by Austin Fragomen and Chad Ellsworth
While most other types of business immigration cases allow a client to consent to dual representation with a proper waiver, given the EB-5 industry’s heavy scrutiny in the media, by congressional leaders, and by regulatory bodies such as the Securities and Exchange Commission (“SEC”), we caution against dual representation in the EB-5 context. Immigration attorneys who engage in dual representation in the EB-5 context may expose themselves to serious risks and potential sanctions by the SEC and their state bar. Therefore, we advise regional centers and individual investors to obtain separate immigration counsel to navigate through the complicated EB-5 regulatory and immigration terrain when at all possible.
As demonstrated by several recent cases such as American Life Inc., and Hui Feng and the Law Offices of Feng & Associates P.C., the SEC has increased its scrutiny of the EB-5 program and made it an enforcement priority to penalize anyone, including immigration attorneys, who may not be complying with SEC regulations. The SEC has the authority to issue civil penalties and cease and desist orders, compel disgorgement of illegal profits, bar a firm from acting as an investment advisor, or bar a professional from practice before the commission for failure to comply with SEC regulations.
Recently the SEC has found regulatory violations involving immigration attorneys. On December 7, 2015, the SEC announced a series of enforcement actions against lawyers and their law firms across the country for violating Section 15(a)(1) of the Exchange Act by offering EB-5 investments to investors as unregistered brokers. Therefore, immigration attorneys should be especially wary of receiving any transaction-based compensation or of any appearance that a broker-dealer relationship exists with a regional center.
Further, the SEC has regulations pertaining to the standards of professional conduct for lawyers appearing and practicing before the commission. Although Part 205 of the SEC regulations only pertains to lawyers representing issuers of public registered securities, it demonstrates that a lawyer’s professional conduct can be scrutinized by the SEC.
The Model Rules of Professional Conduct
On December 7, 2015, the SEC filed a complaint in the U.S. District Court for the Central District of California against Hui Feng, and the Law Offices of Feng & Associates P.C. The SEC’s complaint alleged violations, including SEC Rule 10b-5 and Section 15(a)(1) of the Exchange Act. SEC Rule 10b-5, codified at 17 C.F.R. 240.10b-5, makes it unlawful to employ any device to defraud, or make any untrue statement of a material fact, or to omit to state a material fact in the purchase and sale of a security. Feng allegedly violated these two SEC regulations amongst others by offering and selling EB-5 investments to clients as an unregistered broker and by defrauding clients without disclosing his commissions from the regional center in connection with individual investor subscriptions, according to the SEC complaint. Further, Feng’s alleged conduct as an attorney also violated the ABA Model Rules of Professional Conduct (“ABA Model Rules”) in his failure to meet his fiduciary duties of loyalty, disclosure, and competent representation to his clients.
The ABA Model Rules provide the ethical guidelines to ensure professional and ethical standards of conduct for all U.S.-licensed attorneys. These rules, or a variation of them, have been adopted by most states and are enforceable against the attorneys in each respective state. The rules relating to an attorney’s fiduciary duties, especially the three duties of loyalty, confidentiality and competent representation, are especially relevant to an immigration attorney’s consideration of dual representation.
In every instance prior to engagement, an immigration attorney must evaluate whether dual representation will conflict with their legal duty to act solely in the client’s interest. Additionally, there are specific limitations on dual representation where a conflict of interest may arise. Per ABA Model Rule 1.7, immigration attorneys should not engage in dual representation when:
1. The representation of one client would presently be directly adverse to another client; or
2. There is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer in the future.
The ABA Model Rule 1.7 also provides a limited circumstance where a conflict may be waived:
1. The lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client;
2. The representation is not prohibited by law;
3. The representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and
4. Each affected client gives informed consent, confirmed in writing. If all of the above factors are not met, even a client’s informed consent in writing will not allow an attorney to represent both clients. Generally, in immigration law, attorneys more commonly engage in dual representation of clients than in other practice areas; this is due to the common fact that, in business law and family law contexts, the interests of both clients are usually closely aligned. Immigration representation is unique when compared to other areas of the law, as it is typically not an adversarial process, and as all parties typically have the same desired objectives.
Further, as a practical matter, using separate counsel in a business or family immigration context results in inefficiencies and higher costs for both parties.
While most other types of business immigration cases allow a client to consent to dual representation with a proper waiver, we believe the EB-5 context presents unique challenges when a waiver is unlikely to stand. The interests of the regional center and the individual investor are arguably not aligned at the very outset of the EB-5 relationship, since the regional center’s main objective is to obtain financial funding for its projects while the investor’s main interest is to obtain immigration benefits. Given these differing interests, we believe that as a matter of best practice, an immigration attorney should only represent one party—either the regional center or the individual investor— but not both. While some attorneys may disagree with our opinion based on their specific waiver language, which tends to narrowly define the scope and limits of attorney representation, we believe dual representation in the EB-5 context is fraught with risk and that waivers are insufficient. In addition to the ethical issue of a conflict of interest between two clients, an EB-5 attorney runs the risk of SEC scrutiny and potential enforcement as EB-5 offerings are securities offerings.
