SECURITIES & EXCHANGE COMMISSION

v.

COMPLETE BUSINESS SOLUTIONS GROUP, INC.

THIS CAUSE comes before the Court on Defendants’ Joint Motion for Partial Summary Judgment and Incorporated Memorandum of Law [ECF No. 804] (“Motion”) and accompanying Statement of Facts [ECF No. 805] (“DSOF”), filed on October⁴, 2021. The Motion is made on behalf of Defendants Joseph LaForte, Lisa McElhone, and Joseph Cole Barleta, Mot. at 2, and Defendants Perry Abbonizio and Dean Vagnozzi filed Notices of Joinder to the Motion on October⁶, 2021 and October 20, 2021, respectively, [ECF Nos. 819, 849]. Plaintiff filed a Response in Opposition [ECF No. 894] (“Response”), and Opposition to Defendants’ Joint Statement of Undisputed Facts [ECF No. 887-1] (“PRSOF”), on October 28, 2021. In addition, Plaintiff filed a Statement of Undisputed Facts [ECF No. 816-1] (“PSOF”), and Defendants filed a Joint Statement of Facts in Support of their Response to the SEC’s Motion for Partial Summary Judgment [ECF No. 895] (“DRSOF”). Defendants filed a Reply in support of their Motion [ECF No. 947] (“Reply”) on November 15, 2021. Having reviewed all the pleadings, and being otherwise fully advised, it is ORDERED AND ADJUDGED that the Motion is DENIED as set forth herein.

BACKGROUND

As the parties are familiar with the underlying facts in this case and the Court extensively covered such background in its Order Denying Motion to Dismiss [ECF No. 583] (“Order Denying Motion to Dismiss”), only a summary is warranted.¹

I. Factual Background

This case is an enforcement action brought by the Securities and Exchange Commission (“SEC”) alleging that Defendants issued, marketed, and sold unregistered, fraudulent securities to fund short-term loans to small businesses—known as “merchant cash advances.” Par Funding— a company founded in 2011 by husband-wife duo McElhone and LaForte—was engaged in the business of making “opportunistic loans” to small businesses across the country. See Am. Compl. ¶ 1. From approximately August 2012 through mid-2020, to fuel these merchant cash advances (MCAs), Defendants raised nearly half a billion dollars through unregistered securities sold to over a thousand investors nationwide. Id. The SEC describes the alleged scheme as consisting of two primary phases. During the first phase, from August 2012 until around December 2017, Par Funding primarily issued promissory notes and offered them to the investing public directly and through a network of sales agents (“Phase I”). Id. ¶ 2. Then, in early January 2018—after learning it was under investigation by the Pennsylvania Department of Banking and Securities for violating state securities laws through the use of unregistered agents—Par Funding implemented a new way to raise funds for the MCAs (“Phase

II”). Id. ¶¶ 3-4. Par Funding began relying on “Agent Funds” that were “created for the purpose of issuing their own promissory notes, selling the notes to the investing public through unregistered security offerings, and funneling investor funds to Par Funding.” Id. ¶ 4. Par Funding would

II. Procedural Background

The SEC filed this action on July 24, 2020, seeking—among other things—a temporary restraining order and preliminary injunction, an asset freeze, appointment of a receiver, a permanent injunction, disgorgement, and penalties. See Compl. [ECF No. 1]. The Court entered an order appointing a receiver over certain Defendant entities, as well as several subsequent orders expanding the scope of the receivership [ECF Nos. 141, 238, 436, 484, 517]. The Court also granted the SEC’s request for a temporary restraining order and asset freeze [ECF No. 42] and held a two-day preliminary injunction hearing [ECF Nos. 170, 192]. Following the hearing, each Defendant consented to a preliminary injunction [ECF Nos. 173, 176, 187, 200, 201, 221, 255, 336]. On October 27, 2020, the Court stayed this case as to Defendant Gissas, who reached a tentative settlement with the SEC [ECF No. 349]. On November², 2020, Defendants filed a Motion to Dismiss, seeking dismissal of the Amended Complaint that the SEC filed on August 10, 2020. [ECF No. 363] (“Motion to Dismiss”). The Court denied the Motion to Dismiss on May 11, 2021. Defendants filed the instant Motion on October⁴, 2021, seeking partial summary judgment regarding certain claims in the Amended Complaint.

