Former Fair Finance Co. co-owner and Chief Executive Officer Timothy S. Durham, the one-time president and CEO of National Lampoon Inc., asked a federal judge Wednesday to throw out a securities fraud case, claiming prosecutors violated wiretap laws and rules.
Durham was indicted last year for allegedly cheating more than 5,000 investors in Ohio in a $200 million scheme involving the sale of interest-bearing notes by Akron-based Fair Finance.
His lawyers said prosecutors began wiretapping Durham’s phones before getting permission to do so and then asked the grand jury to consider a different charge than those for which the surveillance was authorized.
Durham and two colleagues are scheduled for trial in June on various federal charges.
“The government misconduct in this case shows a complete lack of respect for the rights and the privacy of not only Mr. Durham, but also for every one of the dozens of people who were unknowingly overheard and recorded,” his attorneys said.
Durham is CEO of the Indianapolis-based leveraged buyout firm Obsidian Enterprises Inc. and a Republican Party political fundraiser.
He resigned his National Lampoon posts last month, company spokeswoman Cora Victoriano said in an email. Comedy movie maker National Lampoon isn’t mentioned in the indictment.
Also charged are former Fair Finance Chairman James F. Cochran and ex-Chief Financial Officer Rick D. Snow. The three men face 10 counts of wire fraud and one count of securities fraud, all punishable by as much as 20 years in prison, and one count of conspiring to commit those crimes. The court last year entered automatic not-guilty pleas for each defendant.
The three men are also being sued by the Fair Finance bankruptcy trustee, Cleveland attorney Brian Bash, who has accused them of “massive fraud” and running a Ponzi scheme. Bash is also suing others and last week filed a lawsuit in U.S. Bankruptcy Court seeking nearly $1.2 billion from two financing companies that he claims helped the three men perpetuate fraud and a Ponzi scheme.
Durham and Cochran acquired family-owned Fair Finance through a holding company in January 2002. Operating in Ohio since 1934, Fair Finance provided liquidity to businesses by purchasing their accounts receivable at a discount, according to the March 15 indictment.
It raised money for doing so by selling uninsured, interest-bearing certificates to investors in Ohio.
By February 2005, as Fair Finance continued selling the certificates, it had shifted from providing commercial financing to making loans to its principals, their associates and Obsidian and other entities they controlled, according to the indictment.
“Durham, Cochran and Snow then deceived investors by making and causing others to make false and misleading statements about Fair’s financial condition and about the manner in which they were using Fair investor money,” the charging document said.
Fair Finance closed after FBI raids on Nov. 24, 2009. In February 2010, its creditors forced it into involuntary bankruptcy in Akron.
In a court filing, those creditors accused Durham, Cochran and companies they controlled of taking $176 million in loans from Fair Finance.
Prosecutors responded to Durham’s misconduct claims by calling them “frivolous.”
Attorneys for the U.S. say they briefed Durham’s lawyers on how the wiretap operated in this case and that the defense has offered no proof those explanations were inaccurate.
Defense lawyers also argued that while the court granted prosecutors permission to listen for evidence of bank fraud, wire fraud and money laundering, the government then asked to consider it as proof of the “distinctly separate crime” of securities fraud.
Opposing that dismissal request, prosecutors told the court the securities fraud charge is based on the same set of facts as the wire fraud charges. Durham, Cochran and Snow have also been sued by the U.S. Securities and Exchange Commission.
Beacon Journal business writer Jim Mackinnon contributed to this report.
