UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF FLORIDA

CASE NO. 20-CIV-81205-RAR

SECURITIES AND EXCHANGE 

COMMISSION,

Plaintiff,

v.

COMPLETE BUSINESS SOLUTIONS 

GROUP, INC. d/b/a PAR FUNDING, et al.,

Defendants.

_______________________________/ 

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 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. 

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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 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 

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. 

The Amended Complaint states that McElhone and LaForte “orchestrate[d] the scheme” 

through Par Funding and McElhone’s company, Full Spectrum Processing, Inc., whose employees 

operated Par Funding. LaForte, Cole (Full Spectrum’s CFO), and Abbonizio (Par Funding’s 

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investment director and partial owner) solicited investors to invest in the securities. Am. Compl. 

¶ 5. Vagnozzi, through his company ABetterFinancialPlan.com d/b/a A Better Financial Plan

(“ABFP”), recruited individuals to create the Agent Funds and provided them training and other 

materials to assist them with the creation and operation of the funds. Id. ¶ 6. Vagnozzi, Furman, 

and Gissas each operated Agent Funds that raised money for Par Funding through unregistered 

securities offerings. Id. ¶ 7. 

The SEC avers that in addition to violating the federal securities laws by selling 

unregistered securities, Defendants also made false or misleading statements and omissions 

concerning the Par Funding offering in violation of the antifraud provisions of the Securities Act 

of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”). Id. at 29-

50. The misrepresentations alleged by the SEC can be grouped into seven categories:

First, the Amended Complaint alleges that Defendants made misrepresentations regarding 

Par Funding’s underwriting process. It describes a recorded conversation between Abbonizio and 

an individual posing undercover as an investor where Abbonizio touted Par Funding’s 

underwriting practices. Am. Compl. ¶¶ 156-57. It is also cites a brochure that Furman, Abbonizio, 

and Vagnozzi distributed to investors emphasizing Par Funding’s “Exceptional Underwriting 

Rigor”; marketing materials where Par Funding claimed that it conducted on-site merchant 

inspections prior to loan approval; and a solicitation event where Abbonizio told investors that Par 

Funding does on-site inspections 100% of the time before approving any loan. Id. ¶¶ 158-164. 

The SEC alleges that contrary to these representations, Par Funding did not always conduct onsite inspections before approving an MCA. Id. ¶¶ 167-82. It also contends that Par Funding funded 

loans “without obtaining information about the merchant’s profit margins, expenses, or debts,” id.

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¶ 183, and did not “always assign a liaison to small businesses or have a liaison who communicates 

with the small businesses” as it claimed. Id. ¶ 184. 

Second, the Amended Complaint alleges that Defendants made misrepresentations 

regarding Par Funding’s loan default rate. LaForte, Abbonizio, and Vagnozzi represented to 

prospective investors that Par Funding’s loan default rate was around 1%, id. ¶¶ 185-190, when in 

reality, “Par Funding has filed more than 2,000 collections lawsuits against small borrowers for 

defaulting on the [l]oans Par Funding made to them.” Id. ¶ 193. The Amended Complaint asserts 

that Par Funding claims to have funded more than $600 million in loans and the lawsuits seek to 

recover over $300 million that the small businesses have allegedly failed to repay. Id. ¶ 194. 

According to the SEC, “[a]n analysis of these lawsuits reveals that Par Funding’s loan default rate 

is as high as 10%.” Id. The SEC also alleges that Par Funding excluded from its default rate “any 

[l]oan where the borrower is making even a partial payment or is speaking with Par Funding about 

the loan.” Id. ¶ 202. 

Third, the Amended Complaint alleges that Defendants made misrepresentations regarding 

insurance offered on the MCAs. The brochure that Par Funding distributed to potential investors

allegedly misrepresented that Par Funding offered insurance on all its products up to $150,000. 

Am. Compl. ¶ 204. LaForte and Abbonizio also told investors that Par Funding had insurance to 

back up investor funds. Id. ¶¶ 205-06. In reality, “Par Funding did not offer small businesses 

insurance on the [l]oans, and thus investor funds were not protected by insurance.” Id. ¶ 207. 

Fourth, the Amended Complaint alleges that Defendants made misrepresentations and 

omissions about LaForte’s background to investors. LaForte, Cole, Abbonizio, and Par Funding 

touted LaForte’s financial and business acumen and success without disclosing that he is a twiceconvicted felon who was formerly imprisoned and ordered to pay $14.1 million in restitution for 

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grand larceny and money laundering. Id. ¶¶ 213-217. Further, Par Funding did not disclose 

LaForte as a “Related Person” in its Form D filing with the SEC even though LaForte ran the dayto-day operations of Par Funding and functioned as one of its executives. Id. ¶¶ 218-219. 

Fifth, the Amended Complaint alleges that Defendants made misrepresentations to 

investors regarding Defendants’ regulatory history. In November 2018, Pennsylvania securities 

regulators filed a Consent Agreement and Order against Par Funding for violating the Pennsylvania 

Securities Act’s prohibition on the use of unregistered agents in the offer and sale of securities and 

fined Par Funding $499,000 (“Pennsylvania Order”). Am. Compl. ¶ 228. Then, in December 

2018, the New Jersey Bureau of Securities issued a Cease-and-Desist Order against Par Funding 

based on its offer and sale of unregistered securities (“New Jersey Order”). Id. ¶ 229. 

Additionally, in February 2020, the Texas State Securities Board issued an Emergency Cease-andDesist Order against Par Funding and others, alleging fraud and registration violations in 

connection with its securities offerings through an Agent Fund in Texas (“Texas Order”). Id. ¶ 

231. The SEC alleges that Par Funding, LaForte, Abbonizio, and Vagnozzi promoted Par 

Funding’s success while failing to disclose to investors that Par Funding had been sanctioned 

several times for violating state securities laws. Id. ¶¶ 220-227.

The SEC alleges that Vagnozzi similarly touted his financial and business acumen and 

success to investors but failed to disclose his regulatory history. Am. Compl. ¶¶ 246-57. Vagnozzi 

told an audience of investors at a dinner: “What I’m doing is legal, but most financial advisors 

don’t have a set of you-know-what’s to drop that license so they can do what I’m doing.” Id. ¶ 

248. However, just months before, Pennsylvania securities regulators had sanctioned Vagnozzi 

for state securities law violations. Id. ¶ 249. Even after Vagnozzi was sanctioned by state 

securities regulators and the SEC filed a Consent Order against him, the ABFP website featured 

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an article he wrote titled “What’s the Catch?”, which recognized that investors may be wondering 

“Is Dean Vagnozzi a scam artist? Is A Better Financial Plan 1346 a fraud?” Vagnozzi attempted 

to dispel those concerns in the article, stating “[t]here is no catch” and “the only law I think I ever 

broke was a speeding ticket that I received on the New Jersey Turnpike . . . .” Id. ¶ 252. ABFP’s 

website featured videos telling investors that none of Vagnozzi’s clients had ever lost money, that 

ABFP worked with one of the top law firms in Philadelphia, and that “Dean and his company are 

standup people,” while failing to disclose the existence of a securities enforcement action against 

ABFP, Par Funding, and Abbonizio in Texas. Id. ¶¶ 258-261. 

Furthermore, Furman allegedly made misrepresentations about the New Jersey Order to at 

least one potential investor—who was an undercover individual—falsely claiming that New Jersey 

had “retracted” its action against Par Funding and that Par Funding was “good” and did not face 

fines or penalties. Id. ¶¶ 233-34. 

Sixth, the Amended Complaint alleges that Par Funding made false statements in its Form 

D filings with the SEC about McElhone and Cole’s receipt of funds and Par Funding’s payment 

of finders’ fees and commissions. Am. Compl. ¶¶ 235-243. Par Funding filed a Notice of Exempt 

Offering of Securities on Form D with the SEC on February 19, 2019 and an amended Form D on 

April 28, 2020. Id. ¶¶ 235-36. These filings stated that none of the gross proceeds of the offering 

had been or were proposed to be used for payments to executive officers or others listed on the 

form as Related Persons. Id. ¶¶ 235-37. The amended Form D, signed by Cole, also stated that 

Par Funding had paid no finders’ fees and commissions. Id. ¶ 237. Contrary to the statements 

made on the Form D filings, both McElhone and Cole received money from the offering, id. ¶ 240-

42, and Par Funding paid finders’ fees of at least $3.6 million, as well as $1 million in commissions. 

Id. ¶ 243.

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Seventh, the Amended Complaint alleges that LaForte falsely told prospective investors 

that he had personally invested large sums of money in Par Funding. Id. ¶¶ 244-45. 

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 November 2, 2020, Defendants filed the 

instant Motion to Dismiss, seeking dismissal of the Amended Complaint that the SEC filed on 

August 10, 2020. 

LEGAL STANDARD

To survive a motion to dismiss under Fed. R. Civ. P. 12(b)(6), “a complaint must include 

‘enough facts to state a claim to relief that is plausible on its face.’” Hunt v. Aimco Properties,

L.P., 814 F.3d 1213, 1221 (11th Cir. 2016) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 

(2007)). When reviewing a motion to dismiss pursuant to Rule 12(b)(6), a court must accept as 

true all factual allegations contained in the complaint, and the plaintiff should receive the benefit 

of all favorable inferences that can be drawn from the facts alleged. See Chaparro v. Carnival 

Corp., 693 F.3d 1333, 1335 (11th Cir. 2012); Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). 

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Although the court is required to accept as true all allegations contained in the complaint, courts 

“are not bound to accept as true a legal conclusion couched as a factual allegation.” Twombly, 550 

U.S. at 555 (quotation omitted); Iqbal, 556 U.S. at 678.

Securities fraud claims are subject to the heightened pleading requirements of Rule 9(b) of 

the Federal Rules of Civil Procedure. S.E.C. v. City of Miami, Fla., 988 F. Supp. 2d 1343, 1353 

(S.D. Fla. 2013). Rule 9(b) requires a party to “state with particularity the circumstances 

constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person’s mind 

may be alleged generally.” Fed. R. Civ. P. 9(b). The Eleventh Circuit has explained that:

While Rule 9(b) does not abrogate the concept of notice pleading, it 

plainly requires a complaint to set forth (1) precisely what 

statements or omissions were made in which documents or oral 

representations; (2) the time and place of each such statement and 

the person responsible for making (or, in the case of omissions, not 

making) them; (3) the content of such statements and the manner in 

which they misled the plaintiff; and (4) what the defendant obtained 

as a consequence of the fraud.

FindWhat Inv. Grp. v. FindWhat.com, 658 F.3d 1282, 1296 (11th Cir. 2011). Under Rule 9(b), it 

is “sufficient to plead the who, what, when, where, and how of the allegedly false statements and 

then allege generally that those statements were made with the requisite intent.” Mizzaro v. Home 

Depot, Inc., 544 F.3d 1230, 1237 (11th Cir. 2008). 

