Judge balks at holding Par Funding owners in contempt
A federal judge condemned money diversion in the case but said evidence was not sufficient to blame founders for it.
The financial maneuvering that generated money to pay defense lawyers in the Par Funding scandal “doesn’t smell good,” a federal judge said Monday.
Further, he said, the money diversion laid out to him in court “clearly violated” his order freezing assets in the case.
Still, he said, he didn’t have evidence to tie Par Funding founder Joseph LaForte and Lisa McElhone, LaForte’s wife, to the scheme or hold them in contempt of court for it.
» READ MORE: Brother of Par Funding owner says he raised millions to pay lawyers in long-running SEC fight
U.S. District Court Rodolfo Ruiz II said that the fact the couple took the Fifth Amendment and refused to answer questions about the money flow was not quite enough for him to find them in contempt, though law permits judges in civil matters to draw negative conclusions about defendants who take the Fifth.
In his remarks from the bench Monday morning, Ruiz rebuffed the contempt motion sought by the receiver he appointed in 2020 to take control of Par Funding and the assets of LaForte, McElhone, and others involved with the Philadelphia lender. Ruiz is presiding over a sweeping lawsuit by federal financial regulators saying that Par defrauded 1,200 investors who sunk $540 million into the enterprise by misleading them about LaForte’s criminal record involving fraud and Par’s reckless business practices.
Par drew upon the investor money to make high-interest loans to cash-short smaller businesses that couldn’t get regular bank loans. In July, as the case was winding toward its finish, the receiver, Florida lawyer Ryan K. Stumphauzer, leveled a fresh complaint against LaForte and McElhone, who live on the Main Line. He accused them of going behind his back to route money that should have gone into the receiver’s bank accounts into their own to pay for their $3 million defense.
» READ MORE: Was Par Funding a Ponzi-ish scheme or a righteous business undone by the feds? A judge will decide soon.
Stumphauzer said they pulled this off by deceiving merchant borrowers who still owed money to Par Funding into switching their loan payments to intermediate firms, rather than to the receiver. The money, sometimes after circuitous trips through the bank accounts of various firms, ended up paying the couple’s teams of defense lawyers and accountants, the receiver said.
The SEC brought its case in Florida, where Par Funding moved its nominal headquarters from Philadelphia several years ago for tax purposes.
In addition to the civil case, the FBI has been conducting a criminal investigation of Par Funding, one that a lawyer for LaForte has said likely would lead to his prosecution on charges that could include fraud and extortion. Last week, a reputed organized crime associate, Renato “Gino” Gioe, pleaded guilty to serving as an enforcer who threatened borrowers to collect debts.
The hearing Monday was one of two critical sessions scheduled for this week in the high-stakes lawsuit brought by the U.S. Securities and Exchange Commission. On Wednesday, Ruiz has scheduled a final hearing, also on Zoom, before he decrees how much to order LaForte, McElhone, and others to pay back investors. The SEC has urged the judge to order them to pay back $378 million. The defendants say they should pay no more than $80 million.
After hearing the judge’s analysis, Stumphauzer’s legal team, led by Philadelphia lawyer Gaeta Alfano and Florida lawyer Timothy Kolaya, agreed they would drop the contempt bid for now, though they said that could change if more evidence surfaced.
Alfano and Kolaya obtained a deposition last week from a person deeply involved in the money transfers that had seemed to bolster their case going into Monday’s hearing.
In the deposition, witness Francis Scarpati undercut his own sworn declaration as given to lawyers for LaForte and McElhone only two weeks earlier. In that declaration, he said he had lent up to $3 million to LaForte’s younger brother, James, to pay for the couple’s legal bills because he was a friend of the brother.
In the newer deposition, Scarpati admitted that he had used a fake name, “Terry Lane,” in instructing about 75 merchants borrowers to switch loan payments to another firm. This firm then wired the payments to Scarpati’s business, and Scarpati used the money to bankroll the loan to James LaForte, according to a summary of the deposition filed by Alfano and Kolaya.
However, Scarpati did not tie the diversion to Joseph LaForte or McElhone. He told Alfano in the deposition that a lawyer had told him it was OK to step in and collect the money from the borrowers as payment for commissions he was owed. He said he could not remember the lawyer’s name.