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

Durham trial closing arguments provide clashing accounts

June 20, 2012

The fate of Tim Durham and two co-defendants will land in the jury's hands after prosecution and defense attorneys on Tuesday offered spirited closing arguments in a standing-room-only courtroom.

The prosecution pulled together pieces of a case it presented over six days, describing Durham as "the mastermind" of a Ponzi scheme to defraud 5,000 Ohio investors in Fair Finance Co. of more than $200 million, while partner Jim Cochran acted as the front man who lied "to people's faces" about Fair's condition, and Chief Financial Officer Rick Snow served as the "backroom numbers guy."

"It's a sad, sad story—the demise of a great business," said Assistant U.S. Attorney Winfield Ong. "It took an extraordinary effort to crush the extraordinary edifice built by the Fair family."

Durham attorney John Tompkins described the government's case as a "well tailored, professionally edited" presentation of "evidence that fit their premise," which he compared to the notion the Earth was flat.

"Their premise isn't correct—you have to look deeper," he told the jury, arguing the financial crisis and a series of bad business decisions, not crimes, led to Fair's downfall. "Don't be fooled and drawn into this trap."

Cochran's attorney said his client's interests diverged from Durham's almost immediately after the pair purchased Fair Finance in 2002: Cochran sought a successful Fair, putting him in alignment with Fair investors including his mother and brother-in-law, while Durham saw it merely as a financing vehicle for his struggling businesses and flashy lifestyle.

Meantime, Snow's attorney said the government "lumped in" Fair's chief financial officer with its co-owners even though Snow didn't take out any loans from Fair, had little actual authority over its financials, and didn't 't have an ownership interest in any company.

The U.S. Attorney's Office gave its closing statements in two parts delivered before and after the defense closings. Ong led off and fellow Assistant U.S. Attorney Henry Van Dyck closed.

Ong said the conspiracy began with three "accounting bombshells" the defendants ignored in 2005 and 2006. The first two came when separate accounting firms raised questions about Fair's practices and the defendants fired the firms rather than follow their advice. The firms had questioned the health of Obsidian Enterprises, a major beneficiary of loans from Fair. Other issues: A glut of loans to insiders, and the practice of counting unpaid interest on the loans as income.

The third accounting bombshell came when the second accounting firm demanded Fair stop referencing an audit of its 2004 books as a tool to sell investment certificates to Ohio investors.

That was the last year an independent auditor reviewed Fair's books, Ong noted. Instead, Durham personally attested to the accuracy of financial figures prepared by Snow.

Business executives usually don't set out to commit fraud, Ong said, but at some point they "decide it's too hard to make money the honest way."

"They start to cheat, tell a little lie to get out of a bad situation," he said. "Rather than deal with the real situation, rather than disclose to investors, they began to lie and cheat."

With no auditors around, the lies and cheating at Fair Finance grew worse, Ong said. The "pillaging" to fund Durham's and Cochran's "fantasy" lifestyles continued even as Fair entered a "death spiral."

"In this world, assets weren't assets, income wasn't income, and Fair Finance investors weren't entitled to know the truth," Ong said. "While Fair was a remarkable company, it couldn't put up with this."

Ong compared the headquarters of Fair and Obsidian on the 48th floor of Chase Tower to the fake trading floor at Enron, a Potemkin village in business simply to provide cover from investors and regulators and prevent the discovery of the looting.

"In this case, the enemy was the Ohio Department of Securities, and investors," he said, noting that Fair's last-ditch application to sell more investment certificates contained several lies and a hidden $5.5 million collateral "plug" he described as a "blatant accounting fraud."

Tompkins, Durham's attorney, in his closing argument asked a series of questions designed to raise doubt among jurors over the government's claim the defendants ran Fair Finance as a Ponzi scheme. If Durham was looting Fair, why would he invest $28 million of his own money from 2005 to 2009 into companies indebted to Fair? How could men who had so many disagreements work together on such a fraud? Why would Durham destroy a business he co-owned that was profitable?

He blamed Fair's collapse in 2009 on a "perfect storm" of a bad economy, bad press and newly skeptical securities regulators in Ohio. Tompkins said the "fog of war" led the defendants to make several business mistakes. Among them were decisions to raise the cap on investments, which led to higher cash-out requests during the crisis; offer higher interest rates; and delay interest payments and redemption requests when cash-flow was tight, leaving investors leery.

"A scheme to delay (payments) is not a scheme to defraud," Tompkins said, adding that the move actually turned off investors rather than inducing them to invest.

Tompkins said the FBI raid of Fair and Obsidian on Nov. 24, 2009, was the "end of a storm" that would "only be made worse by an unjust verdict." He said no one will ever know what would have happened with Fair if the FBI raid hadn't undercut Durham's efforts to save it. 

He reminded jurors the defendants made no attempt to shred documents or flee.

Van Dyck shot back a few minutes later, asking whether the defendants would have kept the documents if the FBI hadn't taken the decision out of their hands.

He said Durham was "up to his neck in every single aspect of the scheme" but "he couldn't have done it by himself." Durham needed Cochran to "lie to people's faces" about Fair's condition and Snow to "falsify financial information." He said that included hiding the $5.5 million collateral "plug" in a category called "fixed assets," and claiming $17 million of bad debt had been reserved when it had not.

Van Dyck said there was no evidence of a run on Fair despite the financial crisis, and he scoffed at the suggestion Snow was just an employee following orders.

"Every step of this fraud, when Mr. Durham needed to lie about financials, he turned to Mr. Snow," Van Dyck said. "Did Mr. Durham keep him tied to a chair in his office and beat him with a stick" when he needed something?

"No," Van Dyck said, answering his own question: it was the carrot of a $400,000 salary that kept Snow on board for seven years.

Jeffrey Baldwin, Snow's attorney, said the government's case against his client was based on six letters: CFO and CPA.

"That's not evidence of participation in a fraud," Baldwin argued. "He didn't even have the authority to write a check. Some CFO when you can't even write a check."

Bill Dazey, Cochran's attorney, said his client was prepared to take "moral responsibility" for the huge investor losses at Fair. But whether he committed a crime is another matter.

Dazey reminded jurors that Cochran had challenged Durham repeatedly about his lavish spending and expressed worry Durham was sinking so much of Fair's money into troubled companies under the Obsidian umbrella. Cochran had asked that he share signature authority for every transaction, a notion Durham  dismissed as impractical.

Dazey asked the jury to excuse Cochran's purchase of three homes with mortgages paid by Fair.

"It is OK in America to want things," Dazey said, adding that Fair was the kind of business that could have given Cochran the lifestyle he wanted. "What was good for Mr. Cochran was also good for Fair Finance."

Dazey suggested to the jury that if there was a fraud scheme, Durham didn't share the plans with his business partner. If he was clued in to a scheme, Dazey asked, wouldn't he have cashed out his mother and brother-in-law from their Fair investment certificates?

"Mr. Cochran believed Mr. Durham could pull this off," said Dazey, a public defender. "There were plans in the works to get loans paid. You've seen enough to know now, it probably wasn't going to work."

The jury is scheduled to begin its deliberations Wednesday morning. If convicted on all counts, each defendant could face hundreds of years in prison.

To catch up on IBJ's coverage of Fair Finance and Tim Durham, click here.

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