ANALYSIS

The SEC’s Amended Complaint alleges that Defendants engaged in fraud in violation of 

Section 10(b) of the Exchange Act and Rule 10b-5(a)-(c) thereunder (Counts I-III) and Section 

17(a)(1)-(3) of the Securities Act (Counts IV-VI). It also alleges that Defendants violated Sections 

5(a) and 5(c) of the Securities Act by selling unregistered securities (Count VII). Lastly, the SEC 

asserts Control Liability Under Section 20(a) of the Exchange Act against McElhone and LaForte 

(Count VIII). 

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In their Motion, Defendants raise several arguments in favor of dismissal. First, 

Defendants argue that the SEC does not have enforcement authority over the Phase I Par Funding 

promissory notes because they are not securities. See Mot. at 4. Second, Defendants maintain the 

SEC has failed to establish that Defendants violated the antifraud provisions of the federal 

securities laws—Section 10(b), Rule 10b-5(a)-(c), and Section 17(a)(1)-(3)—because the SEC 

insufficiently alleges that Defendants possessed the requisite state of mind and fails to plead claims 

with particularity as required by Rule 9(b). Id. Third, Defendants argue that the SEC’s Amended 

Complaint constitutes a shotgun pleading. Id. Fourth, Defendants contend that the Amended 

Complaint improperly joins The LME Trust as a relief defendant without sufficiently alleging facts 

to show that The LME Trust is a recipient of ill-gotten funds. Id. And fifth, Defendants claim that 

the Amended Complaint requests relief well outside the statute of limitations. Id. The Court will 

address each of these arguments in turn. 

I. Are the Phase I Promissory Notes Securities?

a. Test for determining whether promissory notes are securities

To reach the issue of an alleged violation of the Securities Acts, the transaction at hand 

must involve a “security” as defined in the Acts. Fin. Sec. Assur., Inc. v. Stephens, Inc., 500 F.3d 

1276, 1285 (11th Cir. 2007) (quoting Home Guaranty Ins. Corp. v. Third Fin. Servs., Inc., 667 F. 

Supp. 577, 579 (M.D. Tenn. 1987)). Section 2(a)(1) of the Securities Act and Section 3(a)(10) of 

the Exchange Act broadly define a “security” to include “any note.” 15 U.S.C. § 77b(a)(1); 15 

U.S.C. § 78c(a)(10).

1

 However, the Supreme Court has explained that the phrase “any note” as it 

appears in the Securities Acts “should not be interpreted to mean literally ‘any note,’ but must be 

understood against the backdrop of what Congress was attempting to accomplish in enacting the 

1

 The Exchange Act exempts those notes with terms “not exceeding nine months.” 15 U.S.C. § 78c(a)(10). 

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Securities Acts.” Reves v. Ernst & Young, 494 U.S. 56, 62-63 (1990). Congress’s purpose in 

enacting the federal securities laws was to “regulate investments, in whatever form they are made 

and by whatever name they are called.” Id. at 61 (emphasis in original). 

Accordingly, in Reves, the Supreme Court articulated a test—the “family resemblance” 

test—to enable courts to distinguish between “notes issued in an investment context (which are 

‘securities’) from notes issued in a commercial or consumer context (which are not).” Id. at 63. 

The family resemblance test begins with a presumption that any note of more than nine months is 

a security. Id. That presumption is rebuttable only by a showing that the note is on a list of 

judicially excepted instruments or bears a “strong resemblance” to an item on that list. Id. at 67. 

The categories of non-security instruments enumerated by the Second Circuit and adopted by the 

Supreme Court in Reves include:

the note delivered in consumer financing, the note secured by a 

mortgage on a home, the short-term note secured by a lien on a small 

business or some of its assets, the note evidencing a ‘character’ loan 

to a bank customer, short-term notes secured by an assignment of 

accounts receivable, or a note which simply formalizes an openaccount debt incurred in the ordinary course of business 

(particularly if, as in the case of the customer of a broker, it is 

collateralized)[, and] . . . notes evidencing loans by commercial 

banks for current operations. 

Id. at 65 (quoting Exch. Nat. Bank of Chicago v. Touche Ross & Co., 544 F.2d 1126, 1138 (2d Cir. 

1976); Chemical Bank v. Arthur Andersen & Co., 726 F.2d 930, 939 (2d Cir. 1984)). 

The Supreme Court listed four factors that courts should apply to determine whether an 

instrument bears a “strong resemblance” to the items on the list: (1) “the motivations that would

prompt a reasonable seller and buyer to enter into [the transaction]”; (2) “the ‘plan of distribution’ 

of the instrument,” with an eye on “whether it is an instrument in which there is common trading 

for speculation or investment”; (3) “the reasonable expectations of the investing public”; and (4) 

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“whether some factor such as the existence of another regulatory scheme significantly reduces the 

risk of the instrument, thereby rendering application of the Securities Acts unnecessary.” Reves, 

494 U.S. at 66-67 (internal quotations omitted). If an instrument is not sufficiently similar to one 

of the enumerated items, “the decision whether another category should be added is to be made by 

examining the same factors.” Id. at 67. Notably, Reves emphasizes that the test is designed to 

focus on the “economic realities” of the transaction and not elevate form over substance. Id. at 

61-62. Because the factors are considered as a whole, failure to satisfy one of the factors is not 

dispositive. S.E.C. v. Thompson, 732 F.3d 1151, 1160 (10th Cir. 2013). 

b. Defendants’ argument as to why Phase I promissory notes are not securities 

As mentioned above, Defendants argue that the Court should dismiss the SEC’s claims

regarding any conduct stemming from the alleged offer or sale of promissory notes during Phase 

I because the notes issued by Par Funding during that time were not securities. See Mot. at 8-10. 

Defendants contend that the Phase I promissory notes fall under two of the judicially exempt 

categories: (1) short term notes secured by a lien on a small business or some of its assets; and (2) 

short-term notes secured by an assignment of accounts receivable. Id. at 8-9. Defendants point to 

the 12-month duration of the promissory notes and the Security Agreement that accompanied 

them, which states that Par Funding “grant[s] a security interest to the investor in substantially all 

of [Par Funding’s] assets, including, without limitation, its inventory, accounts receivable and 

general intangibles, to Secured Party . . . .” Id.; Security Agreement [ECF Nos. 28-14 and 28-15]. 

The Security Agreement also defines “Collateral” as:

[A]ll tangible and intangible personal property of Debtor [Par 

Funding], wherever located and whether now owned or hereafter 

acquired, including but not limited to all accounts, contract rights, 

general intangibles, chattel paper, machinery equipment, goods, 

inventory, fixtures, investment property, letter of credit rights, 

supporting obligations, books and records, deposit accounts, bank 

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accounts, documents and instruments together with all proceeds 

thereof. 

Security Agreement [ECF No. 28-14] at 2. Defendants maintain that because the Phase I 

promissory notes fall under the judicially exempt categories, the Court need not apply the family 

resemblance factors. 

c. Discussion

Guided by the principles articulated in Reves, the Court finds that Defendants have not 

rebutted the presumption that the Phase I promissory notes are securities. The Phase I promissory 

notes do not obviously fit into the judicially exempt categories enumerated in Reves such that 

application of the family resemblance factors isrendered superfluous—and the family resemblance 

factors support a finding that the Phase I promissory notes are securities. 

As an initial matter, the Court notes that the judicially exempt instruments are on that list 

precisely because they possess characteristics that the family resemblance factors are designed to 

identify. See Reves, 494 U.S. at 65-66 (explaining that the family resemblance factors reflect 

“what it is about those [judicially exempt] instruments that makes them non-‘securities.’”)

(emphasis in original). Thus, finding that an instrument is a non-security simply because it 

superficially resembles one of the enumerated exceptions—even where the family resemblance 

factors point the other way—flouts Reves’s directive that courts must focus on the “economic 

realities” of the transaction. See S.E.C. v. Wallenbrock, 313 F.3d 532, 538 (9th Cir. 2002) (“It is 

not the moniker or label that is dispositive, but the economic characteristics of the notes.”). 

For example, in S.E.C. v. J.T. Wallenbrock & Assocs., the defendant sold unregistered 

securities in the form of three-month promissory notes, promising a 20% return with little or no 

risk, where the notes were purportedly secured by latex glove manufacturers’ accounts receivable 

purchased by the defendant through an offshore trust. No. 02-00808, 2002 WL 35649374, at *1 

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(C.D. Cal. Apr. 3, 2002). The court found that the promissory notes did not fall within the 

judicially crafted exemption for short-term notes secured by accounts receivable. Id. at *2. It 

explained that “the typical short-term note secured by an assignment of accounts receivable is 

issued directly by a manufacturer to the lender; in exchange for funds to cover a cash-flow 

shortfall, the manufacturer assigns a particular receivable to the lender.” Id. In contrast, the notes 

in Wallenbrock were issued to finance the defendant’s purported business of receivables 

factoring—there was no contact between the investors and the manufacturers, the notes did not 

indicate who the manufacturers were, and the notes were not exchanged for interest in particular 

receivables. Id. The court therefore concluded that the notes bore only a “surface resemblance” 

to the exemption and, after applying the family resemblance factors, concluded that the notes were 

securities. Id. at *3-4. 

Similarly, in S.E.C. v. 1 Global Capital, LLC, the court held that promissory notes issued 

to fund the defendant’s MCA loans did not fall under the judicially crafted exemption for shortterm loans secured by accounts receivable or a lien on a small business or some of its assets. No. 

18-61991, 2019 WL 1670799, at *5 (S.D. Fla. Feb. 8, 2019). The court reasoned that these

exemptions did not clearly extend to the situation at hand where the notes were secured by “many

liens on many businesses or secured by multiple assignments of accounts receivable,” and “each 

noteholder obtained a small, fractionalized interest in up to hundreds of MCAs.” Id.

2

 

2 Although it dealt with a different type of instrument, the Fourth Circuit’s holding in Zolfaghari v. 

Sheikholeslami, 943 F.2d 451 (4th Cir. 1991), also highlights the importance of looking beyond the labels 

associated with the notes. There, the district court had dismissed the plaintiffs’ securities claims, finding 

that the notes at issue were not securities. Id. at 454. The Fourth Circuit noted that it was “understandable” 

that the district court reached this conclusion because plaintiffs indicated they were buying “notes secured 

by first mortgages”—and a note secured by a mortgage is typically not a security. Id. However, the Fourth 

Circuit nevertheless reversed, distinguishing between notes secured by a single mortgage, which are not 

securities, and interests in an amalgamated pool of mortgage notes, which are securities “because any 

profits realized are derived from the managerial efforts of those who run the pool and make such decisions 

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As in Wallenbrock and 1 Global Capital, the Phase I promissory notes at issue here are not 

clearly encompassed by the judicially crafted exemptions for short-term notes secured by accounts 

receivable or by a lien on assets of a small business as those exemptions are commonly understood. 

The investors’ funds were used by Par Funding to fund thousands of loans to small businesses so 

that each investor noteholder obtained “a small, fractionalized interest” in the loans. The SEC 

does not allege that the notes were exchanged for interest in particular receivables or assets. Nor 

is there any indication that the notes even identified the small business borrowers or that the 

noteholders had any contact with them or the ability to assess the soundness of their businesses as 

in the traditional context of a loan secured by the assets of a small business. Rather, the noteholders

relied on Par Funding’s entrepreneurial efforts managing the portfolio of MCA loans and ensuring 

the noteholders would receive their return on investment. 

