-70, at ECF 6.) In a sworn declaration submitted by the SEC, Annie Seelaus, the CEO of Seelaus since 2015, stated that she was completely “unaware of the [Chan] [l]etter[.]” (Dkt. 4, ¶¶ 3-5.) Ms. Seelaus further stated that she could not find in her company's records a copy of the Chan letter or any correspondence with Xia. (Id. | 5.) Ms. Seelaus also explained under oath during a deposition that Edward Chan lacked the authority to commit Seelaus to any loan and that Seelaus “doesn't make loans” and has never made one. (Dkt. 52-3, at 71:6-9, 101:2-7.) Ms. Seelaus concluded that Seelaus “never made-or even considered making-any loan to Richard Xia or his company,” and was of the view that the letter was “not authentic or legitimate.” (Dkt. 4, ¶¶ 9-10.) At the Hearing, Xia denied knowing that the Chan letter, which was described as fraudulent, was not authorized when he received it, and by extension, when his attorney, acting under his direction, sent it. (Tr. 78:13-19, 84:11-25.)
Having obtained Fleet's designation as a USCIS-approved regional center, Xia produced offering memoranda marketing the Projects to investors who wished to participate in the EB-5 program. (See Tr. 19:19-25.)
The Eastern Mirage is a building located at 42-31 Union Street Flushing, New York. (See Dkt. 3 I 5; Tr: 630:1-8.) From ...
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