Editor's note: This is the second installment in a three-part series.
Whenever Sarah Lockhart visited Fair Finance Co.'s aging Akron office, it almost felt as if she'd stepped back in time.
Nothing inside the East Market Street location where she had been investing her money for decades ever seemed to change.
No new furniture. No new decor. Even an old lamp, circa the 1940s, was never replaced.
To Lockhart, that was a sign that her money was safe. It wasn't being wasted on fancy renovations or frivolous things.
In March 2006, she made her first substantial investment, using money from her late mother's estate and other funds, and a year later added the proceeds from the sale of a rental property. That brought total investments for Lockhart of Green into the six figures.
Fair Finance investors were told their money wasn't backed by federal government insurance as with a regular bank account.
''I knew they were uninsured, but they'd been around forever,'' she said. ''So I was fearless.''
But behind the scenes, public filings and court records show that in 2002 Fair Finance, a simple and trustworthy home-grown consumer lender since the Great Depression, overnight became a cash machine for its new owners and their complicated web of business interests.
From the day they acquired Fair from the founding family in January 2002 through 2005, Indianapolis businessmen Timothy S. Durham and James F. Cochran extracted tens of millions of dollars to prop up hemorrhaging business ventures and to support a lifestyle that included a yacht, swanky restaurants, expensive cars and luxurious homes.
Akron area investors would have little reason to know that they could possibly be providing cash flow to National Lampoon, a foundering entertainment company that had evolved from comedy movie producer and magazine publisher to a company attempting to capitalize on college drinking and sex.
In Lampoon's business portfolio was a Web site called http://www.drunkuniversity.com, with pictures of scantily clad women, and it was marketing an R-rated animated video and related games, Jake's Booty Call, through an Indy racing team sponsored by Fair Finance.
But the connections between Akron-area investors and the entertainment company were there.
In November 2005, exactly one month after Fair Finance sought permission to sell up to $250 million in investment certificates to Ohio residents, Lampoon CEO Daniel Laikin was allowed to amend a promissory note for the fifth time with DC Investments, which was controlled by Durham. The amendment allowed him to borrow up to $15 million.
Durham, meanwhile, had his eye on more acquisitions and was moving forward with plans to take the parent company of most of his ventures, Obsidian Enterprises, out of public view by going private. Black Rock Acquisition, which was created for that purpose, owned most of Obsidian's stock by early 2006 and completed the process in March.
Obsidian's final amended annual report showed it had a $23 million line of credit with Fair Holdings as of Oct. 31, 2005, compared to $10.8 million a year earlier and the total amount of so-called ''related party loans'' among Obsidian, DC Investments and Fair Holdings was listed at $31.1 million.
But while Obsidian was now private, public scrutiny of Durham's businesses didn't end.
He had begun buying shares in the publicly traded Texas company CellStar. By the end of February 2006, he owned 8.2 percent of the company's stock.
And Obsidian emerged in the news again in December when Evansville, Ind.-based Old National Bank sued, saying Obsidian was in default of $2.6 million in loans. The bank and Obsidian reached a settlement in February 2007, with Durham placing the blame on an employee who he said embezzled between $500,000 and $1 million from Obsidian subsidiary Pyramid Coach.
The businessmen also added to their real estate.
On March 3, 2006, records show Durham, who already owned a home valued at $2.7 million near Indianapolis, bought a single-family home valued at $245,590 in Gun Barrel City, Texas.
Dan Laikin and his wife, Shirley, took out a $2.858 million loan in December on a Carmel, Ind., property.
And Fair Finance co-owner James Cochran and his wife, Susan, took out a nearly $1.2 million loan on property they had owned for years in McCordsville, Ind. The Cochrans in another year would also buy a $3.5 million waterfront home in Naples, Fla.
Business deals
In December 2006, there was a fortunate turn of events.
Brightpoint, an Indiana cell-phone distributor run by Robert Laikin — brother of Dan Laikin — became interested in CellStar, the company in which Durham had amassed a block of stock.