Thus, although there may be circumstances where application of the family resemblance 

factors is superfluous because it is readily apparent—based on economic characteristics—that an 

instrument falls under one of the judicial exemptions, such circumstances are not present in this 

case. See Bass v. Janney Montgomery Scott, Inc., 210 F.3d 577, 585 (6th Cir. 2000) (“Although 

the promissory notes received by [Plaintiff] bear similarities to at least two of the enumerated 

categories of notes which are not securities . . . we decline to struggle to fit an atypical peg into a 

standardized hole when the Supreme Court has provided, in its four-factor test, a tool for custom 

fitting.”); Wallenbrock, 2002 WL 35649374, at *3 (“The crucial inquiry . . . is the family 

resemblance factors, not whether the face of the note appears to fall within one of the exception 

categories.”). 

as determining which mortgages shall be in the pool, how the individual notes will be serviced and 

managed, and other fund decisions.” Id. at 455.

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The Court therefore proceeds to examine the family resemblance factors discussed in Reves

to discern whether the Phase I promissory notes are securities under the Securities Acts. First, the 

Court looks at the motivations that would prompt a reasonable seller and buyer to enter into the 

transaction. The Supreme Court has explained that “[i]f the seller’s purpose is to raise money for 

the general use of a business enterprise or to finance substantial investments and the buyer is 

interested primarily in the profit the note is expected to generate, the instrument is likely to be a 

‘security.’” Reves, 494 U.S. at 66. In contrast, “[i]f the note is exchanged to facilitate the purchase 

and sale of a minor asset or consumer good, to correct for the seller’s cash-flow difficulties, or to 

advance some other commercial or consumer purpose . . . the note is less sensibly described as a 

‘security.’” Id. 

The first factor comfortably supports a finding that the Phase I promissory notes are 

securities. The investors’ primary motivation was likely the 12% to 44% rate of return that Par 

Funding offered. See Am. Compl. ¶ 50. There is no indication that the investor noteholders 

received any other benefits from the transaction. The SEC alleges that Par Funding sold the notes 

to fuel its merchant cash advance loan business and enrich itself and its principals. See id. ¶¶ 1, 2, 

48-50. Thus, from both sides, “the transaction is most naturally conceived as an investment in a 

business enterprise rather than as a purely commercial or consumer transaction.” Reves, 494 U.S. 

at 68. 

Second, the Court examines if there was “common trading for speculation or investment” 

on the notes. The offer and sale of the note to a “broad segment of the public” is sufficient to 

establish this element. Id.; see also S.E.C. v. Levin, No. 12-21917, 2014 WL 11878357, at *10 

(S.D. Fla. Oct. 6, 2014) (“The notes here were sold to at least 83 different investors in at least 6 

different states . . . That the notes were sold to a number of investors in different states indicates 

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that the notes are securities.”); Wright v. Downs, 972 F.2d 350, 1992 WL 168104, at *3 (6th Cir. 

July 17, 1992) (finding that notes sold to 200 investors constituted a broad segment of the public). 

The Amended Complaint does not specify exactly how many investors purchased the Phase I 

promissory notes, but it alleges that by the end of Phase I in December 2017, Par Funding had 

raised at least $90 million from investors through the offer and sale of promissory notes. See Am. 

Compl. ¶ 61. It also alleges that Par Funding contracted with sales agents through “Finders 

Agreements” to locate and solicit investors. Id. ¶ 55. And by February 2019, Par Funding had 

raised no less than $227 million from 488 investors in at least a dozen states. Id. at ¶ 235. Thus,

this factor weighs in favor of finding that the Phase I promissory notes are securities.

Third, the Court analyzes the reasonable expectation of the investing public to see if the 

public views the notes as securities. Instruments are considered securities “on the basis of such 

public expectations, even where an economic analysis of the circumstances of the particular 

transaction might suggest that the instruments are not ‘securities’ as used in that transaction.” 

Reves, 494 U.S. at 66. Further, where the notes are characterized by the originator as 

“investments” and there are no “countervailing factors” that would lead a reasonable person 

to question this characterization, “it would be reasonable for a prospective purchaser to take the 

[originator] at its word.” Id. at 69; see also S.E.C. v. Lottonet Operating Corp., No. 17-21033, 

2017 WL 6949289, at *10 (S.D. Fla. Mar. 31, 2017), report and recommendation adopted, No. 17-

21033, 2017 WL 6989148 (S.D. Fla. Apr. 6, 2017) (indicating that the issuer’s “characterization 

of these investments as subject to the federal securities laws is sufficient to characterize them as 

securities where . . . there are ‘no countervailing factors that would lead a reasonable person to 

question this characterization.’”) (quotation omitted). 

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Here, the third factor supports a finding that the Phase I promissory notes are securities. 

Par Funding characterized the notes as securities by filing a Notice of Exempt Offering of 

Securities on Form D with the SEC. See Am. Compl. ¶¶ 235-36. Defendants contend that Par 

Funding’s Form D is not relevant to whether the Phase I promissory notes are securities because 

Par Funding filed the Form D in February 2019—after Phase I. See Reply at 2. However, the 

Form D indicated that the first sale of the notes was on August 1, 2012, which is when Phase I 

started. See Am. Compl. ¶¶ 235-36. Additionally, the Court agrees with the SEC that investors 

sending money to Par Funding to fund its MCA business in exchange for a high single- or low 

double-digit rate of return would reasonably expect that they were making an investment. Id. ¶¶ 

58-60; S.E.C. v. Davis, No. 18-10481, 2019 WL 6841986, at *4 (C.D. Cal. Oct. 15, 2019) (finding 

that a reasonable investor would consider twelve-to-eighteen-month promissory notes bearing 5%-

8% interest an investment); Wallenbrock, 313 F.3d at 539 (“A reasonable investor sending funds 

to [Defendant] for a guaranteed return of 20% and an automatic rollover every three months would 

expect that the funds were an investment, not a short-term loan.”).3

 

The final factor requires the Court to assess whether there are adequate risk-reducing 

factors such as an alternate regulatory scheme that would “significantly reduce[ ] the risk of the 

instrument” to the lender, “thereby rendering application of the Securities Acts unnecessary.” 

Reves, 494 U.S. at 67 (citations omitted). On the one hand, the Amended Complaint alleges that 

the investor funds were not protected by insurance, see Am. Compl. ¶ 207, and Defendants have 

not identified an alternative regulatory scheme to protect investors’ interests. Even though 

3

 In its Response, the SEC cites to several documents introduced at the preliminary injunction hearing to 

show that Defendants characterized the Par Funding notes as “investments” during Phase I when soliciting 

investors. However, “[i]n passing on a motion to dismiss because the complaint fails to state a cause of 

action, the facts set forth in the complaint are assumed to be true and affidavits and other evidence produced 

on application for a preliminary injunction may not be considered.” Fla. Fam. Pol’y Council v. Freeman, 

561 F.3d 1246, 1253 (11th Cir. 2009) (quoting Land v. Dollar, 330 U.S. 731 (1947)). 

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Pennsylvania, Texas, and New Jersey state regulators brought actions against Defendants, the 

Amended Complaint alleges that the Par Funding notes were offered “nationwide,” Am. Compl. ¶ 

1, and Reves was particularly focused on whether the notes would escape “federal regulation” if 

the Securities Act were not to apply. 494 U.S. at 69 (emphasis added). However, on the other 

hand, the Security Agreement that accompanied the notes indicates that the funds received from 

investors were collateralized, which helps mitigate the risk. See Bass, 210 F.3d at 585 (“In

application, [the fourth Reves] factor comprises, in addition to comprehensive regulatory schemes, 

the presence or absence of risk-reducing factors such as collateral or insurance.”). The Court 

therefore treats this factor as neutral in its analysis of whether the notes are securities. See Aubrey 

v. Barlin, 159 F. Supp. 3d 752, 757 (W.D. Tex. 2016) (finding that risk-reducing factors were 

neutral in the determination of whether notes were securities where there was collateral but no 

evidence of insurance or an alternative regulatory scheme). 

The Court notes that Defendants only cursorily challenge the Reves factors in their briefing. 

They instead rely heavily on one case that the Court finds distinguishable. Defendants argue that 

the Phase I notes are comparable to the short-term notes in Asset Prot. Plans, Inc. v. Oppenheimer 

& Co., No. 11-00440, 2011 WL 2533839 (M.D. Fla. June 27, 2011) (“APP”), which provided 

money to NFL prospects to cover training, relocation, and other living expenses until the prospects 

began to receive income as professional athletes. The APP court concluded that the notes were 

similar to notes delivered in consumer financing, as well as short-term notes secured by a lien on 

a small business or some of its assets because the notes were secured by the guarantee and assets 

of the prospects’ sports agency. Id. at *3. The court also found that the two largest notes were 

akin to a “short-term note secured by an assignment of accounts receivable” because they were 

secured by both a prospect’s anticipated income and the sports agency’s future accounts. Id. 

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The Court disagrees that the Phase I promissory notes are comparable to the notes at issue 

in APP. The notes there were intended to cover the players’ expenses until they began receiving 

income as professional athletes, which is significantly different than the use of investor funds for 

an enterprise like Par Funding’s MCA business. See Reves, 494 U.S. at 66 (indicating that a note 

to obtain funds to correct for cash-flow difficulties or for a consumer purpose is less likely to be a 

security, whereas a note to raise capital for business enterprise is likely to be a security). Further, 

the APP court concluded that each note was a heavily negotiated loan, and the notes were not 

offered to the general public. APP, 2011 WL 2533839, at *4. The court found that with a heavily 

negotiated loan between two parties, “a main concern of the Securities Acts—that the issuer ‘has 

superior access to and control of information’ while the investor must rely ‘solely on semianonymous and secondhand market information’—is not present.” Id. In contrast, the Par Funding 

notes were offered to a broad segment of the public, and Par Funding had superior access to and

control of information regarding the businesses that would be receiving the MCA loans. The Phase 

I promissory notes are therefore materially distinguishable from the notes at issue in APP. 

For the foregoing reasons, and primarily based on the first, second, and third Reves factors, 

the Court concludes that Defendants have not overcome the presumption that the promissory notes

are securities. 

II. Has the SEC sufficiently alleged violations of the antifraud provisions of the Securities 

Acts?

The Court now turns to whether the SEC has sufficiently alleged violations of the Securities 

Acts’ antifraud provisions. The SEC alleges that Defendants’ actions violated Section 10(b) and 

Rule 10b-5 of the Exchange Act and Section 17(a) of the Securities Act. These statutes are very 

similar. The main difference is “that § 10(b) and Rule 10b-5 apply to acts committed in connection 

with a purchase or sale of securities while § 17(a) applies to acts committed in connection with 

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an offer or sale of securities.” S.E.C. v. Maio, 51 F.3d 623, 631 (7th Cir. 1995) (emphasis in 

original); see also S.E.C. v. Big Apple Consulting USA, Inc., 783 F.3d 786, 795 (11th Cir. 2015) 

(“Though Rule 10b-5 regulates a different activity, i.e., the “purchase or sale” of securities rather 

than their “offer or sale,” it borrows much, though not all, of its language from § 17(a).”).

