Case 2:15-cv JLR Document 2 Filed 08/24/15 Page 1 of 25

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1 Case :-cv-00-jlr Document Filed 0// Page of 0 UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON SEATTLE DIVISION SECURITIES AND EXCHANGE COMMISSION, vs. Plaintiff, PATH AMERICA, LLC; PATH AMERICA SNOCO LLC; PATH AMERICA FARMER S MARKET, LP; PATH AMERICA KINGCO LLC; PATH AMERICA TOWER, LP; PATH TOWER SEATTLE, LP; POTALA TOWER SEATTLE, LLC; and LOBSANG DARGEY, Defendants, and POTALA SHORELINE, LLC; and POTALA VILLAGE KIRKLAND, LLC, Relief Defendants. Civil Action No. MOTION FOR TEMPORARY RESTRAINING ORDER SECURITIES AND EXCHANGE COMMISSION TELEPHONE: -0-00

2 Case :-cv-00-jlr Document Filed 0// Page of 0 EX PARTE The Securities and Exchange Commission hereby moves, ex parte, for an order temporarily restraining and enjoining Defendants Lobsang Dargey, Path America, LLC; Path America SnoCo LLC; Path America Farmer s Market, LP; Path America KingCo LLC; Path America Tower, LP; Path Tower Seattle, LP; and Potala Tower Seattle, LLC. In particular, the Commission moves the Court for an immediate order: () Enjoining Defendants from engaging in specified conduct; () Freezing Defendants assets and specified assets of Relief Defendants Potala Shoreline, LLC and Potala Village Kirkland, LLC, including any assets held in escrow; () Requiring Defendant Dargey to repatriate assets; () Prohibiting the destruction of documents; () Granting expedited discovery; () Requiring Defendant Path America, LLC to prepare an accounting of all money obtained from investors; and () Requiring Defendants to show cause why the Court should not issue a Preliminary Injunction imposing the requested relief during the pendency of this action. The Commission s motion is brought pursuant to Section (b) of the Securities Act of, U.S.C. t(b), and Section (d) of the Securities Exchange Act of, U.S.C. u(d), which permit the Commission to seek, and the Court to order, a temporary injunction based upon a showing of a prima facie case of previous violations of federal securities laws, and a reasonable likelihood that the wrong will be repeated or is being repeated through ongoing conduct. The Commission s motion is supported by the attached brief; the Declaration of Michael D. Foley and the exhibits thereto; the Declaration of Bernard B. Smyth and the exhibits thereto; the Declaration of Steven D. Buchholz and the exhibits thereto; the Declaration of Susan F. LaMarca; and the [Proposed] Temporary Restraining Order and Order Granting Other Ancillary Relief. -- SECURITIES AND EXCHANGE COMMISSION TELEPHONE: -0-00

3 Case :-cv-00-jlr Document Filed 0// Page of 0 TABLE OF CONTENTS I. INTRODUCTION... II. FACTS... A. Defendant Dargey Controls the Entity Defendants and Relief Defendants... B. Defendants Raise Funds and Issue Securities to Develop Specific Real Estate Projects.... Farmer s Market Project.... Tower Project... C. Defendants Misappropriated and Misused Investor Funds.... Dargey Obtains Access to Investors Money.... Dargey Used Investor Funds to Purchase a Home.... Dargey Siphons Cash from Both the Farmer s Market and the Tower Accounts.... Dargey Funded Two Unrelated Real Estate Projects Using Investors Money... D. Defendants Solicit Investments Based on Materially Misleading Statements... E. Investor Funds Held in Escrow... III. ARGUMENT... 0 A. Standard for TRO and for an Asset Freeze in SEC Enforcement Cases... 0 B. Defendants Deceptive Misappropriation and Fraudulent Statements... C. Defendants Should Be Immediately Enjoined to Halt the Fraud... D. The Court Should Order the Requested Asset Freezes... -i- SECURITIES AND EXCHANGE COMMISSION TELEPHONE: -0-00

4 Case :-cv-00-jlr Document Filed 0// Page of E. The Court Should Order the Requested Ancillary Relief... IV. CONCLUSION ii- SECURITIES AND EXCHANGE COMMISSION TELEPHONE: -0-00

5 Case :-cv-00-jlr Document Filed 0// Page of 0 CASES TABLE OF AUTHORITIES Basic v. Levinson, U.S., - ()... City of Roseville Employees Ret. Sys. v. Energysolutions, Inc., F. Supp. d, (S.D.N.Y. )... FTC v. Affordable Media, LLC, F.d, (th Cir. )... FTC v. The Crescent Publ. Gr., Inc., F. Supp. d, - (S.D.N.Y. 0)... Gebhart v. SEC, F.d 0, 0 (th Cir. 0)... Hicks ex rel. Feiock v. Feiock, U.S., ()... Hollinger v. Titan Capital Corp., F.d, (th Cir. 0)... In re Software Toolworks Inc., 0 F.d, (th Cir.)... Janus Capital Grp., Inc. v. First Derivative Traders, --- U.S. ---, S. Ct., ()... Johnson v. Couturier, F.d 0, 0 & n. (th Cir. 0)... SEC v. Cavanagh, F.d, (d Cir. )..., SEC v. Hickey, F.d, (th Cir. 0)... SEC v. Int l Swiss Invests. Corp., F.d, (th Cir. 0)..., SEC v. Management Dynamics, Inc., F.d 0, 0 (d Cir. )... SEC v. Manor Nursing Ctrs., Inc., F.d 0, 0 n. (d Cir. )..., SEC v. Murphy, F.d, (th Cir. 0)... -iii- SECURITIES AND EXCHANGE COMMISSION TELEPHONE: -0-00

