Judge balks at scorning crowdfunding owners

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The financial maneuver that generated money to pay defense attorneys in the crowdfunding scandal “doesn’t smell good,” a federal judge ruled Monday.

Moreover, he said, the misappropriation of money presented to him in court “clearly violated” his order freezing assets in the case.

Yet, he said, he had no evidence to link 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 fight with SEC

US District Court Rodolfo Ruiz II said the fact that the couple took the Fifth Amendment and refused to answer questions about the flow of money was not quite enough for him to find them guilty of contempt, although the law allows civil judges to draw negative inferences about defendants. who take the Fifth.

In his remarks from the bench on Monday morning, Ruiz denied 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 lender. Philadelphia. Ruiz is presiding over a sweeping lawsuit brought by federal financial regulators alleging that Par defrauded 1,200 investors who sunk $540 million into the company by misleading them about LaForte’s criminal record involving fraud and reckless business practices by By.

Par tapped into investor money to provide high-interest loans to cash-strapped small businesses that couldn’t get regular bank loans. In July, as the case neared completion, the receiver, Florida attorney Ryan K. Stumphauzer, filed a new lawsuit against LaForte and McElhone, who live on the Main Line. He accused them of going behind his back to funnel money that should have gone into the receiver’s bank accounts to theirs to pay for their $3 million defense.

READ MORE: Was equity financing a Ponzi scheme or a virtuous business canceled by the feds? A judge will decide soon.

Stumphauzer said he succeeded by tricking borrowing merchants who still owed money to Par Funding into transferring their loan payments to intermediary companies rather than to the recipient. The money, sometimes after circuitous trips to bank accounts at various businesses, ended up paying the couple’s teams of defense attorneys and accountants, the receiver said.

The SEC took its case to Florida, where Par Funding moved its nominal headquarters from Philadelphia several years ago for tax purposes.

In addition to the civil case, the FBI conducted a criminal crowdfunding investigation, an investigation that a lawyer for LaForte said would likely lead to his prosecution on charges that could include fraud and extortion. Last week, a well-known organized crime associate, Renato “Gino” Gioe, pleaded guilty to serving as an executor who threatened borrowers to collect their debts.

Monday’s hearing 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 scheduled a final hearing, also on Zoom, before deciding how much to order LaForte, McElhone and others to repay investors. The SEC urged the judge to order them to repay $378 million. The defendants say they should not pay more than $80 million.

After hearing the judge’s analysis, Stumphauzer’s legal team, led by Philadelphia attorney Gaeta Alfano and Florida attorney Timothy Kolaya, agreed it would drop the contempt bid for the time being, although she said that could change if more evidence comes to light.

Alfano and Kolaya obtained a deposition last week from a person deeply involved in the money transfers that appeared to bolster their case ahead of Monday’s hearing.

In the deposition, witness Francis Scarpati undermined his own affidavit given to lawyers for LaForte and McElhone only two weeks earlier. In that statement, he said he loaned LaForte’s younger brother James up to $3 million to pay for the couple’s legal bills because he was a friend of the brother.

In the new deposition, Scarpati admitted that he used a false name, “Terry Lane”, to ask about 75 borrowing merchants to transfer loan payments to another business. That company then transferred the payments to Scarpati’s company, and Scarpati used the money to fund the loan to James LaForte, according to a summary of the deposition filed by Alfano and Kolaya.

However, Scarpati did not link the diversion to Joseph LaForte or McElhone. He told Alfano in his deposition that a lawyer told him he agreed to step in and collect money from the borrowers in payment of the commissions owed to him. He said he couldn’t remember the lawyer’s name.

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