Rule 10b-5 and Section 17(a) both include three subsections. Rule 10b-5(a) makes it 

unlawful to “employ any device, scheme, or artifice to defraud”; subsection (b) makes it unlawful 

to “make any untrue statement of a material fact or to omit to state a material fact necessary in 

order to make the statements made . . . not misleading”; and subsection (c) makes it unlawful to 

“engage in any act, practice, or course of business which operates or would operate as a fraud or 

deceit upon any person.” 17 C.F.R. § 240.10b-5(a)-(c). 

Similarly, Section 17(a)(1) makes it unlawful “to employ any device, scheme, or artifice 

to defraud”; § 17(a)(2) makes it unlawful “to obtain money or property by means of any untrue 

statement of a material fact or any omission to state a material fact necessary in order to make the 

statements made . . . not misleading”; and § 17(a)(3) makes it unlawful “to engage in any 

transaction, practice, or course of business which operates or would operate as a fraud or deceit 

upon the purchaser.” 15 U.S.C. § 77q(a).

In some cases, the Eleventh Circuit has indicated that violations of Section 10(b), Rule 

10b-5, and Section 17(a) require a showing of “material misrepresentations or materially 

misleading omissions.” See S.E.C. v. Merch. Cap., LLC, 483 F.3d 747, 766 (11th Cir. 2007); 

S.E.C. v. Radius Cap. Corp., 653 F. App’x 744, 749 (11th Cir. 2016). However, the Eleventh 

Circuit has also clarified that a defendant may be liable under both Section 17(a)(1) and (3) and 

Rule 10b-5(a) and (c) without making a material misrepresentation. See Big Apple Consulting,

783 F.3d at 796 (indicating that subsections (1) and (3) in § 17(a) and subsections (a) and (c) in 

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Rule 10b–5 “prohibit schemes to defraud and fraudulent courses of business” and “do not use the 

word ‘make’ or even address misstatements”); S.E.C. v. Monterosso, 756 F.3d 1326, 1334 (11th 

Cir. 2014) (“The operative language of section 17(a) does not require a defendant to “make” a 

statement in order to be liable . . . Likewise, subsections (a) and (c) of Rule 10b–5 ‘are not so 

restricted’ as subsection (b), because they are not limited to ‘the making of an untrue statement of 

a material fact.’”); see also S.E.C. v. Strebinger, 114 F. Supp. 3d 1321, 1331 (N.D. Ga. 2015) 

(“[S]ubsection (a) and (c) of Rule 10b-5, unlike subsection (b), do not require an individual ‘make’

a false statement to establish liability.”); S.E.C. v. Contrarian Press, LLC, No. 16-06964, 2019 

WL 1172268, at *4 (S.D.N.Y. Mar. 13, 2019) (“While Rule 10b-5(b) targets misleading 

disclosures, Rules 10b-5(a) and (c) target deceptive conduct.”). 

Accordingly, 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. Merch. Cap., 483 F.3d at 766. 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 of 

the same conduct. Lorenzo v. S.E.C., 139 S. Ct. 1094, 1102 (2019). However, Rule 10b-5(b) and 

§ 17 (a)(2) specifically require misrepresentation. And Rule 10b-5(b)—but not § 17(a)(2)—

requires that the defendant be the “maker” of the misrepresentation or omission, meaning the 

defendant has “ultimate authority over the statement, including its content and whether and how 

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to communicate it.” Janus Cap. Grp., Inc. v. First Derivative Traders, 564 U.S. 135, 142 (2011); 

Big Apple Consulting, 783 F.3d at 797 (holding that Section 17(a)(2) cannot be read to include the 

“maker” restriction present in Rule 10b–5(b)). 

The Court will first address whether the SEC has sufficiently alleged material 

misrepresentations or omissions in violation of Rule 10b-5(b) and § 17(a)(2). The Court will then 

analyze whether the SEC has adequately pleaded violations of Rule 10b-5(a) and (c) and 

§§ 17(a)(1) and (a)(3).

a. Whether the SEC has sufficiently alleged violations of Rule 10b-5(b) and 

Section 17(a)(2)

As noted above, to establish a violation of Rule 10b-5(b), the SEC must prove that the 

defendant made a material misrepresentation or materially misleading omission in connection with 

the sale or purchase of securities with scienter. Section 17(a)(2) requires a showing of a material 

misrepresentation or materially misleading omission in connection with an offer or sale of 

securities made with negligence. Because the Court has already determined that the SEC has 

adequately alleged the promissory notes are securities—and Defendants do not otherwise 

challenge the “in connection with the purchase or sale of” and “in the offer or sale of” elements—

the Court will focus its analysis on: (i) whether the SEC has sufficiently pleaded material 

misrepresentations or omissions made with scienter and negligence; and (ii) whether the SEC’s 

allegations concerning the circumstances constituting fraud satisfy the heightened pleading 

requirements of Rule 9(b).

In the securities fraud context, the test for materiality is “whether a reasonable man would 

attach importance to the fact misrepresented or omitted in determining his course of action.” 

Merch. Cap., 483 F.3d at 766 (quoting S.E.C. v. Carriba Air, 681 F.2d 1318, 1323 (11th Cir.

1982)). In other words, a statement or omission is material where “there is a substantial likelihood 

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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—and a complaint should not be dismissed on materiality grounds unless

the alleged misstatements or omissions “are so obviously unimportant to a reasonable investor that 

reasonable minds could not differ on the question of their importance.” Ganino v. Citizens Utilities 

Co., 228 F.3d 154, 162 (2d Cir. 2000). 

Scienter is “a mental state embracing intent to deceive, manipulate, or defraud.” S.E.C. v. 

Ginsburg, 362 F.3d 1292, 1297 (11th Cir. 2004) (internal quotations and citation omitted). 

Scienter can be established by a showing of knowing misconduct or severe recklessness. 

Monterosso, 756 F.3d at 1335. To show severe recklessness, the SEC must demonstrate “that the 

defendant’s conduct was an extreme departure of the standards of ordinary care, which presents a 

danger of misleading buyers or sellers that is either known to the defendant or is so obvious that 

the actor must have been aware of it.” Id. (quoting Carriba Air, 681 F.2d at 1324). Circumstantial 

evidence may be used to support a strong inference of scienter. City of Miami, 988 F. Supp. 2d at 

1360. 

The SEC need only plead scienter generally. S.E.C. v. Levin, No. 12-21917, 2013 WL 

5588224, at *13 (S.D. Fla. Oct. 10, 2013). However, it must still “allege plausible facts or suggest 

reasonable inferences that, if taken as true, would support a finding of scienter.” S.E.C. v. 

Mannion, 789 F. Supp. 2d 1321, 1342 (N.D. Ga. 2011); see also S.E.C. v. Ustian, 229 F. Supp. 3d 

739, 774 (N.D. Ill. 2017) (“In SEC enforcement actions, Rule 9(b) allows mental states to be 

alleged generally, yet there must still be some basis for believing the plaintiff could prove 

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scienter.”) (quotation omitted). The Court determines scienter by examining all allegations in the 

aggregate rather than sole allegations in isolation. Phillips v. Scientific–Atlanta, Inc., 374 F.3d 

1015, 1016-17 (11th Cir. 2004). Typically, scienter is an issue left to the trier of fact. Monterosso, 

756 F.3d at 1335.4

To establish negligence for purposes of Sections 17(a)(2)-(3), the SEC must show a failure 

to exercise a standard of reasonable care. City of Miami, 988 F. Supp. 2d at 1362; see also S.E.C.

v. Hughes Capital Corp., 124 F.3d 449, 453-54 (3d Cir. 1997) (describing negligence in securities 

context as the failure to exercise reasonable care or competence). Factual allegations supporting 

an inference of scienter will also satisfy the lower standard of negligence required for claims under 

Sections 17(a)(2) and (3) of the Securities Act. S.E.C. v. Coplan, No. 13-62127, 2014 WL 695393, 

at *4 (S.D. Fla. Feb. 24, 2014). 

For the reasons discussed below, the Court finds that the SEC has established the elements 

of Rule 10b-5(b) for each Defendant. The Court therefore finds it unnecessary to separately 

analyze Section 17(a)(2) and concludes that its elements are also satisfied. For McElhone and 

4

 Defendants contend that the SEC must meet the benchmark announced by the Supreme Court in Tellabs, 

Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324 (2007), under which a complaint survives a motion 

to dismiss “only if a reasonable person would deem the inference of scienter cogent and at least as 

compelling as any opposing inference one could draw from the facts alleged.” The Court acknowledges 

that district courts have taken differing positions as to whether this standard from Tellabs applies to SEC 

enforcement actions. Compare S.E.C. v. Betta, No. 09-80803, 2011 WL 4369012, at *9 (S.D. Fla. Sept. 

19, 2011) (indicating that based on Tellabs, courts are required to take into account “plausible opposing 

inferences” when assessing whether scienter was adequately pleaded) with Mannion, 789 F. Supp. 2d at 

1334 (finding that the standard announced in Tellabs is limited to private actions and has no application to 

SEC enforcement actions). Having reviewed Tellabs, the Court is persuaded by cases that have declined 

to extend the standard to SEC enforcement actions. See, e.g., S.E.C. v. Pentagon Cap. Mgmt. PLC, 612 F. 

Supp. 2d 241, 263-64 (S.D.N.Y. 2009); Rains v. Zale Corp., No. 09-2133, 2011 WL 3331213, at *5 (N.D. 

Tex. Aug. 1, 2011). In any event, the Court believes that the inferences of scienter it draws from the SEC’s 

allegations in this case are at least as compelling as opposing inferences that one could draw from the facts 

alleged.

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LaForte, the Court also finds that the SEC has sufficiently pleaded controlling person liability 

under Section 20(a). 

i. LaForte

The SEC alleges at least three material misrepresentations by LaForte that satisfy the 

elements of Rule 10b-5(b) and Section 17(a)(2) and are pleaded with particularity as required by 

Rule 9(b). First, the SEC alleges that on November 21, 2019, LaForte falsely told an audience of 

more than 300 investors and potential investors that he had invested his own money in Par Funding. 

See Am. Compl. ¶¶ 103, 244-245. This allegation sets forth the who, what, when, where, and how 

of the allegedly false statement and therefore satisfies Rule 9(b). The SEC has also established 

materiality for this misrepresentation—in deciding whether to invest in Par Funding, a reasonable 

person could attach importance to whether LaForte, who ran the day-to-day operations of Par 

Funding, would be willing to risk his own money by investing in the company. Finally, taking as 

true the SEC’s allegation that LaForte never actually invested his money in Par Funding, the 

Amended Complaint sufficiently alleges that LaForte acted with knowledge or at minimum severe 

recklessness when he led investors to believe otherwise. 