Brightpoint wasn't new to Durham. In 2002, he had invested heavily in the then-struggling company and made as much as $30 million a few years later when stock prices rebounded and he sold his holdings, he told Indianapolis media.
Brightpoint was now interested in CellStar, and said it intended to spend $88 million to buy most of the assets. The deal was expected to close in early 2007.
CellStar changed its name to CLST Holdings, and in mid-2007 Durham launched a proxy battle to take control of the company.
(In 2009, CLST became entangled in complicated transactions with Fair Finance. Federal authorities have subpoenaed executives of CLST as part of the Fair Finance and Obsidian investigation.)
As the CLST proxy battle loomed, Fair Finance filed another offering circular with the state of Ohio, asking for permission to sell up to $250 million in investment certificates.
The Jan. 18 document offered bold warnings, pointing out numerous transactions between Fair Finance and ''related parties'' such as DC Investments and Champion Trailer. The circular also warned ''prospective investors should be aware that it may not be advisable to concentrate excessive portions of their net worth in a single investment vehicle.''
Cars and politics
Durham the businessman was also Durham the party guy who continued to flaunt extravagant tastes, Indiana media reported.
And Durham liked cars — fast cars, antique cars, collectible cars. Until May 2010 he sat on the board of the Auburn Cord Duesenberg Museum in Indiana, which is dedicated to preserving classic cars. The museum at one point had a Timothy S. Durham gallery.
And he had his eyes on what is considered the world's fastest, most expensive sports car, the Bugatti Veyron.
The European-made Veyron has a top speed of more than 250 mph; it can reach 60 miles per hour from a stop in well under three seconds. Its V-16 engine produces more than 1,000 horsepower.
The price tag for all of that: Somewhere between $1.6 million and $1.8 million.
Durham invited an Indianapolis television station to his home on June 22, 2007, to record the delivery.
And Durham was a big donor to politicians, among them people who had the power to investigate.
Bankruptcy files suggest he gave $225,000 to Indianapolis prosecutor Carl Rizzi's campaign over a period of time, and a Marion County elections board investigation shows that in December 2007, Durham made a $200,000 loan to the county sheriff, Tim Motsinger. Motsinger told the elections board that Durham indicated the loan was ''being held in trust'' in a Fair Holdings account.
Another $195,000 went to Gov. Mitch Daniel's campaign, $185,000 to the Indiana Republican Campaign Committee and nearly $300,000 more to other political causes.
Retirement savings
Several years after retiring as an engineer in the tire mold industry, Tom Ries began putting some of his nest egg into Fair Finance investment certificates.
''Fair Finance was a solid name,'' he said.
Like many investors, the lifelong Wadsworth resident didn't realize the company no longer was owned by the Fair family, even though that fact was included in all the offering circulars.
In January 2007, he invested his first $15,000, with plans to add more.
The interest rates were unbeatable, ranging from 8.5 to 9.5 percent. At the time, his other investments were paying 4 percent or less.
His goal: Grow his money with Fair Finance until he had enough to help buy his dream retirement home in Florida.
At the end of 2007, Dan Sciury visited the Canton office of Fair Finance to see whether he could increase his holdings.
After retiring the previous year, he was relying on interest payments from Fair Finance as a main source of income.
He knew his additional investment would take him over Fair Finance's approved limit of $200,000 per person.
''I'm already at the max,'' he told an office employee, ''but I have another CD that matured that isn't paying very well. Can I invest it here?''
The worker made a call to get permission.
In mid-2008 he again was allowed to exceed the maximum for one of his children.
At the time, Sciury believed Fair Finance was bending its rules for a good customer. He didn't know the limits were filed with the Ohio Division of Securities and were legally binding.
All told, about 80 percent of his retirement savings were tied up in Fair Finance.
''I tried to save and do the best I could,'' he said.
Lavish lifestyle
While Sciury and other Ohio investors pinched pennies for their future, Durham continued to spend on parties, planes, his yacht and expensive cars.