6 Case :-cv-00-jlr Document Filed 0// Page of 0 SEC v. Platforms Wireless Int l Corp., F.d 0, 0 (th Cir. 0)... SEC v. Rana Research, Inc., F.d, (th Cir. )... SEC v. Schooler, 0 F. Supp. d, n. (S.D. Cal. )... SEC v. Trabulse, F. Supp. d 00, 0- (N.D. Cal. 0)... SEC v. Unifund SAL, 0 F.d 0, 0 (d Cir. 0)..., SEC v. Unique Fin. Concepts, Inc., F.d, n. (th Cir. )..., SEC v. Wencke, F.d, (th Cir. 0)..., SEC v. Zandford, U.S., (0).... Simpson v. AOL Time Warner, Inc., F.d 00, 0 (th Cir. 0)... Spot Runner, Inc. v. WPP Luxembourg Gamma Three Sarl, F.d 0, (th Cir. ) cert. denied, S. Ct. ()... Stuhlbarg Int l Sales Co. v. John D. Brush & Co., 0 F.d, n. (th Cir. 0)... United States v. Diapulse Corp. of America, F.d, - (d Cir. )... United States v. Jenkins, F.d, 0 (th Cir. )... United States v. Nutri-Cology, Inc., F.d, (th Cir. )..., Vernazza v. SEC, F.d, 0 & n. (th Cir. 0)... STATUTES U.S.C. q(a)... U.S.C. j(b)... C.F.R. 0.0b-... -iv- SECURITIES AND EXCHANGE COMMISSION TELEPHONE: -0-00

7 Case :-cv-00-jlr Document Filed 0// Page of 0 I. INTRODUCTION Since February, defendants Lobsang Dargey, Path America, LLC ( Path America ), and the other entity defendants whom they together control, have defrauded investors by luring Chinese nationals into an investment under the guise of providing the opportunity for investment returns coupled with a path to United States residency. As a result of Defendants fraud, more than 0 individuals have invested more than approximately $ million as of July 0,, purportedly to develop two large real estate projects in the Seattle area. But contrary to the Defendants claims to investors and to the United States immigration authorities, Defendants have not used the funds solely for the intended purposes. Instead, Defendant Dargey, using other entity defendants that he controls, has misappropriated more than approximately $. million of the investors funds. Dargey used significant amounts for his own consumption, such as approximately $. million he spent to purchase a residence in the name of a trust of which he is a beneficiary, and cash withdrawals totaling hundreds of thousands of dollars over a more than two-year period, including at different casinos. He also took millions of dollars of investor funds to fund other, unrelated real estate projects near Seattle. The victims of Defendants fraud are foreign nationals targeted by the Defendants because they seek a pathway to residency in the United States, under a program called the EB- Program. The program provides that foreign nationals may qualify for United States residency if they make a qualified investment of $00,000 or more in a specified project that is determined to have created or preserved at least 0 jobs for United States workers. Defendants have solicited millions of dollars from investors purportedly for two such projects in the Seattle area, while Dargey has concealed his misuse of their funds. Defendants have also failed to disclose to the investors that the purposes of their investments the opportunity to earn a return on their money, as well as to obtain residency have been put in serious jeopardy, and may be entirely unachievable, due to Defendants actions. To halt Defendants fraud, the Securities and Exchange Commission ( Commission or SEC ) seeks an order temporarily and immediately restraining Defendants from further violations, including injunctions against the solicitation of new investors. Further, to preserve the status quo, the -- SECURITIES AND EXCHANGE COMMISSION TELEPHONE: -0-00

8 Case :-cv-00-jlr Document Filed 0// Page of 0 Commission seeks an order freezing accounts or assets that are the proceeds of the fraud and accounts or assets that are at risk of being dissipated, and requiring Defendant Dargey to repatriate funds moved to bank accounts abroad. II. FACTS A. Defendant Dargey Controls the Entity Defendants and Relief Defendants Defendant Lobsang Dargey of Bellevue, Washington, sits at the top of several companies he controls, which are instrumental to this fraudulent scheme. Dargey wholly owns and controls Dargey Development, LLC, which is in turn the sole owner of Defendant Path America, LLC, a Washington limited liability company since 0, with its principal place of business in Everett, Washington. See and Exhibits and to the Declaration of Bernard B. Smyth ( Smyth Decl. ). Dargey, through Path America, also controls each of the other Defendants as described below. And, Dargey himself controls the Relief Defendants. Smyth Decl., Exs. and. Defendant Path America is the parent and managing member of Defendants Path America KingCo LLC, and Path America SnoCo LLC, which are both Washington limited liability companies with their principal place of business in Everett, Washington. Smyth Decl., Exs. and. Significantly, on August,, Path America SnoCo obtained designation as a Regional Center from the United States Customs and Immigration Services ( USCIS ), and on June,, Path America KingCo also was designated as a Regional Center. See Exhibits and to the Declaration of Steven D. Buchholz ( Buchholz Decl. ). Designation as a Regional Center meant that each was authorized to sponsor specific EB- Program investments, and each did so. See id. Defendant Dargey is identified in materials provided to investors, and to the USCIS, as the person in control of the entity defendants. Thus, in private placement memoranda, subscription agreements, and business plans sponsored both by Path America SnoCo and Path America KingCo (and the entities they control), Dargey is identified as the contact. See Smyth Decl., Exs. (p. ), (p. ), (Sect. ), (p. ), and (Sect..). He describes himself as the President and CEO of Defendant Path America in the business plans provided to USCIS. E.g., Smyth Decl., Exs. (Sect..) and (Sect..). At the same time, Dargey has also pursued other, unrelated business -- SECURITIES AND EXCHANGE COMMISSION TELEPHONE: -0-00