Second, the SEC alleges that LaForte touted his business success, financial expertise, and 

leadership without disclosing that he was previously convicted and served time in prison for grand 

larceny and money laundering. Id. ¶¶ 213-14. For example, the Amended Complaint alleges that 

“the Par Funding website includes numerous articles featuring LaForte and his claimed business 

success, and directs readers to LaForte’s ‘Forbes Council’ profile, in which he describes himself 

as ‘...one of the small business industry’s most distinguished and accomplished leaders.’” Id. ¶ 

213. The Amended Complaint also states that “LaForte ... holds himself out in videos he posts 

online as a ‘financial expert’ for Par Funding.” Id. The SEC alleges that to conceal his criminal 

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history, LaForte “uses two aliases—Joe Mack and Joe Macki—because, as LaForte admitted to at 

least one individual, if people ‘google’ his real name they will see his negative history.” Id. ¶ 214. 

These factual allegations are sufficient to satisfy Rule 9(b)’s particularity requirement. 

Reasonable minds could conclude that LaForte’s criminal history was material to investors. 

See, e.g., S.E.C. v. Prater, 289 F. Supp. 2d 39, 52-53 (D. Conn. 2003) (“The failure to disclose 

anywhere on the websites or in other materials any information about [Defendant’s] extensive 

criminal history, including convictions for fraud, would certainly constitute a material omission 

which a reasonable investor might view as important in deciding whether to trust their money with 

[Defendant] or his company.”); S.E.C. v. Cap. Cove Bancorp LLC, No. 15-00980, 2015 WL 

9704076, at *6 (C.D. Cal. Sept. 1, 2015) (finding that in using an alias, defendant “omitted and 

never disclosed [his] criminal history when soliciting investments” and that this omission was 

material); United States v. Hatfield, 724 F. Supp. 2d 321, 328 (E.D.N.Y. 2010) (“It is well-settled 

that information impugning management’s integrity is material to shareholders.”). And the SEC’s 

allegations that LaForte used aliases with investors because he knew a Google search of his name 

would reveal his “negative history” supports an inference of scienter. Am. Compl. ¶ 214. 

In their Reply, Defendants argue that LaForte’s alleged omissions regarding his criminal 

history cannot form the basis for securities fraud violations because the SEC’s own regulations—

specifically Regulation S-K—only require disclosure of a conviction by a control person when it 

is within five years and material to an investment decision. See Reply at 9-10 (citing 17 C.F.R. § 

229.401(g)). However, “the fact that Regulation S–K does not require disclosure of particular 

information does not answer whether the information is material to investors under the securities 

laws.” S.E.C. v. Brown, 740 F. Supp. 2d 148, 159 (D.D.C. 2010).5

 And because the SEC has 

5 Furthermore, the SEC alleges that Defendants’ fraudulent scheme began in 2012, and LaForte’s latest 

conviction occurred in 2009. Am. Compl. ¶¶ 2, 18. It is therefore not apparent from the face of the 

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alleged that LaForte used aliases with investors, Defendants’ argument that LaForte’s criminal 

history was publicly available is similarly unavailing at this stage of the proceedings. 

Third, the SEC alleges that LaForte told investors that the default rate on Par Funding’s 

loans was 1% when in reality, Par Funding had filed at least 2,000 lawsuits seeking about $300 

million in missed payments from borrowers—which the SEC alleges reflect a default rate closer 

to 10%. Am. Compl. ¶¶ 185-203. The SEC also asserts that LaForte misrepresented to investors 

that their funds were protected by insurance. Id. ¶¶ 204-212. And the SEC provides specific dates 

when LaForte made these misrepresentations to investors. Id. ¶¶ 186, 199, 201, 205. These 

allegations are sufficient to satisfy Rule 9(b). 

Given 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. The Court also has no trouble concluding that a 

reasonable person would attach importance to a representation concerning whether an investment 

is protected by insurance. The Court therefore finds that materiality is adequately pleaded for 

these misrepresentations. Considering that the SEC (unlike private litigants) is only required to 

plead scienter generally, the SEC’s allegations that LaForte approved and signed the loans and was 

responsible for Par Funding’s day-to-day operations raises an inference that he knew or was 

severely reckless in not knowing that the loans did not include an insurance component and that 

the loans he was approving had resulted in thousands of lawsuits for defaulted loan payments. Id.

¶ 43. 

Amended Complaint that the alleged misrepresentations about LaForte’s criminal history occurred entirely 

outside the five-year window referenced by Defendants.

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Defendants argue that the SEC’s allegations that Par Funding’s loan default rate was 

calculated differently than the SEC’s preferred method does not prove falsity or scienter. See Mot. 

at 14. They also contend that the SEC’s allegation that “Par Funding did not offer small businesses 

insurance on the [l]oans” does not mean investor funds were not protected by insurance. Id. at 

15. However, the Court is required to accept the SEC’s well-pleaded allegations as true at this 

stage. Whether Par Funding did indeed protect investor funds with insurance or accurately 

represent its loan default rate are factual issues that cannot be resolved on a motion to dismiss. 

ii. Cole

The SEC alleges that Cole signed6 an April 2020 Form D for Par Funding that was filed 

with the SEC, and that the form failed to identify LaForte in the “Related Persons” section, which 

requires identification of “[e]ach executive officer or director of the issuer and person performing 

similar functions (title alone is not determinative) for the issuer . . .” and “[e]ach person who has 

functioned directly or indirectly as a promoter of the issuer . . . .” Id. ¶¶ 218-19, 238. The Form 

D also falsely stated that Par Funding: (1) did not pay McElhone or Cole any of the gross proceeds 

from the securities offering, and (2) did not pay any commissions. Id. ¶¶ 237-43. These allegations 

are sufficient to satisfy Rule 9(b).

The SEC’s allegations regarding Cole’s misrepresentations also satisfy materiality. As 

discussed above, when making an investment decision, a reasonable investor could attach 

importance to LaForte’s criminal history and the fact that he was running the day-to-day operations 

of Par Funding. Furthermore, courts have held that “[m]isrepresentations regarding the use of 

investors’ funds are material.” Lottonet, 2017 WL 6949289, at *13 (collecting cases). 

6

 “[C]ourts have consistently held that the signer of a corporate filing is its “maker.” Brown, 878 F. Supp. 

2d at 116. 

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The Court also finds that the SEC’s allegations are sufficient to support an inference of 

scienter. The SEC alleges that Cole knew LaForte had been convicted of crimes involving 

dishonesty and actively helped conceal LaForte’s identity from investors. See Am. Compl. ¶ 215. 

The SEC also alleges that Cole attended sales events with LaForte where LaForte was introduced 

to investors as the President of Par Funding, yet Cole still did not list LaForte on the Form D 

submitted to the SEC. Id. ¶¶ 101, 104. Finally, the SEC alleges that Cole received proceeds from 

the securities offering but nevertheless signed a Form D representing that he did not. Id. ¶ 240. 

These allegations are enough to support an inference of scienter at the pleadings stage. 

iii. Abbonizio

The SEC alleges that Abbonizio misrepresented Par Funding’sloan default rate to investors 

and falsely told investors that the MCA loans were insured and that Par Funding always performed 

on-site inspections before approving a loan. The Amended Complaint describes a November 2019 

event where Abbonizio told an audience of investors that Par Funding had a default rate of 1%, 

compared to an industry average default rate of 18.5%. Am. Compl. ¶ 99. He advised the audience 

to focus on the default rate because that is the most important part of the investment. Id. ¶ 100. 

On January 7, 2020, Abbonizio told an undercover individual posing as a potential investor that 

Par Funding issues bad loans 1% of the time. Id. ¶ 187. He explained that the defaults are “one 

percent of $500 million.” Id. The SEC alleges that contrary to these assertions, Par Funding had 

filed at least 2,000 lawsuits seeking about $300 million in missed payments from borrowers. Id.

¶ 47. 

The SEC also alleges that Abbonizio touted Par Funding’s underwriting, describing the 

underwriting group to an undercover individual posing as an investor as “the key to our whole 

investment thesis,” and explaining that the investment in Par Funding is “only compelling if 

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you have confidence that whatever you give, $50,000 or $5 million, that we are going to do 

an exemplary job of putting your hard earned money in the hands of suitable companies that can 

meet their daily obligation to pay us back.” Id. ¶ 156. The SEC further asserts that in August 

2019, Abbonizio falsely told potential investors during a solicitation event that Par Funding does 

an on-site inspection of small businesses 100% of the time before approving any loan. Id. ¶¶ 163-

64. With respect to insurance, the SEC alleges that at an event in Florida to solicit investors in 

August 2019, Abbonizio told potential investors that Par Funding’s merchant loans were insured. 

Id. ¶ 206. These allegations sufficiently set forth the who, what, when, where, and how of the 

allegedly false statements and therefore satisfy Rule 9(b). 

As noted previously, given that Par Funding’s ability to pay investors is impacted by 

whether small business borrowers make payments on the MCAs, a reasonable person deciding 

whether to invest in Par Funding would certainly attach importance to the default rate, whether 

there was insurance on the loans, and Par Funding’s underwriting rigor. The Court therefore finds 

that the SEC has sufficiently alleged that Abbonizio’s misrepresentations or omissions were 

material. 

The SEC’s allegations also support a reasonable inference that Abbonizio acted with 

scienter. The Amended Complaint avers that Abbonizio was an owner and manager of Par 

Funding—and that Par Funding’s business centered on making merchant cash advances. Am. 

Compl. ¶¶ 11, 20, 41. The SEC alleges that Abbonizio was responsible for soliciting investors and 

providing information to potential investors about Par Funding. Id. ¶ 20. It also alleges that 

Abbonizio repeatedly made assertions to investors about how critical the MCA default rate and 

underwriting were to Par Funding’s business, suggesting that he was informed regarding these 

matters. Id. ¶¶ 100, 154-58, 181, 189; In re Complete Mgmt. Inc. Sec. Litig., 153 F. Supp. 2d 314, 

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325 (S.D.N.Y. 2001) (“[C]ourts . . . have held that on a motion to dismiss, making all reasonable 

assumptions in favor of the plaintiff includes assuming that principal managers of a corporation 

are aware of matters central to that business’s operation.”).7

 Coupled with the SEC’s general 

assertion that Abbonizio acted with scienter, these allegations support a reasonable inference that 

Abbonizio was at least reckless in misrepresenting the loan default rate, existence of insurance on 

the MCAs, and underwriting process to investors. See S.E.C. v. Landberg, 836 F. Supp. 2d 148, 

155 (S.D.N.Y. 2011) (“[A]llegations of recklessness have been found to be sufficient where 

plaintiffs alleged facts demonstrating that defendants failed to review or check information that 

they had a duty to monitor, or ignored obvious signs of fraud.”) (quotation omitted).

iv. Vagnozzi

The SEC alleges misrepresentations or omissions by Vagnozzi with sufficient particularity 

to satisfy Rule 9(b). The SEC alleges that at a November 2019 solicitation dinner, Vagnozzi touted 

his “proven track record” and told the audience of investors: “What I’m doing is legal, but most 

financial advisors don’t have a set of you-know-what’s to drop the license so they can do what I’m

doing.” Am. Compl. ¶¶ 247-48. Just months before making this representation, however, 

Vagnozzi had allegedly been sanctioned by Pennsylvania state regulators for securities laws 

violations. Id. ¶ 249. The SEC also alleges that Vagnozzi had his “What’s the Catch?” article 

7

 In the context of securities fraud actions brought by private litigants, many courts have held that scienter 

cannot be inferred merely from a defendant’s position within the company. See, e.g., Richard Thorpe & 

Darrel Weisheit v. Walter Inv. Mgmt., Corp., 111 F. Supp. 3d 1336, 1360 (S.D. Fla. 2015); In re Pegasus 

Wireless Corp. Sec. Litig., No. 07-81113, 2009 WL 3055205, at *6 (S.D. Fla. Sept. 21, 2009). The Court 

finds it unnecessary to analyze whether this is also the case in SEC enforcement actions—which are not 

subject to the Private Securities Litigation Reform Act’s heightened pleading standard for scienter—

because the Court is not concluding that the SEC sufficiently alleged scienter based merely on Abbonizio’s 

position in the company. Rather, the Court is persuaded that Abbonizio’s repeated representations to 

investors regarding the centrality of the default rate and underwriting—coupled with his responsibility for 

conveying information about Par Funding to investors—are sufficient to support an inference that he was 

at least severely reckless in not knowing his statements were false. 

