A proposed class action lawsuit alleges a coterie of individuals and business entities conspired to advertise, market and sell merchant cash advance investments by purporting in false and misleading radio ads and in-person solicitations that the unregistered securities were a safer and more profitable alternative to more proven options such as stocks and bonds.
Fifty-four plaintiffs allege in the sprawling 175-page complaint that the following defendants have violated the federal Racketeer Influenced and Corporation Organizations Act—RICO—by fraudulently inducing consumers nationwide, including retirees and others on fixed incomes, to spend millions in hard-earned savings on unsecured securities backed by risky merchant cash advance loans to small businesses:
Paul Terence Kohler;
John W. Pauciulo;
Eckert Seamans Cherin & Mellott, LLC;
Spartan Income Fund, LLC;
Pisces Income Fund LLC;
Capricorn Income Fund I, LLC;
Merchant Services Income Fund, LLC;
Coventry First LLC;
Pillar Life Settlement Fund I, L.P.;
Pillar II Life Settlement Fund, L.P.;
Pillar 3 Life Settlement Fund, L.P.;
Pillar 4 Life Settlement Fund, L.P.;
Pillar 5 Life Settlement Fund, L.P.;
Pillar 6 Life Settlement Fund, L.P.;
Pillar 7 Life Settlement Fund, L.P.;
Pillar 8 Life Settlement Fund, L.P.;
Atrium Legal Capital, LLC;
Atrium Legal Capital 2, LLC;
Atrium Legal Capital 3, LLC;
Atrium Legal Capital 4, LLC;
Promed Investment Co., L.P.; and
Woodland Falls Investment Fund, LLC.
Those who found themselves wrapped up in the defendants’ scheme have been left in the lurch with regard to the possibility of recouping their principal investments, let alone receiving the double-digit returns they were promised, the complaint says.
Filed in Pennsylvania federal court, the lawsuit alleges the defendants, in order to carry out the complex scheme, created and disseminated false and misleading radio advertisements and engaged in deceptive in-person solicitations to persuade consumers into buying merchant cash advance investments. Merchant cash advances, which, along with life settlement funds, litigation funding and real estate funds were one of four types of investments offered by the defendants, are not technically a loan, but rathera cash advance based on the credit card sales of a business. In effect, a business that takes a merchant cash advance sells a portion of their future credit/debit card sales, in this case to investors, in exchange for immediate access to capital.
Proposed class members’ purchase of these merchant cash investments was pursuant to false, misleading and sophisticated “Private Placement Memoranda and Subscription Agreements” with a slew of Delaware limited liability companies and limited partnerships “formed, promoted and syndicated” by the defendants, the complaint claims. According to the lawsuit, these “trappings of financial establishment” were “nothing more than a sham.”
Throughout the timeline detailed in the suit, Dean Vagnozzi, whose AM radio ads promoting his website ABetterFinancialPlan.com are described in the suit as “ubiquitous” across the Greater Philadelphia region, falsely represented to the investing public that the site’s merchant cash advance investments were “safer than anything available on Wall Street.” He claimed the four investment options offered by the website could yield “higher returns with less risk” and without using annuities, the plaintiffs say. According to the lawsuit, John W. Pauciulo and Eckert Seamans Cherin & Mellott were aware of Vagnozzi’s investment-risk statements yet “did not take any measures to correct or repudiate such statements.”
As the lawsuit tells it, the scheme would not have been able to continue for as long as it did had Vagnozzi not had the help and counsel of his two co-defendants:
“Defendant Vagnozzi would have been unable to carry out his fraudulent scheme without the counsel and assistance of long-time co-conspirators Pauciulo and Eckert Seamans, who have advised Vagnozzi and the ABFP entities for more than 16 years. By creating, preparing and disseminating sophisticated Private Placement Memoranda and Subscription Agreements for the ABFP investments signed by Plaintiffs and the Class, as well as the underlying promissory notes between ABFP and Par Funding, Pauciulo and Eckert Seamans have given Vagnozzi and ABFP the veneer of being a financially stable, trustworthy method of investing with minimum risk potential.”
In their sales pitch, the defendants routinely provided to prospective investors information sheets that falsely represented that merchant cash advance investments were insured and that the underlying merchant cash loans had a default rate of only 1.38 percent, the lawsuit says. Moreover, the information sheets included a table outlining tiered rates of return based on the amounts invested, a tool with which the defendants induced proposed class members to make larger investments, the case claims.
“In reality, the underlying merchant cash advance agreements were the lowest grade paper imaginable,” the suit claims, noting the high rate at which businesses, i.e. merchant cash borrowers, defaulted on investors’ effective loans.
