276 F. Supp. 3d 852
N.D. Ill.2017Background
- SEC sued immigration attorney Sayed Kameli and related entities alleging securities-law violations in connection with EB-5 investment funds that loaned investor capital to senior-care development projects in Illinois and Florida. SEC sought a preliminary injunction and ancillary relief including a receiver and asset freeze.
- Kameli formed multiple Funds (Illinois Funds and Florida Funds) and affiliated entities (CFIG, AEP, Bright Oaks, PREPI). Investors (mostly Iranian/Chinese nationals) contributed $500,000 plus fees; funds were held in escrow until USCIS I-526 approval.
- Many projects are behind/over budget; only one project (Aurora) was completed and is under foreclosure; most I-829 petitions remain unadjudicated.
- SEC alleged undisclosed developer/management payments (~$4M), use of ~ $15.8M of investor funds in brokerage accounts, misuse of a Silver Fund–collateralized line of credit for non-project and personal expenses, and undisclosed profit (~$1.06M) from PREPI land sales to projects.
- After a five-day preliminary injunction hearing and extensive evidence, the court denied the SEC’s motion, finding the SEC had not made the required substantial showing of likelihood of success on most claimed violations and had not shown sufficient risk of repetition.
Issues
| Issue | Plaintiff's Argument (SEC) | Defendant's Argument (Kameli) | Held |
|---|---|---|---|
| Undisclosed developer/management compensation and conflicts | PPMs omitted millions in payments to CFIG/AEP/Bright Oaks and failed to disclose Kameli family involvement; omissions were material and misleading. | Payments were for development services (not manager compensation), many fees were disclosed in Business Plans, and conflicts language in PPMs warned of undisclosed/affiliate transactions. No scienter shown. | Court: SEC failed to make a substantial showing of likelihood of success on claims based on undisclosed compensation/conflicts. |
| Investment of Fund proceeds in brokerage accounts/securities trading | Investor funds were used to trade securities, contrary to PPMs that said funds would be used for construction; trading produced gains/losses and diverted proceeds (e.g., to PREPI). | Transfers were authorized by Operating Agreements and/or were necessary due to banking/OFAC/FDIC issues; funds remained available for projects and were placed in low-risk accounts to protect investors. | Court: SEC did not sufficiently rebut defendants’ explanations or show PPMs were misleading; no substantial showing of success on these claims. |
| Silver Fund line of credit collateralized by investor funds | CFIG used Silver collateral to secure a credit line and spent proceeds on non-project expenses and personal charges (cruise, tuition); investors would view authorization as for fund benefit. | Investor Holdings Account Agreement expressly allowed use of investor-held funds as collateral and permitted manager to use line proceeds as it deemed proper; some expenditures arguably benefitted other projects. | Court: SEC made a sufficient showing that use of line proceeds for personal expenses was misleading, material, and involved scienter; but overall risk of future misuse was limited and injunction not justified. |
| PREPI land transactions (buy low / sell to projects at higher price) | PREPI acquired land and sold to Projects at marked-up prices, producing undisclosed profit (~$1.06M) that should have been disclosed as compensation/conflict. | PREPI bought land before Funds existed; appraisals later showed land value exceeded $1M; sales to Projects were at or below appraised value and consistent with business-plan land-cost estimates. | Court: SEC failed to show non-disclosure rendered PPMs misleading or that proceeds constituted undisclosed compensation; no substantial showing of success. |
| Preliminary injunction / risk of repetition | SEC sought statutory injunction plus conduct-based injunction and ancillary relief to prevent future violations and preserve assets. | Defendants had cooperated, frozen assets per interim order, ceased taking new investors, and claim inability/intent not to get new lines of credit; contend traditional harms balancing should apply to conduct restriction. | Court: Because SEC made a substantial showing only on limited misuse of Silver line for personal expenses, and not on broader allegations or a sufficient risk of repetition, preliminary injunction and ancillary relief were denied. |
Key Cases Cited
- Maio v. S.E.C., 51 F.3d 623 (7th Cir.) (elements of §10(b) and §17(a)(1) claims are essentially the same)
- Bauer v. S.E.C., 723 F.3d 758 (7th Cir.) (scienter standard and elements for securities-fraud claims)
- Rowe v. Maremont Corp., 850 F.2d 1226 (7th Cir.) (standard for materiality of omissions/misrepresentations)
- Cavanagh v. S.E.C., 155 F.3d 129 (2d Cir.) (SEC may obtain injunction upon substantial showing of likelihood of success on past violations and risk of repetition)
- Smith v. S.E.C., 653 F.3d 121 (2d Cir.) (SEC injunctions do not require showing of irreparable harm)
- Holschuh v. S.E.C., 694 F.2d 130 (7th Cir.) (once past violation shown, SEC need only show reasonable likelihood of future violations for injunctive relief)
- Unifund S.A.L. v. S.E.C., 910 F.2d 1028 (2d Cir.) (courts should require a persuasive showing when injunction burdens are onerous)
- S.E.C. v. Familant, 910 F. Supp. 2d 83 (D.D.C.) (discusses scheme liability/deceptive conduct theory)