Five years after takeover, Par Funding cash and blame are still being sorted out in court

Five years after a court-ordered receivership took over Philadelphia-based Par Funding and months after its founder Joseph LaForte and his associates were sentenced to prison for criminal fraud and conspiracy, the lawyers resolving the Ponzi scheme are putting together a plan to double the cash they have sent hundreds of investors.

From 2011 to 2020, investors poured more than $500 million into Par Funding to fund its high-priced loans to shaky small businesses. For years, they collected monthly checks with interest yielding 10% a year, or more. But Par stopped paying principal and interest in 2020, leaving more than 1,700 investors with net losses totaling $226 million and leading to the court-ordered takeover.

The SEC filed civil fraud charges against Par’s founders and several of its outside salespeople, which they agreed not to contest, and has seized assets to be returned to investors.

Criminal fraud and conspiracy charges were also filed against Par founder LaForte, his brother and chief collector James, and Par chief financial officer Joseph Cole Barleta. The men pleaded guilty to looting the company at investors’ expense and were sentenced to prison terms earlier this year.

Beginning Tuesday, a panel of lawyers will hold a hearing to consider sanctions against John Pauciulo, a former partner at the Eckert Seamans law firm and the former lawyer for the top Par salesman, Dean Vagnozzi.

The Office of Disciplinary Counsel of the state Supreme Court’s disciplinary board says in its petition against Pauciulo that he played a “pivotal” role in the Par scheme. His defense lawyer says he provided “private” advice and was not part of the fraud.

In December, federal Judge Rodolfo Ruiz authorized $111 million in payments to Par investors, nearly half the net $226 million they had lost.

Another $108 million is now available for distribution, according to a report filed by the receiver on Aug. 1.

That includes additional money collected from Par borrowers and owners, plus $37 million that had been held up pending a settlement that has since been reached with a group of early Par investors, the Chehebar family, owners of Rainbow Stores; $32 million from a legal settlement with Eckert Seamans’ insurers; and $12 million from the sale of LaForte’s former Florida resort home, almost the last of two dozen properties seized from company leaders.

There could be a final payout if the receivers collect more.

Still in the works: a $10 million tax refund application to the IRS; negotiations with federal prosecutors in Philadelphia, who still have a lawsuit against Par on the books, to turn over LaForte’s former Cessna jet and a Charles Schwab investment account worth an estimated $20 million; sales of the last remaining Par assets, including a Cherubini yacht; and collection of the last outstanding unforgiven, unpaid loans to Par borrowers, totaling over $5 million.

The cases have run up more than $60 million in lawyer fees plus Par staff and operating expenses and other costs to run the receivership over the last five years.

The receiver is also managing $16 million in purchased life insurance policies in two of Vagnozzi’s former funds that were mixed with Par investments. They can be sold for only a fraction of their face value.

Pauciulo, a former partner in the law firm of Eckert Seamans Cherin & Mellott and chair of Eckert’s Financial Transactions practice group, showed Vagnozzi and other salespeople how to package Par loans into the investments that later defaulted. He faces charges of misconduct and other violations of lawyers’ Rules of Professional Conduct.

The SEC filed a civil complaint in 2022 accusing Pauciulo, a onetime SEC lawyer, of securities fraud for his involvement with the Par scheme. He settled the case without admitting wrongdoing by agreeing to a $125,000 fine and a five-year suspension from SEC cases.

He left Eckert and set up his own office. Insurers for Eckert agreed to pay $45 million to settle claims by employees and investors that Pauciulo’s bad advice was partly responsible for their losses.

Investigators for the Office of Disciplinary Counsel in April filed a petition accusing Pauciulo of violating the Rules of Professional Conduct, specifically alleging misconduct related to “dishonesty, fraud, deceit or misrepresentation,” and failing to meet the rules’ standards of competence, diligence, dealings with people not represented by counsel, and avoiding conflicts of interest.

Pauciulo’s lawyer, Samuel Stretton of West Chester, said Pauciulo worked for Vagnozzi, not for Par, adding that lawyers who worked directly for Par haven’t been hit with disciplinary complaints.

“John is charged with everyone under the sun, but he didn’t deal with Par,“ Stretton said, adding that Vagnozzi is on Pauciulo’s defense witness list, even though he sued his former lawyer.

The disciplinary board will hear Pauciulo and witnesses in three days of scheduled hearings this week before deciding on any penalties.