Fair Finance was run as a Ponzi investment scheme and its owner, Indiana businessman Timothy S. Durham, perpetrated ''a fraud of shocking proportions and consequences,'' the Akron company's bankruptcy trustee says in a new lawsuit.
''The trustee will establish that Timothy Durham purchased Fair Finance Company [in 2002] so that he could loot it . . . '' trustee Brian Bash alleges in the lawsuit filed Monday in U.S. Bankruptcy Court in Akron. ''At the time Durham's purchase of the debtor [Fair Finance] closed, Durham remarked that 'this will be like taking candy from a baby.' ''
After Durham bought the small, privately owned Fair Finance, about 5,300 Northeast Ohio residents and organizations purchased more than $200 million in investment certificates from the now-bankrupt company. Federal officials say they are investigating Fair Finance, its owners and executives, following FBI raids in November 2009 amid allegations that the company was being run as a Ponzi investment scheme.
Durham, who now heads comedy movie maker National Lampoon in California, has not been charged with any crimes. Durham could not be reached for comment.
The 49-page lawsuit spells out in detail how the trustee believes Durham and others took money from Fair Finance to prop up failing companies, made millions of dollars of insider loans that were never repaid and speculated in the stock market, primarily by buying shares in
an Indianapolis company called Brightpoint. The lawsuit seeks to consolidate Durham-owned Obsidian Enterprises, a leveraged buyout firm, and his Diamond Investments business into the bankruptcy.
Just the beginning
The suit includes hundreds of pages of exhibits, including transcripts of depositions and e-mails from Durham, Fair Finance co-owner James Cochran, employees and others.
Fair Finance never reopened following the Nov. 24, 2009, FBI raids in Akron and at Obsidian in Indianapolis. Investors forced Fair Finance into Chapter 7 bankruptcy in February 2010.
''This is just the beginning,'' Bash told the Beacon Journal Tuesday in a telephone interview. ''I think it does lay out the pattern. This has been quite a fraud.''
Bash, a Cleveland attorney who has more than 30 years of bankruptcy law experience, said Fair Finance is one of the most complex cases in which he has been involved. More than 70 ''entities'' — businesses and individuals — are involved so far, he said.
Ohio and federal investigators said Tuesday they are aware of the new lawsuit.
The Ohio Division of Securities cannot comment on whether the state is conducting its own investigation, spokesman Dennis Ginty said.
''The division is charged with enforcing Ohio's securities laws. We take this very, very seriously,'' he said.
Tim Morrison, first assistant U.S. attorney in Indianapolis, said there is an ongoing investigation into Durham and Fair Finance. The trustee's civil action is a separate line of investigation from what others are doing, he said.
While Morrison said he cannot give a timetable on any investigation his office is involved in, he said ''there are a number of people working to get some answers'' for Fair Finance investors.
E-mails exchanged
Bash, meanwhile, said in the lawsuit that what he has found shows Fair Finance was a Ponzi scheme.
Bash found a 2005 memorandum from Obsidian President Terry Whitesell to Durham ''bemoaning the awful state of the subsidiaries, stating that the outside cash flow to them needed to stop and the companies needed to 'turn around or die.' ''
In another instance, ''Durham admitted to Fair's attorney in 2008 that between 89 percent and 93 percent of new money brought in from investors was 'used to repay' debts to other investors,'' the civil lawsuit says. ''By the time the trustee was appointed, the debtor [Fair Finance] only had about one-tenth of a cent in liquid assets for every dollar of unsecured debt.''
For decades, Fair Finance, a consumer loan and accounts receivables firm created in 1934, had sold uninsured, high-interest-rate investment certificates, or short-term debt, to Ohio residents.
In e-mails between Durham and Akron attorney Ron Kaffen in October 2008, Durham wrote that ''90 percent of all new sales retires old certs and interest there on.'' In another e-mail, Durham said that Fair Finance issued new investment certificates, including renewals, of $133.9 million, of which nearly $124.8 million ''has been used to repay expiring certificates, or 93.17%.''
Kaffen wrote in an e-mail to Durham: ''While it is true that most of the new funds are now used to replace redeemed certificates, I am not comfortable characterizing the sales as selling certificates to pay off old certificates. Such a characterization would not be much different than a pyramid scheme.''
Bash said the evidence he has found shows Fair Finance was being run as a Ponzi scheme.
''Indeed, by the end of 2005, at the latest, the debtor [Fair Finance] had become a Ponzi scheme and was insolvent by at least $50 million. By that point if not significantly earlier, the debtor [Fair Finance] did not have the money to pay its investment certificate holders except by taking proceeds from new investors,'' the lawsuit says.
Fair Finance assets
Fair Finance might have been insolvent from the time Durham bought it in January 2002 using a leveraged buyout of more than $20 million, the lawsuit said.
Fair Finance's assets at the time of the 2002 sale were smaller than the liabilities after the leveraged buyout ''and it was insolvent if not given credit for goodwill,'' the lawsuit said. ''Given that Durham did not intend to operate the company for profit, but intended to completely loot it, it is unclear to what extent Debtor [Fair Finance] should have been permitted to treat goodwill as an asset.''
Goodwill is an accounting term that places a value on intangible assets.
Bash said that Fair Finance Co.'s Ohio parent, Fair Holdings, and its Indiana corporate parent, DC Investments, ''primarily served as conduits for Durham to loan [Fair Finance] money to friends and privileged insiders.''
Bash said in the lawsuit Durham used Fair Finance money to purchase a large yacht and to also buy shares in Brightpoint, a $3.2 billion wireless distribution company. Durham and Obsidian Vice President Anthony Schlichte were among the largest buyers of Brightpoint stock during the period Bash said he looked at.
''The largest traders in Brightpoint during the times of Durham's most active trading also included Bernie Madoff [on his personal account],'' the lawsuit said. Former New York stockbroker and investor Madoff is now serving a 150-year term in federal prison after admitting to an $18 billion Ponzi scheme. Bash said Madoff is not connected to the Fair Finance case.
Bash said he does not know when he will be able to recover enough assets to distribute to Fair Finance certificate holders, many of which are elderly Ohio residents.
''I understand their struggle, their agony, their pain,'' Bash said. ''I wish I could have found a pot of gold.''
But he said it might be ''some time'' before certificate holders get some of their money back.
''Everything has been a look under rocks,'' Bash said. ''I'm hopeful it won't be many, many years before they see anything.''
Jim Mackinnon can be reached at 330-996-3544 or jmackinnon@thebeaconjournal.com.
