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United States Securities and Exchange Commission v. Kameli

United States District Court, N.D. Illinois, Eastern Division

September 5, 2017

UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
SEYED TAHER KAMELI, et al., Defendants, and AURORA MEMORY CARE, LLC, et al., Relief Defendants.

          MEMORANDUM OPINION AND ORDER

          Joan B. Gottschall United States District Judge.

         In April 2017, the U.S. Securities and Exchange Commission (“SEC” or “Commission”) filed this enforcement action against Sayed Taher Kameli (“Kameli”) alleging that he violated Section 17(a) of the Securities Act of 1933 (“Securities Act”), 15 U.S.C. § 77q(a); and section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder. The SEC's allegations are based on investments that Kameli offered through the U.S. Citizenship and Immigration Service's (USCIS's) EB-5 Program, which extends U.S. citizenship to immigrants who invest money in designated businesses in the U.S. that create a certain number of jobs. Before the court is the SEC's motion for a preliminary injunction. The Commission seeks to enjoin Kameli from further violations of the securities laws and from any further involvement with EB-5 investments. The Commission also seeks ancillary relief, including appointment of a Receiver to manage several businesses that Kameli has created with investor funds. For the reasons discussed below, the motion is denied.

         BACKGROUND

         A. The EB-5 Program

         Congress created the EB-5 Program with the passage of the Immigration Act of 1990. See Pub. L. No. 101-649, 104 Stat 4978 (codified at 8 U.S.C. § 1153(b)(5)). In 1991, the Immigration and Naturalization Service (INS) promulgated regulations for the EB-5 Program's administration. Today, the program is administered by USCIS. The program's chief purpose is to stimulate the economy by encouraging infusions of new capital and creating jobs. See, e.g., Kenkhuis v. I.N.S., No. CIV.A. 301CV2224N, 2003 WL 22124059, at *3 & n.2 (N.D. Tex. Mar. 7, 2003) (citing the EB-5 Program's legislative history).

         The application process begins with the filing of a “Form I-526, Immigrant Petition by Alien Entrepreneur” with USCIS. 8 C.F.R. § 204.6. The application must be “accompanied by evidence that the alien has invested or is actively in the process of investing lawfully obtained capital in a new commercial enterprise in the United States which will create full-time positions for not fewer than 10 qualifying employees.” 8 C.F.R. § 204.6(j). In support of their petitions, applicants may submit “[a] copy of a comprehensive business plan showing that, due to the nature and projected size of the new commercial enterprise, the need for not fewer than ten (10) qualifying employees will result, including approximate dates, within the next two years, and when such employees will be hired.” 8 C.F.R. § 204.6(j)(4)(i)(B).

         If the I-526 petition is approved, the investor is granted a conditional green card giving him permanent resident status on a conditional basis. 8 U.S.C. § 1186b(a)(1). To have the conditions removed, the investor must file (within a specified time period) a “Form I-829, Petition by Entrepreneur to Remove Conditions.” 8 C.F.R. § 216.6. At this stage, the investor must show that his investment of capital was sustained during his or her period of conditional residence and that the investment “created or can be expected to create with a reasonable period of time ten full-time jobs to qualifying employees.” 8 C.F.R. § 216.6(a)(4)(iv). If USCIS grants the I-829 petition, the conditions are removed from the investor's green card and he becomes a lawful permanent resident. If not, the investor loses his conditional permanent residency. 8 C.F.R. § 216.6(d)(1)-(2).

         B. Kameli's Investment Offerings

         Kameli is an attorney who specializes in immigration matters. Beginning in 2008-2009, he began searching for businesses that could be used for EB-5 investments. Eventually, he decided to offer investments in funds that lent money for the development and construction of facilities that provided memory care and/or assisted living services to senior citizens. Kameli initially planned four such projects in Illinois: Aurora Memory Care, LLC d/b/a Bright Oaks of Aurora, LLC (the “Aurora Project”); Elgin Memory Care, LLC d/b/a Bright Oaks of Elgin, LLC (the “Elgin Project”); Golden Memory Care, Inc. d/b/a Bright Oaks of Fox Lake, Inc. (the “Golden Project”); and Silver Memory Care, Inc. d/b/a Bright Oaks of West Dundee, Inc. (the “Silver Project”).[1] A separate fund was created as an investment vehicle for each project: Aurora Assisted Living EB-5 Fund, LLC (the “Aurora Fund”); Elgin Assisted Living EB-5 Fund, LLC (the “Elgin Fund”); Golden Assisted Living EB-5 Fund, LLC (the “Golden Fund”); and Silver Assisted Living EB-5 Fund, LLC (the “Silver Fund”), respectively.[2] Each Fund used investors' money to make a loan to its associated Project for the development and construction of a particular senior living facility.