LEGAL STANDARD

Summary judgment is rendered if the pleadings, the discovery and disclosure materials on file, and any affidavits show there is no genuine issue as to any material fact and the movant is entitled to judgment as a matter of law. See FED. R. CIV. P. 56(a), (c). An issue of fact is “material” if it might affect the outcome of the case under governing law. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). It is “genuine” if the evidence could lead a reasonable jury to find for the non-moving party. See id.; see also Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). At summary judgment, the moving party has the burden of proving the absence of a genuine issue of material fact, and all factual inferences are drawn in favor of the non-moving party. See Allen v. Tyson Foods Inc., 121 F. 3d 642, 646 (11th Cir. 1997). The nonmoving party’s presentation of a “mere existence of a scintilla of evidence” in support of its position is insufficient to overcome summary judgment. Anderson, 477 U.S. at 252. If there are any factual issues, summary judgment must be denied, and the case proceeds to trial. See Whelan v. Royal Caribbean Cruises Ltd., No. 12-22481, 2013 WL 5583970, at *2 (S.D. Fla. Aug. 14, 2013) (citing Envtl. Def. Fund v. Marsh, 651 F. 2d 983, 991 (5th Cir. 1981)).

ANALYSIS

Defendants move for partial summary judgment on claims under Section 17(a)(1)-(3) of the Securities Act, Section 10(b) of the Exchange Act, and SEC Rule 10b-5(a)-(c). Defendants contend that the SEC cannot prove the necessary elements to establish a violation under each statute or rule—namely, that Defendants made certain material misrepresentations or omissions to investors and in doing so, acted with scienter.² Mot. at 2. But contrary to Defendants’ assertions, discovery has, in fact, revealed the existence of genuine issues of material fact barring partial summary judgment in their favor. Id. To allege claims under Section 17(a)(1)-(3), Section 10(b), and Rule 10b-5(a)-(c), the SEC must show: (1) a device, scheme, artifice to defraud; a material misrepresentation or omission; or an act, practice, or course of business which would operate as a fraud or deceit; (2) in the offer of or in connection with the purchase or sale of a security; and (3) in interstate commerce. See S.E.C. v. Quiros, No. 16-21301, 2016 WL 11578637, at *12 (S.D. Fla. Nov. 21, 2016). For claims under Section 17(a)(1) and Rule 10b-5, the SEC must also allege facts supporting scienter. S.E.C. v. Merch. Cap., LLC, 483 F. 3d 747, 766 (11th Cir. 2007). The SEC need only demonstrate negligence for claims under Sections 17(a)(2) and (3). Id. There is “considerable overlap among the subsections of the Rule and related provisions of the securities laws”—i.e., they prohibit some

Here, Defendants present two arguments: (1) the SEC cannot prove that failing to disclose three Cease-and-Desist Orders to investors constituted a material omission; and (2) in failing to disclose the Cease-and-Desist Orders, Defendants acted with scienter. A statement or omission is material where “there is a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable shareholder as having significantly altered the ‘total mix of information available.’” S.E.C. v. Monterosso, 768 F. Supp. 2d 1244, 1263 (S.D. Fla. 2011), aff’d, 756 F. 3d 1326 (11th Cir. 2014) (quoting S.E.C. v. DCI Telecommunications, Inc., 122 F. Supp. 2d 495, 498 (S.D.N.Y. 2000)). Materiality is a mixed question of law and fact. Ganino v. Citizens Utilities Co., 228 F. 3d 154, 162 (2d Cir. 2000). Summary judgment on the issue of materiality is only appropriate if the established omissions are “so obviously important to an investor, that reasonable minds cannot differ on the question of materiality.” TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 450 (1976). In their Motion, Defendants contend that the “SEC failed to present any evidence that Par Funding’s regulatory history has any connection to or impact on its financial performance.” Mot. at 3. Simply put, Defendants argue that Par Funding’s regulatory history is not material to its financial performance; thus, failing to disclose such history is not a material omission.³ In response, the SEC points to the undisputed fact that LaForte touted the success of Par Funding at a November 2019 investor presentation without disclosing the Pennsylvania and New Jersey cease-and-desist orders that had been entered against Par Funding. PSOF ¶ 94; DRSOF ¶ 94; PRSOF ¶ 87. Therefore, the SEC argues, by failing to disclose Par’s regulatory history, LaForte’s statements touting Par Funding’s success were materially misleading. Mot. at 3. Applying the standard laid out in TSC Indus., Inc. to LaForte’s statements, the Court finds that reasonable minds could differ as to whether failing to disclose Par Funding’s regulatory history was a material omission in the context of a statement asserting that Par Funding was a successful company.⁴

