The Securities and Exchange Commission (SEC) has filed suit against an EB-5 operator for misappropriation of investor funds from 2010 to 2013. According to documents filed on April 28, defendants Serofim Muroff and affiliated entities Blackhawk Manager, LLC, and ISR Capital, LLC raised approximately $140.5 million in investor capital from over 280 foreign investors.
According to filed documents in the case of Securities and Exchange Commission v. Serofim Muroff, Blackhawk Manager, LLC, ISR Capital, LLC, Equity Recap Account, LLC and Debra L. Riddle, the SEC alleges that through Muroff’s Idaho State EB-5 Regional Center, the group offered foreign investors a chance to petition for residency by contributing to ventures which included mining operations and a luxury real estate development.
The EB-5 Program allows foreign investors to apply for permanent residency for themselves and their families provided they invest a minimum of $500,000 into American projects that save or add ten full-time jobs. The program is administered by the United States Citizen and Immigration Services (USCIS) and provides an opportunity for American firms to raise capital from foreign investors who qualify under the rules of the program.
The complaint alleges that while some of the investor funds were directed towards valid projects, including a gold mine and commercial real estate deal, Muroff, through Blackhawk and ISR Capital, misappropriated and misused investor funds from both project offerings. The SEC claims Muroff siphoned off over $5 million for personal purposes– including $1.1 million dollars to purchase residential properties, $423,000 to invest in a private business venture, and another $182,000 for luxury vehicles and personal expenses.
The suit also asserts that Muroff, as Manager of Quartzburg Gold, diverted another $20 million into an options trading account that lost or spent more than $1 million of investor funds, and never disclosed the investment strategy, the fees paid to advisers, or any of the losses to the investors. He also allocated $5.6 million towards a marketing firm in Taiwan to solicit additional Chinese investors.
The complaint named Debra Louise Riddle, the Chief Financial Officer of ISR Capital, as a defendant based on her employment as bookkeeper and administrative assistant to Muroff. The SEC alleges that Riddle facilitated Muroffs scheme by transferring money from the fund into Muroff’s wholly-owned company, Equity Recap Account, LLC, as well as funneling funds directly to Muroff for his personal use.
By offering and selling interests in the LLC, defendant Riddle engaged in a scheme that is a violation of the antifraud provisions of Section 17(a) of the Securities Act of 1933. Muroff, as manager of Blackhawk Gold and Quartzburg Gold, and acting as an investment advisor through Blackhawk Manager and ISR Capital, violated Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 by making misrepresentations, engaging in fraud, and breaching the fiduciary duties to the investors in administering the Fund.
Under the terms of a settlement agreement, Muroff will pay approximately $5 million in disgorgement, along with $865,270 in interest. Muroff and his companies will also pay a $2 million penalty and agree to refrain from any future investment offerings, participation in the EB-5 Program, or acting as an officer or director of any public entity. Riddle agreed to pay $503,417 in disgorgement, along with $81,626 in interest, and a $100,000 fine.
