Par Funding was unprofitable and $144 million in payments to owners made it worse, accountants say

Center City-based Par Funding lent more than $1 billion to small businesses at high interest, and barely collected that much money back, let alone made any money. Instead it ran up “significant” operating losses — while paying insiders $144 million, relying on new investments to make up the shortfall.

That’s according to a preliminary forensic accounting report by a team of CPAs headed by Bradley D. Sharp, chief executive of Development Specialists Inc., commissioned by Par’s court-ordered receiver, Ryan Stumphauzer, to review Par’s books after the Securities and Exchange Commission filed a civil fraud case against the company in late July. The SEC acted after Par defaulted on interest and principal payments to investors in April.

The report was filed last week and presented by Stumphauzer’s lawyers, led by Philadelphia-based Gaetan Alfano, on a conference call with U.S. District Judge Rodolfo Ruiz Tuesday that was attended by 200 spectators, including many Par investors.

Lawyers for the Par owners called the Sharp report “materially flawed,” and said they hoped Ruiz would help them obtain Par records now controlled by the receiver. They say those records would help confirm that Par was a profitable company, and its loans well-collateralized and accounted for by Par’s former legal team at law firm Fox Rothschild.

The defense also argues that the main danger to investors is Stumphauzer’s failure to seize borrowers’ collateral from nonpaying borrowers since the receiver took control of the company in early August. But the receiver’s lawyers contend Par’s own records don’t show that money is collectible.

Alan S. Futerfas, the New York lawyer who has served as spokesman for the defense team, declined to comment.

Par stopped making principal and interest payments to investors in April, though it resumed making reduced interest payments to some clients in June, if they agreed not to sue.

Stumphauzer, a former SEC lawyer, was named receiver and tasked with finding and returning hundreds of millions of dollars to several hundred investors, after the SEC filed civil charges against Par owner-managers Joseph F. LaForte, his wife Lisa McElhone, and Joseph Cole Barleta, plus four Pennsylvania and Florida agents who helped Par raise money.

The SEC accused them of not properly warning investors of the true risks of financing Par’s high-interest small-business loans in exchange for monthly checks yielding 10% or more each year. The firm also hid the criminal past of LaForte, who used aliases to keep investors from knowing about his convictions for two previous financial crimes, the agency said.

According to the Sharp report, despite its weak returns from borrowers, Par repaid investors $95 million in interest and $135.6 million in principal through last year. At the same time, it also paid $144 million to entities controlled by LaForte, McElhone, Cole Barleta, and salesman Perry Abbonizio, a defendant in the civil fraud case who the SEC says was also a part-owner of Par. All have denied wrongdoing and are fighting the SEC accusations.

Those payments, plus $28 million in operating costs, left the company with a “cash loss of $203.5 million,” according to the report, which it could hope to make up only from new investors.

The Sharp report also noted:

The defense has said these and other repeat borrowers were well-collateralized and their loans could be collected. But those lawyers have not released detailed reports documenting the assets, saying they need more information from the receiver.

Ruiz, who is overseeing the SEC case against the Par owners, Wednesday evening expanded the receivership by adding 29 properties they controlled, mostly in Center City plus homes in Haverford, the Poconos and Florida, and other assets that the owners bought with millions they collected from the small-business finance company. That makes the properties potentially available to use for paying investors if the SEC wins its fraud case.

The defense had argued there’s no need to expand the receivership, because the owners have made no move to liquidate their assets since the SEC filed its case. Federal agents seized the plane, cash, and some other assets in raids in July.

According to lawyers for the receiver, the owners’ assets could be the main source enabling investors in Par to get much of their money back, since Par has relatively little cash, and much of what it is owed by borrowers looks uncollectible.

An attempt at mediation has made little progress, lawyers for both sides said privately.

While the case has left Par investors wondering how much of their money they will recoup and when, there are signs that other investment payments halted under the receivership may resume.

Buyers of non-Par investments sold by Dean Vagnozzi, a King of Prussia insurance agent and one of the salespeople the SEC accused in addition to the Par owners, have in recent weeks received emails from InvestServ LLC, a new firm that will be administering the Pillar Life Settlement funds, Atrium Legal Capital funds, ProMed Investment funds, and other funds.

Payments to investors from those funds stopped when Vagnozzi’s firm was put into receivership alongside Par in July.

In the emails, InvestServ lawyer Ryan Wertman told fund investors his firm was set up by the operators of the Atrium and ProMed funds. The Atrium and ProMed fund operating groups were purchased last summer by Conshohocken-based Experity Ventures LLC, a firm founded by investor Joe Greco. An independent administrator such as Experity was a condition that Ruiz had set for resuming payments.

Wertman added that Vagnozzi, who like the others sued by the SEC has denied wrongdoing, “was very supportive during this process,” and promised that InvestServ will provide more information “as we overcome the turbulence of the past together.”