Legal Issues and Banking & Finance and Investing and Criminal Charges and U.S. District Court and Loans and Tim Durham and Law

Durham prosecutors wrap case with details on asset transfer

June 18, 2012

In the weeks before an FBI raid shut down Fair Finance Co., top executives led by Indianapolis financier Tim Durham devised a last-ditch financial maneuver they hoped would persuade Ohio regulators to allow them to keep selling investment certificates.

Executives decided to transfer $85 million in nonperforming loans and investments held by Fair's parent company, DC Investments, to Fair's own books. The rationale, they reasoned in e-mails and government-recorded phone calls, was twofold: The move theoretically would reduce the balance of related-party loans from Fair, and it would allow Fair to show more assets on its own balance sheet.

Many of the loans to be transferred involved businesses that already had closed, individuals with ties to Durham and partner Jim Cochran who didn't have the means to pay them back, and still-operating companies that came up well short of the collateral required for such loans, government witnesses testified Friday afternoon and Monday morning in U.S. District Court.

The prosecution in the fraud trial of Durham and co-defendants Cochran and Rick Snow was expected to rest its case Monday afternoon. Defense attorneys expect to finish their presentations Tuesday evening, allowing the jury to begin deliberations as early as Wednesday afternoon following closing arguments.

The big question is whether any of the defendants will take the stand. John Tompkins, Durham's attorney, on Friday said he hadn't made the decision yet whether to recommend Durham testify in his own defense, though he said ultimately that will be Durham's call. The other attorneys declined comment.

Durham, Cochran and Snow, Fair's chief financial officer, are facing 10 counts of wire fraud, one count of securities fraud, and one count of conspiracy to commit wire fraud and securities fraud. The government alleges they bilked more than 5,000 Ohio investors out of $200 million by turning Fair into a Ponzi scheme. If convicted, they face decades in prison.

In testimony Monday morning, William Bavis, a forensic accountant hired by the government, said Fair failed to own up to the fact that $17 million in loans to luxury bus company Pyramid Coach—a firm partly owned by Durham—were uncollectible. Bavis highlighted an Aug. 9, 2009, e-mail in which Snow told an accountant that "at some point we need to write those off."

But the loans were not written off when Fair submitted paperwork to state securities regulators in October 2009 seeking approval to sell an additional $250 million in investment certificates to Ohio investors.

In that filing, Fair listed its net worth as $5.6 million. Writing off the Pyramid loans would have left Fair with negative net worth of $11 million "and the company would be considered from an accounting perspective to be insolvent," said Bavis, managing director in the Baltimore office of Invotex Group.

The bad loans from Pyramid wound up in a grouping of $21.6 million of loans transferred to Fair and labeled as "previously reserved," even though Durham had not set aside any cash to cover the losses, Bavis said Monday. 

Bavis said other loans included in the "previously reserved" category included $1.3 million for a yacht Durham no longer owned, $424,000 for a jet he had sold, and a $470,000 loan to his mother, Mitza Durham.

The $85 million asset transfer essentially "liquidated" DC Investments, Bavis said.

On Friday, the prosecution took testimony from Jeff Osler, a former executive vice president at Durham's Obsidian Enterprises who is married to Durham's sister (the couple is getting a divorce) and for years took money from Durham for his home, business ventures and children's tuition, running up a tab of $1.3 million.

One of Osler's last assignments before the FBI raided Fair Finance and Obsidian in November 2009 was to prepare a list of loans and investments held by other Durham entities, including personal loans made by Durham and Cochran. Osler testified the plan was to move the loans to Fair's balance sheet, making Fair look stronger in terms of assets even though the loans weren't performing and had little chance for repayment.

Many of the $85 million in loans that wound up on Fair's books were for companies that had shut down years earlier, including for an embroidery business called DWA LLC and a tech startup called Inet Now, Osler testified.

The $1.3 million loan to Osler also wound up with Fair, though Osler testified he had no means to pay it back. He had a first mortgage on his home, leaving little equity to cover the second mortgage that purportedly secured the loan.

Defense attorneys pointed out mistakes in the accounting for loans, including a couple of Osler loans that had been assigned to Cochran. They also noted the final list of loans set for offload to Fair did not include some of the most obviously bad loans.

By the time the FBI raided Fair, the company had gone five years without audited financial statements. That's because independent accountants refused to sign off on the firm's books.

After the firm BCBG Partners declined in 2005 to issue an audit of Fair's 2003 financials, Somerset CPAs stepped in.

Despite its own concerns, Somerset wound up delivering audited financial statements for 2004, but it withdrew from a 2005 audit because of "changes in the financial position of the company and the required adoption of new accounting pronouncements," according to a July 2006 letter.

But the firm went a step further, asking Fair to stop using its 2004 audit in its materials shared with investors.

"We no longer felt comfortable with our opinion to be used in offering circulars," Somerset principal Ben Kimmerling testified Friday.

Fair's loans to related entities and individuals had increased, and its collateral had fallen in value, Kimmerling explained.

Somerset's draft 2005 financial statements showed a loss of more than $19 million by Fair. The statements Durham and Snow ultimately signed off on showed a profit of about $300,000.

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