SEC Anti-Fraud Provisions
Generally speaking, a gap in power and financial knowledge often exists between a large corporation that is issuing the security and an individual investor of the security. Congress enacted the Securities Act of 1933 to protect investors from fraud in the offer or sale of securities along with the Securities and Exchange Act of 1934 to govern the secondary trading of securities. Under these Acts and corresponding SEC regulations, violations for issuers of security occur when there is either negligent misrepresentation or actual knowledge of making an untrue statement of material fact or any omission to state a material fact, which cannot be waived.
Although most EB-5 offerings are not registered securities offerings, these anti-fraud provisions still apply. Therefore, given the government’s extra measure of consumer protection required for security offerings, we believe that an attorney who engages in dual representation may face a difficult situation if certain prejudicial information about a regional center arises, as fiduciary duties to both clients will be in conflict. Although a waiver may contain language explaining that the EB-5 investor has assumed the risk and will seek new counsel in the event a conflict arises, certain SEC anti-fraud rules cannot be waived. If the conflict of interest cannot be resolved through a waiver, then the attorney would have to withdraw from a difficult situation that could have been altogether mitigated by not representing both clients in the first place.
Unlike a typical securities offering, the power and knowledge gap may be even greater in the EB-5 context where EB-5 investors are often foreign nationals who may have limited English proficiency; have limited understanding of complex U.S. immigration and securities laws; and are often working through third parties that include migration agents. As such, there is a greater likelihood that the EB-5 investor may be unaware of the risks that he is assuming when he signs a dual representation waiver. Based on these unique factors, we believe there is a greater likelihood that an EB-5 investor may hastily sign a waiver without truly understanding the extent of his consent to dual representation if it is not properly explained to him by independent counsel. Therefore, even if a regional center and an investor may agree to a waiver, we do not recommend that the immigration attorney represent both clients.
Divergent Interests and Conflicts in the EB-5 Context
It is also difficult for an immigration attorney to represent both a regional center and individual investor while adhering to the duties of loyalty, confidentiality, and competent representation as required by the rules of professional conduct.
For example, regional centers and individual investors frequently have divergent interests at the outset of the EB-5 relationship, as outlined below:
• A serious conflict may arise in a dual representation context when an individual investor asks an immigration attorney to perform immigration due diligence on a regional center’s project prior to subscription. It’s very common in the industry for individual investors to seek guidance from their immigration attorney on factors that may affect the likelihood of success for a particular EB-5 project, such as the capital stack, job cushion and job allocation procedures, in order to compare them against other popular projects on the market. In this instance, a conflict may arise between the competing duties of loyalty to the regional center and the individual investor. The immigration attorney must accurately reflect the regional center project’s particular weaknesses to the individual investor, as it is in the investor’s best interest to select the project with the highest likelihood of success. This results in a violation of the duty of loyalty to the regional center, as the regional center may lose the investor and their funding.
• Regional centers and individual investors also usually have competing interests when it comes to the timing of the release of EB-5 funds into the actual project. As the regional center’s primary goal is to secure funding, it is in the interest of the regional center to receive funds from escrow as soon as they are deposited by the individual investor, so that money can be immediately deployed into the business or construction of the project. However, potential investors typically prefer their funds to remain in escrow as long as possible under U.S. Citizenship and Immigration Services (“USCIS”) regulations, released upon approval of the investor’s I-526 petition, since there is a smaller risk of the project losing capital the shorter the period of deployment.
• Further, a conflict may arise between regional centers and individual investors when it comes to the disclosure of facts between the two parties. In the EB-5 context, almost all offerings are structured by regional centers as private placements, which qualify for Regulation D or Regulation S exemptions under the Securities Act of 1933. Under these provisions, the EB-5 investment is considered a private placement or an unregistered offering; therefore, these offerings are exempt from registration with the SEC3. As a result, the usual protections of a registered offering may not apply to the EB-5 offering. Regional centers that are exempt must present information that is true and may not omit any material facts, but they are not required to make the same comprehensive financial disclosures to investors as with registered offerings. Thus, investors may be exposed to greater risk of non-disclosure by regional centers.
We believe this dilemma may be further compounded when the immigration attorney represents both the regional center and the individual investor, as it may be against the regional center’s interest to disclose all known or potential problems to the individual investor but the attorney has a fiduciary duty to both clients. Therefore, this may lead to a direct conflict between the immigration attorney’s duty of loyalty and confidentiality to the regional center and the individual investor.
