Was Par Funding a Ponzi-ish scheme or a righteous business undone by the feds? A judge will decide soon.

Was Par Funding, the big Philadelphia lender enmeshed in a government lawsuit alleging fraud, a successful business undone by overzealous feds or a bogus enterprise flawed from the start?

A judge is now weighing that question as he decides how much Par Funding’s principals will have to pay back to investors.

Two years after the U.S. Securities and Exchange Commission sued Par Funding’s owners and network of financial pitchmen, the complex case is nearing its climax. The defendants, led by Joseph LaForte and his wife, Lisa McElhone, late last year dropped their opposition to the agency’s legal attack, leaving the only issue to be resolved what they owe in disgorged profits and fines.

The SEC wants the judge to order the seven defendants to pay a total of $378 million. The defendants say they should pay about $80 million.

U.S. District Judge Rodolfo Ruiz III will impose a figure, perhaps sometime soon. His view on how Par operated could be an important factor in his decision. Court precedent permits bigger penalties for firms deemed to have been corrupt.

Underpinning the entire debate is a simple question that has haunted the Par lawsuit since day one: Did Par operate like a Ponzi scheme, in which money from new investors was used to pay older ones, rather than a business that sought a legitimate profit?

Par was founded by LaForte and McElhone in Philadelphia in 2011 and operated out of Old City, though it moved its address to Florida for tax reasons in 2017, which is where the SEC brought its federal lawsuit and Ruiz has his court. It raised money from nearly 1,200 investors, promising them 14% returns, by lending their money in high-interest loans to 1,300 cash-strapped merchants across the nation.

Even after dropping any defense ahead of a trial, the defendants insist, in the words of one Par legal filing this month, that Par was a “thriving, successful company” that never missed a payment to investors until COVID caused it to skip doing so for a couple months in early 2020.

Par resumed paying investors later, albeit with returns cut by half. All payments to investors were then halted after the SEC filed suit in July 2020.

Although Par insists that it could have kept on operating smoothly, the SEC and a court-appointed receiver have painted a far more negative picture of its operation. They describe it as a company with shaky finances, at best, whose co-founder, LaForte, hid from investors that he had served prison terms for a $14 million mortgage fraud and his role in an illegal offshore gambling operation. Among other allegations, they say he told one investor he had put $800 million into Par himself, when he had actually invested nothing.

In a battle of accountants, experts for the SEC, the receiver that now runs Par Funding, and the defendants have all taken deep dives into the firm’s financial records. The reports for the SEC and receiver Ryan Stumphauzer, who is a Florida lawyer and a former federal prosecutor, both conclude that Par paid older investors with money from newer ones. The firm’s expert disputes that.

Apart from the SEC civil action, lawyers for LaForte have said in court papers that an ongoing FBI investigation could result in criminal charges against him.

The SEC says Par took in $540 million from investors and paid out $200 million in commissions, consulting fees and the like, much of it to insiders such as LaForte and McElhone. Should Judge Ruiz adopt the payment figure suggested by the couple, who have houses on the Main Line, in Florida and in the Poconos, they would be left with about $100 million in assets, according to an accounting they submitted in the case.

In April, SEC senior trial counsel Amie Riggle Berlin outraged the defendants by flatly labeling their business in court as a Ponzi operation. Under an agreement with the judge, she later agreed not to use the term — but all the while accusing Par of the same conduct. In May, her amended demand for money from the defendants still said they “operated Par Funding as a fraudulent scheme and also used investor money to pay purported investment returns.”

The SEC wants the defendants to make payments to return money to investors. Of the seven defendants, three, including prominent King of Prussia financial adviser Dean Vagnozzi, have agreed to pay a total of $17.6 million. The others are contesting the sums recommended by the SEC. In dropping their opposition to the SEC’s suit ahead of trials, defendants did not admit or deny the SEC allegations.

In 2020, an accounting expert for the receiver, Bradley Sharp, found that Par lent $1.1 billion to merchants though 2019 but cleared only $7 million in profit from those loans. Yet during those times, Sharp found, it paid $231 million in returns to investors and a similar sum to operate and to insiders. The accountant concluded that only the diversion of money from other investors kept the business afloat.

The SEC’s expert, accountant Melissa Davis, came to a similar conclusion. For years, she wrote, “the business expenses and investor interest and principal payments could not have been made without the investor funds.”

In the rival analysis for the defendants, accountant Joel Glick disagreed. His report said Par actually made $64 million in profit through 2019.

Glick said the receiver’s expert “erroneously alleges” that Par “was a Ponzi scheme.” In fact, he wrote, “a forensic analysis” of the firm’s books “demonstrates that cash flows from merchants were sufficient to cover principal and interest payments made.”

The dueling analyses seem to reflect how the accountants treated debts from borrower merchants. The experts for the SEC and receiver ignored those promised but unpaid sums. Glick wrote that he relied on a method of accounting under which money was counted as soon as a deal was completed, rather than when payments were made.

And in a court filing last year, key lawyers for the receiver — Philadelphia attorney Gaetan Alfano and Florida attorney Timothy Kolaya — said Glick had been unduly optimistic about how much money Par would collect.

An accurate appraisal of the many bad loans, they wrote, “would eliminate any profit for Par Funding.”

The issue of how to account for deadbeat borrowers has been a sore point for Par. In its lawsuit, the SEC contends that Par’s outside accountants balked some years ago when Par executives asked them to reduce its figure for bad debt. The executives wanted a change that would have boosted Par’s performance for 2017 from a loss to a profit.

In early 2019, the firm stamped its accounting report with an “adverse” ruling and declared on its opening pages that the report violated accounting rules. Par never finished another accounting after that.

The receiver had made public a dismal portrait of Par Funding’s lending to merchants. As early as July 2020, the receiver says, more than 200 of its borrowers had filed for bankruptcy, suggesting that investors might not recoup millions of the $100 million lent them. It lists 16 more in a special category of “challenging” borrowers who owe more than half the total debt. Four of the major borrowers are known to be linked to executives with convictions for financial crimes.

The single biggest debtor is B&T Supply Inc., an office-supply firm headed by Stephen Odzer, who was pardoned by then-President Donald Trump last year for his conviction in a $16 million bank fraud. Par says B&T owes it $91 million, but the supply company contests that.

In sum, receiver Stumphauzer warned Judge Ruiz in a hearing last year that Par’s figure for accounts receivable was unreliable.

“It’s not a real number,” Stumphauzer said. “It doesn’t reflect allowances for uncollectible accounts. It includes millions and millions of dollars of companies that are in bankruptcy. It contains millions and millions of dollars of companies that are out of business. It contains millions of dollars for companies that don’t exist.”

Staff writer Joseph N. DiStefano contributed to this article.