No ‘rubber-stamp’: Judge orders SEC to try to reach a settlement with Par Funding owners

After more than two years of litigation, Wednesday was supposed to mark the final arguments before a federal judge signed off on how much money owners of Philadelphia-based Par Funding must pay to reimburse 1,200 investors, who the government says were sold fraudulent securities to finance Par’s high-fee loans to small businesses.

Instead, the federal Securities and Exchange Commission was given 10 days to negotiate a settlement with Par founders, Joseph LaForte and his wife, Lisa McElhone.

The SEC had called on the court to order the couple to pay $337 million in a petition filed in May. The couple’s lawyers said they should pay a maximum $56 million.

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Under tough questions and complaints from Judge Rodolfo Ruiz II, lawyer Amie Riggle Berlin withdrew the SEC petition and agreed at Ruiz’s urging to one last attempt to negotiate a settlement with defense lawyers — though both sides said a deal was unlikely.

If they don’t come up with a plan, the judge says, he is likely to make an award that would disappoint both sides.

Whatever the judge sets aside will be used to help fill “a giant pot that’s to be assembled” so receiver Ryan Stumphauzer “can write 1,200 checks,” said James Miller Kaplan, a lawyer for the defense.

Two years ago at the SEC’s request, Ruiz appointed Stumphauzer, a former federal prosecutor, as the receiver to take over Par, also known as Complete Business Solutions Group, after it stopped monthly interest payments that had attracted investors eager for an alternative to the stock market and hoping for steady, high returns.

The SEC sued Par’s owners and several outside salespeople for failing to register the investments as securities and failing to warn investors of risks, including LaForte’s past felony convictions and the difficulties Par borrowers faced repaying their loans at the company’s high interest rates.

Last year Par owners agreed not to dispute the SEC’s allegations; since then, the two sides have been arguing over how much they should have to pay. The SEC is pursuing its civil lawsuit in Florida, where Par moved its headquarters in 2017, though Par kept offices in Philadelphia.

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At Wednesday’s hearing to decide on the SEC’s cash demand, Judge Ruiz complained the government had failed to justify its call that he refuse the Par defendants’ efforts to discount millions in business expenses, or that he impose an additional $50 million penalties on both LaForte and McElhone. SEC cases are often settled without large penalties and after deducting a broad range of expenses.

Agency lawyers have argued the severity of the Par fraud justified aggressive payouts. “This case is second to none” among the firms prosecuted by the SEC for illegal activity, said senior counsel Berlin.

She cited a history of the Par owners “lying” to regulators and investors and said SEC leaders believed Par’s offenses were more severe than those of a Florida company accused of a “Ponzi scheme” that was ordered in 2019 to pay a $100 million civil penalty and repay millions in “ill-gotten gains” and interest.

But Ruiz said Berlin’s “pleading is deficient” to show Par was that bad.

“I cannot rubber-stamp this,” he added.

When Berlin said accounting proofs the judge sought were filed as part of the case many months before the hearing, Ruiz said the connections should have been made clear in the motion for payment: “I cannot go through this like a pig searching for truffles.”

He said he’d spent more than a month drafting a 42-page payment decision but was putting it aside because the SEC had not given him enough information to support its demands.

Defense lawyer Kaplan said the judge’s job, in the end, is straightforward: “We gave you buckets of deductions” — payments the defense says were legitimate business expenses that the Par owners should not be required to reimburse to the SEC for investors. “You may choose some, reject others.”

At Ruiz’s urging, Kaplan and other defense lawyers and SEC representatives agreed to try once more to reach an agreement with the agency.

“If we can’t get to spitting distance in a week, we can’t,” Kaplan concluded. “Do what you need to do.”

» READ MORE: Judge balks at holding Par Funding owners in contempt

The SEC in May called on the couple to pay back $226 million in money it said Par had paid them and firms they controlled, plus $11 million in interest, and civil penalties totaling $50 million each. The government also imposed smaller penalties on other defendants, some of whom have paid; others remain in dispute.

The SEC’s receiver has taken custody of more than $160 million in cash and other assets — a corporate jet, dozens of homes, a small fleet of yachts and cars, paintings, watches, jewelry.

The SEC wants Ruiz to allow the federal agency to keep that money and to collect many millions in as-yet uncollected loans from Par’s borrowers. The borrowers include hundreds of small businesses that didn’t qualify for cheaper bank loans and a few larger companies the receiver has sued to collect bigger sums.

That money, plus any more the receiver is able to collect, would enable the government to repay some or all of the $250 million that the SEC says Par still owes investors — and maybe a large part of the interest investors hoped to collect, instead of having their money frozen with no certainty of full repayment, let alone interest.

The more Ruiz orders the owners to pay, the more will be available to investors.

Ruiz said he’s still committed to getting what he fairly can for Par’s long-deferred investors. But “it’s better to have a judge who scrutinizes than one who rubber stamps” and is likely to have the decision reversed on appeal, he said.

Staff writer Craig R. McCoy contributed to this article.