         In 2013, Kameli began to offer similar investments in connection with senior living facilities in Florida. Kameli created four Funds: First American Assisted Living EB-5 Fund, LLC (the “First American Fund”); Naples Memory Care EB-5 Fund, LLC (the “Naples Fund”); Ft. Myers EB-5 Fund, LLC (the “Ft. Myers Fund”); and Juniper Assisted Living EB-5 Fund, LLC (the “Juniper Fund”).[3] Each Fund loaned money to a Project for the development of a senior living center: First American Assisted Living, Inc. (the “First American Project”) for a facility to be located in Wildwood, Florida; Naples ALF, Inc. (the “Naples Project”) for a facility to be located in Naples, Florida; Ft. Myers ALF, Inc. (the “Ft. Myers Project”), for a facility to be located in Ft. Myers, Florida; and Juniper ALF, Inc. (the “Juniper Project”) for a facility to be located in Sun City, Florida.[4]

         The Illinois Funds were managed by Chicagoland Foreign Investment Group (CFIG), an entity created and owned by Kameli. The Florida Funds are managed by American Enterprise Pioneers (AEP), a subsidiary of CFIG. As detailed more fully below, in addition to managing the Illinois Funds, CFIG provided development services for the various Projects. In 2013, Kameli created Bright Oaks Group, Inc. and Bright Oaks Development, Inc. (together, “Bright Oaks”) to provide business and development services to the Projects. Nader Kameli (“Nader”), Kameli's brother, served as the president of CFIG and later as the CEO of Bright Oaks. In addition to Kameli personally, CFIG and AEP are named as defendants in the suit. The individual Funds and Projects, along with Bright Oaks, are named as relief defendants.[5]

         Kameli offered investors, the vast majority of whom are Iranian or Chinese nationals, an ownership interest in a particular Illinois or Florida Fund. Each of the Funds issued Private Placement Memorandums (“PPMs”) to prospective investors. These included a Business Plan containing information about the ways in which the Project would spend the money borrowed from the Fund. The Business Plan also provided an estimate of the time necessary for the Project's completion. The PPMs stated that the Projects would begin repaying the loan once the senior living facility had become operational. CFIG and AEP were to be compensated for their management services by a portion of the interest paid by the Projects on these loans.

         To invest, individuals executed subscription agreements, which they returned to defendants along with $500, 000. In addition, investors were charged an administrative fee of between $35, 000 and $75, 000. Investors' funds were held in escrow until their I-526 petitions were adjudicated. Once the petition was granted, the investor's money was deposited into the specific Fund for which the investor had applied. If the petition was denied, the money was returned to the investor. Eventually, each investor would hopefully earn back his or her principal plus interest. More importantly, each Project was to create enough jobs to support investors' I-829 petitions.

         It would be an understatement to say that things did not go as planned. Each of the Projects is over budget and behind schedule. To date, only the Aurora Project has actually been completed. However, only 12 of the facility's 60 units are occupied. The property is also the subject of a foreclosure suit in Kane County in which a receiver has been appointed. West Suburban Bank v. Aurora Memory Care LLC , No. 17-CH-000662 (Kane Cty. Cir. Ct. filed July 27, 2017).

         The other Illinois Projects remain in various stages of development. The foundations have been poured and structures partially erected for the Elgin and Golden Projects. However, the general contractor for both Projects has stopped working and has sued the respective Funds for unpaid amounts of $2.197 million and $1.549 million, respectively. See Global Builders v. Elgin Memory Care LLC, No. 16 CH 964 (Kane Cty. Cir. Ct. filed Sept. 23, 2016); Global Builders v. Golden Memory Care Inc., No. 16 CH 1472 (Kane Cty. Cir. Ct. filed Sept. 28, 2016). In addition, in December 2016, the City of Elgin sent Kameli a Notice of Unsafe Condition and Demolition Order for the Elgin Project. See Ex. 69, Elgin Community Development Dept. Notice of Unsafe Condition & Demolition Order, Dec. 22, 2016. Kameli appealed the demolition order, see Ex. 70, Letter from T. Kameli to Raoul Johnston, City of Elgin Community Development Department (Jan. 20, 2017), but the City of Elgin denied the appeal in March 2017, see Ex. 71, email from Christopher Beck, City of Elgin Assistant Corporation Counsel to Eric Phillips, U.S. Securities Exchange (Mar. 28, 2017). To date, there has been no construction on the Silver Project or on any of the Florida projects.

