The SEC Already Suffered a Major Defeat in the Par Funding Battle – But Who is the Real Loser?

While the news media, regulatory agencies, and law enforcement are high-fiving each other over the course of events in the Par Funding saga (a lawsuit, a receivership, an asset freeze, and an arrest), there lies a major problem: The SEC already suffered a major defeat.

On July 28th, rumors of a vague legal “victory” for Par Funding circulated on the DailyFunder forum. The context of this win was unknowable because the case at issue was still under seal and nobody was supposed to be aware of it.

Cue Bloomberg News…

In December 2018, Bloomberg Businessweek published a scandalous story about a Philadelphia-based company named Par Funding. And then not a whole lot happened… that is until Bloomberg Law and Courthousenews.com published a lengthy SEC lawsuit less than two years later that alleged Par along with several entities and individuals had engaged in the unlawful sale of unregistered securities.

At the courthouse in South Florida, those documents were sealed. The public was not supposed to know about them and deBanked could not authenticate the contents of the purported lawsuit through those means. According to The Philadelphia Inquirer, the mixup happened when a court clerk briefly unsealed it “by mistake” thus alerting a suspiciously narrow set of news media to the contents. deBanked was the first to publicly point this out.

In court papers, some of the defendants said that they learned of the lawsuit that had been filed under seal on July 24th from “news reports.” Bloomberg Law published a summary of the lawsuit on its website in the afternoon of July 27th.

“It is fortuitous that the Complaint was initially published before it was sealed,” an attorney representing several of the defendants wrote in its court papers. “Otherwise, [The SEC] would have likely accomplished its stealth imposition of so-called temporary’ relief, that would have led to the unnecessary destruction of a legitimate business.”

The day after this, on July 28th, a team of FBI agents raided Par Funding’s Philadelphia offices as well as the home of at least one individual. Rumors about the office raid landed on the DailyFunder forum just hours later, along with links to the inadvertently public SEC lawsuit now circulating on the web.

The New York Post caught wind of the story and published a photo of an arrest that had taken place fifteen years ago, creating confusion about what, if anything, was happening. Nobody, was in fact, arrested.

The SEC lawsuit was finally unsealed on July 31st, along with the revelation that Par Funding and other entities had been placed in a limited receivership pursuant to a Court order issued just days earlier. The receivership order was a massive blow to the SEC. It failed to obtain the most important element of its objective, that is to have the court-ordered right to “to manage, control, operate and maintain the Receivership Estates.” The SEC specifically requested this in its motion papers but was denied this demand and others by the judge who leaned in favor of granting the Receiver document and asset preservation powers rather than complete control of the companies.

The language of the Court order was interpreted differently by the Receiver, who immediately fired all of the company’s employees, locked them out of the office, and then suspended all of the company’s operations which even prevented the inbound flow of cash to the company (of which in the matter of days amounted to nearly $7 million). The SEC did successfully secure an asset freeze order.

In court papers, Par Funding’s attorneys wrote that: “The Receiver’s and SEC’s actions are ruining a business with excellent fundamentals and a strong financial base and essentially putting it into an ineffective liquidation causing huge financial losses. In taking this course of action against a fully operational business, the key fact that has been lost by the SEC, is that their actions are going to unilaterally lead to massive investor defaults.”

The Receiver, in turn, tried to fire Par Funding’s attorneys from representing Par. Par’s attorneys say that the Receiver has communicated to them that it is his view “that he controls all the companies.”

“The SEC is simply trying to drive counsel out of this case, as an adjunct to all the other draconian relief that they insist must be employed to ‘protect the investors,'” Par’s attorneys told the Court. “Due Process is of no regard to the SEC.”

As lawyers on all sides in this mess assert what is best for “investors,” seemingly lost is the collateral damage that is likely to be thrust on Par’s customers. The Philadelphia Inquirer has repeated the SEC’s contention that Par made loans with up to 400% interest. Bloomberg News has called Par a “lending company” whose alleged top executive is a “cash-advance tycoon.”

A review of some of Par’s contracts, however, indicate that they often entered into “recourse factoring” arrangements. “This is a factoring agreement with Recourse,” is a statement that is displayed prominently on the first page of the sample of contracts obtained by deBanked.

Parallels between the business practices of Par Funding and a former competitor, 1 Global Capital, have been raised at several junctures in the SEC litigation thus far. But some sources told deBanked that in recent times, Par has been offering a unique product, one that is likely to create disastrous ripple effects for hundreds or perhaps thousands of small businesses as a result of the Receiver’s actions (even if well-intentioned).

The “Reverse”

Par offered what’s known as a “Reverse Consolidation,” industry insiders told deBanked. In these instances Par would provide small businesses with weekly injections of capital that were just enough to cover the weekly payments that these small businesses owed to other creditors.

One might understand a consolidation as a circumstance in which a creditor pays off all the outstanding debts of a borrower so that the borrower can focus on a relationship with a single lender. In a “reverse” consolidation, the consolidating lender makes the daily, weekly, or monthly payments to the borrower’s other creditors as they become due rather than all at once. Once the other creditors have been satisfied, the borrower’s only remaining debt (theoretically) is to the consolidating lender.

Par does not appear to have offered loans but sources told deBanked that Par would provide regular weekly capital injections to businesses that could not afford its financial obligations otherwise. Par, in essence, would keep those businesses afloat by making their payments.

That all begs the question, what is going to happen to the numerous businesses when Par breaches its end of the contract by failing to provide the weekly injections?

As the Receiver makes controversial attempts to assert the control it wished it had gotten (but didn’t), the press dazzled the public on Friday with the announcement that an executive at Par Funding had been arrested on something entirely unrelated, an illegal gun possession charge. The FBI discovered the weapons while executing a search warrant on July 28th but waited until August 7th to make the arrest.

It remains to be seen what the 1,200 investors will recover in this case or what will become of the Receiver in the battle for control, but sources tell deBanked that the authorities are all fighting over the wrong thing.

They should all be asking “what’s going to happen to the small businesses when their weekly capital injection doesn’t come in the middle of a pandemic?”

Sean Murray is the President and Chief Editor of deBanked and the founder of the Broker Fair Conference. Connect with me on LinkedIn or follow me on twitter. You can view all future deBanked events here.