SEATTLE — Attorneys are arguing in U.S. District Court about who should control properties belonging to an Everett-based developer accused of securities fraud.
While the U.S. Securities and Exchange Commission is pursuing a civil complaint against Lobsang Dargey, the FBI is conducting a criminal investigation.
The SEC has asked the court to appoint a receiver with wide-ranging powers to oversee several development projects controlled by Dargey, 41, and his Everett-based company, Path America. The commission filed a civil suit in the U.S. District Court for Western Washington against Dargey in August accusing him of misusing as much as $46 million of investors money.
Dargey’s attorneys say the SEC’s request entails far-reaching powers that will halt progress on the developments, which include a 220-unit apartment building in Everett. They also say it will hurt foreign investors.
Dargey used a federal investment program known as the EB-5 program to bankroll much of his company development work. The program essentially allows foreign nationals a shortcut to consideration for U.S. residency in exchange for investing at least $500,000 in a qualifying project. To qualify, projects must create at least 10 U.S. jobs.
Foreigners, mostly from China, invested millions in two Dargey projects: the 220-apartment Potala Place and Farmer’s Market and adjacent Hampton Inn in downtown Everett, and a 41-story Potala Tower in Seattle.
Potala Place and Farmer’s Market is nearly finished. Tenant improvements for ground-floor retail shops are supposed to be finished by the end of the year. The Hampton Inn is already completed. Both are operating.
Potala Tower, however, is simply an empty hole in downtown Seattle.
The court froze assets of Dargey and Path America when the SEC filed its complaint Aug. 24. It subsequently allowed some payments to be processed. On Tuesday, the court re-affirmed the asset freeze.
Without the freeze, there is good reason to believe the defendants “will dissipate, conceal, or transfer from the jurisdiction of this Court” assets that might have to be turned over or used to pay penalties, U.S. District Judge James Robart said in his ruling.
The SEC is arguing that a court-appointed receiver “is necessary because it is imperative that a person other than Dargey make an informed decision about the projects that were begun with investor money and whether they can and should be completed as originally described,” wrote Susan LaMarca and Bernard Smyth, SEC attorneys at ithe agency’s regional office in San Francisco.
In a counter-motion filed Monday, one of Dargey’s lawyers, Daniel Dunne, said “the SEC has proposed its standard, off-the-rack receivership with the basic blunderbuss provisions …”
Dunne is with Seattle-based Orrick, Herrington &Sutcliffe.
Instead, he wrote, the court should encourage the receiver to keep work going on Potala Place and Potala Tower.
The SEC’s approach will cause further project delays, harming the Everett mixed-use development and threatening to sink Potala Tower, he said.
Delays in completing tenant improvements for Potala Place could cost up to $2,000 a day. If one tenant loses confidence and backs out, it could have a domino effect, he wrote.
If the projects don’t create U.S. jobs, that will threaten investors’ ability to gain U.S. residency through the EB-5 program, he said.
This week, several of Dargey’s foreign backers filed motions asking the court to let them withdraw their investments so they can put the money into other projects.
Shortly before the SEC filed its complaint, Dargey had secured $96.4 million in additional financing for Potala Tower, enough to finish the project, according to a statement submitted to the court by one of his business associates.
Atlanta-based Voya Investment Management gave the tower project a $66.4 million loan, and a Chinese company, Binjiang Tower Corporation invested $30 million for a 20 percent interest in the project.
In all, Dargey and Path America got foreign investors to put in more than $125 million that was supposed to go to either Potala Tower in Seattle or Potala Place and Farmer’s Market in Everett.
SEC officials say that Dargey misused at least $46 million of that money, spending it on development projects that didn’t qualify for the EB-5 program and for personal use, such as trips to local casinos.
Dargey’s attorneys have said it comes down to accounting errors, not fraud.
The FBI, however, is also looking into the matter and in August served a search warrant at Dargey’s office in Everett, according to court documents.
Dan Catchpole: 425-339-3454; dcatchpole@heraldnet.com; Twitter: @dcatchpole.
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