         Defendants claim that the Projects faced numerous obstacles, including delays due to bureaucratic requirements of municipal governments; rising construction and labor costs; and new regulations imposed by the U.S. Department of Treasury's Office of Foreign Asset Control (“OFAC”) on investments made by Iranian nationals.[6] See, e.g., Kameli Decl. ¶¶ 73, 158. The SEC's investigation of Kameli, which has been underway since at least 2015, has made it difficult for the Funds to attract additional investments.

         Defendants also state that, although the Projects are unfinished, they have in some cases created a sufficient number of jobs to support many investors' I-829 petitions. According to defendants, the Aurora Project has created 362 jobs; the Elgin Project has created 200 jobs; the Golden Project has created 189 jobs; and the Silver Project has created 14 jobs. See Defs.' Concl. Br. ¶ 20. Nevertheless, investors' green-card applications are in limbo. As of July 2014, USCIS had approved 12 of the 17 I-526 petitions filed by Aurora investors; 18 of the 24 I-526 petitions filed by Elgin and Golden Fund investors, respectively; 20 of the 29 I-526 petitions filed by Silver Fund investors; and approximately 14 I-526 petitions by investors in the First American Fund. USCIS has yet to act on any of the petitions submitted by investors in the other Florida Funds. To date, no I-829 petitions have been approved. See Tr. 472:24-473:10. It appears that, due to a backlog, few I-829 petitions, if any, have been adjudicated.

         C. The SEC's Allegations

         According to the SEC, defendants committed numerous violations of the securities laws in their handling of the EB-5 Funds and Projects. Specifically, the SEC alleges that defendants (1) charged several of the Funds and Projects over $4 million in undisclosed fees; (2) used approximately $16 million of investors' funds to engage in securities trading; (3) used money of Silver Fund investors as collateral for a line of credit, which they then used for their own benefit and the benefit of Funds and Projects other than the Silver Fund; and (4) made an undisclosed profit of roughly $1 million by acquiring parcels of land through a separate entity and selling them at a higher price to several of the Florida Projects. The SEC's complaint alleges that these constituted violations of section 17(a) of the Securities Act, and section 10(b) of the Exchange Act. The Commission seeks disgorgement of ill-gotten gains and the imposition of civil penalties pursuant to Section 21(d)(3) of the Exchange Act, 15 U.S.C. § 78u(d)(3), and Section 20(d) of the Securities Act, 15 U.S.C. § 77t(d).

         Contemporaneously with the filing of its complaint, the SEC moved for a temporary restraining order (TRO) and a preliminary injunction, seeking to enjoin defendants from further violations of the securities laws, and to enjoin Kameli from participating in any further EB-5 Program offerings. The motion also seeks ancillary relief, including: (1) an asset freeze; (2) appointment of a Receiver; (3) an accounting; and (4) a document preservation directive.

         After a hearing on the TRO, the parties entered into an agreement pending the court's decision on the SEC's preliminary injunction motion. Order ¶ I.A, ECF No. 40. The agreement freezes all the defendants' and relief defendants' accounts, except for Kameli's personal accounts and those of the Aurora Fund (which must have funds available to pay for the Aurora facility's operation). The order also forbids Kameli, Nader, and other individuals from using the entities' assets. Id.

         A preliminary injunction hearing was subsequently held over a period of five days, during which the court heard testimony from more than fifteen witnesses. The parties also submitted post-hearing briefs with proposed findings of fact and conclusions of law.

         LEGAL STANDARD

         Section 20(b) of the Securities Act and Section 21(d) of the Exchange Act both authorize the SEC, “upon a proper showing, ” to obtain a permanent or temporary injunction against violators of the securities. See 15 U.S.C. § 77t(b); 15 U.S.C. § 78u(d). Because the SEC seeks a preliminary injunction pursuant to these statutory provisions, the traditional preliminary injunction standard does not apply. See, e.g., United States v. Dove, No. 1:10-CV-0060, 2010 WL 11426136, at *2 (N.D. Ill. Apr. 16, 2010) (“‘When an injunction is expressly authorized by statute, the standard preliminary injunction test is not applied.'”) (quoting S.E.C. v. Mgmt. Dynamics, Inc., 515 F.2d 801, 808 (2d Cir. 1975)).