Indianapolis media reported Durham threw a birthday party for himself in July 2007 and dubbed the event a ''Fantasy Pajama and Lingerie Party.'' Media reported that Durham's MySpace page showed pictures of topless women frolicking, kissing and groping at his home.
Durham's lifestyle, well-documented in Indiana, made the national scene a year later as part of a CNBC special, Untold Wealth, in which he had a starring role as one of America's wealthiest people. The June 2008 show valued Durham's net worth at $75 million as it showed off a mansion, an immaculate two-story garage filled with valuable cars, and flying on a private jet to Florida to sail on his yacht, the Obsidian.
Durham told CNBC that obtaining wealth was like keeping score.
''After you get to a certain level, you know, your basic needs are paid for. The rest of it is not necessary. I don't need this to live,'' Durham said. But he said he had no apologies.
Durham also showed off the Bugatti Veyron and joked about having a $22,000 flat tire.
About the same time the CNBC show was in production, Beverly Barabas, a widow from Wadsworth, withdrew $10,000 from her account at Fair Finance. She didn't need just a tire, she needed a car. The $10,000 helped her purchase a used Jeep Grand Cherokee.
She left $30,000 in notes at Fair Finance.
FBI investigates
While the public was getting a good look at Durham's lifestyle, a Philadelphia area scam artist was striking a deal with federal prosecutors that would bring authorities to California-based National Lampoon's front door.
Kevin Waltzer had bilked investors of $44 million, and when federal agents caught him in 2007, he struck a deal to become an FBI informant.
How Waltzer and the FBI became involved in Lampoon isn't clear, but in the summer of 2008, Durham friend and Lampoon CEO Daniel Laikin set up a scheme to manipulate the company's stock price.
In the process, Waltzer was asked to participate in a ruse that would suggest National Lampoon's stock was in play and drive up the price.
When Waltzer was approached, he was wearing a wire.
Laikin was indicted by a grand jury in mid-December 2008 on allegations that he manipulated the company's stock price.
A few days after the indictment, Laikin resigned as CEO and Durham, a director of National Lampoon since 2002, succeeded him as the top executive.
In his capacity as National Lampoon CEO, Durham in August 2009 was a ''celebrity judge,'' along with reality TV star Khloe Kardashian and others in the Miss Malibu beauty pageant, an event co-sponsored by National Lampoon and Durham's friend, Grammy Award-winning rapper Chris ''Ludacris'' Bridges.
Laikin, meanwhile, would reappear in federal court in September 2009 to agree to a deal — and his sentencing would be held in abeyance for nearly a year.
Investors keep coming
Unaware of the significance of events at National Lampoon, Akron-area residents made investment choices.
When it came time to renew investment certificates in March 2009, Sarah Lockhart decided to keep her money in Fair Finance until 2011, when she would turn 65. At that time, she planned to cash out all her certificates and move her money into more secure investments.
After getting $50,000 from a real-estate transaction in the summer of 2009, Tom Ries, 72, invested the money with Fair Finance.
Ries was getting so close to his goal of buying a retirement home in the Sunshine State that he could almost smell the sea air.
By this point, his Fair Finance holdings totaled $75,000 plus interest.
''I was going to make $13,000 in 24 months by investing $75,000 at 91/2 percent,'' he said.
His confidence in Fair Finance soared in September 2009, when he was selected in a drawing to throw out the first pitch at the Akron Aeros game to celebrate the grand opening of a new office in his hometown of Wadsworth.
High-ranking executives with Fair Finance chatted with him during the game. They assured him the company was growing and strong, with investments in doctor's offices, shopping malls and other lucrative ventures. Fair Finance was also intending to open new offices in Ohio.
Ries viewed the new office openings as a good thing — a sign that he was investing in a growing, thriving business.
But Lockhart, the longtime Fair Finance investor from Green, was starting to feel uneasy as she watched the once-conservative company aggressively expanding throughout the region. The always-generous interest rates were climbing higher, reaching 9 percent on some certificates.
