For investors in Akron-based Fair Finance, there are more questions than answers.
If it turns out that Fair Finance is unable to pay its investors, was there a way to recognize the problems ahead of time?
Authorities are alleging that Fair Finance and related companies with connections to Fair Chief Executive Timothy Durham of Indianapolis are part of a Ponzi scheme, which uses new money from investors to pay interest and principal to existing investors. The schemes collapse when the new money can't keep up with the existing investors.
A company attorney indicated the offices might be able to reopen, possibly today, an event that investors might be anxiously awaiting.
If the offices are unable to open and eventually investors' fears that they won't be repaid come true, was there a way to know?
It's tough to figure, said consumer advocates.
''Up until this incident, the company has managed their affairs very well,'' said Vic Wlaszyn, president of the Akron area Better Business Bureau.
''This is something that's happened quickly overnight and we weren't aware of it.''
Wlaszyn said several employees at the BBB office have family members who invested in Fair. ''We're all in a holding pattern, waiting to see what the next step is going to be.''
The BBB has suspended Fair Finance's membership, Wlaszyn said.
''Considering what information we've received, it doesn't bode well for their
future,'' he said. The company formerly had a good BBB report, he said.
The Akron-based company's offices and a related company in Indianapolis were raided by the FBI two days before Thanksgiving.
Court documents and other records show that the FBI, the U.S. attorney's office in southern Indiana and the Securities and Exchange Commission are investigating whether Fair Finance and related companies defrauded Ohio investors.
No one has been charged or arrested.
Ponzi scheme?
Wlaszyn said it's too early to know whether Fair Finance was a Ponzi scheme.
In general, Wlaszyn said, Ponzi schemes always work well until they collapse.
''Most Ponzi schemes when they operate, operate fluidly as long as the money is coming in and there's a rate of return. The moment the investors stop putting their money in, then it goes to a downturn,'' he said. ''There would be an almost immediate downturn such in a way that it crashes.''
If Fair Finance does not turn out to be a Ponzi scheme, consumers still need to be careful when putting money into uninsured or private investments, Wlaszyn said.
''It's a huge risk. Frankly, when they say there's nothing to back it up, there's no insurance behind it, no government behind it, you really need to understand that the moment the company fails, you fail to get your money.
''It's as simple as that. It's as much 'buyer beware' as it possibly can be,'' Wlaszyn said.
Brent Steiner, a certified financial planner with Ramsier Financial Services Inc. in Smithville, said his firm has counseled clients to be careful about Fair Financial for the 10 years he's been with the company.
Awkward conversation
''It's always been an awkward conversation with these clients since we don't want to be perceived as knocking another business, but as advisers, when we look at this stuff, we see the risk,'' Steiner said.
He said he knows clients who have invested small amounts, between $5,000 and $10,000, in Fair Finance. He suspects there are more clients who have invested in Fair Finance who have not told their advisers, since the investments could be done by the consumer.
He also suspects there are a high number of Fair Finance investors in Wayne County, where he works, because investors there tend to be more conservative, want fixed rates and don't like the risk of the stock market.
The yield spread that Fair Finance promised — sometimes as high as 9 percent — compared to bank CD rates was huge and a potential warning sign, he said.
Raising the limit
A few years ago, Fair Finance raised its maximum investment limit from $100,000 per individual to $200,000.
''That was a red flag and we pointed that out to clients and said that's not necessarily because they were all of a sudden being nice. They needed more money,'' Steiner said.
What is the difference between a private investment firm like Fair Finance and money in the stock market, which also is not federally insured?
Steiner said he didn't believe clients were getting a full picture of the downside risk compared to the potential gains.
''If I'm telling a client you have a reasonable risk of losing 20 percent or 30 percent of your investment, we're at least having that conversation. That's really the difference. I don't know there was ever a conversation with these clients or anybody saying, 'There's a real risk of you losing all of the money,' '' he said.
Wlaszyn of the BBB said the stock market has well-known investment firms with support and reserves.
Uphill battle
Steiner acknowledged that it was an uphill battle sometimes persuading clients not to invest in Fair Finance, since the client might think the adviser was trying to compete for the investment money. ''What clients need to realize is we care about them enough that we will have those awkward conversations, regardless of who is selling it and how it's being positioned. At the end of the day, we had clients saying, 'I'm willing to take that risk.' ''
Change in owners
Many investors have said they relied on the long-term history of Fair Finance, which has operated in Akron since 1934. But many say they weren't aware the company was sold from local owners to out-of-state owners in 2002.
Change in ownership in any long-standing business can go one of two ways, Wlaszyn said. The business can either continue to grow on the company's history and current practices, or it can ''operate on the old owners' good name and good will; they drive it into the ground,'' he said.
Cynthia Sich, director of the Summit County Office of Consumer Affairs, said consumers need to keep up with researching companies they do business with and read the fine-print details.
''When you invest, sometimes people just put the money there and the money is rolling in and they think, 'I don't have to keep tabs on it.' It's your money. You should always keep tabs on what's going on,'' she said.
Aware of risk
Time will tell whether Fair Finance's investors will be made whole. If the assets are not there to repay the investors, because there is no Federal Deposit Insurance Corp. (FDIC) insurance, the government will not back up the losses, though most of the investors said they were aware of that risk.
Wlaszyn said the BBB's accountant on Thursday attended a meeting where it was discussed that there's a possibility investors could claim some of their losses on their income taxes.
According to the IRS, losses related to a Ponzi scheme might be deductible. For information, go to http://www.irs.gov and search for ''Ponzi scheme,'' then read the link for ''Help for victims of Ponzi schemes.'' Earlier this year, the IRS issued revised rules regarding losses in response to the Bernard Madoff scandal.
Consumers should also consult their tax advisers. A Medina CPA, among the investors of Fair Finance, who did not want to be identified because of a feeling of embarrassment, said he hopes he'll get his $200,000 investment back instead of having to claim it on his taxes.
''Yeah, there's potential savings there, but nowhere near saving them what they've lost in cash,'' he said.
Betty Lin-Fisher can be reached at 330-996-3724 or blinfisher@thebeaconjournal.com.
