Bankruptcy and Legal Issues and Fraud and Attorneys and Banking & Finance and Investing and Obsidian Enterprises and Tim Durham and Law

Fair bankruptcy trustee alleges complicity by silence

March 3, 2012

Even before Tim Durham bought Fair Finance Co. in 2002, business associates and lenders already had at least one solid reason to feel uneasy about the big-talking Indianapolis businessman.

A lender considering financing that $16 million purchase turned up this startling fact: Durham had a credit score of just 552, placing him among the bottom 10 percent of all Americans.

The fact that Rhode Island-based Textron Corp. financed the deal anyway may speak volumes about how Durham got away with what investigators allege was a seven-year-long Ponzi scheme that caused investor losses topping $230 million.

Lawyers overseeing Fair’s liquidation charge that, every step of the way, businesspeople who crossed Durham’s path and witnessed questionable behavior looked the other way—because it was highly profitable for them to do so.

Investigators say many would-be whistle-blowers stood by as Durham funneled tens of millions in loans to himself and failing businesses he owned. They charge the looting left Fair without the means to repay more than 5,000 Ohio residents who purchased unsecured notes with interest rates as high as 9.5 percent.

Whether Durham could repay those investors wasn’t really Textron’s problem. That’s because its credit line to Durham and fellow Indianapolis businessman Jim Cochran was secured by Fair’s customer accounts, according to a lawsuit Fair’s bankruptcy trustee filed in February seeking hundreds of millions of dollars from Textron.

Fair, founded in 1934, specialized in buying consumer-finance contracts from fitness clubs, condo developers and other firms that offered extended-payment plans—a core business that shrank drastically under Durham.

In late 2003, a Textron official sent an e-mail to Durham expressing concern that the businessman’s use of note sales “as a piggy bank” to fund losses at his other businesses was “wrong” and “could come back to haunt us,” according to a copy of the correspondence obtained by Fair’s bankruptcy trustee, Brian Bash.

Textron grew increasingly concerned about Durham’s insider loans and delays in obtaining audited financials, according to the suit. But instead of going public, it forced Fair to sell off customer accounts and repay it in full. By the time that transaction closed in July 2007, Textron had collected more than $10 million in fees and interest on a credit line that was less than $18 million.

Former Fair owner Donald Fair turned a similarly blind eye to Durham’s shenanigans—in part because he was issued a $4.1 million note at the time of the sale that wasn’t paid in full until 2007, according to a $150 million lawsuit Bash filed against Donald Fair last month.

Then there was the bevy of executives who worked at Fair or other Durham companies and had a front-row seat to the alleged fraud. They also kept quiet, the trustee alleges, because they were collecting millions of dollars in salary and bonuses, or received loans themselves that they never repaid.

The trustee in recent weeks has sued former Fair Chief Financial Officer Ricky Snow and former Fair President John Head, as well as Terry Whitesell, former president of Obsidian Enterprises Inc., Durham’s Indianapolis-based leveraged-buyout firm.

From 2002 until Fair’s collapse in November 2009, Snow collected more than $1.2 million in salary and bonuses and Head collected $2 million in salary and bonuses, according to the lawsuits.

Most of the bonuses were based on fictitious profits, according to the suits. In addition, each man received a $50,000 bonus that was not reported on their tax forms for acquiescing to a questionable transfer of assets between Durham companies, court papers allege.

The trustee’s suit against Whitesell says the executive as early as 2005 realized Durham’s financial empire was in dire straits. That year, 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 alleges.

In February 2009, Whitesell warned Durham that if Obsidian continued to “drain Fair,” it was “going to kill Fair.” But according to the suit, he continued to go along with Durham’s wishes for inappropriate transfers.

The suit seeks to recover more than $200,000 on a 2002 loan from Fair that Whitesell never made payments on. It also seeks to recoup more than $220,000 in transfers Whitesell and his wife received from Durham companies over seven years.

Whitesell, like so many others, “had a significant incentive not to oppose Durham insofar as he greatly benefitted from the fraud,” the suit alleges.

Reached by IBJ, Whitesell said: "Obviously, I don't agree with the suit. ... It's not our position that we owe them money."

Snow and Head could not be reached. Patrick Keating, an attorney for Donald Fair, said that, although his client had the title chairman emeritus after the sale, he was not privy to Fair’s inner workings once Durham and Cochran owned it.

A grand jury in March 2011 indicted Durham, Cochran and Snow on charges of wire fraud, securities fraud and conspiracy to commit wire and securities fraud. All three—who are scheduled for trial in June—deny breaking the law.•
 

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