Durham's Ponzi Scheme: "A Fraud With Shocking Proportions"

An Ohio federal bankruptcy court trustee for Tim Durham's Fair Finance Company has filed a scathing 49-page complaint against companies controlled by Durham through which a large percentage of the more than $200 million losses amassed by the company's investors was funneled before the FBI raided it and shut it down in November, 2009. In an effort to recover a fraction of the money thousands of elderly and Amish Ohio residents invested and lost in the company, Trustee Brian Bash is suing two holding companies owned and controlled by Durham, Obsidian Enterprises, Inc. and Diamond Investments, LLC. The complaint details "the inner workings of a fraud with shocking proportions" and seeks to recover nearly $30 million drained from the company by Obsidian and more than $9 million funneled to Diamond. A review of the trustee's 49-page complaint allows us to draw these inferences:

• Durham's publicly-traded Obsidian Enterprises was essentially bankrupt when Durham purchased Fair Finance in 2002 and continued losing money year after year up to the time of its closure due to the fact that virtually all of the businesses it owned were losing money, including U.S Rubber, Pyramid, Danzer, Champion, Classic Manufacturing and Diamond; only United Expressline managed to turn a profit, a small one at that.
• Durham used a leverage buyout in which he invested none of his own money to buy Fair Finance and relied on its assets to carry out his plan of purchase.
• Durham almost immediately shifted the long history of Fair Finance from operating as a factoring company that purchased accounts receivable to becoming a high-risk lender of insider loans that were not adequately collateralized and were made without regard to the likelihood of them being repaid.
• Durham began looting Fair Finance from day one to bail out his other losing businesses and to finance a high lifestyle for himself, business associates, family and close friends. Durham is quoted as telling a business associate, "This will be like taking candy from a baby."
• Beginning in 2005, Durham operated Fair Finance as a Ponzi scheme because from that point on he had drained so much of the company's assets that he required infusions of new investments from the issuance of certificates of investment to Ohio investors simply to have money to pay those certificates of investment that had matured. By 2008, Durham admitted he required 89% to 93% of funds raised from new investments simply to repay debts owed to other investors.

As disturbing as Bash's complaint against Durham's related companies is, what I find more disturbing is the fact that Durham remains a free man running a publicly-traded company, National Lampoon, despite a mountain of evidence accumulated by the bankruptcy trustee to prove a criminal securities fraud case against Durham nearly 15 months after the FBI raided his businesses and all but one of them ceased operations. At the time of the FBI raid in November, 2009, then-Acting U.S. Attorney Tim Morrison filed a forfeiture action against Durham and his companies to recover the more than $200 million squandered by Durham in his elaborate Ponzi scheme. Strangely, Morrison voluntarily dismissed the forfeiture action less than a week later, claiming that Durham was cooperating with his investigation and would turn over any assets sourced to Fair Finance. That forced the defrauded investors in Ohio to file for an involuntary bankruptcy proceeding in Ohio federal district court and the appointment of a trustee to help recover their assets.

The government's action was in sharp contrast to the swift forfeiture actions federal prosecutors in New York and Florida pursued to recover assets for investors who were defrauded by Ponzi scheme operators Bernie Madhoff and Scott Rothstein. In the case of Madhoff, federal prosecutors have successfully recovered nearly $12 billion of the estimated $20 billion he bilked from investors. To date, the recovery efforts of Fair Finance's bankruptcy trustee after more than a year of work has yielded less than $2 million, almost all of which will be used to pay attorneys and trustee expenses. Without the aggressive assistance of federal prosecutors, recovery of assets takes far longer at a far greater cost and will likely result in little or no net recovery for Fair Finance's defrauded investors. Meanwhile, news reports indicate Durham has been living in an L.A. mansion that rents for more than $20,000 a month while he runs National Lampoon, a company that he has run since his business associate, Dan Laikin, was convicted of securities fraud and sentenced to prison. According to the trustees complaint, Laikin owes Fair Finance nearly $20 million he received in insider loans that were never repaid. Durham's business partner, Jim Cochran, was loaned at least $10 million that was not repaid. Durham's Obsidian owes Fair nearly $30 million. At least $117 million in insider loans were made altogether.