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published on the ABFP website, in which he asserts that a traffic law is the only law he has ever 

violated and encourages investors to “[s]top googling, stop searching to see if Dean Vagnozzi is a 

scam . . .” Id. ¶ 252. The SEC asserts that this article was on the ABFP website after Vagnozzi 

had been sanctioned by Pennsylvania regulators for securities laws violations, Texas regulators 

had filed a claim against ABFP (Vagnozzi’s alleged alter ego) for fraud in connection with the Par 

Funding offering, and the SEC had filed a consent order against Vagnozzi for violations of federal 

securities laws. Id. ¶¶ 253-54. 

The Court further finds that a reasonable investor could attach importance to Vagnozzi’s 

violations of state and federal securities laws when making the decision of whether to invest in Par 

Funding through Vagnozzi’s company. See Merch. Cap., 483 F.3d at 771-72 (“The 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.”). 

Finally, the Court finds that in addition to its general allegations that Vagnozzi acted with 

knowledge or recklessly, the SEC pleads sufficient facts to support an inference of scienter. The 

regulatory actions that Vagnozzi allegedly failed to disclose were about him and ABFP, the 

company he owned, so it is fairly obvious that Vagnozzi knew about them. 

v. Furman

The Amended Complaint asserts that Furman misrepresented the New Jersey Order to at 

least one potential investor while soliciting her for the Par Funding investment through Fidelis. 

See Am. Compl. ¶ 233. Specifically, the SEC alleges that on June 16, 2019, Furman told an

undercover individual posing as an investor that the state of New Jersey had “retracted” its action

against Par Funding and had said Par Funding was “good” and did not need to pay a fine or have 

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any penalties. Id. The SEC alleges that this representation was false. Id. ¶ 234. These allegations 

are sufficient to satisfy Rule 9(b)’s particularity standard. 

As noted previously, a reasonable investor could find Defendants’ violations of state or

federal securities laws material. The Court further finds that the SEC has sufficiently pleaded 

scienter for Furman. The SEC generally alleges that Furman acted knowingly or recklessly—and 

Furman’s statement that the New Jersey Order was retracted when it remains in effect represents 

“an extreme departure of the standards of ordinary care, which presents a danger of misleading 

buyers or sellers that is either known to the defendant or is so obvious that the actor must have 

been aware of it.” Monterosso, 756 F.3d at 1335 (quotation and citation omitted); see also S.E.C. 

v. ICN Pharms., Inc., 84 F. Supp. 2d 1097, 1099 (C.D. Cal. 2000) (indicating that “when a 

complaint alleges with particularity the circumstances constituting fraud, as required by Rule 9(b), 

then generally it will also have set forth facts from which an inference of scienter could be drawn”) 

(internal quotations and alterations omitted). 

vi. Par Funding

Section 10(b) and Rule 10b-5 can be violated by any “person,” natural or legal, including 

corporations. In re ChinaCast Educ. Corp. Sec. Litig., 809 F. 3d 471, 475 (9th Cir. 2015). Because 

the Exchange Act and related regulations “do not contain any explicit instructions on when an 

employee’s acts and intent are to be imputed as those of the company, courts have looked to agency 

principles for guidance.” Id.; see also APA Excelsior III, L.P. v. Windley, 329 F. Supp. 2d 1328, 

1353 (N.D. Ga. 2004) (“[T]he principles of agency may be used to impute the actions of corporate 

officers and directors to the corporation itself . . . in essence, making the corporation liable under 

§ 10(b) and Rule 10b-5.”); S.E.C. v. Tome, 638 F. Supp. 596, 623 (S.D.N.Y. 1986) (indicating that

a corporation can only act through its agents and is therefore liable as a principal “for the actions 

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of its responsible officers and authorized agents.”); Cent. Bank of Denver, N.A. v. First Interstate 

Bank of Denver, N.A., 511 U.S. 164, 201 (1994) (“many courts . . . have imposed liability in § 

10(b) actions based upon respondeat superior and other common-law agency principles.”). Indeed, 

the Eleventh Circuit has stated that because a corporation has no state of mind of its own, the 

scienter of its agents must be imputed to it. Mizzaro, 544 F.3d at 1254; see also Adams v. KinderMorgan, Inc., 340 F.3d 1083, 1106 (10th Cir. 2003). 

As discussed above, the SEC has sufficiently alleged material misrepresentations or 

omissions—made with scienter—by LaForte, Cole, and Abbonizio. The Amended Complaint 

asserts that LaForte, Cole, and Abbonizio are owners, officers, and/or directors of Par Funding. 

See Am. Compl. ¶¶ 5, 17, 19, 20, 37, 121. It also pleads sufficient facts to support the inference 

that they made the alleged misrepresentations while transacting corporate business for Par 

Funding—for example, LaForte and Abbonizio’s alleged misrepresentations occurred in the 

context of soliciting investors for Par Funding, and Cole allegedly made misrepresentations in Par 

Funding’s Form D filing with the SEC. Par Funding “may be held liable co-extensively with the 

officer or employee actually responsible for the fraudulent conduct engaged in while in the course 

of employment and while transacting corporate business,” APA Excelsior, 329 F. Supp. 2d at 1353-

54. Furthermore, Par Funding is considered a “maker” of the false statements contained in the 

Form D filings. See Lottonet, 2017 WL 6949289, at *12 (finding that company and signatory were 

both makers of the false statements and omissions contained in the company’s Private Placement 

Memorandum and Form D filings); In re Cannavest Corp. Sec. Litig., 307 F. Supp. 3d 222, 240 

(S.D.N.Y. 2018) (holding that corporation and executive who signed the corporation’s Form 10-

Qs submitted to the SEC were both responsible for the statements contained therein). 

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Additionally, the SEC alleges that Par Funding distributed a marketing brochure to 

potential investors that falsely claimed Par Funding’s underwriting process takes 48 to 72 hours 

and includes, among other things, an on-site inspection before approving any loan. See Am. 

Compl. ¶¶ 159-161, 165-180. The SEC also alleges that the brochure falsely claims to offer 

insurance on all its products up to $150,000. Id. ¶¶ 204, 207. The Court disagrees with 

Defendants’ contention that the SEC cannot rely on the brochure for its Rule 10b-5(b) claims 

because “the Complaint does not identify the maker of the alleged statement,” as required by 

Janus. The Amended Complaint indicates that Par Funding distributes the brochure to investors 

through Abbonizio, a part owner and director of Par Funding, as well as through Agent Funds. Id.

¶¶ 158, 204. The SEC has therefore alleged that Par Funding is “the entity with authority over the 

content of the statement and whether and how to communicate it.” Janus, 564 U.S. at 144. 

The Court is also satisfied that the SEC has sufficiently alleged materiality and scienter for 

the misrepresentations in the brochure. As an initial matter, the foregoing analysis regarding the 

materiality of misrepresentations as to insurance and underwriting in connection with the claims 

against the individual defendants is equally applicable here. To plead corporate scienter in the 

context of securities actions brought by private litigants—which have a heightened pleading 

standard that the SEC is not required to meet here—the plaintiff need only allege facts that 

engender a strong inference “that somebody responsible for the allegedly misleading statements 

must have known about the fraud.” Monroe Cty. Employees’ Ret. Sys. v. S. Co., No. 17-00241, 

2018 WL 1558577, at *23 (N.D. Ga. Mar. 29, 2018), order clarified, No. 17-00241, 2018 WL 

1702675 (N.D. Ga. Apr. 6, 2018) (emphasis added). The person whose state of mind is imputed 

to the corporate defendant need not also be the person who made the material misstatements at 

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issue. See Pennsylvania Pub. Sch. Employees’ Ret. Sys. v. Bank of Am. Corp., 874 F. Supp. 2d 

341, 372 (S.D.N.Y. 2012); Lee v. Active Power, Inc., 29 F. Supp. 3d 876, 883 (W.D. Tex. 2014). 

Here, as noted previously, the SEC has sufficiently alleged that LaForte and Abbonizio 

acted with scienter when they made misleading statements regarding Par Funding’s underwriting 

rigor and insurance. The SEC also alleges that LaForte controlled the day-to-day operations of 

Par Funding, that Abbonizio distributed the brochure to investors, and that Abbonizio oversees the 

Agent Funds that also distributed the brochure to investors. See Am. Compl. ¶¶ 6, 17, 20, 158. 

These allegations are sufficient to impute scienter to Par Funding. See In re Marsh & Mclennan 

Companies, Inc. Sec. Litig., 501 F. Supp. 2d 452, 481 (S.D.N.Y. 2006) (“[C]ourts have readily 

attributed the scienter of management-level employees to corporate defendants.”). Thus, dismissal 

of the SEC’s Rule 10b-5(b) and Section17(a)(2) claims against Par Funding is unwarranted. 

vii. McElhone

Because the SEC does not specifically allege that McElhone personally uttered any of the 

misrepresentations referenced in the Amended Complaint, the Court must determine whether the 

SEC’s allegations are sufficient to hold McElhone primarily liable under Rule 10b-5(b) for Par 

Funding’s misrepresentations. In other words, the Court must examine whether the SEC has

sufficiently alleged that McElhone was the “maker” of those misrepresentations as contemplated 

by the Supreme Court in Janus. 

In Janus, the Supreme Court held that a mutual fund investment adviser could not be held 

liable in a private action under Rule 10b-5 for false statements included in its client mutual funds’ 

prospectuses. 564 U.S. at 131. The Supreme Court explained that:

For purposes of Rule 10b-5, the maker of a statement is the person 

or entity with ultimate authority over the statement, including its 

content and whether and how to communicate it. Without control, 

a person or entity can merely suggest what to say, not “make” a 

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statement in its own right. One who prepares or publishes a 

statement on behalf of another is not its maker. And in the ordinary 

case, attribution within a statement or implicit from surrounding 

circumstances is strong evidence that a statement was made by—

and only by—the party to whom it is attributed. This rule might best 

be exemplified by the relationship between a speechwriter and a 

speaker. Even when a speechwriter drafts a speech, the content is 

entirely within the control of the person who delivers it. And it is 

the speaker who takes credit—or blame—for what is ultimately said.