A friend warned her that the business may be heading for trouble. When Lockhart confronted a Fair Finance manager with her concerns in October 2009, she was assured everything was fine.
''We're going to get some more securities,'' he told her.
Still unsure, Lockhart simply hoped for the best.
Her concerns were justified.
By this time in 2009, Durham's cash flow was drying up, according to the forensic accountant hired by the Fair Finance trustee to look into the company's records.
The accountant said he found where Durham wrote ''Need cash,'' in company memos that year.
Article raises concerns
Cindy Scott, a Cuyahoga Falls mother who had invested her four children's money in Fair Finance, also was nervous.
Scott had accumulated seven investment certificates totaling more than $9,000 by the fall of 2009.
College for her oldest son, a high school junior, was in the not-so-distant future.
But she was hearing rumblings from a few investors that their seemingly safe investments might be at risk.
In late October, Fair Finance's mounting financial woes first became public in an article in the Indianapolis Business Journal.
Scott went online and read the Oct. 26 article's dire warnings that owner Timothy Durham ''has treated Ohio-based Fair Finance Co. almost like a personal bank since buying it several years ago'' and owed it more than $168 million.
The more she read, the more concerned she became.
''The extensive borrowing — which represents 70 percent of Fair's assets — worries some investment-industry observers at a time parts of Durham's financial empire are strained. They note that if the borrowers fail to pay off the loans, Ohioans who have provided capital to Fair for decades by buying short-term investment certificates may not get their money back.''
Scott dug through her family's financial documents and discovered three of the investment certificates expired in less than a month, on Nov. 24, 2009.
She began counting down the days until she could cash them out and get back at least some of her children's money.
To keep the cash flowing, Fair Finance filed a request in late October with the Ohio Division of Securities seeking to sell up to $250 million in new securities in Ohio.
The previous authorization to sell securities for a 16-month period was to expire on Nov. 24, 2009.
Unaware of the mounting problems, Raymond Warner, 90, of Ravenna was preparing to make his first investment.
Decades earlier, Warner's brother, Paul, started investing with Fair Finance and boasted about the healthy returns.
Warner and his wife, Ruth, lived in Arizona for several decades, where he made a living specializing in antiques and liquidations. He handled plenty of bankruptcies, helping to sell off assets of failed or foreclosed businesses.
When his wife of 51 years became ill, the couple moved back to their native Ohio in 2005 before she died.
Several years later, $40,000 worth of the widower's investment CDs matured. With the struggling economy, conventional CDs weren't providing him much interest income.
So Warner talked with his brother about Fair Finance and discovered he could earn 71/2 percent interest on a six-month investment.
Warner was sold.
He and his brother hadn't heard about the article in the Indianapolis magazine.
''We thought it was a good investment,'' he said.
On the morning of Nov. 17, Warner drove with his brother to the East Market Street office in Akron intent on investing.
A woman working in the office greeted him but seemed reluctant to take his money at first.
''We only have two certificates left,'' she told him. ''I'll have to see if they're available.''
The worker went into another room and returned a couple minutes later to let him know he could buy two investment certificates for $20,000 each after all.
Warner handed over his checks, signed the paperwork and left with two certificates in hand, along with a promise to get his first interest payment of $246.58 a month later.
A week later, on the morning of Nov. 24, Cindy Scott gathered up her children's investment certificates that matured that day and went to Fair Finance's Cuyahoga Falls office to cash them out.
When she got there, the office was empty. A sign on the door indicated the business was closed for the week for the Thanksgiving holiday.
''That's nice,'' she thought. ''They've never done that before. But that's nice.''
Unconcerned, Scott went home to her modest but comfortable Cuyahoga Falls home to get ready to spend the Thanksgiving holiday with her family.
It wasn't until early Thanksgiving morning two days later that she learned the truth: Fair Finance wasn't just closed for the holiday.
It had been raided by the FBI.
Cheryl Powell can be reached at 330-996-3902 or chpowell@thebeaconjournal.com. Jim Mackinnon can be reached at 330-996-3544 or jmackinnon@thebeaconjournal.com.