Pennsylvania regulators entered an Order against Par Funding, that may give rise to a disclosure requirement. Resp. at 5; Rutledge Tr., Vol. II at 316:18-21. Further, Rutledge testified that he recommended, several times, that Defendants prepare a private placement memorandum for the

2. They are correct. Celotex Corp. v. Catrett, 477 U.S. 317, 323-324 (1984). However, Defendants have not established the nonexistence of a genuine issue of material fact as to any essential element of the SEC’s claims. Notably, the Eleventh Circuit has noted that “[t]he existence of a state cease and desist order against identical instruments is clearly relevant to a reasonable investor, who is naturally interested in whether management is following the law in marketing the securities.” See Merch. Cap., LLC, 483 F. 3d at 766. Therefore, LaForte’s omission of Par Funding’s regulatory history creates a genuine issue of material fact as to whether LaForte’s proclamation of Par Funding’s success was a material misrepresentation as contemplated by Section 10(b) of the Exchange Act, SEC Rule 10b-5(a)-(c), and Section 17(a)(1)-(3) of the Securities Act.

Defendants argue that the undisputed facts show they did not intend to mislead Pennsylvania regulators as to the nature and pay structure of their business. Mot. at 3-4. Pennsylvania Securities Regulators began investigating Par Funding in 2018. DSOF ¶ 26; [ECF No. 805-2] at 74–83 (“Rutledge Letter”).⁷ At the time the Pennsylvania investigation was announced, Defendants had been paying commissions to those responsible for finding investors (i.e., compensating finders in connection with the offer and sale of securities). Id. In 2018, Par Funding adopted a different business structure, referred to as the “Agent Fund” structure. Resp. at 6; DSOF ¶ 37; PRSOF ¶ 37. The SEC alleges that Par Funding would compensate the Agent Funds by offering them promissory notes that had higher rates of return than the notes the Agent Funds sold to investors. See Am. Compl. ¶ 4. After Par Funding adopted the Agent Fund structure, Rutledge wrote to Pennsylvania regulators that Par Funding was no longer compensating finders in connection with the offer and sale of securities. Rutledge Letter at 77. As a result of that representation, the SEC contends that Defendants engaged in a scheme to deceive Pennsylvania Securities Regulators into believing that Par Funding was no longer paying commissions to find investors. Am. Compl. ¶ 62-69.

III. Genuine issues of material fact exist as to whether Defendants misled investors regarding the Default Rate.

Defendants argue that the SEC cannot establish they made false or misleading representations regarding Par Funding’s default rate because Par Funding’s default rate is accurate. Mot. at 5. They also posit the SEC cannot show that any alleged misrepresentations about the default rate were material, nor that Defendants acted with scienter. Id. at 7. First, the accuracy of Par Funding’s default rate is a disputed fact. DSOF ¶¶ 4–12; PRSOF ¶¶ 4–12. For instance, the SEC and Defendants dispute the accuracy of their respective experts’ findings as to the data contained in the Funding Analysis Report. DSOF ¶¶ 9–10; PRSOF ¶¶ 9– 10. These disputed facts are at the center of whether the default rate represented by Defendants was accurate—a key issue for the jury to decide. Next, Defendants attempt to argue the SEC cannot establish that a misrepresentation related to the default rate would be material. Mot. at 7–8. In support, Defendants cite findings by their expert, Joel Glick, who posits that if the default rate is calculated in the way suggested by the SEC’s expert, it would only change by .03%—an immaterial amount. Mot. at 7; DSOF ¶¶ 18–19. In direct dispute, the SEC states that any analysis conducted by Defendants’ expert presupposes that the underlying numbers in Par Funding’s Financial Analysis Report were accurate; therefore, the calculations are unreliable. PRSOF ¶¶ 18–19. Given this expert witness dispute, the Court cannot find that any alleged misrepresentation related to the default rate was immaterial because there is a genuine issue of material fact as to the underlying default rate itself—as well as questions surrounding the accuracy of representations made in the Financial Analysis Report. And, as previously noted by this Court, “[g]iven that borrowers defaulting on the MCA loans affects Par Funding’s ability to repay investors, a reasonable investor would likely attach importance to the default rate being ten times higher than what was represented to investors.” Order Denying Motion to Dismiss at 27. Even a finding that the default rate was a mere percentage point higher could lead reasonable minds to differ as to the importance of such a misrepresentation. Lastly, Defendants argue that the SEC has failed to show that Defendants acted with the requisite level of scienter required to establish a violation under Section 10(b) and 17(a). Mot. at 9. Defendants’ main contention is that they could not have acted with scienter because they worked alongside professional accountants to implement the policies and procedures at issue in this litigation. Mot. at 9. In support, Defendants assert that their public accounting firm, Rod Ermel Associates (“Ermel”), had full and complete access to Par Funding’s books and records and that very same firm conducted a review of Par Funding’s Financial Analysis Report in 2016. DSOF ¶¶ 20–21. The SEC disputes that the evidence cited by Defendants shows that Ermel was given full access to the books and records; rather, the evidence shows he was given access to Quickbooks. PRSOF ¶ 20. However, it is undisputed that Ermel, in 2016, conducted a one-time review of Par Funding’s Financial Analysis Report. Id. at ¶ 21. That being said, there are still insufficient facts to establish that Defendants acted without scienter. For example, if the underlying Financial Analysis Report reviewed by Ermel contained faulty numbers, Defendants’ request that Ermel audit a faulty report may very well show that Defendants acted with scienter. Resp. at 9. Based on these facts, summary judgment as to Defendants’ scienter, or lack thereof, is precluded. IV. Whether or not Par Funding performed vigorous underwriting is a disputed fact. Contrary to Defendants’ assertion that “there is no genuine issue of material fact that Par Funding did conduct vigorous underwriting,” the record is riddled with factual disputes. Mot. at 10. The SEC alleges that Par Funding made material misrepresentations as to its underwriting processes by (1) representing that Par Funding always conducted onsite inspections before funding merchant cash advances; and (2) representing that Par Funding took 48–72 hours to complete its vigorous underwriting process. Am. Comp. ¶¶ 159-161, 165-180.