Id. at 142-43. Courts applying Janus have emphasized that “Janus did not alter the wellestablished rule that a corporation can act only through its employees and agents.” S.E.C. v. 

Brown, 878 F. Supp. 2d 109, 116 (D.D.C. 2012); see also S.E.C. v. Pocklington, No. 18-00701, 

2018 WL 6843663, at *14 (C.D. Cal. Sept. 10, 2018) (“Importantly, Janus does not stand for the 

proposition that officers cannot be liable for false and misleading statements in their own 

company’s financial statements.”). A corporate officer’s position alone is insufficient to render 

the officer a “maker” of the statement without “additional allegations as to the officer’s ability to 

control the contents of the statement at issue.” Mandalevy v. Bofi Holding, Inc., No. 17-00667, 

2021 WL 794275, at *6 (S.D. Cal. Mar. 2, 2021). However, a plaintiff is not required to “plead 

that the defendant directly issued the allegedly misleading statement.” Id. Rather, the plaintiff 

must plead sufficient facts to support an inference that the defendant had the power and authority 

to control the content and issuance of the statement. Id.

Although it is a close call, the Court finds that at this stage, the SEC has adequately pleaded 

that McElhone had power and authority to control the content of the alleged misrepresentations in 

Par Funding’s brochure and Form D filings with the SEC. This case does not present a situation 

where, for example, the plaintiff is alleging that a CEO of a large company was the “maker” of 

statements by other employees acting within the scope of their employment simply by virtue of 

his or her position. The SEC alleges that McElhone is Par Funding’s President, CEO, and sole 

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formal employee, and that she has ultimate decision-making authority for Par Funding. Am. 

Compl. ¶¶ 11, 16, 37, 42. It also alleges that McElhone and LaForte control Par Funding together. 

Id. ¶ 40. Moreover, “the question whether a defendant in fact exercised the requisite control over 

the content of the statement is ‘an inherently fact-bound inquiry.’” S.E.C. v. Kameli, No. 17-4686, 

2020 WL 2542154, at *13 (N.D. Ill. May 19, 2020) (quoting Glickenhaus & Co. v. Household 

Int’l, Inc., 787 F.3d 408, 427 (7th Cir. 2015)); see also S.E.C. v. Geswein, 2 F. Supp. 3d 1074, 

1083 (N.D. Ohio 2014) (indicating that whether defendants were the “makers” of the alleged 

misrepresentations required fact-intensive discovery). Additionally, the facts alleged in the 

Amended Complaint support an inference that McElhone—as CEO and as the person who 

controlled Par Funding—was at a minimum reckless in not knowing that representations made in 

the Par Funding brochure and filings with the SEC were false. At this stage, the SEC has pleaded 

sufficient facts to state a claim for primary liability under Rule 10b-5(b) based on McElhone’s near 

exclusive decision-making authority over Par Funding.

The SEC has also adequately pleaded that McElhone is liable as a “controlling person” 

under Section 20(a) of the Exchange Act. Section 20(a) “imposes joint and several liability on 

‘[e]very person who, directly or indirectly, controls any person liable’ for violation of the securities 

laws.” In re Galectin Therapeutics, Inc. Sec. Litig., 843 F.3d 1257, 1276 (11th Cir. 2016) (quoting 

15 U.S.C. § 78t(a)). It is a type of secondary liability and “cannot exist in the absence of a primary 

violation.” Id. (quoting Southland Sec. Corp. v. Inspire Ins. Sols., Inc., 365 F.3d 353, 383 (5th Cir. 

2004)). A defendant is liable as a controlling person under Section 20(a) if he or she “had the 

power to control the general affairs of the entity primarily liable at the time the entity violated the 

securities laws . . . and had the requisite power to directly or indirectly control or influence the 

specific corporate policy which resulted in the primary liability.” Brown v. Enstar Grp., Inc., 84 

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F.3d 393, 396 (11th Cir. 1996) (quotation and alteration omitted). A controlling person is 

derivatively liable under Section 20(a) if the controlling person “acted recklessly in failing to do 

what he could have done to prevent the violation.” Laperriere v. Vesta Ins. Grp., Inc., 526 F.3d 

715, 722 (11th Cir. 2008) (quotation omitted). 

As set forth above, the SEC sufficiently alleges primary violations by Par Funding. It also 

alleges that McElhone and LaForte exercised control over Par Funding—and that McElhone is the 

President of Par Funding, the signatory on Par Funding’s bank accounts, and according to Par 

Funding’s most recent corporate deposition under Federal Rule of Civil Procedure 30(b)(6), has 

ultimate authority over Par Funding. See Am. Compl. ¶ 40, 42. Furthermore, the Amended 

Complaint alleges that McElhone acted recklessly. Id. ¶¶ 269, 272, 275. Thus, the Court finds 

that the SEC has adequately pleaded control person liability under Section 20(a).8

 

b. Whether the SEC has sufficiently alleged violations of Rule 10b-5(a) and (c) and 

Section 17(a)(1) and (3)

To state a claim under Rule 10b-5(a) and (c) and Section 17(a)(1), the SEC must show that 

(1) the defendant committed a deceptive or manipulative act (2) in furtherance of the alleged 

scheme to defraud (3) with scienter. S.E.C. v. Glob. Dev. & Env’t Res., Inc., No. 08-00993, 2008 

WL 11338454, at *3 (M.D. Fla. Nov. 26, 2008); Quiros, 2016 WL 11578637, at *12. Section 

17(a)(3) requires only a showing of negligence. Id.

Prior to the Supreme Court’s holding in Lorenzo, many courts had adopted the position 

that Rule 10b-5(a) and (c) require deceptive acts distinct from the alleged misrepresentation 

8

 In their Reply, Defendants contend that “it is well established” that a plaintiff must allege a controlling 

person’s “culpable participation” in the fraud to plead controlling person liability under Section 20(a). 

Reply at 13. However, the Eleventh Circuit and courts in this district have declined to adopt the culpable 

participation test for Section 20(a). See Durgin v. Mon, 659 F. Supp. 2d 1240, 1257, n.6 (S.D. Fla. 2009), 

aff’d, 415 F. App’x 161 (11th Cir. 2011) (citing Laperriere, 526 F.3d 715; Brown, 84 F.3d 393). The Court 

therefore declines to apply that standard in evaluating the SEC’s Section 20(a) claim. 

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forming the basis of a Rule 10b-5(b) claim, but courts have indicated that this position in no longer 

tenable in light of Lorenzo. See S.E.C. v. Winemaster, No. 19-04843, 2021 WL 1172773, at *23 

(N.D. Ill. Mar. 29, 2021); see also In re Cognizant Tech. Sols. Corp. Sec. Litig., No. 16-06509, 

2020 WL 3026564, at *17 (D.N.J. June 5, 2020) (“[U]nder Lorenzo, unlike prior precedent, a 

plaintiff need not necessarily allege deceptive conduct that extends beyond the alleged 

misstatement itself.”). 

In Lorenzo, the Supreme Court held that Rule 10b-5(a) and (c) “capture a wide range of 

conduct,” including “the dissemination of false or misleading statements with intent to 

defraud . . . even if the disseminator did not ‘make’ the statements and consequently falls outside 

subsection (b) of the Rule.” Lorenzo, 139 S. Ct. at 1100-01. The Supreme Court explained that 

there is “considerable overlap among the subsections” of Rule 10b-5 as “each succeeding 

prohibition was . . . meant to cover additional kinds of illegalities—not to narrow the reach of the 

prior sections.” Id. at 1102. Thus, the Court emphasized that there is no basis to find that each 

subsection of Rule 10b-5 “should be read as governing different, mutually exclusive, spheres of 

conduct.” Id.

Guided by these principles, the Court concludes that the SEC has adequately pleaded 

violations of Rule 10b-5(a) and (c) and Section 17(a)(1) and (3) for all Defendants. As set forth 

in connection with the SEC’s Rule 10b-5(b) and Section 17(a)(2) claims, the SEC has sufficiently 

alleged that Defendants each made material misrepresentations and/or omissions with scienter in 

the offer and sale of the Par Funding promissory notes. The Amended Complaint also alleges that 

these Defendants did so in furtherance of a scheme designed to conceal—among other things—

the true nature of Par Funding’s loan practices, the safety of investing in Par Funding, Par 

Funding’s regulatory history, and the fact that proceeds from the security offering were “funneled” 

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to McElhone, Cole, and The LME Trust, which is McElhone’s family trust. See Am. Compl. ¶ 8. 

The SEC alleges that McElhone and LaForte orchestrated the scheme. Id. ¶ 5. 

The SEC further alleges that after Par Funding was sanctioned by state securities regulators 

for the use of unregistered sales agents, Defendants engaged in a coordinated effort to set up the 

Agent Fund model to allow Par Funding to continue offering fraudulent, unregistered securities 

without disclosing Par Funding’s regulatory history to investors. Id. ¶¶ 4-7. Without commenting 

on the merits of the SEC’s allegations, the Court finds that they are sufficient to withstand 

Defendants’ Motion to dismiss the Rule 10b-5(a) and (c) and Section 17(a)(1) and (3) claims.

III. Is the Amended Complaint a shotgun pleading?

Defendants contend that the SEC’s Amended Complaint constitutes an impermissible 

shotgun pleading because “the antifraud provisions contained in Counts I-VII do not state with 

particularity which specific allegations apply to which specific count” and instead state that the 

SEC “repeats and realleges paragraphs 1 through 267 of this Complaint.” Mot. at 26 (citing Am. 

Compl. ¶¶ 268, 271, 274, 277, 280, 281, 286). Defendants rely on Wagner v. First Horizon 

Pharmaceutical Corp., where the Eleventh Circuit found that the elements of the securities fraud 

claims in plaintiff’s complaint were insufficiently linked to the large fact section that preceded the 

counts. 464 F.3d 1273, 1279 (11th Cir. 2006). The Eleventh Circuit noted that the complaint was 

“the proverbial shotgun pleading,” which are “those that incorporate every antecedent allegation 

by reference into each subsequent claim for relief or affirmative defense.” Id. 

Importantly, however, the Eleventh Circuit has explained that “[t]he essence of a shotgun 

pleading is ‘that it is virtually impossible to know which allegations of fact are intended to support 

which claim(s) for relief.’” Vujin v. Galbut, 836 F. App’x 809, 814 (11th Cir. 2020) (quoting 

Anderson v. District Bd. of Trustees of Cent. Florida Cmty. Coll., 77 F.3d 364, 366 (11th Cir. 

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1996)). The Eleventh Circuit has identified four types of pleadings that produce this problem: (1) 

“complaints that contain multiple counts where each count adopts the allegations of all preceding 

counts, causing each successive count to carry all that came before and the last count to be a 

combination of the entire complaint”; (2) “complaints that are replete with conclusory, vague, and 

immaterial facts not obviously connected to any particular cause of action”; (3) “complaints that 

do not separate each cause of action or claim for relief into separate counts”; and (4) “complaints 

that assert multiple claims against multiple defendants without specifying which of the defendants 

are responsible for which acts or omissions, or which of the defendants the claim is brought 

against.” Id. at 815 (quoting Weiland v. Palm Beach Cty. Sherriff’s Off., 792 F.3d 1313, 1321-23

(11th Cir. 2015)) (internal quotations omitted).

