Par Funding investors get some of their millions back, as LaForte brothers await sentencing

Investors in Par Funding, a defunct Philadelphia small-business lender that raised $547 million from more than 1,700 investors in what the Securities and Exchange Commission calls a Ponzi scheme, have received some of their long-awaited money back.

Payments total around $110 million, or almost half the $227 million in investors’ approved claims. Some get more, some less, depending on how they invested.

The partial refunds are arriving in batches based on how recipients invested: either directly in Par, in funds organized by former Eckert Seamans law partner John Pauciulo for insurance broker Dean Vagnozzi and other salespeople, or through tax-protected individual retirement accounts (IRAs).

Joseph Brock, a labor-relations consultant, said Thursday that he had received an initial $43,000 payment. He invested a total of $200,000 with Par, which promised annual returns of 12% or more before it defaulted in 2020.

Brock is “waiting on another” check of around $47,000 in this first round of payments, he said Thursday. Other investors also confirmed their partial refunds have been deposited.

These initial payments are funded from the sale of homes, stores, and other assets, mostly in Philadelphia, and accounts seized from Par founder Joseph LaForte and other Par officials.

Those assets were collected by lawyers for the receiver appointed by U.S. District Judge Rodolfo Ruiz to raise cash for investors after the SEC filed federal civil fraud charges against LaForte, other Par insiders, and salespeople in July 2020.

Plans for a second round of checks that could boost total recoveries to around 70% are in the works, though lawyers familiar with discussions say it will take months or longer to work out all those details.

The payment proposal was approved by Ruiz last fall, more than four years after the judge appointed receiver Ryan Stumphauzer to seize Par assets and set up a repayment plan. The defendants agreed to plead guilty to civil fraud charges and to help repay investors.

LaForte and his brother and chief debt collector, James, who federal prosecutors in Brooklyn allege is a member of the Gambino crime organization, were also charged with criminal conspiracy and securities fraud and with obstruction of justice in the beating of Gaetan Alfano, a Philadelphia lawyer for the receiver. They pleaded guilty before a scheduled trial last fall. The brothers are scheduled to be sentenced at separate hearings next month in Philadelphia federal court.

Charges brought against Par and its leaders say they lied about investment risks from their loans to shaky businesses, falsely claimed the investments were insured against financial risk, failed to register the investments as securities (which would have required detailed warnings about their true risks), and failed to warn investors that both LaForte brothers had been convicted and imprisoned for financial crimes, before Joseph and his wife, Lisa McElhone, started Par in 2012.

U.S. District Judge Mark A. Kearney, in a presentencing memo Jan. 21, found that the LaForte brothers and Par chief financial officer Joseph Cole Barleta had “enriched themselves” and other insiders by paying themselves $150 million of investor funds, even as the business lost money. He concluded that the trio had caused investors losses totaling a net $288 million.

Eckert and its insurers have agreed to pay more than $45 million to settle complaints that it failed to keep ex-partner Pauciulo from giving fund managers and investors bad advice. Pauciulo, once an SEC lawyer, agreed to pay a fine and stop representing clients before the SEC.

The proposed Eckert settlement, including parts that still await final approval, include around $32 million in additional funds for the investors and $6 million for their lawyers. It also includes $7 million, which would cover payments to salesman Vagnozzi, members of his family, his lawyer George Bochetto, and a group of former Par salespeople who complained that they, like the investors, were victims of Pauciulo’s bad advice.

Vagnozzi in 2022 had agreed to pay $5 million to resolve the SEC’s civil fraud claims for selling the unregistered Par securities. He was not criminally charged.

Another $40 million collected by the receiver from Par and its leaders has been held back from the initial distribution to investors. It’s being kept as a reserve pending resolutions of complaints by members of the Chehebar family (also spelled Shehebar by some members), owners of the Rainbow Stores retail clothing chain. The family invested early in Par. Their lawyers argue that they extracted special repayment guarantees and should have been paid before other investors. Litigation in that case is still pending.

Court documents show that a second payment to investors could include: funds from the Chehebar set-aside; late payments from a few remaining Par Funding borrowers; a refund of federal income taxes Par paid on its phony profits in its effort to fool investors; proceeds from the sale of LaForte’s former Florida beach home and other assets still held by the receiver; and proceeds from a private jet and other Par property seized by the FBI but not yet shared with the receiver. Even if most of that money were collected, it would likely be less than the first payment.

This first round of payments has brought a higher than usual recovery for a Ponzi scheme, according to Eric Lechtzin, a Bucks County lawyer who filed the first investor complaints against Par after the SEC sued the firm in July 2020.

In a Ponzi scheme, fraudsters pay early investors a slice of later investors’ funds to keep them interested, but steal the rest, investing little in the actual business that investors think they are buying.

In the largest Ponzi scheme to date, the late Bernard Madoff’s fraudulent investment funds, investors eventually got their principal back even though Madoff’s assets failed to cover the losses because banks that enabled Madoff to fool investors helped repay them, Lechtzin said.

But banks weren’t implicated in the Par frauds. To the contrary, salespeople used the private, off-Wall-Street nature of the funds as a selling point to investors, some of whom were skeptical of regulated, mainstream investments.

Brock said he’s personally “numb” to finally receiving partial payment after years of following the case in hundreds of court filings and a string of remote public hearings.

“I feel for all of those people who trusted their hard-earned savings to see this return,” Brock said.

He said he’s looking ahead to the sentencing in the criminal case: “I also hope for justice with those who took advantage of these good people.”