As to the first allegation—whether Par Funding always conducted onsite inspections before funding merchant cash advances—it is undisputed that they did not. DSOF ¶ 58; PRSOF ¶ 58. However, the parties do dispute the materiality of this misrepresentation. But as explained above, the issue of materiality is a question of fact for the jury. As to the second allegation, Defendants assert that they did not make any type of misrepresentation when telling investors that underwriting was completed within 48–72 hours because that statement, without more, is not a promise that Defendants took at least 48 hours to complete their underwriting process. Mot. at 11. Again, the materiality of this distinction is at issue here. Mot. at 11; Reply at 8. And the Court is not in a position to determine materiality as a matter of law, which would invade the province of the jury.

Thus, based on the set of facts presented, summary judgment on this point is unwarranted. V. Whether Defendants made any materially false or misleading statements regarding Par Funding’s insurance in connection with the purchase or sale of a security is a disputed fact.

Defendants argue the SEC cannot show that alleged material misrepresentations regarding insurance to cover merchant defaults were made in connection with the purchase or sale of securities. Mot. at 13. But the Court is not persuaded that the SEC is unable to produce evidence to establish this element. See Rudolph v. Arthur Andersen & Co., 800 F. 2d 1040, 1046 (11th Cir. 1986) (citations omitted) (cleaned up) ([f]or the “in connection with” requirement to be satisfied it is enough that the fraud “touch” the sale in some manner . . . the requirement is satisfied, for example, if the purchase or sale of a security and the proscribed conduct are “part of the same fraudulent scheme”). For example, LaForte’s statements to investors related to Par Funding’s insurance coverage were made to attract investors to purchase the securities offered by Par Funding, and in the view of the SEC, made in furtherance of the fraudulent scheme. Am. Comp. ¶ 205; Mot. at 13. Next, Defendants cite to the Declaration of Anthony Bernato [ECF No. 804-25] (“Bernato’s Declaration”) to show that there is no genuine issue of material fact as to whether Defendants made materially false or misleading statements regarding Par Funding’s insurance. Mot. at 12–13; DSOF ¶¶ 23–24. In actuality, however, Bernato’s Declaration highlights several issues of material fact. Resp. at 13.; PRSOF ¶¶ 78–79. The SEC alleges that LaForte, on June⁵, 2018, told potential investors that if a merchant defaulted on his loan, Par Funding had insurance to back up their investor funds. Am. Comp. ¶ 205. But Bernato did not obtain any type of insurance coverage for Defendants until the fall of 2018. Bernato Declaration ¶ 8. And Defendants do not point to any other evidence that Par Funding had insurance of the type touted by LaForte prior to the coverage obtained by Bernato. This discrepancy alone represents an issue of material fact. Further, this discrepancy undermines Defendants’ claim that the SEC cannot prove that Defendants acted with scienter. Mot. at 13. If proven by the SEC, LaForte’s statement could show

