Fair Finance Co.’s bankruptcy trustee on Monday filed a lawsuit alleging that Tim Durham perpetrated “a fraud of shocking proportions,” draining huge sums from the Akron, Ohio, firm for years to mask that his business empire had collapsed.
“Durham fired auditors who became too squeamish and operated [Fair] as a Ponzi scheme, enabling him to loot every last penny,” according to the sharply worded 49-page lawsuit filed in U.S. Bankruptcy Court in Akron.
By the time Durham and fellow Indianapolis businessman Jim Cochran bought Fair in 2002, his Indianapolis-based buyout firm—Obsidian Enterprises Inc.—already was effectively bankrupt, the suit says.
Trustee Brian Bash alleges in the suit that Durham bought Fair to fund Obsidian’s failing businesses—a collection of transportation and manufacturing firms—and to provide cash for other personal investments.
When Durham’s and Cochran’s purchase of Fair closed, Durham remarked that “this will be like taking candy from a baby,” the suit says.
From there, Bash charges, Durham began looting Fair at a “stupendous pace,” extending millions of dollars in credit to Obsidian businesses.
An attorney for Durham was not immediately available to comment on the lawsuit.
Fair's lending spree caused huge losses for the investors who financed the company—mom-and-pop Ohioans who bought unsecured investment certificates boasting interest rates as high as 9.5 percent. More than 5,000 Ohio residents are owed more than $200 million.
The related-party loans continued, the suit says, even though the firm’s outside auditor, BGBC Partners PC of Indianapolis, expressed deep concerns as early as 2002. The firm would not sign off on Fair’s financials for that fiscal year and was fired in 2005 without having completed 2003 or 2004 audits.
A different accounting firm, Indianapolis-based Somerset CPAs, issued 2003 and 2004 audits in the summer of 2005, but did not issue additional reports. In May 2006, Somerset issued an incomplete audit opinion that concluded Fair was not a going concern.
Fair did not undergo full audits from that point on, but was nonetheless granted approval by Ohio securities regulators to continue selling millions of dollars in unsecured notes to investors.
In April 2005, BGBC wrote a letter to Durham and Cochran explaining that it could not issue an unqualified audit report for 2003 or 2004 because Fair’s “conduct indicated it was not being run for its own benefit,” according to the lawsuit.
The letter said the “loans” to related parties actually were really “distributions to shareholders” because the likelihood of repayment was so low.
“The accusations in this letter are particularly impressive because Durham was one of BGBC’s five largest clients, producing between $250,000 and $300,000 a year for a four-partner practice,” the suit says.
By the end of 2005 at the latest, Fair was operating as a Ponzi scheme, the suit says, relying almost entirely on new sales of investment certificates to pay what it owed prior investors. By that point, according to the lawsuit, Fair was insolvent by at least $50 million.
That same year, Obsidian President Terry Whitesell wrote a memorandum 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,’” the suit said.
Obsidian and Fair continued to operate until November 2009, when the FBI raided their offices in Indianapolis and Akron. The raid came about a month after an IBJ investigative story highlighted the insider loans and raised questions about whether the firm had the means to repay holders of investment certificates.
The U.S. Attorney’s Office is conducting a criminal investigation of the company’s collapse. Durham has acknowledged that he owes Fair millions but has denied breaking the law. He noted that the offering circulars provided to prospective investors detailed the insider loans and highlighted other risks.
But the trustee’s lawsuit said Fair shifted assets among various companies to obscure its precarious financial condition. Non-performing loans often were moved to Fair’s parent, Fair Holdings Inc., “hiding their negative impact on [Fair Finance’s] financial condition, the suit alleges.
The trustee’s lawsuit asks the court to fold Obsidian and another Durham firm, Diamond Investments LLC, into Fair Finance’s year-old bankruptcy liquidation case.
The suit says purchasers of Fair’s investment certificates “could have realized a significant recovery” if Durham had liquidated the company years ago when it first become obvious that it was doomed.