A conflict also cannot be adequately waived when there is a significant risk that an immigration attorney’s representation of one client will be materially limited by the attorney’s responsibilities to another client during the course of representation.
In the EB-5 context, there are several significant examples where interests are not likely to be aligned throughout the entirety of the EB-5 relationship, as bulleted below:
• A conflict may arise between the regional center and the individual investor when it comes to the timing of the adjudication of the I-526 petition, especially when there are “age-out” considerations for dependent beneficiaries. For example, an investor may be incentivized to delay the I-526 petition adjudication when there is a beneficiary who is nearing the age of 21, as USCIS “freezes” the child’s age while the petition is pending, but not once the petition is approved and the investor is waiting for an immigrant visa number to become available. Thus, it may be in the investor’s best interest to delay response to a Request for Evidence (“RFE”) for the I-526 petition if one is received, in order to have the child’s age frozen for a longer period of time. This may result in a conflict between the regional center and individual investor in a few ways, as typically it is in the regional center’s best interest to have I-526 petitions adjudicated as quickly as possible. For example, some regional centers have provisions in their offering documents which prohibit release of all or a portion of the EB-5 capital until after approval of the I-526 petition. Additionally, from a project marketing perspective, regional centers are incentivized to report the fastest average processing times, based on past case adjudication, in order to attract future investors.
• A clear and direct conflict arises in any litigation action between the individual investor and the regional center, such as in cases where the project falls through, the project loses all or a significant portion of the investor’s capital contribution through mismanagement of the project, there was a misappropriation of funds or fraud perpetrated by the regional center or project, or any other instance where the individual investor sues the regional center. Continued dual representation in this instance is specifically prohibited under the ABA Model Rules, as it involves the assertion of a claim by one client against another client represented in the same litigation or other proceeding.
• Further, conflicts of interest are more likely to transpire the longer the duration of representation. In EB-5 matters, additional conflicts may arise between the regional center and the investor during the lengthy wait, often several years, before an investor is able to obtain U.S. permanent residence. In the case of Chinese investors, the wait time is even longer due to current immigrant visa availability.
Dual representation in the EB-5 context also presents an issue due to the relative uncertainty of the laws and regulations in the industry. Since the regional center program operates as a pilot program, it requires reauthorization for its continued existence, with the next deadline set at September 30, 2016. Although it is likely that the EB-5 regional center program will be extended, it is almost certain that there will be significant changes to regulations surrounding the EB-5 program and regional center submissions in the coming years.
These potential changes may further exacerbate conflicts of interest issues between regional centers and individual investors. As an example, under the proposed EB-5 Integrity Act of 2016, all applications for approval of an investment in a new commercial enterprise must disclose any existing or potential conflicts of interest among the regional center, the new commercial enterprise, the job-creating entity, or principals or attorneys of any of these entities. As such, these proposed changes would make it even more difficult for an immigration attorney to represent both the regional center and an individual investor while fulfilling the duties of loyalty, confidentiality, and competent representation.
Potential Consequences of Dual Representation
There are several potential consequences when an immigration attorney represents both the regional center and individual investor, and a conflict of interest arises. When a non-waivable conflict occurs after an immigration attorney has been engaged, the immigration attorney must withdraw promptly from representation of both parties. If, subsequent to this withdrawal, separate counsel cannot be quickly obtained leading to harm to the regional center or individual investor, the immigration attorney may be liable for monetary damages. Additionally, if dual representation was improperly entered into as an initial matter, the immigration attorney may also face malpractice issues, potential sanctions by the state bar, additional lawsuits from the regional center or individual investor, and reputational damage leading to the loss of other clients.
Historically, the practice of law has been largely self-regulated based on our ethical responsibilities to our clients and the public. Again, due to the actions of a few bad actors, the EB-5 industry’s reputation has recently suffered harm based on instances of fraud and misrepresentation. It is our ethical responsibility as responsible professionals to set a good example in the EB-5 industry and promote the continued viability of the EB-5 program. Therefore we suggest that an immigration attorney not engage in dual representation and carefully consider all potential ramifications to their personal and firm reputation, to both their regional center and individual investor clients, and the reputation of the EB-5 industry as a whole if they do.
Even the perception of impropriety that may arise from dual representation should be avoided. We believe that as a matter of best practice, the regional center and the investor should seek independent immigration attorneys to zealously advocate their interests.
See Fragomen, A. T., Jr., & Yakoob, N. H. (2007, Summer). No Easy Way
Out: The Ethical Dilemmas of Dual Representation. Georgetown Immigration
Law Journal, 21, 621.
H.R. 4530 EB-5 Integrity Act of 2016 available at https://www.congress.