         Although the Seventh Circuit has not addressed how the applicable standard is to be understood, there is general agreement that “[t]he SEC may obtain a temporary injunction against further violations of the securities laws upon a substantial showing of likelihood of success as to (a) current violations and (b) a risk of repetition.” U.S. S.E.C. v. Hollnagel, 503 F.Supp.2d 1054, 1058 (N.D. Ill. 2007); see also S.E.C. v. Cavanagh, 155 F.3d 129, 132 (2d Cir. 1998) (“A preliminary injunction enjoining violations of the securities laws is appropriate if the SEC makes a substantial showing of likelihood of success as to both a current violation and the risk of repetition.”); S.E.C. v. Trabulse, 526 F.Supp.2d 1008, 1012 (N.D. Cal. 2007) (“A preliminary injunction enjoining violations of the securities laws is appropriate if the SEC makes a substantial showing of likelihood of success as to both a current violation and the risk of repetition.”).[7]

         There is also general agreement that, unlike a private litigant, the SEC may be granted a preliminary injunction without showing a risk of irreparable injury or the unavailability of alternative remedies. See, e.g., Smith v. S.E.C., 653 F.3d 121, 127-28 (2d Cir. 2011) (“In this jurisdiction, injunctions sought by the SEC do not require a showing of irreparable harm or the unavailability of remedies at law.”); Sec. & Exch. Comm'n v. San Francisco Reg'l Ctr. LLC, No. 17-CV-00223-RS, 2017 WL 1092315, at *2 (N.D. Cal. Mar. 23, 2017); Sec. & Exch. ComM'n v. Texas Int'l Co., 498 F.Supp. 1231, 1253 (N.D. Ill. 1980) (“Under this standard, the SEC need not show irreparable harm but need only show that the statutory conditions have been satisfied.”).

         The defendants argue that the SEC is seeking two types of injunctive relief: a statutory injunction prohibiting Kameli from committing future violations of the securities laws; and a conduct-based injunction prohibiting him from participating in any EB-5 offering. Defs.' Concl. Br. at 2 n.1. Defendants agree that the standard articulated above applies in the case of the former, but they argue that the traditional standard (requiring a showing of irreparable harm and a balancing of the hardships) applies where the SEC seeks a conduct-based injunction. The court has found no authority for this proposition.[8] Nevertheless, a preliminary injunction against future violations of securities laws is a grave remedy. See, e.g., S.E.C. v. Compania Internacional Financiera S.A., No. 11 CIV 4904 DLC, 2011 WL 3251813, at *10 (S.D.N.Y. July 29, 2011) (“An injunction against future securities violations has grave consequences, especially for individuals who are regularly involved in the securities industry, because the injunction places them in danger of contempt charges in all future securities transactions. The reputational and economic harm of suffering a preliminary injunction, especially on charges of fraud, can also be severe.”) (citation, quotation marks, and alteration omitted). And courts have observed that, “[l]ike any litigant, the Commission should be obliged to make a more persuasive showing of its entitlement to a preliminary injunction the more onerous are the burdens of the injunction it seeks.” See, e.g., S.E.C. v. Unifund SAL, 910 F.2d 1028, 1039 (2d Cir. 1990).

         DISCUSSION

         As noted above, the SEC alleges violations of 10(b) of the Exchange Act and 17(a) of the Securities Act. The elements of a claim under sections § 10(b) and § 17(a)(1) are essentially the same. “The principal difference is that § 10(b) and Rule 10b-5 apply to acts committed in connection with a purchase or sale of securities while § 17(a) applies to acts committed in connection with an offer or sale of securities.” S.E.C. v. Maio, 51 F.3d 623, 631 (7th Cir. 1995).[9]To prove a violation of either statute, the SEC must show that defendants “(1) made a material misrepresentation or a material omission as to which [they] had a duty to speak, or used a fraudulent device; (2) with scienter; (3) in connection with the purchase or sale of securities.” S.E.C. v. Bauer, 723 F.3d 758, 768-69 (7th Cir. 2013) (quotation marks and brackets omitted). The elements of claims under § 17(a)(2) and § 17(a)(3) are the same as those for § 17(a)(1), except they require a showing of negligence instead of scienter. Id. at 768 n.2 (“§ 10(b), Rule 10b-5 and § 17(a)(1) have a scienter requirement, while § 17(a)(2) and (a)(3) … do not.”). “An omission or misstatement is material if a substantial likelihood exists that a reasonable investor would find the omitted or misstated fact significant in deciding whether to buy or sell a security, and on what terms to buy or sell.” Rowe v. Maremont Corp., 850 F.2d 1226, 1233 (7th Cir. 1988). Scienter is a mental state that “embraces an intent to deceive, manipulate, or defraud, as well as reckless disregard of the truth.” Bauer, 723 F.3d at 775 (quotation marks and citations omitted).

         A. Likelihood of Success in Showing Current or Past ...


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