In his broadcast ads -- KYW, WPHT, Facebook -- and events for retirement savers, Dean J. Vagnozzi says his King of Prussia business, A Better Financial Plan LLC, is receiving more than a million dollars a week from investors hoping to collect higher profits than familiar stock and bond retirement accounts offer.
One fact he doesn’t feature in the ads: Vagnozzi on May 30 agreed to pay a state-record $490,000 to settle accusations by the Pennsylvania state securities agency that he was selling some investments without a license.
“This is the largest settlement with an individual in department history,” Dulcey Antonucci, spokesman for the Pennsylvania Department of Banking and Securities and secretary Robin L. Wiessmann, said last week. (See UPDATE below for Vagnozzi’s comments after this story was published.)
The investments that the Bureau of Securities Compliance and Examinations accused Vagnozzi of selling through A Better Financial Plan without proper registration consist of high-interest investment notes issued by a Philadelphia-based small-business lending company, Complete Business Solutions Group Inc., under the business name, Par Funding.
Par Funding, based in a ground-floor office in Center City’s “N3rd St.” district, where neighbors include software start-ups, agreed to pay $499,000 in November to settle state accusations that it made deals with unregistered agents to sell its investments in 2016 to 2017. That amount ties a previous record for the largest settlement by a firm in a Pennsylvania securities case.
Separately, Par Funding was barred from continuing to sell unregistered securities in New Jersey, through unregistered agents who collected commissions “as high as 25 percent" of what investors paid, under a Dec. 27 order by that state’s securities regulator.
New Jersey Attorney General Gurbir S. Grewal expressed concern at that time that the small-business funding industry, at worst, could become “a magnet for financial predators," and he sought to put the companies “on notice that we are watching closely.”
Securities laws typically require interest-bearing investments and the people who sell them to be registered, even when they are selling to sophisticated investors. In the 2000s, notes issued by suburban Philadelphia-based Advanta Corp. and American Business Financial Corp. defaulted after the companies went bankrupt. Advanta investors were eventually paid after long delays; American Business clients suffered significant losses.
By registering investment securities and the professionals who sell them, governments hope to hold professionals accountable for making sure investments comply with industry rules and are appropriate for buyers. But lawyers representing sales agents say it’s not always clear when loan products or people who help locate customers need to register.
“Complete Business Solutions favorably resolved its securities-related matter with the State of Pennsylvania last year, as the settlement agreement indicates, without any admission of liability," and also settled with New Jersey, said the company’s lawyer, Robert S. Wolf, of Moses & Singer LLP, New York, in an email. He said the Philadelphia firm "has complied with its state and federal registration-related requirements in connection with its business operations.”
Since the fines and restrictions, Vagnozzi and Par Funding continue to do business together. Par has raised more than $226 million through Vagnozzi and other sales agents, Par told the Securities and Exchange Commission in a February filing.
And Vagnozzi has continued to refer interested clients to Par, says his lawyer, John W. Pauciulo of Eckert Seamans Cherin & Mellott, LLC in Philadelphia. He adds that Vagnozzi-related sales were “by far the largest” of Par’s agents in Pennsylvania, Arizona, Delaware, Florida, New Jersey, Texas and Virginia, who were listed in Par’s SEC filing earlier this year.
The filing says the agents were paid a total of $3.6 million in “finder’s fees” for locating buyers of securities for Par. Pauciulo says Vagnozzi’s share of those fees are “a fraction of what he has made” from the sale of other investments not cited in the state settlement.
Pauciulo notes that Pennsylvania didn’t allege that investors were losing money on the investments, but that “anybody involved in the sale needed to be licensed as a broker.” Vagnozzi didn’t register as a broker because he “relied on representations from Par Funding they were not securities and he didn’t need a license,” Pauciulo added. He called that “a technical issue,” and said Vagnozzi was in the process of registering.
“Vagnozzi is not presently registered under Section 301 with the Department,” said Antonucci, the state spokeswoman. “Complete Business Solutions is not currently registered with the department," either, she added. Complete Business, she said, has "filed for an exemption with the SEC pursuant to Rule 506 of Regulation D,” in an attempt to show that sales referral agents are not required to register.
Complete Business officials, including Joseph Laforte, the marketing chief quoted in the company’s cheerful news releases about the businesses it helps with its loans, were unavailable to meet with a reporter who visited their Old City office Tuesday. Staff referred questions to lawyer Wolf.