9 Case :-cv-00-jlr Document Filed 0// Page of 0 ventures. Among those separate business projects are Relief Defendants Potala Shoreline, LLC and Potala Village Kirkland, LLC, both of Everett, Washington; each of those entities was formed to develop real estate in different locations in the Seattle area. Smyth Decl., and Exs. and (Sect..). B. Defendants Raise Funds and Issue Securities to Develop Specific Real Estate Projects Through limited partnerships under the umbrella of the two Regional Center sponsors, Path America SnoCo and Path America KingCo, Dargey and Path America solicited investments in two different EB- Program projects from investors in China. First, beginning in, Path America SnoCo sponsored an investment offered exclusively to EB- Program applicants, by selling securities which were issued as limited partnership interests by an entity it controls, Defendant Path America Farmer s Market, LP, an Everett, Washington limited partnership. Smyth Decl., Exs. and 0. Then, beginning in, Path America KingCo similarly sponsored two other securities offerings, also as limited partnership interests, exclusively to EB- Program applicants, issued by Defendants Path America Tower, LP and Path Tower Seattle, LP, both of Everett, Washington. Id., Exs. and.. Farmer s Market Project Between approximately February and June, investors from China invested a total of approximately $0 million with Defendants Path America, Path America SnoCo, and Path America Farmer s Market (the Farmer s Market Project ). Smyth Decl.. Defendant Path America Farmer s Market claimed in the offering materials given to investors that investor funds would be used to develop, construct, manage and operate a particular real estate project comprised of residential apartments, and to develop, construct, manage, and operate a hotel project on the immediately adjacent parcel of land through an interest in a hospitality company. Smyth Decl., Ex. (summary page ). As described in a business plan prepared by Path America, the project was located at 00 Grand Avenue, Everett, Washington. Smyth Decl., Ex. (Sect..). It was expected to include a year-round farmer s market, 0 luxury apartments, and a Hampton Inn. Id. The business plan anticipated raising $0 million from EB- Program investors. Id. (Sect..). -- SECURITIES AND EXCHANGE COMMISSION TELEPHONE: -0-00

10 Case :-cv-00-jlr Document Filed 0// Page 0 of 0. Tower Project Defendant Path America KingCo sponsored two securities offerings: the first offering of limited partnership interests was issued by Defendant Path America Tower, LP, and the second offering of limited partnerships was issued by Defendant Path Tower Seattle, LP. Smyth Decl., Exs. and. From approximately November through the present (as of July, ), Defendants Path America, Path America KingCo, Path America Tower, Path Tower Seattle, and Dargey have together raised approximately $ million from approximately 0 Chinese investors to develop this project ( the Tower Project ). Smyth Decl. and. Both offerings used similar materials, including private placement memoranda that attached the same business plan provided to USCIS that described the project tied to the investment as the development and ongoing operation of a new, 0-story residential and hotel property located at th Avenue, Seattle, Washington, called the Potala Tower. See Smyth Decl., Ex. (Sections. and.). The business plan is premised upon raising $ million through sales of securities to EB- Program investors (Section.), and describes the uses of those funds as related solely to the Potala Tower (Section.). Id. According to the business plan, the money raised through the sale of securities in the Path America Tower and Path Tower Seattle offerings was loaned to an operating company controlled by Dargey; that entity is Defendant Potala Tower Seattle, LLC. Smyth Decl., Exs. (Sect..) and. Potala Tower Seattle was committed to disburse the funds for construction and development of the 0-story Potala Tower. See Smyth Decl., Ex. (Sect..). C. Defendants Misappropriated and Misused Investor Funds Defendant Dargey has misappropriated a total of approximately $. million of investor funds from the three EB- Program investments. As detailed below, Dargey has used investor funds to purchase a home, for cash likely used at casinos, and for two unrelated business ventures. To accomplish this fraud, Dargey has raised investor funds through Defendants Path America Farmer s Market, Path America Tower, and Path Tower Seattle, and he has funneled investor money through accounts in the names of Defendants Path America Farmer s Market and Potala Tower Seattle. Finally, Dargey ultimately used much of the funds he took to fund unrelated projects in the names of -- SECURITIES AND EXCHANGE COMMISSION TELEPHONE: -0-00

11 Case :-cv-00-jlr Document Filed 0// Page of 0 Relief Defendants Potala Shoreline and Potala Village Kirkland. By using these entities and their accounts, Defendant Dargey has concealed his misuse of funds to make it appear that the funds were used for the promised business purposes described to investors and to the USCIS.. Dargey Obtains Access to Investors Money To make an investment in either the Farmer s Market Project or the Tower Project, a Path America investor submits a subscription agreement to Defendant Dargey. Once Dargey signs the subscription agreement as the manager of Defendant Path America, the investor transfers $00,000 to an escrow account in the United States. See Exhibits - to the Declaration of Michael D. Foley ( Foley Decl. ); Smyth Decl., Exs. (Sects., ), (Sects., ), and (Sects. -). For instance, the subscription agreement for the Path America Tower offering directs investors to wire their $00,000 investment (the Capital Contribution ) to an escrow account administered by Central Escrow, Inc. of Monterey Park, California. Smyth Decl., Ex. (Sect. ); Foley Decl., Ex.. The investor also must acknowledge his or her acceptance of the terms of the Escrow Agreement between Central Escrow and Path America Tower (attn.: Lobsang Dargey). Smyth Decl., Ex. (Sect. ). As described to the investors, the terms state that upon confirmation that the investor has filed an EB- visa petition with USCIS, Central Escrow releases $00,000 to Path America Tower. Id. The remaining $00,000 is maintained in escrow until the escrow agent receives confirmation that USCIS has approved the investor s EB- visa petition. Id. Similar subscription agreements are signed by investors for each offering, including Path Tower Seattle and Path America Farmer s Market. Smyth Decl., Exs. and. As of July,, a total of approximately $. million was released by the escrow agent to an account held in the name of Path America Farmer s Market (the Farmer s Market Account ). Smyth Decl., ; Foley Decl., - and Ex.. Defendant Dargey is an authorized signer for the Farmer s Market Account. Foley Decl., Ex.. Similarly, when the escrow agent released funds In addition, investors are also directed to wire a $,000 non-refundable administrative fee to an account in Hong Kong. See Smyth Decl., Ex. (Sect. ). -- SECURITIES AND EXCHANGE COMMISSION TELEPHONE: -0-00