According to the lawsuit, the onset of the coronavirus pandemic and the near-avalanche of merchant cash advance defaults spanning 2019 and early 2020 signaled the beginning of the end of the defendants’ apparent scheme, which also involved Par Funding, a small-business lending outfit that issued high-interest notes through ABetterFinancialPlan.com. From the complaint:
“With thousands of defaults during 2019 and early 2020, Par Funding’s business was in a death spiral months before COVID-19 mandated the closure of businesses in mid-March 2020. Even so, the COVID-19 shutdown provided Defendants with the opportunity to belatedly disclose Par Funding’s failing business and halt investors’ monthly interest payments, which Par Funding’s lending operations could no longer support.
In response to thecollapse of its merchant cash advance business, Par Funding has made a largely futile attempt to recoup its merchant cash loans by filing thousands of confessions of judgment against the merchant borrowers. As these confessions of judgment typically force the small businesses to seek bankruptcy protection,Par Funding’s merchant cash advance loans are ultimately rendered uncollectible.”
What followed, the lawsuit continues, was a “panic” among ABetterFinancialPlan.com investors once Par Funding decided to terminate interest payments in early March 2020. Around that time, Vagnozzi attempted to assuage investors’ worries, falsely assuring that “they had nothing to worry about” and that he would be receiving money from Par Funding to resume sending monthly interest payments. Less than two weeks later, however, Vangozzi admitted to investors that Par Funding was insolvent but that he was working with legal counsel to restructure investments so that investors could begin to be paid once again, the suit says.
In May 2019, Vangozzi agreed to pay a state-record $490,000 to settle claims from the Pennsylvania Department of Bank and Securities that he was selling securities without a license, the lawsuit says, noting that this information was conveniently left out of his radio spots. The investments Vangozzi was alleged by the state to have sold without proper registration were high-interest notes issued by small-business lending company Complete Business Solutions Group, which does business as Par Funding, the suit states.
Moreover, Vagnozzi’s ABetterFinancialPlan.com radio ads also failed to disclose not only a February 2020 emergency cease-and-desist order against ABetterFinancialPlan.com from the Texas Securities Board in connection with the offer and sale of merchant cash advance investments, but a nearly $500,000 July 2020 settlement Vagnozzi entered into with the Securities and Exchange Commission (SEC), the lawsuit says. According to the suit, the SEC settlement was the result of a lengthy investigation into Vagnozzi’s “offering and selling unregistered securities in Violation of Section 5 of the Securities Act and acting as an unregistered broker-dealer,” also in violation of federal law.
“These penalties arose from Vagnozzi’s and ABFP’s promotion and sale of millions of dollars of illegal unregistered investment funds, named Pillar 1 through 8, comprised of ownership interests in life settlement contracts during the period from April 2013 through August 2017,” the complaint reads, adding that Vagnozzi, from May through September 2018, acted as an unregistered broker and earned transaction-based compensation by raising funds for defendant Fallcatcher, Inc. without being associated with a registered broker-dealer.
According to the case, Vagnozzi, by the end of April 2020, was still successful in fraudulently inducing most of his investors to enter into so-called exchange note offerings in conjunction with the restructuring of ABetterFinancialPlan.com agreements with Par Funding:
“Under the Exchange Notes Offerings, ABFP Merchant Cash Advance investors would receive 4% interest payments instead of the promised 10% interest, and the repayment of principal would be delayed from the promised 1-year term to 7 years. For ABFP investors, who include elderly and/or disabled persons on fixed incomes, the payment terms of the Exchange Notes Offerings were an unmitigated disaster.”
As time went on, the complaint says, it became evident that the exchange note offers were also “nothing more than a sham.”
“After making only two reduced monthly interest payments to investors in June and July 2020, Defendants defaulted on the Amended and Restated Notes and breached the Exchange Notes Agreements between ABFP and investors,” per the suit.
After a Florida federal court granted on July 27 an SEC motion for the Appointment of a Receiver over the corporate defendants, the FBI raided Par Funding’s Philadelphia offices on July 31 to execute search warrants. Days later, the FBI took into custody Joseph LaForte, Par Funding’s controller who went by a number of aliases as a means to, according to the case, “conceal his identity as a twice-convicted felon.” With LaForte’s arrest, the FBI also took into custody his private plane, $2.5 million in cash “found hidden in bundles at his properties” and a $10 million bank account controlled by LaForte and his wife, the lawsuit says.
In the aftermath, ABetterFinancialPlan.com merchant cash advance investors have “been left out in the cold” while Vagnozzi and his associates have “profited handsomely,” the lawsuit alleges.
The full complaint can be found below.
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