Defendants seek summary judgment on the SEC’s allegations that Par Funding engaged in unlawful loan practices. Mot. at 15. However, as repeatedly noted by this Court and the SEC, the nature and legality of the Merchant Cash Advance business is not a feature of this case. Thus, the Court declines to breathe life into a non-existent cause of action. Similarly, Defendants seek summary judgment on an alleged claim by the SEC that Defendants misled investors when they represented that Par Funding was at risk of defaulting on then-existing notes or entering bankruptcy before the exchange note offering. Mot. at 19. Upon careful review of the Amended Complaint, it is clear that the SEC did not make this allegation and the paragraphs cited by Defendants do not allege any misrepresentation or omission. Therefore, the Court, again, refuses to weigh in on an illusory cause of action. VII. Genuine issues of material fact exist as to Defendants’ advice of counsel defense.

Defendants argue the SEC cannot prove they acted with scienter in failing to disclose LaForte’s criminal history to investors because Defendants relied on the advice of counsel, who advised them that disclosure was not necessary under Rule 502(b).9 Mot. at 18. To establish an advice of counsel affirmative defense, Defendants must show that: (1) they fully disclosed all relevant facts to their counsel; and (2) that they relied in good faith on counsel’s advice. S.E.C. v. 9 Rule 502(b) governs required disclosures for offerings of securities to non-accredited investors. Huff, 758 F. Supp. 2d 1288, 1348 (citing United States v. Parker, 839 F. 2d 1473, 1486 n.6 (11th Cir. 1988)). Because it is an affirmative defense, Defendants bear the burden of proving these elements. U.S. v. Vernon, 723 F. 3d 1234, 1269 (11th Cir. 2013). Here, Defendants fail to even address these elements in their Motion. Moreover, summary judgment is precluded by the record. Squarely at issue here is whether Defendants disclosed all relevant facts to their counsel. Defendants state that Rutledge, in 2018, advised them that they did not have to make certain disclosures under 502(b). Mot. at 17. These disclosures included matters pertaining to management. Rutledge provided this advice based on the information available to him at the time. PSOF ¶ 73. However, at the time Rutledge provided counsel, he was not aware that LaForte was involved in Par Funding—nor that he had a criminal history. PRSOF ¶ 74; [ECF No. 896-12] (“Rutledge Tr., Vol. I”) at 36:16–39:22. Regardless of whether Defendants were required to make certain disclosures under 502(b), LaForte’s role in the business is likely a relevant fact that should have been disclosed to counsel. Indeed, Rutledge testified that LaForte’s involvement and criminal history were facts he would have wanted to know. Rutledge Tr., Vol. II at 393:7–21. In sum, the Court finds that summary judgment is precluded as to Defendants’ advice of counsel affirmative defense because they have failed to meet their burden as to the elements required to establish such a defense—namely, that they fully disclosed all relevant facts to counsel. VIII. Whether or not Defendants failed to disclose that the Texas Securities Regulators had entered an Emergency Cease-and-Desist Order is disputed.

Defendants contend that the Cease-and-Desist Order entered by Texas was disclosed to investors in the 2020 exchange offering. In support, they cite the deposition testimony of Rutledge. Mot. at 19; Rutledge Tr., Vol. II at 319–320. However, Defendants do not provide any evidence regarding the exchange offering itself, or whether investors received or were aware of such disclosures. In opposition, the SEC contends they have provided record evidence disputing Defendants’ purported disclosure, nebulously citing to paragraph 138 of the Amended Complaint and the Temporary Restraining Order (without directing the Court to any specific page in which such evidence might be found). The SEC further maintains that “paragraph is supported by a different exhibit that does not include that language.” Resp. at 16. Based on these inadequate citations, and even after extensive review of the record, the Court is unable to discern what exhibit the SEC may be referring to. However, during the Court’s review, it came across Exhibit 109 to the SEC’s Temporary Restraining Order. [ECF No. 41-25] at 67-101. Exhibit 109 appears to contain the exchange note materials provided to investors in 2020. Within these materials, the Court does not see any disclosures related to the Texas Emergency Cease-and-Desist Order. Therefore, the Court finds that this is a disputed issue of material fact and summary judgment is not appropriate.

CONCLUSION

For the foregoing reasons, it is hereby ORDERED AND ADJUDGED that Defendants’ Motion for Partial Summary Judgment [ECF No. 804] is DENIED. DONE AND ORDERED in Fort Lauderdale, Florida, this 19th day of November, 2021.

UNITED STATES DISTRICT JUDGE