Laikin is the brother of Robert Laikin, CEO of another Indianapolis-based publicly-traded company, Brightpoint. Dan Laikin was convicted of paying bribes to stock brokers to aid in pumping the stock price of National Lampoon. Interestingly, an SEC whistleblower has claimed for years that Durham and others engaged in a similar stock price pumping scam with shares of Brightpoint. The trustees complaint alleges Durham indeed used Fair Finance money to finance speculation in Brightpoint stock as part of an investment group that included Dan Laikin. The largest purchasers of Brighpoint stock during the period examined by the trustee included Durham and the family of Obsidian Vice-President Anthony Schlichte, whose investments in Brightpoint stock exceeded $25 million. Interestingly, one of the other largest active traders in Brightpoint's stock at the same time as Durham was none other than Bernie Madoff, who purchased the shares on his personal account according to Bash, lending further credence to the whistleblower's claim of a stock pumping scam with Brightpoint stock. The SEC has unbelievably taken no enforcement action with regards to that allegation despite knowledge of it for years just like it ignored whistleblower complaints against Madoff for years.

After reading Bash's detailed complaint outlining the inner working of Durham's Ponzi scheme, it is incomprehensible why the U.S. Attorney's office in Indianapolis has failed to bring criminal charges against Durham. Bash goes into great detail as to how Durham broke Ohio securities laws for which he should be held criminally liable. Durham has always insisted that he broke no laws because he disclosed the fact that Fair Finance had made substantial insider loans and the risks associated with those loans in the circulars furnished to individuals who invested in the company. As he told WTHR-TV in an interview late last year, "It's complicated", but he insisted he would be vindicated in the end. While the interwoven network of transactions among the various business entities owned and controlled by Durham were without a doubt complicated, there is no mistaking the deliberate fraud with which these transactions were undertaken and Durham's failure to adequately warn investors of the true extent of their risks.

As the trustee points out in his complaint, it wasn't just that Fair Finance was entering into a disproportionate number of insider loans. There was a complete lack of care given to ensuring that those loans were properly collateralized to minimize the risk to the investors, or to even take into consideration the high likelihood they would never be repaid. No effort was made to ensure an adequate loan loss reserve was maintained. During Durham's control of Fair Finance, the company's debt to equity ratio more than doubled from 4:1 to 10:1. This made the company highly vulnerable to a "bank run" scenario if a large number of investors cashed out their investments upon maturity rather than reinvesting in the company. Indeed, the company was bouncing checks issued to investors during the lead up to the raid on the company before it permanently closed its doors. Many of these loans were made with periods of maturity as long as 5 to 6 years without any prepayment of interest and principal required from the borrowers, something that is virtually unheard of in commercial lending.

Perhaps the most damning allegation made by the trustee was his discovery that Fair Finance had essentially become insolvent in 2005. The last audit done for the company was an incomplete audit performed by Somerset in 2006. From that point on, there were no independently-performed audited financial statements because no accounting firm worth its salt would do them. Yet Durham continued to offer the sale of securities in Fair Finance in clear violation of Ohio law knowing this unmistakable fact. When the company's own auditors "became too squeamish", expressed their "going concern" issues and view that the company was being operated as a Ponzi scheme, Durham responded by firing the auditors. The facts uncovered by the trustee clearly contradict Durham's claims that the only reason the company could not repay the investors was because the government raided it and forced a run on its investments.

After reading the complaint, I have also concluded that there is no question but that U.S. Attorney Joe Hogsett must recuse himself from any involvement with the Fair Finance and Durham-related investigations because of the role the law firm at which he was a partner before becoming a federal prosecutor played in representing some of Durham's companies as debtor's counsel. Bash's complaint notes how "Durham commingled business functions by staffing the same employees and lawyers in high-level positions across Obsidian, Diamond and Fair entities." Durham, Dan Laikin and Durham friend Scott McKain all served as board members for both Obsidian and Fair at various times. Durham used the same CFO, Rick Snow, for all of his companies.

