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SEC v. Complete Bus. Sols. Grp.

SEC v. Complete Bus. Sols. Grp.

United States District Court for the Southern District of Florida

May 11, 2021, Decided; May 11, 2021, Entered on Docket

CASE NO. 20-CIV-81205-RAR

Opinion

 [*1317]  ORDER DENYING MOTION TO DISMISS

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 [**4]  loans to small businesses—known as "merchant cash advances." Before the Court is a Motion to Dismiss the Amended Complaint [ECF No. 363] ("Motion") filed by Defendants Complete Business Solutions Group, Inc. d/b/a Par Funding, Lisa McElhone, Joseph W. LaForte, Joseph Cole Barleta, Perry S. Abbonizio, Dean J. Vagnozzi, Michael C. Furman (collectively, "Defendants") and Relief Defendant The LME 2017 Family Trust. Having reviewed the Motion, the SEC's Response [ECF No. 416], Defendants' Reply [ECF No. 455], the record, applicable law, and being otherwise fully advised, it is hereby

ORDERED AND ADJUDGED that the Motion [ECF No. 363] is DENIED for the reasons discussed herein.

BACKGROUND

I. Factual Background

The Court begins by setting forth the facts as described in the SEC's Amended Complaint, many of which Defendants vehemently dispute. 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  [*1318]  billion dollars through unregistered [**5]  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 compensate the Agent Funds by offering them promissory notes that had higher rates of return than the notes the Agent Funds sold to investors. Id. ¶ 4.

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538 F. Supp. 3d 1309 *; 2021 U.S. Dist. LEXIS 89518 **; 2021 WL 1907020

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. COMPLETE BUSINESS SOLUTIONS GROUP, INC. d/b/a PAR FUNDING, et al., Defendants.

Prior History: SEC v. Complete Bus. Solutions Group, 2020 U.S. Dist. LEXIS 253060 (S.D. Fla., July 30, 2020)

CORE TERMS

Funding, investors, alleges, promissory note, scienter, Phase, misrepresentations, omissions, violations, factors, loans, small business, pleaded, resemblance, offering, exempt, regulators, investing, unregistered, short-term, proceeds, underwriting, soliciting, quotation, brochure, asserts, material misrepresentation, accounts receivable, factual allegations, securities law

Civil Procedure, Defenses, Demurrers & Objections, Motions to Dismiss, Failure to State Claim, Pleadings, Complaints, Requirements for Complaint, Heightened Pleading Requirements, Fraud Claims, Securities Law, Postoffering & Secondary Distributions, Securities Exchange Act of 1934 Actions, Heightened Pleading Requirements, Mistake, Scope of Provisions, Definitions, Covered Securities, Initial Offerings of Securities, Security Defined, Securities Act Actions, Definitions, Civil Liability Considerations, Preservation of Remedies & Rights, Bankruptcy Law, Exemptions, Bankruptcy Code Exemptions, Avoidance, Exemptions From Avoidance, Ordinary Course Payments, Commercial Law (UCC), Definitions & General Concepts, Security Interests, Real Property Law, Financing, Mortgages & Other Security Instruments, Definitions & Interpretation, Tax Law, Tax Accounting, Allocations of Deductions & Income, Substance Over Form Doctrine, Summary Judgment, Supporting Materials, Affidavits, Remedies, Injunctions, Preliminary & Temporary Injunctions, Implied Private Rights of Action, Elements of Proof, Connection Requirement, Discharge & Dischargeability, Exceptions to Discharge, Embezzlement & False Representations, Governments, Legislation, Interpretation, Express Liabilities, Misleading Statements, Elements of Proof, Proxies, Materiality, Materiality, Questions of Fact & Law, Evidence, Types of Evidence, Circumstantial Evidence, Scienter, Recklessness, Civil Liability, Fraudulent Interstate Transactions, Scienter, Relevant Factors, Inferences & Presumptions, Inferences, Defenses, Reasonable Care, Business & Corporate Compliance, Contracts Law, Contract Formation, Execution & Delivery, Torts, Fraud & Misrepresentation, Actual Fraud, Elements, Business & Corporate Law, Corporate Existence, Powers & Purpose, Powers, Acts Through Agents, Establishment, Elements, Application of Agency Law Principles, Secondary Liability, Primary & Secondary Liability, Appeals, Standards of Review, Insider Trading, Contemporaneous Trading, Controlling Persons, Defenses, Blue Sky Laws, Controlling Persons, Definition of Control, Burdens of Proof, Allocation, Courts, Rule Application & Interpretation, Disgorgement of Profits, Equitable Relief, Estate, Gift & Trust Law, Trustees, Duties & Powers, Claims Against & By