12 Case :-cv-00-jlr Document Filed 0// Page of 0 related to the Tower Project, the funds were transferred to an account held in the name of either Path America Tower or Path Tower Seattle, depending upon the issuer with whom the investor had invested. Foley Decl., - and Ex.. But in either event, once the funds were released from escrow for the Tower Project, Dargey then arranged for the money to be transferred to a third account in the name of Defendant Potala Tower Seattle (the Tower Account ). Foley Decl., -, Ex.. After the funds were deposited to either the Farmer s Market Account or to the Tower Account, Dargey used his access to those funds to divert significant amounts totaling approximately $. million for his own consumption and for his separate business projects.. Dargey Used Investor Funds to Purchase a Home Dargey misappropriated approximately $. million to purchase a home in Bellevue, Washington. Thus, on September,, defendant Dargey transferred $. million from the Tower Account to an account held in the name of Dargey Development, the entity Dargey controls that is the parent of Path America. Foley Decl., -0, Exs. and (showing Dargey s control of Dargey Development account); Smyth Decl., Exs. and. From the Dargey Development account, on September 0,, Dargey transferred the $. million into an account held in his name and that of his wife. Foley Decl., 0. On that same day, Dargey transferred another $ million from the Tower Account directly into the account held in his name and that of his wife. Id. Shortly after, on September,, Dargey used $,,00 from the account in his and his wife s name to fund the purchase of a residential property in Bellevue, Washington. Foley Decl., -0 and Ex.. The purchase of the home was made in the name of Bellewood Farms Trust, but the beneficiaries of the trust are Dargey and his wife. Smyth Decl., Ex.. The home purchase was not authorized by the offering materials provided to investors, or to the USCIS, related to the Tower Project. See, e.g., Smyth Decl., Exs.,,, and.. Dargey Siphons Cash from Both the Farmer s Market and the Tower Accounts From approximately October through June, Defendant Dargey has withdrawn a total of approximately $0,000 in cash from the Tower Account and the Farmer s Market Account. Foley Decl. and Ex. 0. Dargey made more than $0,000 of those withdrawals at different -- SECURITIES AND EXCHANGE COMMISSION TELEPHONE: -0-00

13 Case :-cv-00-jlr Document Filed 0// Page of 0 gambling establishments in Washington, Nevada, California, and British Columbia, Canada. Id. These withdrawals were also not authorized under any of the materials provided to investors or the USCIS for either the Farmer s Market Project or the Tower Project. See, e.g., Smyth Decl., Exs.,,, and.. Dargey Funded Two Unrelated Real Estate Projects Using Investors Money Defendant Dargey also determined to use millions in investor money to fund unrelated projects of his, in which the investors in the Tower Project and Farmer s Market Project had no legal interest. In fact, shortly after purchasing the Bellevue residence with investor funds, Dargey spent nearly $. million in investor funds for an unrelated real estate project he was attempting to develop. On October,, defendant Dargey transferred $0,000 of investor funds from the Tower Account to an escrow account as the first installment of earnest money on the purchase of property located in Shoreline, Washington, more than seven miles from the downtown Seattle project. Foley Decl., and Ex.. On January,, defendant Dargey transferred an additional $0,000 from the Tower Account to an escrow account for use as earnest money on the purchase of the same Shoreline property. Id. Then, from January through May, Dargey transferred an additional $,,000 from the Tower Account to an account in the name of Relief Defendant Potala Shoreline, LLC, including a $ million transfer on May,. Foley Decl. -; Exs. and. Defendant Dargey controls Potala Shoreline and is an authorized signer on the Potala Shoreline account. Id., Ex. ; Smyth Decl., Ex.. From the Potala Shoreline account, on May,, Dargey used approximately $. million of the funds to complete the approximately $. million purchase of the property located in Shoreline, Washington. Foley Decl. and, and Ex.. In total, Dargey diverted $,,000 from the Tower Project for use in the unrelated Potala Shoreline project. Defendant Dargey similarly used a combination of investors funds from both the Tower Account and the Farmer s Market Account to fund yet another, unrelated real estate development in Kirkland, Washington. In total, from both accounts between approximately July and August, Dargey transferred approximately $. million to an account held in the name of Relief -- SECURITIES AND EXCHANGE COMMISSION TELEPHONE: -0-00

