Par Funding was a Ponzi scheme, judge rules, clears way for investor payments
Philly small-business lender was never a viable or profitable business, but merely used new investors' funds to fool old investors, Judge Ruiz found.
Par Funding, the Philadelphia small-business lender taken over by a court-ordered receiver four years ago, “operated as a Ponzi scheme” that paid investors phony “profits” unwittingly funded by newer investors, a federal judge has ruled.
Judge Rodolfo Ruiz, based in Florida, scheduled a Zoom hearing for July 12 at 3 p.m. to review initial plans for distributing the money. The June 26 ruling comes nearly four years after the Securities and Exchange Commission filed civil fraud charges against its founders.
Ruiz’s decision clears the way for a plan to start repaying investors who lost money in the scheme from 2012 to 2020. Claims approved by receiver Ryan Stumphauzer, appointed by Judge Ruiz in 2020 to recover lost funds from Par and its owners, total more than the assets so far collected to pay them.
The exact number of victims is hard to gauge since dozens of the investors listed by the receiver are funds that are themselves composed of multiple investors.
Ruiz’s order largely endorses the receiver’s recommendations filed last spring. Ruiz rejected most of the 40 objections filed by investment sales people, financiers, investors, and others who had demanded a share of the cash, properties, and luxury goods taken from Par founder Joe LaForte and his wife, Lisa McElhone, and assets collected from other Par officials by the receiver. Ruiz ruled a few large claims from others may also deserve to be paid.
By designating Par a Ponzi scheme, Ruiz also made it easier for the receiver to deduct payments longtime investors received from Par before 2020, from the amount they may now collect. The effect of the ruling is to pay less to longtime Par investors who collected interest from the company, and more to recent investors who got little or nothing from Par.
LaForte, McElhone, Par chief financial officer Joseph Cole Barleta, and investment salesmen who ran their own firms promoting Par investments earlier agreed not to contest SEC allegations that they failed to warn investors about LaForte’s criminal past, falsely claimed the investments were insured, and exaggerated loan payment rates from Par’s risky borrowers, who typically could not get loans from mainstream lenders.
According to Ruiz’s order, Par meets common definitions of a Ponzi scheme because investors were misled into sending their money to Par by its practice of sending monthly interest payments that yielded far more than bank deposits or other insured investments.
Those payments were funded, not by successful loans to business borrowers as the company and its salespeople promised, but by money from newer investors, in order to keep the fraud running.
The fraudulent payments began when Par started doing business in 2012, and ended in 2020, the judge found. Par stopped making interest payments and sending back principal as promised, in March of that year. Par attorneys offered to resume much lower interest payments to investors who agreed not to sue. Par lawyers blamed the default on the nationwide drop in business activity due to COVID restrictions, an explanation the court later rejected. All payments had ended by June of that year; the company was seized and put into receivership in late July.
While Par claimed it was profitable before the government stepped in, and even paid income taxes, the company’s actual loan collections were “insufficient to cover expenses,” and it lost money every year, leaving it with a net cash deficit of $301 million, Ruiz wrote in his order.
Par’s LaForte, Cole Barleta, head loan collector James LaForte, and two of their accountants separately face criminal conspiracy and other federal criminal charges at a trial scheduled in Philadelphia this fall. James LaForte, the founder’s brother, is a convicted felon who federal prosecutors in New York say is a member of the Gambino criminal organization.
McElhone pleaded guilty to wire fraud and faces sentencing in August. Prosecutors had accused her of dodging $40 million in federal income taxes between 2013 and 2021.
Here are estimates for the value of victims’ claims and the assets available to pay for them, drawn from Ruiz’s order and from the receiver’s financial reports:
The majority of Par investors, including those whose investments were made in funds overseen by fund servicer Camaplan, have filed valid claims worth $223 million.
Additional claims that Ruiz said have validity including $18 million claimed by the Chelebar family, owners of Rainbow Shops stores, a fraction of the total they invested with Par; $10 million to certain Par borrowers, including receivers for bankrupt Ridgeway Trailers Inc.; $8 million to Cole Barleta’s business partner, William Bromley, and his company, Capital Source 2000; and a few smaller creditors.
The money the receiver has collected to pay these claims include $152 million in cash and proceeds from the sale of most of the 25 buildings and other assets the government collected from Par owners since 2020, as of the last accounting on April 30. The receiver is also owed $24 million by Par borrowers whose debts haven’t yet been paid or written off; and $29 million for companies controlled by the defendants, which the government says were wrongly paid with Par funds that should have stayed with the business. But the receiver’s accountants warn those latter debts may prove “uncollectible.”
The receiver hopes to get a refund for $10.5 million Par paid in taxes on its phony income.
Judge Ruiz has also approved a settlement with Eckert Seamans and former partner John Pauciulo, who set up investment funds used by hundreds of Par investors. Among them were clients of Dean Vagnozzi, who as a King of Prussia insurance agent advertised on radio station KYW and conservative talk radio for investments he said provided good alternatives to the stock market.
The settlement was negotiated with the law firm and its insurers for $45 million — including $37 million for the investors, and $7 million for lawyers representing Vagnozzi and others who argued they were due a share of the Eckert money — and investors in other funds Pauciulo helped prepare, including a fraudulent anti-drug software company called Fallcatcher.
But that settlement was left “dead on arrival” by the Supreme Court’s recent Perdue decision, which makes it harder to make settlements with corporate defendants that exclude other potential claims, said George Bochetto, Vagnozzi’s lawyer. He said he expected additional talks between Eckert’s insurers and claimants’ attorneys before any settlement is reached. A hearing into the Eckert settlement is scheduled for Aug. 13.