Legal Issues and Investment Losses and Banking & Finance and Opinion and Investing and Securities fraud and Tim Durham and Law

Pliant Ohio regulators helped clear path for Durham's fraud

November 24, 2012
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Convicted financier Tim Durham, right, is set to be sentenced Friday.

Financier Tim Durham has been showered with scorn as details of his massive Ponzi scheme have emerged over the past three years.

Other parties in the scandal, however, most notably the Ohio securities regulators who enabled the fraud by signing off on $1 billion in securities offerings, have largely avoided the crossfire.

In the years after Durham and fellow businessman Jim Cochran bought Akron, Ohio-based Fair Finance Co. in 2002, the Ohio Department of Commerce’s Division of Securities repeatedly allowed the company to sell additional unsecured investment certificates to everyday Ohioans.

Durham Durham

The registrations continued even after Durham drained the firm of more than $100 million through insider loans—and even after it ceased providing audited financials to the division’s examiner.

“That was one of the things I understood the least,” Jim Klimek, former chief counsel to Indiana’s securities commissioner, said of the Ohio division’s willingness to accept unaudited numbers.

He said Ohio’s examiner, Mark Heuerman, “is a very experienced, very level-headed, competent examiner who I have known for 20 years.”

Klimek said in an October 2009 IBJ story that he was incredulous Ohio regulators had continued to register the certificates. In addition to lacking audited financials, he said at the time, the offering circulars distributed to prospective investors had other problems, including presenting information in a difficult-to-decipher fashion.

A month later, Fair halted payments on the certificates and folded—leaving 5,000 Ohio residents who bought $200 million in certificates empty-handed.

By then, regulators were playing tough and asking hard questions. But court-authorized phone wiretaps show that, even in those final weeks, Durham seemed optimistic he could put one over on regulators and get more certificates approved.

“My guess is, the guy at the state of Ohio isn’t a financial genius,” Durham told CFO Rick Snow in one of the calls. “And I think if we … overwhelm him with stuff, that may be the better approach.”

Lulled into complacency

Investors—and securities regulators—may have been lulled into complacency by Fair’s long record of stable performance. The firm’s prior owner sold certificates for decades without a hitch, plowing proceeds into its core business of buying finance contracts from businesses that offered extended-payment plans to customers.

Under Durham, Fair sold far more certificates, but cut back on finance contracts. By the end, it enticed buyers with 9-percent interest—far higher than what buyers of FDIC-backed CDs could earn.

Heuerman remains with the Division of Securities, but it isn’t clear whether the office has changed how it evaluates proposed offerings. A written statement from a state spokesman didn’t say. It did note that a bill pending in Ohio’s legislature would broaden the circumstances under which the division mandates audited financials.

Because Fair sold securities only in Ohio and devoted less than 3 percent of proceeds to expenses such as commissions, it qualified for a less rigorous process known as “registration by description.” The Ohio division calls that a “a simple registration process for higher quality securities” and for transactions with a small number of buyers or low sales commissions.

But nothing about that registration would have prevented regulators from demanding audited financials—a stance that could have brought down Fair years earlier.

A criminal probe found Fair stopped providing audited financials in 2005 after Durham dismissed two local accounting firms, BGBC and Somerset CPAs, that refused to provide unqualified opinions.

Indiana regulators weren’t involved with Fair, but in the wake of its collapse they’re also reviewing whether to require audited financials more broadly.

“It is currently not a requirement,” Indiana Securities Commissioner Chris Naylor said. “It is something we may ask the General Assembly to take up and review.”

Sentencing nears

The Nov. 30 sentencing of Durham and co-defendants Cochran and Snow will be an all-day affair.

Judge Jane Magnus-Stinson will devote 9 a.m. to 11 a.m. to arguments about the presentencing reports prepared by probation staff. Those reports aren’t public, but Durham’s attorney has revealed his client’s includes a recommended sentence of 225 years, a term he calls “absurd.”

From 11 to noon, prosecutors plan to call five victims. Durham’s sentencing is scheduled for 1 p.m., Cochran’s for 2:30 p.m., and Snow’s for 3:30 p.m.

A federal jury in June found Durham, 50, guilty on all 12 felony counts stemming from Fair’s collapse. It found Cochran guilty on eight of 12 counts, and found Snow guilty on five of 12.•

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