14 Case :-cv-00-jlr Document Filed 0// Page of 0 Defendant Potala Village Kirkland. Foley Decl. -, and Exs. and. Potala Village Kirkland is a company Dargey owns and controls, with the stated purpose of developing real property located on Lake Street South in Kirkland, Washington. Smyth Decl., and Ex. (Sect..). Of the approximately $. million taken, Dargey used approximately $. million in August to purchase Kirkland property. Foley Decl., ; Smyth Decl.,, Exs. 0 and. The uses of the investor funds for the unrelated Shoreline and Kirkland projects were not authorized by the Farmer s Market Project and Tower Project materials provided to investors or to the USCIS. See Smyth Decl., Exs.,,, and. D. Defendants Solicit Investments Based on Materially Misleading Statements Defendants Dargey, Path America, Path America SnoCo, Path America KingCo, Path America Farmer s Market, Path America Tower, and Path Tower Seattle each continued to solicit new investments and to sell securities even after Dargey began taking investor funds for his personal use, and to fund his other projects. And, the business plans and private placement memoranda they used to solicit investors in the Tower Project and the Farmer s Market Project continued to describe the use of the investors funds as related solely to those projects. For instance, the Potala Tower EB- Project Business Plan, which was an exhibit to the private placement memoranda that were used to solicit investments issued by Defendants Path America KingCo, Path America Tower and Path Tower Seattle in August (and were submitted to USCIS), included a summary of the uses to which investment funds would be put. See Smyth Decl., Ex. (Sect..). But none of the In August, the Court of Appeals of the State of Washington rejected Potala Village Kirkland s efforts to have a building permit for the site processed. See Smyth Decl., Ex.. Dargey now states that the date for groundbreaking on the Kirkland project is to be determined. Id.,. Path America KingCo called itself the sponsor of the offerings made by both Path America Tower and Path Tower Seattle in the respective private placement memoranda provided to investors. See Smyth Decl., Exs. and (cover pages of each). Similarly, Path America SnoCo was the sponsor of the offerings made by Path Farmer s Market. Smyth Decl., Ex. (cover page). Further, Dargey was individually identified as the investors point of contact, and he signed the subscription agreements as the Managing Member of Path America, which in turn was identified as the General Partner of Path America KingCo (and Path America SnoCo). E.g., id., Exs. and. -- SECURITIES AND EXCHANGE COMMISSION TELEPHONE: -0-00

15 Case :-cv-00-jlr Document Filed 0// Page of 0 expenses described in the plan included the personal cash withdrawals, the purchase of a residence or the siphoning of millions to fund other, unrelated real estate projects. Defendants solicitation of investments despite the misappropriation of funds rendered several other statements they made in the private placement memoranda false and misleading. For example, the Path America Tower Private Placement Memorandum detailed the more significant risks facing investors, highlighting the risk that the success of the project was dependent on raising substantial funds from the EB- investors, and that without sufficient investor funds the investors stood to lose some or all of their investment. See Smyth Decl., Ex. (second summary page). Furthermore, the Path America Tower Private Placement Memorandum describes in a number of places the uses of the funds as for the Tower Project, and for no other development. E.g., id. (pp., ). Indeed, the risks disclosures warn that the investment is not diversified since it is intended to concentrate solely on the Project. Id. (second summary page). Investors were also warned that their permanent residency petition could be denied by USCIS if the funds were used for a project that was a material departure from the business plan presented to USCIS in obtaining the investor s initial EB- petition approval. Id. (p. ). Indeed, investors were required to submit evidence demonstrating that their investments were in fact used for the approved project and that the project generates sufficient revenue to support the requisite ten jobs in order to obtain permanent residency. Buchholz Decl., ; Exs. (p. ) and (p. ). Not disclosed to investors in the Private Placement Memorandum or in the Business Plan was the fact that, by that point, Defendants had already materially departed from the stated uses of the investors funds by allowing Dargey to use investor money for his own purposes. Also not disclosed was the fact that Dargey had thereby significantly increased the risk that either the project would fail, or it would fail to reach the economic and job-creation targets required for investors to obtain their permanent residency. E. Investor Funds Held in Escrow As of July,, a total of approximately $ million in investor funds related to the Farmer s Market and Tower Projects is held in escrow, in accounts maintained at Central Escrow. Smyth Decl.,. As described above, a portion of the amount in escrow are funds recently invested -- SECURITIES AND EXCHANGE COMMISSION TELEPHONE: -0-00

16 Case :-cv-00-jlr Document Filed 0// Page of 0 by new EB- investors. The remainder is comprised of funds from investors in offerings by Path America Farmer s Market, Path America Tower, or Path Tower Seattle that Central Escrow has not yet released because it has not yet received confirmation that USCIS has approved the investors EB- visa petitions. These amounts continue to fluctuate as new investor funds arrive, and as funds are released pursuant to the escrow agreements to the Path America entities. III. ARGUMENT The Commission seeks a temporary restraining order, and a freeze of the assets and accounts owned or in the name of Defendants and Relief Defendants, in order to put a halt to this fraud and to protect the investors remaining assets from dissipation. Defendants ongoing fraud and misappropriation of investor assets, if unchecked, will result in greater harm to individual investors. Accordingly, the Commission details below how the defendants have defrauded, and continue to defraud investors, and then why the specified injunctions against their further sales, as well as injunctions against their violations of the securities laws, are necessary. Finally, the Commission describes the asset freeze sought. A. Standard for TRO and for an Asset Freeze in SEC Enforcement Cases Under Section (b) of the Securities Act of, U.S.C. t(b), and Section (d) of the Securities Exchange Act of, U.S.C. u(d), the SEC is entitled to a preliminary injunction when it establishes the following: () a prima facie case of previous violations of federal securities laws, and () a reasonable likelihood that the wrong will be repeated. SEC v. Unique Fin. Concepts, Inc., F.d, n. (th Cir. ). In the Ninth Circuit, the standards for granting a temporary restraining order are substantially the same as those for granting a preliminary injunction. See Stuhlbarg Int l Sales Co. v. John D. Brush & Co., 0 F.d, n. (th Cir. 0) (Ninth Circuit s analysis for the propriety of granting a TRO and a preliminary injunctions are substantially identical). Finally, SEC enforcement actions do not require the posting of a bond. See SEC v. Wencke, F.d, (th Cir. 0). The SEC appears before the Court not as an ordinary litigant, but as a statutory guardian charged with safeguarding the public interest in enforcing the securities laws. SEC v. Management -0- SECURITIES AND EXCHANGE COMMISSION TELEPHONE: -0-00

