Fraud and Investing and Banking & Finance and Tim Durham and Law

Mysterious $14M Verizon payable looms over Durham firm

March 20, 2010

Most of the media coverage of embattled Indianapolis businessman Tim Durham has focused on whether he defrauded investors in Fair Finance Co., the Akron, Ohio, firm he’s owned for eight years.

But federal investigators also are swarming around Texas-based CLST Holdings Inc., a former cell-phone distributor where Durham is a major shareholder and has been chairman since last year.

A Securities and Exchange Commission subpoena made public in December suggests the agency is zeroing in on the company’s purchase early last year of customer-finance contracts from Fair Finance Co.

The related-party deal-making provided financial relief to Fair at a time it was straining to make payments to Ohio residents who bought tens of millions of dollars in investment certificates. The contract acquisitions, which moved CLST into an entirely new business, so appalled one board member that he quit in protest.

But there’s plenty more at CLST for investigators to puzzle over, including this whopper: The company’s founder and former CEO, Al Goldfield, says the company hid a $14 million debt to Verizon Communications Inc. in the years after he left.

Verizon, created by the 2000 merger of GTE and Bell Atlantic, apparently lost track of the receivable as it was integrating systems early this decade. And after Verizon didn’t try to collect, CLST management swept it under the rug, said Goldfield, who retired in 2001.

He told IBJ he found out about the CLST payable in 2005, as he was preparing to work with an investment firm on a plan to return to the company’s helm and provide it with a $25 million infusion.

Goldfield said he insisted the company pay the bill. But, according to Goldfield, Robert Kaiser, who was CEO at the time and currently holds the job, refused, saying doing so would knock the company out of compliance with its banks and force it into bankruptcy. Kaiser did not respond to requests for comment.

“I wasn’t going to go forward until that got paid,” said Goldfield, who said the Verizon payable was the only reason he dropped the deal in July 2005. “You owed the money. You can’t hide it. It’s wrong.”

The alleged showdown occurred around the time a Durham-led investment group began scarfing up shares in the obscure, Pink Sheet-listed firm. Durham knew nothing about the payable when he made those purchases, said Larry Mackey, Durham’s attorney. And he didn’t become a board member for another two years.

But how the company has handled the payable continues to be an issue. CLST later started accounting for it as a liability on its balance sheet, but didn’t explain in SEC filings what it was all about.

Filings last year did provide some detail, without mentioning Verizon by name. CLST says it “contacted the vendor in question several times during the second quarter of 2009 regarding this matter with no results.”

Those efforts may not have been as magnanimous as they sound, since by then time was on the company’s side. In the same filing, CLST says “it now believes that the statute of limitations on this trade payable may have expired,” getting it off the hook for the bill.

The upshot: The company—known as CellStar before it sold off its cell-phone operations three years ago—may be a lot richer than it looks. If the debt disappears, the $14 million drops to the bottom line, providing a windfall for CLST investors.

That raises a new question: Did Durham stick with the stock and add to his holdings because he was convinced the company’s financials were a lot brighter than they appeared to outsiders?

And were other friends of Durham who jumped into the stock privy to that inside information? Backers of the company included a throng from Indianapolis, including restaurateur Henri Najem and Marion County Prosecutor Carl Brizzi.

Mackey said Durham “never has provided inside information to others nor traded on inside information.” Brizzi told IBJ he didn’t know about the payable; Najem couldn’t be reached.

CLST's assets exceeded its liabilities by just $3 million as of November 2009. But if the $14 million liability goes away, the financial picture brightens substantially.

Still, wiping out the liability is no panacea. The federal investigation and steep legal fees have cast a cloud over the company, as have disclosures that at least some of the finance contracts CLST acquired have soured. Shares in the company are fetching a mere 5 cents apiece, down from around 15 cents in January 2009.

Back then, the company hadn’t said publicly the $14 million liability might go away. But according to New York investor David Sandberg, whose Red Oak Partners is now a major investor, Kaiser talked openly that he believed that was the case when Sandberg began conducting due diligence on the stock in late 2008.

“I came in believing the $14 million is not real,” Sandberg told IBJ.

Goldfield said that after he pulled his proposal to invest in CLST, he told the SEC about the Verizon payable and provided testimony. An SEC official working on the CLST probe declined to comment.•

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