Shareholder Derivative Suit Charges Durham And Others With Self-Dealing

Indianapolis entrepreneur Timothy Durham and two other defendants have been slapped with a lawsuit filed on behalf of several minority shareholders of a publicly-traded holding company effectively controlled by Durham in a Dallas, Texas civil court, alleging breach of fiduciary duty and self-dealing. The holding company, CLST Holdings, Inc., formerly owned and operated CellStar, a wireless telecommunications business. After the company proved less than profitable, the shareholders adopted a plan to convert it to a holding company and liquidate its assets in 2007. Upon the sale of the assets, the shareholders anticipated that the cash would be distributed to the shareholders and the holding company dissolved. That's not what happened. [See this 2007 story in the IBJ for background concerning Durham and CellStar and the role Brightpoint played in the transactions leading up to Durham gaining control CLST.]

Durham, who holds a 15% stake in the company, successfully nominated a slate of board candidates, including himself, Robert Kaiser and David Tornek, and took charge of the newly-created holding company. The lawsuit alleges that the controlling group sold some of the assets to Indianapolis-based Brightpoint, a company in which Durham has held a financial interest in the past. Instead of distributing about $60 million in cash to the shareholders in accordance with the plan approved by the shareholders, the suit alleges that Durham and the other directors engaged in various self-dealing transactions. Specifically, it alleges that Durham and his co-defendants sold off significant corporate assets at an unfair price, Durham and his associates used the holding company's liquidity to purchase questionable assets in which Durham held an interest, established restricted stock benefits for Durham and Kaiser, and initiated a poison pill plan to defeat a tender offer by certain minority shareholders to purchase the holding company's outstanding stock.

The lawsuit alleges that Durham and his co-defendants engaged in transactions in which they stood on both sides of the transaction, obtained personal benefits for themselves, engaged in self-dealing and avoided providing shareholders with pertinent information regarding these transactions. The lawsuit notes that Kaiser received a change in control payment of $3.6 million before resigning as President and CEO of CellStar and then becoming a paid consultant and director of the holding company controlled by Durham. The suit notes that substantially all of CellStar's assets were sold to Metropolis Corp., a wholly-owned subsidiary of Brightpoint. Durham once owned a significant beneficial interest in Brightpoint through Obsidian Enterprises, Inc., a company he owns. One of the co-defendants, Tornek, co-owns with Durham a restaurant in South Beach, Florida called Touch.

The lawsuit alleges that Durham pledged to fulfill a promise to carry out the liquidation and winding up of the affairs of the holding company when he and his slate of board candidates sought control of the company but reneged on that promise once they took control. The suit notes that Durham is acting as interim CEO of National Lampoon after Durham's long-time friend, Dan Laikin, brother to Brightpoint CEO Bob Laikin, was indicted by the government on charges he manipulated the price of National Lampoon's stock. The suit charges that Durham and his controlling directors have failed to have a single shareholders meeting since obtaining control of CLST.

According to the suit, CLST used most of the $60 million in liquid assets to purchase $41 million in "home improvement consumer receivables" for $41 million from FCC Investment Trust, a company in which Durham held an interest. The suit charges that Durham and his controlling directors did not disclose any specific information regarding the purchased receivables, including the identity of the original holder of the receivables or the age of the receivables. In another transaction, Durham caused the holding company to acquire for $2 million "certain receivables, installment sales contracts and related assets", again failing to disclose pertinent information about the assets, such as the balance, interest rate or age of the receivables. The holding company also became a borrower of up to $50 million under one of the purchase agreements, of which $15 million is for incurring the purchase of additional receivables. CLST is guaranteed to incur exorbitant fees whether it borrows money under the credit agreement according to the suit. In only one transaction did the holding company disclose that Durham was a seller of assets purchased by the company. Approximately $3.6 million in receivables, installment sales contracts and related assets were purchased from FFC, a company owned by Durham and James Cochran. At the same time, stock transactions authorized by CLST allowed Durham to elevate his ownership in the company from a 5% stake to a 15% stake. The suit also accuses Durham of using an attorney who had personally represented him in various matters as the attorney for the company.

When a group of shareholders represented by Red Oak Partners tendered an offer earlier this year to acquire the outstanding shares of stock for the company, Durham and his controlling directors responded with a shareholders rights plan to deter them, a so-called poison pill. In response, Red Oak withdrew its tender offer and instituted this derivative lawsuit, along with other minority shareholders. The suit charges that a directors' share purchase plan approved without the consent of the shareholders allows the controlling directors to purchase nearly double the amount of shares of common stock existing at the time of plan's approval. The lawsuit seeks to undo that directors' share purchase plan, along with the purchase agreements entered into by the controlling directors. The minority shareholders also seek the appointment of a conservator to oversee the implementation of the dissolution plan originally adopted by the shareholders, among other remedies.

Durham has been a prominent figure on the Indianapolis business and political scene in recent years. He chaired the campaign finance committee of the Marion County Republican Party until recently. Durham is also the single largest contributor to Marion County Prosecutor Carl Brizzi's campaign committee, having contributed in excess of $100,000 to him. Brizzi and Durham are close friends. The Republican members of the City-County Council caucused in Durham's offices to pick their leadership team following the 2007 city elections. Durham's sex life became the focus of local media attention when the Indianapolis Star reported on his R-rated MySpace page and the photographs he posted there of wild pajama parties he has thrown at his palatial mansion in Fortville with scantily-clad Pentouse models.