17 Case :-cv-00-jlr Document Filed 0// Page of 0 Dynamics, Inc., F.d 0, 0 (d Cir. ). Because of this, courts have repeatedly determined that the Commission faces a lower burden than a private civil litigant seeking a temporary restraining order. See Unique Fin. Concepts, F.d at n. ( Under (b) of the Securities Act of, and Section (d) of the Securities Exchange Act of, the SEC is entitled to a preliminary injunction when it establishes the following: () a prima facie case of previous violations of federal securities laws, and () a reasonable likelihood that the wrong will be repealed. ); SEC v. Schooler, 0 F. Supp. d, n. (S.D. Cal. ) (following Unique Fin. Concepts in absence of controlling Ninth Circuit precedent). Thus, where the SEC shows the probability of success on the merits, irreparable injury will be presumed. See United States v. Nutri-Cology, Inc., F.d, (th Cir. ) ( In statutory enforcement actions, where the government has met the probability of success prong of the preliminary injunction test, we presume it has met the possibility of irreparable injury prong because the passage of the statute itself is an implied finding by Congress that violations will harm the public. ). Where the Court has jurisdiction over the defendants, the District Court has authority to order [defendants] to freeze property under [their] control, whether the property be within or without the United States. SEC v. Int l Swiss Invests. Corp., F.d, (th Cir. 0) (citing United States v. First Nat l City Bank, U.S., () and Republic of the Philippines v. Marcos, F.d, (th Cir. ) (en banc)). Federal courts apply a lower standard to freeze assets that may be subject to disgorgement, than to grant other forms of preliminary or temporary injunctive relief, as asset freezes are designed to maintain the status quo. See SEC v. Unifund SAL, 0 F.d 0, 0 (d Cir. 0) (an interlocutory freeze order is an ancillary equitable remedy, which may be granted even in circumstances where the elements required to support a traditional SEC injunction have not been established ). Further, an asset freeze is appropriately ordered even against a non-defendant, such as a relief defendant, where the SEC shows that the person () has received ill-gotten funds; and () does not have a legitimate claim to those funds. SEC v. Cavanagh, F.d, (d Cir. ). -- SECURITIES AND EXCHANGE COMMISSION TELEPHONE: -0-00

18 Case :-cv-00-jlr Document Filed 0// Page of 0 B. Defendants Deceptive Misappropriation and Fraudulent Statements Exchange Act Section 0(b) and Rule 0b- make it unlawful for any person, with scienter, by the use of interstate commerce in connection with the purchase or sale of securities: (a) to employ any device, scheme, or artifice to defraud; (b) to make an untrue statement of material fact or omit to state a necessary material fact; or (c) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person. U.S.C. j(b); C.F.R. 0.0b-. Section (a)() of the Securities Act makes it unlawful for any person in the offer or sale of securities by the use of interstate commerce to employ any device, scheme, or artifice to defraud with scienter. U.S.C. q(a) Sections (a)() and (a)(), respectively, prohibit obtaining money or property by means of materially false or misleading statements and engaging in any transaction, practice, or course of business that operates or would operate as a fraud or deceit upon the purchaser. U.S.C. q(a). The congressional intent in passing these anti-fraud statutes was to inculcate a policy of full disclosure instead of the philosophy of caveat emptor, and thus to achieve a high standard of business ethics in the securities industry. SEC v. Zandford, U.S., (0). The Commission proves a violation of the antifraud provisions by evidence that () defendants made a materially false or misleading statement, or engaged in materially deceptive conduct; () in connection with the purchase, offer or sale of a security; () involving interstate commerce; and () with scienter. See SEC v. Platforms Wireless International Corp., F.d 0, 0 (th Cir. 0); SEC v. Rana Research, Inc., F.d, (th Cir. ). Each of these elements is satisfied here. Defendant Dargey has repeatedly engaged in materially deceptive conduct in furtherance of a scheme to defraud, by misusing investors funds. Conduct that is itself deceptive may result in liability under Rule 0b-(a) or (c), where it had the principal purpose and effect of creating a false appearance of fact in furtherance of a scheme. Simpson v. AOL Time Warner, Inc., F.d 00, 0 (th Cir. 0), vacated on other grounds sub nom., U.S. (0). The misappropriation of investor money for a defendant s own purposes constitutes a deceptive act in -- SECURITIES AND EXCHANGE COMMISSION TELEPHONE: -0-00

19 Case :-cv-00-jlr Document Filed 0// Page of 0 violation of Exchange Act Section 0(b) and Rule 0b-(a) and (c). See Zandford, U.S. at - (defendant misappropriated clients assets by writing a series of checks to himself on their brokerage account which resulted in the sale of their securities; each sale was deceptive as it was neither disclosed nor authorized by the clients and was in furtherance of the scheme to defraud them). Here, Dargey used the accounts into which investor funds for the Farmer s Market and Tower Projects had been deposited as though they were his own personal accounts, making frequent withdrawals of cash from each. He also siphoned millions of dollars from the accounts holding investors money to fund his own purchase of an expensive home, and to buy the land to be used in the development of two wholly unrelated projects. As reflected in the Declaration of Michael Foley, Dargey s misuse of the investors funds took a circuitous path, involving accounts held by several entities he controls, and has continued unabated even escalated since approximately. All the while, Dargey pitched the promise to new investors of projects that offered the opportunity for them to both earn investment returns and to potentially obtain United States residency. Dargey s theft was thus also material, as a reasonable investor would consider it significant to the total mix of available information. See Basic v. Levinson, U.S., - () ( there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available ); United States v. Jenkins, F.d, 0 (th Cir. ) ( the standard of materiality is an objective one, based on whether a reasonable investor would consider the false or omitted information useful or significant ). Dargey also made material misrepresentations or omissions of fact to induce investments, in violation of Exchange Act, Section 0(b) and Rule 0b-(b). A person makes a false statement, or a statement that is misleading because it omits material information, if he or she (or it) is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it. Janus Capital Grp., Inc. v. First Derivative Traders, --- U.S. ---, S. Ct., (). Where a statement is attributed to several persons, each of them may be liable for the false or misleading statement. See, e.g., City of Roseville Employees Ret. Sys. v. Energysolutions, -- SECURITIES AND EXCHANGE COMMISSION TELEPHONE: -0-00