The settlements, and the fact the companies continue to do business with no apparent change in their licensing, raise obvious questions about the intent and effectiveness of state securities enforcement. State officials say the settlements speak for themselves. For his part, lawyer Pauciulo says he expects the state demanded the settlement “because they wanted the money.”
Par Funding makes its money by lending to small businesses that can’t get bank loans, at higher rates of interest, and moving to collect collateral pledged for those loans when borrowers fall behind.
In a series of stories last year, Bloomberg LP quoted clients complaining that the company charged interest rates sometimes in excess of 100 percent a year, and employed aggressive tactics, including collection agents who refused to leave borrowers’ premises until they were paid. Par representatives have denied wrongdoing.
The business targeted by state regulators in the settlement is a small piece of Vagnozzi’s business activity, Pauciulo said. Vagnozzi operates an insurance agency (life, health, disability, annuities); an “alternative assets” investment business that buys real estate and life insurance policies (viaticals); and also makes referrals to investments such as Par, the focus of the state complaint.
Securities and insurance regulators use different playbooks. Pennsylvania’s Banking and Securities Department, in a newsletter Wednesday, headlined that its “essential function” is “consumer protection.”
By contrast, the Pennsylvania Insurance Department and other agencies that regulate insurance-related investments focus on making sure insurers price policies profitably enough to remain in business.
"If you really want life insurance, buy life insurance,” advises Olivia Mitchell, a Wharton School professor who has researched and testified extensively on investments and their regulation. But as to hybrid insurance-investment offerings, "the more complex a product, the easier it is to shroud what is going on inside it,” including fees.
A week before settling with Vagnozzi, Pennsylvania also settled unregistered-agent complaints against two other Par Funding salespeople. Jacalyn Kerbec agreed to pay $30,000. Daniel O’Neil agreed to pay $16,000.
UPDATE 7/29: Vagnozzi called in response to this article. From his comments: "I’m the most ethical hardest working financial guy in the business.
"We give everybody the pros and cons. There’s no wool pulled over their eyes. People come in with a million bucks to invest and they give us 100 grand. We do the right thing by people. We are ethical. We are not over-exposing people (to risk.)
“We think, with the market that’s had this 11-year run, most people think the market is due for a pullback. You think it... People say where can I put my money?” He offers alternatives, he says, “not guarantees.
"I have 250 people coming to my event Wednesday... I’m going to write another ad for it at KYW tomorrow. We are now taking in $1.5 million a week.
“These people are getting double-digit returns. I don’t guarantee it. There is risk.”
I reminded him the state’s actions in forcing a large settlement are news, and of course we are going to report it. He insisted he had not acted illegally -- added that “it frustrates me the state doesn’t allude to” the other, legal investments he sells.
LATER: After I posted his remarks, three readers pointed out the language in his radio ads for investment backed by high-rate loans, which Vagnozzi was glad to provide: “Every single one of those investors earns a 10 percent annual return with their interest check deposited into their bank account on the same day every month and all of their principal is return to them after just one year."
Ten percent. Doesn’t that sound like a guarantee?
VAGNOZZI REPLIES: “You heard the commercial. Did you hear the word ‘guarantee’? I know you listened to the 800 number too. Did you hear the word ‘guarantee’? We have a lot of clients that can vouch for the payments every month and the rate of return... That’s not a guarantee,” he insisted.
“People don’t invest based on what they hear on my commercials. They choose to come in because of my commercials. When they come into my office they hear about all the pros and cons of the investment. I go home and they think about things and they only come back if they want to work with us."
So: 10 percent returns aren’t a promise of future yield, but a come-on-in-let’s-talk, according to the man who says it in his ads.
PREVIOUSLY: Before the Vagnozzi and Par settlements, the largest penalties Pennsylvania’s securities regulator previously collected from brokers accused of misdeeds included:
- a $200,000 individual assessment levied two years ago against Doylestown broker Austin Dutton for selling inappropriately risky real estate investments from companies associated with investor Nick Schorsch’s real estate operations, to clients including Philadelphia police officers recruited through FOP Lodge 5 publications and meetings;
- a $499,000 company penalty assessed against Dutton’s former employer, Newbridge Securities, for not overseeing him more carefully .
Dutton, who also used shows and ads on Philadelphia radio stations to find customers, has since his settlement been the subject of complaints by 18 clients, including Philadelphia police officers and at least one firefighter, demanding a total of more than $2 million. He has settled two of the smaller cases for cash payments, while the others remain pending, according to records posted by FINRA, the securities industry’s self-regulatory agency.