Here, the Court is not convinced that the Amended Complaint is a shotgun pleading. Each 

count does not incorporate every preceding allegation, including the allegations from preceding 

counts. Rather, each count incorporates only the general factual allegations contained in 

paragraphs 1-267 of the Amended Complaint, which “support each claim for relief and identify 

the relevant events, misrepresentations, and omissions advanced by the SEC.” City of Miami, 988 

F. Supp. at 1354 (denying motion to dismiss SEC complaint that incorporated the factual 

allegations in paragraphs 1 through 115 into each count as shotgun pleading); see also S.E.C. v.

Spartan Sec. Grp., LTD, No. 19-00448, 2019 WL 2372277, at *3 (M.D. Fla. June 5, 2019)

(denying motion to dismiss SEC complaint as shotgun pleading because “[w]hile each count 

incorporates by reference all the factual allegations, each count does not incorporate the prior 

count.”); Strebinger, 114 F. Supp. 3d at 1327, n.4 (“[A]ll of the SEC’s claims are based on one 

continuous act of fraud and, therefore, it is appropriate for the SEC to incorporate all of its factual 

allegations into each count.”).

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Further, it is certainly not “virtually impossible” to know which factual allegations are 

intended to support which claims for relief. See S.E.C. v. PV Enterprises, Inc., No. 16-20542, 

2016 WL 8808697, at *3 (S.D. Fla. June 28, 2016). The factual allegations against each Defendant 

are clear—the SEC separately describes each alleged misrepresentation that forms the basis for its 

claims under the antifraud provisions and indicates exactly which Defendants made each 

misrepresentation. And the Amended Complaint identifies claims with sufficient clarity for 

Defendants to frame a responsive pleading. Therefore, dismissal of the Amended Complaint on 

the grounds that it is a shotgun pleading is unwarranted.

IV. Does the SEC plead sufficient facts to establish that The LME Trust is a proper relief 

defendant?

A federal court may add a person who is not accused of wrongdoing in a securities 

enforcement action as a relief defendant when that person (1) has received ill-gotten funds and (2) 

does not have a legitimate claim to those funds. S.E.C. v. Cavanagh, 155 F.3d 129, 136 (2d Cir. 

1998); FTC v. Transnet Wireless Corp., 506 F. Supp. 2d 1247, 1273 (S.D. Fla. 2007). The person 

or entity is known as a “relief defendant” or a “nominal defendant”—someone who is not accused 

of violating the securities laws but who is nevertheless in possession of funds that the violator 

passed along to him or her. S.E.C. v. Merrill, No. 18-2844, 2021 WL 1117280, at *4 (D. Md. Mar. 

23, 2021). In the securities context, to have no legitimate claim to the ill-gotten funds means that 

an individual gave no consideration for the funds and thus received them as a gift. S.E.C. v. Nat. 

Diamonds Inv. Co., No. 19-80633, 2019 WL 2583863, at *7 (S.D. Fla. June 11, 2019). “Alleging 

that the proposed relief defendant has ‘no legitimate claim’ to the ill-gotten funds is sufficient to 

satisfy the second pleading requirement at the motion to dismiss stage of the proceeding.” Fed. 

Trade Comm’n v. IAB Mktg. Assocs., LP, No. 12-61830, 2013 WL 11331001, at *1 (S.D. Fla. Aug. 

20, 2013) (citations omitted). 

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Here, the Amended Complaint states that The LME Trust owns Par Funding; that

McElhone is the Grantor of the Trust; and that McElhone and LaForte are the Trustees of The 

LME Trust. See Am. Compl. ¶ 36. The SEC also alleges that “[b]etween July 2018 and September 

2018, Par Funding transferred at least $14.3 million, which included investor funds, to The LME 

Trust for no legitimate purpose.” Id. These allegations are sufficient at the pleading stage to 

establish that The LME Trust is a proper Relief Defendant in this case. See F.T.C. v. LeanSpa, 

LLC, 920 F. Supp. 2d 270, 281 (D. Conn. 2013) (denying relief defendant’s motion to dismiss 

where plaintiff alleged that the relief defendant “received or otherwise benefitted from” proceeds 

of the unlawful practice and the relief defendant had “no legitimate claim” to those funds); United 

States Commodity Futures Trading Comm’n v. Gresham, No. 09-00075, 2010 WL 11506864, at 

*3 (N.D. Ga. Apr. 28, 2010) (denying relief defendant’s motion to dismiss where plaintiff alleged 

that relief defendant received over $400,000 from Ponzi scheme and did not provide any services 

in exchange for the funds, or in the alternative, the services he provided did not warrant the 

substantial payments received). 

Defendants maintain that the SEC has pleaded insufficient facts to establish that The LME 

Trust is a proper Relief Defendant in this case. See Mot. at 28. They argue that because Par 

Funding’s funneling of investor funds to The LME Trust is part of the alleged fraud, the SEC’s 

allegations regarding this conduct in the context of the nonfraud Relief Defendant must still be 

pleaded with particularity under Rule 9(b). Id. at 28-29. They also insist that the SEC is required 

to provide factual support for its allegation that investor funds were diverted into the Trust, 

particularly because a reasonable inference can be drawn from the Amended Complaint that the 

transfers were made from Par Funding revenues and not gross proceeds from the offering. Id. at 

29-30.

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As an initial matter, it is not clear that Rule 9(b)’s heightened pleading standard applies to 

the SEC’s allegations that The LME Trust is a relief defendant. See, e.g., Merrill, 2021 WL 

1117280, at *5 (“[T]he SEC need not satisfy the heightened pleading standard of Federal Rule 9(b) 

for claims sounding in fraud to adequately allege a claim against [the Movant] as a Relief 

Defendant.”). However, the Court need not resolve this question because even assuming Rule 

9(b)’s heightened pleading standard applies, the Court finds that the SEC has satisfied it. The SEC 

provides the specific amounts of funds that Par Funding allegedly transferred to The LME Trust 

($14.3 million) and the time period when the transfers occurred (between July and September 

2018). Defendants’ contention that the SEC’s allegations are insufficient because one can draw a 

reasonable inference that the transfers consisted of proceeds from Par Funding’s merchant cash 

advances is unavailing. The Court must draw reasonable inferences in the SEC’s favor on a motion 

to dismiss—and must take its allegation that the transfers included investor funds as true at this 

stage. See S.E.C. v. Aragon Cap. Advisors, LLC, No. 07-00919, 2011 WL 3278907, at *19 

(S.D.N.Y. July 26, 2011). 

Defendants rely heavily on S.E.C. v. Founding Partners Cap. Mgmt., 639 F. Supp. 2d 1291 

(M.D. Fla. 2009), where the Court concluded that the SEC had failed to establish that the relief 

defendants, referred to collectively as Sun Capital, lacked an ownership interest or legitimate claim 

in the funds they received. In that case, the SEC alleged that Defendants made misrepresentations 

to investors when soliciting investor funds to fuel their business, which included making loans to 

Sun Capital. See S.E.C. v. Founding Partners Cap. Mgmt., No. 09-00229, 2009 WL 10669238, at 

*2 (M.D. Fla. May 7, 2009). Defendants made loans to Sun Capital pursuant to written loan 

agreements, which allowed Sun Capital to use the loan proceeds to purchase healthcare and 

commercial receivables. Founding Partners, 639 F. Supp. 2d at 1292. In finding that Sun Capital 

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was not a proper relief defendant, the Court reasoned that Sun Capital “received the loan proceeds 

pursuant to written loan agreements . . . , which gives Sun Capital certain rights and obligations 

with regard to the loan proceeds.” Id. at 1294. It further noted that there had been “a debtorcreditor relationship between Sun Capital and [Defendant] based on written agreements” for years

and that “Sun Capital is a far cry from the ‘paradigmatic’ nominal defendant: a trustee, agent or 

depository.” Id. 

The facts in this case are significantly different. The SEC alleges that The LME Trust is 

McElhone’s family trust and that McElhone and LaForte are its trustees. In contrast to the debtorcreditor relationship described in Founding Partners, or cases where the relief defendant 

performed services in exchange for compensation, “[a] claim of ownership is not legitimate where 

the relief defendant holds the funds in trust for the primary violator, the ownership claim is a sham, 

the relief defendant acted as a mere conduit of proceeds from the underlying statutory violation, 

or some similar specious claim to ownership.” S.E.C. v. World Cap. Mkt., Inc., No. 14-02334, 

2014 WL 12561076, at *2 (C.D. Cal. July 10, 2014). 

V. Are the SEC’s claims time-barred under 28 U.S.C. section 2462?

Defendants argue that many of the SEC’s claims are time-barred because they are based 

on conduct that occurred outside the five-year statute of limitations period set forth in 28 U.S.C. 

section 2462. See Mot. at 30. Specifically, Defendants contend that any non-equitable remedies, 

including penalties and disgorgement, requested by the SEC for conduct arising prior to July 24, 

2015 (five years prior to the date of the Complaint) must be dismissed. Id. The SEC does not 

dispute that the Court may only penalize violations that occurred within five years of the filing of 

the Complaint and award disgorgement for ill-gotten gains received during that period. Resp. at 

39. However, it disputes Defendants’ attempt to link the statute of limitations to “conduct,” 

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asserting that section 2462 is tied to the accrual of a “claim,” and the Court may therefore impose 

a penalty for any violation where at least one of the elements occurs within the limitations period. 

Id. at 39-40. The SEC also points out that each count in its Amended Complaint identifies the 

time period from July 2015 onward—i.e., within the statute of limitations—and thus there is 

nothing for the Court to dismiss. Id. at 40.

The Court does not see any reason to dismiss counts in the Amended Complaint based on 

section 2462. If the SEC’s claims included violations occurring outside the five-year limitations

period, it would be appropriate for the Court to partially dismiss the claims to the extent they seek 

time-barred relief. See S.E.C. v. Cohen, 332 F. Supp. 3d 575, 587-88 (E.D.N.Y. 2018). However, 

each count in the Amended Complaint is limited to the five-year period within the statute of 

limitations. See Am. Compl. ¶¶ 272, 275, 278, 281, 284, 288, and 291. And the parties agree that 

the SEC may only penalize violations occurring within the five-year limitations period. See S.E.C.

v. Graham, 823 F.3d 1357, 1364 (11th Cir. 2016). Accordingly, dismissal of any counts on statute 

of limitations grounds is unwarranted. 

CONCLUSION

For the foregoing reasons, it is ORDERED AND ADJUDGED that Defendants’ Motion 

to Dismiss [ECF No. 363] is DENIED.

DONE AND ORDERED in Fort Lauderdale, Florida this 11th day of May, 2021.

 ______________________________

 RODOLFO A. RUIZ II

 UNITED STATES DISTRICT JUDGE

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