20 Case :-cv-00-jlr Document Filed 0// Page of 0 Inc., F. Supp. d, (S.D.N.Y. ) (each of the defendants who had signed a registration statement were makers of the misleading statements Janus). As described above, Dargey and the entities that issued the securities, or that managed other entities that issued securities including Defendants Path America, Path America SnoCo, Path America KingCo, Path America Farmer s Market, Path America Tower, and Path Tower Seattle together made numerous representations about the various specific uses of investor money toward the development and operation of specific real estate projects. They made those claims both to investors, and to the USCIS. Their business plans and private placement memoranda described how failure to obtain, or to appropriately use, the funds sought through the offering materials would jeopardize the investors chance of receiving any return on their investment, as well as their chance of obtaining United States residency. But none of those documents revealed that Dargey had already substantially increased those risks by routinely siphoning off money for his own ends. With less at stake, courts have found such critically misleading investment pitches to be material. See, e.g., SEC v. Murphy, F.d, (th Cir. 0) ( Surely the materiality of information relating to financial condition, solvency and profitability is not subject to serious challenge. ). Dargey (and the defendants that sponsor and issue securities) made materially misleading statements and omissions, which constitute conduct separate from Dargey s misappropriation of the money, and that conduct renders them additionally liable under Exchange Act Rule 0b (b). Cf. Spot Runner, Inc. v. WPP Luxembourg Gamma Three Sarl, F.d 0 (th Cir. ). (differentiating between conduct that violates Rule 0b (b) and other, deceptive conduct that is the basis for Rule 0b (a) and (c) claims). Furthermore, because Dargey and the defendants that issued and sponsored the securities continued to solicit and accept new investments from to the present, even after the misappropriation began, their material omissions and deceptions were in connection with the purchase or sale of securities, satisfying the second element. See Zandford, U.S. at - ( in connection with element satisfied when securities transactions coincide with deceptive practices). Defendants also made use of interstate commerce in satisfaction of the third element, as detailed in the Foley Declaration summarizing the movements of cash by wire among accounts and even overseas. -- SECURITIES AND EXCHANGE COMMISSION TELEPHONE: -0-00

21 Case :-cv-00-jlr Document Filed 0// Page of 0 Finally, Dargey s misappropriation and materially misleading claims to investors were also made with scienter. Scienter may be established, therefore, by showing that the defendants knew their statements were false, or by showing that defendants were reckless as to the truth or falsity of their statements. Gebhart v. SEC, F.d 0, 0 (th Cir. 0). The Ninth Circuit has further defined recklessness as misconduct that is so obvious that the actor must have been aware of it. Hollinger v. Titan Capital Corp., F.d, (th Cir. 0). A defendant s scienter may be inferred from circumstantial evidence suggesting an obvious risk of misleading investors that is so great that it is simply implausible that defendant did not know about it. Vernazza v. SEC, F.d, 0 & n. (th Cir. 0); In re Software Toolworks Inc., 0 F.d, (th Cir. ). Here, Dargey s deceptive actions were bold, repeated, and even concealed. Dargey began misusing investor funds in, by making withdrawals of cash from the accounts he controls, frequently while visiting casinos. There can be no mistake that investors did not authorize the use of their funds in this manner, as Dargey clearly knew. Over the last year, Dargey s misappropriation has grown bolder and larger, and he has now managed to siphon off approximately $. million from the investors funds. Finally, Dargey s scienter should be imputed to each of the defendants. Dargey controls each of the entity defendants and had signing authority over each account into which the investors funds were deposited. Where, as here, an individual defendant exerts such unfettered control over the entity defendants, the individual defendant s deceptive acts and materially misleading statements to investors are imputed to the corporate defendants. See SEC v. Manor Nursing Ctrs., Inc., F.d 0, 0 n. (d Cir. ) (citing SEC v. North Am. R. & D. Corp., F.d 0, 0 (d Cir. 0)). As set forth above, the Commission has established a prima facie case of violations of the federal securities laws by Dargey and by each of the entity defendants, and has shown that there is a reasonable likelihood that their misconduct, which has been ongoing for years, will be repeated. See Unique Fin. Concepts, F.d at n..; Nutri-Colog, F.d at. Accordingly, a temporary restraining order, as described below, should be granted. -- SECURITIES AND EXCHANGE COMMISSION TELEPHONE: -0-00