For professional services, attorneys Neil Lucas, Gary Sallee and Jackson Walker, LLP served overlapping roles as attorneys for all of the business entities and Durham personally. Bash's complaint notes Sallee "regularly engaged in transactions that harmed" Fair Finance while acting as its attorney. A racing company owned by Sallee, Playa Del Racing, received a $700,000 loan from Fair Finance. Sallee was briefly suspended from the practice of law in Indiana but reinstated earlier this year after fulfilling his continuing legal education requirements. Another attorney, Stephen Plopper, is being sued in separate lawsuit brought by the trustee for a $375,000 loan from Fair on which he defaulted. Plopper shared offices with Durham in the Chase Tower and served as secretary for some of his business entities. While Joe Hogsett was still a partner at Bingham-McHale, his law firm served as debtor counsel for both Obsidian and DCI, another holding company controlled by Durham. Durham also used accountants for overlapping roles. Somerset performed audit and tax work for Fair, Obsidian and various subsidiaries, while BGBC performed audit work for Fair Finance and SEC compliance work for Obsidian.

The public has every reason to be skeptical of the role the Indianapolis U.S. Attorney's office has played in this investigation to date. Acting U.S. Attorney Tim Morrison instilled no confidence in his handling of the case before Hogsett became U.S. Attorney after his confirmation late last year. Historically, the office has been run by political hacks beholden to the power brokers within the Democratic and Republican Parties. This has been a problem in this office for decades. Former Star reporter Dick Cady detailed in his book, "Deadline: Indianapolis", how the office completely ignored overwhelming evidence of corruption within the police department during the administration of former Mayor Richard Lugar under the leadership of his police chief Winston Churchill. Many police officers were enmeshed in organized crime and despite the Pulitzer-prize winning stories Cady and his colleagues at the Star authored detailing these criminal activities, the U.S. Attorney's office would do nothing because it did not want to politically harm Lugar or his political henchman, Keith Bulen, who had earlier been fired as a deputy prosecutor by the county prosecutor for his role in fixing an illegal gambling case involving organized crime.

As Indiana's senior senator, Lugar made the appointment of Susan Brooks as the last appointed prosecutor under President George W. Bush before Hogsett's appointment. Brooks is married to GOP ward boss David Brooks and was renowned for refusing to prosecute high profile public corruption cases involving high-level politicians, most notably the misappropriation of the Lawrence water utility assets by cronies of former Mayor Tom Schneider. Appointees made by Evan Bayh during Democratic administrations have been equally too political. Hogsett is perhaps the most political person appointed to the office in many years, having formerly served as Secretary of State and unsuccessfully sought several offices as a Democratic candidate, as well as serving as a past chairman of the Indiana Democratic Party. Cady detailed in his book how Hogsett refused to prosecute a securities fraud case involving Ski World when he was Indiana's Secretary of State because of the politically-connected people accused in the case. "We're not going to do a goddamn thing," Cady quoted Hogsett as telling an attorney representing the defrauded investors when he he asked Hogsett what he intended to do with the case.

In the case of Tim Durham, we had at least one million dollars of Fair Finance money that wound up in the hands of Indiana politicians in the form of political contributions, mostly Republicans but some Democrats as well, including former U.S. Rep. Baron Hill, a Hogsett friend, and former Indianapolis Mayor Bart Peterson. Nearly half of the money wound up in the political coffers of Gov. Mitch Daniels and former Marion Co. Prosecutor Carl Brizzi, who briefly served on Fair Finance's board. That's what we know about. There may be other beneficiaries of Durham's Ponzi scheme that remain unknowned. If the Justice Department wants the public to have any confidence in this investigation, it needs to immediately remove this case from the U.S. Attorney's office and place it under the direct control of the Public Integrity Section of the Justice Department in Washington. There is absolutely no excuse other than political corruption for there not to be criminal prosecutions brought in this case. Justice demands no less.