Defense attorneys representing indicted businessman Tim Durham and two other executives tied to bankrupt Fair Finance Co. could have a hard time convincing a jury to find them innocent.
A 23-page indictment, unsealed March 16, alleges that Durham, 48, and business partner James F. Cochran, 55, worked with former Fair Chief Financial Officer Rick D. Snow, 47, to devise and execute a scheme to defraud investors in the Akron, Ohio-based company.
Authorities say Fair Finance owes 5,200 investors $230 million. Officials call it the largest corporate fraud case in Indiana’s history.
Prosecutors worked for more than a year to piece together the complex case and present it to a grand jury, said Timothy M. Morrison, first assistant U.S. attorney for the Southern District of Indiana.
“We have to get this right,” he said. “You have to prove it to 12 people without a reasonable doubt. Now we look forward to proving the allegations.”
The odds are with the government. According to the U.S. Department of Justice, 94.1 percent of federal prosecutors’ cases resolved in 2009 ended with a conviction, and 96 percent of those convicted pleaded guilty before or during their trial. Of those convicted, 81 percent were sentenced to prison.
Federal prosecutors in Indianapolis will lead the case against the three, who are set to be tried May 16.
The Southern District doesn’t track conviction rates. But prosecutors typically build a solid case before bringing charges, which improves their chances for a favorable outcome, said local attorney Dick Kiefer, who leads Bingham McHale LLP’s white-collar-criminal practice.
Kiefer represents Durham’s Indianapolis-based Obsidian Enterprises Inc., one of the primary beneficiaries of loans Fair Finance made from investors’ money to Durham, Cochran and other insiders, according to the indictment.
Kiefer declined to comment on the specific charges, but he provided insight into the Southern District’s overall approach to prosecutions.
“The U.S. Attorney’s Office here, in particular, has generally been very conservative over the years in charging cases, and I think that’s to their credit,” he said. “They tend to file cases that are much stronger, but that doesn’t mean they’re always right.”
The Southern District’s conservative nature might explain why it took 16 months after an FBI raid for investigators to announce charges against the men.
All three are facing felony charges: 10 counts of wire fraud, one count of securities fraud, and one count of conspiracy to commit wire fraud and securities fraud.
Each faces a maximum of five years in prison for the conspiracy charge, 20 years in prison for each wire fraud count, and 20 years in prison for the securities fraud. In addition, each could be fined $250,000 for each count on which they are convicted.
Charges stem from a lengthy FBI investigation that made headlines in November 2009 when agents raided Obsidian’s offices in Indianapolis and Fair’s Akron headquarters.
Two weeks earlier, according to the indictment, Durham and Cochran had telephone conversations that painted a striking picture of their alleged deceit.
Cochran allegedly told Durham that they needed to retain Fair’s employees, regardless of their competence, because “these guys know a little bit too much. They can take it and bust us.”
“We can’t [let them go],” Durham agreed. “We’ve got to get through this.”
A few days later, the indictment says, they had another phone conversation, discussing an accounting strategy to make millions of dollars of “bad debt loans” they otherwise would need to disclose to Ohio regulators “literally disappear.”
And about a week before the FBI raid, they allegedly schemed to give a false and misleading explanation to an investor about why he could not redeem an investment certificate.
Later the same day, Cochran told Durham he thought he succeeded at heading off the investor, according to the indictment.
Responded Durham: “You are the best at this.”
Durham, in yet another instance involving an investor, instructed Cochran to “use the same reason you used yesterday with the other guy,” according to the indictment, but cautioned him not to use it too often “because it’s really not true.”
Five days later, on Nov. 24, 2009, FBI agents conducted their raid on the offices of Obsidian and Fair, serving search warrants.
The raid came about a month after IBJ ran an investigative story about Fair highlighting the related-party loans, which amounted to $230 million by that time.
The company, meanwhile, owed investors more than $200 million and had only $24 million in consumer receivables—its only real source of revenue—on its books, according to the indictment.
Durham and Cochran bought the then-68-year-old business for $23 million in 2002, using almost entirely borrowed money.
They immediately began doling out related-party loans, adding to the debt load, while scaling back what had been Fair’s profit-making business—buying customer-finance contracts from fitness clubs, time-share developers and other firms that offered customers extended-payment plans.
Durham and Cochran allegedly sold off additional receivables over the years to pay off investors even as they used money from Fair Finance to pay for extravagances like a $250,000 garage remodeling project, a $150,000 gambling spree and $50,000 in country club dues.
Fair Finance was forced into involuntary Chapter 7 bankruptcy in early 2010.
Last month, bankruptcy trustee Brian Bash filed a lawsuit that provided a preview of many of the government’s charges, alleging that Durham perpetrated fraud of “shocking proportions” by draining huge sums of money from the Ohio company over a period of years.
“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.
The indictment alleges that Durham essentially admitted as much in an October 2008 e-mail exchange, saying he acknowledged that Fair used proceeds from the sale of new investment certificates to pay existing investors.
Durham also dismissed two outside auditors who raised questions about the insider loans, according to the indictment, before signing the financial statements himself to certify their accuracy.
Proving intent is key
The three men all were arrested March 16 at their homes—Durham in Los Angeles and Cochran and Snow in Indianapolis, Morrison said. Durham previously lived in a 10,700-square-foot home on Geist Reservoir that fell into foreclosure.
Cochran and Snow were released on their own recognizance following a March 16 initial hearing in Indianapolis before U.S. Magistrate Judge Kennard Foster. Durham, meanwhile, was awaiting his initial hearing in Los Angeles at press time.
Durham’s lawyer, famed criminal defense attorney Roy Black of Miami, did not return phone calls.
Key to securing convictions in fraud cases is proving whether the defendants knowingly intended to commit fraud, local white-collar criminal defense lawyers said.
Because it’s difficult to prove what somebody actually was thinking, the government often relies on circumstantial evidence and expert testimony, said J.P. Hanlon, who leads Indianapolis-based Baker & Daniels LLP’s white-collar practice group. He also teaches white-collar crime at the Indiana University School of Law in Indianapolis.
“Ultimately, the jury is given the very challenging job of evaluating all of the evidence and deciding whether the defendant acted with a fraudulent purpose,” he said.
Still, the trail of loans Fair Finance left in its wake could prove most beneficial for prosecutors, said local defense lawyer Richard Kammen.
“The one thing about money is, it’s generally traceable,” he said. “They’ve spent a lot of time figuring out where it went. And that is the reason the federal government is very successful. But every case stands on its own.”•