22 Case :-cv-00-jlr Document Filed 0// Page of 0 C. Defendants Should Be Immediately Enjoined to Halt the Fraud A temporary restraining order, consistent with the order proposed by the Commission, is appropriate. The Commission s proposed order would: () prohibit further violations of the antifraud provisions that defendants have violated and continue to violate as described above; and () specifically enjoin defendants from, directly or indirectly, soliciting any person to purchase or sell any securities, including to EB- Program participants. These proposed injunctions would address defendants conduct and should have the effect of halting defendants ongoing fraud. As courts have frequently observed, protection of the public interest in such situations is paramount. See United States v. Diapulse Corp. of America, F.d, - (d Cir. ). For instance, orders prohibiting the defendants from violating Section 0(b) of the Exchange Act, Rule 0b-, and Section (a) of the Securities Act are necessary to deter defendants from continuing with their fraud, as a violation of such an order may be met with contempt sanctions. See, e.g., Hicks ex rel. Feiock v. Feiock, U.S., () (contempt of Court s order shown by existence of a valid order, defendant s knowledge of the order, and defendant s failure to comply with the order). Similarly, the proposed injunction against further sales is tailored to the specific fraud, in order to halt the ongoing fraud. Courts may fashion temporary restraining orders or preliminary injunctions that address the harm caused by a defendant s actions, including by enjoining a defendant from further violations of law, or prohibiting his specific actions with regard to management of securities. See, e.g., SEC v. Trabulse, F. Supp. d 00, 0- (N.D. Cal. 0) (prohibiting hedge fund manager from further violations of specific provisions of law, and from withdrawing any money pursuant to his advisory agreement prior to completing an accounting). D. The Court Should Order the Requested Asset Freezes As described above, the Court has the power to order a freeze over the assets of parties, and nonparties, under its inherent equitable powers and ancillary to the Court s authority to provide final equitable relief. See Wencke, F.d at. Courts use freeze orders to prevent the waste or dissipation of assets, and to ensure their availability for a disgorgement order requiring a defendant (or relief defendant) to relinquish ill-gotten gains. See, e.g., SEC v. Hickey, F.d, (th -- SECURITIES AND EXCHANGE COMMISSION TELEPHONE: -0-00

23 Case :-cv-00-jlr Document Filed 0// Page of 0 Cir. 0) (affirming asset freeze over nonparty brokerage firm controlled by defendant to effectuate disgorgement order against defendant); Manor Nursing, F.d at 0-0 (affirming freeze). Courts recognize that, absent a freeze, an order imposed at final judgment may be rendered meaningless. See Unifund SAL, 0 F.d at 0. Here, the Court should order a freeze over the assets, including real property and bank accounts, either owned or controlled by Defendant Dargey, including accounts or property in the name of each of the Defendants. Such an order now is necessary to ensure that any order by this Court at the conclusion of the case that Defendants return ill-gotten gains will be effective. An asset freeze is additionally critical to prevent the further dissipation of the remaining investor funds, and to prevent the assets from being moved or concealed where they cannot be readily retrieved. See FTC v. Affordable Media, LLC, F.d, (th Cir. ) (upholding district court s freeze where defendant s prior conduct included history of spiriting their commissions away to a Cook Island trust ). A freeze order is also necessary over the assets of Relief Defendants. To obtain a freeze of funds held by a relief defendant, the Commission must show a likelihood of success on the merits. Cavanagh, F.d at. Also, the Commission must show a likelihood of dissipation of the claimed assets, or other inability to recover monetary damages, if relief is not granted. See Johnson v. Couturier, F.d 0, 0 & n. (th Cir. 0). But the Commission need not make any showing that a future violation is likely because it is not accusing the nominal defendant of any wrongdoing. Cavanagh, F.d at. As described above, the Commission has demonstrated a likelihood of success in proving that Dargey moved significant funds from the Tower Account and the Farmer s Market Account to the accounts of each Relief Defendant. Those funds, and property obtained with those funds, are traceable to the investors and constitute ill-gotten proceeds of his fraud. As such, the Relief Defendants lack any bona fide claim to them and should not be permitted to retain them. It is also important, in order to maintain the status quo, for the Court to freeze the funds associated with both projects and currently held in escrow at Central Escrow. As of July,, -- SECURITIES AND EXCHANGE COMMISSION TELEPHONE: -0-00

24 Case :-cv-00-jlr Document Filed 0// Page of 0 those funds totaled approximately $ million. However, as described above, the escrow agreements require Central Escrow to release funds to the Defendants upon the satisfaction of certain conditions: the first $00,000 of any individual s investment is released upon confirmation that an investor has filed his or her EB- petition with USCIS; and the remaining $00,000 is released upon confirmation that USCIS has approved the investor s EB- visa petition. Absent an order from this Court, the escrow agent may be required to release more money to defendants, thereby further jeopardizing investor funds. Finally, the Court should exercise its power to order Defendant Dargey to repatriate assets deposited overseas. See FTC v. The Crescent Publ. Gr., Inc., F. Supp. d, - (S.D.N.Y. 0) (even where relatively minor overseas account identified, repatriation order was appropriate to ensure the enforceability of any judgment ). As described in the Foley Declaration, there is evidence that Dargey routinely transfers funds received from investors to a Hong Kong account, and those funds may be necessary to satisfy a disgorgement order. E. The Court Should Order the Requested Ancillary Relief The Commission also seeks orders from the Court: () prohibiting the destruction of documents; () allowing for expedited discovery; and () requiring Defendant Path America to prepare an accounting of all money obtained from investors. Orders permitting discovery to go forward immediately and shortening certain discovery notice provisions, and prohibiting document destruction, are necessary, especially if a hearing is required to determine whether the requested TRO should be converted to preliminary injunction. An accounting by Defendant Path America is appropriate, as it would allow the Court to determine the extent to which investor funds have been misused or dissipated and to aid in their recovery; it would also aid in determining the scope of defendants fraud. See Int l Swiss Invs. Corp., F.d at. Path America is the appropriate defendant to conduct such an accounting, as it sits atop the corporate pyramid of companies that are a part of Dargey s fraudulent scheme. It should therefore have access to each of the other entity Defendants records of the use of funds. -- SECURITIES AND EXCHANGE COMMISSION TELEPHONE: -0-00